(a)Includes the impact of net restructuring costs of $89 million, $112 million, $161 million, $40 million, and $44 million in 2020, 2019, 2018, 2017 and 2016, respectively, and JLT integration, restructuring and acquisition related costs of $305 million, $485 million and $12 million in 2020, 2019 and 2018, respectively. 2020 also includes a $161 million JLT legacy E&O provision.
(b)Income tax expense in 2017 includes a $460 million provisional charge related to the enactment of U.S. tax reform.
Marsh & McLennan Companies, Inc. and its consolidated subsidiaries (the "Company") is a global professional services firm offering clients advice in the areas of risk, strategy and people. The Company’s 76,000 colleagues advise clients in over 130 countries. With annual revenue over $17 billion, the Company helps clients navigate an increasingly dynamic and complex environment through four market-leading businesses. Marsh advises individual and commercial clients of all sizes on insurance broking and innovative risk management solutions. Guy Carpenter develops advanced risk, reinsurance and capital strategies that help clients grow profitably and pursue emerging opportunities. Mercer delivers advice and technology-driven solutions that help organizations redefine the world of work, reshape retirement and investment outcomes, and unlock health and well being for a changing workforce. Oliver Wyman Group serves as critical strategic, economic and brand advisor to private sector and governmental clients.
•Risk and Insurance Services includes risk management activities (risk advice, risk transfer and risk control and mitigation solutions) as well as insurance and reinsurance broking and services. The Company conducts business in this segment through Marsh and Guy Carpenter.
We describe the primary sources of revenue and categories of expense for each segment below, in our discussion of segment financial results. A reconciliation of segment operating income to total operating income is included in Note 17 to the consolidated financial statements included in Part II, Item 8 in this report.
JLT's results of operations for the period April 1, 2019 through December 31, 2019 are included in the Company’s results of operations for 2019. In accordance with applicable accounting guidance, JLT's results of operations for the period January 1 through March 31, 2019 and for the year ended 2018 are not included in the Company's results of operations and therefore, affect comparability. The Company’s results for the years ended December 31, 2020 and 2019 were impacted by JLT related acquisition, restructuring and integration costs as well as legacy MMC restructuring programs as discussed in Note 14 to the consolidated financial statements.
Diluted earnings per share increased 16% to $3.94 in 2020 compared with $3.41 in 2019. This increase is a result of the factors discussed above, and a lower effective tax rate in 2020.
Risk and Insurance Services operating income increased $513 million, or 28%, in 2020 compared with 2019. Revenue increased 8%, reflecting increases of 3% on an underlying basis and 1% from acquisitions, partly offset by a 1% decrease from the impact of foreign currency translation. Expense increased 3% reflecting decreases of 2% on an underlying basis and 1% from the impact of foreign currency translation, partly offset by an increase of 2% from acquisitions. The decrease in underlying expenses is primarily due to lower JLT integration, restructuring and acquisition related costs and savings realized from the completion of integration efforts to date. The decrease also reflects lower travel and entertainment and meeting costs resulting from the Company’s restrictions on travel and cost containment measures taken in light of COVID-19, partly offset by higher severance.
Consulting operating income decreased $216 million, or 18%, to $1.0 billion in 2020 compared with 2019, reflecting the impact of a decrease in revenue of 2% and an increase in expense of 1%. Revenue decreased 2% on an underlying basis and 1% from the impact of dispositions. On an underlying basis, expense increased 1% primarily due to a JLT legacy E&O provision of $161 million recorded in 2020, higher JLT integration and restructuring related costs as well as higher severance, partly offset by lower travel, entertainment and meeting costs resulting from the Company’s restrictions on travel and cost containment measures taken in light of COVID-19 and lower expenses recoverable from clients.
In 2020, 2019 and 2018, the Company’s results of operations and earnings per share were impacted by the following items:
•JLT integration and restructuring costs: Includes severance, lease related exit costs as well as consulting costs from the JLT Transaction. 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. 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.
The Company is completing its integration of JLT, which is discussed in more detail in Note 14 to the consolidated financial statements. The costs incurred in connection with the integration and restructuring of the combined businesses, primarily related to severance, real estate rationalization and technology, consulting fees related to the management of the integration processes and legal fees related to the rationalization of legal entity structures. The Company incurred costs of $251 million in 2020 and $335 million in 2019 and expects the remaining costs of $139 million to be incurred in 2021 of which $134 million will be cash expenditures. Through December 31, 2020, the Company has exceeded the initial estimated savings of $350 million. The Company now expects approximately $425 million of annualized savings when the integration is completed in 2021.
The Company conducts business in many countries. As a result, foreign exchange rate movements may impact period-to-period comparisons of revenue. Similarly, certain other items such as the revenue impact of acquisitions and dispositions, including transfers among businesses, may impact period-to-period comparisons of revenue. Underlying revenue measures the change in revenue from one period to another by isolating these impacts.
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.
In Marsh, revenue increased 3% on an underlying basis and 2% from the impact of acquisitions, partly offset by a 1% decrease from the impact of foreign currency translation. U.S./Canada had underlying revenue growth of 5%. International operations increased 1% on an underlying basis, reflecting increases of 4% in Asia Pacific and 3% in Latin America, while EMEA was flat compared to prior year.
Guy Carpenter’s revenue increased 15% to $1.7 billion in 2020 compared with 2019, or 6% on an underlying basis.
The Risk and Insurance Services segment completed seven acquisitions during 2020. Information regarding those acquisitions is included in Note 5 to the consolidated financial statements.
Expense in the Risk and Insurance Services segment increased 3% in 2020 compared with 2019, reflecting decreases of 2% on an underlying basis and 1% from the impact of foreign currency, partly offset by a 2% increase from acquisitions. The decrease in underlying expense reflects lower JLT integration, restructuring and acquisition related costs and savings realized from the completion of integration efforts to date. The decrease also reflects lower travel and entertainment and meeting costs resulting from the Company’s restrictions on travel and cost containment measures taken in light of COVID-19 and lower base salaries. These decreases are partly offset by higher incentive compensation and severance.
Consulting expense in 2020 increased 1% compared with 2019. This reflects an increase of 1% on an underlying basis and a decrease of 1% from the impact of dispositions. The increase in underlying expense reflects a JLT legacy E&O provision of $161 million recorded in 2020, higher JLT integration and restructuring costs as well as higher base salaries, incentive compensation and severance. These increases were partly offset by lower travel, entertainment and meeting costs resulting from the Company’s restrictions on travel and cost containment measures taken in light of COVID-19 and lower expenses recoverable from clients.
