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EX-32.1 - SECTION 1350 CERTIFICATIONS - MARSH & MCLENNAN COMPANIES, INC.mmc0331201710qex_321.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - MARSH & MCLENNAN COMPANIES, INC.mmc0331201710qex_312.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MARSH & MCLENNAN COMPANIES, INC.mmc0331201710qex_311.htm
EX-12.1 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - MARSH & MCLENNAN COMPANIES, INC.mmc0331201710qex_121.htm
EX-10.4 - FORM OF SO AWARD DATED FEBRUARY 22, 2017 - MARSH & MCLENNAN COMPANIES, INC.a2017formofsoawardex_104.htm
EX-10.3 - FORM OF PSU AWARD DATED FEBRUARY 22, 2017 - MARSH & MCLENNAN COMPANIES, INC.a2017formofpsuawardex_103.htm
EX-10.2 - FORM OF RSU AWARD DATED FEBRUARY 22, 2017 - MARSH & MCLENNAN COMPANIES, INC.a2017formofrsuawardex_102.htm
EX-10.1 - 2017 FORM OF DSU AWARD - MARSH & MCLENNAN COMPANIES, INC.a2017formofdsuawardex_101.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 March 31, 2017
_____________________________________________ 
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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
  
Accelerated Filer  ¨
 
 
Non-Accelerated Filer  ¨(Do not check if a smaller reporting company)
  
Smaller Reporting Company  ¨
 
 
 
 
 
Emerging Growth Company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
As of April 25, 2017, there were outstanding 514,159,981 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 exposure to potential civil damages, criminal penalties or other consequences, such as reputational impact, if we fail to comply with applicable U.S. and non-U.S. laws and regulations, including in connection with the U.K. Financial Conduct Authority's ongoing investigation into the aviation insurance and reinsurance sector; our exposure to potential liabilities, including reputational impact, arising from errors and omissions, breach of fiduciary duty and similar claims against us; our organization's ability to maintain adequate safeguards to protect the security of our information systems and confidential, personal or proprietary information, particularly given the volume of third party vendors we use; our ability to successfully recover if we experience a business continuity problem due to cyberattack, natural disaster or otherwise; our ability to compete effectively and adapt to changes in the competitive environment, including to respond to disintermediation, 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 decision in the U.K. to exit the E.U. and the potential for a move towards protectionist laws and business practices; the financial and operational impact of complying with laws and regulations where we operate, including the E.U.’s General Data Protection Regulation; our ability to incentivize and retain key employees; 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 impact on our competitive position of our tax rate relative to our competitors; the impact of fluctuations in foreign exchange, interest rates and securities markets on our results; 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 in 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
March 31,
(In millions, except per share amounts)
2017

 
2016

Revenue
$
3,503

 
$
3,336

Expense:
 
 
 
Compensation and benefits
1,945

 
1,854

Other operating expenses
749

 
749

Operating expenses
2,694

 
2,603

Operating income
809

 
733

Interest income
2

 
2

Interest expense
(58
)
 
(46
)
Investment income (loss)

 
(3
)
Income before income taxes
753

 
686

Income tax expense
175

 
196

Net income before non-controlling interests
578

 
490

Less: Net income attributable to non-controlling interests
9

 
9

Net income attributable to the Company
$
569

 
$
481

Net Income Per Share Attributable to the Company:
 
 
 
Basic
$
1.10

 
$
0.92

Diluted
$
1.09

 
$
0.91

Average number of shares outstanding:
 
 
 
Basic
515

 
521

Diluted
522

 
526

Shares outstanding at March 31,
515

 
521

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
March 31,
(In millions)
2017

 
2016

Net income before non-controlling interests
$
578

 
$
490

Other comprehensive income (loss), before tax:
 
 
 
    Foreign currency translation adjustments
235

 
13

    Unrealized investment gains (losses)
(5
)
 

    Gain related to pension/post-retirement plans
33

 
138

Other comprehensive income, before tax
263

 
151

Income tax expense on other comprehensive income
7

 
28

Other comprehensive income, net of tax
256

 
123

Comprehensive income
834

 
613

Less: comprehensive income attributable to non-controlling interest
9

 
9

Comprehensive income attributable to the Company
$
825

 
$
604

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)
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
930

 
$
1,026

Receivables
 
 
 
Commissions and fees
3,564

 
3,370

Advanced premiums and claims
53

 
83

Other
278

 
286

 
3,895

 
3,739

Less-allowance for doubtful accounts and cancellations
(100
)
 
(96
)
Net receivables
3,795

 
3,643

Other current assets
256

 
215

Total current assets
4,981

 
4,884

Goodwill
8,769

 
8,369

Other intangible assets
1,291

 
1,126

Fixed assets
(net of accumulated depreciation and amortization of $1,729 at March 31, 2017 and $1,683 at December 31, 2016)
722

 
725

Pension related assets
872

 
776

Deferred tax assets
1,009

 
1,097

Other assets
1,325

 
1,213

 
$
18,969

 
$
18,190

 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)
March 31,
2017
 
December 31,
2016
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
412

 
$
312

Accounts payable and accrued liabilities
2,033

 
1,969

Accrued compensation and employee benefits
765

 
1,655

Accrued income taxes
202

 
146

Dividends payable
176

 

Total current liabilities
3,588

 
4,082

Fiduciary liabilities
4,601

 
4,241

Less – cash and investments held in a fiduciary capacity
(4,601
)
 
(4,241
)
 

 

Long-term debt
5,479

 
4,495

Pension, post-retirement and post-employment benefits
2,025

 
2,076

Liabilities for errors and omissions
300

 
308

Other liabilities
958

 
957

Commitments and contingencies

 

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

 

Common stock, $1 par value, authorized
 
 
 
1,600,000,000 shares, issued 560,641,640 shares at March 31, 2017
 
 
 
   and December 31, 2016
561

 
561

Additional paid-in capital
733

 
842

Retained earnings
12,606

 
12,388

Accumulated other comprehensive loss
(4,837
)
 
(5,093
)
Non-controlling interests
87

 
80

 
9,150

 
8,778

Less – treasury shares, at cost, 45,617,551 shares at March 31, 2017
 
 
 
   and 46,150,415 shares at December 31, 2016
(2,531
)
 
(2,506
)
Total equity
6,619

 
6,272

 
$
18,969

 
$
18,190

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

7



MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31,
 
 
 
(In millions)
2017

 
2016

Operating cash flows:
 
 
 
Net income before non-controlling interests
$
578

 
$
490

Adjustments to reconcile net income to cash used for operations:
 
 
 
Depreciation and amortization of fixed assets and capitalized software
80

 
78

Amortization of intangible assets
40

 
33

Adjustments and payments related to contingent consideration liability
(20
)
 
1

Provision for deferred income taxes
25

 
22

Loss on investments

 
3

Loss on disposition of assets
6

 
2

Share-based compensation expense
42

 
31

Changes in assets and liabilities:
 
 
 
Net receivables
(146
)
 
(175
)
Other current assets
(43
)
 
