Marsh & McLennan Companies maintains its corporate headquarters in New York City. We also maintain other offices around the world, primarily in leased space. In certain circumstances we may have space that we sublet to third parties, depending upon our needs in particular locations.
On March 20, 2019, the Securities and Exchange Commission ("SEC") adopted changes to its rules and forms in an effort to modernize and simplify disclosure requirements for public companies. These rule changes include a registrant's option to omit the earliest year in its discussion in Management's Discussion and Analysis ("MD&A"). Under the previous rules, registrants generally provided a discussion covering the three-year period of the financial statements with year-to-year comparisons. The amendments allow registrants to eliminate the discussion of the earliest of the three years, if such a discussion was included in a prior 10-K filing and if there were no material changes to such older periods. The Company has elected to adopt this rule change and eliminate the prior year-to-year comparisons in this current December 31, 2019 Annual Report on Form 10-K filing. For information on fiscal 2017 results and similar comparisons, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the fiscal year ended December 31, 2018.
On April 1, 2019, the Company completed the acquisition (the "Transaction") of all of the outstanding shares of Jardine Lloyd Thompson Group plc ("JLT"), a public company organized under the laws of England and Wales. Under the terms of the Transaction, JLT shareholders received £19.15 in cash for each JLT share, which valued JLT’s existing share capital at approximately £4.3 billion (or approximately $5.6 billion based on the exchange rate of U.S. $1.31:£1) on the Transaction closing date.
Consolidated operating income was $2.7 billion in 2019 compared with $2.8 billion in 2018. Improvements in the Company's ongoing operating results, both legacy and from the inclusion of JLT's results beginning on April 1, 2019 was offset by the year-over-year increase in JLT integration, restructuring and acquisition related costs as per the chart below.
Diluted earnings per share increased 6% to $3.41 in 2019 compared with $3.23 in 2018. This increase is a result of the factors discussed above, and a lower effective tax rate in 2019. Average diluted shares
outstanding for 2019 remained unchanged from 2018 at 511 million. Share repurchases during the year were offset by the shares issued related to vesting of share awards and the exercise of employee stock options.
Risk and Insurance Services operating income decreased $31 million, or 2%, in 2019 compared with 2018. Revenue increased 17%, reflecting a 4% increase on an underlying basis partly offset by a 2% decrease from the impact of foreign currency translation. Expense increased 22% or 5% on an underlying basis in 2019 compared with 2018 primarily due to JLT related integration, restructuring and acquisition related costs.
Consulting operating income increased $111 million, or 10%, to $1.2 billion in 2019 compared with 2018, reflecting the combined impact of increases in revenue of 5% and expense of 4%.
Restructuring costs, excluding JLT: Includes severance and related charges from restructuring activities, adjustments to restructuring liabilities for future rent under non-cancellable leases and other real estate costs, and restructuring costs related to the integration of recent acquisitions. These costs are discussed in more detail in Note 14 of the consolidated financial statements.
JLT acquisition related costs: Includes advisor fees and stamp duty taxes related to the closing of the JLT Transaction and retention costs. These costs are reflected as part of net operating income. Also includes the loss on the sale of JLT's aerospace business, which is included in revenue.
Change in fair value of acquisition related derivatives: In connection with the JLT Transaction, to hedge the risk of appreciation of the GBP-denominated purchase price relative to the U.S. dollar, in September 2018, the Company entered into a deal contingent foreign exchange contract (the "FX Contract") to, solely upon consummation of the JLT Transaction, purchase £5.2 billion and sell a corresponding amount of U.S. dollars at a contracted exchange rate. The FX Contract is discussed in Note 11 to the consolidated financial statements. An unrealized loss of $325 million related to the fair value changes to this derivative was recognized in the consolidated
statement of income for the year ended December 31, 2018, largely due to the depreciation of the GBP from September 2018. In 2019, the Company recorded a gain of $31 million upon final settlement of the FX Contract.
In addition, to hedge the economic risk of increases in interest rates prior to its issuance of senior notes in January 2019, in the fourth quarter of 2018, the Company entered into Treasury lock contracts related to $2 billion of the expected debt issuance. These economic hedges were not designated as accounting hedges. The Company recorded an unrealized loss of $116 million related to the changes in the fair value of these derivatives in the consolidated statement of income for the year ended December 31, 2018. In January 2019, upon issuance of the $5 billion of senior notes, the Company settled the Treasury lock contracts and made a payment to its counter party for $122 million. In 2019, an additional charge of $6 million was recorded to the consolidated statement of income related to the settlement of the Treasury lock derivatives.
JLT related interest income and expense: To secure funding for the Transaction, the Company entered into a bridge loan agreement with aggregate commitments of £5.2 billion in September 2018. The Company paid the customary upfront fees related to the bridge loan, which were amortized as interest expense based on the period of time the facility was expected to be in effect. The Company recorded interest expense of approximately $30 million for the year ended December 31, 2018 related to the amortization of the bridge loan fees and an additional $6 million in 2019 upon termination of the bridge loan agreement in connection with the closing of the JLT Transaction. The Company recorded approximately $47 million of interest expense related to the senior notes issued in the first quarter of 2019 and $25 million of interest income from the investment of the proceeds prior to the closing of the JLT Transaction
Investment loss-impairment charge: The Company owns approximately 34% of the common stock of Alexander Forbes ("AF"), a South African company listed on the Johannesburg Stock Exchange, which it purchased in 2014 for 7.50 South African Rand per share. Based on the duration of time and the extent to which the shares traded below their cost, the Company concluded the decline in value of the investment was other than temporary and recorded a charge of $83 million in the 2018 consolidated statement of income. See Note 5 to the consolidated financial statements for additional information regarding the pending sale of the Company's remaining investment in AF.
The impact of foreign currency exchange fluctuations, acquisitions and dispositions, including transfers among businesses, on the Company’s operating revenues by segment are as follows:
Consolidated revenue was $17 billion in 2019, an increase of 11%, or 4% on an underlying basis. Revenue in the Risk and Insurance Services segment increased 17% in 2019 compared with 2018, or 4% on an underlying basis. Revenue increased 4% and 5% on an underlying basis at Marsh and Guy Carpenter, respectively, as compared with 2018. The Consulting segment's revenue increased 5% compared with 2018, or 3% on an underlying basis. Revenue increased 2% and 6% on an underlying basis at Mercer and Oliver Wyman Group, respectively, as compared with 2018.
Consolidated operating expenses increased 15% in 2019 compared with 2018, or 4% on an underlying basis. The increase in underlying expenses is primarily due to the JLT acquisition, integration and restructuring as discussed in more detail in Notes 5 and 14 of the consolidated financial statements, as well as higher incentive compensation.
