Includes the impact of net restructuring costs of $40 million, $44 million, $28 million, $12 million and $22 million in 2017, 2016, 2015, 2014 and 2013, respectively.
Risk and Insurance Services includes risk management activities (risk advice, risk transfer and risk control and mitigation solutions) as well as insurance and reinsurance broking and services. The Company conducts business in this segment through Marsh and Guy Carpenter.
Consulting includes health, retirement, talent and investments 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.
U.S. tax reform - On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"). The TCJA provides for a reduction in the U.S. corporate tax rate to 21% and the creation of a territorial tax system. The TCJA also changes the deductibility of certain expenses, primarily executive officers compensation. An aggregate charge of $460 million was recorded in the fourth quarter of 2017 as a result of the enactment of the TCJA. The TCJA provides for a transition to the territorial system through a deemed repatriation tax (the "transition tax") on undistributed earnings of non-U.S. subsidiaries. The Company recorded a provisional charge of $240 million in the fourth quarter of 2017 as an estimate of U.S. transition taxes and ancillary effects, including state taxes and foreign withholding taxes related to the change in permanent reinvestment status with respect to our pre-2018 foreign earnings. This transition tax is payable over eight years. The reduction of the U.S. corporate tax rate from 35% to 21%, reduces the value of the U.S. deferred tax assets and liabilities, accordingly, a net charge of $220 million was recorded. A more complete discussion of the TCJA and its impact on the Company’s results is included under the heading "Income Taxes".
Consolidated operating income increased 7%, to $2.9 billion, in 2017 compared with $2.7 billion in 2016, reflecting the combined impact of a 6% increase in revenue and a 6% increase in expenses as compared with the prior year. Income before income taxes increased 7%, to $2.6 billion, reflecting the increase in operating income partly offset by higher interest expense, primarily reflecting an increase in average debt outstanding during the year resulting from the issuance of $1 billion of senior notes in January 2017, partly offset by the repayment of $250 million of senior notes in April 2017.
Diluted earnings per share was $2.87 in 2017, compared with $3.38 in 2016. The decrease reflects a significantly higher effective tax rate in 2017, primarily resulting from an aggregate provisional charge of $460 million related to the enactment in December 2017 of U.S. tax reform and a pension settlement charge, which are discussed above. The impact from U.S. tax reform was partly offset by discrete tax items during the year, in particular the benefit from the required change in accounting for tax consequences related to stock compensation. The $460 million provisional charge related to U.S. tax reform reduced diluted earnings per share by $0.89.
Risk and Insurance Services operating income increased $118 million, or 7%, in 2017 compared with 2016. Revenue increased 7%, reflecting a 3% increase on an underlying basis and a 4% increase from acquisitions. Expense increased 7% or 2% on an underlying basis in 2017 compared with 2016.
Risk and Insurance Services operating income increased $214 million, or 14% in 2016 compared with 2015. Revenue increased 4% reflecting a 3% increase on an underlying basis and a 3% increase from acquisitions, partly offset by a decrease resulting from the impact of foreign currency translation of 2%. Expense increased 1% in 2016 compared with 2015.
The Company conducts business in many countries. As a result, foreign exchange rate movements may impact period-to-period comparisons of revenue. Similarly, certain other items such as the revenue impact of acquisitions and dispositions, including transfers among businesses, may impact period-to-period comparisons of revenue. Underlying revenue measures the change in revenue from one period to another by isolating these impacts. The impact of foreign currency exchange fluctuations, acquisitions and dispositions, including transfers among businesses, on the Company’s operating revenues by segment was as follows:
Underlying revenue measures the change in revenue using consistent currency exchange rates, excluding the impact of certain items that affect comparability such as: acquisitions, dispositions, transfers among businesses and the deconsolidation of Marsh India.
Effective January 1, 2017, Mercer established a Wealth business reflecting a unified client strategy for its former Retirement and Investment business. The 2016 information in the chart above has been conformed to the current presentation.
Marsh also receives other compensation from insurance companies, separate from retail fees and commissions. This compensation includes, among other things, payment for consulting and analytics services provided to insurers; administrative and other services provided to or on behalf of insurers (including services relating to the administration and management of quota share, panels and other facilities in which insurers participate); and contingent commissions. Marsh and Guy Carpenter also receive interest income on certain funds (such as premiums and claims proceeds) held in a fiduciary capacity for others. The investment of fiduciary funds is regulated by state and other insurance authorities. These regulations typically require segregation of fiduciary funds and limit the types of investments that may be made with them. Interest income from these investments varies depending on the amount of funds invested and applicable interest rates, both of which vary from time to time. For presentation purposes, fiduciary interest is segregated from the other revenues of Marsh and Guy Carpenter and separately presented within the segment, as shown in the revenue by segments charts presented earlier in this MD&A.