Corporate expense in 2020 was $274 million compared with $366 million in 2019. Expenses decreased 17% on an underlying basis due to lower acquisition, integration and restructuring costs primarily related
Interest income earned on corporate funds amounted to $7 million in 2020 compared with $39 million in 2019. During the first quarter of 2019, the Company issued approximately $6.5 billion of senior notes related to the JLT acquisition. The funds were held in escrow and released for payment in April 2019, when the acquisition was completed. The decrease in interest income from the prior year is primarily due to interest earned on these funds in 2019. Interest expense in 2020 was $515 million compared with $524 million in 2019. The decrease in interest expense was primarily due to the impact of lower average interest rates on borrowings.
The Company's consolidated effective tax rate was 26.7%, 27.3%, and 25.6% in 2020, 2019, and 2018, respectively. The rates in all periods reflect the effects of tax planning and the ongoing impact of the Tax Cuts and Jobs Act ("TCJA"), including regulatory and other guidance as it became available. The tax rate in 2020 includes a valuation allowance for certain tax credits, the impact of uncertain tax positions, and certain tax planning benefits. The 2019 rate reflects items related to the JLT acquisition, including non-deductible goodwill allocated to the sale of Aerospace and non-deductible expenses incurred in relation to the JLT acquisition. The 2018 rate includes the effect of a charge related to the Company’s investment in AF as discussed in Note 1. The tax rates in all periods reflect the impact of discrete tax matters, tax legislation, and nontaxable adjustments to contingent acquisition consideration.
The Company derives a significant portion of its revenue and operating profit from operating subsidiaries located outside of the U.S. Funds from those operating subsidiaries are regularly repatriated to the U.S. out of annual earnings. At December 31, 2020, the Company had approximately $789 million of cash and cash equivalents in its foreign operations, which includes $249 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. In general, the Company has determined that its permanent reinvestment assertions, in light of the enactment of the TCJA, should allow the Company to repatriate previously taxed earnings from the deemed repatriations as cash becomes available.
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
The Company contributed $34 million to its U.K. plans in 2020, including an expense allowance of approximately $5 million. The Company's contributions to its U.K. plans in 2021 are expected to be approximately $47 million, including an expense allowance of $16 million.
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 $2.4 billion and $3.5 billion at December 31, 2020 for the U.S. plans and non-U.S. plans, respectively, compared with losses of $2.1 billion and $3.1 billion at December 31, 2019. 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 2020 and 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. 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 2020, the Company's defined benefit pension plan assets had gains of 13.1% and 12.0% in the U.S. and U.K., respectively, as compared to gains of 21.4% and 13.1% in the U.S. and U.K., respectively, in 2019. During 2018, the Company's defined benefit pension plan assets had losses of 7.4% in the U.S. and 1.0% in the U.K.
Overall, based on the measurement at December 31, 2020, total benefit credits related to the Company’s defined benefit plans are expected to increase in 2021 by approximately $22 million compared to 2020, reflecting an increase in non-U.S. plans of approximately $31 million, offset by a decrease in U.S. plans of $9 million.
The Company and certain of its foreign subsidiaries have a multi-currency five-year unsecured revolving credit facility of $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. The Company borrowed $1 billion under this facility in the first quarter of 2020, which was repaid in full during the second quarter of 2020. There were no borrowings outstanding under this facility at December 31, 2020.
In April 2020, the Company entered into a new 364 day $1 billion unsecured revolving credit facility with a term out option after one year. The facility has similar coverage and leverage ratios as the multi-currency five-year unsecured revolving credit facility. The Company had no borrowings outstanding under this facility at December 31, 2020.
The Company has established a short-term debt financing program of up to $1.5 billion through the issuance of commercial paper. The proceeds from the issuance of commercial paper were used for general corporate purposes. The Company had no commercial paper outstanding at December 31, 2020.
In December 2020, the Company repaid $700 million of maturing Senior Notes and $300 million of floating rate notes with an original maturity of December 2021.
In May 2020, the Company issued $750 million of 2.250% Senior Notes due 2030. The Company used the net proceeds from this offering to pay outstanding borrowings under the revolving credit facility.
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 Stable outlook with S&P and a Negative outlook with Moody's.
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 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 increased by $124 million during 2020 related to the change in foreign exchange rates. The Company concluded that the hedge was highly effective and recorded an increase to accumulated other comprehensive loss for the year ended December 31, 2020.
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 British Pound ("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 the GBP, related to JLT’s U.S. dollar denominated revenue in the U.K. Prior to the acquisition, these derivative contracts were designated as cash flow hedges. Upon 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 13 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.
In connection with the JLT Transaction and to hedge the risk of increases in future interest rates prior to its issuance of senior notes, the Company entered into treasury locks related to $2 billion of the expected debt in the fourth quarter of 2018. 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. 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 year 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.
The Company paid $668 million and $5.5 billion, net of cash acquired, for acquisitions it made during 2020 and 2019, respectively.
At December 31, 2019, the Company owned approximately 443 million shares of the common stock of AF, a South African company listed on the Johannesburg Stock Exchange, which was accounted for under the equity method of accounting. In February 2020, the Company sold approximately 49 million shares, and in May 2020, sold an additional 193 million shares, leaving the Company with an investment of approximately 201 million shares of the common stock of AF at December 31, 2020. Upon completion of the sale of shares in May 2020, the investment in AF was accounted at fair value, with investment gains and losses recorded as investment income in the consolidated statement of income.
During the first quarter of 2019, the Company disposed of its investment in Benefitfocus for total proceeds of approximately $132 million. The Company received $115 million in the first quarter of 2019 and $17 million in the second quarter of 2019 as final settlement on the sale.
During the second quarter of 2019, the Company disposed of its investment in Payscale and received proceeds of approximately $47 million. In January 2019, the Company increased its equity ownership in Marsh India from 26% to 49% for approximately $88 million. Marsh India is carried under the equity method.
The Company’s additions to fixed assets and capitalized software, which amounted to $348 million in 2020 and $421 million in 2019, primarily related to computer equipment purchases, the refurbishing and modernizing of office facilities and software development costs.
The Company has commitments for potential future investments of approximately $46 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 $64.5 million.
financial statements because their application places the most significant demands on management’s judgment, and requires management to make estimates about the effect of matters that are inherently uncertain. Actual results may differ from those estimates.
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 Company recognizes the funded status of its over-funded defined benefit pension and retiree medical plans as a net benefit plan asset and its unfunded and underfunded plans as a net benefit plan liability. The gains or losses and prior service costs or credits that have not been recognized as components of net periodic costs are recorded as a component of Accumulated Other Comprehensive Income ("AOCI"), net of tax, in the Company’s consolidated balance sheets. The gains and losses that exceed specified corridors, 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets, 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 vast majority of unrecognized losses relate to inactive plans and are amortized over the remaining life expectancy of the participants.
