Includes the impact of net restructuring costs of $12 million, $22 million, $78 million, $51 million, and $141 million in 2014, 2013, 2012, 2011, and 2010, respectively.
Marsh & McLennan Companies, Inc. and Subsidiaries (the “Company”) is a global professional services firm offering clients advice and solutions in risk, strategy and people. It is the parent company of a number of the world’s leading risk experts and specialty consultants, including: Marsh, the insurance broker, intermediary and risk advisors; Guy Carpenter, the risk and reinsurance specialist; Mercer, the provider of HR and related financial advice and services; and Oliver Wyman Group, the management, economic and brand consultancy. With approximately 57,000 employees worldwide and annual revenue of approximately $13 billion, the Company provides analysis, advice and transactional capabilities to clients in more than 130 countries.
Risk and Insurance Services operating income increased $88 million or 6% in 2014 compared with 2013. Revenue increased 5%, or 3% on an underlying basis, to $6.9 billion in 2014, reflecting underlying revenue growth of 4% at Marsh and 2% at Guy Carpenter, while expenses increased 5%, or 3% on an underlying basis.
Consulting operating income increased $153 million or 22% to $845 million in 2013 compared with 2012 due to the combined effects of increased revenue at Mercer and lower expenses in the segment.
Consolidated net income attributable to the Company was $1.5 billion in 2014, compared with $1.4 billion in 2013 and $1.2 billion in 2012.
The Company conducts business in many countries, as a result of which the impact of foreign exchange rate movements may impact period-to-period comparisons of revenue. Similarly, the revenue impact of acquisitions and dispositions 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 is as follows:
Consolidated operating expenses increased 1% in 2013 compared with the same period in 2012 on both a reported and underlying basis. The increase in underlying expenses primarily reflects higher incentive compensation and pension costs, partly offset by lower costs related to professional indemnity claims.
Revenue in the Risk and Insurance Services segment increased 5%, or 3% on an underlying basis, in 2014 compared with 2013.
May - MMA acquired Kinker-Eveleigh Insurance Agency, an Ohio-based agency specializing in property-casualty and employee benefits solutions, VISICOR, a full-service employee benefits brokerage and consulting firm based in Texas and Senn Dunn Insurance, a full service insurance brokerage located in North Carolina.
September - Marsh acquired Kocisko Insurance Brokers, Inc., a full service commercial insurance brokerage located in Montreal, Quebec.
October - MMA acquired NuWest Insurance Services, Inc., a California-based property-casualty agency.
MMA acquired The Benefit Planning Group, Inc., a North Carolina-based employee benefit consulting firm.
Revenue in the Risk and Insurance Services segment increased 4%, or 3% on an underlying basis, in 2013 compared with 2012.
Guy Carpenter’s revenue increased 5% to $1.1 billion in 2013 compared with 2012, or 5% on an underlying basis, reflecting growth across North America, International, Global Specialties and U.K. Facultative.
Expenses in the Risk and Insurance Services segment increased 5% on a reported basis and 3% on an underlying basis in 2014 compared with 2013. The increase in expenses on an underlying basis is primarily due to higher base salaries, incentive compensation, facilities and intangible asset amortization expenses, partly offset by lower pension costs.
Reimbursable expenses incurred by professional staff in the generation of revenue and sub-advisory fees incurred by the majority of funds are included on a gross basis in the investment management business in revenue and the related expenses are included in other operating expenses.
February - Mercer acquired Transition Assist, a retiree exchange specializing in helping retirees in employer-sponsored plans select Medicare supplemental health care insurance.
During 2014, Mercer acquired a 34% stake in South Africa-based Alexander Forbes Group Holding Limited (“Alexander Forbes”) becoming a strategic shareholder after Alexander Forbes successfully launched an initial public offering. The Company’s investment in Alexander Forbes is accounted for using the equity method of accounting and is included in other assets in the consolidated balance sheet.
Corporate expenses in 2014 were $204 million compared to $190 million in 2013. The increase is primarily due to corporate initiatives, which include strengthening cyber security protections, expenses related to strategic investments and corporate transformation efforts, primarily within the HR and Finance functions.