Revenue in the Risk and Insurance Services segment increased 7% in 2017 compared with 2016, due to a 3% growth in underlying revenue and 4% growth from acquisitions.
The Risk and Insurance Services segment completed seven acquisitions during 2017. Information regarding those acquisitions is included in Note 4 to the consolidated financial statements.
In Marsh, revenue of $6 billion increased 4% in 2016 as compared with 2015, reflecting a 3% increase on an underlying basis and a 4% increase from acquisitions, offset by a 2% decrease resulting from the impact of foreign currency translation. The underlying revenue increase reflects growth in all major geographies. International operations had underlying revenue growth of 3% reflecting increases of 2% in EMEA, 3% in Asia Pacific and 8% in Latin America, while U.S./Canada increased 2%.
Guy Carpenter’s revenue increased 2% to $1.1 billion in 2016 compared with 2015, for both a reported and underlying basis.
Consulting revenue in 2017 increased 5% compared with 2016, reflecting a 4% increase on an underlying basis and 2% growth from acquisitions. Mercer's revenue increased 5% to $4.5 billion over the prior year, or 2% on an underlying basis. Mercer's year over year revenue comparison also reflects an increase of 2% from acquisitions. The underlying revenue growth reflects an increase in Career of 5%, Health of 2% and Wealth of 2%. Within Wealth, Investment Management & Related Services increased 10% while Defined Benefit Consulting & Administration decreased 2% compared with the prior year. Oliver Wyman Group’s revenue increased 7% in 2017 compared with 2016, for both a reported and underlying basis.
Consulting revenue in 2016 increased 1% compared with 2015, reflecting a 3% increase on an underlying basis offset by a 2% decrease from the impact of foreign currency translation. Mercer’s revenue of $4.3 billion was flat when compared with 2015 but increased 3% on an underlying basis. Mercer's year over year revenue comparison reflects a decrease of 2% from the impact of foreign currency translation. The underlying revenue growth reflects an increase in Wealth of 2%, Health of 3% and Career of 5%. Within Wealth, Investment Management & Related Services increased 6% while Defined Benefit Consulting & Administration was flat compared with 2015. Oliver Wyman Group’s revenue increased 2% in 2016
compared with 2015, reflecting an increase of 3% on an underlying basis, partly offset by a decrease of 2% from the impact of foreign currency translation.
Consulting expense in 2017 increased 5% compared with 2016, reflecting an increase of 3% on an underlying basis and a 3% increase from the impact of acquisitions. The increase in underlying expense reflects higher base salaries, asset based fees and outside service costs, partly offset by lower severance costs and lower costs related to liabilities for errors and omissions.
Corporate expense in 2016 was $192 million compared with $195 million in 2015, reflecting lower executive compensation and lower defined benefit pension costs.
Interest income earned on corporate funds amounted to $5 million in 2016 compared with $13 million in 2015. The decrease is due to the combined effects of a lower level of invested funds and lower interest rates. Interest expense in 2016 was $189 million compared with $163 million in 2015 due to higher average outstanding debt in 2016.
The caption "Investment income (loss)" in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in current earnings. It includes, when applicable, other-than-temporary declines in the value of debt and available-for-sale securities and equity method gains or losses on its investment in private equity funds. The Company's investments may include direct investments in insurance, consulting and related companies and investments in private equity funds. The Company recorded net investment income of $15 million in 2017 compared to less than $1 million in 2016 and $38 million in 2015. The increase in 2017 versus 2016 was primarily due to a gain on the sale of an investment and higher equity method gains related to the Company's investments in private equity funds. Net investment income in 2015 was primarily related to the general partner carried interest from Trident III. Stonepoint Capital, the investment manager of Trident III, substantially liquidated the remaining two investments of Trident III during the third quarter of 2015, which resulted in the Company recognizing its remaining deferred performance fees.
On December 22, 2017, the U.S. enacted the TCJA. The TCJA provides for a reduction in the U.S. corporate tax rate to 21% and the creation of a territorial tax system. The TCJA also changes the deductibility of certain expenses, primarily executive officers compensation. The Company recorded a provisional charge of $460 million related to the enactment of the TCJA. As discussed in Note 6 to the consolidated financial statements this provisional charge may be adjusted in 2018. The TCJA provides for a transition to the territorial system via a transition tax on undistributed earnings of non-U.S. subsidiaries. The Company recorded a provisional charge of $240 million in the fourth quarter as an estimate of U.S. transition taxes and ancillary effects, including state taxes and foreign withholding taxes related to the
The Company is organized as a legal entity separate and distinct from its operating subsidiaries. As the Company does not have significant operations of its own, the Company is dependent upon dividends and other payments from its operating subsidiaries to pay principal and interest on its outstanding debt obligations, pay dividends to stockholders, repurchase its shares and pay corporate expenses. The Company also provides financial support to its operating subsidiaries for acquisitions, investments and certain parts of their business that require liquidity, such as the capital markets business of Guy Carpenter. Other sources of liquidity include borrowing facilities discussed below in financing cash flows.
