Includes the impact of net restructuring costs of $112 million, $161 million, $40 million, $44 million, and $28 million in 2019, 2018, 2017, 2016 and 2015, respectively, and JLT integration, restructuring and acquisition related costs of $485 million in 2019 and $12 million in 2018.
Income tax expense in 2017 includes a $460 million provisional charge related to the enactment of U.S. tax reform.
Marsh & McLennan Companies, Inc. and its consolidated subsidiaries (the "Company") is a global professional services firm offering clients advice and solutions in risk, strategy and people. Its businesses include: Marsh, the insurance broker, intermediary and risk advisor; Guy Carpenter, the risk and reinsurance specialist; Mercer, the provider of HR and Investment related financial advice and services; and Oliver Wyman Group, the management, economic and brand consultancy. With 76,000 colleagues worldwide and annual revenue of $17 billion, the Company provides analysis, advice and transactional capabilities to clients in more than 130 countries.
JLT's results of operations for the period April 1, 2019 through December 31, 2019 are included in the Company’s results of operations for 2019. Under applicable accounting guidance, JLT's results of operations for the period January 1 through March 31, 2019 and for the years ended 2018 and 2017 are not included in the Company's results of operations and therefore, affect comparability. Prior to being acquired by the Company, JLT operated in three segments: Specialty, Reinsurance and Employee Benefits. JLT operated in 41 countries, with significant revenue in the United Kingdom, Pacific, Asia and the United States. As of April 1, 2019, the historical JLT businesses were combined into MMC operations as follows: JLT Specialty is included by geography within Marsh, JLT Reinsurance is included in Guy Carpenter and the majority of JLT's Employee Benefits business was included in Mercer Health and Wealth.
Upon the consummation of the acquisition of JLT, the Company assumed the legal liabilities and became responsible for JLT’s litigation and regulatory exposures as of April 1, 2019. Please see the "Risk Factors" section of this Annual Report on Form 10-K for risks associated with the acquisition.
The Company’s results for the year ended December 31, 2019 were impacted by JLT related acquisition, restructuring and integration costs as well as legacy MMC restructuring programs as discussed in Note 14 to the consolidated financial statements.
Acquisitions and dispositions impacting the Risk and Insurance Services and Consulting segments are discussed in Note 5 to the consolidated financial statements.
This MD&A contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See "Information Concerning Forward-Looking Statements" at the outset of this report.
Income before income taxes increased 9% to $2.4 billion as compared to $2.2 billion in 2018, reflecting the change in operating income discussed immediately above and the increase in year-over-year interest expense, primarily related to new debt issued to finance the JLT Transaction, partly offset by lower derivative related costs, pension settlement charges and the 2018 impairment charge related to Alexander Forbes.
In 2019 and 2018, the Company’s results of operations and earnings per share were significantly impacted by the following items:
JLT integration and restructuring costs: Includes costs incurred for staff reductions, lease related exit costs as well as consulting costs related to the JLT Transaction. These costs are discussed in more detail in Note 14 of the consolidated financial statements.
Pension settlement charge: The Defined Benefit Pension Plans in the U.K. and certain other countries allow participants an option for the payment of a lump sum distribution from plan assets before retirement in full satisfaction of the retirement benefits due to the participant as well as any survivor’s benefit. The Company’s policy under applicable U.S. GAAP is to treat these lump sum payments as a partial settlement of the plan liability if they exceed the sum of service cost plus interest cost components of net period pension cost of a plan for the year ("settlement thresholds"). The amount of lump sum payments through December 31, 2018 exceeded the settlement thresholds in two of the U.K. plans. The Company recorded non-cash settlement charges, primarily related to these plans of $42 million and $54 million for the years ended December 31, 2018 and 2017, respectively, of which approximately 90% impacted Risk and Insurance Services. In 2019, the Company recorded $7 million of non-cash pension settlement charges related to certain of its non U.S. plans.
The Company is currently integrating JLT, which is discussed in more detail in Note 14 to the consolidated financial statements, and will incur costs in connection with the integration and restructuring of the combined businesses, primarily related to severance, real estate rationalization, technology, consulting fees related to the management of the integration processes and legal fees related to the rationalization of legal entity structures. Based on current estimates, the Company expects to incur pre-tax charges of $700 million, of which approximately $625 million will be cash charges. These costs reflect $335 million incurred in 2019 and projected costs of approximately $365 million, most of which will be incurred in 2020 and the remainder in 2021. Based on further analysis and review during the second half of 2019, the Company identified additional opportunities for further efficiencies that will result in additional future cost savings and is currently tracking ahead of our prior guidance. The Company expects to achieve run rate savings of at least $350 million. The Company has realized cost savings in 2019 of approximately $125
JLT acquisition related costs include costs directly related to completing the Transaction, such as retention costs, investment banking fees, legal fees and stamp duty tax. It also includes the loss on disposal of JLT's aerospace business.
The calculation of underlying revenue growth for the twelve-month period ended December 31, 2019, is calculated as if MMC and JLT were a combined company a year ago, but excludes the impact of currency and other acquisitions, dispositions, and transfers among businesses. Combined prior year revenue information for MMC and JLT for the twelve-month periods ended December 31, 2018 are presented below. The unaudited 2018 JLT revenue amounts in the "2018 including JLT" column reflect historical JLT revenue information following IFRS, adjusted to conform with U.S. GAAP and the Company's specific accounting policies, primarily related to development of constraints and subsequent release of those constraints related to the reinsurance business. The decrease in revenue due to the disposal of JLT's Aerospace business is reflected in the acquisitions/dispositions column beginning in June 2019, when the sale was completed. See the reconciliation of non-GAAP measures on page 55. All other acquisitions/dispositions activity is included in the acquisitions/dispositions column. Underlying expense growth is calculated in a similar manner.
Revenue in the Risk and Insurance Services segment increased 17% in 2019 compared with 2018, reflecting the inclusion of JLT for the last three quarters of 2019. Revenue grew 4% on an underlying basis partly offset by a 2% decrease related to the impact of foreign currency translation.
Fiduciary interest income was $105 million in 2019 compared with $65 million in 2018 primarily due to the inclusion of JLT's results from April 1 to December 31, 2019.
Consulting revenue in 2019 increased 5% compared with 2018, reflecting the inclusion of JLT for the last three quarters of 2019. Revenue increased 3% on an underlying basis, partly offset by a 2% decrease from the impact of foreign currency translation.