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, 2020 measurement date (for measuring pension expense in 2021) for the total Company, the U.S. and the Rest of World ("ROW").
The impact of discount rate changes shown above relates to the increase or decrease in actuarial gains or losses being amortized through net periodic pension cost, as well as the increase or decrease in interest expense, with all other facts and assumptions held constant. It does not contemplate nor include potential future impacts a change in the interest rate environment and discount rates might cause, such as the impact on the market value of the plans’ assets. In addition, the assumed return on plan assets would likely be impacted by changes in the interest rate environment and other factors, including equity valuations, since these factors reflect the starting point used in the Company’s projection models. For example, a reduction in interest rates may result in a reduction in the assumed return on plan assets. Changing the discount rate and leaving the other assumptions constant also may not be representative of the impact on expense, because the long-term rates of inflation and salary increases are often correlated with the discount rate. Changes in these assumptions will not necessarily have a linear impact on the net periodic pension cost.
The Company contributes to certain health care and life insurance benefits provided to its retired employees. The cost of these post-retirement benefits for employees in the U.S. is accrued during the period up to the date employees are eligible to retire but is funded by the Company as incurred. The key assumptions and sensitivity to changes in the assumed health care cost trend rate are discussed in Note 8 to the consolidated financial statements.
•The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50-percent likely of being realized upon ultimate resolution with a taxing authority. 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.
Goodwill Impairment Testing - The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment assessment for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, a company can assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. Alternatively, the Company may elect to proceed directly to the quantitative goodwill
•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;
The Company completed its qualitative assessment in the third quarter of 2020 and concluded that a quantitative goodwill impairment test was not required in 2020 and that goodwill was not impaired.
See Note 9 to the consolidated financial statements for additional information regarding accounting for share-based payments.
income. Prior to their settlement, determination of the fair value of these contracts, in particular the deal contingent foreign exchange contract, required significant management judgments or estimates about the potential closing dates of the transaction and remaining value of the deal contingency feature. All derivative contracts related to the JLT Transaction were settled during 2019.
On April 1, 2019, the Company completed its acquisition of JLT. JLT's results of operations for the year ended December 31, 2020 are included in the Company’s results of operations. JLT's results of operations for the three months ending March 31, 2019 are not included in the Company's results of operations for the twelve month period ended December 31, 2019. 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 2020. The Company believes that in addition to the change in reported GAAP revenue, a comparison of 2020 GAAP reported revenue to the combined 2019 revenue of MMC and JLT, as if the companies were combined on January 1, 2019, 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.
In 2020, the Company recorded an investment loss of $22 million compared to investment income of $22 million in 2019 and investment loss of $12 million in 2018. The net investment loss in 2020 is primarily due to the $23 million loss from the sale of shares of AF during the second quarter of 2020. The investment gain in 2019 includes gains of $10 million related to mark-to-market changes in equity securities and gains of $12 million related to investments in private equity funds and other investments. The investment loss in 2018 includes an impairment charge of $83 million related to its investment in AF. The net investment loss in 2018 also includes gains of $54 million related to mark-to-market changes in equity securities and gains of $17 million related to investments in private equity funds and other investments.
Goodwill and Other Intangible Assets: Goodwill represents acquisition costs in excess of the fair value of net assets acquired. Goodwill is assessed 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, a 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 qualitative impairment assessment during 2020. 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 assessed 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, 2020 and 2019.
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, 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.
As of December 31, 2020, the Company’s liability for errors and omissions was $639 million, compared to $484 million at December 31, 2019, of which $271 million and $149 million, respectively, were included in accounts payable and accrued liabilities in the Consolidated Balance Sheets.
Income Taxes: The Company's effective tax rate reflects its income, statutory tax rates and tax planning in the various jurisdictions in which it operates. Significant judgment is required in determining the annual tax provision and in evaluating uncertain tax positions and the ability to realize deferred tax assets.
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
Costs for real estate consolidation are recognized based on the type of cost, and the expected future use of the facility. For locations where the Company does not expect to sub-lease the property, the amortization of any right-of-use asset is accelerated from the decision date to the cease use date. For locations where the Company expects to sub-lease the properties subsequent to its vacating the property, the right-of-use asset is reviewed for potential impairment at the earlier of the cease use date or the date a sub-lease is signed. To determine the amount of impairment, the fair value of the right-of-use asset is determined based on the present value of the estimated net cash flows related to the property. Contractual costs outside of the right-of-use asset are recognized based on the net present value of expected future cash outflows for which the Company will not receive any benefit. Such amounts are reliant on estimates of future sub-lease income to be received and future contractual costs to be incurred.
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 recoverables. 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.
Mercer manages assets in trusts or funds for which Mercer’s management or trustee fee is not considered a variable interest, since the fees are commensurate with the level of effort required to provide those services. Mercer is not the primary beneficiary of these trusts or funds. Mercer’s maximum exposure to loss of its interests is, therefore, limited to collection of its fees.
•fair value estimates of contingent consideration receivable or payable related to acquisitions or dispositions
The Company believes these estimates are reasonable based on information currently available at the time they are made. In most situations where estimates, fair values or recoverability of assets is dependent upon short or long term projections of cash flows, revenues or earnings before interest, taxes, depreciation and amortization ("EBITDA"), the Company has based its projections assuming the gradual lifting of global lockdowns during 2021. The Company has also considered potential impacts to its customer base in various industries and geographies. The ultimate extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s businesses, results of operations and financial condition will depend on future developments that are highly uncertain, including new information that may emerge concerning COVID-19 and the actions taken to contain it or treat it, and the economic impact on local, regional, national and international customers and markets. Actual results may differ from these estimates.
In January 2020, the FASB issued guidance that addresses accounting for the transition into and out of the equity method and measuring certain purchased options and forward contract to acquire investments. The standard takes effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this standard did not have a material impact on the Company’s financial position or its results of operations.
In August 2018, the FASB issued new guidance that amends required fair value measurement disclosures. The guidance adds new requirements, eliminates some current disclosures and modifies other required disclosures. The new disclosure requirements, along with modifications made to disclosures as a result of the change in requirements for narrative descriptions of measurement uncertainty, must be applied on a prospective basis. The effects of all other amendments included in the guidance must be applied retrospectively for all periods presented. The adoption of this guidance impacted disclosures only and did not have an impact on the Company's financial position or results of operations.
