SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________________________________ 

FORM 10-Q

_____________________________________________ 

(Mark One)

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019

OR

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

_____________________________________________ 

Marsh & McLennan Companies, Inc.

1166 Avenue of the Americas

New York, New York 10036

(212) 345-5000

_____________________________________________ 

Commission file number 1-5998

State of Incorporation: Delaware

I.R.S. Employer Identification No. 36-2668272

_____________________________________________ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐(Do not check if a smaller reporting company)	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐   No  ý

As of October 25, 2019, there were outstanding 504,668,238 shares of common stock, par value $1.00 per share, of the registrant.

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains "forward-looking statements," as defined in the Private Securities Litigation Reform Act of 1995. These statements, which express management's current views concerning future events or results, use words like "anticipate," "assume," "believe," "continue," "estimate," "expect," "forecast," "intend," "plan," "project" and similar terms, and future or conditional tense verbs like "could," "may," "might," "should," "will" and "would."

Forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. Factors that could materially affect our future results include, among other things:

• our ability to successfully integrate or achieve the intended benefits of the acquisition of JLT;

• the impact of any investigations, reviews, or other activity by regulatory or law enforcement authorities, including the ongoing investigation by the European Commission competition authority;

• our organization's ability to maintain adequate safeguards to protect the security of our information systems and confidential, personal or proprietary information, particularly given the large volume of our vendor network and the need to identify and patch software vulnerabilities, including those in the existing JLT information systems;

• our ability to maintain our credit ratings and repay our outstanding long-term debt in a timely manner and on favorable terms, including approximately $6.8 billion issued in connection with the acquisition of JLT;

• the impact from lawsuits, other contingent liabilities and loss contingencies arising from errors and omissions, breach of fiduciary duty or other claims against us;

• our ability to compete effectively and adapt to changes in the competitive environment, including to respond to disintermediation, digital disruption and other types of innovation;

• the financial and operational impact of complying with laws and regulations where we operate and the risks of noncompliance with such laws, including cybersecurity and data privacy regulations such as the E.U.’s General Data Protection Regulation, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and trade sanctions regimes;

• the impact of macroeconomic, political, regulatory or market conditions on us, our clients and the industries in which we operate, including the impact and uncertainty around Brexit or the inability to collect on our receivables;

• the regulatory, contractual and reputational risks that arise based on insurance placement activities and various broker revenue streams;

• our ability to manage risks associated with our investment management and related services business, including potential conflicts of interest between investment consulting and fiduciary management services;

• our ability to successfully recover if we experience a business continuity problem due to cyberattack, natural disaster or otherwise; and

• the impact of changes in tax laws, guidance and interpretations, including certain provisions of the U.S. Tax Cuts and Jobs Act, or disagreements with tax authorities.

The factors identified above are not exhaustive. We caution readers not to place undue reliance on any forward-looking statements, which are based only on information currently available to us and speak only as of the dates on which they are made. The Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which it is made.

Further information concerning Marsh & McLennan Companies and its businesses, including information about factors that could materially affect our results of operations and financial condition, is contained in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" section and in the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of our most recently filed Annual Report on Form 10-K.

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TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION		4
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	4
	CONSOLIDATED STATEMENTS OF INCOME	4
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5
	CONSOLIDATED BALANCE SHEETS	6
	CONSOLIDATED STATEMENTS OF CASH FLOWS	8
	CONSOLIDATED STATEMENTS OF EQUITY	9
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	10
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS	42
	OF OPERATIONS
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	57
ITEM 4.	CONTROLS & PROCEDURES	58
PART II. OTHER INFORMATION		59
ITEM 1.	LEGAL PROCEEDINGS	59
ITEM 1A.	RISK FACTORS	59
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	60
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	60
ITEM 4.	MINE SAFETY DISCLOSURE	60
ITEM 5.	OTHER INFORMATION	60
ITEM 6.	EXHIBITS	60

3

PART I.    FINANCIAL INFORMATION

Item 1. Financial Statements.