Mercer's revenue in 2019 increased 2% on an underlying basis. Mercer's year-over-year revenue comparison also reflects a 2% decrease from the impact of foreign currency translation. The underlying revenue growth reflects increases in both Career and Health of 5%, while Wealth remained flat. Oliver Wyman Group’s revenue increased 4% in 2019 compared with 2018, or 6% on an underlying basis.
Consulting expense in 2019 increased 4% compared with 2018, reflecting the inclusion of JLT for the last three quarters of 2019. The underlying expense increases of 2% was offset by a 2% decrease from the impact of foreign currency translation. The increase in underlying expense reflects higher incentive compensation and restructuring-related costs. Consulting expense in 2019 included $56 million related to a business restructuring at Mercer.
Interest income earned on corporate funds amounted to $39 million in 2019 compared with $11 million in 2018. Interest expense in 2019 was $524 million compared with $290 million in 2018. During the first quarter of 2019, the Company issued approximately $6.5 billion of senior notes related to the JLT acquisition. The funds were held in escrow and released for payment in April 2019, when the acquisition was completed. The increase in interest income from the prior year is primarily due to interest earned on
these funds. The increase in interest expense was primarily due to new debt issuances related to the JLT acquisition.
The caption "Investment income" in the consolidated statements of income comprises realized and unrealized gains and losses from investments. It includes, when applicable, other-than-temporary declines in the value of securities, mark-to-market increases/decreases in equity investments with readily determinable fair values and equity method gains or losses on its investments in private equity funds. The Company's investments may include direct investments in insurance, consulting or other strategically linked companies and investments in private equity funds.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2018, the Company prospectively adopted a new accounting standard that requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The Company holds certain equity investments that under legacy U.S. GAAP were previously treated as available for sale securities, whereby the mark-to-market change was recorded to other comprehensive income in its consolidated balance sheet. The Company recorded a cumulative-effect adjustment increase to retained earnings as of the beginning of the period of adoption of $14 million, reflecting the reclassification of cumulative unrealized gains, net of tax, as of December 31, 2017 from other comprehensive income to retained earnings. Prior periods have not been restated.
As noted above, on April 1, 2019, the Company completed the JLT Transaction. The integration of this global organization required intercompany transfers of acquired entities into the Company's country structures and combination of those entities within the equivalent Company businesses. The integration transactions were designed to be tax efficient. The Company's global effective tax rate on JLT's earnings was reduced compared to JLT's pre-acquisition tax rate by utilizing debt for the restructuring transactions to be capital efficient, and reducing the generation of post-acquisition tax losses by merging historically unprofitable JLT entities with profitable Company operations. The provisions for deferred taxes and uncertain tax positions have been established as part of the purchase price allocation as of April 1, 2019.
The broader JLT organization is now held under the Company, which makes it part of a U.S.-based multinational company and subjects it to full U.S. taxation.
In 2017, the tax reform legislation known as the "Tax Cuts and Jobs Act" (the "TCJA"), significantly changed the U.S. federal income tax regime. It provided for a reduction in the U.S. corporate tax rate to 21% and the creation of a quasi-territorial system to tax non-U.S. based operations, including adding a minimum tax on Global Intangible Low-Taxed Income ("GILTI"). The TCJA also changed the deductibility of certain expenses, primarily meals and entertainment, executive officers’ compensation and interest. As further discussed in Note 7 to the consolidated financial statements, in the fourth quarter of 2017, the Company recorded a provisional charge of $460 million related to the enactment of the TCJA, and this provisional charge was finalized in 2018. State treatment of certain TCJA provisions is still evolving.
The Company's consolidated effective tax rate was 27.3%, 25.6%, and 42.9% in 2019, 2018, and 2017, respectively. The rates in 2019 and 2018 reflect ongoing impacts of the TCJA, primarily the reduced 21% U.S. statutory tax rate, and certain tax planning benefits, largely offset by higher U.S. tax costs under the quasi-territorial system, greater disallowance of compensation and entertainment deductions, a decrease in excess tax benefits related to share compensation primarily due to the lower U.S. tax rate, lower federal benefit for State taxes and treatment by States of certain TCJA provisions. The 2019 rate reflects items related to the JLT acquisition, including non-deductible goodwill allocated to the sale of Aerospace
During 2019, the Company recorded foreign currency translation adjustments which increased net equity by $151 million. Continued weakening of the U.S. dollar against foreign currencies would further increase 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 Company generated $2.4 billion of cash from operations in both 2019 and 2018. These amounts reflect the net income of the Company during those periods, excluding gains or losses from investments, adjusted for non-cash charges and changes in working capital which relate primarily to the timing of payments of accrued liabilities or receipts of assets and pension contributions.
During 2019, the Company contributed $35 million to its U.S. pension plans and $87 million to non-U.S. pension plans compared to contributions of $30 million to U.S. plans and $82 million to non-U.S. plans in 2018.
benefit section which was frozen to future accruals in 2006 and a defined contribution section. The assets of the JLT U.K. plan are held in a trustee administered fund separate from the Company.
Net cash provided by financing activities was $3.3 billion in 2019 compared with $1.3 billion used in 2018.
The Company increased outstanding debt by approximately $6.1 billion in 2019, discussed in more detail below. Outstanding debt increased $340 million in 2018.
In March 2019, the Company issued €550 million of 1.349% Senior Notes due 2026 and €550 million of 1.979% Senior Notes due 2030. In addition, the Company issued an additional $250 million of 4.375% Senior Notes due 2029, in March 2019. These notes constitute a further issuance of the 4.375% Senior Notes due 2029, of which $1.25 billion aggregate principal amount was issued in January 2019 (see above). After giving effect to the issuance of the notes, the Company has $1.5 billion aggregate principal amount of 4.375% Senior Notes due 2029. The Company used part of the net proceeds from these offerings, along with the $5 billion of Senior Notes issued in January 2019 (discussed above) to primarily fund the acquisition of JLT, including the payment of related fees and expenses, and to repay certain JLT indebtedness, as well as for general corporate purposes.
In connection with the closing of the JLT Transaction, the Company assumed approximately $1 billion of historical JLT indebtedness. In April and June of 2019, the Company repaid approximately $450 million and $553 million, respectively, which represented all of the JLT debt acquired upon the acquisition of JLT. The Company incurred debt extinguishment costs of $32 million in regard to the repayment of this debt.
The Company has established a short-term debt financing program of up to $1.5 billion through the issuance of commercial paper. The proceeds from the issuance of commercial paper are used for general corporate purposes. The Company had no commercial paper outstanding at December 31, 2019.
In March 2018, the Company issued $600 million of 4.20% senior notes due 2048. The Company used the net proceeds for general corporate purposes.