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. Adoption of this guidance impacted disclosures only and did not have an impact on the Company's financial position or results of operations.
In January 2017, the FASB issued new guidance to simplify the test for goodwill impairment. The new guidance eliminates the second step in the current two-step goodwill impairment process, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill for that reporting unit. The new guidance requires a one-step impairment test, in which the goodwill impairment charge is based on the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance should be applied on a prospective basis with the nature of and reason for the change in accounting principle disclosed upon transition. The adoption of this standard did not have an impact on the Company's financial position or results of operations.
In June 2016, the FASB issued new guidance on the impairment of financial instruments. The new guidance adds an allowance for credit losses ("CECL") impairment model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected credit losses, which the FASB believes will result in more timely recognition of such losses. The new standard is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. Further, the new standard makes targeted changes to the impairment model for available-for-sale debt securities. The adoption of this standard did not have a material impact on the Company's financial position or results of operations.
Effective January 1, 2019, the Company adopted new guidance that allowed an entity to reclassify the stranded tax effects resulting from the Tax Cuts and Job Act (the "TCJA") from accumulated other comprehensive income ("AOCI") to retained earnings. The guidance is effective for the period beginning January 1, 2019. The Company elected not to reclassify the stranded income tax effects of the TCJA from AOCI to retained earnings. The adoption of this standard had no impact on the Company's financial position or results of operations. The Company’s accounting policy related to releasing income tax effects from AOCI follows the portfolio approach.
Insurance brokerage commissions are generally invoiced on the policy effective date. Fee based arrangements generally include a percentage of the total fee due upon signing the arrangement, with additional fixed installments payable over the remainder of the year. Payment terms range from receipt of invoice up to 30 days from invoice date.
For consulting projects, Mercer generally invoices monthly in arrears with payment due within 30 days of the invoice date. Fees for delegated management services are either deducted from the net asset value of the fund or invoiced to the client on a monthly or quarterly basis in arrears. Oliver Wyman Group typically bills its clients 30-60 days in arrears with payment due upon receipt of the invoice.
The Company recognizes commission revenue from arrangements for a significant portion of its brokerage arrangements at a point in time at effective date of the underlying policy. Commission revenue is estimated using historical information about the risks to be covered over the policy period, some of which are dependent on variable factors such as number of employees covered, covered payroll, airline passenger miles flown, shipped tonnage of marine cargo and others. For the year ended December 31, 2020, the Company recorded a revenue reduction of $42 million for estimated commission revenue accounted for on a point in time basis. The reduction primarily relates to policy inception periods from the third quarter of 2019 through the second quarter of 2020.
The amount of revenue recognized in 2020 and 2019 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 $97 million and $79 million, respectively.
The Company capitalizes 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.
At December 31, 2020, the Company’s capitalized assets related to deferred implementation costs, costs to obtain and costs to fulfill were $29 million, $253 million and $296 million, respectively. At December 31, 2019, the Company's capitalized assets related to deferred implementation costs, costs to obtain and costs to fulfill were $30 million, $222 million, and $262 million, respectively. Costs to obtain and deferred implementation costs are primarily included in other assets and costs to fulfill are primarily included in other current assets in the Company's consolidated balance sheets. The Company recorded amortization of compensation and benefits expense of $1.3 billion and $1.2 billion for the years ended December 31, 2020 and 2019, respectively, related to these capitalized costs.
The classification of contingent consideration payments in the consolidated statement of cash flows is dependent upon whether the payment was part of the initial liability established on the acquisition date (financing) or an adjustment to the acquisition date liability (operating).
The following amounts are included in the consolidated statements of cash flows as a financing activity. The Company paid deferred and contingent consideration of $122 million in the year ended December 31, 2020, consisting of deferred purchase consideration of $68 million and contingent purchase consideration of $54 million. In the year ended December 31, 2019, the Company paid deferred and contingent consideration of $65 million, consisting of deferred purchase consideration of $43 million and contingent consideration of $22 million, and 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.
The following amounts are included in the operating section of the consolidated statements of cash flows. For the year ended December 31, 2020, the Company recorded a net charge for adjustments to acquisition related accounts of $26 million and contingent consideration payments of $48 million. For the year ended December 31, 2019, the Company recorded a net charge for adjustments to acquisition related accounts of $68 million and contingent consideration payments of $41 million, and for the year ended December 31, 2018 the Company recorded a net charge for adjustments to acquisition related accounts of $32 million and contingent consideration payments of $36 million.
On January 1, 2020, the Company adopted the new guidance on the impairment of financial instruments. The Company’s policy for providing an allowance for credit losses on its accounts receivable is a combination of factors, including historical write-offs, aging of balances, and other qualitative and quantitative analyses.
The changes, net of tax, in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the years ended December 31, 2020 and 2019, including amounts reclassified out of AOCI, are as follows:
The components of other comprehensive income (loss) for the years ended December 31, 2020, 2019 and 2018 are as follows:
The Risk and Insurance Services segment completed seven acquisitions during 2020.
•December - MMA acquired Heritage Insurance Services, Inc., a Kentucky-based full service broker that provides commercial property and casualty and personal lines primarily in the trucking and transportation industry, Inspro Insurance, Inc., a Nebraska-based full service broker that provides commercial property and casualty insurance, personal lines and employee benefits services, and Compass Financial Partners, LLC, a North Carolina-based retirement consulting and investment advisory firm.
The following table presents the preliminary allocation of purchase consideration to the assets acquired and liabilities assumed during 2020 based on the estimated fair values for the acquisitions as of their respective acquisition dates:
•Amounts of intangible assets, fixed assets, capitalized software assets and right-of-use assets, subject to finalization of valuation efforts;
•Amounts for deferred tax assets and liabilities pending the finalization of valuations of the assets acquired, liabilities assumed and associated goodwill discussed below; and
•Amounts for income tax assets, receivables and liabilities, pending the filing of the acquired companies' pre-acquisition income tax returns and receipt of information from taxing authorities which may change certain estimates and assumptions used.
In 2020, the Company incurred acquisition-related costs of $3 million, primarily related to legal fees. In 2019, the Company incurred acquisition-related costs, primarily related to legal, investment banking and U.K. stamp duty tax of $125 million, primarily related to the acquisition of JLT. Acquisition-related costs incurred in 2018 were $7 million. These costs are included in other operating expenses in the Company's consolidated statement of income.