On December 31, 2014, an agreement was reached between Putnam and the Massachusetts Department of Revenue ("DOR") regarding a tax dispute, which was covered under the indemnity agreement discussed above. The December 2014 agreement was subject to certain approvals, which included the State Attorney General and the Commissioner of the DOR. In January 2015, all necessary approvals were received, the agreement was executed and the tax was paid. Concurrently, Putnam and the Company executed a settlement agreement to resolve all remaining matters under the indemnity agreement. The Company recorded a gain, net of federal tax, of approximately $28 million in 2014 related to the settlement with Putnam.
In October 2014, the Company redeemed $230 million of its 2015 notes and $400 million of its 2019 notes. The Company acquired the notes at market value plus a make-whole premium based on the terms of the original indenture, which exceeded the carrying value of the notes and resulted in a cost of $137 million in the fourth quarter of 2014.
In October 2013, the Company redeemed $250 million of its 2015 Notes. The Company acquired the notes at market value plus a make-whole premium based on the terms of the original indenture, which exceeded the carrying value of the notes and resulted in a cost of approximately $24 million in the fourth quarter of 2013.
The caption “Investment income” 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. The Company's investments may include direct investments in insurance or consulting companies and investments in private equity funds. The Company recorded investment income of $37 million and $69 million in 2014 and 2013, respectively. In 2014, the Company recorded gains of $31 million related to our general partner carried interest from Trident III no longer subject to claw-back and gains of $6 million primarily related to investments in private equity funds. In 2013, the Company recorded gains of $41 million related to its general partner carried interest from Trident III, $22 million of gains related to its investment in Trident II and $6 million primarily related to investments in private equity funds. At December 31, 2014 and 2013, the Company had deferred performance fees of approximately $16 million and $38 million, respectively, related to Trident III. The timing of recognition of the remaining deferred performance fees is unknown and is not controlled by the Company.
The Company's consolidated effective tax rate was 28.5%, 30.1% and 29.0% in 2014, 2013 and 2012, respectively. The tax rate in each year reflects foreign operations which are taxed at rates lower than the U.S. statutory tax rate. The lower effective tax rate attributed to the Company's foreign operations primarily reflects lower corporate tax rates that prevail outside of the U.S., net of the U.S. tax impact from repatriating foreign earnings. In 2014, pre-tax income in the U.K., Canada, Australia, Germany and Bermuda accounted for approximately 60% of the Company's total non-U.S. pre-tax income, with effective rates in those countries of 21%, 26%, 29%, 28% and 1%, respectively. Under current U.S. tax law, the Company anticipates its non-U.S. operations will continue to incur taxes at rates below the U.S. federal tax rate of 35%. The Company's U.S. revenue over the past three years has been approximately 45% of total revenue, while over that period the pre-tax income from U.S. locations varied from 15% to 23% of total pre-tax income.
The effective tax rate may vary significantly from period to period for the foreseeable future. It is sensitive to the geographic mix and repatriation of the Company's earnings, which may result in higher or lower tax rates. A proportional increase in U.S. pre-tax income will tend to increase the effective tax rate because U.S. federal and state corporate tax rates exceed tax rates applicable outside the U.S. Losses in certain jurisdictions cannot be offset by earnings from other operations, and may require valuation allowances that affect the rate, depending on estimates of the realizability of associated deferred tax assets. The effective tax rate is also sensitive to changes in unrecognized tax benefits, including the impact of settled tax audits and expired statutes of limitation.
Cash on our consolidated balance sheets includes funds available for general corporate purposes. Funds held on behalf of clients in a fiduciary capacity are segregated and shown separately in the consolidated balance sheets as an offset to fiduciary liabilities. Fiduciary funds cannot be used for general corporate purposes, and should not be considered as a source of liquidity for the Company.
The Company generated $2.1 billion of cash from operations in 2014, compared with $1.3 billion in 2013. These amounts reflect the net income reported by the Company during those periods, excluding gains or losses from investments, cost of extinguishment of debt and the disposition of businesses, adjusted for non-cash charges such as depreciation and amortization and changes in working capital which relate, primarily, to the timing of payments for accrued liabilities or receipts of assets. Approximately half of this increase is due to lower pension contributions in 2014 as compared to 2013, which is further discussed below.