In March 2019, the Company closed on $300 million one-year and $300 million three-year term loan facilities. The interest rate on these facilities was based on LIBOR plus a fixed margin which varies with the Company's credit ratings. In August 2019, the Company terminated the $300 million three-year term loan facility. The Company had $300 million of borrowings outstanding under the one-year term facility at September 30, 2019 which was terminated and repaid in December 2019.
In September 2018, the Company entered into a bridge loan agreement to finance the proposed JLT transaction. The Company paid approximately $35 million of customary upfront fees related to the bridge loan at the inception of the loan commitment. The bridge loan agreement was terminated on April 1, 2019.
The Company also maintains other credit facilities, guarantees and letters of credit with various banks, aggregating $598 million at December 31, 2019 and $594 million at December 31, 2018. There were no outstanding borrowings under these facilities at December 31, 2019 or December 31, 2018.
The Company's potential exposure to the discontinuance of LIBOR is discussed in Note 13 to the consolidated financial statements.
During 2018, the Company repurchased 8.2 million shares of its common stock for total consideration of $675 million at an average price per share of $82.61.
recorded on the date of acquisition are reflected as financing cash flows. Payments related to increases in the contingent consideration liability subsequent to the date of acquisition of $41 million are reflected as operating cash flows. Remaining estimated future contingent consideration payments of $223 million for acquisitions completed in 2019 and in prior years are included in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheet at December 31, 2019. The Company paid deferred purchase consideration related to prior years' acquisitions of $43 million and $62 million for the years ended December 31, 2019 and 2018, respectively. Remaining deferred cash payments of approximately $193 million are included in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheet at December 31, 2019.
In connection with the JLT Transaction, to hedge the risk of increases in future interest rates prior to its issuance of senior notes, in the fourth quarter of 2018, the Company entered into treasury locks related to $2 billion of the expected debt. The fair value at December 31, 2018 was based on the published treasury rate plus forward premium as of December 31, 2018 compared to the all in rate at the inception of the
Net cash used for investing activities amounted to $5.7 billion in 2019 compared with $1.1 billion used for investing activities in 2018.
In January 2019, the Company increased its equity ownership in Marsh India from 26% to 49% for approximately $88 million. Marsh India is carried under the equity method.
The Company’s additions to fixed assets and capitalized software, which amounted to $421 million in 2019 and $314 million in 2018, primarily relate to computer equipment purchases, the refurbishing and modernizing of office facilities and software development costs.
The above does not include the liability for unrecognized tax benefits of $86 million as the Company is unable to reasonably predict the timing of settlement of these liabilities, other than approximately $2 million that may become payable during 2020.
See Note 2 to the consolidated financial statements for additional information.
The Company and its subsidiaries are subject to numerous claims, lawsuits and proceedings including claims for errors and omissions ("E&O"). GAAP requires that a liability be recorded when a loss is both probable and reasonably estimable. Significant management judgment is required to apply this guidance. The Company utilizes case level reviews by inside and outside counsel, an internal actuarial analysis by Oliver Wyman Group, a subsidiary of the Company, and other methods to estimate potential losses. The liability is reviewed quarterly and adjusted as developments warrant. In many cases, the Company has not recorded a liability, other than for legal fees to defend the claim, because we are unable, at the present time, to make a determination that a loss is both probable and reasonably estimable. Given the unpredictability of E&O claims and of litigation that could flow from them, it is possible that an adverse outcome in a particular matter could have a material adverse effect on the Company’s businesses, results of operations, financial condition or cash flow in a given quarterly or annual period.
Significant judgment is required in determining the annual effective tax rate and in evaluating uncertain tax positions. The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process:
First, the Company determines whether it is more likely than not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements.
Certain items are included in the Company's tax returns at different times than the items are reflected in the financial statements. As a result, the annual tax expense reflected in the consolidated statements of income is different than that reported in the tax returns. Some of these differences are permanent, such as non-deductible expenses, and some differences are temporary and reverse over time, such as depreciation expense. Temporary differences create deferred tax assets and liabilities, which are measured at existing tax rates. Deferred tax liabilities generally represent tax expense recognized in the
financial statements for which payment has been deferred, or expense for which a deduction has been taken already in the tax return but the expense has not yet been recognized in the financial statements. Deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which a benefit has already been recorded in the financial statements. The Company evaluates all significant available positive and negative evidence, including the existence of losses in recent years and its forecast of future taxable income by jurisdiction, in assessing the need for a valuation allowance. The Company also considers tax planning strategies that would result in realization of deferred tax assets, and the presence of taxable income in prior period tax filings in jurisdictions that allow for the carryback of tax attributes pursuant to the applicable tax law. The underlying assumptions the Company uses in forecasting future taxable income require significant judgment and take into account the Company's recent performance. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which temporary differences or carry-forwards are deductible or creditable. Valuation allowances are established for deferred tax assets when it is estimated that it is more likely than not that future taxable income will be insufficient to fully use a deduction or credit in that jurisdiction.
Goodwill Impairment Testing - The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment assessment for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, a company can assess qualitative factors to determine whether it is necessary to perform a goodwill impairment test. Alternatively, the company may elect to proceed directly to the quantitative goodwill impairment test. In 2019, the Company elected to perform a quantitative impairment assessment. Fair values of the reporting units were estimated using a market approach. Carrying values for the reporting units are based on balances at the prior quarter end and include directly identified assets and liabilities as well as an allocation of those assets and liabilities not recorded at the reporting unit level. The Company completed its 2019 annual review in the third quarter and concluded goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value by a substantial margin.
As of December 31, 2019, there was $19 million of unrecognized compensation cost related to stock option awards. The weighted-average period over which the costs are expected to be recognized is 1.25 years. Also as of December 31, 2019, there was $357 million of unrecognized compensation cost related to the Company’s restricted stock, restricted stock unit and performance stock unit awards. The weighted-average period over which that cost is expected to be recognized is approximately 1.11 years.
Although not directly recorded in the Company’s consolidated balance sheets, the Company's defined benefit pension plans hold investments of approximately $17 billion, which include private equity and other non-liquid investments. The fair value of the plan investments determines, in part, the over-or under-funded status of those plans, which is included in the Company’s consolidated balance sheets. The Company also has minority positions in certain equity securities (primarily Alexander Forbes) as well as approximately $107 million of investments in private equity funds accounted for using the equity method of accounting.