At December 31, 2019, the Company owned approximately 443 million shares of the common stock of Alexander Forbes ("AF"), a South African company listed on the Johannesburg Stock Exchange, which was accounted for under the equity method of accounting. In February 2020, the Company sold approximately 49 million shares of the common stock of AF, and in May 2020, sold an additional 193 million shares to third parties, leaving the Company with an investment of approximately 201 million shares of the common stock of AF at December 31, 2020. Upon completion of the May transaction, the investment in AF is accounted at fair value, with unrealized gains and losses recorded as investment (loss) income in the consolidated statement of income.
On April 1, 2019, the Company completed the JLT Transaction and purchased all of the outstanding shares of JLT. Under the terms of the Transaction, JLT shareholders received £19.15 in cash for each JLT share, which valued JLT’s existing issued and to be issued share capital at approximately £4.3 billion (or approximately $5.6 billion based on an exchange rate of U.S. $1.31:£1). The Company also assumed existing JLT long-term indebtedness of approximately $1 billion. The Company implemented the Transaction by way of a scheme of arrangement under Part 26 of the United Kingdom Companies Act 2006, as amended.
During 2019, the Risk and Insurance Services segment completed five other acquisitions.
•February - MMA acquired Bouchard Insurance, Inc., a Florida-based full service agency and Employee Benefits Group, Inc., a Maryland-based independent insurance agency.
•October - MMA acquired Benefits Reports Insurance Services, Inc., a Massachusetts-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 EBITDA and/or revenue targets over periods of two to four years. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. During 2019, the Company also paid $43 million of deferred purchase consideration and $63 million of contingent consideration related to acquisitions made in prior years.
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. Also, on June 1, 2019, the Company completed its disposition of JLT’s global aerospace business for cash proceeds of $165 million and contingent consideration receivable of approximately $65 million, based on the aerospace business achieving certain revenue milestones in 2020. The aerospace business was divested as part of the European Commission's approval of the JLT Transaction.
The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment assessment for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, a company can assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. Alternatively, the Company may elect to proceed directly to the quantitative goodwill impairment test. In 2020, the Company elected to perform a qualitative impairment assessment. As part of its assessment, the Company considered numerous factors, including:
The Company completed its qualitative assessment in the third quarter of 2020 and concluded that goodwill was not impaired.
The goodwill acquired in 2020 and 2019 included approximately $179 million and $213 million, respectively, which is deductible for tax purposes, primarily related to the Risk and Insurance Services segment.
Goodwill allocable to the Company’s reportable segments is as follows: Risk and Insurance Services, $11.7 billion and Consulting, $3.8 billion.
The gross cost and accumulated amortization of intangible assets at December 31, 2020 and 2019 are as follows:
Aggregate amortization expense was $351 million for the year ended December 31, 2020, $314 million for the year ended December 31, 2019 and $183 million for the year ended December 31, 2018. The estimated future aggregate amortization expense is as follows:
A valuation allowance was recorded to adjust deferred tax assets to the amount that the Company believes is more likely than not to be realized. Valuation allowances had net increases of $72 million, $60 million and $36 million in 2020, 2019 and 2018, respectively. Adjustments of the beginning of the year balances of valuation allowances decreased income tax expense by $14 million during 2020. There was no change to income tax expense as a result of adjustments of the beginning of the year valuation allowances in 2019, while in 2018 changes to the beginning of year valuation allowance increased income tax expense by $1 million. Approximately 58% of the Company’s net operating loss carryforwards expire from 2021 through 2037, and others are unlimited. The potential tax benefit from net operating loss carryforwards at the end of 2020 comprised federal, state and local, and non-U.S. tax benefits of $24 million, $25 million, and $94 million, respectively, before reduction for valuation allowances.
Of the total unrecognized tax benefits at December 31, 2020, 2019 and 2018, $90 million, $75 million and $64 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, 2020, 2019 and 2018, before any applicable federal benefit, was $40 million, $31 million and $15 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, 2018 and 2019 tax returns. The Company was accepted into the Bridge phase of the CAP process for tax year 2020.
New York is a significant tax jurisdiction for the Company. During 2019, New York State initiated an audit for the 2015 tax year; and during 2020 included the 2016 tax year. During 2020, New York City initiated an audit for tax years 2016 through 2018. During 2018, New York State and New York City closed the examination of tax years 2007 through 2009. In addition, New York State and New York City have continuing examinations underway for various entities covering the years 2010 through 2014.
The status of audits for significant jurisdictions outside the United States are summarized in the table below:
The Company has established liabilities for uncertain tax positions in relation to potential assessments in the jurisdictions in which it operates. The Company believes the resolution of tax matters will not have a material effect on the consolidated financial position of the Company, although a resolution of tax matters could have a material impact on the Company's net income or cash flows and on its effective tax rate in a particular future period. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $33 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.
The Company uses actuaries from Mercer, a subsidiary of the Company, to perform valuations of its pension plans. The long-term rate of return on plan assets assumption is determined for each plan based on the facts and circumstances that exist as of the measurement date, and the specific portfolio mix of each plan’s assets. The Company utilizes a model developed by the Mercer actuaries to assist in the determination of this assumption. The model takes into account several factors, including: actual and target portfolio allocation; investment, administrative and trading expenses incurred directly by the plan trust; historical portfolio performance; relevant forward-looking economic analysis; and expected returns, variances and correlations for different asset classes. These measures are used to determine 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.
The target asset allocation for the U.S. plans is 64% equities and equity alternatives and 36% fixed income. At the end of 2020, the actual allocation for the U.S. plans was 64% equities and equity alternatives and 36% fixed income. The target asset allocation for the U.K. plans, which comprise approximately 81% of non-U.S. plan assets, is 32% equities and equity alternatives and 68% fixed income. At the end of 2020, the actual allocation for the U.K. plans was 33% equities and equity alternatives and 67% fixed income. The assets of the Company's defined benefit plans are diversified and are managed in accordance with applicable laws and with the goal of maximizing the plans' real return within acceptable risk parameters. The Company uses threshold-based portfolio re-balancing to ensure the actual portfolio remains consistent with target asset allocation ranges.
The Company expects to contribute approximately $37 million to its U.S. plans in 2021. 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 following schedules provide information concerning the Company’s non-U.S. defined benefit pension plans and non-U.S. post-retirement benefit plans:
The projected benefit obligation and fair value of plan assets for non-U.S. pension plans with projected benefit obligations in excess of plan assets was $3.3 billion and $2.6 billion, respectively, as of December 31, 2020 and $3.0 billion and $2.3 billion, respectively, as of December 31, 2019.
The increase in the benefit obligation in 2020 compared to 2019 reflects an actuarial loss primarily due to the decrease in discount rates used to measure plan liabilities.