(34
)
Other assets
(25
)
 
2

Accounts payable and accrued liabilities
60

 
36

Accrued compensation and employee benefits
(888
)
 
(931
)
Accrued income taxes
56

 
(26
)
      Contributions to pension and other benefit plans in excess of current year expense/credit
(106
)
 
(67
)
Other liabilities
(46
)
 
(71
)
Effect of exchange rate changes
(12
)
 
25

Net cash used for operations
(399
)
 
(581
)
Financing cash flows:
 
 
 
Purchase of treasury shares
(200
)
 
(200
)
Net increase in commercial paper
100

 
252

Proceeds from debt
987

 
347

Repayments of debt
(5
)
 
(3
)
Shares withheld for taxes on vested units – treasury shares
(48
)
 
(37
)
Issuance of common stock from treasury shares
73

 
92

Payments of deferred and contingent consideration for acquisitions
(34
)
 
(39
)
Distributions of non-controlling interests
(1
)
 
(6
)
Dividends paid
(175
)
 
(161
)
Net cash provided by financing activities
697

 
245

Investing cash flows:
 
 
 
Capital expenditures
(62
)
 
(51
)
Net sales (purchases) of long-term investments
11

 
(2
)
Proceeds from sales of fixed assets
1

 
1

Acquisitions
(411
)
 
(75
)
Other, net

 
1

Net cash used for investing activities
(461
)
 
(126
)
Effect of exchange rate changes on cash and cash equivalents
67

 
6

Decrease in cash and cash equivalents
(96
)
 
(456
)
Cash and cash equivalents at beginning of period
1,026

 
1,374

Cash and cash equivalents at end of period
$
930

 
$
918

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 Three Months Ended March 31,
 
 
 
(In millions, except per share amounts)
2017

 
2016

COMMON STOCK
 
 
 
Balance, beginning and end of period
$
561

 
$
561

ADDITIONAL PAID-IN CAPITAL
 
 
 
Balance, beginning of year
$
842

 
$
861

Change in accrued stock compensation costs
(43
)
 
(36
)
Issuance of shares under stock compensation plans and employee stock purchase plans and related tax impact in 2016
(66
)
 
(48
)
Balance, end of period
$
733

 
$
777

RETAINED EARNINGS
 
 
 
Balance, beginning of year
$
12,388

 
$
11,302

Net income attributable to the Company
569

 
481

Dividend equivalents declared – (per share amounts: $0.68 in 2017 and $0.62 in 2016)
(1
)
 
(1
)
Dividends declared – (per share amounts: $0.68 in 2017 and $0.62 in 2016)
(350
)
 
(322
)
Balance, end of period
$
12,606

 
$
11,460

ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
Balance, beginning of year
$
(5,093
)
 
$
(4,220
)
Other comprehensive income, net of tax
256

 
123

Balance, end of period
$
(4,837
)
 
$
(4,097
)
TREASURY SHARES
 
 
 
Balance, beginning of year
$
(2,506
)
 
$
(1,991
)
Issuance of shares under stock compensation plans and employee stock purchase plans
175

 
169

Purchase of treasury shares
(200
)
 
(200
)
Balance, end of period
$
(2,531
)
 
$
(2,022
)
NON-CONTROLLING INTERESTS
 
 
 
Balance, beginning of year
$
80

 
$
89

Net income attributable to non-controlling interests
9

 
9

Distributions and other changes
(2
)
 
(6
)
Balance, end of period
$
87

 
$
92

TOTAL EQUITY
$
6,619

 
$
6,771

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. and its consolidated subsidiaries (the "Company"), a global professional services firm, is organized based on the different services that it offers. Under this structure, the Company’s two segments are Risk and Insurance Services and Consulting.
The Risk and Insurance Services segment provides risk management services 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, wealth and career. As of March 31, 2017, Mercer had assets under management of $177 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, 2016 (the "2016 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 month periods ended March 31, 2017 and 2016.
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 $167 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 the Company's investments in private equity funds. The Company recorded net investment income of less than $1 million for the three months ended March 31, 2017 compared to a net investment loss of $3 million for the same period in 2016.
Income Taxes
The Company's effective tax rate in the first quarter of 2017 was 23.3% compared with 28.6% in the first quarter of 2016. These rates reflect foreign operations which are taxed at rates below the U.S. statutory tax rate, including the

10



effect of repatriation, as well as the impact of discrete tax matters such as changes in tax legislation, changes in valuation allowances, nontaxable adjustments to contingent acquisition consideration and, starting in 2017, excess tax benefits related to share-based compensation.
The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. When evaluating the potential imposition of penalties, the Company considers a number of relevant factors under penalty statutes, including appropriate disclosure of the tax return position, the existence of legal authority supporting the Company's position, and reliance on the opinion of professional tax advisors.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in tax returns. The Company's gross unrecognized tax benefits increased from $65 million at December 31, 2016 to $66 million at March 31, 2017. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $7 million within the next twelve months due to 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 March 31, 2017 and 2016, respectively. The Consulting segment recorded fiduciary interest income of $1 million in each of the three month periods ended March 31, 2017 and 2016. 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 $7.8 billion at March 31, 2017 and $7 billion at December 31, 2016. 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 are the same for both basic and diluted EPS.
Basic and Diluted EPS Calculation
Three Months Ended
March 31,
(In millions, except per share amounts)
2017

 
2016

Net income before non-controlling interests
$
578

 
$
490

Less: Net income attributable to non-controlling interests
9

 
9

Net income attributable to the Company
$
569

 
$
481

Basic weighted average common shares outstanding
515

 
521

Dilutive effect of potentially issuable common shares
7

 
5

Diluted weighted average common shares outstanding
522

 
526

Average stock price used to calculate common stock equivalents
$
71.32

 
$
55.86

There were 12.8 million and 14.6 million stock options outstanding as of March 31, 2017 and 2016, respectively.

11



5.    Supplemental Disclosures to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning acquisitions, interest and income taxes paid for the three-month periods ended March 31, 2017 and 2016.
(In millions)
 
2017

 
2016

Assets acquired, excluding cash
 
$
577

 
$
105

Liabilities assumed
 
(76
)
 
(4
)
Contingent/deferred purchase consideration
 
(90
)
 