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions, except per share amounts)	2019			2018			2019			2018
Revenue	$	3,968		$	3,504		$	12,388		$	11,238
Expense:
Compensation and benefits	2,437			2,083			7,256			6,442
Other operating expenses	1,064			880			3,047			2,656
Operating expenses	3,501			2,963			10,303			9,098
Operating income	467			541			2,085			2,140
Other net benefit credits	69			63			203			194
Interest income	4			2			34			8
Interest expense	(133		)	(69		)	(394		)	(198		)
Cost of extinguishment of debt	—			—			(32		)	—
Investment income (loss)	7			(52		)	20			(24		)
Acquisition related derivative contracts	—			(100		)	(8		)	(100		)
Income before income taxes	414			385			1,908			2,020
Income tax expense	108			106			531			509
Net income before non-controlling interests	306			279			1,377			1,511
Less: Net income attributable to non-controlling interests	3			3			26			14
Net income attributable to the Company	$	303		$	276		$	1,351		$	1,497
Net income per share attributable to the Company:
Basic	$	0.60		$	0.55		$	2.67		$	2.96
Diluted	$	0.59		$	0.54		$	2.64		$	2.93
Average number of shares outstanding:
Basic	506			504			506			506
Diluted	511			510			511			512
Shares outstanding at September 30,	505			504			505			504

The accompanying notes are an integral part of these unaudited consolidated statements.

4

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2019			2018			2019			2018
Net income before non-controlling interests	$	306		$	279		$	1,377		$	1,511
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments	(475		)	(237		)	(366		)	(538		)
Gain related to pension/post-retirement plans	82			23			102			131
Other comprehensive (loss), before tax	(393		)	(214		)	(264		)	(407		)
Income tax on other comprehensive loss	11			9			20			24
Other comprehensive (loss), net of tax	(404		)	(223		)	(284		)	(431		)
Comprehensive (loss) income	(98		)	56			1,093			1,080
Less: comprehensive income attributable to non-controlling interest	3			3			26			14
Comprehensive (loss) income attributable to the Company	$	(101	)	$	53		$	1,067		$	1,066

The accompanying notes are an integral part of these unaudited consolidated statements.

5

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)	(Unaudited) September 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	1,213		$	1,066
Receivables
Commissions and fees	4,636			3,984
Advanced premiums and claims	126			79
Other	575			366
	5,337			4,429
Less-allowance for doubtful accounts and cancellations	(139		)	(112		)
Net receivables	5,198			4,317
Other current assets	645			551
Total current assets	7,056			5,934
Goodwill	14,286			9,599
Other intangible assets	2,869			1,437
Fixed assets (net of accumulated depreciation and amortization of $1,944 at September 30, 2019 and $1,842 at December 31, 2018)	816			701
Pension related assets	1,857			1,688
Right of use assets	1,957			—
Deferred tax assets	603			680
Other assets	1,653			1,539
	$	31,097		$	21,578

 The accompanying notes are an integral part of these unaudited consolidated statements.

6

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

(In millions, except share amounts)	(Unaudited) September 30, 2019			December 31, 2018
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt	$	1,139		$	314
Accounts payable and accrued liabilities	2,479			2,234
Accrued compensation and employee benefits	1,762			1,778
Acquisition related derivatives	—			441
Current lease liabilities	341			—
Accrued income taxes	251			157
Dividends payable	232			—
Total current liabilities	6,204			4,924
Fiduciary liabilities	7,547			5,001
Less – cash and investments held in a fiduciary capacity	(7,547		)	(5,001		)
	—			—
Long-term debt	11,429			5,510
Pension, post-retirement and post-employment benefits	1,998			1,911
Long-term lease liabilities	1,957			—
Liabilities for errors and omissions	324			287
Other liabilities	1,388			1,362
Commitments and contingencies	—			—
Equity:
Preferred stock, $1 par value, authorized 6,000,000 shares, none issued	—			—
Common stock, $1 par value, authorized 1,600,000,000 shares, issued 560,641,640 shares at September 30, 2019 and December 31, 2018	561			561
Additional paid-in capital	796			817
Retained earnings	14,811			14,347
Accumulated other comprehensive loss	(4,931		)	(4,647		)
Non-controlling interests	177			73
	11,414			11,151
Less – treasury shares, at cost, 55,643,998 shares at September 30, 2019 and 56,804,468 shares at December 31, 2018	(3,617		)	(3,567		)
Total equity	7,797			7,584
	$	31,097		$	21,578

The accompanying notes are an integral part of these unaudited consolidated statements.

