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 mutual funds and money market 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).

The Company does not have any assets or liabilities that utilize Level 2 inputs.

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.

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, 2015 and 2014:



(In millions of dollars)	Identical Assets (Level 1)				Observable Inputs (Level 2)				Unobservable Inputs (Level 3)				Total
	12/31/15		12/31/14		12/31/15		12/31/14		12/31/15		12/31/14		12/31/15		12/31/14
Assets:
Financial instruments owned:
Mutual funds^(a)	$	142	$	150	$	—	$	—	$	—	$	—	$	142	$	150
Money market funds^(b)	140		107		—		—		—		—		140		107
Total assets measured at fair value	$	282	$	257	$	—	$	—	$	—	$	—	$	282	$	257
Fiduciary Assets:
Money market funds	$	48	$	57	$	—	$	—	$	—	$	—	$	48	$	57
Total fiduciary assets measured at fair value	$	48	$	57	$	—	$	—	$	—	$	—	$	48	$	57
Liabilities:
Contingent purchase consideration liability^(c)	$	—	$	—	$	—	$	—	$	309	$	207	$	309	$	207
Total liabilities measured at fair value	$	—	$	—	$	—	$	—	$	309	$	207	$	309	$	207

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

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

During the year ended December 31, 2015, 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, 2015 and December 31, 2014 that represent contingent purchase consideration related to acquisitions:



(In millions of dollars)	2015			2014
Balance at January 1,	$	207		$	104
Additions	104			114
Payments	(47		)	(42		)
Revaluation Impact	45			31
Balance at December 31,	$	309		$	207

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 $45 million for the year ended December 31, 2015. A 5% increase in the above mentioned projections would increase the liability by approximately $24 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $37 million.

Long-Term 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 $347 million and $388 million at December 31, 2015 and 2014, respectively.

The Company's investments in private equity funds were $76 million and $61 million at December 31, 2015 and December 31, 2014, 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.

Alexander Forbes: During 2014, the Company acquired a 34% interest in South Africa-based Alexander Forbes Group Holding Limited ("Alexander Forbes") becoming a strategic shareholder after Alexander Forbes successfully launched an initial public offering. Mercer purchased its stake in Alexander Forbes in two tranches at 7.50 South African Rand per share for aggregate purchase consideration of approximately $300 million.

Upon completion of the acquisition, the purchase price of the Alexander Forbes shares exceeded the Company's share of the equity in net assets by approximately $146 million. The majority of this basis difference resulted from the excess of the Company’s purchase price for the Alexander Forbes common stock acquired over the book value of Alexander Forbes’ net assets. Substantially all of this basis difference was allocated, based on the fair values of Alexander Forbes’ assets and liabilities, to the value of investment contracts, customer contracts and relationships acquired and technology related intangible assets, related deferred tax liability and goodwill. The basis difference related to these intangible assets (excluding goodwill) is recorded as additional amortization expense over their estimated lives. The basis difference related to the goodwill will be recognized upon disposition of our investment.

Alexander Forbes principally focuses on employee benefits and investment solutions for institutional clients, and financial wellbeing and retail financial solutions for individual clients. Services include retirement funds and investment consulting, actuarial and administration services, employee risk benefits and health-care consulting, multi-manager investments solutions, and personal lines and business insurance.

As of December 31, 2015, the carrying value of the Company’s investment in Alexander Forbes was approximately $230 million. As of December 31, 2015, the market value of the approximately 443 million shares owned by the Company, based on the December 31, 2015 closing share price of 5.78 South African Rand per share, was approximately $166 million. During 2015, the share price of Alexander Forbes ranged from 5.32 Rand to 10.38 Rand. The trading price first dropped below MMC's purchase price in November 2015. The Company considered several factors related to its investment in Alexander Forbes, including its financial position, the near- and long-term prospects of Alexander Forbes and the broader South African economy and capital markets, the length of time and extent to which the market value was below cost, and the Company’s intent and ability to retain the investment for a sufficient period of time to allow for anticipated recovery in market value. As a result, the Company determined the investment was not impaired.

The carrying value of the Company’s investment in Alexander Forbes and its other investments in private companies that are accounted for using the equity method of accounting is included in other assets in the consolidated balance sheets and the related results are included in revenue in the consolidated income statements. The Company records its share of income or loss on its equity method investments on a one quarter lag basis.

On February 24, 2015, Mercer purchased shares of common stock of Benefitfocus (NASDAQ:BNFT) constituting approximately 9.9% of BNFT's outstanding capital stock as of the acquisition date. The purchase price for the BNFT shares and certain other rights and other consideration was approximately $75 million. The Company has elected to account for this investment under the cost method of accounting as the shares purchased are categorized as restricted and cannot be sold for more than one year. Effective January 1, 2017, these shares will be be accounted for as available for sale securities and classified as Level 2 in the fair value hierarchy and included in other assets in the consolidated balance sheets. The value of the BNFT shares based on the closing price on the NASDAQ at December 31, 2015 and without regard to the restrictions on sale was approximately $102 million.

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)	2015		2014		2013
Revenue	$	1,018	$	239	$	148
Net investment income (a)	$	1,620	$	161	$	88
Net income	$	196	$	216	$	135



As of September 30,
(In millions of dollars)	2015		2014
Total assets	$	21,101	$	25,497
Total liabilities	$	19,348	$	24,209
Non-controlling interests	$	12	$	14

The information above includes twelve months of income statement activity for Alexander Forbes in 2015 and two months of activity in 2014, reflecting the timing of the Company's investment.

(a) Net investment income in 2015 includes approximately $1.5 billion related to Alexander Forbes, substantially all of which is credited to policy holders.