The Company generated $1.9 billion of cash from operations in 2017, compared with $2.0 billion in 2016. These amounts reflect the net income of the Company during those periods, excluding gains or losses from investments, adjusted for non-cash charges and changes in working capital which relate primarily to the timing of payments of accrued liabilities or receipts of assets and pension contributions.
The Company contributed $129 million to the U.K. plans in 2017, including an expense allowance of approximately $9 million. Based on the funding test carried out at November 1, 2017, the Company contributions to the U.K. plans in 2018 are expected to be approximately $22 million, including the expense allowance.
In the aggregate, the Company expects to contribute approximately $82 million to its non-U.S. defined benefit plans in 2018, comprising approximately $60 million to plans outside of the U.K. and $22 million to the U.K. plans.
In October 2016, the Company modified its U.S. defined benefit pension plans to discontinue further benefit accruals for participants after December 31, 2016. At the same time, the Company amended its U.S. defined contribution retirement plans for most of its U.S. employees to add an automatic Company contribution equal to 4% of eligible base pay beginning on January 1, 2017. This new Company contribution, together with the Company’s current matching contribution, provides eligible U.S. employees with the opportunity to receive a total contribution of up to 7% of eligible base pay. As required under GAAP, the defined benefit plans that were significantly impacted by the modification were re-measured in October 2016 using market data and assumptions as of the modification date. The net periodic pension expense recognized in 2016 reflects the weighted average costs of the December 31, 2015 measurement and the October 2016 re-measurement. In addition, the U.S. qualified plans were merged effective December 30, 2016, since no participants would be receiving benefit accruals after December 2016.
Overall, based on the measurement at December 31, 2017, expenses related to the Company’s defined benefit plans are expected to decrease in 2018 by approximately $90 million compared to 2017. Approximately $80 million of the reduction relates to non-U.S. plans, primarily in the U.K. and in Canada. In the U.K., the net benefit credit was reduced in 2017 by the $54 million settlement charge discussed previously. The recognition of a similar charge in 2018 and the amount of such a charge, if any, is dependent upon whether participant lump sum elections reach or exceed the settlement threshold. The remaining decrease primarily relates to plans in Canada, which ceased the accrual of future benefits on January 1, 2018. Approximately half of the defined benefit expense decrease in Canada will be offset by increased costs for contributions to its defined contribution plans.
The Company increased outstanding debt by approximately $680 million in 2017 and $400 million in 2016.
outstanding borrowings under these facilities at December 31, 2017 and $1.6 million of outstanding borrowings under these facilities at December 31, 2016.
During 2016, the Company repurchased 12.7 million shares of its common stock for total consideration of $800 million at an average price per share of $63.18.
The Company paid total dividends of $740 million in 2017 ($1.43 per share), $682 million in 2016 ($1.30 per share) and $632 million in 2015 ($1.18 per share).
During 2017, the Company paid $108 million of contingent payments related to acquisitions made in prior years. These payments are split between financing and operating cash flows in the consolidated statements of cash flows. Payments of $81 million related to the contingent consideration liability that was recorded on the date of acquisition are reflected as financing cash flows. Payments related to increases in the contingent consideration liability subsequent to the date of acquisition of $27 million are reflected as operating cash flows. Remaining estimated future contingent consideration payments of $189 million for acquisitions completed in 2017 and in prior years are included in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheet at December 31, 2017. The Company paid deferred purchase consideration related to prior years' acquisitions of $55 million, $54 million and $36 million in the years ended December 31, 2017, 2016 and 2015, respectively. Remaining deferred cash payments of approximately $121 million are included in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheet at December 31, 2017.
The Company’s additions to fixed assets and capitalized software, which amounted to $302 million in 2017 and $253 million in 2016, primarily relate to computer equipment purchases, the refurbishing and modernizing of office facilities and software development costs.
The Company has commitments for potential future investments of approximately $57 million in four private equity funds that invest primarily in financial services companies.
The following sets forth the Company’s future contractual obligations by the types identified in the table below as of December 31, 2017:
The above does not include the liability for unrecognized tax benefits of $71 million as the Company is unable to reasonably predict the timing of settlement of these liabilities, other than approximately $1 million that may become payable during 2018. The above does not include net pension liabilities of approximately $1.8 billion because the timing and amount of ultimate payment of such liability is dependent upon future events, including, but not limited to, future returns on plan assets and changes in the discount rate used to measure the liabilities. The above does not include the provisional estimate of transitional tax payments related to the TCJA of $240 million. The amounts of estimated future benefits payments to be made from pension plan assets are disclosed in Note 7 to the consolidated financial statements. In 2018, the Company expects to contribute approximately $27 million and $82 million to its U.S. and non-U.S. defined benefit pension plans, respectively.