The Company reviews the carrying value of its investments (both direct and held through its pension plans) to determine if any valuation adjustments are appropriate under the applicable accounting
pronouncements. The Company bases its review on the facts and circumstances as they relate to each investment. In those instances where quoted market prices are not available, particularly for private equity funds, significant management judgment is required to determine the appropriate value of the Company’s investments. Fair value of investments in private equity funds is determined by the funds’ investment managers. Factors considered in determining the fair value of private equity investments include: implied valuation of recently completed financing rounds that included sophisticated outside investors; performance multiples of comparable public companies; restrictions on the sale or disposal of the investments; trading characteristics of the securities; and the relative size of the holdings in comparison to other private investors and the public market float.
In connection with the JLT Transaction, the Company entered into several derivative contracts, described in Note 11 to the consolidated financial statements. These derivative contracts are recorded at fair value at the end of each period, with the change in fair value recorded in the consolidated statements of income. Prior to the settlement, determination of the fair value of these contracts, in particular the deal contingent foreign exchange contract, required significant management judgments or estimates about the potential closing dates of the transaction and remaining value of the deal contingency feature. All derivative contracts related to the JLT Transaction were settled during 2019.
Note 1 to the consolidated financial statements contains a summary of the Company’s significant accounting policies, including a discussion of recently issued accounting pronouncements and their impact or potential future impact on the Company’s financial results, if determinable, under the sub-heading "New Accounting Pronouncements".
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 $105 million, $65 million and $39 million in 2019, 2018 and 2017, respectively. The Consulting segment recorded fiduciary interest income of $4 million, $3 million and $4 million in 2019, 2018 and 2017, 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, 2019, the Company maintained $197 million related to these regulatory requirements.
Income Taxes: The Company's effective tax rate reflects its income, statutory tax rates and tax planning in the various jurisdictions in which it operates. Significant judgment is required in determining the annual tax provision and in evaluating uncertain tax positions and the ability to realize deferred tax assets. See Part II, Item 7. ("Management’s Discussion and Analysis of Financial Condition and Results of Operations" - Income Taxes) for a discussion of accounting policies governing the Company’s income tax provision.
Tax law may require items be included in the Company's tax returns at different times than the items are reflected in the financial statements. As a result, the annual tax expense reflected in the consolidated statements of income is different than that reported in the income tax returns. Some of these differences are permanent, such as expenses that are not deductible in the returns, and some differences are temporary and reverse over time, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which benefit has already been recorded in the financial statements. Valuation allowances are established for deferred tax assets when it is estimated that future taxable income will be insufficient to use a deduction or credit in that jurisdiction. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred, or expense for which a deduction has been taken already in the tax return but the expense has not yet been recognized in the financial statements.
Integration and Restructuring Charges: Severance and related costs are recognized based on amounts due under established severance plans or estimates of one-time benefits that will be provided. Typically, severance benefits are recognized when the impacted colleagues are notified of their expected termination and such termination is expected to occur within the legally required notification period. These costs are included in compensation and benefits in the consolidated statements of income.
Estimates: GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may vary from those estimates.
The following new accounting standard was adopted using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of January 1, 2019:
Effective January 1, 2019, the Company adopted new guidance intended to improve financial reporting for leases. Under the new guidance, a lessee is required to recognize assets and liabilities for leases. Consistent with legacy GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on the classification of the lease as financing or operating. However, unlike legacy GAAP, which requires that only capital leases are recognized on the balance sheet, the new guidance requires that both operating and financing leases be recognized on the balance sheet. The Company adopted this new standard using a modified retrospective method, applying the new guidance as of the beginning of the year of adoption, with a cumulative effect of initially applying the guidance recognized as an adjustment to retained earnings at January 1, 2019. Therefore, prior period information has not been restated. The Company has elected the package of practical expedients, which among other things, allows historical lease classifications to be carried forward. The Company did not elect the hindsight practical expedient in determining lease term and impairment of an entity's Right of Use Assets ("ROU assets"). On January 1, 2019, the Company recognized a lease liability of $1.9 billion and ROU asset of $1.7 billion, related to real estate operating leases. The ROU asset also reflected reclassification adjustments primarily from other liabilities related to existing deferred rent, unamortized lease incentives and restructuring liabilities of approximately $200 million upon adoption. There was no
cumulative-effect adjustment required to be booked to retained earnings upon transition. The adoption of this standard did not have a material impact on our income statement as compared to prior periods.
The following new accounting standards were adopted using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of January 1, 2018:
Effective January 1, 2018, the Company adopted new guidance which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance eliminates the exception for an intra-entity transfer of an asset other than inventory. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance was applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company adopted the new guidance effective January 1, 2018, and recorded a cumulative-effect adjustment decrease to retained earnings of approximately $14 million as of the beginning of the period of adoption.
In August 2018, the FASB issued new guidance that amends required fair value measurement disclosures. The guidance adds new requirements, eliminates some current disclosures and modifies other required disclosures. The new disclosure requirements, along with modifications made to disclosures as a result of the change in requirements for narrative descriptions of measurement uncertainty, must be applied on a prospective basis. The effects of all other amendments included in the guidance must be applied retrospectively for all periods presented. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted. Adoption of this guidance will impact disclosures only and will not have an impact on the Company's financial position or results of operations.
In January 2017, the FASB issued new guidance to simplify the test for goodwill impairment. The new guidance eliminates the second step in the current two-step goodwill impairment process, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill for that reporting unit. The new guidance requires a one-step impairment test, in which the goodwill impairment charge is based on the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance should be applied on a prospective basis with the nature of and reason for the change in accounting principle disclosed upon transition. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its financial position or results of operations.
Effective January 1, 2018, the Company adopted new accounting guidance related to revenue from contracts with customers. The Company adopted the new guidance using the modified retrospective method, which applies the new guidance beginning in the year of adoption, with the cumulative effect of initially applying the guidance recognized as an adjustment to retained earnings at January 1, 2018. The Company elected to apply the modified retrospective method to all contracts. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition guidance, while 2017 and prior amounts are not adjusted and continue to be reported in accordance with legacy accounting guidance that were in effect for that period. The adoption of this new revenue recognition standard shifted revenue in the Risk and Insurance Services segment among quarters from historical patterns, but did not have a significant year-over-year impact on annual revenue in either segment.
Other revenue included in the consolidated statements of income that is not from contracts with customers is less than 1% of total revenue, and therefore is not presented as a separate line item.
Risk and Insurance Services revenue reflects compensation for brokerage and consulting services through commissions and fees. Commission rates and fees vary in amount and can depend upon a number of factors, including the type of insurance or reinsurance coverage provided, the particular insurer or reinsurer selected, and the capacity in which the broker acts and negotiates with clients. For the majority of the insurance and reinsurance brokerage arrangements, advice and services provided which culminate in the placement of an effective policy are considered a single performance obligation.
