Consulting includes Health, Retirement, Talent and Investments consulting services and products, and specialized management, economic and brand consulting services. We conduct business in this segment through Mercer and Oliver Wyman Group.
Risk and Insurance Services operating income increased $87 million or 7% in 2013 compared with 2012. Revenue increased 4%, or 3% on an underlying basis, to $6.6 billion in 2013 reflecting underlying revenue growth of 3% at Marsh and 5% at Guy Carpenter.
Consolidated revenue for 2013 increased 3% on both a reported and underlying basis to $12.3 billion compared with $11.9 billion in 2012. Revenue in the Risk and Insurance Services segment increased 4% in 2013 compared with 2012, or 3% on an underlying basis, with underlying revenue growth of 3% at Marsh and 5% at Guy Carpenter. The Consulting segment's revenue increased 2% on both a reported and underlying basis. On an underlying basis, Mercer's revenue was up 4% in 2013 compared with 2012, while the Oliver Wyman Group decreased 1%.
In Marsh, revenue grew to $5.8 billion or 6% in 2014 as compared to 2013, reflecting a 4% increase on an underlying basis and a 3% increase from acquisitions, partly offset by a 1% decrease resulting from the impact of foreign currency translation. The underlying revenue increase reflects growth in all major geographies driven by strong new business, particularly in countries such as the U.S., Canada, and the U.K., as well as in Africa. International operations had underlying revenue growth of 5% reflecting increases of 10% in Latin America, 7% in Asia Pacific and 3% in EMEA, while U.S. / Canada increased 3%.
November - Marsh acquired Torrent Technologies, Inc., a Montana-based flood insurance specialist.
The major component of revenue in the Consulting business is fees paid by clients for advice and services. Mercer, principally through its health line of business, also earns revenue in the form of commissions received from insurance companies for the placement of group (and occasionally individual) insurance contracts, primarily life, health and accident coverages. Revenue for Mercer’s delegated investment management business and certain of Mercer’s defined contribution administration services consists principally of fees based on assets under management and/or administration.
December - Mercer acquired Denarius, a compensation and benefits survey and information products consulting firm based in Chile, and Oliver Wyman acquired OC&C Strategy Consultants (Boston) LLC (part of the OC&C network) a Boston-based consulting firm specializing in the business media, information services and education sectors.
Consulting revenue in 2013 increased 2% compared with 2012 on both a reported and underlying basis. Mercer’s revenue was $4.2 billion in 2013, an increase of 2% reflecting a 4% increase in underlying revenue, partly offset by a 1% decrease due to the impact of foreign currency translation. The underlying revenue growth was primarily driven by Health and Investments, which increased 6% and 9%, respectively. Oliver Wyman’s revenue was flat in 2013 compared to 2012, as a 1% decrease in underlying revenue was offset by a 1% increase due to the impact of foreign currency translation.
August - Mercer acquired Global Remuneration Solutions, a market leading compensation consulting firm based in South Africa.
Interest income earned on corporate funds amounted to $18 million in 2013 compared with $24 million in 2012. The decrease in interest income is due to lower average interest rates compared with the prior year. Interest expense was $167 million in 2013 compared with $181 million in 2012. The decrease is due to lower average debt balances in 2013 and lower interest rates on senior notes issued in 2013 compared with the interest rates on senior notes that matured or were extinguished during 2013.
In 2013, investment income was $69 million compared with $24 million in 2012. This increase was primarily due to $41 million of performance fees from Trident III. In addition, 2012 results included an impairment loss on a debt security of $8 million.
The realization of deferred tax assets depends on generating future taxable income during the periods in which the tax benefits are deductible or creditable. Tax liabilities are determined and assessed jurisdictionally by legal entity or filing group. Certain taxing jurisdictions allow or require combined or consolidated tax filings. The Company assessed the realizability of its deferred tax assets and considered all available evidence, including the existence of a recent history of losses, placing particular weight on evidence that could be objectively verified. A valuation allowance was recorded to reduce deferred tax assets to the amount that the Company believes is more likely than not to be realized.
The Company is organized as a holding company, a legal entity separate and distinct from its operating subsidiaries. As a holding company without significant operations of its own, the Company is dependent upon dividends and other payments from its operating subsidiaries to meet its obligations for paying principal and interest on outstanding debt obligations, for paying dividends to stockholders, for share repurchases and for corporate expenses. Other sources of liquidity include borrowing facilities discussed below in financing cash flows.