In Marsh, revenue increased 4% on an underlying basis, partly offset by a 2% decrease from the impact of foreign currency translation. U.S./Canada had underlying revenue growth of 5%. International operations increased 3% on an underlying basis, reflecting increases of 7% in Asia Pacific, 3% in Latin America and 1% in EMEA.
Guy Carpenter’s revenue increased 15% to $1.5 billion in 2019 compared with 2018, or 5% on an underlying basis.
The Risk and Insurance Services segment completed five acquisitions during 2019, other than JLT. Information regarding those acquisitions is included in Note 5 to the consolidated financial statements.
Expense in the Risk and Insurance Services segment increased 22% in 2019 compared with 2018, reflecting the inclusion of JLT for the last three quarters of 2019. The underlying expense increases of 5% and 3% from acquisitions, were partly offset by a 3% decrease from the impact of foreign currency. The increase in underlying expense reflects the impact of acquisition, restructuring and integration related costs of $326 million, primarily due to severance, lease related exit costs and consulting fees related to the JLT Transaction as well as higher incentive compensation.
The major component of revenue in the Consulting business is fees paid by clients for advice and services. Mercer, principally through its health line of business, also earns revenue in the form of
commissions received from insurance companies for the placement of group (and occasionally individual) insurance contracts, primarily life, health and accident coverages. Revenue for Mercer’s investment management business and certain of Mercer’s defined contribution administration services consists principally of fees based on assets under management or administration.
Corporate expense in 2019 was $366 million compared with $202 million in 2018. Expenses increased 54% on an underlying basis, primarily due to acquisition, integration and restructuring costs related to the JLT Transaction of $139 million recorded in 2019 as well as higher incentive compensation.
The Company recorded net investment income of $22 million in 2019 which included $10 million related to mark-to-market changes to equity securities and $12 million of gains related to investments in private equity funds and other investments. The Company recorded a net investment loss of $12 million in 2018, that included an $83 million charge related to an other than temporary decline in the Company's equity method investment in Alexander Forbes (see Note 10 to the consolidated financial statements), partly offset by investment gains of $54 million related to mark-to-market changes in equity securities and $17 million related to investments in private equity funds and other investments.
The effective tax rate may vary significantly from period to period for the foreseeable future. The effective tax rate is sensitive to the geographic mix and repatriation of the Company's earnings, which may result in higher or lower tax rates. Thus, a shift in the mix of profits among jurisdictions can affect the effective tax rate. In 2019, pre-tax income in Barbados, Canada, Australia, Ireland, Germany, the U.K. and Bermuda accounted for approximately 60% of the Company's total non-U.S. pre-tax income, with effective rates in those countries of 1%, 28%, 32%, 14%, 29%, 105% and 1% respectively.
In addition, 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 value of associated deferred tax assets which can be realized. A valuation allowance was recorded to reduce deferred tax assets to the amount that the Company believes is more likely than not to be realized. The details are provided in Note 7 of the consolidated financial statements. 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.
The quasi-territorial tax regime provides an opportunity for the Company to repatriate foreign earnings more tax efficiently and there is less incentive for permanent reinvestment of these earnings. However, permanent reinvestment continues to be a component of the Company’s global capital strategy. The Company revised its permanent reinvestment assertion related to accumulated earnings that were subject to the 2017 transition tax of the TCJA, to facilitate repatriation of most of those accumulated earnings. For post-2017 years, including 2019, the Company continues to evaluate its global investment and repatriation strategy in light of our capital requirements, considering the TCJA and the quasi-territorial tax regime for future foreign earnings.
The Company derives a significant portion of its revenue and operating profit from operating subsidiaries located outside of the United States. Funds from those operating subsidiaries are regularly repatriated to the United States out of annual earnings. At December 31, 2019, the Company had approximately $1.0 billion of cash and cash equivalents in its foreign operations, which includes $178 million of operating funds required to be maintained for regulatory requirements or as collateral under certain captive insurance arrangements. The Company expects to continue its practice of repatriating available funds from its non-U.S. operating subsidiaries out of current annual earnings. Where appropriate, a portion of the current year earnings will continue to be permanently reinvested. With respect to repatriating 2018 and prior earnings, the Company has evaluated such factors as its short- and long-term capital needs, acquisition and borrowing strategies, and the availability of cash for repatriation for each of its subsidiaries. The Company has determined that, in general, its permanent reinvestment assertions, in light of the enactment of the Tax Cuts and Jobs Act, should allow the Company to repatriate previously taxed earnings from the deemed repatriations as cash becomes available.
In the United States, 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. In 2019, the Company made $31 million of contributions to its non-qualified plans and $4 million to plans acquired in the JLT acquisition. The Company expects to contribute approximately $76 million to its U.S. pension plans in 2020, including $47 million to the US qualified plans to meet ERISA funding requirements and $29 million for its non-qualified plans.
The Company contributed $27 million to the U.K. plans in 2019, including an expense allowance of approximately $10 million. The Company's contributions to the U.K. plans in 2020 are expected to be approximately $39 million, including an expense allowance of $10 million.
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 JLT U.K. plan has a defined
The year-over-year change in the funded status of the Company's pension plans is impacted by the difference between actual and assumed results, particularly with regard to return on assets, and changes in the discount rate, as well as the amount of Company contributions, if any. Unrecognized actuarial losses were approximately $2.1 billion and $3.1 billion at December 31, 2019 for the U.S. plans and non-U.S. plans, respectively, compared with losses of $1.9 billion and $2.6 billion at December 31, 2018. The increases in both the U.S. and non-U.S. plans was primarily due to a decrease in the discount rate used to measure plan liabilities partly offset by an increase in asset values. In the past several years, the amount of unamortized losses has been significantly impacted, both positively and negatively, by actual asset performance and changes in discount rates. The discount rate used to measure plan liabilities in 2019 decreased in the U.S. and U.K. (the Company's largest plans) following increases in the U.S. and the U.K. in 2018. The discount rate used to measure plan liabilities decreased in 2017. An increase in the discount rate decreases the measured plan benefit obligation, resulting in actuarial gains, while a decrease in the discount rate increases the measured plan obligation, resulting in actuarial losses. During 2019, the Company's defined benefit pension plan assets had gains of 21.4% and 13.1% in the U.S. and U.K., respectively as compared to losses of 7.4% and 1.0% in the U.S. and U.K., respectively in 2018. During 2017, the Company's defined benefit pension plan assets had actual returns of 19.3% in the U.S. and 9.1% in the U.K.
Overall, based on the measurement at December 31, 2019, total benefit credits related to the Company’s defined benefit plans are expected to decrease in 2020 by approximately $5 million compared to 2019, reflecting a decrease in non-U.S. plans of approximately $8 million, offset by an increase in U.S. plans of $3 million.