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 receives revenue in the form of commissions received from insurance companies for the placement of group (and occasionally individual) insurance contracts, primarily health, life and accident coverages. Revenue for Mercer’s investment
A significant majority of fee revenues in the Consulting segment is recognized over time.
For consulting projects, Mercer generally invoices monthly in arrears with payment due within 30 days of the invoice date. Fees for delegated management services are either deducted from the net asset value of the fund or invoiced to the client on a monthly or quarterly basis in arrears. Oliver Wyman typically bills its clients 30-60 days in arrears with payment due upon receipt of the invoice.
The following schedule provides contract assets and contract liabilities information from contracts with customers.
At December 31, 2019, the Company’s capitalized assets related to deferred implementation costs, costs to obtain and costs to fulfill were $30 million, $222 million and $262 million, respectively. At December 31, 2018, the Company's capitalized assets related to deferred implementation costs, costs to obtain and costs to fulfill were $41 million, $206 million, and $227 million, respectively. Costs to obtain and deferred implementation costs are primarily included in other assets and costs to fulfill are primarily included in other current assets in the Company's consolidated balance sheets. The Company recorded amortization of compensation and benefits expense of $1.2 billion and $1.0 billion for the years ended December 31, 2019 and 2018, respectively, related to these capitalized costs.
The Company has elected to use the practical expedient and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets is one year or less.
The following amounts are included in the operating section of the consolidated statements of cash flows. For the year ended December 31, 2019, the Company recorded a net charge for adjustments to acquisition related accounts of $68 million and contingent consideration payments of $41 million. For the year ended December 31, 2018, the Company recorded a net charge for adjustments to acquisition related accounts of $32 million and contingent consideration payments of $36 million, and for the year ended December 31, 2017 the Company recorded a net charge for adjustments to acquisition related accounts of $3 million and contingent consideration payments of $27 million.
April - MMA acquired Lovitt & Touche, Inc., an Arizona-based insurance agency and The Centurion Group, LLC, a Pennsylvania-based retirement consulting, asset management and benefit plan advisory firm.
October - MMA acquired Benefits Reports Insurance Services, Inc., a Massachusetts-based independent insurance agency.
The following table presents the preliminary allocation of purchase consideration to the assets acquired and liabilities assumed during 2019 based on the estimated fair values for JLT and other acquisitions as of their respective acquisition dates:
Amounts for contingencies, pending the finalization of the Company’s assessment of the portfolio of contingencies;
Amounts for income tax assets, receivables and liabilities, pending the filing of the acquired companies' pre-acquisition income tax returns and receipt of information from taxing authorities which may change certain estimates and assumptions used.
February - MMA acquired Highsmith Insurance Agency, a North Carolina-based independent insurance brokerage firm.
June - MMA acquired Bleakley Insurance Services, a California-based provider of employee benefits solutions; Klein Agency, Inc., a Minnesota-based surety and property/casualty agency; and Insurance Associates, Inc., a Maryland-based independent insurance agency.
November - MMA acquired James P. Murphy & Associates, Inc., a Connecticut-based insurance agency.
December - MMA acquired Otis-Magie Insurance Agency, Inc., a Minnesota-based insurance agency, and Marsh acquired Hector Insurance PCC Ltd, a U.K.-based captive management company.
During January 2020, MMA completed the acquisition of two independent insurance brokers, Momentous Insurance Brokerage ("Momentous") and Ironwood Insurance Services ("Ironwood"). Momentous is a California-based full-service risk management and employee benefits firm specializing in high net worth private client services and insurance solutions for the entertainment industry. Ironwood is an Atlanta-based broker that provides commercial property/casualty insurance, employee benefits, and private client solutions to mid-size businesses and individuals throughout the US.
At December 31, 2019, the Company owned approximately 34% of Alexander Forbes ("AF"). In January 2020, the Company announced that it would dispose of a substantial portion of its investment in AF in the form of two independent transactions. In February 2020, the Company, in a separate transaction, sold the shares not subject to the agreements above to an independent third party. The consummation of all three transactions will result in a total liquidation of the Company's investment in AF.
The consolidated statement of income for 2019 includes approximately $1.2 billion of revenue and an operating loss of $40 million related to acquisitions made during 2019. The consolidated statement of income for 2018 includes approximately $120 million of revenue and $2 million of operating income related to acquisitions made during 2018, and the consolidated statement of income for 2017 includes approximately $156 million of revenue and $19 million of operating income related to acquisitions made during 2017.
The Company incurred acquisition related costs, primarily related to legal, investment banking and U.K. stamp duty tax of $125 million for the year ended December 31, 2019, primarily related to the acquisition of JLT. These costs are included in other operating expenses in the Company's consolidated statement of income.
Also, on June 1, 2019, the Company completed its disposition of JLT’s global aerospace business for cash proceeds of $165 million and contingent consideration receivable of approximately $65 million, based on the aerospace business achieving certain revenue milestones in 2020. The aerospace business was divested as part of the European Commission's approval of the JLT Transaction.
The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment assessment for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, a company can assess qualitative factors to determine whether it is necessary to perform a goodwill impairment test. Alternatively, the company may elect to proceed directly to the quantitative goodwill impairment test. In 2019, the Company elected to perform a quantitative impairment assessment. Fair values of the reporting units were estimated using a market approach. Carrying values for the reporting units are based on balances at the prior quarter end and include directly identified assets and liabilities, as well as an allocation of those assets and liabilities not recorded at the reporting unit level. The Company completed its 2019 annual assessment in the third quarter and concluded goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value by a substantial margin.
Other intangible assets that are not deemed to have an indefinite life are amortized over their estimated lives and reviewed for impairment upon the occurrence of certain triggering events in accordance with applicable accounting literature. The Company does not have any indefinite lived intangible assets.
The goodwill acquired of $5.1 billion in 2019 (approximately $213 million of which is deductible for tax purposes) is comprised of $5 billion related to the Risk and Insurance Services segment and $167 million related to the Consulting segment.
Goodwill allocable to the Company’s reportable segments is as follows: Risk and Insurance Services, $11.7 billion and Consulting, $3 billion.
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, which, at December 31, 2019, the Company estimates amounted to approximately $1.8 billion. The determination of the unrecognized deferred tax liability with respect to these investments is not practicable.