The assumed health care cost trend rate was approximately 4.93% in 2020, gradually declining to 4.22% in 2040. Assumed health care cost trend rates can have a significant effect on the amounts reported for the non-U.S. health care plans.
The Company expects to contribute approximately $87 million to its non-U.S. pension plans in 2021. 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 addition, in the U.K., the Company assumed responsibility for JLT's Pension Scheme (JLT U.K. plan). We currently expect to pay $29 million of deficit funding in 2021, although we will also reach a new funding agreement with the trustee during 2021.
The U.S. and non-U.S. plan investments are classified into Level 1, which refers to investments valued using quoted prices from active markets for identical assets; Level 2, which refers to investments not traded on an active market but for which observable market inputs are readily available; Level 3, which refers to investments valued based on significant unobservable inputs; and NAV, which refers to investments valued using net asset value as a practical expedient. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 10 for further description of fair value hierarchy leveling.
The Company maintains certain defined contribution plans for its employees, including the Marsh & McLennan Companies 401(k) Savings & Investment Plan ("MMC 401(k) Plan") and the Marsh & McLennan Agency Savings and Investment Plan (collectively, the "401(k) Plans"), that are qualified under U.S. tax laws. For the 401(k) Plans, eligible employees may contribute a percentage of their base salary, subject to certain limitations, and the Company matches a fixed portion of the employees’ contributions. In addition, the Company also amended the MMC 401(k) Plan for most of its U.S. employees to add an automatic Company contribution equal to 4% of eligible base pay beginning on January 1, 2017. The 401(k) Plans contain an Employee Stock Ownership Plan feature under U.S. tax law. Approximately $537 million of the 401(k) Plans' assets at December 31, 2020 and $556 million at December 31, 2019 were invested in the Company’s common stock. If a participant does not choose an investment direction for his or her future contributions, they are automatically invested in a BlackRock LifePath Portfolio that most closely matches the participant’s expected retirement year. The cost of these defined contribution plans was $145 million in 2020, $139 million in 2019 and $133 million in 2018. In addition, the Company has significant defined contribution plans in the U.K. As noted above, effective August 1, 2014, a newly formed defined contribution plan replaced the existing defined contribution and defined benefit plans with regard to future service. In addition, the Company has assumed responsibility for the defined contribution section of the JLT U.K. plan. The cost of the U.K. defined contribution plan was $121 million, $100 million and $80 million in 2020, 2019 and 2018, respectively.
The types of awards permitted under the 2020 Plan include stock options, restricted stock units payable in Company common stock or cash, and other stock-based awards. Performance-based restricted stock units are referred to as performance stock units. The 2020 Plan contains a provision which, in the event of a change in control of the Company, may accelerate the vesting of awards. This provision requires both a change in control of the Company and a subsequent specified termination of employment for vesting to be accelerated. There are 20 million shares available for issuance under the 2020 plan. The total number of shares issued in connection with full-value awards may not exceed 12.5 million shares. Full-value awards include awards such as restricted stock units and performance stock units but exclude stock options.
The Company's current practice is to grant non-qualified stock options, restricted stock units ("RSUs") and/or performance stock units ("PSUs") on an annual basis to senior executives and a limited number of
other employees as part of their total compensation. RSU awards are also granted to new hires or as retention awards for certain employees.
Stock Options: The Company currently grants non-qualified stock options under the 2020 Plan. The Compensation Committee determines when the options vest and may be exercised and under what terms the options are forfeited. Options are generally granted with an exercise price equal to the market value of the Company's common stock on the date of grant. These option awards generally vest 25% per year and have a contractual term of 10 years.
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, 2020, 2019 and 2018 was $21.09, $17.87 and $18.29, respectively. The total intrinsic value of options exercised during the same periods was $159.3 million, $136.7 million and $72.9 million, respectively.
As of December 31, 2020, there was $17.5 million of unrecognized compensation cost related to the Company's option awards. The weighted-average period over which that cost is expected to be recognized is approximately 1.23 years. Cash received from the exercise of stock options for the years ended December 31, 2020, 2019 and 2018 was $72.0 million, $106.5 million and $46.7 million, respectively.
Restricted Stock Units and Performance Stock Units: The Company currently grants RSU and PSU awards under the 2020 Plan. The Compensation Committee determines the restrictions on such units, when the restrictions lapse, when the units vest and are paid, and under what terms the units are forfeited. The cost of these awards is amortized over the vesting period, which is generally three years. Dividend equivalents are not paid out unless and until such time that the award vests and shares are
distributed. For PSU's granted prior to 2020, payout is based on the achievement of the Company's performance measures, based on adjusted EPS growth as modified for executive compensation purposes and measured on a three-year annualized growth basis, and paid out generally over the three-year performance period. The Company accounts for these awards as performance condition restricted stock units. The performance condition is not considered in the determination of grant date fair value of such awards. Compensation cost is recognized over the performance period based on management’s estimate of the number of units expected to vest and shares to be paid and is adjusted to reflect the actual number of shares paid out at the end of the three-year performance period.
The assumptions used in the Monte Carlo simulation model for PSU's granted with the TSR modifier by the Company in 2020 include:
A summary of the status of the Company's RSU and PSU awards as of December 31, 2020 and changes during the period then ended is presented below:
The payout of shares in 2020 with respect to the PSU awards granted in 2017 was 168% of target based on performance for the three-year performance period. In aggregate, 354,452 shares became distributable in respect to PSUs vested in 2020.
In May 1999, the Company's stockholders approved an employee stock purchase plan (the "1999 Plan") to replace the 1994 Employee Stock Purchase Plan (the "1994 Plan"), which terminated on September 30, 1999 following its fifth annual offering. Under the current terms of the Plan, shares are purchased four times during the plan year at a price that is 95% of the average market price on each quarterly purchase date. Under the 1999 Plan, after including the available remaining unused shares in the 1994 Plan and reducing the shares available by 10,000,000 consistent with the Company's Board of Directors' action in March 2007 and the addition of 4,750,000 shares due to a shareholder action in May 2018, no more than 40,350,000 shares of the Company's common stock may be sold. Employees purchased 394,419 shares during the year ended December 31, 2020 and at December 31, 2020, 4,878,288 shares were available for issuance under the 1999 Plan. Under the 1995 Company Stock Purchase Plan for International Employees (the "International Plan"), after reflecting the additional 5,000,000 shares of common stock for issuance approved by the Company's Board of Directors in July 2002, the addition of 4,000,000 shares due to a shareholder action in May 2007 and reducing the shares available by 1,000,000 consistent with the Company's Board of Directors' action in March 2018, no more than 11,000,000 shares of the Company's common stock may be sold. Employees purchased 115,199 shares during the year ended December 31, 2020 and there were 1,156,014 shares available for issuance at December 31, 2020 under the International Plan. The plans are considered non-compensatory.