The Company derives a significant portion of its revenue and operating profit from operating subsidiaries located outside of the United States. Funds from the Company’s operating subsidiaries located outside of the United States are regularly repatriated to the United States out of annual earnings. At December 31, 2014, the Company had approximately $1.3 billion of cash and cash equivalents in its foreign operations, substantially all of which is considered to be permanently invested in those operations to fund foreign investments and working capital needs. At the current time, the Company does not intend to repatriate any of this cash. The non-U.S. cash and cash equivalents considered permanently reinvested includes $179 million of operating funds required to be maintained for regulatory requirements or as collateral under certain captive insurance arrangements. The Company expects to continue its practice of repatriating foreign funds out of current annual earnings. While management does not foresee a need to repatriate the funds which are currently deemed permanently invested, if facts or circumstances change, management could elect to repatriate them, if necessary, which could result in higher effective tax rates in the future. During 2014, the Company recorded foreign currency translation adjustments which reduced net equity by $515 million. Continued strengthening of the U.S. dollar against foreign currencies would further reduce the translated U.S. dollar value of the Company’s net investments in its non-U.S. subsidiaries, as well as the translated U.S. dollar value of cash repatriations from those subsidiaries.
The year-over-year change in the funded status of the Company's pension plans is impacted by the variance between actual and assumed results, particularly with regard to return on assets and changes in the discount rate, as well as the amount of Company contributions, if any. Unrecognized actuarial losses were approximately $1.7 billion and $3.2 billion at December 31, 2014 for the U.S. plans and non-U.S. plans, respectively, compared with $1.0 billion and $3.0 billion at December 31, 2013. The increase is primarily due to the impact of decreases in the discount rates, partly offset by actual returns on plan assets in 2014 that were higher than the estimated long-term rate of return on plan assets. In the past several years, the amount of actuarial losses has been significantly impacted, both positively and negatively, by actual asset performance and changes in discount rates. The discount rate used to measure plan liabilities decreased in both the U.S. and the U.K. (the Company's two largest plans) in 2014 after increasing in 2013 for the first time in four years. Prior to 2013, the discount rate decreased in each of the four years from 2009 to 2012. At the end of 2009, the weighted average discount rate for all plans was 6.0%, declining to 5.6%, 4.9% and 4.4% at the end of 2010, 2011 and 2012, respectively. In 2013, the weighted average discount rate increased to 4.8%, and in 2014, it decreased to 3.8%. An increase in the discount rate decreases the measured plan benefit obligation, resulting in actuarial gains, while a decrease in the discount rate increases the measured plan obligation, resulting in actuarial losses. During 2014, the Company's defined benefit pension plan assets had actual returns of 9.8% and 19.4% in the U.S. and U.K., respectively. During 2013, the Company's defined benefit pension plan assets had actual returns of 12.6%, and 8.6% in the U.S. and U.K., respectively; and in 2012, the actual returns were 14.1% in the U.S. and 9.8% in the U.K. In 2013, both the increase in the discount rate and actual asset returns that were higher than the assumed rates of return contributed to actuarial gains. In 2012, actuarial losses resulting from declines in the discount rate were partly offset by actual asset returns which exceeded the assumed rate of return.
The Company plans to implement changes to its post-65 retiree medical plan in 2015. The impact of the plan amendment will be recognized when the terms of the amendment are finalized and communicated to impacted employees.
Net cash used for financing activities was $961 million in 2014 compared with $834 million of net cash used for financing activities in 2013.
In September 2014, the Company issued $300 million of 2.35% five-year senior notes and $500 million of 3.50% 10.5-year senior notes. In October 2014, a significant portion of the net proceeds of this offering was used to redeem $630 million of debt, including $230 million of 5.75% senior notes due in September 2015 and $400 million of 9.25% senior notes due in 2019. Total cash outflow related to this transaction was approximately $765 million, including a $137 million cost for early redemption, which is reflected as a charge in the consolidated statements of income in the fourth quarter of 2014.
The Company paid $17 million in 2013 and $30 million in 2012 of contingent payments related to acquisitions made in prior periods.