The discount rate selected for each U.S. Plan is based on a model bond portfolio with coupons and redemptions that closely match the expected liability cash flows from the plan. Discount rates for non-U.S. plans are based on appropriate bond indices adjusted for duration; in the U.K., the plan duration is reflected using the Mercer yield curve.
The impact of discount rate changes shown above relates to the increase or decrease in actuarial gains or losses being amortized through net periodic pension cost, as well as the increase or decrease in interest expense, with all other facts and assumptions held constant. It does not contemplate nor include potential future impacts a change in the interest rate environment and discount rates might cause, such as the impact on the market value of the plans’ assets. Changing the discount rate and leaving the other assumptions constant also may not be representative of the impact on expense, because the long-term rates of inflation and salary increases are often correlated with the discount rate. Changes in these assumptions will not necessarily have a linear impact on the net periodic pension cost.
The Company's tax rate reflects its income, statutory tax rates and tax planning in the various jurisdictions in which it operates. In 2017, the Company's tax expense was significantly impacted by the enactment of the TCJA, which is discussed in more detail in Note 6 to the consolidated financial statements included in this report. Significant judgment is required in determining the annual effective tax rate and in evaluating uncertain tax positions. The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step involves recognition. The Company determines whether it is more likely than not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position derive from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority.
The Company completed its qualitative assessment in the third quarter of 2017 and concluded that a two-step goodwill impairment test was not required in 2017 and that goodwill was not impaired.
See Note 8 to the consolidated financial statements for additional information regarding accounting for share-based payments.
The Company conducts business in its Consulting segment through Mercer and Oliver Wyman Group. Mercer provides consulting expertise, advice, services and solutions in the areas of health, retirement, talent and investments. Oliver Wyman Group provides specialized management and economic and brand consulting services.
Principles of Consolidation: The accompanying consolidated financial statements include all wholly-owned and majority-owned subsidiaries. All significant inter-company transactions and balances have been eliminated.
Fiduciary Assets and Liabilities: In its capacity as an insurance broker or agent, generally 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 $39 million, $26 million and $21 million in 2017, 2016 and 2015, respectively. The Consulting segment recorded fiduciary interest income of $4 million, $3 million and $4 million in 2017, 2016 and 2015, respectively. Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities.
Cash and Cash Equivalents: Cash and cash equivalents primarily consist of certificates of deposit and time deposits, with original maturities of three months or less, and money market funds. The estimated fair value of the Company's cash and cash equivalents approximates their carrying value. The Company is required to maintain operating funds primarily related to regulatory requirements outside the United States or as collateral under captive insurance arrangements. At December 31, 2017, the Company maintained $187 million related to these regulatory requirements.
In 2017, the Company recorded investment income of $15 million compared to less than $1 million in 2016 and $38 million in 2015. The investment income in 2015 was primarily due to general partner carried interest from the Company's investment in Trident III, which was substantially liquidated in 2015.
Specific considerations related to the enactment of U.S. tax reform are discussed in more detail in Note 6 to the consolidated financial statements.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company determines whether it is more likely than not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position derive from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position
does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate resolution with a taxing authority. Uncertain tax positions are evaluated based upon the facts and circumstances that exist at each reporting period. Subsequent changes in judgment based upon new information may lead to changes in recognition, de-recognition, and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
There were 10.2 million, 13.2 million and 14.8 million stock options outstanding as of December 31, 2017, 2016 and 2015, respectively.
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, 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 year ended December 31, 2017, the adoption of this new standard reduced income tax expense in the consolidated statement of income by approximately $79 million. For the years ended December 31, 2016 and 2015, the Company recorded an excess tax benefit of $44 million and $53 million, respectively, as an increase to equity in its consolidated balance sheets, which was reflected as cash provided by financing activities in the consolidated statements of cash flows.
Typically, this resulted in revenue being recognized over a 12 to 24 month period. Under the new guidance, estimated revenue from these treaties will be recognized largely at the policy effective date. In the insurance brokerage operations, revenue from commission based arrangements will continue to be recorded at the policy effective date, while the timing of revenue recognition for certain fee based arrangements will shift among quarters. However, since the vast majority of our fee arrangements involve contracts that cover a single year of services, the Company does not expect there will be a significant change in the amount of revenue recognized in an annual period.
In its Consulting segment, the Company incurs implementation costs necessary to facilitate the delivery of the contracted services. Although certain implementation costs are deferred under current GAAP, the Company has concluded that certain additional implementation costs currently expensed under legacy GAAP will be deferred under the new guidance. In addition, the amortization period for these implementation costs will be longer under the new guidance as the amortization period will include the initial contract term plus expected renewals. Currently, deferred implementation costs are amortized over the initial contract term.
