Fair Value Measurements

Fair Value Hierarchy

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 accounting literature. 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 1.	Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities and money market mutual funds).

Assets and liabilities utilizing Level 1 inputs include exchange-traded equity securities and mutual funds.


Level 2.	Assets and liabilities whose values are based on the following:


a)	Quoted prices for similar assets or liabilities in active markets;


b)	Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);


c)	Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and


d)	Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full asset or liability (for example, certain mortgage loans).

Assets and liabilities utilizing Level 2 inputs include corporate and municipal bonds, senior notes and interest rate swaps.

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 measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, certain commercial mortgage whole loans, and long-dated or complex derivatives including certain foreign exchange options and long-dated options on gas and power).

Liabilities utilizing Level 3 inputs include liabilities for contingent purchase consideration.

Valuation Techniques

Equity Securities and Mutual Funds - Level 1

Investments for which market quotations are readily available are valued at the sale price on their principal exchange, or official closing bid price for certain markets.

Interest Rate Swap Derivative - Level 2

The fair value of interest rate swap derivatives is based on the present value of future cash flows at each valuation date resulting from utilization of the swaps, using a constant discount rate of 1.6% compared to discount rates based on projected future yield curves. The Company settled its interest rate swap positions in July 2014.

Senior Notes due July 2014 - Level 2

In the first quarter of 2011, the Company entered into two interest rate swaps to convert interest on a portion of its Senior Notes from a fixed rate to a floating rate. The swaps are designated as fair value hedging instruments. The change in the fair value of the swaps is recorded on the balance sheet. The carrying value of the debt related to these swaps is adjusted by an equal amount. The $250 million of Senior Notes that were tied to the interest rate swaps discussed above matured in July 2014.

Contingent Purchase Consideration Liability - Level 3

Purchase consideration for some acquisitions made by the Company includes contingent consideration arrangements. Contingent consideration arrangements are primarily based on meeting EBITDA and revenue targets over periods from two to four years. The fair value of contingent consideration is estimated as the present value of future cash flows resulting from the projected revenue and earnings of the acquired 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, 2014 and 2013:



(In millions of dollars)	Identical Assets (Level 1)				Observable Inputs (Level 2)				Unobservable Inputs (Level 3)				Total
	12/31/14		12/31/13		12/31/14		12/31/13		12/31/14		12/31/13		12/31/14		12/31/13
Assets:
Financial instruments owned:
Mutual funds^(a)	$	150	$	154	$	—	$	—	$	—	$	—	$	150	$	154
Money market funds^(b)	107		45		—		—		—		—		107		45
Interest rate swap derivatives^(c)	—		—		—		3		—		—		—		3
Total assets measured at fair value	$	257	$	199	$	—	$	3	$	—	$	—	$	257	$	202
Fiduciary Assets:
Money market funds	57		—		—		—		—		—		57		—
Total fiduciary assets measured at fair value	$	57	$	—	$	—	$	—	$	—	$	—	$	57	$	—
Liabilities:
Contingent purchase consideration liability^(d)	$	—	$	—	$	—	$	—	$	207	$	104	$	207	$	104
Senior Notes due 2014^(e)	—		—		—		253		—		—		—		253
Total liabilities measured at fair value	$	—	$	—	$	—	$	253	$	207	$	104	$	207	$	357

(a) Included in other assets in the consolidated balance sheets.

(b) Included in cash and cash equivalents in the consolidated balance sheets.

(d) Included in accounts payable and accrued liabilities and other liabilities in the consolidated balance sheets.

(e) Included in long-term debt in the consolidated balance sheets.

During the year ended December 31, 2014, there were no assets or liabilities that transferred between any of the levels.

The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities for the years ended December 31, 2014 and December 31, 2013 that represent contingent purchase consideration related to acquisitions:



(In millions of dollars)	2014			2013
Balance at January 1,	$	104		$	63
Additions	114			26
Payments	(42		)	(17		)
Revaluation Impact	31			32
Balance at December 31,	$	207		$	104

The fair value of the contingent purchase consideration liability is based on projections of revenue and earnings for the acquired entities that are reassessed on a quarterly basis. As set forth in the table above, based on the Company's ongoing assessment of the fair value of contingent consideration, the Company recorded a net increase in the estimated fair value of such liabilities for prior period acquisitions of $31 million for the year ended December 31, 2014. A 5% increase in the above mentioned projections would increase the liability by approximately $22 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $26 million.

Equity Method Investments

The Company holds investments in certain private companies, public companies and certain private equity investments that are accounted for using the equity method of accounting. The carrying value of these investments amounted to $388 million and $89 million at December 31, 2014 and 2013, respectively. The Company's investments in private equity funds were $61 million and $38 million at December 31, 2014 and December 31, 2013, respectively. The carrying values of these private equity investments approximates fair value. The underlying private equity funds follow investment company accounting, where investments within the fund are carried at fair value. The Company records in earnings, investment gains/losses for its proportionate share of the change in fair value of the funds. These investments would be classified as Level 3 in the fair value hierarchy and are included in Other assets in the consolidated balance sheets.

During 2014, the Company purchased 34% of Alexander Forbes common stock. As of December 31, 2014, the carrying value of the Company’s investment in Alexander Forbes was approximately $282 million. As of December 31, 2014, the market value of the approximately 443 million shares owned by the Company, based on the December 31, 2014 closing share price of 9.5 South African Rand per share, was approximately $362 million. The Company’s investment in Alexander Forbes and its other equity investments in private companies are accounted for using the equity method of accounting and included in revenue in the consolidated income statements and in other assets in the consolidated balance sheets. The Company records its share of income or loss on its equity method investments on a one quarter lag basis since the information is not readily available in time for the Company's Form 10-Q and Form 10-K filings.

The summarized financial information presented below reflects the aggregated financial information of all significant equity method investees as of and for the twelve months ended September 30 of each year (or portion of those twelve months the company owned its investment), consistent with the Company’s recognition of the results of its equity method investments on a one quarter lag. The investment income information presented below reflects the net realized and unrealized gains/losses, net of expenses, related to the Company's investments in several private equity funds. Certain of the Company’s equity method investments, including Alexander Forbes, have unclassified balance sheets. Therefore, the asset and liability information presented below are not split between current and non-current.

Below is a summary of the financial information for the Company's significant equity method investees:



For the twelve months ended September 30,
(In millions of dollars)	2014		2013		2012
Revenue	$	239	$	148	$	144
Net investment income	$	161	$	88	$	(19	)
Net income	$	216	$	135	$	36



As of September 30,
(In millions of dollars)	2014		2013
Total assets	$	25,497	$	741
Total liabilities	$	24,209	$	136
Non controlling interests	$	14	$	3

The information above includes only two months of income statement activity for Alexander Forbes through September 30, 2014, since the Company purchased its first tranche in July 2014.