(26
)
Net cash outflow for acquisitions
 
$
411

 
$
75

(In millions)
2017

 
2016

Interest paid
$
62

 
$
58

Income taxes paid, net of refunds
$
100

 
$
187

The classification of contingent consideration in the statement of cash flows is determined by whether the payment was part of the initial liability established on the acquisition date (financing) or an adjustment to the acquisition date liability (operating).
The following amounts are included in the consolidated statements of cash flows as a financing activity. The Company paid deferred and contingent consideration of $34 million for the three months ended March 31, 2017. This consisted of deferred purchase consideration related to prior years' acquisitions of $26 million and contingent consideration of $8 million. For the three months ended March 31, 2016, the Company paid deferred and contingent consideration of $39 million, consisting of deferred purchase consideration related to prior years' acquisitions of $25 million and contingent consideration of $14 million.
The following amounts are included in the operating section of the consolidated statements of cash flows. For the three months ended March 31, 2017, the Company recorded a net credit for adjustments to acquisition related accounts of $16 million and contingent consideration payments of $4 million. For the three months ended March 31, 2016, the Company recorded a net charge for adjustments related to acquisition related accounts of $5 million and contingent consideration payments of $4 million.
The Company had non-cash issuances of common stock under its share-based payment plan of $85 million and $67 million for the three months ended March 31, 2017 and 2016, respectively. The Company recorded stock-based compensation expense related to equity awards of $28 million and $20 million for the three-month periods ended March 31, 2017 and 2016, respectively.
Effective January 1, 2017, the Company adopted new accounting guidance related to share-based compensation, that requires companies to record excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement and classify excess tax benefits as an operating activity in the statement of cash flows. Prior to the adoption of this standard, the Company recorded excess tax benefits in equity in the consolidated balance sheet and as a financing activity in the consolidated statement of cash flows. For the three months ended March 31, 2017, the adoption of this new standard reduced income tax expense in the consolidated statement of income by approximately $44 million. For the three months ended March 31, 2016, the Company recorded an excess tax benefit of $18 million as an increase to equity in its consolidated balance sheet and an increase to cash provided by financing activities in the consolidated statement of cash flows.


12



6.    Other Comprehensive Income (Loss)
The changes in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the three-month periods ended March 31, 2017 and 2016, 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 January 1, 2017
$
19

 
$
(3,232
)
 
$
(1,880
)
 
$
(5,093
)
Other comprehensive income (loss) before reclassifications
(3
)
 
(6
)
 
235

 
226

Amounts reclassified from accumulated other comprehensive income

 
30

 

 
30

Net current period other comprehensive income (loss)
(3
)
 
24

 
235

 
256

Balance as of March 31, 2017
$
16

 
$
(3,208
)
 
$
(1,645
)
 
$
(4,837
)
(In millions)
Unrealized Investment Gains
 
Pension/Post-Retirement Plans Gains (Losses)
 
Foreign Currency Translation Gains (Losses)
 
Total Gains (Losses)
Balance as of January 1, 2016
$
6

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

 
80

 
13

 
93

Amounts reclassified from accumulated other comprehensive income

 
30

 

 
30

Net current period other comprehensive income (loss)

 
110

 
13

 
123

Balance as of March 31, 2016
$
6

 
$
(3,014
)
 
$
(1,089
)
 
$
(4,097
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The components of other comprehensive income (loss) for the three-month periods ended March 31, 2017 and 2016 are as follows:
Three Months Ended March 31,
 
2017
 
2016
(In millions)
 
Pre-Tax

Tax (Credit)

Net of Tax

 
Pre-Tax

Tax

Net of Tax

Foreign currency translation adjustments
 
$
235

$

$
235

 
$
13

$

$
13

Unrealized investment gains
 
(5
)
(2
)
(3
)
 



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


 
Prior service cost (a)
 



 
1


1

Net actuarial losses (a)
 
40

10

30

 
41

12

29

Subtotal
 
40

10

30

 
42

12

30

 Effect of remeasurement
 
9

2

7

 
(1
)

(1
)
 Effect of curtailment
 
(1
)

(1
)
 



 Effect of settlement
 
1


1

 
1


1

 Foreign currency translation (losses) gains
 
(15
)
(3
)
(12
)
 
97

16

81

 Other
 
(1
)

(1
)
 
(1
)

(1
)
Pension/post-retirement plans gains
 
33

9

24

 
138

28

110

Other comprehensive income
 
$
263

$
7

$
256

 
$
151

$
28

$
123

(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.
 
 
 
 
 
 
 
 

13



7.     Acquisitions
The Company’s acquisitions have been accounted for as business combinations. Net assets and results of operations are included in the Company’s consolidated financial statements commencing at the respective purchase closing dates. In connection with acquisitions, the Company records the estimated value of the net tangible assets purchased and the value of the identifiable intangible assets purchased, which typically consist of purchased customer lists, developed technology, trademarks and non-compete agreements. The valuation of purchased intangible assets involves significant estimates and assumptions. Until final valuations are complete, any change in assumptions could affect the carrying value of tangible assets, goodwill and identifiable intangible assests.
The Risk and Insurance Services segment completed four acquisitions during the first three months of 2017.
January – Marsh & McLennan Agency ("MMA") acquired J. Smith Lanier & Co. ("JSL"), one of the nation’s largest privately held insurance brokerage firms providing insurance, risk management, and employee benefits solutions to businesses and individuals throughout the U.S.
February – MMA acquired iaConsulting Services, a Texas-based employee benefits consulting firm.
March – MMA acquired Blakestad, Inc., a Minnesota-based private client and commercial lines insurance agency, and RJF Financial Services, a Minnesota-based retirement advisory firm.
Total purchase consideration for acquisitions made during the first three months of 2017 was $509 million, which consisted of cash paid of $419 million and deferred purchase and estimated contingent consideration of $90 million. Contingent consideration arrangements are based primarily on earnings before interest, tax, depreciation and amortization ("EBITDA") or revenue targets over a period of two to four years. The fair value of the contingent consideration was based on projected revenue and EBITDA 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 $26 million of deferred purchase consideration and $12 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 2017 based on their fair values:
For the Three Months Ended March 31, 2017
 
(In millions)
 
Cash
$
419

Estimated fair value of deferred/contingent consideration
90

Total Consideration
$
509

Allocation of purchase price:
 
Cash and cash equivalents
$
8

Accounts receivable, net
7

Property, plant, and equipment
3

Other intangible assets
204

Goodwill
363

Total assets acquired
585

Current liabilities
4

Other liabilities
72

Total liabilities assumed
76

Net assets acquired
$
509

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 about other intangible assets acquired during 2017:
 
 
Amount
 
Weighted Average Amortization Period
Client relationships
 
$
204

 
10 years

14



 
Prior-Year Acquisitions
The Risk and Insurance Services segment completed nine acquisitions during 2016.
February – MMA acquired The Celedinas Agency, Inc., a Florida-based brokerage firm providing property and casualty and marine insurance as well as employee benefits services, and Aviation Solutions, LLC, a Missouri-based aviation risk advisor and insurance broker.
March – MMA acquired Corporate Consulting Services, Ltd., a New York-based insurance brokerage and human resource consulting firm.
August – MMA acquired Benefits Advisory Group LLC, an Atlanta-based employee benefits consulting firm.
September – MMA acquired Vero Insurance, Inc., a Florida-based agency specializing in private client insurance services.
November – MMA acquired Benefits Resource Group Agency, LLC, an Ohio-based benefits consulting firm and Presidio Benefits Group, Inc., a California-based employee benefits consulting firm.
December – Marsh acquired AD Corretora, a multi-line broker located in Brazil, and Bluefin Insurance Group, Ltd, a U.K.-based insurance brokerage.
The Consulting segment completed six acquisitions during 2016.
January – Mercer acquired The Positive Ageing Company Limited, a U.K.-based firm providing advice on issues surrounding the aging workforce.
April – Mercer acquired the Extratextual software system and related client contracts. Extratextual is a web based compliance system that helps clients manage and meet their compliance and risk management obligations.
December – Oliver Wyman acquired LShift Limited, a software development company, and Mercer acquired Sirota Consulting LLC, a global provider of employee benefit solutions; Pillar Administration, a superannuation provider located in Australia; and Thomsons Online Benefits, a U.K.-based global benefits software business.
Total purchase consideration for acquisitions made during the first three months of 2016 was $103 million, which consisted of cash paid of $77 million and deferred purchase and estimated contingent consideration of $26 million. Contingent consideration arrangements are primarily based on EBITDA or revenue targets over three 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 three months of 2016, the Company also paid $25 million of deferred purchase consideration and $18 million of contingent consideration related to acquisitions made in prior years.

