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, 2013 (the “2013 10-K”).

The financial information contained herein reflects all adjustments consisting only of 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-month periods ended March 31, 2014 and 2013.

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 of approximately $190 million related to regulatory requirements outside the U.S. or as collateral under captive insurance arrangements.

Investment Income

The caption “Investment income” in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in current earnings. It includes, when applicable, other than temporary declines in the value of debt and available for sale securities and the change in value of the Company’s holdings in certain private equity funds, including equity method gains (losses) on its investment in the Trident funds. The Company’s investments may include direct investments in insurance or consulting companies and investments in private equity funds. Trident II fully harvested all its portfolio investments and made final distributions to its partners during the fourth quarter of 2013. As of the end of 2013, the Company recognized all the performance fees related to its general partnership interest in Trident II. The Company recorded gains on its investment in Trident II of $20 million, including $15 million of deferred performance fees, for the three months ended March 31, 2013. Investment income for the three months ended March 31, 2014 includes performance fees of $7 million from Trident III which had been deferred, and that are no longer subject to claw-back, and also includes approximately $6 million of mark-to-market gains in the Company's private equity investments. At March 31, 2014, the Company had deferred performance fees of approximately $35 million related to Trident III. Recognition of these deferred performance fees will only occur as investments are harvested and the performance fees are no longer subject to claw-back. Timing of this is unknown and is not controlled by the Company.

Income Taxes

The Company's effective tax rate in the first quarter of 2014 was 29.5%. The rate reflects the impact of non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation. The effective tax rate for the first quarter of 2013 was 29.9%.

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

$128 million at December 31, 2013 to $117 million at March 31, 2014. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $27 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.

Reclassifications

In the first quarter of 2014, the Company enhanced its operating cash flow presentation within the statement of cash flows to show on single lines the impact of pension and other benefit plan contributions in excess of the related expenses, and the non-cash impact of equity share awards. Previously, the cash flow impact of those items was presented as part of changes in other assets and other liabilities, and changes in other liabilities, respectively. The prior year’s presentation was conformed to the current presentation for the following line items within operating cash flows:


•	Share based compensation expense


•	Changes in other assets


•	Contributions to pension and other benefit plans in excess of current year expense/credit


•	Changes in other liabilities