The cumulative effect of adopting the standard, net of tax, on January 1, 2018 are expected to result in an increase to the opening balance of retained earnings of approximately $325 million to $425 million, with offsetting increases/decreases to other balance sheet accounts, e.g. accounts receivable, other assets and deferred income taxes. The comparative information and prior periods will not be restated and will continue to be reported under the legacy accounting standards that were in effect for those periods.
In March 2017, the FASB issued new guidance that changes 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. 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. The new guidance requires retrospective application for the presentation of the service cost component and the other components of net periodic benefit costs as discussed in more detail below, and prospective application for the capitalization of the service cost component.
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
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. The Company does not expect the adoption of this standard to have an impact on the Company's financial position or results of operations.
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 financing 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 targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model. The new guidance on leases is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application is 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.
consideration of $81 million. In the year ended December 31, 2016 the Company paid deferred and contingent consideration of $98 million, consisting of deferred purchase consideration of $54 million and contingent consideration of $44 million, and in the year ended December 31, 2015 the Company paid deferred and contingent consideration of $49 million, consisting of deferred purchase consideration of $36 million and contingent consideration of $13 million.
In 2015, the consolidated statement of cash flows includes the cash flow impact of discontinued operations from indemnification payments related to the Putnam disposition that reduced the net cash flow provided by operations by $82 million.
As discussed in Note 1, for the years ended December 31, 2016 and 2015, the Company recorded an excess tax benefit of $44 million and $53 million, respectively, as an increase to equity in its consolidated balance sheets, which was reflected as cash provided by financing activities in the consolidated statements of cash flows.
The changes in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the years ended December 31, 2017 and 2016, including amounts reclassified out of AOCI, are as follows:
The Risk and Insurance Services segment completed seven acquisitions during 2017.
February - MMA acquired iaConsulting, 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.
August - Marsh acquired International Catastrophe Insurance Managers, LLC, a Colorado-based managing general agent providing property catastrophe insurance to business and homeowners, and MMA acquired Hendrick & Hendrick, Inc., a Texas-based insurance agency.
Total purchase consideration for acquisitions made during 2017 was approximately $777 million, which consisted of cash paid of $668 million and deferred purchase and estimated contingent consideration of $109 million. Contingent consideration arrangements are based primarily on EBITDA and/or revenue targets over periods of two to four years. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. During 2017, the Company also paid $55 million of deferred purchase consideration and $108 million of contingent consideration related to acquisitions made in prior years.
December - Marsh acquired AD Corretora, a multi-line broker located in Brazil, and Bluefin Insurance Group, Ltd, a U.K.-based insurance brokerage.
January - Mercer acquired The Positive Ageing Company Limited, a U.K.-based firm providing advice on issues surrounding the aging workforce.
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.
The following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during 2017, 2016 and 2015. In accordance with accounting guidance related to pro-forma disclosures, the information presented for current year acquisitions is as if they occurred on January 1, 2016 and reflects acquisitions made in 2016 as if they occurred on January 1, 2015. The pro-forma information includes 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.
Acquisition-related expenses incurred in 2017 and 2016 were $3 million and $14 million, respectively.
In December 2015, Mercer sold its U.S. defined contribution recordkeeping business. The Company recognized pre-tax gains of $37 million in 2015 and $6 million in 2016 from this transaction, which are included in revenue in the consolidated statements of income in those years.
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. As part of its assessment, the Company considers numerous factors, including that the fair value of each reporting unit exceeds its carrying value by a substantial margin based on its most recent estimates, 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 2017 and concluded that a two-step goodwill impairment test was not required in 2017 and that goodwill was not impaired.
The gross cost and accumulated amortization at December 31, 2017 and 2016 are as follows:
Aggregate amortization expense was $169 million for the year ended December 31, 2017, $130 million for the year ended December 31, 2016 and $109 million for the year ended December 31, 2015. The estimated future aggregate amortization expense is as follows:
Net of valuation allowances of $11 million in 2017 and $17 million in 2016.
A reconciliation from the U.S. Federal statutory income tax rate to the Company’s effective income tax rate is shown below:
our global capital strategy. As a result of the transition tax, the Company anticipates repatriating the majority of the accumulated earnings that it previously intended to permanently invest. A charge of $240 million was recorded in the fourth quarter as a provisional estimate of the transition tax and ancillary effects.
U.S. federal income taxes are not provided on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. The determination of the unrecognized deferred tax liability with respect to these investments is not practicable.