During 2014, the Company contributed $25 million to its U.S. pension plans and $156 million to non-U.S. pension plans. In 2013, the Company contributed $26 million to U.S. plans and $620 million to non-U.S. plans, which included contributions of $250 million to pre-fund all of the 2014, and a substantial portion of the 2015 deficit funding contributions for the U.K. plans and a discretionary contribution of $70 million to the Canadian plans.
In the U.S., contributions to the tax-qualified defined benefit plans are based on ERISA guidelines and the Company generally expects to maintain a funded status of 80% or more of the liability determined under the ERISA guidelines. The pension stabilization provisions included in the "Moving Ahead for Progress in the 21st Century Act", enacted on July 6, 2012, changed the methodology for determining the discount rate used for calculating plan liabilities under ERISA, which determines, in part, the funding requirements. After considering the impact of the pension funding stabilization provisions discussed above, the Company made a $0.2 million contribution to its tax-qualified U.S. pension plan in the first quarter of 2014. There currently is no ERISA funding requirement for the U.S. qualified plan for 2015. The Company expects to fund approximately $25 million to its non-qualified U.S. pension plans in 2015.
The Company has a large number of non-U.S. defined benefit pension plans, the largest of which are in the U.K., which comprise approximately 83% of non-U.S. plan assets. Contribution rates for non-U.S. plans are generally based on local funding practices and statutory requirements, which may differ significantly from measurements under U.S. GAAP. In the U.K., contributions to defined benefit pension plans are based on statutory requirements and are determined through a negotiation process between the Company and the plans' trustee that typically occurs every three years in conjunction with the actuarial valuation of the plans. This negotiation process is governed by U.K. pension regulations. The assumptions that result from the funding negotiations are different from those used for U.S. GAAP and currently result in a lower funded status than under U.S. GAAP. In March 2014, the Company and the Trustee of the U.K. Defined Benefits Plans agreed to a funding deficit recovery plan for the U.K. defined benefit pension plans. The current agreement with the Trustee sets out the annual deficit contributions which would be due based on the deficit at December 31, 2012. The funding level is subject to re-assessment, in most cases on November 1st of each year. If the funding level on November 1st has sufficiently improved, no deficit funding contributions will be required in the following year, and the contribution amount will be deferred. As part of a long-term strategy, which depends on having greater influence over asset allocation and overall investment decisions, the Company has agreed to support annual deficit contributions by the U.K. operating companies under certain circumstances, up to GBP 450 million over a seven-year period.
As a result of the significant improvement in funded status during 2013, which included the $250 million deficit pre-funding contribution discussed above, no additional deficit recovery contributions were required in 2014. Based on the funding test carried out at November 1, 2014, Company contributions to the U.K. plans in 2015 are expected to be $54 million. The U.K. employers also contribute an expense allowance each year of approximately $9 million.
After completion of a consultation period with affected colleagues, in January 2014, the Company amended its U.K. defined benefit pension plans to close those plans to future benefit accruals effective August 1, 2014 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 U.S. 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. As a result of the re-measurement, the Projected Benefit Obligation ("PBO") increased by approximately $147 million and the funded status decreased by approximately $137 million. The change in the PBO and in the funded status relates primarily to a decrease in the discount rate at the re-measurement date. The net periodic benefit costs recognized in 2014 were based on a weighted average resulting from the December 31, 2013 measurement and the January 2014 re-measurement. The Company recognized a curtailment gain of $65 million in the first quarter of 2014, primarily resulting from the recognition of the remaining unamortized prior service credit related to a plan amendment made in December 2012. This gain was largely offset by the cost of a transition benefit to certain employees most impacted by the amendment.
The Company increased outstanding debt by approximately $432 million in 2014 and $37 million in 2013.
During the second quarter of 2014, the Company issued $600 million of 3.5% ten-year senior notes. A portion of the net proceeds of this offering was used for general corporate purposes as well as the repayment of $320 million of 5.375% senior notes that matured in July 2014.
During the first quarter of 2013, the Company used cash to repay its 4.85% fixed rate $250 million senior notes that matured.