15



Pro-Forma Information
The following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during 2017 and 2016. 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, 2016 and reflects acquisitions made in 2016 as if they occurred on January 1, 2015. The unaudited pro-forma information adjusts for the effects of amortization of acquired intangibles. The unaudited pro-forma financial data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved if such acquisitions had occurred on the dates indicated, nor is it necessarily indicative of future consolidated results.
 
Three Months Ended
March 31,
(In millions, except per share figures)
2017

 
2016

Revenue
$
3,515

 
$
3,460

Net income attributable to the Company
$
568

 
$
481

Basic net income per share attributable to the Company
$
1.10

 
$
0.92

Diluted net income per share attributable to the Company
$
1.09

 
$
0.91

The consolidated statement of income includes the results of operations of acquired companies since their respective acquisition dates. The consolidated statements of income for the three month period ended March 31, 2017 include approximately $28 million of revenue and $10 million of operating income related to acquisitions made in 2017.
Acquisition-related expenses incurred in the first three months of 2017 were less than $1 million.
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 include whether 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:
March 31,
 
 
 
(In millions)
2017

 
2016

Balance as of January 1, as reported
$
8,369

 
$
7,889

Goodwill acquired
363

 
61

Other adjustments(a)
37

 

Balance at March 31,
$
8,769

 
$
7,950

(a) 
The increase in 2017 primarily reflects the impact of foreign exchange.
Goodwill allocable to the Company’s reportable segments at March 31, 2017 is as follows: Risk and Insurance Services, $6.3 billion and Consulting, $2.5 billion.
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.

16



The gross cost and accumulated amortization at March 31, 2017 and December 31, 2016 are as follows:
  
March 31, 2017
 
December 31, 2016
(In millions)
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

 
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

Client Relationships
$
1,591

 
$
422

 
$
1,169

 
$
1,390

 
$
392

 
$
998

Other (a)
205

 
83

 
122

 
204

 
76

 
128

 Amortized intangibles
$
1,796

 
$
505

 
$
1,291

 
$
1,594

 
$
468

 
$
1,126

(a) Primarily non-compete agreements, trade names and developed technology.
Aggregate amortization expense for the three months ended March 31, 2017 and 2016 was $40 million and $33 million, respectively. The estimated future aggregate amortization expense is as follows:
For the Years Ending December 31,
 
(In millions)
Estimated Expense

2017 (excludes amortization through March 31, 2017)
$
126

2018
161

2019
153

2020
135

2021
129

Subsequent years
587

 
$
1,291

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 exchange-traded money market mutual funds).
Assets and liabilities using Level 1 inputs include exchange-traded equity securities, exchange-traded mutual funds and money market funds.
Level 2.
Assets and liabilities whose values are based on the following:
a)
Quoted prices for similar assets or liabilities in active markets;
b)
Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full asset or liability (for example, certain mortgage loans).
The Company does not have any assets or liabilities that use Level 2 inputs.

17



Level 3.
Assets and liabilities whose values are based on prices, or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
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 or 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 and related targets of the acquired entities.
The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016.
 
Identical Assets
(Level 1)
 
Observable Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
(In millions)
03/31/17

 
12/31/16

 
03/31/17

 
12/31/16

 
03/31/17

 
12/31/16

 
03/31/17

 
12/31/16

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exchange traded equity securities(a)
$
83

 
$
89

 
$

 
$

 
$

 
$

 
$
83

 
$
89

Mutual funds(a)
134

 
141

 

 

 

 

 
134

 
141

Money market funds(b)
24

 
22

 

 

 

 

 
24

 
22

Total assets measured at fair value
$
241

 
$
252

 
$

 
$

 
$

 
$

 
$
241

 
$
252

Fiduciary Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
28

 
$
90

 
$

 
$

 
$

 
$

 
$
28

 
$
90

Total fiduciary assets measured
at fair value
$
28

 
$
90

 
$

 
$

 
$

 
$

 
$
28

 
$
90

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent purchase
consideration liability(c)
$

 
$

 
$

 
$

 
$
247

 
$
241

 
$
247

 
$
241

Total liabilities measured at fair value
$

 
$

 
$

 
$

 
$
247

 
$
241

 
$
247

 
$
241

(a) 
Included in other assets in the consolidated balance sheets.
(b) 
Included in cash and cash equivalents in the consolidated balance sheets.
(c) 
Included in accounts payable and accrued liabilities and other liabilities in the consolidated balance sheets.
During the three-month period ended March 31, 2017, there were no assets or liabilities that were transferred between any of the levels.

18



The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities as of March 31, 2017 and 2016 that represent contingent consideration related to acquisitions: 
(In millions)
2017

 
2016

Balance at January 1,
$
241

 
$
309

Additions
34

 
8

Payments
(12
)
 
(18
)
Revaluation Impact
(16
)
 
5

Other (a)

 
(2
)
Balance at March 31,
$
247

 
$
302

(a) Primarily reflects the impact of foreign exchange.
The fair value of the contingent purchase consideration liability is based on projections of revenue and EBITDA for the acquired entities in relation to the established targets and 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 decrease in the estimated fair value of such liabilities for prior-period acquisitions of $16 million in the three-month period ended March 31, 2017. A 5% increase in the above mentioned projections would increase the liability by approximately $22 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $22 million.
Long-Term Investments
The Company holds investments in certain private equity investments, public companies and private companies that are accounted for using the equity method of accounting. The carrying value of these investments was $426 million and $389 million at March 31, 2017 and December 31, 2016, respectively.
Private Equity Investments
The Company's investments in private equity investments were $72 million and $79 million at March 31, 2017 and December 31, 2016, 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 March 31, 2017, the carrying value of the Company’s investment in Alexander Forbes was approximately $289 million. As of March 31, 2017, the market value of the approximately 443 million shares of Alexander Forbes owned by the Company, based on the March 31, 2017 closing share price of 6.43 South African Rand per share, was approximately $229 million. During the first three months of 2017, the shares closed between 6.38 Rand (in late March) and 7.89 Rand (in early January). 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 determined the investment was not impaired.
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 statements of income and the carrying value of which is included in other assets in the consolidated balance sheets. The Company records its share of income or loss on its equity method investments on a one quarter lag basis.
Benefitfocus: On February 24, 2015, the Company purchased shares of common stock of Benefitfocus (NASDAQ:BNFT) constituting 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. Until December 31, 2016, the Company accounted for this investment under the cost method of accounting as the