The Company’s consolidated effective tax rate was 27.3%, 25.6% and 42.9% in 2019, 2018 and 2017, respectively. The rates in 2019 and 2018 reflect ongoing impacts of the Tax Cuts and Jobs Act (TCJA) and certain tax planning benefits, largely offset by higher estimated tax costs from the TCJA quasi-territorial system, greater disallowance of certain expenses, a decrease in excess tax benefits related to share compensation primarily due to the 21% U.S. tax rate, lower Federal benefit for State tax deductions and State treatment of certain TCJA provisions. The 2019 rate includes certain tax costs of the JLT integration. The 2018 rate includes the effect of a charge related to the Company’s investment in Alexander Forbes as discussed in Note 10. The tax rate in 2017 reflects the fact that foreign operations were generally taxed at rates lower than the U.S. statutory tax rate prior to the TCJA, as well as including a provisional estimate of the impact of the enactment of the TCJA.
A valuation allowance was recorded to adjust deferred tax assets to the amount that the Company believes is more likely than not to be realized. Valuation allowances had net increases of $60 million and $36 million in 2019 and 2018, respectively. There was no change to income tax expense as a result of adjustments of the beginning of the year valuation allowances in 2019. Adjustments of the beginning of the year balances of valuation allowances increased income tax expense by $1 million during 2018. Approximately 69% of the Company’s net operating loss carryforwards expire from 2020 through 2040, and others are unlimited. The potential tax benefit from net operating loss carryforwards at the end of 2019 comprised federal, state and local, and non-U.S. tax benefits of $32 million, $34 million and $84 million, respectively, before reduction for valuation allowances.
The Company has established liabilities for uncertain tax positions in relation to potential assessments in the jurisdictions in which it operates. 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 $10 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.
The Company uses actuaries from Mercer, a subsidiary of the Company, to perform valuations of its pension plans. The long-term rate of return on plan assets assumption is determined for each plan based on the facts and circumstances that exist as of the measurement date, and the specific portfolio mix of each plan’s assets. The Company utilizes a model developed by the Mercer actuaries to assist in the determination of this assumption. The model takes into account several factors, including: actual and target portfolio allocation; investment, administrative and trading expenses incurred directly by the plan trust; historical portfolio performance; relevant forward-looking economic analysis; and expected returns, variances and correlations for different asset classes. These measures are used to determine
The target asset allocation for the U.S. plans is 64% equities and equity alternatives and 36% fixed income. At the end of 2019, the actual allocation for the U.S. plans was 64% equities and equity alternatives and 36% 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 2019, the actual allocation for the U.K. plans was 35% equities and equity alternatives and 65% 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.
As part of the JLT Transaction, the Company assumed responsibility for a number of pension plans throughout the world, with $255 million of net pension liabilities as of December 31, 2019 ($1,003 million in liabilities and $748 million of plan assets as of December 31, 2019), the most significant of which is the Jardine Lloyd Thompson U.K. Pension Scheme ("JLT U.K. plan"). The JLT U.K. plan has a defined benefit section which was frozen to future accrual in 2006 and a defined contribution section. The assets of the JLT U.K. plan are held in a trustee administered fund separate from the Company.
Defined Benefit Pension Plans in the U.K. and certain other countries allow participants an option for the payment of a lump sum distribution from plan assets before retirement in full satisfaction of the retirement benefits due to the participant as well as any survivor’s benefit. The Company’s policy under applicable U.S. GAAP is to treat these lump sum payments as a partial settlement of the plan liability if they exceed the total of interest plus service costs ("settlement thresholds"). Based on the amount of lump sum payments through December 31, 2018, the lump sum payments exceeded the settlement thresholds in two of the U.K. plans. The Company recorded non-cash settlement charges of $42 million and $54 million, in the consolidated statements of income for the twelve month periods ended December 31, 2018, and 2017, respectively, primarily related to these plans. The Company recorded $7 million of non-cash settlement charges in 2019 related to other non-U.S. plans.
The major categories of plan assets include equity securities, equity alternative investments, and fixed income securities. For the U.S. plan, the category ranges are 59-69% for equities and equity alternatives, and 31-41% for fixed income. For the U.K. plans, the category ranges are 31-37% for equities and equity alternatives, and 63-69% for fixed income. Asset allocation is monitored frequently and re-balancing actions are taken as appropriate.
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 $6.3 billion, $6.3 billion and $4.7 billion, respectively, as of December 31, 2019 and $5.5 billion, $5.5 billion and $4.1 billion, respectively, as of December 31, 2018.
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 $6.3 billion and $4.7 billion, respectively, as of December 31, 2019 and $5.5 billion and $4.1 billion, respectively, as of December 31, 2018.
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 $3.0 billion and $2.3 billion, respectively, as of December 31, 2019 and $1.9 billion and $1.6 billion, respectively, as of December 31, 2018.
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, 2019 and December 31, 2018:
(a) Transfers in during 2019 are primarily related to the inclusion of JLT plan assets.
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 $556 million of the 401(k) Plan’s assets at December 31, 2019 and $444 million at December 31, 2018 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 $139 million in 2019, $133 million in 2018 and $130 million in 2017. In addition, the Company has significant defined contribution plans 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. In addition, the Company has assumed responsibility
On May 19, 2011, the Marsh & McLennan Companies, Inc. 2011 Incentive and Stock Award Plan (the "2011 Plan") was approved by the Company's stockholders. The 2011 Plan replaced the Company's two previous equity incentive plans (the 2000 Senior Executive Incentive and Stock Award Plan and the 2000 Employee Incentive and Stock Award Plan).
A summary of the status of the Company’s stock option awards as of December 31, 2019 and changes during the year then ended is presented below:
As of December 31, 2019, there was $19.0 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 1.25 years. Cash received from the exercise of stock options for the years ended December 31, 2019, 2018 and 2017 was $106.5 million, $46.7 million and $126.7 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) ranges, generally, from 0-200% of the number of units granted, based on the achievement of objective, pre-determined Company performance measure(s), 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 shares to be paid 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 and shares are distributed.
A summary of the status of the Company's restricted stock units and performance stock units as of December 31, 2019 and changes during the period then ended is presented below:
As of December 31, 2019, there was $357 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 1.11 years.