The Company’s accounting policies for its defined benefit pension plans, including the selection of and sensitivity to assumptions, are discussed below under Management’s Discussion of Critical Accounting Policies. For additional information regarding the Company’s retirement plans, see Note 8 to the consolidated financial statements.
In October 2018, the Company repaid $250 million of maturing senior notes.
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.
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 Company's senior debt is currently rated A- by Standard & Poor's and Baa1 by Moody's. The Company's short-term debt is currently rated A-2 by Standard & Poor's and P-2 by Moody's. The Company carries a Negative outlook from both firms.
During 2019, the Company repurchased 4.8 million shares of its common stock for total consideration of $485 million at an average price per share of $100.48. In November 2019, the Board of Directors authorized an increase in the Company’s share repurchase program, which supersedes any prior authorization, allowing management to buy back up to $2.5 billion of the Company’s common stock. As of December 31, 2019, the Company remained authorized to purchase additional shares of its common stock up to a value of approximately $2.4 billion. There is no time limit on this authorization.
During 2019, the Company paid $63 million of contingent payments related to acquisitions made in prior years. These payments are split between financing and operating cash flows in the consolidated statements of cash flows. Payments of $22 million related to the contingent consideration liability that was
Prior to the JLT Transaction closing, a significant portion of JLT's outstanding senior notes were denominated in U.S. dollars. In order to hedge its exposure against the risk of fluctuations between the GBP and the U.S. dollar, JLT entered into foreign exchange and interest rate swaps, which were designated as fair value hedges. In June 2019, the Company redeemed these U.S. dollar denominated senior notes and settled the related derivative contracts. Both the change in fair value of the debt and the change in fair value of the derivative contracts were recorded in the consolidated statement of income in the second quarter of 2019. The Company received approximately $112 million upon settlement of these derivative contracts.
JLT also had a number of foreign exchange contracts to hedge the risk of foreign exchange movements between the U.S. dollar and 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 acquisition, the 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 in the second quarter of 2019. The charge is recorded as a change in fair value of acquisition related derivative contracts in the consolidated statement of income.
In March 2019, the Company issued €1.1 billion of senior notes related to the JLT Transaction. See Note 14 for additional information related to the Euro senior note issuances. In connection with the senior note issuances of €1.1 billion, the Company entered into a forward exchange contract to hedge the economic risk of changes in foreign exchange rates from the issuance date to settlement date of the Euro senior notes. This forward exchange contract was settled in March 2019 and the Company recorded a charge of $7 million in the first quarter of 2019 related to the settlement of this contract.
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 these derivatives in the consolidated statement of income for the twelve month period 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.
The Company has investments in various subsidiaries with Euro functional currencies. As a result, the Company is exposed to the risk of fluctuations between the Euro and U.S. dollar exchange rates. As part of its risk management program to fund the JLT acquisition, the Company issued €1.1 billion senior notes, as discussed above, and designated the debt instruments as a net investment hedge of its Euro denominated subsidiaries. The hedge is re-assessed each quarter to confirm that the designated equity balance at the beginning of each period continues to equal or exceed 80% of the outstanding balance of the Euro debt instrument and that all the critical terms of the hedging instrument and the hedged net investment continue to match. If the Company concludes that the hedge is highly effective, the change in the debt balance related to foreign exchange fluctuations will be recorded in foreign currency translation gains (losses) in the consolidated balance sheet. The U.S. dollar value of the Euro notes decreased by $28 million during 2019 related to the change in foreign exchange rates. Since the Company concluded that the hedge was highly effective, it recorded an increase to foreign currency translation gains (losses) for the twelve months ended December 31, 2019.
The Company has commitments for potential future investments of approximately $60 million in four private equity funds that invest primarily in financial services companies.
The above does not include the remaining transitional tax payments related to the TCJA of $69 million.
Under the new standard, certain costs to obtain or fulfill a contract that were previously expensed as incurred have been capitalized. The Company capitalizes the incremental costs to obtain contracts primarily related to commissions or sales bonus payments. These deferred costs are amortized over the expected life of the underlying customer relationships. The Company also capitalizes certain pre-placement costs that are considered fulfillment costs that are amortized at a point in time when the associated revenue is recognized.
The determination of net periodic pension cost is based on a number of assumptions, including an expected long-term rate of return on plan assets, the discount rate, mortality and assumed rate of salary increase. The assumptions used in the calculation of net periodic pension costs and pension liabilities are disclosed in Note 8 to the consolidated financial statements. The assumptions for expected rate of return on plan assets and the discount rate are discussed in more detail below.
The table below shows the weighted average assumed rate of return and the discount rate at the December 31, 2019 measurement date (for measuring pension expense in 2020) for the total Company, the U.S. and the Rest of World ("ROW").
The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50-percent likely of being realized upon ultimate resolution with a taxing authority. Uncertain tax positions are evaluated based upon the facts and circumstances that exist at each reporting period and involve significant management judgment. Subsequent changes in judgment based upon new information may lead to changes in recognition, de-recognition, and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
The guidance for accounting for share-based payments requires, among other things, that the estimated grant date fair value of stock options be charged to earnings. Significant management judgment is required to determine the appropriate assumptions for inputs such as volatility and expected term necessary to estimate option values. In addition, management judgment is required to analyze the terms of the plans and awards granted thereunder to determine if awards will be treated as equity awards or liability awards, as defined by the accounting guidance.
On April 1, 2019, the Company completed its previously announced acquisition of JLT. JLT's results of operations for the three months ended December 31, 2019 are included in the Company’s results of operations for the fourth quarter of 2019. JLT's results of operations from April 1, 2019 are included in the Company's results of operations for the twelve month-period ended December 31, 2019. Prior periods in 2018 do not include JLT’s results. Prior to being acquired by the Company, JLT operated in three segments, Specialty, Reinsurance and Employee Benefits. 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 within Guy Carpenter and the majority of the JLT Employee Benefits business is included in Mercer Health and Wealth.
The JLT Transaction had a significant impact on the Company’s results of operations in 2019. The Company believes that in addition to the change in reported GAAP revenue, a comparison of 2019 GAAP reported revenue to the combined 2018 revenue of MMC and JLT, as if the companies were combined on April 1, 2018, provides investors with meaningful information as to the Company’s year-over-year underlying operating results. Investors should not consider the comparison of these non-GAAP measures in isolation from, or as a substitute for, the financial information that the Company reports in accordance with GAAP.
The 2018 Including JLT revenue information set forth in the table below presents revenue information as if the companies were combined on April 1, 2018 and is not necessarily indicative of what the results would have been had we operated the business since April 1, 2018.