7

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES                        

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the Nine Months Ended September 30,
(In millions)	2019			2018
Operating cash flows:
Net income before non-controlling interests	$	1,377		$	1,511
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization of fixed assets and capitalized software	245			236
Amortization of intangible assets	235			135
Non cash lease expense	236			—
Adjustments and payments related to contingent consideration liability	(9		)	(10		)
Charge for early extinguishment of debt	32			—
Provision for deferred income taxes	95			66
Loss (gain) on investments	(20		)	24
Loss (gain) on disposition of assets	36			(53		)
Share-based compensation expense	184			146
Change in fair value of acquisition-related derivative contracts	8			100
Changes in assets and liabilities:
Net receivables	(84		)	(210		)
Other current assets	30			19
Other assets	(59		)	(51		)
Accounts payable and accrued liabilities	(126		)	(3		)
Accrued compensation and employee benefits	(281		)	(312		)
Accrued income taxes	120			(13		)
Contributions to pension and other benefit plans in excess of current year expense/credit	(269		)	(250		)
Other liabilities	(149		)	11
Operating lease liabilities	(240		)	—
Effect of exchange rate changes	(70		)	(27		)
Net cash provided by operations	1,291			1,319
Financing cash flows:
Purchase of treasury shares	(300		)	(675		)
Net increase in commercial paper	325			75
Net increase in short term borrowings	300			—
Proceeds from issuance of debt	6,459			592
Repayments of debt	(760		)	(10		)
Payment of bridge loan fees	—			(24		)
Payments for early extinguishment of debt	(585		)	—
Purchase of non-controlling interests	(75		)	—
Acquisition-related derivative payments	(337		)	—
Shares withheld for taxes on vested units – treasury shares	(89		)	(62		)
Issuance of common stock from treasury shares	132			72
Payments of deferred and contingent consideration for acquisitions	(60		)	(106		)
Distributions of non-controlling interests	(18		)	(15		)
Dividends paid	(655		)	(594		)
Net cash provided by (used for) financing activities	4,337			(747		)
Investing cash flows:
Capital expenditures	(284		)	(222		)
Sales (purchases) of long-term investments	193			(1		)
Purchase of equity investment	(91		)	—
Proceeds from sales of fixed assets	4			3
Dispositions	225			5
Acquisitions	(5,500		)	(536		)
Other, net	(51		)	(1		)
Net cash used for investing activities	(5,504		)	(752		)
Effect of exchange rate changes on cash and cash equivalents	23			(74		)
Increase (decrease) in cash and cash equivalents	147			(254		)
Cash and cash equivalents at beginning of period	1,066			1,205
Cash and cash equivalents at end of period	$	1,213		$	951

The accompanying notes are an integral part of these unaudited consolidated statements.

8

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions, except per share amounts)	2019			2018			2019			2018
COMMON STOCK
Balance, beginning and end of period	$	561		$	561		$	561		$	561
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period	$	736		$	732		$	817		$	784
Change in accrued stock compensation costs	65			46			23			20
Issuance of shares under stock compensation plans and employee stock purchase plans	(5		)	(7		)	(44		)	(33		)
Balance, end of period	$	796		$	771		$	796		$	771
RETAINED EARNINGS
Balance, beginning of period	$	14,741		$	14,131		$	14,347		$	13,140
Cumulative effect of adoption of the revenue recognition standard (See Note 19)	—			—			—			364
Net income attributable to the Company	303			276			1,351			1,497
Dividend equivalents declared	(2		)	(2		)	(6		)	(5		)
Dividends declared	(231		)	(209		)	(881		)	(800		)
Balance, end of period	$	14,811		$	14,196		$	14,811		$	14,196
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of period	$	(4,527	)	$	(4,265	)	$	(4,647	)	$	(4,043	)
Cumulative effect of adoption of the financial instruments standard (See Note 19)	—			—			—			(14		)
Other comprehensive loss, net of tax	(404		)	(223		)	(284		)	(431		)
Balance, end of period	$	(4,931	)	$	(4,488	)	$	(4,931	)	$	(4,488	)
TREASURY SHARES
Balance, beginning of period	$	(3,446	)	$	(3,443	)	$	(3,567	)	$	(3,083	)
Issuance of shares under stock compensation plans and employee stock purchase plans	29			31			250			171
Purchase of treasury shares	(200		)	(175		)	(300		)	(675		)
Balance, end of period	$	(3,617	)	$	(3,587	)	$	(3,617	)	$	(3,587	)
NON-CONTROLLING INTERESTS
Balance, beginning of period	$	272		$	81		$	73		$	83
Net income attributable to non-controlling interests	3			3			26			14
Net non-controlling interests (disposed) acquired	(100		)	—			95			—
Distributions and other changes	2			1			(17		)	(12		)
Balance, end of period	$	177		$	85		$	177		$	85
TOTAL EQUITY	$	7,797		$	7,538		$	7,797		$	7,538
Dividends declared per share	$	0.455		$	0.415		$	1.740		$	1.580

The accompanying notes are an integral part of these unaudited consolidated statements.