In May 1999, the Company's stockholders approved an employee stock purchase plan (the "1999 Plan") to replace the 1994 Employee Stock Purchase Plan (the "1994 Plan"), which terminated on September 30, 1999 following its fifth annual offering. Under the current terms of the Plan, shares are purchased four times during the plan year at a price that is 95% of the average market price on each quarterly purchase date. Under the 1999 Plan, after including the available remaining unused shares in the 1994 Plan and reducing the shares available by 10,000,000 consistent with the Company's Board of Directors' action in March 2007 and the addition of 4,750,000 shares due to a shareholder action in May 2018, no more than 40,350,000 shares of the Company's common stock may be sold. Employees purchased 405,872 shares during the year ended December 31, 2019 and at December 31, 2019, 5,272,708 shares were available for issuance under the 1999 Plan. Under the 1995 Company Stock Purchase Plan for International Employees (the "International Plan"), after reflecting the additional 5,000,000 shares of common stock for issuance approved by the Company's Board of Directors in July 2002, the addition of 4,000,000 shares due to a shareholder action in May 2007 and reducing the shares available by 1,000,000 consistent with the Company's Board of Directors' action in March 2018, no more than 11,000,000 shares of the Company's common stock may be sold. Employees purchased 103,635 shares during the year ended December 31, 2019 and there were 1,271,213 shares available for issuance at December 31, 2019 under the International Plan. The plans are considered non-compensatory.
Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities and exchange-traded money market mutual funds).
Assets and liabilities using Level 3 inputs include liabilities for contingent purchase consideration and the deal contingent foreign exchange contract (the "FX Contract").
In connection with the JLT Transaction, the Company entered into the FX Contract, to hedge the risk of appreciation of the GBP-denominated purchase price. The Company settled the FX contract on April 1, 2019, upon completion of the JLT Transaction.
The fair value at December 31, 2018, was determined using the probability distribution approach, comparing the all in forward rate to the foreign exchange rate for possible dates the JLT Transaction could close, discounted to the valuation date and adjusted for the fair value of the deal contingency feature. Determining the fair value of the FX Contract required significant management judgments or estimates about the potential closing dates of the transaction and remaining value of the deal contingency feature.
The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities for the years ended December 31, 2019 and December 31, 2018.
The fair value of the contingent purchase consideration asset and liability is based on projections of revenue and earnings for the acquired or disposed entities that are reassessed on a quarterly basis. As set forth in the table above, based on the Company's ongoing assessment of the fair value of contingent consideration, the Company recorded a net increase in the estimated fair value of such liabilities for prior period acquisitions of $70 million for the year ended December 31, 2019. A 5% increase in the above mentioned projections would increase the liability by approximately $25 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $28 million.
The Company holds investments in certain private equity investments, public companies and private companies that are accounted for using the equity method of accounting. The carrying value of these investments was $434 million and $287 million at December 31, 2019 and 2018, respectively.
The Company's investments in private equity funds were $107 million and $82 million at December 31, 2019 and December 31, 2018, 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. The Company recorded net investment
income of $13 million and $16 million for the years ended December 31, 2019 and 2018, respectively, related to these investments.
(a) Net investment income in 2019, 2018 and 2017 includes approximately $645 million, $1.2 billion and $1.5 billion, respectively, related to Alexander Forbes, substantially all of which is credited to policy holders.
On September 20, 2018, the Company entered into the FX Contract to purchase £5.2 billion at a contracted exchange rate, to hedge the risk of appreciation of the GBP-denominated purchase price of JLT, which was settled on April 1, 2019 upon the closing of the JLT Transaction. The FX Contract did not qualify for hedge accounting treatment under applicable accounting guidance, which required the Company to record the change in the fair value of the FX Contract on each reporting date to the statement of income. The Company recorded a gain of $31 million in the consolidated statement of income for the year ended December 31, 2019, related to the FX Contract. An unrealized loss of $325 million related to the change in fair value of the FX contract was recorded in the consolidated statement of income during 2018.
December 31, 2018 was based on the published treasury rate plus the forward premium as of December 31, 2018 compared to the all in rate at the inception of the contract. The contracts were not designated as an accounting hedge. The Company recorded an unrealized loss of $116 million related to the change in the fair value of this derivative in the consolidated statement of income for the twelve months ended December 31, 2018. In January 2019, upon issuance of the $5 billion of senior notes, the Company settled the treasury lock derivatives and made a payment to its counter party for $122 million. An additional charge of $6 million was recorded in the first quarter of 2019 related to the settlement of the Treasury lock derivatives.
JLT also had a number of foreign exchange contracts to hedge the risk of foreign exchange movements between the U.S. dollar and the GBP, related to JLT’s U.S. dollar denominated revenue in the U.K. Prior to the acquisition, these derivative contracts were designated as cash flow hedges. Upon completion of the JLT Transaction, these derivative contracts were not re-designated as cash flow hedges by the Company. The contracts were settled in June 2019. The change in fair value between the acquisition date and the settlement date resulted in a charge of $26 million for the year ended December 31, 2019. The charge is recorded as a change in fair value of acquisition related derivative contracts in the consolidated statement of income.
The following chart provides additional information about the Company’s property leases:
As of December 31, 2019, the Company had additional operating real estate leases that had not yet commenced of $45 million. These operating leases will commence over the next 12 months.
On September 18, 2018, the Company entered into a bridge loan agreement to finance the JLT acquisition. The bridge loan agreement provided for commitments in the aggregate principal amount of £5.2 billion. In 2018, the Company paid approximately $35 million of customary upfront fees related to the bridge loan at the inception of the loan commitment, of which $30 million was amortized in 2018 and $5 million in the first quarter of 2019 as interest expense. The Company terminated its bridge loan agreement on April 1, 2019.
In January 2020, the Company closed on $500 million one-year and $500 million two-year term loan facilities. The interest rate on these facilities is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. The facilities require the Company to maintain coverage ratios and leverage ratios consistent with the revolving credit facility discussed below. The Company has no current borrowings outstanding under these facilities. The facility includes a provision for determining a LIBOR successor rate in the event LIBOR reference rates are no longer available, which is expected to occur by the end of 2021.These facilities are expected to expire on or around the time that LIBOR is expected to be replaced by a successor rate.
Also in March 2019, the Company issued €550 million of 1.349% Senior Notes due 2026 and €550 million of 1.979% Senior Notes due 2030. In addition, in March 2019, the Company issued an additional $250 million of 4.375% Senior Notes due 2029. These notes constitute a further issuance of the 4.375% Senior Notes due 2029, of which $1.25 billion aggregate principal amount was issued in January 2019 (see above). After giving effect to the issuance of the notes, the Company has $1.5 billion aggregate principal amount of 4.375% Senior Notes due 2029. The Company used part of the net proceeds from these offerings, along with the $5 billion of Senior Notes issued in January 2019 (discussed above) primarily to fund the acquisition of JLT, including the payment of related fees and expenses, and to repay certain JLT indebtedness, as well as for general corporate purposes.