The MMC revenue amounts are as previously reported by the Company in its quarterly filings on Form 10-Q for the applicable periods. The unaudited 2018 JLT revenue amounts reflect historical JLT revenue information following IFRS, adjusted to conform with U.S. GAAP and MMC’s specific accounting policies, primarily related to the development of constraints and subsequent release of those constraints related to the reinsurance business. The revenue includes JLT’s aerospace business. Additional information can be found in the supplemental information furnished to the SEC on June 6, 2019 on Form 8-K, which is not incorporated by reference in this Form 10-K.
The Risk and Insurance Services segment provides risk management solutions, services, advice and insurance broking, reinsurance broking and insurance program management services for businesses, public entities, insurance companies, associations, professional services organizations, and private clients. The Company conducts business in this segment through Marsh and Guy Carpenter.
Net uncollected premiums and claims and the related payables were $8.9 billion and $7.3 billion at December 31, 2019 and 2018, respectively. The increase reflects the inclusion of JLT's balances at December 31, 2019. The Company is not a principal to the contracts under which the right to receive premiums or the right to receive reimbursement of insured losses arises. Accordingly, net uncollected premiums and claims and the related payables are not assets and liabilities of the Company and are not included in the accompanying consolidated balance sheets.
Goodwill and Other Intangible Assets: Goodwill represents acquisition costs in excess of the fair value of net assets acquired. Goodwill is reviewed at least annually for impairment. The Company performs an annual impairment test 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. When a quantitative test is performed, fair values of the reporting units are estimated using either a market approach or a discounted cash flow model. 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. As discussed in Note 6, the Company elected to perform a quantitative impairment assessment during 2019. Other intangible assets, which primarily consist of acquired customer lists, that are not deemed to have an indefinite life, are amortized over their estimated lives, typically ranging from 10 to 15 years, and reviewed for impairment upon the occurrence of certain triggering events in accordance with applicable accounting literature. The Company had no indefinite lived identified intangible assets at December 31, 2019 and 2018.
Capitalized Software Costs: The Company capitalizes certain costs to develop, purchase or modify software for the internal use of the Company. These costs are amortized on a straight-line basis over periods ranging from 3 to 10 years. Costs incurred during the preliminary project stage and post implementation stage, are expensed as incurred. Costs incurred during the application development stage are capitalized. Costs related to updates and enhancements are only capitalized if they will result in additional functionality. Capitalized computer software costs of $496 million and $435 million, net of accumulated amortization of $1.4 billion and $1.3 billion as of December 31, 2019 and 2018, respectively, are included in other assets in the consolidated balance sheets.
Legal and Other Loss Contingencies: The Company and its subsidiaries are subject to a significant number of claims, lawsuits and proceedings including claims for errors and omissions ("E&O"). The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("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, including estimated legal costs. 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.
These costs are included in other operating expenses in the consolidated statements of income.
Derivative Instruments: All derivatives, whether designated in hedging relationships or not, are recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. The fair value of the derivative is recorded in the consolidated balance sheet in other receivables or accounts payable and accrued liabilities. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Changes in the fair value attributable to the ineffective portion of cash flow hedges are recognized in earnings. If a derivative is not designated as an accounting hedge, the change in fair value is recorded in earnings.
The following new accounting standards were adopted prospectively as of January 1, 2019:
Effective January 1, 2019, the Company adopted new guidance intended to refine and expand hedge accounting for both financial and commodity risks. The guidance creates more transparency around how economic results are presented in both the financial statements and the footnotes, as well as making targeted improvements to simplify the application of hedge accounting guidance. The Company adopted this guidance effective January 1, 2019. The adoption of this standard did not have an impact on the Company's financial position or results of operations.
Effective January 1, 2018, the Company adopted new accounting guidance related to revenue from contracts with customers. 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. The Company adopted the new guidance effective January 1, 2018, using the modified retrospective method, which applies the new guidance beginning with 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. The cumulative effect of adopting the standard, net of tax, on January 1, 2018 resulted in an increase to the opening balance of retained earnings of $364 million, with offsetting increases/decreases to other balance sheet accounts (accounts receivable, other assets and deferred income taxes).
Effective January 1, 2018, the Company adopted new guidance intended to improve the recognition and measurement of financial instruments. The new guidance requires investments in equity securities (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The Company holds certain equity investments that under legacy GAAP were previously treated as available for sale securities, whereby the mark-to-market change was recorded to AOCI in its consolidated balance sheet. The Company adopted the new accounting guidance, effective January 1, 2018, and 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 AOCI to retained earnings.
Effective January 1, 2018, the Company adopted new guidance that changes the presentation of net periodic pension cost and net periodic postretirement cost (''net periodic benefit costs"). The new guidance requires employers to report the service cost component of net periodic benefit costs in the same line item as other compensation costs in the income statement. The other components of net periodic benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The new guidance required retrospective application for the presentation of the service cost component and the other components of net periodic benefit costs. Accordingly, the Company reclassified prior period information in the consolidated results of operations, segment data and related disclosures contained in our notes to the consolidated financial statements to reflect the retrospective adoption of this standard.
In December 2019, the Financial Accounting Standards Board ("FASB") issued guidance related to the accounting for income taxes. The standard removes specific exceptions in the current rules and eliminates the need for an organization to analyze whether the following apply in a given period: (a) exception to the incremental approach for intraperiod tax allocation; (b) exceptions to accounting for basis differences when there are ownership changes in foreign investments and (c) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The standard also is designed to improve financial statement preparers’ application of income tax-related guidance and simplify GAAP for (a) franchise taxes that are partially based on income; (b) transactions with a government that result in a step-up in the tax basis of goodwill; (c) separate financial statements of legal entities that are not subject to tax and (d) enacted changes in tax laws in interim periods. The standard takes effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the impact this standard will have on the Company’s financial position.
In August 2018, the FASB issued new guidance that amends disclosures related to Defined Benefit Plans. The guidance removes disclosures that no longer are considered cost-beneficial, clarifies the specific requirements of certain disclosures, and adds disclosure requirements identified as relevant. The guidance must be applied on a retrospective basis. The guidance is effective for fiscal years ending after
December 15, 2020. 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.
The core principle of the revenue recognition 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 applies 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.
Arrangements with clients may include the placement of a single policy, multiple policies or a combination of policy placements and other services. Consideration related to such "bundled arrangements" is allocated to the individual performance obligations based on their relative fair value. Revenue for policy placement is generally recognized on the policy effective date, at which point control over the services provided by the Company has transferred to the client and the client has accepted the services. In many cases, fee compensation may be negotiated in advance, based on the type of risk, coverage required and service provided by the Company and ultimately, the extent of the risk placed into the insurance market or retained by the client. The trends and comparisons of revenue from one period to the next can be affected by changes in premium rate levels, fluctuations in client risk retention and increases or decreases in the value of risks that have been insured, as well as new and lost business, and the volume of business from new and existing clients. For such arrangements, revenue is recognized using output measures, which correspond to the progress toward completing the performance obligation. Fees for non-risk transfer services provided to clients are recognized over time in the period the services are provided, using a proportional performance model, primarily based on input measures. These measures of progress provide a faithful depiction of the progress towards completion of the performance obligation.
management business and certain of Mercer’s defined benefit administration services consists principally of fees based on assets under delegated management or administration.