The Company has categorized its assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy as defined by the FASB. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, for disclosure purposes, is determined based on the lowest level input that is significant to the fair value measurement. Assets and liabilities recorded in the consolidated balance sheets at fair value are categorized based on the inputs in the valuation techniques as follows:
Level 3.Assets and liabilities whose values are based on prices, or valuation techniques that require inputs that are both unobservable and significant to the overall fair value
Assets and liabilities measured using Level 3 inputs relate to assets and liabilities for contingent purchase consideration.
Purchase consideration for some acquisitions and dispositions made by the Company include contingent consideration arrangements. Contingent consideration arrangements are based primarily on EBITDA or revenue targets over a period of two to four years. The fair value of contingent purchase consideration asset and liability is estimated as the present value of future cash flows to be paid, based on projections of revenue and earnings and related targets of the acquired and disposed entities.
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, 2020 and 2019:
(c) Included in other receivables at December 31, 2020 and other assets at December 31, 2019 in the consolidated balance sheets.
(d) Included in accounts payable and accrued liabilities and other liabilities in the consolidated balance sheets.
The Level 3 assets in the above chart reflect contingent purchase consideration from the sale of businesses during 2019. The change in the asset from December 31, 2019 is primarily due to the net impact of accretion and adjustments to the fair value of the acquisition related asset of approximately $15 million. A 5% increase or decrease in the projections used to estimate the contingent consideration would result in a corresponding increase or decrease of the asset of approximately $7 million.
During the year ended December 31, 2020, there were no assets or liabilities that were transferred between any of the levels.
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 $11 million for the year ended December 31, 2020. A 5% increase in the projections used to estimate the contingent consideration would increase the liability by approximately $12 million. A 5% decrease would decrease the liability by approximately $21 million.
At December 31, 2019, the Company owned approximately 443 million shares of the common stock of AF, a South African company listed on the Johannesburg Stock Exchange, which was accounted for
On September 20, 2018, the Company entered into the FX contract to purchase £5.2 billion at a contracted exchange rate, to hedge the risk of appreciation of the GBP-denominated purchase price of JLT, which was settled on April 1, 2019 upon the closing of the JLT Transaction. The FX contract did not qualify for hedge accounting treatment under applicable accounting guidance, which required the Company to record the change in the fair value of the FX contract on each reporting date to the statement of income. The Company recorded a gain of $31 million in the consolidated statement of income for the year ended December 31, 2019, related to the settlement of the FX Contract. An unrealized loss of $325 million related to the change in fair value of the FX contract was recorded in the consolidated statement of income during 2018.
In connection with the JLT Transaction, to hedge the economic risk of changes 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 senior notes issued in January 2019. The fair value of the treasury locks at December 31, 2018 was based on the published treasury rate plus the forward premium as of December 31, 2018 compared to the all in rate at the inception of the contract. The contracts were not designated as an accounting hedge. The Company recorded an unrealized loss of $116 million related to the change in the fair value of this derivative in the consolidated statement of income for the twelve months ended December 31, 2018. In January 2019, upon issuance of the $5 billion of senior notes, the Company settled the treasury lock derivatives and made a payment to its counter party for $122 million. A charge of $6 million was recorded in the first quarter of 2019 related to the settlement of the treasury lock derivatives.
JLT also had a number of foreign exchange contracts to hedge the risk of foreign exchange movements between the U.S. dollar and the British pound, related to JLT’s U.S. dollar denominated revenue in the U.K. Prior to the acquisition, these derivative contracts were designated as cash flow hedges. Upon completion of the JLT Transaction, these derivative contracts were not re-designated as cash flow hedges by the Company. The contracts were settled in June 2019. The change in fair value between the acquisition date and the settlement date resulted in a charge of $26 million for the year ended December 31, 2019. The charge is recorded as a change in fair value of acquisition related derivative contracts in the consolidated statement of income.
The Company uses discount rates to determine the present value of future lease payments. The Company primarily uses its incremental borrowing rate adjusted to reflect a secured rate, based on the information available for leases, including the lease term and interest rate environment in the country in which the lease exists. The lease terms used to calculate the ROU asset and lease liability may include options to extend or terminate when it is reasonably certain that the Company will exercise that option.
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, the Company's 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. 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.
The Company determined that $28 million and $9 million of its ROU assets were impaired, and therefore, recorded a charge to the consolidated statement of income for the year ended December 31, 2020 and 2019, respectively, with an offsetting reduction to ROU assets.
As of December 31, 2020, the Company had additional operating real estate leases that had not yet commenced of $3 million. These operating leases will commence over the next 12 months.
In December 2020, the Company repaid $700 million of maturing Senior Notes. The Company also prepaid $300 million of floating rate notes with an original maturity of December 2021.
In May 2020, the Company issued $750 million of 2.250% Senior Notes due 2030. The Company used the net proceeds from this offering to pay outstanding borrowings under the revolving credit facility discussed above.
In September 2019, the Company repaid $300 million of maturing senior notes.
During 2019, the Company issued approximately $6.5 billion of Senior Notes to primarily fund the acquisition of JLT, including the payment of related fees and expenses, and to repay certain JLT indebtedness, as well as for general corporate purposes.
In January 2020, the Company closed on $500 million one-year and $500 million two-year term loan facilities. In the first quarter of 2020 the Company borrowed $1 billion against these facilities. During the third quarter of 2020, the Company repaid $500 million of borrowings from its one-year facility. In December 2020, the Company repaid $500 million of borrowings from the two year facility. These two facilities were terminated as of December 31, 2020 after repayment of the initial draw down.
Additional credit facilities, guarantees and letters of credit are maintained with various banks, primarily related to operations located outside the United States, aggregating $573 million at December 31, 2020 and $598 million at December 31, 2019. There were no outstanding borrowings under these facilities at December 31, 2020 and December 31, 2019.
Scheduled repayments of long-term debt in 2021 and in the four succeeding years are $517 million, $516 million, $619 million, $1.6 billion and $518 million, respectively.
The fair value of the Company’s short-term debt consists primarily of term debt maturing within the next year and its fair value approximates its carrying value. The estimated fair value of a primary portion of the Company's long-term debt is based on discounted future cash flows using current interest rates available for debt with similar terms and remaining maturities. Short- and long-term debt would be classified as Level 2 in the fair value hierarchy.