19



shares purchased were categorized as restricted. Effective December 31, 2016, these shares were no longer considered restricted for the purpose of determining if they are marketable securities under GAAP, and are now accounted for as available for sale securities and included in other assets in the consolidated balance sheets. The value of the BNFT shares based on the closing price on the NASDAQ as of March 31, 2017 was approximately $79 million. During the first quarter of 2017 an unrealized loss related to these shares of approximately $5 million was recorded in other comprehensive income.
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 March 31, 2017, the actual allocation for the Company's U.S. Plan was 64% equities and equity alternatives and 36% fixed income. The target asset allocation for the Company's U.K. Plans, which comprise approximately 81% of non-U.S. Plan assets at December 31, 2016, was 48% equities and equity alternatives and 52% fixed income. At March 31, 2017, the actual allocation for the U.K. Plans was 47% equities and equity alternatives and 53% fixed income. The assets of the Company's defined benefit plans are diversified and are managed in accordance with applicable laws and with the goal of maximizing the plans' real return within acceptable risk parameters. The Company generally uses threshold-based portfolio re-balancing to ensure the actual portfolio remains consistent with target asset allocation ranges.
The components of the net periodic benefit cost for defined benefit and other post-retirement plans are as follows:
Combined U.S. and significant non-U.S. Plans
Pension
 
Post-retirement
For the Three Months Ended March 31,
Benefits
 
Benefits
(In millions)
2017

 
2016

 
2017

 
2016

Service cost
$
18

 
$
44

 
$

 
$

Interest cost
122

 
137

 
1

 
2

Expected return on plan assets
(224
)
 
(241
)
 

 

Amortization of prior service cost

 

 
1

 
1

Recognized actuarial loss (gain)
40

 
42

 

 
(1
)
Net periodic benefit (credit) cost
$
(44
)
 
$
(18
)
 
$
2

 
$
2

Curtailment gain
(1
)
 

 

 

Settlement loss
1

 

 

 

Total (credit) cost
$
(44
)
 
$
(18
)
 
$
2

 
$
2

U.S. Plans only
Pension
 
Post-retirement
For the Three Months Ended March 31,
Benefits
 
Benefits
(In millions)
2017

 
2016

 
2017

 
2016

Service cost
$

 
$
26

 
$

 
$

Interest cost
66

 
66

 

 
1

Expected return on plan assets
(89
)
 
(95
)
 

 

Amortization of prior service cost

 

 
1

 
1

Recognized actuarial loss (gain)
9

 
18

 

 
(1
)
Net periodic benefit (credit) cost
$
(14
)
 
$
15

 
$
1

 
$
1

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. In addition, the U.S. qualified plans were merged effective December 30, 2016.

20



 
 
 
 
 
 
 
 
Significant non-U.S. Plans only
Pension
 
Post-retirement
For the Three Months Ended March 31,
Benefits
 
Benefits
(In millions)
2017

 
2016

 
2017

 
2016

Service cost
$
18

 
$
18

 
$

 
$

Interest cost
56

 
71

 
1

 
1

Expected return on plan assets
(135
)
 
(146
)
 

 

Recognized actuarial loss
31

 
24

 

 

Net periodic benefit (credit) cost
$
(30
)
 
$
(33
)
 
$
1

 
$
1

Curtailment gain
(1
)
 

 

 

Settlement loss
1

 

 

 

Total (credit) cost
$
(30
)
 
$
(33
)
 
$
1

 
$
1

In March 2017, the Company modified its defined benefit pension plans in Canada to discontinue further benefit accruals for participants after December 31, 2017 and replaced it with a defined contribution arrangement. The Company also amended its post-retirement benefits plan in Canada so that individuals who retire after April 1, 2019 will not be eligible to participate, except in certain situations. The Company re-measured the assets and liabilities of the plans, based on assumptions and market conditions on the amendment date.
The weighted average actuarial assumptions utilized to calculate the net periodic benefit costs for the U.S. and significant non-U.S. defined benefit plans are as follows:
Combined U.S. and significant non-U.S. Plans
Pension
Benefits
 
Post-retirement
Benefits
March 31,
2017

 
2016

 
2017

 
2016

Weighted average assumptions:
 
 
 
 
 
 
 
Expected return on plan assets
6.64
%
 
7.07
%
 

 

Discount rate
3.40
%
 
4.11
%
 
3.64
%
 
4.12
%
Rate of compensation increase*
1.77
%
 
2.44
%
 

 

*The 2017 assumption does not include a rate of compensation increase for the U.S. defined benefit plans since future benefit accruals were discontinued for those plans after December 31, 2016.
The Company made approximately $56 million of contributions to its U.S. and non-U.S. defined benefit plans in the first three months of 2017. The Company expects to contribute approximately $200 million to its U.S. pension and non-U.S. pension plans during the remainder of 2017.
Defined Contribution Pans
The Company maintains certain defined contribution plans for its employees, the most significant being in the U.S. and the U.K. The cost of these U.S. and U.K. defined contribution plans was $54 million and $40 million for the three months ended March 31, 2017 and 2016, respectively.


21



11.    Debt
The Company’s outstanding debt is as follows:
 
(In millions)
March 31,
2017

 
December 31,
2016

Short-term:
 
 
 
Commercial paper
$
150

 
$
50

Current portion of long-term debt
262

 
262

 
412

 
312

Long-term:
 
 
 
Senior notes – 2.30% due 2017 (a)
250

 
250

Senior notes – 2.55% due 2018
249

 
249

Senior notes – 2.35% due 2019
299

 
299

Senior notes – 2.35% due 2020
497

 
497

Senior notes – 4.80% due 2021
498

 
498

Senior notes – 2.75% due 2022
496

 

Senior notes – 3.30% due 2023
347

 
347

Senior notes – 4.05% due 2023
248

 
248

Senior notes – 3.50% due 2024
596

 
596

Senior notes – 3.50% due 2025
495

 
495

Senior notes – 3.75% due 2026
596

 
596

Senior notes – 5.875% due 2033
297

 
297

Senior notes – 4.35% due 2047
492

 

Mortgage – 5.70% due 2035
379

 
382

Other
2

 
3

 
5,741

 
4,757

Less current portion
262

 
262

 
$
5,479

 
$
4,495

(a) Repaid on April 1, 2017.
The senior notes in the table above are registered by the Company with the Securities and Exchange Commission, and are not guaranteed.
The Company has established a short-term debt financing program of up to $1.5 billion through the issuance of commercial paper. The proceeds from the issuance of commercial paper are used for general corporate purposes. The Company had $150 million of commercial paper outstanding at March 31, 2017 at an effective interest rate of 1.28%.
In January 2017, the Company issued $500 million of 2.75% senior notes due 2022 and $500 million of 4.35% senior notes due 2047. The Company used the net proceeds for general corporate purposes, including the repayment of a $250 million debt maturity in April 2017.
In March 2016, the Company issued $350 million of 3.30% seven-year senior notes. The Company used the net proceeds for general corporate purposes.
The Company and certain of its foreign subsidiaries maintain a $1.5 billion multi-currency five-year unsecured revolving credit facility. The interest rate on this facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. This facility expires in November 2020 and requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. There were no borrowings outstanding under this facility at March 31, 2017.
The Company has a $150 million uncommitted bank credit line. There were no borrowings under this facility at March 31, 2017.