Consulting projects in Mercer’s wealth and career businesses, as well as consulting projects in Oliver Wyman, typically consist of a single performance obligation, which is recognized over time as control is transferred continuously to customers. Typically, revenue is recognized over time using an input measure of time expended to date relative to total estimated time to be incurred at project completion. Incurred hours represent services rendered and thereby faithfully depicts the transfer of control to the customer.
Health brokerage and consulting services are components of both Marsh, which includes MMA, and Mercer, with approximately 63% of such revenues reported in Mercer. Health contracts typically involve a series of distinct services that are treated as a single performance obligation. Revenue for these services is recognized over time based on the amount of remuneration the Company expects to be entitled in exchange for these services. Payments for health brokerage and consulting services are typically paid monthly in arrears from carriers based on insured lives under the contract.
The Company records accounts receivable when the right to consideration is unconditional, subject only to the passage of time. Contract assets primarily relate to quota share reinsurance brokerage and contingent insurer revenue. The Company does not have the right to bill and collect revenue for quota share brokerage until the underlying policies written by the ceding insurer attach to the treaty. Estimated revenue related to achievement of volume or loss ratio metrics cannot be billed or collected until all related policy placements are completed and the contingency is resolved. The change in contract assets from January 1, 2019 to December 31, 2019 is primarily due to $437 million of additions during the period (including JLT), partly offset by $342 million transferred to accounts receivables, as the rights to bill and collect became unconditional. The change in contract assets from January 1, 2018 to December 31, 2018 is primarily due to $331 million of additions during the period offset by $347 million transferred to accounts receivables. Contract assets are included in other current assets in the Company's consolidated balance sheets. Contract liabilities primarily relate to the advance consideration received from customers. Contract liabilities are included in current liabilities in the Company's consolidated balance sheets. The change in contract liabilities from January 1, 2019 to December 31, 2019 includes cash received for performance obligations not yet fulfilled of $518 million and $42 million related to JLT, offset by revenue recognized in 2019 of $531 million that was included in the contract liability balance at the beginning of the year. The Company recognized revenue of $582 million in 2018 that was included in the contract liability balance at January 1. 2018. The amount of revenue recognized in 2019 and 2018 from performance obligations satisfied in previous periods, mainly due to variable consideration from contracts with insurers, quota share business and consulting contracts previously considered constrained was $79 million and $51 million, respectively. The 2019 amount includes a $17 million adjustment of previous estimates related to a multi-year Guy Carpenter contract in the third quarter of 2019.
The Company applies the practical expedient and therefore does not disclose the value of unsatisfied performance obligations for (1) contracts with original contract terms of one year or less and (2) contracts where the Company has the right to invoice for services performed. The revenue expected to be recognized in future periods during the non-cancellable term of existing contracts greater than one year that is related to performance obligations that are unsatisfied or partially satisfied at the end of the reporting period is approximately $39 million for Marsh, $104 million for Mercer and $4 million for Oliver Wyman. The Company expects revenue in 2020, 2021, 2022, 2023 and 2024 and beyond of $105 million, $36 million, $5 million, $1 million and $1 million, respectively, related to these performance obligations.
The Company capitalized the incremental costs to obtain contracts primarily related to commissions or sales bonus payments in both segments. These deferred costs are amortized over the expected life of the underlying customer relationships.
The following amounts are included in the consolidated statements of cash flows as a financing activity. The Company paid deferred and contingent consideration of $65 million in the year ended December 31, 2019, consisting of deferred purchase consideration of $43 million and contingent purchase consideration of $22 million. In the year ended December 31, 2018, the Company paid deferred and contingent consideration of $117 million, consisting of deferred purchase consideration of $62 million and contingent consideration of $55 million, and in the year ended December 31, 2017 the Company paid deferred and contingent consideration of $136 million, consisting of deferred purchase consideration of $55 million and contingent consideration of $81 million.
Effective January 1, 2019, the Company adopted the new accounting guidance related to leases, which requires a lessee to recognize assets and liabilities for its leases. Upon adoption of this accounting standard, the Company recorded a non-cash ROU asset of $1.7 billion and lease liability of $1.9 billion in the first quarter of 2019.
The changes in the balances of each component of AOCI for the years ended December 31, 2019 and 2018, including amounts reclassified out of AOCI, are as follows:
The Company believes the Transaction strengthens MMC’s leadership position in insurance and reinsurance broking, health and retirement. The addition of over 10,000 colleagues provides deeper industry expertise in almost every part of the Company. The Transaction also builds on MMC’s efforts to expand in faster-growing geographies and market segments, and facilitates investment in data and analytics.
The Risk and Insurance Services segment completed five other acquisitions during 2019.
February - MMA acquired Bouchard Insurance, Inc., a Florida-based full service agency and Employee Benefits Group, Inc., a Maryland-based independent insurance agency.
Total purchase consideration for acquisitions made during 2019 was approximately $5,927 million, which consisted of cash paid of $5,861 million and deferred purchase and estimated contingent consideration of $66 million. Contingent consideration arrangements are based primarily on earnings before interest, tax, depreciation and amortization ("EBITDA") or revenue targets over a period of two to four years. During 2019, the Company also paid $43 million of deferred purchase consideration and $63 million of contingent consideration related to acquisitions made in prior years. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized.
The purchase price allocation above is based on estimates that are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments must be finalized during the measurement period, which for a particular asset, liability, or non-controlling instrument ends once the acquirer determines that either (1) the necessary information has been obtained or (2) the information is not available. However, the measurement period for all items is limited to one year from the acquisition date. During the fourth quarter of 2019, the Company made certain adjustments to the above JLT purchase price allocation, which included an increase to goodwill of approximately $90 million, an increase to other liabilities, and decreases to net receivables, other assets and current liabilities.
Amounts for deferred tax assets and liabilities pending the finalization of valuations of the assets acquired, liabilities assumed and associated goodwill discussed below; and
The estimation of fair value requires numerous judgments, assumptions and estimates about future events and uncertainties, which could materially impact these values, and the related amortization, where applicable, in the Company’s results of operations.
The following chart provides information about intangible assets acquired during 2019:
In January 2019, Marsh increased its equity ownership in Marsh India from 26% to 49%. Marsh India is accounted for under the equity method.
During 2018, the Risk and Insurance Services segment completed 12 acquisitions.