The Company is completing its integration of JLT, which involves combining business practices and co-locating colleagues in most geographies, rationalization of real estate leases around the world, realization of synergies and migration of legacy JLT systems onto the Company's information technology environment and security protocols. The Company also incurred costs for consulting fees related to integration management processes and legal fees related to the rationalizing legal entity structures to reduce costs, mitigate risks and improve operational transparency.
In connection with the JLT integration and restructuring, for the year ended December 31, 2020, the Company incurred costs of $251 million: $171 million in RIS, $51 million in Consulting, $29 million in Corporate. The severance and related costs were included in compensation and benefits and the other costs were included in other operating expenses in the consolidated statement of income.
(a) Includes ROU asset impairments, data center contract termination costs and temporary infrastructure leasing costs.
(b) Includes consulting fees related to the management of the integration processes and legal fees related to the rationalization of legal entity structures.
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 completed this initiative and incurred restructuring severance and consulting costs of $54 million for the year ended December 31, 2020 related to this initiative.
In addition to the changes discussed above, the Company incurred costs of $32 million at Corporate for the year ended December 31, 2020 that reflects costs to modernize the Company's information
The following details the other restructuring liabilities for actions initiated during 2020 and prior:
The Company did not repurchase any of its common stock during 2020. During 2019, the Company repurchased 4.8 million shares of its common stock for total consideration of $485 million. In November 2019, the Board of Directors of the Company authorized the Company to repurchase up to $2.5 billion of the Company's common stock, which superseded any prior authorizations. The Company remains authorized to purchase additional shares of its common stock up to a value of approximately $2.4 billion. There is no time limit on the authorization.
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, 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 November 2020, the Company received a notice that the European Commission adopted a decision to close this investigation without taking any action.
•In 2017, JLT identified payments to a third-party introducer that had been directed to unapproved bank accounts. These payments related to reinsurance placements made on behalf of an Ecuadorian state-owned insurer between 2014 and 2017. In early 2018, JLT voluntarily reported this matter to law enforcement authorities. In February and March 2020, money laundering charges were filed in the United States against a former employee of JLT, the principals of the third-party introducer and a former official of the state-owned insurer. Three of these individuals, including the former JLT employee, have since pleaded guilty to criminal charges. We are cooperating with all ongoing investigations related to this matter.
In 2014, the FCA conducted an industry-wide review of the suitability of financial advice provided to individuals by a number of companies, including JLT, relating to enhanced transfer value ("ETV") defined benefit pension transfers. In January 2015, the FCA notified JLT that it was commissioning a Skilled Person review of ETV pension transfer advice given by JLT and a business acquired by JLT in 2012. Following the Skilled Person review which took place between 2015 and 2018, JLT engaged a compliance consulting firm to conduct an analysis of approximately 14,000 individual files to assess the suitability of the advice provided and, where appropriate, the amount of redress to be paid. In February 2019, prior to the completion of its acquisition by the Company, JLT recorded a gross liability of £59 million (or $77 million). This preliminary estimate by JLT, which reflected the projected redress amounts
contained in the Skilled Person report, was based on a review of a limited number of files. Thereafter, the FCA expanded the scope of the thematic review. As of December 31, 2020, the updated redress liability, including the projected costs of completing the review, increased to £155 million (or $210 million) resulting from the expansion in the scope of the review, and the significant progress made in completing the individual suitability reviews. We expect to finalize the suitability review of the limited number of files that remain outstanding and calculate all redress amounts by the end of the second quarter of 2021. We anticipate this gross liability will be partially offset by a contractual indemnity and insurance recoveries from third-party E&O insurers.
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, 2020, the reinsurance coverage exceeded the best estimate of the projected liability of the policies covered by the guarantee. To the extent River Thames or the reinsurer is unable to meet its obligations under those policies, a claimant may seek to recover from the Company under the guarantee.
The pending proceedings described above and other matters not explicitly described in this Note 16 on Claims, Lawsuits and Other Contingencies may expose the Company or its subsidiaries to liability for significant monetary damages, fines, penalties or other forms of relief. Where a loss is both probable and reasonably estimable, the Company establishes liabilities in accordance with FASB guidance on Contingencies - Loss Contingencies. Except as described above, the Company is not able at this time to provide a reasonable estimate of the range of possible loss attributable to these matters or the impact they may have on the Company's consolidated results of operations, financial position or cash flows. This is primarily because these matters are still developing and involve complex issues subject to inherent uncertainty. Adverse determinations in one or more of these matters could have a material impact on the Company's consolidated results of operations, financial condition or cash flows in a future period.
▪Risk and Insurance Services, comprising insurance services (Marsh) and reinsurance services (Guy Carpenter); and
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.
(b)Includes inter-segment revenue of $84 million, $82 million and $51 million in 2020, 2019 and 2018, respectively, interest income on fiduciary funds of $1 million, $4 million and $3 million in 2020, 2019 and 2018, respectively, and equity method income of $5 million, $16 million and $8 million in 2020, 2019 and 2018, respectively.
(c)Corporate assets primarily include insurance recoverables, pension related assets, the owned portion of the Company headquarters building and intercompany eliminations.
(d)Includes equity method investments of $165 million, $179 million and $57 million at December 31, 2020, 2019 and 2018, respectively.
We have audited the accompanying consolidated balance sheets of Marsh & McLennan Companies, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows, and equity for each of the three years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
The Company is 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 (“E&O”) in connection with the performance of professional services. These claims may seek damages, including punitive and treble damages, in amounts that could be significant. The Company uses case level reviews performed by inside and outside counsel, internal actuarial analysis and other methods to estimate potential losses resulting from reported and unreported claims.
•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, management’s review of the appropriateness of the assumptions used and calculation of case loss estimates, and management’s independent review of case level estimates provided by inside and outside counsel, as applicable.
•For selected E&O matters, we evaluated the reasonableness of management’s case loss estimates and, as applicable, made inquiries of the Company’s inside and outside counsel regarding the status of these matters and likelihood of settlement.
•We compared total incurred losses and current case estimates as of the balance sheet date to amounts reported in prior periods to evaluate trends and developments in reported cases.
-Comparing management’s prior-year assumptions of expected development and ultimate loss to actual amounts incurred during the current year to identify potential bias in the determination of the liability for E&O.
-Developing a range of independent estimates and comparing those to the liability for E&O recorded by the Company.
Net income attributable to the Company $ 754 $ 572 $ 316 $ 374
Dividends Paid Per Share $ 0.455 $ 0.455 $ 0.465 $ 0.465
Net income attributable to the Company $ 1.42 $ 0.66 $ 0.60 $ 0.77
As of February 12, 2021, there were 4,602 stockholders of record.