On March 27, 2014, the Company and certain of its foreign subsidiaries amended the $1.0 billion facility, discussed below, into a new $1.2 billion multi-currency five-year unsecured revolving credit facility. The interest rate on this facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. This facility expires in March 2019 and requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. There were no borrowings outstanding under this facility at December 31, 2014.
The Company and certain of its foreign subsidiaries previously maintained a $1.0 billion multi-currency five-year revolving credit facility. The facility was previously due to expire in October 2016 and was in
The Company also maintains other credit facilities, guarantees and letters of credit with various banks, primarily related to operations located outside the United States, aggregating $260 million at December 31, 2014 and $282 million at December 31, 2013. There was $0.6 million outstanding borrowings under these facilities at December 31, 2014 and $1 million outstanding borrowings under these facilities at December 31, 2013.
In May 2014, the Board of Directors increased the amount of the Company's share repurchase program to $2 billion. During 2014, the Company repurchased 15.5 million shares of its common stock for total consideration of $800 million at an average price per share of $51.44. The Company remains authorized to purchase additional shares of its common stock up to a value of approximately $1.3 billion. There is no time limit on this authorization. During 2013, the Company repurchased approximately 13.2 million shares of its common stock for total consideration of $550 million at an average price per share of $41.76.
The Company paid total dividends of $582 million in 2014 ($1.06 per share), $533 million in 2013 ($0.96 per share) and $497 million in 2012 ($0.90 per share).
On June 23, 2014, Mercer entered into a definitive agreement to acquire a 34% stake in South Africa-based Alexander Forbes Group Holdings Limited ("Alexander Forbes"), becoming a strategic shareholder after Alexander Forbes successfully launched an initial public offering. Mercer purchased its stake in Alexander Forbes in two tranches at 7.50 South African Rand per share. On July 24, 2014, the Company purchased 14.9% of Alexander Forbes common shares for approximately $137 million and in October 2014, the Company paid approximately $166 million for the remaining 19.1%, which is included in other assets in the consolidated balance sheet. The investment in Alexander Forbes is accounted for using the equity method.
The Company made eight acquisitions in 2013. Cash used for these acquisitions, net of cash acquired was $125 million. In addition, in 2013, the Company paid $2 million for the purchase of other intangible assets.
The following sets forth the Company’s future contractual obligations by the types identified in the table below as of December 31, 2014:
As of December 31, 2014, there was $16 million of unrecognized compensation cost related to stock option awards. The weighted-average periods over which the costs are expected to be recognized is 1.05 years. Also as of December 31, 2014, there was $55.8 million of unrecognized compensation cost related to the Company’s restricted stock, restricted stock unit and deferred stock unit awards. The weighted-average period over which that cost is expected to be recognized is approximately one year.
Fiduciary Assets and Liabilities: In its capacity as an insurance broker or agent, the Company generally 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 $24 million, $27 million and $39 million in 2014, 2013 and 2012, respectively. The Consulting segment recorded fiduciary interest income of $6 million, $5 million and $4 million in 2014, 2013 and 2012, respectively. Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities.
Investments in private equity funds are accounted for under the equity method of accounting using a consistently applied three-month lag period adjusted for any known significant changes from the lag period to the reporting date of the Company. The underlying private equity funds follow investment company accounting, where investments within the fund are carried at fair value. The Company records in earnings, investment gains/losses for its proportionate share of the change in fair value of the funds. Investments using the equity method of accounting are included in other assets in the consolidated balance sheets.
On February 24, 2015, Mercer announced that it had made an investment to purchase approximately 10% of Benefitfocus (NASDAQ: BNFT), a benefits technology provider, with the option to increase its ownership over time.
Capitalized Software Costs: The Company capitalizes certain costs to develop, purchase or modify software for the internal use of the Company. These costs are amortized on a straight-line basis over periods ranging from 3 to 10 years. Costs incurred during the preliminary project stage and post implementation stage, are expensed as incurred. Costs incurred during the application development stage are capitalized. Costs related to updates and enhancements are only capitalized if they will result in additional functionality. Capitalized computer software costs of $501 million and $399 million, net of accumulated amortization of $837 million and $748 million at December 31, 2014 and 2013, respectively, are included in other assets in the consolidated balance sheets.
provide disclosures in reporting periods that include the date of initial application of the amount by which each financial statement line item is affected in the current reporting period by application of the guidance as compared to guidance that was in effect before the change, and an explanation for the reasons for significant changes. The Company is currently evaluating the impact of the adoption of the guidance on its financial condition and results of operations.