March - Marsh acquired Hoken Soken, Inc., a Japan-based insurance agency.
August - Marsh acquired John L. Wortham & Son, L.P., a Houston-based independent insurance broker.
October - MMA acquired Eustis Insurance, Inc., a Louisiana-based insurance agency.
January - Oliver Wyman acquired Draw Ltd., a U.K.-based digital transformation agency.
March - Oliver Wyman acquired 8Works Limited, a U.K.-based design thinking consultancy.
June - Mercer acquired India Life Capital Private Ltd., an India-based investment advisor.
The following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during 2019, 2018 and 2017. In accordance with accounting guidance related to pro-forma disclosures, the information presented for current year acquisitions is as if they occurred on January 1, 2018 and reflects acquisitions made in 2018 as if they occurred on January 1, 2017. The 2017 information includes 2017 acquisitions as if they occurred on January 1, 2016. The pro-forma information includes the effects of amortization of acquired intangibles and additional interest expense related to the issuance of debt related to the JLT Transaction. The unaudited pro-forma financial data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved if such acquisitions had occurred on the dates indicated, nor is it necessarily indicative of future consolidated results.
During the third quarter of 2019, the Company completed the sale of a U.S. Specialty business at Marsh and a U.S. large market health and defined benefit business at Mercer for cash proceeds of approximately $60 million.
(a) Includes $4.9 billion from the acquisition of JLT in 2019.
(b) Primarily reflects the impact of dispositions in 2019 and foreign exchange translation in 2018.
Aggregate amortization expense was $314 million for the year ended December 31, 2019, $183 million for the year ended December 31, 2018 and $169 million for the year ended December 31, 2017. The estimated future aggregate amortization expense is as follows:
Net of valuation allowances of $54 million in 2019 and $21 million in 2018.
Net of valuation allowances of $72 million in 2019 and $45 million in 2018.
The TCJA provided for a transition to a quasi-territorial tax system for taxing foreign earnings via a transition tax on undistributed earnings of non-U.S. subsidiaries. The Company recorded a provisional transition tax charge of $240 million upon enactment of the TCJA in 2017. The reduction of the U.S. corporate tax rate from 35% to 21% reduced the value of the U.S. deferred tax assets and liabilities; accordingly, a charge of $220 million was recorded. These amounts were decreased by $5 million and finalized in 2018.
Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017:
Of the total unrecognized tax benefits at December 31, 2019, 2018 and 2017, $75 million, $64 million and $56 million, respectively, represent the amount that, if recognized, would favorably affect the effective tax rate in any future periods. The total gross amount of accrued interest and penalties at December 31, 2019, 2018 and 2017, before any applicable federal benefit, was $31 million, $15 million and $12 million, respectively.
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 be, in effect, a real-time audit. The IRS is currently examining the Company’s 2017 and 2018 tax returns and is performing a pre-filing review of 2019. In 2019, the Company settled its federal audit for the year 2016.
New York is a significant jurisdiction for the Company. During 2019, New York State initiated an audit for the 2015 tax year. During 2018, New York State and New York City closed the examination of tax years 2007 through 2009. New York State and New York City have examinations underway for various entities covering the years 2010 through 2014.
The weighted average actuarial assumptions utilized for the U.S. and significant non-U.S. defined benefit plans and post-retirement benefit plans are as follows:
*Rate of compensation increase assumptions do not include a rate of compensation increase for the U.S. defined benefit plans since future benefit accruals were discontinued for those plans after December 31, 2016.
probabilities using standard statistical techniques to calculate a range of expected returns on the portfolio. Generally, the Company 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 the most significant plans 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.
For the U.S. plans, 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 ("AOCI"), net of tax. These gains and losses are amortized prospectively out of AOCI over a period that approximates the remaining life expectancy of participants in plans where substantially all participants are inactive, or the average remaining service period of active participants for plans with active participants.
The weighted average actuarial assumptions utilized in determining expense during the year and benefit obligation at the end of the year for the U.S. defined benefit and other U.S. post-retirement plans are as follows:
As of December 31, 2019, the U.S. qualified plan holds 2 million shares of the Company’s common stock which were contributed to the qualified plan by the Company in 2005. This represented approximately 4.8% of that plan's assets as of December 31, 2019.
The components of the net periodic benefit cost (credit) for the U.S. defined benefit and other post-retirement benefit plans are as follows:
The assumed health care cost trend rate for Medicare eligibles and non-Medicare eligibles is approximately 6% in 2019, gradually declining to 4.5% in 2039. 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 post-retirement benefit obligation.
The Company expects to contribute approximately $76 million to its U.S. plans in 2020. The Company’s policy for funding its tax-qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth in the U.S. and applicable foreign law.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the non-U.S. pension plans with accumulated benefit obligations in excess of plan assets were $2.9 billion, $2.7 billion and $2.2 billion, respectively, as of December 31, 2019 and $1.7 billion, $1.6 billion and $1.3 billion, respectively, as of December 31, 2018.
The components of the net periodic benefit cost for the non-U.S. defined benefit and other post-retirement benefit plans and the curtailment, settlement and termination expenses are as follows:
The assumed health care cost trend rate was approximately 4.98% in 2019, gradually declining to 4.34% in 2029. 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 Company expects to contribute approximately $84 million to its non-U.S. pension plans in 2020. Funding requirements for non-U.S. plans vary by country. Contribution rates are generally based on local funding practices and requirements, which may differ significantly from measurements under U.S. GAAP. Funding amounts may be influenced by future asset performance, the level of discount rates and other variables impacting the assets and/or liabilities of the plan. Discretionary contributions may also be affected by alternative uses of the Company’s cash flows, including dividends, investments and share repurchases.
In the U.K., the assumptions used to determine pension contributions are the result of legally-prescribed negotiations between the Company and the plans' trustee that typically occurs every three years in conjunction with the actuarial valuation of the plans. Currently, this results in a lower funded status than under U.S. GAAP and may result in contributions irrespective of the U.S. GAAP funded status. For the MMC UK Pension Fund, in November 2016, the Company and the trustee agreed to a funding deficit recovery plan for the U.K. defined benefit pension plans. A new agreement was reached with the trustee in fourth quarter of 2019 based on the surplus funding position at December 31, 2018. Under the agreement no deficit funding is required until 2023. The funding level will be re-assessed during 2022 to determine if contributions are required in 2023. As part of a long-term strategy, which depends on having greater influence over asset allocation and overall investment decisions, in November 2019 the Company renewed its agreement to support annual deficit contributions by the U.K. operating companies under certain circumstances, up to GBP 450 million over a seven-year period. In addition in the U.K. the Company assumed responsibility for the JLT's Pension Scheme (JLT U.K. plan). Deficit funding of approximately $28 million is expected during 2020 with a new funding agreement expected to be reached with the trustee during 2020.