During 2014, the Company paid $42 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. The portion of these payments that is reflected as a financing activity is $30 million, which represents payments related to the contingent consideration liability that was recorded on the date of acquisition. Payments related to increases in the contingent consideration liability subsequent to the date of acquisition, which were $12 million in 2014, are reflected as operating cash flows. Remaining estimated future contingent consideration payments of $207 million for acquisitions completed in 2014 and in prior years are included in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheet at December 31, 2014. The Company paid deferred purchase consideration related to prior years' acquisitions of $25 million, $15 million and $59 million for the years ended December 31, 2014, 2013 and 2012, respectively. Remaining deferred cash payments of approximately $96 million are included in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheet at December 31, 2014.
In December 2012, the Company closed on a $50 million, 3-year delayed draw term loan facility. The interest rate on this facility is based on LIBOR plus an agreed fixed margin which varies with the Company's credit ratings. The facility requires the Company to maintain coverage ratios and leverage ratios consistent with the revolving credit facility discussed above. The Company had $50 million of borrowings under this facility at December 31, 2014.
The Company's senior debt is currently rated Baa1 by Moody's and A- by Standard & Poor's. The Company's short-term debt is currently rated P-2 by Moody's and A-2 by Standard & Poor's. The Company carries a stable outlook from Moody's and Standard & Poor's.
Net cash used for investing activities amounted to $1.2 billion in 2014 compared with $446 million used for investing activities in 2013.
The Company made 21 acquisitions in 2014. Cash used for these acquisitions, net of cash acquired, was $554 million.
The Company received proceeds from distributions on its Investment in Trident II of $100 million and $35 million in 2013 and 2012, respectively. Trident II has now fully harvested all its portfolio investments and final distributions were made to partners during the fourth quarter of 2013.
The Company has commitments for potential future investments of approximately $60 million in two private equity funds that invest primarily in financial services companies.
The above does not include the liability for unrecognized tax benefits of $97 million as the Company is unable to reasonably predict the timing of settlement of these liabilities, other than approximately $4 million that may become payable during 2015. The above does not include the indemnified liabilities discussed in Note 15 as the Company is unable to reasonably predict the timing of settlement of these liabilities. The above does not include an $82 million payment the Company made to Putnam in January 2015 to fully satisfy and extinguish its indemnity obligations related to the Putnam disposition.The above does not include net pension liabilities of approximately $2.0 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 amounts of estimated future benefits payments to be made from pension plan assets are disclosed in Note 8 to the consolidated financial statements. In 2015, the Company expects to contribute approximately $25 million and $169 million to its U.S. and non-U.S. pension plans, respectively.
The Company's 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 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
Tax law requires 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 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 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. In assessing the need for and amount of a valuation allowance for deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjusts the valuation allowance accordingly. 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 test for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, the Company assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. The Company considered numerous factors, which included that the fair value of each reporting unit exceeded its carrying value by a substantial margin in its most recent estimate of reporting unit fair values, whether significant acquisitions or dispositions occurred which might alter the fair value of its reporting units, macroeconomic conditions and their potential impact on reporting unit fair values, actual performance compared with budget and prior projections used in its estimation of reporting unit fair values, industry and market conditions, and the year-over year change in the Company’s share price.
The Company completed its qualitative assessment in the third quarter of 2014 and concluded that a two-step goodwill impairment test was not required in 2014 and that goodwill was not impaired.
Net uncollected premiums and claims and the related payables amounted to $7.3 billion and $8.2 billion at December 31, 2014 and 2013, respectively. The Company is not a principal to the contracts under which the right to receive premiums or the right to receive reimbursement of insured losses arises. Net uncollected premiums and claims and the related payables are, therefore, not assets and liabilities of the Company and are not included in the accompanying consolidated balance sheets.
achievement of certain performance thresholds are recorded when such levels are attained and such fees are not subject to forfeiture.
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 related to regulatory requirements outside the U.S. or as collateral under captive insurance arrangements. At December 31, 2014, the Company maintained $179 million related to these regulatory requirements.
Investments: The Company holds investments in private companies and private equity funds.
