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Fair Value Measurements

3 Months Ended

Mar. 31, 2020

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 measured 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.

Assets and liabilities measured using Level 3 inputs include assets and liabilities for contingent purchase consideration and the deal contingent foreign exchange contract (the "FX Contract") discussed in more detail in Note 11.

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.

Contingent Purchase Consideration Assets and Liabilities – Level 3

Purchase consideration for some acquisitions and dispositions made by the Company include contingent consideration arrangements. Contingent consideration arrangements are based primarily on earnings before interest, tax, depreciation and amortization EBITDA or revenue targets over a period of two to four years. The fair value of the contingent purchase consideration asset and liability is estimated as the present value of future cash flows to be paid, based on projections of revenue and earnings and related targets of the acquired and disposed 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 following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.



	Identical Assets (Level 1)				Observable Inputs (Level 2)				Unobservable Inputs (Level 3)				Total
(In millions)	03/31/20		12/31/19		03/31/20		12/31/19		03/31/20		12/31/19		03/31/20		12/31/19
Assets:
Financial instruments owned:
Exchange traded equity securities^(a)	$	3	$	4	$	—	$	—	$	—	$	—	$	3	$	4
Mutual funds^(a)	138		166		—		—		—		—		138		166
Money market funds^(b)	408		55		—		—		—		—		408		55
Other equity investment^(a)	—		—		8		8		—		—		8		8
Contingent purchase consideration asset^(a)	—		—		—		—		82		84		82		84
Total assets measured at fair value	$	549	$	225	$	8	$	8	$	82	$	84	$	639	$	317
Fiduciary Assets:
U.S. Treasury Bills	$	—	$	40	$	—	$	—	$	—	$	—	$	—	$	40
Money market funds	134		360		—		—		—		—		134		360
Total fiduciary assets measured at fair value	$	134	$	400	$	—	$	—	$	—	$	—	$	134	$	400
Liabilities:
Contingent purchase consideration liability^(c)	$	—	$	—	$	—	$	—	$	239	$	225	$	239	$	225
Total liabilities measured at fair value	$	—	$	—	$	—	$	—	$	239	$	225	$	239	$	225

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

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

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

The level 3 assets in the above chart reflect contingent purchase consideration from the sale of businesses during 2019, including accretion of approximately $1 million in the first quarter of 2020.

During the three-month period ended March 31, 2020, 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 three month periods ended March 31, 2020 and 2019:



	Three Months Ended March 31,
(In millions)	2020			2019
Balance at beginning of period	$	225		$	508
Net Additions	30			11
Payments	(13		)	(35		)
Revaluation Impact	1			11
Change in fair value of the FX contract	—			(42		)
Other ^(a)	(4		)	1
Balance at March 31,	$	239		$	454

^(a)Primarily reflects the impact of foreign exchange.

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 $1 million in the three-month period ended March 31, 2020. A 5% increase in the projections used to estimate the contingent consideration would increase the liability by approximately $13 million. A 5% decrease would decrease the liability by approximately $17 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 $371 million and $434 million at March 31, 2020 and December 31, 2019, respectively.

Investments Accounted For Using the Equity Method of Accounting

Investments in Public and Private Companies

As of March 31, 2020, the carrying value of the Company’s investment in Alexander Forbes was approximately $105 million. As of that day, the market value of the approximately 394 million shares of Alexander Forbes owned by the Company, based on the March 31, 2020 closing share price of 4.28 South African Rand per share, was approximately $94 million. See Note 8 to the consolidated financial statements for additional information regarding the pending sale of an additional portion of the Company's investment in AF.

The Company has other investments in private insurance and consulting companies with a carrying value of $170 million and $183 million at March 31, 2020 and December 31, 2019, respectively.

The Company’s equity investments in insurance and consulting companies are accounted for using the equity method of accounting, the results of which are included in revenue in the consolidated statements of income 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, some of which are on a one quarter lag basis.

Private Equity Investments

The Company's investments in private equity funds were $97 million and $107 million at March 31, 2020 and December 31, 2019, respectively. The carrying values of these private equity investments approximate 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 its proportionate share of the change in fair value of the funds on the investment income line in the consolidated statements of income. These investments are included in other assets in the consolidated balance sheets. The Company recorded net investment losses of $1 million from these investments for the three month period ended March 31, 2020 compared to net investment gains of $2 million for the same period in 2019.

Other Investments

At March 31, 2020 and December 31, 2019, the Company held certain equity investments with readily determinable market values of $18 million and $19 million, respectively. The Company recorded investment losses on these investments of $1 million in the three month period ended March 31, 2020 and investment gains of $3 million for the same period in 2019. The Company also held investments without readily determinable market values of $32 million and $67 million at March 31, 2020 and December 31, 2019, respectively. 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.

- 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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