The following table sets forth, by level within the fair value hierarchy, a summary of the U.S. and non-U.S. plans' investments measured at fair value on a recurring basis at December 31, 2019 and 2018:
for the defined contribution section of the JLT U.K. plan. The cost of the U.K. defined contribution plan was $100 million, $80 million and $75 million in 2019, 2018 and 2017, respectively.
The assumptions used in the Black-Scholes option pricing valuation model for options granted by the Company in 2019, 2018 and 2017 are as follows:
In the above table, forfeited options are unvested options whose requisite service period has not been met. Expired options are vested options that were not exercised. The weighted-average grant-date fair value of the Company's option awards granted during the years ended December 31, 2019, 2018 and 2017 was $17.87, $18.29 and $15.01, respectively. The total intrinsic value of options exercised during the same periods was $136.7 million, $72.9 million and $195.3 million, respectively.
The weighted-average grant-date fair value of the Company's restricted stock units granted during the years ended December 31, 2018 and 2017 was $83.05 and $73.23, respectively. The weighted average grant date fair value of the Company's performance stock units granted during the years ended December 31, 2018 and 2017 was $83.05 and $73.20, respectively. The total fair value of the shares distributed during the years ended December 31, 2019, 2018 and 2017 in connection with the Company's non-option equity awards was $211.9 million, $170.3 million and $117.1 million, respectively.
The payout of shares in 2019 with respect to the PSUs awarded in 2016 was 97% of target based on performance for the three-year performance period. In aggregate, 254,993 shares became distributable in respect to PSUs vested in 2019.
Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
In connection with the JLT Transaction, to hedge the risk of increases in future interest rates prior to its issuance of fixed rate debt in the fourth quarter of 2018, the Company entered into Treasury locks related to $2 billion of expected issuances of senior notes in January 2019. 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 contract. These treasury locks were settled during the first quarter of 2019.
The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018:
The level 3 assets in the above chart reflects contingent purchase consideration from the sale of businesses during 2019, including accretion of approximately $2 million.
Alexander Forbes: The Company owns approximately 34% of the common stock of Alexander Forbes, a South African company listed on the Johannesburg Stock Exchange, which it purchased in 2014 for 7.50 South African Rand per share. In the third quarter of 2018, the Company concluded the decline in value of the investment was other than temporary and recorded a charge of $83 million in 2018. As of December 31, 2019, the carrying value of the Company’s investment in Alexander Forbes was approximately $144 million. As of December 31, 2019, the market value of the approximately 443 million shares of Alexander Forbes owned by the Company, based on the December 31, 2019 closing share price of 5.55 South African Rand per share, was approximately $173 million. See Note 5 to the consolidated financial statements for additional information regarding the pending sale of the Company's remaining investment in AF.
The Company has other investments in private insurance and consulting companies with a carrying value of $183 million and $61 million at December 31, 2019 and December 31, 2018, respectively.
In March 2019, the Company issued €1.1 billion of senior notes related to the JLT Transaction. See Note 14 for additional information related to the Euro senior note issuances. In connection with the senior note issuances, the Company entered into a forward exchange contract to hedge the economic risk of changes in foreign exchange rates from the issuance date to settlement date of the Euro senior notes. The Company recorded a charge of $7.3 million in the consolidated statement of income for the year ended December 31, 2019, related to the settlement of this contract.
A significant portion of JLT's outstanding senior notes at the time of completion of the Transaction were denominated in U.S. dollars. In order to hedge its exposure against the risk of fluctuations between the GBP and the U.S. dollar, JLT entered into foreign exchange contracts and interest rate swaps, which were designated as fair value hedges. In June, 2019, the Company redeemed these U.S. dollar denominated senior notes and settled the related derivative contracts. The offsetting changes in fair value of the debt and the change in fair value of the derivative contracts were recorded in the consolidated statement of income for the year ended December 31, 2019.
The Company has investments in various subsidiaries with Euro functional currencies. As a result, the Company is exposed to the risk of fluctuations between the Euro and U.S. dollar exchange rates. The Company designated its €1.1 billion senior note debt instruments ("euro notes") as a net investment hedge (the "Hedge") of its Euro denominated subsidiaries. The Hedge effectiveness is re-assessed each quarter to confirm that the designated equity balance at the beginning of each period continues to equal or exceed 80% of the outstanding balance of the Euro debt instrument and that all the critical terms of the hedging instrument and the hedged net investment continue to match. If the Company concludes that the hedge is highly effective, the change in the debt balance related to foreign exchange fluctuations will be recorded in foreign currency translation gains (losses) in the consolidated balance sheet. The Company concluded that the hedge continues to be highly effective as of December 31, 2019. During 2019, the U.S. dollar value of the euro notes decreased $28 million through December 31, 2019 due to the impact of foreign exchange rates, with a corresponding increase to foreign currency translation gains (losses).
A lease is defined as a party obtaining the right to use an asset legally owned by another party. The Company determines if an arrangement is a lease at inception. For operating leases entered into prior to January 1, 2019, the ROU assets and operating lease liabilities are recognized in the balance sheet based on the present value of the remaining future minimum payments over the lease term from the implementation date of the standard, January 1, 2019. The ROU asset was adjusted for unamortized lease incentives and restructuring liabilities that were reported, prior to January 1, 2019, as other liabilities in the consolidated balance sheet. For leases entered into subsequent to January 1, 2019, the operating
lease ROU asset and operating lease liabilities are based on the present value of minimum payments over the lease term at the commencement date of the lease.
The Company leases office facilities under non-cancelable operating leases with terms generally ranging between 10 and 25 years. The Company utilizes these leased office facilities for use by its employees in countries in which the Company conducts its business. Leases are negotiated with third-parties and, in some instances contain renewal, expansion and termination options. The Company also subleases certain office facilities to third-parties when the Company no longer utilizes the space. None of the Company’s leases restrict the payment of dividends or the incurrence of debt or additional lease obligations, or contain significant purchase options. In addition to the base rental costs, our lease agreements generally provide for rent escalations resulting from increased assessments for real estate taxes and other charges. A portion of our real estate lease portfolio contains base rents subject to annual changes in the Consumer Price Index ("CPI") as well as charges for operating expenses which are reimbursable to the landlord based on actual usage. Changes to the CPI and payments for such reimbursable operating expenses are considered variable and are recognized as variable lease costs in the period in which the obligation for those payments was incurred.
As a practical expedient, the Company has elected an accounting policy not to separate non-lease components from lease components and instead, accounts for these components as a single lease component. The Company has made an accounting policy election not to recognize ROU assets and lease liabilities for leases that, at the commencement date, are for 12 months or less. Approximately 99% of the Company’s lease obligations are for the use of office space. All of the Company’s material leases are operating leases.