In July 2013, the FASB issued new accounting guidance related to the presentation of unrecognized tax benefits as a reduction to a deferred tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward. However, to the extent a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward is not available at the reporting date under the tax law of the applicable jurisdiction to settle taxes that would result from the disallowance of the tax position or the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice), the unrecognized tax benefit shall be presented in the financial statement as a liability and shall not be combined with deferred tax assets. The guidance was effective for fiscal years beginning after December 15, 2013. The adoption of this new guidance impacted balance sheet classification and footnote disclosure only and did not have a material impact on the Company's financial statements.
In June 2013, the FASB issued new accounting guidance which amends the criteria for an entity to qualify as an investment company. The guidance clarifies the characteristics of an investment company, provides comprehensive guidance to determine whether an entity is an investment company and sets measurement and disclosure requirements for investment companies. The guidance is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of this guidance did not materially affect the Company's financial position, results of operations or cash flows.
Reclassifications: In the first quarter of 2014, the Company enhanced its operating cash flow presentation within the statements of cash flows to show on single lines the impact of pension and other benefit plan contributions in excess of the related expenses, and the non-cash impact of equity share awards. Previously, the cash flow impact of those items was presented as part of changes in other assets and other liabilities, and changes in other liabilities, respectively. The prior years' presentation was conformed to the current presentation for the following line items within operating cash flows:
The following schedule provides additional information concerning acquisitions, interest and income taxes paid:
The Company paid deferred purchase consideration related to prior years' acquisitions of $25 million, $15 million and $59 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The consolidated statements of cash flows includes the cash flow impact of discontinued operations in each cash flow category, which were insignificant to the overall cash flows of the Company.
March - MMA acquired Capstone Insurance Services, LLC, an agency that provides property-casualty insurance and risk management solutions to businesses and individuals throughout South Carolina.
September - Oliver Wyman acquired Bonfire Communications, an agency specializing in employee engagement and internal communications based in San Francisco, California.
Total purchase consideration for acquisitions made during 2013 was $178 million, which consisted of cash paid of $139 million and deferred purchase and estimated contingent consideration of $39 million. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over two to four years. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. During 2013, the Company also paid $15 million of deferred purchase consideration and $17 million of contingent consideration related to acquisitions made in prior years. In addition, the Company paid $2 million to purchase other intangible assets during 2013.
The consolidated statements of income for 2014 include approximately $134 million of revenue and $18 million of operating income related to acquisitions made during 2014.
Alexander Forbes: In June 2014, Mercer entered into a definitive agreement to acquire a 34% interest in South Africa-based Alexander Forbes Group Holding Limited (“Alexander Forbes”) becoming a strategic shareholder after Alexander Forbes successfully launched an initial public offering. Mercer purchased its stake in Alexander Forbes in two tranches at 7.50 South African Rand per share. In July 2014, the Company purchased 14.9% of Alexander Forbes common shares for approximately $137 million. In October 2014, the Company paid approximately $166 million for the remaining 19.1% of Alexander Forbes common shares.
Upon completion of the acquisition, the purchase price of the Alexander Forbes shares exceeded the Company's share of the equity in net assets by approximately $146 million. The majority of this basis difference resulted from the excess of the Company’s purchase price for the Alexander Forbes common stock acquired over the book value of Alexander Forbes’ net assets. Substantially all of this basis difference was allocated, based on our preliminary estimates of the fair values of Alexander Forbes’ assets and liabilities, to the value of investment contracts, customer contracts and relationships acquired and technology related intangible assets, related deferred tax liability and goodwill. The basis difference related to these intangible assets (excluding goodwill) is recorded as additional amortization expense over their estimated lives. The basis difference related to the goodwill will be recognized upon disposition of our investment. The Company is finalizing its purchase price allocation.
Amortized intangible assets consist primarily of the cost of client lists and trade names acquired. The gross cost and accumulated amortization at December 31, 2014 and 2013 are as follows:
Aggregate amortization expense was $86 million for the year ended December 31, 2014, and $72 million for the years ended December 31, 2013 and 2012, respectively. The estimated future aggregate amortization expense is as follows:
For financial reporting purposes, income before income taxes includes the following components:
Net of valuation allowances of $82 million in 2014 and $70 million in 2013.