9

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.     Nature of Operations

Marsh & McLennan Companies, Inc. and its consolidated subsidiaries (the "Company"), a global professional services firm, is organized based on the different services that it offers. Under this structure, the Company’s two segments are Risk and Insurance Services and Consulting.

The Risk and Insurance Services ("RIS") segment provides risk management solutions, services, advice and insurance broking, reinsurance broking and insurance program management services for businesses, public entities, insurance companies, associations, professional services organizations, and private clients. The Company conducts business in this segment through Marsh and Guy Carpenter. The Company conducts business in its Consulting segment through Mercer and Oliver Wyman. Mercer provides consulting expertise, advice, services and solutions in the areas of health, wealth and career consulting services and products. Oliver Wyman provides specialized management and economic and brand consulting services.

On April 1, 2019, the Company completed its previously announced acquisition (the "Transaction") of all of the outstanding shares of Jardine Lloyd Thompson Group plc ("JLT"), a public company organized under the laws of England and Wales. JLT's results of operation for the three month period ended September 30, 2019 are included in the Company's results of operations for the three month period ended September 30, 2019. JLT's results of operation for the six months from April 1, 2019 to September 30, 2019 are included in the Company's results of operations for the nine month period ended September 30, 2019. Prior periods in 2018 do not reflect JLT’s results of operations and therefore may affect comparability. Prior to being acquired by the Company, JLT operated in three segments: Specialty, Reinsurance and Employee Benefits. JLT operated in 41 countries, with significant revenue in the United Kingdom, Pacific, Asia and the United States. As of April 1, 2019, the historical JLT businesses were combined into MMC operations as follows: JLT Specialty is included by geography within Marsh, JLT Reinsurance is included in Guy Carpenter and the majority of JLT's Employee Benefits business is included in Mercer Health and Wealth.

2.     Principles of Consolidation and Other Matters

The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations for interim filings, the Company believes that the information and disclosures presented are adequate to make such information and disclosures not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K").

The financial information contained herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial statements as of and for the three and nine month periods ended September 30, 2019 and 2018.

Cash and Cash Equivalents

Cash and cash equivalents primarily consist of certificates of deposit and time deposits, with original maturities of three months or less, and money market funds. The estimated fair value of the Company's cash and cash equivalents approximates their carrying value. The Company is required to maintain operating funds primarily related to regulatory requirements outside of the United States or as collateral under captive insurance arrangements. At September 30, 2019, the Company maintained $193 million compared to $186 million at December 31, 2018 related to these regulatory requirements.

Investments

The caption "Investment income" in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in earnings. It includes, when applicable, other than temporary declines in the value of securities, mark-to-market increases or decreases in equity investments with readily determinable fair values and equity method gains or losses on the Company's investments in private equity funds.

The Company holds investments in certain private equity funds that are accounted for under the equity method of accounting using a consistently applied three-month lag period adjusted for any known significant changes from the lag period to the reporting date of the Company. The underlying private equity funds follow investment company

10

accounting, where investments within the fund are carried at fair value. Investment gains or losses for the Company's proportionate share of the change in fair value of the funds are recorded in earnings. Investments accounted for using the equity method of accounting are included in "other assets" in the consolidated balance sheets.

The Company recorded net investment income of $7 million and $20 million for the three and nine month periods ended September 30, 2019 compared to net investment losses of $52 million and $24 million for the three and nine month periods ended September 30, 2018. The three and nine month periods ending September 30, 2019 includes gains of $4 million and $10 million related to mark-to-market changes in equity securities and gains of $3 million and $10 million related to investments in private equity funds and other investments. The three and nine months periods ending September 30, 2018 include an $81 million impairment charge related to an other than temporary decline in the Company's equity method investment in Alexander Forbes (see Note 10). The three and nine month periods ending September 30, 2018 also include gains of $25 million and $43 million, respectively, related to mark-to-market changes in equity securities and $4 million and $14 million, respectively, related to investments in private equity funds and other investments.

