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Fair Value Measurements

12 Months Ended

Dec. 31, 2019

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).

Assets and 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 was 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. These treasury locks were settled during the first quarter of 2019.

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 settled the FX contract on April 1, 2019, upon completion of the JLT Transaction.

The fair value at December 31, 2018, was determined using the probability distribution approach, comparing the all in forward rate to the foreign exchange rate for possible dates the JLT Transaction could 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 required significant management judgments or estimates about the potential closing dates of the transaction and remaining value of the deal contingency feature.

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, 2019 and 2018:



(In millions of dollars)	Identical Assets (Level 1)				Observable Inputs (Level 2)				Unobservable Inputs (Level 3)				Total
	12/31/19		12/31/18		12/31/19		12/31/18		12/31/19		12/31/18		12/31/19		12/31/18
Assets:
Financial instruments owned:
Exchange traded equity securities^(a)	$	4	$	133	$	—	$	—	$	—	$	—	$	4	$	133
Mutual funds^(a)	166		151		—		—		—		—		166		151
Money market funds^(b)	55		118		—		—		—		—		55		118
Other equity investment^(a)	—		—		8		8		—		—		8		8
Contingent purchase consideration asset^(a)	—		—		—		—		84		—		84		—
Total assets measured at fair value	$	225	$	402	$	8	$	8	$	84	$	—	$	317	$	410
Fiduciary Assets:
Money market funds	$	360	$	80	$	—	$	—	$	—	$	—	$	360	$	80
U.S. Treasury Bills	40		20		—		—		—		—		40		20
Total fiduciary assets measured at fair value	$	400	$	100	$	—	$	—	$	—	$	—	$	400	$	100
Liabilities:
Contingent purchase consideration liability^(c)	$	—	$	—	$	—	$	—	$	225	$	183	$	225	$	183
Acquisition related derivative contracts	—		—		—		116		—		325		—		441
Total liabilities measured at fair value	$	—	$	—	$	—	$	116	$	225	$	508	$	225	$	624

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

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

The level 3 assets in the above chart reflects contingent purchase consideration from the sale of businesses during 2019, including accretion of approximately $2 million.

During the year ended December 31, 2019, 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, 2019 and December 31, 2018.



(In millions)	2019			2018
Balance at January 1,	$	508		$	189
Additions	36			54
Payments	(63		)	(91		)
Revaluation Impact	70			32
Change in fair value of acquisition related derivative contracts	(325		)	325
Other ^(a)	(1		)	(1		)
Balance at December 31,	$	225		$	508

(a) Primarily reflects the impact of foreign exchange.

The fair value of the contingent purchase consideration asset and liability is based on projections of revenue and earnings for the acquired or disposed 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 $70 million for the year ended December 31, 2019. A 5% increase in the above mentioned projections would increase the liability by approximately $25 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $28 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 $434 million and $287 million at December 31, 2019 and 2018, respectively.

Investments Accounted For Using the Equity Method of Accounting

Investments in Public and Private Companies

Alexander Forbes: The Company owns approximately 34% 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. In the third quarter of 2018, 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, 2019, the carrying value of the Company’s investment in Alexander Forbes was approximately $144 million. As of December 31, 2019, the market value of the approximately 443 million shares of Alexander Forbes owned by the Company, based on the December 31, 2019 closing share price of 5.55 South African Rand per share, was approximately $173 million. See Note 5 to the consolidated financial statements for additional information regarding the pending sale of the Company's remaining investment in AF.

The Company has other investments in private insurance and consulting companies with a carrying value of $183 million and $61 million at December 31, 2019 and December 31, 2018, 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 $107 million and $82 million at December 31, 2019 and December 31, 2018, 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 $13 million and $16 million for the years ended December 31, 2019 and 2018, respectively, related to these investments.

Other Investments

At December 31, 2019 and December 31, 2018 the Company held certain equity investments with readily determinable market values of $19 million and $146 million, respectively. In 2019 and 2018, the Company recorded investment gains of $10 million and $54 million, respectively, which reflects the mark-to-market changes in equity securities. The Company also held investments without readily determinable market values of $67 million and $75 million at December 31, 2019 and 2018, respectively. The Company recorded a net loss of approximately $1 million in 2019 and a net gain of approximately $1 million in 2018 on these investments. In March 2019, the Company disposed of its investment in BenefitFocus for total proceeds of approximately $132 million. The Company received $115 million in the first quarter of 2019 and $17 million in April 2019 as final settlement on the sale. During the second quarter of 2019, the Company disposed of its investment in Payscale and received proceeds of approximately $47 million.

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)	2019		2018		2017
Revenue	$	719	$	733	$	628
Net investment income (a)	$	959	$	1,699	$	1,834
Net income	$	482	$	554	$	476



As of September 30,
(In millions of dollars)	2019		2018
Total assets	$	23,366	$	24,644
Total liabilities	$	21,013	$	22,257
Non-controlling interests	$	23	$	22

(a) Net investment income in 2019, 2018 and 2017 includes approximately $645 million, $1.2 billion and $1.5 billion, respectively, related to Alexander Forbes, substantially all of which is credited to policy holders.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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