U.S. Federal income taxes are not provided on temporary differences with respect to investments in foreign subsidiaries that are essentially permanent in duration, which at December 31, 2014, the Company estimates, amounted to approximately $6.3 billion. The determination of the unrecognized deferred tax liability with respect to these investments is not practicable.
A reconciliation from the U.S. Federal statutory income tax rate to the Company’s effective income tax rate is shown below.
Of the total unrecognized tax benefits at December 31, 2014, 2013 and 2012, $51 million, $71 million and $96 million, respectively, represent the amount that, if recognized, would favorably affect the effective tax rate in any future periods. The total gross amount of accrued interest and penalties at December 31, 2014, 2013 and 2012, before any applicable federal benefit, was $7 million, $10 million and $13 million, respectively.
As discussed in Note 5, the Company has provided certain indemnities related to contingent tax liabilities as part of the disposals of Putnam and Kroll. At December 31, 2014, 2013 and 2012, $2 million, $2 million and $6 million, respectively, included in the table above, relates to Putnam and Kroll positions included in consolidated Company tax returns. Since the Company remains primarily liable to the taxing authorities for resolution of uncertain tax positions related to consolidated returns, these balances will remain as part of the Company’s consolidated liability for uncertain tax positions. Any future charges or credits related to these matters, including interest accrued, will be recorded in discontinued operations as incurred.
The Company maintains qualified and non-qualified defined benefit pension plans for its U.S. and non-U.S. eligible employees. The Company’s policy for funding its tax qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth by U.S. law and the laws of the non-U.S. jurisdictions in which the Company offers defined benefit plans.
The major categories of plan assets include equity securities, equity alternative investments, and fixed income securities. For the U.S. qualified plan, the category ranges are 57-67% for equities and equity alternatives, and 33-43% for fixed income. For the U.K. Plan, the category ranges are 47-53% for equities and equity alternatives, and 47-53% for fixed income. Asset allocation is monitored frequently and re-balancing actions are taken as appropriate. Re-balancing in the U.K. Plan was suspended in 2014 while a contingent guarantee agreement was put in place and the investment strategy of the plan was finalized. After the contingent guarantee agreement was executed in January 2015, re-balancing resumed in February 2015 with target asset allocation of 48% equities and equity alternatives and 52% fixed income.
In 2014, the Society of Actuaries in the United States issued a new mortality table (RP-2014) and an updated improvement scale. The Company considered the effect of RP-2014, along with other available information on mortality improvement and industry specific mortality studies, to select its assumptions for measurement of the plans’ benefit obligations at December 31, 2014.
As of December 31, 2014, the U.S. qualified plan holds 4 million shares of the Company’s common stock which were contributed to the Plan by the Company in 2005. This represented approximately 5.1% of that plan’s assets as of December 31, 2014. In addition, plan assets may be invested in funds managed by Mercer Investments, a subsidiary of the Company.
The Company expects to fund approximately $169 million to its non-U.S. pension plans in 2015. Funding requirements for non-U.S. plans vary by country. Contribution rates are generally based on local funding practices and requirements, which may differ significantly from measurements under U.S. GAAP. Funding amounts may be influenced by future asset performance, the level of discount rates and other variables impacting the assets and/or liabilities of the plan. Discretionary contributions may also be affected by alternative uses of the Company’s cash flows, including dividends, investments and share repurchases.
The following table sets forth, by level within the fair value hierarchy, a summary of the U.S. and non-U.S. plans' investments measured at fair value on a recurring basis at December 31, 2014 and 2013:
In 2014, certain non U.S. government securities that were previously categorized as Level 1 were transferred to Level 2.
Real estate investment trusts: Valued at the closing price reported on an exchange.
Registered investment companies: Valued at the closing price reported on the primary exchange.