In December of 2017, the SEC issued Staff Accounting Bulletin 118 ("SAB 118"), establishing a one-year measurement period to complete the accounting for the income tax effects of the TCJA. SAB 118 anticipates three alternative states of completion at the end of the reporting period of accounting for these effects: (1) the tax accounting work has been completed with respect to an item; (2) a provisional amount has been recognized because a reasonable estimate was possible, or (3) a reasonable estimate cannot be provided. The Company believes its analysis of the TCJA to date provides an appropriate basis to record a provisional estimate. Our provisional estimates include the effects of the deemed repatriation tax and the Company's position with respect to permanently reinvested earnings, the impacts of the Global Intangible Low Taxed Income ("GILTI") and Base Erosion and Anti-abuse Tax ("BEAT") provisions, and the remeasurement of U.S. deferred tax based on estimated enactment-date deferred tax balances, which may be adjusted in 2018 when the 2017 tax return is filed. However, given the significant complexity of the TCJA, anticipated guidance from the U.S. Treasury about its implementation, the potential for additional guidance from the SEC or FASB, and the global complexity of the Company, these estimates may be adjusted during 2018.
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.
Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015:
The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. In the US federal jurisdiction the Company participates in the Internal Revenue Service’s ("IRS") Compliance Assurance Process ("CAP"), which is structured to conduct real-time compliance reviews. The IRS is currently examining the Company’s 2015 and 2016 tax returns and is performing a pre-filing review of 2017. In 2015, the Company settled its federal tax audit for the year 2014.
New York State and New York City have examinations underway for various entities covering the years 2007 through 2014. Outside the United States, there are ongoing examinations in Germany for the years 2009 through 2012, in France for the years 2011 and 2012, and in Italy for the year 2015. There are ongoing examinations in Canada of tax years 2013 and 2014. The United Kingdom's examination of year 2014 is ongoing and an examination of year 2015 has been commenced. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. The Company has established liabilities for uncertain tax positions in relation to the potential assessments. The Company believes the resolution of tax matters will not have a material effect on the consolidated financial position of the Company, although a resolution of tax matters could have a material impact on the Company's net income or cash flows and on its effective tax rate in a particular future period. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $6 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.
*The 2017 and 2016 assumption do 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 target asset allocation for the U.S. Plans is 64% equities and equity alternatives and 36% fixed income. At the end of 2017, the actual allocation for the U.S. Plans was 63% equities and equity alternatives and 37% fixed income. The target asset allocation for the U.K. Plans, which comprise approximately 81% of non-U.S. Plan assets, is 34% equities and equity alternatives and 66% fixed income. At the end of 2017, the actual allocation for the U.K. Plans was 48% equities and equity alternatives and 52% 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 uses threshold-based portfolio re-balancing to ensure the actual portfolio remains consistent with target asset allocation ranges.
The projected benefit obligation, accumulated benefit obligation and aggregate fair value of plan assets for U.S. pension plans with accumulated benefit obligations in excess of plan assets were $6.2 billion, $6.2 billion and $4.8 billion, respectively, as of December 31, 2017 and $5.9 billion, $5.9 billion and $4.4 billion, respectively, as of December 31, 2016.
The projected benefit obligation and fair value of plan assets for U.S. pension plans with projected benefit obligations in excess of plan assets was $6.2 billion and $4.8 billion, respectively, as of December 31, 2017 and $5.9 billion and $4.4 billion, respectively, as of December 31, 2016.
As of December 31, 2017, the U.S. qualified plan holds 4 million shares of the Company’s common stock which were contributed to the qualified plan by the Company in 2005. This represented approximately 6.8% of that plan's assets as of December 31, 2017. In addition, plan assets may be invested in funds managed by Mercer Investments, a subsidiary of the Company.
The components of the net periodic benefit cost (credit) for the U.S. defined benefit and other postretirement benefit plans are as follows:
Effective September 1, 2015, the Company divided its U.S. qualified defined benefit plan to provide enhanced flexibility to manage the risk associated with those participants not receiving benefit accruals. The existing plan was amended to cover only the retirees then receiving benefits and terminated vested participants as of August 1, 2015. The Company's active participants as of that date were transferred into a newly established, legally separate qualified defined benefit plan. The benefits offered to the plans' participants were unchanged. As a result of the plan amendment and establishment of the new plan, the Company re-measured the assets and liabilities of the two plans as required under U.S. GAAP, based on assumptions and market conditions at the amendment date. The net periodic pension expense recognized in 2015 reflects the weighted average costs of the December 31, 2014 measurement and the September 1, 2015 re-measurement.
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 matching contribution, provides eligible U.S. employees with the opportunity to receive a total contribution of up to 7% of eligible base pay. As required under GAAP, the defined benefit plans that were significantly impacted by the modification were re-measured in October 2016 using market data and assumptions as of the modification date. The net periodic pension expense recognized in 2016 reflects the weighted average costs of the December 31, 2015 measurement and the October 2016 re-measurement. In addition, the U.S. qualified plans were merged effective December 30, 2016, since no participants would be receiving benefit accruals after December 31, 2016.