Leases

Effective January 1, 2019, the Company adopted the new accounting standard related to leases. Under the new standard, a lessee is required to recognize assets and liabilities for its leases with lease terms of more than 12 months. The Company adopted this new standard using the modified retrospective method, which applies the new guidance beginning with the year of adoption, with the cumulative effect of initially applying the standard recognized as an adjustment to retained earnings at January 1, 2019. There was no cumulative-effect adjustment required to be recorded to retained earnings upon transition. Prior period results have not been restated to reflect the adoption of this new standard.

On January 1, 2019, the Company recognized a lease liability of $1.9 billion and a corresponding right-of-use asset ("ROU asset") of $1.7 billion, including the reclassification of approximately $200 million of unamortized lease incentives and restructuring liabilities, upon the adoption of this standard, with minimal impact on the consolidated statement of income.

See Note 12 for further information related to Leases.

Income Taxes

The Company's effective tax rate in the third quarter of 2019 was 26.0% compared with 27.5% in the third quarter of 2018. The effective tax rates for the first nine months of 2019 and 2018 were 27.8% and 25.2%, respectively. The rate in the first nine months of 2019 reflects discrete adjustments related to the JLT acquisition, including tax on the disposition of JLT’s aerospace business and nondeductible expenses incurred in connection with the Transaction. The rate in the third quarter of 2018 as well as the first nine months of 2018 reflect the impact of a charge related to the Company’s investment in Alexander Forbes as discussed in Note 10, largely offset by favorable adjustments to the estimated impact of tax reform. Both periods reflect the effect of other discrete tax matters such as excess tax benefits related to share-based compensation, tax legislation, changes in uncertain tax positions, deferred tax adjustments and nontaxable adjustments to contingent acquisition consideration.

The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. When evaluating the potential imposition of penalties, the Company considers a number of relevant factors under penalty statutes, including appropriate disclosure of the tax return position, the existence of legal authority supporting the Company's position, and reliance on the opinion of professional tax advisors.

The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in tax returns. The Company's gross unrecognized tax benefits decreased from $78 million at December 31, 2018 to $76 million at September 30, 2019 due to settlements of audits and expirations of statutes of limitation partially offset by current accruals. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $7 million within the next twelve months due to settlements of audits and expirations of statutes of limitation.

Integration and Restructuring Charges

Severance and related costs are recognized based on amounts due under established severance plans or estimates of one-time benefits that will be provided. Typically, severance benefits are recognized when the impacted colleagues are notified of their expected termination and such termination is expected to occur within the legally required notification period. These costs are included in compensation and benefits in the consolidated statements of income.

11

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 their 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. These costs are included in other operating expenses in the consolidated statements of income.

Other costs related to integration and restructuring, such as moving, legal or consulting costs are recognized as incurred. These costs are included in other operating expenses in the consolidated statements of income.

3.     Revenue

The core principle of the revenue recognition guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that principle, the entity applies the following steps: identify the contract(s) with the customer, identify the performance obligations in the contract(s), determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation.

Other revenue included in the consolidated statements of income that is not from contracts with customers is less than 1% of total revenue, and therefore is not presented as a separate line item.

Risk and Insurance Services

Risk and Insurance Services revenue reflects compensation for brokerage and consulting services through commissions and fees. Commission rates and fees vary in amount and can depend upon a number of factors, including the type of insurance or reinsurance coverage provided, the particular insurer or reinsurer selected, and the capacity in which the broker acts and negotiates with clients. For the majority of the insurance and reinsurance brokerage arrangements, advice and services provided which culminate in the placement of an effective policy are considered a single performance obligation. Arrangements with clients may include the placement of a single policy, multiple policies or a combination of policy placements and other services. Consideration related to such "bundled arrangements" is allocated to the individual performance obligations based on their relative fair value. Revenue for policy placement is generally recognized on the policy effective date, at which point control over the services provided by the Company has transferred to the client and the client has accepted the services. The contractual terms for certain fee based brokerage arrangements meet the criteria for revenue recognition over time. For such arrangements, revenue is recognized using output measures, which correspond to the progress toward completing the performance obligation. Fees for non-risk transfer services provided to clients are recognized over time in the period the services are provided, using a proportional performance model, primarily based on input measures. These measures of progress provide a faithful depiction of the progress towards completion of the performance obligation.