22



Fair Value of Short-term and Long-term Debt
The estimated fair value of the Company’s short-term and long-term debt is provided below. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown below are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or need to dispose of the financial instrument.
  
March 31, 2017
 
December 31, 2016
(In millions)
Carrying
Amount

 
Fair
Value

 
Carrying
Amount

 
Fair
Value

Short-term debt
$
412

 
$
412

 
$
312

 
$
313

Long-term debt
$
5,479

 
$
5,658

 
$
4,495

 
$
4,625

The fair value of the Company’s short-term debt consists primarily of commercial paper and term debt maturing within the next year and its fair value approximates its carrying value. The estimated fair value of a primary portion of the Company's long-term debt is based on discounted future cash flows using current interest rates available for debt with similar terms and remaining maturities. Short- and long-term debt would be classified as Level 2 in the fair value hierarchy.
12.    Restructuring Costs
The Company recorded total restructuring costs of $9 million in the first three months of 2017, primarily for severance and future rent under non-cancelable leases. These costs were incurred in Risk and Insurance Services ($4 million), Consulting ($3 million) and Corporate ($2 million).
Details of the restructuring activity from January 1, 2016 through March 31, 2017, which includes liabilities from actions prior to 2017, are as follows:
(In millions)
Liability at 1/1/16
 
Amounts
Accrued
 
Cash
Paid
 
Other 
 
Liability at 12/31/16
 
Amounts
Accrued
 
Cash
Paid
 
Other 
 
Liability at 3/31/17
Severance
$
15

 
$
40

 
$
(22
)
 
$
(1
)
 
$
32

 
$
5

 
$
(21
)
 
$
(1
)
 
$
15

Future rent under non-cancelable leases and other costs
78

 
4

 
(17
)
 
(4
)
 
61

 
4

 
(4
)
 
(2
)
 
59

Total
$
93

 
$
44

 
$
(39
)
 
$
(5
)
 
$
93

 
$
9

 
$
(25
)
 
$
(3
)
 
$
74

The expenses associated with the above initiatives are included in compensation and benefits and other operating expenses in the consolidated statements of income. The liabilities associated with these initiatives are classified on the consolidated balance sheets as accounts payable and accrued liabilities, other liabilities or accrued compensation and employee benefits, depending on the nature of the items.
13.    Common Stock
During the first three months of 2017, the Company repurchased approximately 2.7 million shares of its common stock for consideration of $200 million. In November 2016, the Board of Directors of the Company authorized the Company to repurchase up to $2.5 billion in shares of the Company's common stock, which superseded any prior authorizations. As of March 31, 2017, the Company remained authorized to repurchase up to approximately $2.2 billion in shares of its common stock. There is no time limit on the authorization. During the first three months of 2016, the Company repurchased approximately 3.5 million shares of its common stock for consideration of $200 million.


23



14.    Claims, Lawsuits and Other Contingencies
Litigation Matters
The Company and its subsidiaries are subject to a significant number of claims, lawsuits and proceedings in the ordinary course of business. Such claims and lawsuits consist principally of alleged errors and omissions in connection with the performance of professional services, including the placement of insurance, the provision of actuarial services for corporate and public sector clients, the provision of investment advice and investment management services to pension plans, the provision of advice relating to pension buy-out transactions and the provision of consulting services relating to the drafting and interpretation of trust deeds and other documentation governing pension plans. These claims typically seek damages, including punitive and treble damages, in amounts that could be significant. In establishing liabilities for errors and omissions claims in accordance with FASB ASC Subtopic No. 450-20 (Contingencies-Loss Contingencies), the Company uses case level reviews by inside and outside counsel, and internal actuarial analysis by Oliver Wyman Group, a subsidiary of the Company, and other methods to estimate potential losses. A liability is established when a loss is both probable and reasonably estimable. The liability is reviewed quarterly and adjusted as developments warrant. In many cases, the Company has not recorded a liability, other than for legal fees to defend the claim, because we are unable, at the present time, to make a determination that a loss is both probable and reasonably estimable.
To the extent that expected losses exceed our deductible in any policy year, the Company also records an asset for the amount that we expect to recover under any available third-party insurance programs. The Company has varying levels of third-party insurance coverage, with policy limits and coverage terms varying significantly by policy year.
Governmental Inquiries and Enforcement Matters
Our activities are regulated under the laws of the United States and its various states, the European Union and its member states, and the other jurisdictions in which the Company operates.
The U.K. Financial Conduct Authority (the “FCA”) recently launched a civil competition investigation into the aviation insurance and reinsurance sector. In connection with that investigation, the FCA conducted an on-site inspection on April 4, 2017 at the London office of Marsh Limited, our Marsh and Guy Carpenter operating subsidiary in the United Kingdom. The FCA indicated that it had reasonable grounds for suspecting that Marsh Limited and others have been sharing competitively sensitive information within the aviation insurance and reinsurance sector. We are cooperating fully with the FCA’s ongoing investigation and are conducting our own review with the assistance of outside counsel. As the FCA’s investigation is at an early stage, we are unable to predict the timing or ultimate impact of this matter at this time.
In the ordinary course of business, the Company is subject to other investigations, subpoenas, lawsuits and other regulatory actions undertaken by governmental authorities. For example, the FCA is conducting a market study of the U.K. asset management industry, which includes asset managers and investment consultants such as Mercer. In November 2016, the FCA published an interim report which contains preliminary findings relating to the investment consulting industry and a provisional reference to the U.K. Competition & Markets Authority for a market investigation.
Other Contingencies-Guarantees
In connection with its acquisition of U.K.-based Sedgwick Group in 1998, the Company acquired several insurance underwriting businesses that were already in run-off, including River Thames Insurance Company Limited ("River Thames"), which the Company sold in 2001. Sedgwick guaranteed payment of claims on certain policies underwritten through the Institute of London Underwriters (the "ILU") by River Thames. The policies covered by this guarantee were reinsured up to £40 million by a related party of River Thames. Payment of claims under the reinsurance agreement is collateralized by segregated assets held in a trust. As of March 31, 2017, the reinsurance coverage exceeded the best estimate of the projected liability of the policies covered by the guarantee. To the extent River Thames or the reinsurer is unable to meet its obligations under those policies, a claimant may seek to recover from the Company under the guarantee.
From 1980 to 1983, the Company owned indirectly the English & American Insurance Company ("E&A"), which was a member of the ILU. The ILU required the Company to guarantee a portion of E&A's obligations. After E&A became insolvent in 1993, the ILU agreed to discharge the guarantee in exchange for the Company's agreement to post an evergreen letter of credit that is available to pay claims by policyholders on certain E&A policies issued through the ILU and incepting between July 3, 1980 and October 6, 1983. Certain claims have been paid under the

24



letter of credit and the Company anticipates that additional claimants may seek to recover against the letter of credit.