The Company expects to contribute approximately $27 million to its U.S. plans in 2018. 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 in the U.S. and applicable foreign law.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the non-U.S. pension plans with accumulated benefit obligations in excess of plan assets were $1.3 billion, $1.2 billion and $1.0 billion, respectively, as of December 31, 2017 and $1.2 billion, $1.2 billion and $0.9 billion, respectively, as of December 31, 2016.
The projected benefit obligation and fair value of plan assets for non-U.S. pension plans with projected benefit obligations in excess of plan assets was $2.2 billion and $1.9 billion, respectively, as of December 31, 2017 and $2.1 billion and $1.7 billion, respectively, as of December 31, 2016.
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 them 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.
After completion of a consultation period with affected colleagues, in January 2015, the Company amended its U.K. defined benefit pension plans to close those plans to future benefit accruals effective August 1, 2015 and replaced those plans, along with its existing defined contribution plans, with a new, comprehensive defined contribution arrangement. This change resulted in a curtailment of the U.K. defined benefit plans and, as required under GAAP, the Company re-measured the defined benefit plans’ assets and liabilities at the amendment date, based on assumptions and market conditions at that date. The net periodic benefit costs recognized in 2015 are the weighted average resulting from the December 31, 2014 measurement and the January 2015 re-measurement.
The assumed health care cost trend rate was approximately 5.12% in 2017, gradually declining to 4.41% in 2027. Assumed health care cost trend rates can have a significant effect on the amounts reported for the non-U.S. health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
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, 2017 and 2016:
The tables below set forth a summary of changes in the fair value of the plans’ Level 3 assets for the years ended December 31, 2017 and December 31, 2016:
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. In addition, as mentioned above, as part of the modification to its U.S. defined benefit pension plans, the Company also 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. The 401(k) Plan contains an Employee Stock Ownership Plan feature under U.S. tax law. Approximately $499 million of the 401(k) Plan’s assets at December 31, 2017 and $436 million at December 31, 2016 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 $130 million in 2017, $53 million in 2016 and $51 million in 2015. The increase in cost in 2017 as compared to 2016 is primarily due to the additional automatic Company contribution mentioned above. 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 $75 million, $81 million and $93 million in 2017, 2016 and 2015, respectively. The decrease in cost over the past three years is primarily due to the impact of foreign currency translation.
The assumptions used in the Black-Scholes option pricing valuation model for options granted by the Company in 2017, 2016 and 2015 are as follows:
A summary of the status of the Company’s stock option awards as of December 31, 2017 and changes during the year then ended is presented below:
As of December 31, 2017, there was $14.9 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 1.36 years. Cash received from the exercise of stock options for the years ended December 31, 2017, 2016 and 2015 was $126.7 million, $105.4 million and $134.7 million, respectively.
Company intends to issue treasury shares as long as an adequate number of those shares is available.
The weighted-average grant-date fair value of the Company's restricted stock units granted during the years ended December 31, 2016 and 2015 was $57.54 and $56.81, respectively. The weighted average grant date fair value of the Company's performance stock units granted during the years ended December 31, 2016 and 2015 was $57.47 and $57.33, respectively. The total fair value of the shares distributed during the years ended December 31, 2017, 2016 and 2015 in connection with the Company's non-option equity awards was $117.1 million, $91.4 million and $114.3 million, respectively.
As of December 31, 2017, there was $197.4 million of unrecognized compensation cost related to the Company's restricted stock units and performance stock unit awards. The weighted-average period over which that cost is expected to be recognized is approximately 1.08 years.
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, 2017 and 2016:
The Company's investments in private equity funds were $76 million and $79 million at December 31, 2017 and December 31, 2016, 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 are included in other assets in the consolidated balance sheets.
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 December 31, 2017, the carrying value of the Company’s investment in Alexander Forbes was approximately $266 million. As of December 31, 2017, the market value of the approximately 443 million shares of Alexander Forbes owned by the Company, based on the December 31, 2017 closing share price of 6.87 South African Rand per share, was approximately $239 million. The Company considered several factors in assessing 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. The shares traded over a broad range during the year, with a high of 7.95 Rand and a low of 5.26 Rand, and experienced several cycles of price declines and recovery in 2017. The shares traded above 7.50 Rand multiple times during the fourth quarter of 2017. Based on its assessment of the factors discussed above, the Company determined the investment was not impaired.
Benefitfocus: On February 24, 2015, Mercer purchased shares of common stock of Benefitfocus (NASDAQ:BNFT) constituting approximately 9.9% of BNFT's outstanding capital stock as of the acquisition date. The purchase price for the BNFT shares and certain other rights and other consideration was approximately $75 million. Until December 31, 2016, the Company accounted for this investment under the cost method of accounting as the 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 applicable accounting guidance, 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 at December 31, 2017 was approximately $76 million.