As part of the sale of MMC Capital in 2005, the Company retained the rights to receive certain performance fees related to the Trident II and Trident III private equity partnerships. The Company recognizes performance fee income when such fees are no longer subject to forfeiture, which may take a number of years to resolve. This income is based on the investment performance over the life of each investment in the private equity fund, and future declines in the fund performance from current levels may result in forfeiture of such revenue. Since Trident II fully harvested all its portfolio investments and made final distributions to its partners in 2013, the Company no longer holds any rights to Trident II performance fees. In 2014, the Company recorded investment income of $37 million compared to $69 million in 2013 and $24 million in 2012. The Company recorded Investment income related to its general partner carried interest from Trident III no longer subject to clawback of $31 million and $41 million in 2014 and 2013, respectively. In 2013, the Company recorded $15 million of general partner carried interest from Trident II. There was no carried interest recorded in 2012. The Company also recorded net investment income gains of $6 million, $13 million and $33 million in 2014, 2013 and 2012, respectively, primarily related to its equity method investments. The Company had deferred performance fees of approximately $16 million and $38 million, at December 31, 2014 and 2013, respectively, related to Trident III. Recognition of these deferred performance fees will only occur as the Trident III investments are harvested and the performance fees are no longer subject to clawback. The timing of recognition of the remaining deferred performance fees is unknown and is not controlled by the Company.
Tax law requires 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.
Concentrations of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, commissions and fees receivable and insurance recoverable. The Company maintains a policy providing for the diversification of cash and cash equivalent investments and places its investments in a large number of high quality financial institutions to limit the amount of credit risk exposure. Concentrations of credit risk with respect to receivables are generally limited due to the large number of clients and markets in which the Company does business, as well as the dispersion across many geographic areas.
Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
New Accounting Pronouncements: In June 2014, the FASB issued new accounting guidance to clarify the treatment of share-based payment awards that require a specific performance target to be achieved in order for employees to be eligible to vest in the awards which include terms that may provide that the performance conditions could be achieved after an employee completes the requisite service period. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, a reporting entity should apply the existing guidance as it relates to awards with performance conditions that affect vesting. The guidance is effective for annual periods beginning after December 15, 2015. Earlier adoption is permitted. Adoption of the guidance is not expected to materially affect the Company's financial condition, results of operations or cash flows.
In May 2014, the FASB issued new accounting guidance to clarify the principles for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that principle, the entity should apply the following steps: identify the contract(s) with the customer, identify the performance obligations in the contract(s), determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. Entities are permitted to adopt the guidance under one of the following methods: retrospectively to each prior reporting period presented (with certain practical expedients allowed) or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. If an entity elects this transition method, it must
In April 2014, the FASB issued new accounting guidance which changes the criteria for reporting discontinued operations and enhances disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations, such as disposal of a major geographic area or a major line of business, should be presented as discontinued operations. Those strategic shifts should have a major impact on the organization's operations and financial results. In addition, the new guidance requires expanded disclosures about discontinued operations. The guidance is effective for fiscal years beginning on or after December 15, 2014. Adoption of the guidance is not expected to have a material affect on the Company's financial condition, results of operations or cash flows.
Contributions to pension and other benefit plans in excess of current year expense/credit
The Company had non-cash issuances of common stock under its share-based payment plan of $108 million, $150 million and $193 million for the years ended December 31, 2014, 2013 and 2012, respectively. The Company recorded stock-based compensation expense related to equity awards of $75 million, $110 million and $152 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The changes in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the years ended December 31, 2014 and 2013, including amounts reclassified out of AOCI, are as follows:
January - Marsh & McLennan Agency ("MMA") acquired Barney & Barney, LLC, a San Diego-based insurance broking firm that provides insurance, risk management and employee benefits solutions to businesses and individuals throughout the U.S. and abroad, Great Lakes Employee Benefits Services, Inc., an employee group benefits consulting and brokerage firm based in Michigan, and Bond Network, Inc., a surety bonding agency based in North Carolina.
During 2013, the Risk and Insurance segment completed the following six acquisitions:
July - Guy Carpenter acquired Smith Group, a specialist disability reinsurance risk manager and consultant based in Maine.
The Company’s investment in Alexander Forbes is accounted for using the equity method of accounting and is included in other assets in the consolidated balance sheet. The Company records this investment and its share of Alexander Forbes’ net income or loss on a one quarter lag basis.