* * * *

The pending proceedings described above and other matters not explicitly described in this Note 14 on Claims, Lawsuits and Other Contingencies may expose the Company or its subsidiaries to liability for significant monetary damages, fines, penalties or other forms of relief. Where a loss is both probable and reasonably estimable, the Company establishes liabilities in accordance with FASB ASC Subtopic No. 450-20 (Contingencies - Loss Contingencies). Except as described above, the Company is not able at this time to provide a reasonable estimate of the range of possible loss attributable to these matters or the impact they may have on the Company's consolidated results of operations, financial position or cash flows. This is primarily because these matters are still developing and involve complex issues subject to inherent uncertainty. Adverse determinations in one or more of these matters could have a material impact on the Company's consolidated results of operations, financial condition or cash flows in a future period.
15.    Segment Information
The Company is organized based on the types of services provided. Under this structure, the Company’s segments are:
Risk and Insurance Services, comprising insurance services (Marsh) and reinsurance services (Guy Carpenter); and
Consulting, comprising Mercer and Oliver Wyman Group.
The accounting policies of the segments are the same as those used for the consolidated financial statements described in Note 1 to the Company’s 2016 Form 10-K. Segment performance is evaluated based on segment operating income, which includes directly related expenses, and charges or credits related to integration and restructuring but not the Company’s corporate-level expenses. Revenues are attributed to geographic areas on the basis of where the services are performed.
Selected information about the Company’s operating segments for the three month period ended March 31, 2017 and 2016 are as follows:
 
 
Three Months Ended
March 31,
 
(In millions)
Revenue
 
Operating
Income
(Loss)
 
2017–
 
 
 
 
Risk and Insurance Services
$
1,989

(a) 
$
613

 
Consulting
1,526

(b) 
241

 
Total Operating Segments
3,515

  
854

 
Corporate / Eliminations
(12
)
 
(45
)
 
Total Consolidated
$
3,503

  
$
809

 
2016–
 
 
 
 
Risk and Insurance Services
$
1,868

(a) 
$
535

 
Consulting
1,478

(b) 
245

 
Total Operating Segments
3,346

  
780

 
Corporate / Eliminations
(10
)
 
(47
)
 
Total Consolidated
$
3,336

  
$
733

 
(a) 
Includes inter-segment revenue of $1 million in 2016, interest income on fiduciary funds of $8 million and $6 million in 2017 and 2016, respectively, and equity method income of $2 million in 2017 and $1 million in 2016, respectively.
(b) 
Includes inter-segment revenue of $12 million and $9 million in 2017 and 2016, respectively, interest income on fiduciary funds of $1 million in both 2017 and 2016, and equity method income of $4 million in both 2017 and 2016.

25



Details of operating segment revenue for the three month period ended March 31, 2017 and 2016 are as follows:
 
Three Months Ended March 31,
 
(In millions)
2017

 
2016

 
Risk and Insurance Services
 
 
 
 
Marsh
$
1,602

 
$
1,493

 
Guy Carpenter
387

 
375

 
Total Risk and Insurance Services
1,989

 
1,868

 
Consulting
 
 
 
 
Mercer
1,077

 
1,039

 
Oliver Wyman Group
449

 
439

 
Total Consulting
1,526

 
1,478

 
Total Operating Segments
3,515

 
3,346

 
Corporate / Eliminations
(12
)
 
(10
)
 
Total
$
3,503

 
$
3,336

 
16.    New Accounting Guidance
In March 2017, the FASB issued new guidance to improve the presentation of net periodic pension cost and net periodic postretirement cost (''net periodic benefit costs"). The new guidance requires employers to report the service cost component of net periodic benefit costs in the same line item as other compensation costs in the income statement. The other components of net periodic benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. In addition, only the service cost component is eligible for capitalization, when applicable. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The new guidance requires retrospective application for the presentation of the service cost component and the other components of net periodic benefit costs, and prospective application for the capitalization of the service cost component. The adoption of this guidance will impact the presentation of the Company's results of operations, in particular, reducing net operating income, but will have no impact on the Company's net income.
In January 2017, the FASB issued new guidance to simplify the test for goodwill impairment. The new guidance eliminates the second step in the current two-step goodwill impairment process, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill for that reporting unit. The new guidance requires a one-step impairment test, in which the goodwill impairment charge is based on the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance should be applied on a prospective basis with the nature of and reason for the change in accounting principle disclosed upon transition. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations.
In January 2017, the FASB issued guidance which clarifies the definition of a business in order to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted under certain circumstances and the guidance must be applied prospectively as of the beginning of the period of adoption. The Company is currently evaluating the impact, if any, the adoption of this standard will have on its financial position or results of operations.
In November 2016, the FASB issued new guidance which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for public companies

26



for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance must be applied retrospectively to all periods presented. Early adoption is permitted. The adoption of this guidance is not expected to have an impact on the Company's consolidated balance sheets or consolidated statement of cash flows.
In October 2016, the FASB also issued new guidance which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance eliminates the exception for an intra-entity transfer of an asset other than inventory. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The new guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact the adoption of this standard will have on its financial position or results of operations.
In August 2016, the FASB issued new guidance which adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, including cash payments for debt prepayments or debt extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investees. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance must be applied retrospectively to all periods presented unless retrospective application is impracticable. Early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its statement of cash flows.
In February 2016, the FASB issued new guidance intended to improve financial reporting for leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the new guidance requires that both types of leases be recognized on the balance sheet. The new guidance will require additional disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, and additional information about the amounts recorded in the financial statements. The accounting by organizations that own the assets ("lessor") leased by the lessee will remain largely unchanged from current GAAP. However, the guidance contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The new guidance on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application will be permitted. The Company is currently evaluating the impact the adoption of the guidance will have on its financial position and results of operations, but expects material "right to use" assets and lease liabilities to be recorded on its consolidated balance sheets.
In January 2016, the FASB issued new guidance intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of the guidance on its financial position and results of operations.
New Revenue Recognition Pronouncement
In May 2014, the FASB issued new accounting guidance to clarify the principles for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that principle, the entity should apply the following steps: identify