In the second quarter of 2016, the shareholders’ agreement among the shareholders of Marsh India was amended to comply with these new regulations, which resulted in Marsh no longer having a controlling financial interest under U.S. GAAP. In accordance with U.S. GAAP, the Company was required to deconsolidate Marsh India and recognize its interest in Marsh India at fair value, with the difference between the carrying value and fair value recognized in earnings. The Company estimated the fair value of its interest in Marsh India, primarily using a discounted cash flow approach, which considered various
cash flow scenarios and a discount rate appropriate for the investment. Certain provisions relating to restrictions on sales and repurchase of shares of Marsh India owned by its employees were also required to be removed by the new regulations. As a result, the deferred compensation expense related to those shares was accelerated in the second quarter of 2016. The net gain on the Company’s pre-tax income as a result of these changes was approximately $11 million, which is included in revenue for the year ended 2016. Beginning on May 1, 2016, the Company accounted for its investment in Marsh India using the equity method of accounting.
The Company leases office facilities, equipment and automobiles under non-cancelable operating leases. These leases expire on varying dates, in some instances contain renewal and expansion options, do not restrict the payment of dividends or the incurrence of debt or additional lease obligations, and contain no significant purchase options. In addition to the base rental costs, occupancy lease agreements generally provide for rent escalations resulting from increased assessments for real estate taxes and other charges. Approximately 99% of the Company’s lease obligations are for the use of office space.
The consolidated statements of income include net rental costs of $354 million, $367 million and $381 million for 2017, 2016 and 2015, respectively, after deducting rentals from subleases ($8 million in 2017, $9 million in 2016 and $14 million in 2015). These net rental costs exclude rental costs and sublease income for previously accrued restructuring charges related to vacated space.
At December 31, 2017, the aggregate future minimum rental commitments under all non-cancelable operating lease agreements are as follows:
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.
Additional credit facilities, guarantees and letters of credit are maintained with various banks, primarily related to operations located outside the United States, aggregating $624 million at December 31, 2017 and $376 million at December 31, 2016. There was $0 million of outstanding borrowings under these facilities at December 31, 2017 and $1.6 million of outstanding borrowings under these facilities at December 31, 2016.
The Company issued approximately 5.8 million and 5.3 million shares related to stock compensation and employee stock purchase plans during the years ended December 31, 2017 and 2016, respectively.
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.
In October 2017, the Company received a notice that the Directorate-General for Competition of the European Commission had commenced a civil investigation of a number of insurance brokers, including Marsh, regarding "the exchange of commercially sensitive information between competitors in relation to aviation and aerospace insurance and reinsurance broking products and services in the European Economic Area ("EEA"), as well as possible coordination between competitors." In light of the action taken by the European Commission, the FCA informed Marsh Limited at the same time that it has discontinued its investigation under U.K. competition law into the aviation insurance and reinsurance sector.
In July 2017, the Directorate-General for Competition of the European Commission together with the Irish Competition and Consumer Protection Commission conducted on-site inspections at the offices of Marsh and other industry participants in Dublin in connection with an investigation regarding the "possible participation in anticompetitive agreements and/or concerted practices contrary to [E.U. competition law] in the market for commercial motor insurance in the Republic of Ireland." In December 2017, we received a request from the Directorate-General for Competition of the European Commission seeking documents and information relating to its investigation.
We are cooperating with these investigations and are conducting our own reviews. As these investigations are at early stages, we are unable to predict their likely timing, outcome or ultimate impact.
There can be no assurance that the ultimate resolution of these or any related matters will not have a material adverse effect on our consolidated results of operations, financial condition or cash flows.
In November 2017, the FCA announced the terms of reference for a market study concerning the wholesale insurance broker sector in the United Kingdom, which affects Marsh and Guy Carpenter. The FCA is conducting the study to assess “how effective competition is working in the wholesale insurance broker sector” and "how brokers influence competition in the underwriting sector." The FCA is expected to publish its interim report in the fall of 2018, with a final report expected in 2019.
In the ordinary course of business, the Company is also subject to other investigations, market studies, subpoenas, lawsuits and other regulatory actions undertaken by governmental authorities.
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 December 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.
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 guidance on Contingencies - Loss Contingencies. Except as described above, the Company is not able at this time to provide a reasonable estimate of the range of possible loss attributable to these matters or the impact they may have on the Company's consolidated results of operations, financial position or cash flows. This is primarily because these matters are still developing and involve complex issues subject to inherent uncertainty. Adverse determinations in one or more of these matters could have a material impact on the Company's consolidated results of operations, financial condition or cash flows in a future period.
Includes inter-segment revenue of $45 million, $38 million and $34 million in 2017, 2016 and 2015, respectively, interest income on fiduciary funds of $4 million, $3 million and $4 million in 2017, 2016 and 2015, respectively and equity method income of $17 million, $19 million and $21 million in 2017, 2016 and 2015, respectively.
We have audited the accompanying consolidated balance sheets of Marsh & McLennan Companies, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, cash flows, and equity for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.