The goodwill acquired of $472 million in 2014 (approximately $348 million of which is deductible for tax purposes) is comprised of $445 million related to the Risk and Insurance Services segment and $27 million related to the Consulting segment.
Goodwill allocable to the Company’s reportable segments is as follows: Risk and Insurance Services, $5 billion and Consulting, $2.2 billion.
Net of valuation allowances of $15 million in 2014 and $12 million in 2013.
The Company’s consolidated tax rate was 28.5%, 30.1% and 29.0% in 2014, 2013 and 2012, respectively. The tax rate in each year reflects foreign operations, which are generally taxed at rates lower than the U.S. statutory tax rate.
Valuation allowances had net increases of $15 million, $10 million and $23 million in 2014, 2013 and 2012, respectively. During the respective years, adjustments of the beginning of the year balances of valuation allowances decreased income tax expense by $9 million and $3 million in 2014 and 2013, respectively, and increased income tax expense by $16 million in 2012. Approximately 55% of the Company’s net operating loss carryforwards expire from 2015 through 2034, and others are unlimited. The potential tax benefit from net operating loss carryforwards at the end of 2014 comprised federal, state and local, and non-U.S. tax benefits of $3 million, $40 million and $96 million, respectively, before reduction for valuation allowances. Foreign tax credit carryforwards expire from 2020 through 2022.
The Company is routinely examined by the jurisdictions in which it has significant operations. In the U.S. 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 2013 tax return and performing a pre-filing review of 2014. During 2014, the Company settled its federal tax audit with the IRS for the year 2012, and in 2013 settled the years 2007, and 2009 through 2011. The tax year 2008 was settled in a prior period. New York State and New York City have examinations underway for various entities covering the years 2007 through 2012. Illinois is auditing the Company for years 2009 through 2013. During 2014, California commenced an audit covering the years 2009 through 2013. Outside the U.S., during 2014, examinations commenced in Canada for the year 2012 and in France for years 2011 and 2012. There is an ongoing examination of various subsidiaries for years 2011 and 2012 in the United Kingdom that started in 2013. 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 $16 million within the next twelve months due to the settlement of audits and the expiration of statutes of limitation.
The weighted average actuarial assumptions utilized for the U.S. and significant non-U.S. defined benefit plans and postretirement benefit plans are as follows:
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 probabilities using standard statistical techniques to calculate a range of expected returns on the portfolio. The Company generally does not adjust the rate of return assumption from year to year if, at the measurement date, it is within the range between the 25th and 75th percentile of the expected long-term annual returns. Historical long-term average asset returns of each plan are also reviewed to determine whether they are consistent and reasonable compared with the rate selected. The expected return on plan assets is determined by applying the assumed long-term rate of return to the market-related value of plan assets. This market-related value recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market value of assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future market-related value of the assets will be impacted as previously deferred gains or losses are reflected.
The target asset allocation for the U.S. Plan is 62% equities and equity alternatives and 38% fixed income. At the end of 2014, the actual allocation for the U.S. Plan was 59% equities and equity alternatives and 41% fixed income. The target asset allocation for the U.K. Plans, which comprise approximately 83% of non-U.S. Plan assets, is 50% equities and equity alternatives and 50% fixed income. At the end of 2014, the actual allocation for the U.K. Plans was 43% equities and equity alternatives and 57% 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.
For the U.S. Plan, investment allocation decisions are made by a fiduciary committee composed of senior executives appointed by the Company’s Chief Executive Officer. For the non-U.S. plans, investment allocation decisions are made by local fiduciaries, in consultation with the Company for the larger plans. Plan assets are invested in a manner consistent with the fiduciary standards set forth in all relevant laws relating to pensions and trusts in each country. Primary investment objectives are (1) to achieve an investment return that, in combination with current and future contributions, will provide sufficient funds to pay benefits as they become due, and (2) to minimize the risk of large losses. The investment allocations are designed to meet these objectives by broadly diversifying plan assets among numerous asset classes with differing expected returns, volatilities, and correlations.