Revenue related to reinsurance brokerage for excess of loss ("XOL") treaties is estimated based on contractually specified minimum or deposit premiums, and adjusted as additional evidence of the ultimate amount of brokerage is received. Revenue for quota share treaties is estimated based on indications of estimated premium income provided by the ceding insurer. The estimated brokerage revenue recognized for quota share treaties is constrained to an amount that is probable to not have a significant negative adjustment. The estimated revenue and the constraint are evaluated as additional evidence of the ultimate amount of underlying risks to be covered is received over the 12 to 18 months following the effective date of the placement.

In addition to commissions and fees from its clients, the Company also receives other compensation from insurance companies. This other insurer compensation includes, among other things, payments for consulting and analytics services provided to insurers, fees for administrative and other services provided to or on behalf of insurers (including services relating to the administration and management of quota shares, panels and other facilities in which insurers participate). The Company is also eligible for certain contingent commissions from insurers based on the attainment of specified metrics (i.e., volume and loss ratio measures) relating to Marsh's placements, particularly in Marsh & McLennan Agency ("MMA") and in parts of Marsh's international operations. Revenue for contingent commissions from insurers is estimated based on historical evidence of the achievement of the respective contingent metrics and recorded as the underlying policies that contribute to the achievement of the metric are placed. Due to the uncertainty of the amount of contingent consideration that will be received, the

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estimated revenue is constrained to an amount that is probable to not have a significant negative adjustment. Contingent consideration is generally received in the first quarter of the subsequent year.

A significant majority of the Company's Risk and Insurance Services revenue is for performance obligations recognized at a point in time. Marsh and Guy Carpenter also receive interest income on certain funds (such as premiums and claims proceeds) held in a fiduciary capacity for others.

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.

Reinsurance brokerage revenue is recognized on the effective date of the treaty. Payment terms depend on the type of reinsurance. For XOL treaties, brokerage revenue is typically collected in four installments during an annual treaty period based on a contractually specified minimum or deposit premium. For proportional or quota share treaties, brokerage is billed as underlying insured risks attach to the reinsurance treaty, generally over 12 to 18 months.

Consulting

The major component of revenue in the Consulting business is fees paid by clients for advice and services. Mercer, principally through its health line of business, also receives revenue in the form of commissions received from insurance companies for the placement of group (and occasionally individual) insurance contracts, primarily health, life and accident coverages. Revenue for Mercer’s investment management business and certain of Mercer’s defined benefit administration services consists principally of fees based on assets under delegated management or administration.

Consulting projects in Mercer’s wealth and career businesses, as well as consulting projects in Oliver Wyman typically consist of a single performance obligation, which is recognized over time as control is transferred continuously to customers. Typically, revenue is recognized over time using an input measure of time expended to date relative to total estimated time incurred at project completion. Incurred hours represent services rendered and thereby faithfully depicts the transfer of control to the customer.

On a limited number of engagements, performance fees may also be earned for achieving certain prescribed performance criteria. Revenue for achievement is estimated and constrained to an amount that is probable to not have a significant negative adjustment.

A significant majority of fee revenues in the Consulting segment is recognized over time.

For consulting projects, Mercer generally invoices monthly in arrears with payment due within 30 days of the invoice date. Fees for delegated management services are either deducted from the net asset value of the fund or invoiced to the client on a monthly or quarterly basis in arrears. Oliver Wyman typically bills its clients 30-60 days in arrears with payment due upon receipt of the invoice.

Health brokerage and consulting services are components of both Marsh, which includes MMA, and Mercer, with approximately 63% of such revenues reported in Mercer. Health contracts typically involve a series of distinct services that are treated as a single performance obligation. Revenue for these services is recognized over time based on the amount of remuneration the Company expects to be entitled in exchange for these services. Payments for health brokerage and consulting services are typically paid monthly in arrears from carriers based on insured lives under the contract.

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The following schedule disaggregates components of the Company's revenue:

	Three Months Ended September 30,		Nine Months Ended September 30,
(In millions)	2019		2019
Marsh:
EMEA	$	536	$	1,821
Asia Pacific	242		698
Latin America	110		304
Total International	888		2,823
U.S./Canada	1,014		2,972
Total Marsh	1,902		5,795
Guy Carpenter	273		1,328
Subtotal	2,175		7,123
Fiduciary interest income	31		80
Total Risk and Insurance Services	$	2,206	$	7,203
Mercer:
Wealth	$	592	$	1,748
Health	441		1,341
Career	247		606
Total Mercer	1,280		3,695
Oliver Wyman	505		1,563
Total Consulting	$	1,785	$	5,258

The following schedule provides contract assets and contract liabilities information from contracts with customers.

