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 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 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 exchange-traded money market mutual funds).

Assets and liabilities using Level 1 inputs include exchange-traded equity securities, 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).

Assets and liabilities using Level 2 inputs include treasury locks and an equity security.

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 (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 using Level 3 inputs include liabilities for contingent purchase consideration and the deal contingent foreign exchange contract (the "FX Contract").

Valuation Techniques

Equity Securities, Money Market Funds and Mutual Funds - Level 1

Investments for which market quotations are readily available are valued at the sale price on their principal exchange or, for certain markets, official closing bid price. Money market funds are valued using a valuation technique that results in price per share at $1.00.

Treasury Locks - Level 2

In connection with the JLT Transaction, to hedge the risk of increases 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 expected issuances of senior notes in January 2019. The fair value at December 31, 2018 is 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.

Contingent Purchase Consideration Liability - Level 3

Purchase consideration for some acquisitions made by the Company includes contingent consideration arrangements. These arrangements typically provide for the payment of additional consideration if earnings and revenue targets are met 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.

Foreign Exchange Forward Contract Liabilities - Level 3

In connection with the JLT Transaction, the Company entered into the FX Contract, to hedge the risk of appreciation of the GBP-denominated purchase price. The Company will purchase £5.2 billion at a contracted exchange rate, which is discussed in Note 11. The fair value was determined using the probability distribution approach, comparing the all in forward rate to the foreign exchange rate for possible dates the JLT Transaction is expected to close, discounted to the valuation date and adjusted for the fair value of the deal contingency feature. Determining the fair value of the FX Contract requires significant management judgments or estimates about the potential closing dates of the transaction and remaining value of the deal contingency feature.The fair value related to the deal contingency feature will decrease (and any unrealized loss increase or any unrealized gain decrease) as conditions to the closing are met.

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, 2018 and 2017:



(In millions of dollars)	Identical Assets (Level 1)				Observable Inputs (Level 2)				Unobservable Inputs (Level 3)				Total
	12/31/18		12/31/17		12/31/18		12/31/17		12/31/18		12/31/17		12/31/18		12/31/17
Assets:
Financial instruments owned:
Exchange traded equity securities^(a)	$	133	$	81	$	—	$	—	$	—	$	—	$	133	$	81
Mutual funds^(a)	151		158		—		—		—		—		151		158
Money market funds^(b)	118		143		—		—		—		—		118		143
Other equity investment^(a)	—		—		8		—		—		—		8		—
Total assets measured at fair value	$	402	$	382	$	8	$	—	$	—	$	—	$	410	$	382
Fiduciary Assets:
Money market funds	$	80	$	111	$	—	$	—	$	—	$	—	$	80	$	111
U.S. Treasury Bills	20		—		—		—		—		—		20		—
Total fiduciary assets measured at fair value	$	100	$	111	$	—	$	—	$	—	$	—	$	100	$	111
Liabilities:
Contingent purchase consideration liability^(c)	$	—	$	—	$	—	$	—	$	183	$	189	$	183	$	189
Acquisition related derivative contracts	—		—		116		—		325		—		441		—
Total liabilities measured at fair value	$	—	$	—	$	116	$	—	$	508	$	189	$	624	$	189

(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, 2018, there were no assets or liabilities that were 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, 2018 and December 31, 2017.



(In millions)	2018			2017
Balance at January 1,	$	189		$	241
Additions	54			51
Payments	(91		)	(108		)
Revaluation Impact	32			3
Change in fair value of acquisition related derivative contracts	325			—
Other ^(a)	(1		)	2
Balance at December 31,	$	508		$	189

(a) Primarily reflects the impact of foreign exchange.

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 $32 million for the year ended December 31, 2018. A 5% increase in the above mentioned projections would increase the liability by approximately $43 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $35 million.

Long-Term Investments

The Company holds investments in certain private equity investments, public companies and private companies that are accounted for using the equity method of accounting. The carrying value of these investments was $287 million and $405 million at December 31, 2018 and 2017, respectively.

Investments Accounted For Using the Equity Method of Accounting

Investments in Public and Private Companies

Alexander Forbes: The Company owns approximately 33% of the common stock of Alexander Forbes, a South African company listed on the Johannesburg Stock Exchange, which it purchased in 2014 for 7.50 South African Rand per share. The shares of AF had been trading below the Company’s carrying value since November of 2017, but had traded within 10% of the Company’s carrying value through much of the first quarter of 2018. In May 2018, the trading price declined to 30% to 35% below the Company’s cost and remained at the discounted level through the third quarter of 2018. The Company considered several factors in assessing the carrying value of its investment in AF, including its financial position, the near- and long-term prospects of AF 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. However, based on the duration of time and the extent to which the shares traded below their cost, the Company could not develop sufficient objective evidence to support a recovery of the price in the relatively near future. As such, the Company concluded the decline in value of the investment was other than temporary and recorded a charge of $83 million in 2018. As of December 31, 2018, the carrying value of the Company’s investment in Alexander Forbes was approximately $144 million. As of December 31, 2018, the market value of the approximately 443 million shares of Alexander Forbes owned by the Company, based on the December 31, 2018 closing share price of 5.14 South African Rand per share, was approximately $159 million.

The Company has other investments in private insurance and consulting companies with a carrying value of $61 million and $63 million at December 31, 2018 and December 31, 2017, respectively.

The Company’s investment in Alexander Forbes and its other equity investments in private insurance and consulting companies are accounted for using the equity method of accounting, the results of which are included in revenue in the consolidated income statements and the carrying value of which is included 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.

Private Equity Investments

The Company's investments in private equity funds were $82 million and $76 million at December 31, 2018 and December 31, 2017, 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 are included in other assets in the consolidated balance sheets. The Company recorded net investment income of $16 million and $14 million for the years ended December 31, 2018 and 2017, respectively, related to these investments.

Other Investments

At December 31, 2018 and December 31, 2017 the Company held certain equity investments with readily determinable market values of $146 million and $100 million, respectively. During 2018, the Company recorded investment gains of $54 million, which reflects the increase in the market value of these investments as compared to December 31, 2017. The Company also held investments without readily determinable market values of $75 million and $56 million at December 31, 2018 and 2017, respectively. The Company recorded net gains of approximately $1 million in 2018 and 2017 on these investments.

The summarized financial information presented below reflects the aggregated financial information of all 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 investment in Alexander Forbes and 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 equity method investees:



For the Twelve Months Ended September 30,
(In millions of dollars)	2018		2017		2016
Revenue	$	733	$	628	$	843
Net investment income (a)	$	1,699	$	1,834	$	1,824
Net income	$	554	$	476	$	91



As of September 30,
(In millions of dollars)	2018		2017
Total assets	$	24,644	$	24,739
Total liabilities	$	22,257	$	22,817
Non-controlling interests	$	22	$	19

(a) Net investment income in 2018, 2017 and 2016 includes approximately $1.2 billion, $1.5 billion and $1.9 billion, respectively, related to Alexander Forbes, substantially all of which is credited to policy holders.