In accordance with applicable accounting guidance, the funded status of the Company's pension plans is recorded in the consolidated balance sheets and provides for a delayed recognition of actuarial gains or losses arising from changes in the projected benefit obligation due to changes in the assumed discount rates, differences between the actual and expected value of plan assets and other assumption changes. The unrecognized pension plan actuarial gains or losses and prior service costs not yet recognized in net periodic pension cost are recognized in Accumulated Other Comprehensive Income, net of tax. These gains and losses are amortized prospectively out of AOCI over a period that approximates the average remaining service period of active employees, or for plans in which substantially all the participants are inactive, over the remaining life expectancy of the inactive employees.
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 $5.9 billion and $4.5 billion, respectively, as of December 31, 2014 and $4.8 billion and $4.3 billion, respectively, as of December 31, 2013.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 became law. The net periodic benefit cost for all periods shown above includes the subsidy.
The assumed health care cost trend rate for Medicare eligibles and non-Medicare eligibles is approximately 7.55% in 2014, gradually declining to 4.5% in 2028. Assumed health care cost trend rates have a small effect on the amounts reported for the U.S. health care plans because the Company caps its share of health care trend at 5%. A one percentage point change in assumed health care cost trend rates would have no effect on the total service and interest cost components or the postretirement benefit obligation.
The Company expects to fund approximately $25 million for its U.S. non-qualified plans in 2015. 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. There is currently no ERISA funding requirement for the U.S. qualified plan for 2015.
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 $2.1 billion, $2.0 billion and $1.6 billion, respectively, as of December 31, 2014 and $1.7 billion, $1.5 billion and $1.3 billion, respectively, as of December 31, 2013.
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 $1.6 billion, respectively, as of December 31, 2014 and $1.7 billion and $1.3 billion, respectively, as of December 31, 2013.
After completion of a consultation period with affected colleagues, in January 2014, the Company amended its U.K. defined benefit pension plans to close those plans to future benefit accruals effective August 1, 2014 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 date the employee consultations concluded and the local operating companies approved the plan amendment, based on assumptions and market conditions at that date. As a result of the re-measurement, the projected benefit obligation ("PBO") increased by approximately $147 million and the funded status decreased by approximately $137 million. The change in the PBO and in the funded status relates primarily to a decrease in the discount rate at the re-measurement date. The net periodic benefit costs recognized in 2014 are the weighted average resulting from the December 31, 2013 measurement and the January 2014 re-measurement.
The assumed health care cost trend rate was approximately 5.76% in 2014, gradually declining to 4.92% in 2022. 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 Plans' estimated future benefit payments for its pension and postretirement benefits (without reduction for Medicare subsidy receipts) are as follows:
As of December 31, 2014, there was $55.8 million of unrecognized compensation cost related to the Company's restricted stock, restricted stock units and performance stock unit awards. The weighted-average period over which that cost is expected to be recognized is approximately one year.
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, no more than 35,600,000 shares of the Company's common stock may be sold. Employees purchased 608,453 shares during the year ended December 31, 2014 and at December 31, 2014, 2,779,195 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, and the addition of 4,000,000 shares due to a shareholder action in May 2007, no more than 12,000,000 shares of the Company's common stock may be sold. Employees purchased 93,490 shares during the year ended December 31, 2014 and there were 2,893,986 shares available for issuance at December 31, 2014 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 money market mutual funds).
Assets and liabilities utilizing Level 1 inputs include exchange-traded equity securities and mutual funds.
(b) Included in cash and cash equivalents in the consolidated balance sheets.
During the year ended December 31, 2014, there were no assets or liabilities that transferred between any of the levels.
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, 2014 and December 31, 2013 that represent contingent purchase consideration related to acquisitions:
The fair value of the contingent purchase consideration liability is based on projections of revenue and earnings for the acquired entities that are reassessed on a quarterly basis. As set forth in the table above, based on the Company's ongoing assessment of the fair value of contingent consideration, the Company recorded a net increase in the estimated fair value of such liabilities for prior period acquisitions of $31 million for the year ended December 31, 2014. A 5% increase in the above mentioned projections would increase the liability by approximately $22 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $26 million.