(In millions)	September 30, 2019		January 1, 2019
Contract Assets	$	240	$	112
Contract Liabilities	$	611	$	545

The Company records accounts receivable when the right to consideration is unconditional, subject only to the passage of time. Contract assets primarily relate to quota share reinsurance brokerage and contingent insurer revenue. The Company does not have the right to bill and collect revenue for quota share brokerage until the underlying policies written by the ceding insurer attach to the treaty. Estimated revenue related to achievement of volume or loss ratio metrics cannot be billed or collected until all related policy placements are completed and the contingency is resolved. The change in contract assets from January 1, 2019 to September 30, 2019 is primarily due to the addition of $58 million from JLT and $353 million of additions during the period, partly offset by $262 million transferred to accounts receivables, as the rights to bill and collect became unconditional. Contract assets are included in other current assets in the Company's consolidated balance sheet. Contract liabilities primarily relate to the advance consideration received from customers. Contract liabilities are included in current liabilities in the Company's consolidated balance sheet. The change in contract liabilities includes cash received for performance obligations not yet fulfilled of $400 million and $45 million related to JLT's opening balance offset by revenue recognized in the first nine months of 2019 that was included in the contract liability balance, at the beginning of the year of $378 million. The amount of revenue recognized in the first nine months of 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 $67 million, which includes a $17 million adjustment of previous estimates related to a multi-year Guy Carpenter contract in the third quarter of 2019.

The Company applies the practical expedient and therefore does not disclose the value of unsatisfied performance obligations for (1) contracts with original contract terms of one year or less and (2) contracts where the Company has the right to invoice for services performed. The revenue expected to be recognized in future periods during the non-cancellable term of existing contracts greater than one year that is related to performance obligations that are unsatisfied or partially satisfied at the end of the reporting period is approximately $33 million for Marsh, $127 million for Mercer and $2 million for Oliver Wyman. The Company expects revenue in 2020, 2021, 2022, 2023 and

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2024 and beyond of $107 million, $41 million, $10 million, $1 million and $3 million, respectively, related to these performance obligations.

4.     Fiduciary Assets and Liabilities

In its capacity as an insurance broker or agent, the Company collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters. The Company also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims proceeds are held by the Company in a fiduciary capacity. Risk and Insurance Services revenue includes interest on fiduciary funds ("fiduciary interest income") of $31 million and $80 million for the three and nine month periods ended September 30, 2019, respectively, and $18 million and $46 million for the three and nine month periods ending September 30, 2018, respectively. The Consulting segment recorded fiduciary interest income of less than $1 million and $2 million for the three and nine month periods ended September 30, 2019, respectively, as compared to $1 million and $3 million for the same periods in 2018. Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities.

Net uncollected premiums and claims and the related payables amounted to $9.6 billion at September 30, 2019 and $7.3 billion at December 31, 2018. The Company is not a principal to the contracts under which the right to receive premiums or the right to receive reimbursement of insured losses arises. Accordingly, net uncollected premiums and claims and the related payables are not assets and liabilities of the Company and are not included in the accompanying consolidated balance sheets.

In certain instances, the Company advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. These advances are made from corporate funds and are reflected in the accompanying consolidated balance sheets as receivables.

5.    Per Share Data

Basic net income per share attributable to the Company is calculated by dividing the after-tax income attributable to the Company by the weighted average number of outstanding shares of the Company’s common stock.

Diluted net income per share attributable to the Company is calculated by dividing the after-tax income attributable to the Company by the weighted average number of outstanding shares of the Company’s common stock, which have been adjusted for the dilutive effect of potentially issuable common shares.

Basic and Diluted EPS Calculation	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions, except per share amounts)	2019		2018		2019			2018
Net income before non-controlling interests	$	306	$	279	$	1,377		$	1,511
Less: Net income attributable to non-controlling interests	3		3		26			14
Net income attributable to the Company	$	303	$	276	$	1,351		$	1,497
Basic weighted average common shares outstanding	506		504		506			506
Dilutive effect of potentially issuable common shares	5		6		5			6
Diluted weighted average common shares outstanding	511		510		511			512
Average stock price used to calculate common stock equivalents	$	99.97	$	84.68	$	94.75	</