The Company maintains certain defined contribution plans for its employees, including the Marsh & McLennan Companies 401(k) Savings & Investment Plan (“401(k) Plan”), that are qualified under U.S. tax laws. Under these plans, eligible employees may contribute a percentage of their base salary, subject to certain limitations. For the 401(k) Plan, the Company matches a fixed portion of the employees’ contributions. The 401(k) Plan contains an Employee Stock Ownership Plan feature under U.S. tax law. Approximately $453 million of the 401(k) Plan’s assets at both December 31, 2014 and December 31, 2013 were invested in the Company’s common stock. If a participant does not choose an investment direction for his or her future contributions, they are automatically invested in a BlackRock LifePath Portfolio that most closely matches the participant’s expected retirement year. The cost of these defined contribution plans was $49 million in 2014, $50 million in 2013 and $50 million in 2012. In addition, the Company has a significant defined contribution plan in the U.K. As noted above, effective August 1, 2014, a newly formed defined contribution plan replaced the existing defined contribution and defined benefit plans with regard to future service. The cost of the U.K. defined contribution plan was $65 million, $23 million and $21 million in 2014, 2013 and 2012, respectively.
The assumptions used in the Black-Scholes option pricing valuation model for options granted by the Company in 2014, 2013 and 2012 are as follows:
A summary of the status of the Company’s stock option awards as of December 31, 2014 and changes during the year then ended is presented below:
In the above table, forfeited options are unvested options whose requisite service period has not been met. Expired options are vested options that were not exercised. The weighted-average grant-date fair value of the Company's option awards granted during the years ended December 31, 2014, 2013 and 2012 was $9.66, $6.21 and $6.04, respectively. The total intrinsic value of options exercised during the same periods was $174.3 million, $198.1 million and $57.7 million, respectively.
As of December 31, 2014, there was $16 million of unrecognized compensation cost related to the Company's option awards. The weighted-average period over which that cost is expected to be recognized is approximately 1.05 years. Cash received from the exercise of stock options for the years ended December 31, 2014, 2013 and 2012 was $178.1 million, $281.1 million and $179.3 million, respectively.
Restricted Stock Units and Performance Stock Units: Restricted stock units may be awarded under the Company's 2011 Incentive and Stock Award Plan. The Compensation Committee determines the restrictions on such units, when the restrictions lapse, when the units vest and are paid, and under what terms the units are forfeited. The cost of these awards is amortized over the vesting period, which is generally three years. Awards to senior executives and other employees may include three-year performance-based restricted stock units and three-year service-based restricted stock units. The payout of performance stock units (payable in shares of the Company's common stock) may range, generally, from 0-200% of the number of units granted, based on the achievement of objective, pre-determined Company or operating company performance measures, generally, over a three-year performance period. The Company accounts for these awards as performance condition restricted stock units. The performance condition is not considered in the determination of grant date fair value of such awards. Compensation cost is recognized over the performance period based on management's estimate of the number of units expected to vest and is adjusted to reflect the actual number of shares paid out at the end of the three-year performance period. Dividend equivalents are not paid out unless and until such time that the award vests.
A summary of the status of the Company's restricted stock units and performance stock units ("PSU's") as of December 31, 2014 and changes during the period then ended is presented below:
Restricted Stock: Restricted shares of the Company's common stock may be awarded under the 2011 Plan and are subject to restrictions on transferability and other restrictions, if any, as the Compensation Committee may impose. The Compensation Committee may also determine when and under what circumstances the restrictions may lapse and whether the participant receives the rights of a stockholder, including, without limitation, the right to vote and receive dividends. Unless the Compensation Committee determines otherwise, restricted stock that is still subject to restrictions is forfeited upon termination of employment. There have been no restricted shares granted since 2005.
A summary of the status of the Company's restricted stock awards as of December 31, 2014 and changes during the period then ended is presented below:
The total fair value of the Company's restricted stock distributed was $1.1 million during the year ended December 31, 2013 and $0.6 million for the year ended December 31, 2012. There were no restricted stock distributions during 2014.
Assets and liabilities whose values are based on prices, or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, certain commercial mortgage whole loans, and long-dated or complex derivatives including certain foreign exchange options and long-dated options on gas and power).
The fair value of interest rate swap derivatives is based on the present value of future cash flows at each valuation date resulting from utilization of the swaps, using a constant discount rate of 1.6% compared to discount rates based on projected future yield curves. The Company settled its interest rate swap positions in July 2014.
In the first quarter of 2011, the Company entered into two interest rate swaps to convert interest on a portion of its Senior Notes from a fixed rate to a floating rate. The swaps are designated as fair value hedging instruments. The change in the fair value of the swaps is recorded on the balance sheet. The carrying value of the debt related to these swaps is adjusted by an equal amount. The $250 million of Senior Notes that were tied to the interest rate swaps discussed above matured in July 2014.