During 2014, the Company purchased 34% of Alexander Forbes common stock. As of December 31, 2014, the carrying value of the Company’s investment in Alexander Forbes was approximately $282 million. As of December 31, 2014, the market value of the approximately 443 million shares owned by the Company, based on the December 31, 2014 closing share price of 9.5 South African Rand per share, was approximately $362 million. The Company’s investment in Alexander Forbes and its other equity investments in private companies are accounted for using the equity method of accounting and included in revenue in the consolidated income statements and in other assets in the consolidated balance sheets. The Company records its share of income or loss on its equity method investments on a one quarter lag basis since the information is not readily available in time for the Company's Form 10-Q and Form 10-K filings.
The summarized financial information presented below reflects the aggregated financial information of all significant equity method investees as of and for the twelve months ended September 30 of each year (or portion of those twelve months the company owned its investment), consistent with the Company’s recognition of the results of its equity method investments on a one quarter lag. The investment income information presented below reflects the net realized and unrealized gains/losses, net of expenses, related to the Company's investments in several private equity funds. Certain of the Company’s equity method investments, including Alexander Forbes, have unclassified balance sheets. Therefore, the asset and liability information presented below are not split between current and non-current.
The information above includes only two months of income statement activity for Alexander Forbes through September 30, 2014, since the Company purchased its first tranche in July 2014.
In September 2014, the Company issued $300 million of 2.35% five-year senior notes and $500 million of 3.50% 10.5-year senior notes. In October 2014, a significant portion of the net proceeds of this offering were used to redeem $630 million of debt, including $230 million of 5.75% senior notes due in September 2015 and $400 million of 9.25% senior notes due in 2019. Total cash outflow related to this transaction was approximately $765 million, including a $137 million cost for early redemption, which is reflected as a charge in the consolidated statements of income in the fourth quarter of 2014.
In May 2014, the Company issued $600 million of 3.50% ten-year senior notes. The net proceeds of this offering were used for general corporate purposes, which included the repayment of $320 million of the existing 5.375% senior notes, which matured on July 15, 2014.
The Company and certain of its foreign subsidiaries previously maintained a $1.0 billion multi-currency five-year revolving credit facility. The facility was previously due to expire in October 2016 and was in effect until March 2014. There were no borrowings outstanding under this facility at the time it was amended.
Details of the restructuring liability activity from January 1, 2013 through December 31, 2014, including actions taken prior to 2014 are as follows:
During 2014, the Company repurchased 15.5 million shares of its common stock for total consideration of $800 million. In May 2014, the Board of Directors of the Company authorized share repurchases of up to $2 billion of the Company's common stock. The Company remains authorized to purchase additional shares of its common stock up to a value of $1.3 billion. There is no time limit on the authorization. During 2013, the Company purchased 13.2 million shares of its common stock for total consideration of $550 million.
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 the ordinary course of business the Company is also subject to subpoenas, investigations, lawsuits and/or 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 are 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, 2014, 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 us under the guarantee.
From 1980 to 1983, the Company owned indirectly the English & American Insurance Company (“E&A”), which was a member of the ILU. The ILU required the Company to guarantee a portion of E&A's obligations. After E&A became insolvent in 1993, the ILU agreed to discharge the guarantee in exchange for the Company's agreement to post an evergreen letter of credit that is available to pay claims by policyholders on certain E&A policies issued through the ILU and incepting between July 3, 1980 and October 6, 1983. Certain claims have been paid under the letter of credit and we anticipate that additional claimants may seek to recover against the letter of credit.
Under the terms of a stock purchase agreement with Altegrity, Inc. (“Altegrity”) related to Altegrity's purchase of Kroll from the Company in August 2010, a copy of which is attached as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2010, the Company agreed to provide a limited indemnity to Altegrity with respect to certain Kroll-related litigation and regulatory matters.
Includes inter-segment revenue of $4 million in 2014 and $5 million in both 2013 and 2012, interest income on fiduciary funds of $24 million, $27 million and $39 million in 2014, 2013 and 2012, respectively, and equity method income of $9 million, $8 million and $11 million in 2014, 2013 and 2012, respectively.
We have audited the accompanying consolidated balance sheets of Marsh & McLennan Companies, Inc. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
As of February 20th, 2015, there were 6,197 stockholders of record.