In January 2019, the Company issued $700 million of 3.50% Senior Notes due 2020, $1.0 billion of 3.875% Senior Notes due 2024, $1.25 billion of 4.375% Senior Notes due 2029, $500 million of 4.75% Senior Notes due 2039, $1.25 billion of 4.90% Senior Notes due 2049 and $300 million of Floating Rate Senior Notes due 2021. The floating rate notes are based on LIBOR plus a fixed margin. These notes are due prior to the date that LIBOR is expected to be replaced by a successor rate.
In October 2018 the Company repaid $250 million of maturing senior notes.
In October 2018, the Company and certain of its foreign subsidiaries increased its multi-currency five-year unsecured revolving credit facility from $1.5 billion to $1.8 billion. The interest rate on this facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. This facility expires in October 2023 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, 2019. The facility includes a provision for determining a LIBOR successor rate in the event LIBOR reference rates are no longer available. In such case, the rate would be determined using an alternate reference rate that has been broadly accepted by the syndicated loan market in the United States in lieu of LIBOR (the “LIBOR successor rate”). If no LIBOR successor rate has been determined, the rate will be based on the higher of the rate announced publicly by Citibank, New York, NY, as its base rate or the fed funds rate plus a fixed margin.
Additional credit facilities, guarantees and letters of credit are maintained with various banks, primarily related to operations located outside the United States, aggregating $598 million at December 31, 2019
The Company is currently integrating JLT, which will involve combining the business practices and co-locating colleagues in most geographies, rationalization of real estate leases around the world, realization of synergies and migration of legacy JLT systems onto the Company's information technology environment and security protocols, consulting fees related to integration management processes and legal fees related to the rationalization of legal entity structures that will reduce costs, mitigate risks and improve operational transparency.
In connection with the JLT integration and restructuring, for the twelve month period ended December 31, 2019, costs incurred were $229 million in RIS, $18 million in Consulting, and $88 million in Corporate. The severance and related costs were included in compensation and benefits and the other costs were included in other operating expenses in the consolidated statement of income.
(a) Includes data center contract termination costs and temporary infrastructure leasing costs.
During 2018 and 2019, Marsh initiated programs to simplify its organization structure and realign and rebrand certain of its businesses. The Company incurred severance and consulting costs of $34 million for the twelve month period ended December 31, 2019, related to these initiatives.
In addition to the changes discussed above, the Company incurred at Corporate $22 million of restructuring costs primarily related to future rent under non-cancelable leases.
Details of the restructuring liability activity from January 1, 2018 through December 31, 2019, including actions taken prior to 2019, are as follows:
As of January 1, 2017, the liability balance related to restructuring activity was $93 million. In 2017, the Company accrued $40 million and had cash payments and other adjustments of $68 million related to restructuring activities that resulted in the liability balance at December 31, 2017 reported above.
During 2019, the Company repurchased 4.8 million shares of its common stock for total consideration of $485 million. In November 2019, the Board of Directors of the Company authorized the Company to repurchase up to $2.5 billion of the Company's common stock, which superseded any prior authorizations. The Company remains authorized to purchase additional shares of its common stock up to
The Company issued approximately 4.6 million and 3.3 million shares related to stock compensation and employee stock purchase plans during the years ended December 31, 2019 and 2018, respectively.
In April 2017, the Financial Conduct Authority in the United Kingdom (the "FCA") commenced a civil competition investigation into the aviation insurance and reinsurance sector. In connection with that investigation, the FCA carried out an on-site inspection at the London offices of Marsh Limited, our Marsh and Guy Carpenter operating subsidiary in the United Kingdom, and JLT Specialty Ltd., JLT's U.K. operating subsidiary. The FCA indicated that it had reasonable grounds for suspecting that Marsh Limited, JLT Specialty Ltd. and other participants in the market had been sharing competitively sensitive information within the aviation insurance and reinsurance broking sector.
We are cooperating with these investigations and are conducting our own reviews. At this time, 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 2014, the FCA conducted a thematic review of the suitability of financial advice provided to individuals by a number of firms, including JLT’s employee benefits business, relating to enhanced transfer value ("ETV") pension transfers. In January 2015, the FCA notified JLT that it was commissioning a Skilled Person review of JLT’s ETV advice. In February 2019, prior to the completion of the acquisition, JLT recorded a gross liability of approximately £59 million (or approximately $77 million) arising from the Skilled Person report and ETV review. Pending the outcome of the FCA’s review, and based on our review as of December 31, 2019, the Company has a gross liability of approximately £65 million (or approximately $85 million) recorded on its consolidated balance sheet for the estimated liabilities and costs arising from this matter. We expect this gross liability to be partially offset by insurance and indemnification claims under existing arrangements.
Includes inter-segment revenue of $8 million, $6 million and $5 million in 2019, 2018 and 2017, respectively, interest income on fiduciary funds of $105 million, $65 million and $39 million in 2019, 2018 and 2017, respectively, and equity method income of $25 million, $13 million and $14 million in 2019, 2018 and 2017, respectively and $40 million related to the sale of business in 2018.
Includes equity method investments of $179 million, $57 million and $60 million at December 31, 2019, 2018 and 2017, respectively.
Includes equity method investments of $149 million, $148 million and $269 million at December 31, 2019, 2018 and 2017, respectively.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Given that the determination of the liability for E&O requires management to make significant estimates and assumptions in projecting ultimate settlement values of reported and unreported claims, performing audit procedures to evaluate the reasonableness of such estimates and assumptions required a high degree of auditor judgment, including the need to involve our actuarial specialists.
For selected E&O matters, we made inquiries of the Company’s inside and outside counsel, as applicable, regarding the status of these matters and likelihood of settlement.
With the assistance of our actuarial specialists, we evaluated the reasonableness of the assumptions and methodologies involved in the development of the liability for E&O by:
Testing the underlying data that served as the basis for the actuarial analysis, including historical claims, to evaluate whether the inputs to the actuarial estimate were reasonable.
Comparing management’s prior-year assumptions of expected development and ultimate loss to actual amounts incurred during the current year to identify potential bias in the determination of the liability for E&O.
Other Intangible Assets - Valuation of Customer Relationship Intangible Assets for the Jardine Lloyd Thompson Group plc (“JLT”) Transaction - Refer to Note 5 to the financial statements
Given that the fair value determination of customer relationship intangible assets requires management to make significant estimates and assumptions in determining the forecasted future cash flows and the selection of discount rates, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our valuation specialists.
Testing the source information underlying the determination of the discount rates and testing the mathematical accuracy of the calculations.
Evaluating the reasonableness of the estimated economic life of each selected customer relationship intangible asset.
We evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the audit, such as assumptions utilized by the Company in the determination of their budget.
As of February 18, 2020, there were 4,875 stockholders of record.