On April 1, 2019, the Company assumed approximately $400 million, of ROU assets and lease liabilities from the JLT Transaction. As part of the Company's real estate rationalization plan related to the JLT Transaction, the Company has determined that approximately $9 million of its ROU assets have been impaired, and therefore, recorded a charge to the consolidated statement of income for the twelve month period ended December 31, 2019, with an offsetting reduction to ROU assets. The Company expects additional impairments as it continues to assess its future real estate requirements.
Future minimum lease payments for the Company’s operating leases as of December 31, 2019 are as follows:
The consolidated statements of income include net rental costs of $383 million and $354 million in 2018 and 2017, respectively, after deducting rentals from subleases ($8 million in 2018 and 2017). These net rental costs exclude rental costs and sublease income for previously accrued restructuring charges related to vacated space.
The senior notes in the table above are registered by the Company with the Securities and Exchange Commission, and are not guaranteed.
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, representing all of JLT's debt it acquired upon the closing of the JLT Transaction. The Company incurred debt extinguishment costs of $32 million due to the debt repayments.
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 facility. The Company had $300 million of borrowings outstanding under the one-year term facility at September 30, 2019, which was repaid and terminated in December 2019.
and $594 million at December 31, 2018. There were no outstanding borrowings under these facilities at December 31, 2019 and December 31, 2018.
Scheduled repayments of long-term debt in 2020 and in the four succeeding years are $1.2 billion, $815 million, $515 million, $617 million and $1.6 billion, respectively.
Details of the JLT integration and restructuring activity from January 1, 2019 through December 31, 2019, are as follows:
During the fourth quarter of 2018, Mercer initiated a program to restructure its business to further optimize the way Mercer operates, setting up the Company for a more fluid and nimble structure and operating model for the future. The Company incurred restructuring severance and consulting costs of $56 million for the twelve month period ended December 31, 2019 related to this initiative.
The expenses associated with the above initiatives are included in compensation and benefits and other operating expenses in the consolidated statements of income. The liabilities associated with these initiatives are classified on the consolidated balance sheets as accounts payable and accrued liabilities, other liabilities or accrued compensation and employee benefits, depending on the nature of the items. These programs are substantially completed as of December 31, 2019.
a value of approximately $2.4 billion. There is no time limit on the authorization. During 2018, the Company purchased 8.2 million shares of its common stock for total consideration of $675 million.
The Company and its subsidiaries are subject to a significant number of claims, lawsuits and proceedings in the ordinary course of business. Such claims and lawsuits consist principally of alleged errors and omissions in connection with the performance of professional services, including the placement of insurance, the provision of actuarial services for corporate and public sector clients, the provision of investment advice and investment management services to pension plans, the provision of advice relating to pension buy-out transactions and the provision of consulting services relating to the drafting and interpretation of trust deeds and other documentation governing pension plans. These claims may seek damages, including punitive and treble damages, in amounts that could be significant. In establishing liabilities for errors and omissions claims in accordance with FASB guidance on Contingencies - Loss Contingencies, the Company uses case level reviews by inside and outside counsel, and internal actuarial analysis by Oliver Wyman Group, a subsidiary of the Company, and other methods to estimate potential losses. A liability is established when a loss is both probable and reasonably estimable. The liability is reviewed quarterly and adjusted as developments warrant. In many cases, the Company has not recorded a liability, other than for legal fees to defend the claim, because we are unable, at the present time, to make a determination that a loss is both probable and reasonably estimable. To the extent that expected losses exceed our deductible in any policy year, the Company also records an asset for the amount that we expect to recover under any available third-party insurance programs. The Company has varying levels of third-party insurance coverage, with policy limits and coverage terms varying significantly by policy year.
In January 2019, the Company received a notice that the Administrative Council for Economic Defense anti-trust agency in Brazil had commenced an administrative proceeding against a number of insurance brokers, including both Marsh and JLT, and insurers “to investigate an alleged sharing of sensitive commercial and competitive confidential information" in the aviation insurance and reinsurance sector.
In connection with its acquisition of U.K.-based Sedgwick Group in 1998, the Company acquired several insurance underwriting businesses that were already in run-off, including River Thames Insurance Company Limited ("River Thames"), which the Company sold in 2001. Sedgwick guaranteed payment of claims on certain policies underwritten through the Institute of London Underwriters (the "ILU") by River Thames. The policies covered by this guarantee were reinsured up to £40 million by a related party of River Thames. Payment of claims under the reinsurance agreement is collateralized by segregated assets held in a trust. As of December 31, 2019, the reinsurance coverage exceeded the best estimate of the projected liability of the policies covered by the guarantee. To the extent River Thames or the reinsurer is unable to meet its obligations under those policies, a claimant may seek to recover from the Company under the guarantee.
The accounting policies of the segments are the same as those used for the consolidated financial statements described in Note 1. Segment performance is evaluated based on segment operating income, which includes directly related expenses, and charges or credits related to integration and restructuring but not the Company’s corporate-level expenses. Revenues are attributed to geographic areas on the basis of where the services are performed.
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.
We have audited the accompanying consolidated balance sheets of Marsh & McLennan Companies, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows, and equity for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We tested the effectiveness of internal controls related to the determination of the liability for E&O, including controls over the projection of ultimate settlement values of reported and unreported claims determined through internal actuarial analyses and management’s independent review of case level estimates provided by inside and outside counsel, as applicable.
Developing a range of independent estimates and comparing those to the liability for E&O recorded by the Company.
The Company completed the acquisition of JLT for approximately $5.6 billion on April 1, 2019. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including customer relationship intangible assets of $1,435 million. Management estimated the fair value of customer relationship intangible assets using the income approach, which determines the fair value as the present value of future cash flows over the remaining economic life of the asset. The fair value determination of customer relationship intangible assets involves significant estimates and assumptions related to future cash flows and the selection of the respective discount rates.
Our audit procedures related to the determination of future cash flows and the selection of the discount rates relating to the customer relationship intangible assets included the following, among others:
We tested the effectiveness of internal controls over the assumptions related to the determination of forecasted future cash flows, selection of the discount rates and the valuation methodology used.
With the assistance of our valuation specialists, we evaluated the reasonableness of the determination of the forecasted future cash flows, discount rates and valuation methodology by:
Developing a range of independent estimates of discount rates for each selected customer relationship intangible asset and comparing those to the respective discount rates utilized by management.
When assessing the reasonableness of assumptions related to future cash flows for each selected customer relationship intangible asset, specifically the assumptions relating to revenue growth, attrition rates and earnings margins, we evaluated whether the assumptions used were reasonable considering the past performance of the acquired company and the Company’s historical experience related to similar acquisitions.