27



the contract(s) with the customer, identify the performance obligations in the contract(s), determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. Entities are permitted to adopt the guidance under one of the following methods: the "full retrospective" method, which applies the guidance to each period presented (prior years restated) or the "modified retrospective" method in which the guidance is only applied to the year of adoption, with the cumulative effect of initially applying the guidance recognized as an adjustment to retained earnings. The Company will adopt the new guidance effective January 1, 2018. The Company is evaluating the transition method it will use, but currently expects to use the modified retrospective method.
The Company continues to evaluate the impact of the standard on our Risk and Insurance Services ("RIS") segment. Based on the results of the review to date, the Company expects there will be some movement in the timing of revenue recognition between quarterly and annual periods. However, since the vast majority of our brokerage arrangements involve contracts that cover a single year of placements, on a year over year basis, the Company does not believe there will be a significant change to the amount of revenue recognized in an annual period.
The Company's initial review and preliminary conclusions for the Consulting segment indicate the impact on the existing pattern of revenue recognition in quarterly or annual periods will be less significant than for RIS. The conclusions will be completed following a final review of customer arrangement legal terms and conditions in certain non-U.S. locations.
The Company expects that certain costs that are currently expensed under GAAP will be capitalized as costs to obtain or costs to fulfill customer contracts under guidance issued as part of the revenue recognition standard. Any capitalized costs would be amortized on a basis consistent with the transfer of services to which they relate. Such expenses related to Risk and Insurance Services would generally be "amortized" over a period of one year or less. The Company is continuing to quantify the amount of such costs that must be deferred. In the Consulting segment, certain expenses that are currently deferred may have a longer amortization period to reflect the amortization over the expected life of the contract including anticipated renewal periods.
The Company has not yet quantified the impact of the changes discussed above.
New Accounting Pronouncements Recently Adopted
In October 2016, the FASB issued new guidance which changes the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a variable interest entity), the new guidance requires that reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interest in a variable interest entity and, on a proportionate basis, its indirect variable interests in a variable interest entity held through related parties, including related parties that are under common control with the reporting entity. The adoption of this guidance did not have a significant impact on its financial position, results of operations and statement of cash flows.
In April 2016, the FASB issued new guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance requires that companies record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement and classify excess tax benefits as an operating activity in the statement of cash flows. The Company adopted this new guidance prospectively, effective January 1, 2017 and prior periods have not been adjusted. For the three months ended March 31, 2017, the adoption of this new standard reduced income tax expense in the consolidated statement of income by approximately $44 million. For the three months ended March 31, 2016, the Company recorded an excess tax benefit of $18 million as an increase to equity in its consolidated balance sheet and an increase to cash provided by financing activities in the consolidated statement of cash flows.
In March 2016, the FASB issued new guidance which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity

28



method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The new guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The guidance was adopted on January 1, 2017 and did not have an impact on the Company's financial position or results of operations.

29



Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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. It is the parent company of a number of leading risk advisors and specialty consultants, including: Marsh, the insurance broker, intermediary and risk advisor; Guy Carpenter, the risk and reinsurance specialist; Mercer, the provider of HR and Investment related financial advice and services; and Oliver Wyman Group, the management, economic and brand consultancy. With more than 60,000 employees worldwide and annual revenue of more than $13 billion, the Company provides analysis, advice and transactional capabilities to clients in more than 130 countries.
The Company operates 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 wealth, health and career consulting services and products, and specialized management, economic and brand consulting services. The Company conducts business in this segment through Mercer and Oliver Wyman Group.
Effective January 1, 2017, Mercer established a Wealth business reflecting a unified client strategy for its former Retirement and Investments businesses. Wealth is comprised of two practices, Defined Benefit Consulting & Administration (DBA), and Investment Management & Related Services (IMS). DBA encompasses mature businesses primarily in defined benefit and actuarial consulting, along with defined benefit administration. IMS includes businesses primarily in delegated solutions, defined contribution related investment services, and financial wellness. Among the changes, defined benefit investment consulting, previously reported in the Investments business, will now be included in Defined Benefit Consulting & Administration. Revenue information will be reported for these two practices to provide investors better insight into the underlying growth dynamics within Wealth. This change has no impact on previously reported Mercer total revenue, Consulting segment revenue or operating income, or consolidated revenue or financial results. In addition, moving forward the Company will refer to the Talent business as Career.
A reconciliation of segment operating income to total operating income is included in Note 15 to the consolidated financial statements included in Part I Item 1 in this report. The accounting policies used for each segment are the same as those used for the consolidated financial statements.

30



Consolidated Results of Operations
 
Three Months Ended
March 31,
(In millions, except per share figures)
2017

 
2016

Revenue
$
3,503

 
$
3,336

Expense:
 
 
 
Compensation and Benefits
1,945

 
1,854

Other Operating Expenses
749

 
749

Operating Expenses
2,694


2,603

Operating Income
$
809


$
733

Net income before non-controlling interests
$
578

 
$
490

Net Income Attributable to the Company
$
569

 
$
481

Net Income Per Share Attributable to the Company:
 
 
 
Basic
$
1.10

 
$
0.92

Diluted
$
1.09

 
$
0.91

Average Number of Shares Outstanding:
 
 
 
Basic
515

 
521

Diluted
522

 
526

Shares Outstanding at March 31
515

 
521

The Company's consolidated operating income of $809 million in the first quarter of 2017 increased 10% as compared to the prior year. This reflects the impact of a 5% increase in revenue and a 4% increase in expense. Revenue increased 6% in Risk and Insurance Services and 3% in Consulting as compared to last year. The increase in expenses primarily reflects higher base salaries, offset by credits recorded in the first quarter of 2017 for contingent consideration related to acquisitions.
Income from continuing operations increased 18% to $578 million primarily due to the combined effects of the increase in operating income discussed above, and the impact of a credit to income tax expense related to the required change in accounting for share based awards, partially offset by higher interest expense. Diluted net income per share from continuing operations increased 20% to $1.09, compared to $0.91 last year, reflecting an $88 million increase in net income attributable to the Company as well as a 1% decrease in the average number of diluted shares outstanding. The number of shares issued related to the vesting of share awards and exercise of employee stock options was more than offset by shares repurchased over the past four quarters. In addition, in accordance with the change in accounting for stock compensation, the excess tax benefits for unvested shares and unexercised stock options are no longer included in the calculation of common stock equivalents ("CSE's") under the Treasury stock method. This had the effect of increasing CSE's by approximately 1.8 million shares.



31



Consolidated Revenue and Expense
Revenue - Components of Change
The Company conducts business in more than 130 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 impact of foreign currency exchange fluctuations, acquisitions and dispositions, including transfers among businesses, on the Company’s operating revenues by segment was as follows:
 
Three Months Ended
March 31,
 
%
Change
GAAP
Revenue
 
Components of Revenue Change*
Currency
Impact
 
Acquisitions/
Dispositions
Impact
 
Underlying
Revenue
(In millions)
2017

 
2016

 
Risk and Insurance Services
 
 
 
 
 
 
 
 
 
 
 
Marsh
$
1,596

 
$
1,488

 
7
%
 
(1
)%
 
4
%
 
5
%
Guy Carpenter
385

 
374

 
3
%
 
(1
)%
 

 
4
%
Subtotal
1,981

 
1,862

 
6
%
 
(1
)%
 
3
%
 
5
%
Fiduciary Interest Income
8