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 December 31, 2014 and 2013:
The Company holds investments in certain private companies, public companies and certain private equity investments that are accounted for using the equity method of accounting. The carrying value of these investments amounted to $388 million and $89 million at December 31, 2014 and 2013, respectively. The Company's investments in private equity funds were $61 million and $38 million at December 31, 2014 and December 31, 2013, respectively. The carrying values of these private equity investments approximates fair value. The underlying private equity funds follow investment company accounting, where investments within the fund are carried at fair value. The Company records in earnings, investment gains/losses for its proportionate share of the change in fair value of the funds. These investments would be classified as Level 3 in the fair value hierarchy and are included in Other assets in the consolidated balance sheets.
The consolidated statements of income include net rental costs of $393 million, $403 million and $416 million for 2014, 2013 and 2012, respectively, after deducting rentals from subleases ($12 million in 2014, $13 million in 2013 and $10 million in 2012). These net rental costs exclude rental costs and sublease income for previously accrued restructuring charges related to vacated space.
At December 31, 2014, the aggregate future minimum rental commitments under all non-cancelable operating lease agreements are as follows:
The Company has entered into agreements, primarily with various service companies, to outsource certain information systems activities and responsibilities and processing activities. Under these agreements, the Company is required to pay minimum annual service charges. Additional fees may be payable depending upon the volume of transactions processed, with all future payments subject to increases for inflation. At December 31, 2014, the aggregate fixed future minimum commitments under these agreements are as follows:
In February 2013, the Company repaid its 4.850% $250 million senior notes.
On March 27, 2014, the Company and certain of its foreign subsidiaries amended its $1.0 billion facility, as discussed below, into a $1.2 billion multi-currency five-year unsecured revolving credit facility. The interest rate on this facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. This facility expires in March 2019 and requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. There were no borrowings outstanding under this facility at December 31, 2014.
In December 2012, the Company closed on a $50 million, three-year term loan facility. The interest rate on this facility at December 31, 2014 was 1.17%, which is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. The facility requires the Company to maintain coverage ratios and leverage ratios consistent with the revolving credit facility discussed above. The Company had $50 million of borrowings under this facility at December 31, 2014.
Additional credit facilities, guarantees and letters of credit are maintained with various banks, primarily related to operations located outside the United States, aggregating $260 million at December 31, 2014 and $282 million at December 31, 2013. There was $0.6 million outstanding borrowings under these facilities at December 31, 2014 and $1 million outstanding borrowings under these facilities at December 31, 2013.
Scheduled repayments of long-term debt in 2015 and in the four succeeding years are $10 million, $61 million, $262 million, $262 million and $313 million, respectively.
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.
In 2014, the Company implemented restructuring actions which resulted in costs totaling $12 million. Restructuring costs consist primarily of severance and benefits, costs for future rent and other real estate costs. These costs were incurred as follows: Risk and Insurance Services-$5 million; Consulting-$1 million; and Corporate-$6 million.
As of January 1, 2012, the liability balance related to restructuring activity was $181 million. In 2012, the Company accrued $78 million and had cash payments of $88 million related to restructuring activities that resulted in the liability balance at January 1, 2013 reported above.
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.
The pending proceedings and other matters described in this Note 15 on Claims, Lawsuits and Other Contingencies may expose the Company or its subsidiaries to liability for significant monetary damages and other forms of relief. Where a loss is both probable and reasonably estimable, the Company establishes liabilities in accordance with FASB ASC Subtopic No. 450-20 (Contingencies-Loss Contingencies). Except as described above, the Company is not able at this time to provide a reasonable estimate of the range of possible loss attributable to these matters or the impact they may have on the Company's consolidated results of operations, financial position or cash flows. This is primarily because these matters are still developing and involve complex issues subject to inherent uncertainty. Adverse determinations in one or more of these matters could have a material impact on the Company's consolidated results of operations, financial condition or cash flows in a future period.
Includes inter-segment revenue of $35 million, $31 million and $34 million in 2014, 2013 and 2012, respectively, interest income on fiduciary funds of $6 million in 2014, $5 million in 2013 and $4 million 2012 and equity method income of $2 million in 2014, and $0 million in both 2013 and 2012.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Marsh & McLennan Companies, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.