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Marsh & McLennan Companies 10-Q 2011
MMC-9.30.11 10Q
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
_____________________________________________ 
FORM 10-Q Filing
_____________________________________________ 
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2011
_____________________________________________ 
Marsh & McLennan Companies, Inc.

1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
_____________________________________________ 
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
_____________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting Company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer  x
  
Accelerated Filer  ¨
 
 
Non-Accelerated Filer  ¨(Do not check if a smaller reporting company)
  
Smaller Reporting Company  ¨
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
As of October 31, 2011, there were outstanding 537,968,459 shares of common stock, par value $1.00 per share, of the registrant.
 



INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995. These statements, which express management's current views concerning future events or results, use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would.” For example, we may use forward-looking statements when addressing topics such as: the outcome of contingencies; the expected impact of acquisitions and dispositions; pension obligations; market and industry conditions; changes in our business strategies and methods of generating revenue; the development and performance of our services and products; changes in the composition or level of our revenues; our cost structure and the outcome of cost-saving or restructuring initiatives; dividend policy; cash flow and liquidity; future actions by regulators; and the impact of changes in accounting rules.
Forward-looking statements are subject to inherent risks and uncertainties. Factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements include, among other things:

our exposure to potential liabilities arising from errors and omissions claims against us, particularly in our Marsh and Mercer businesses;
our ability to make strategic acquisitions and dispositions and to integrate, and realize expected synergies, savings or strategic benefits from the businesses we acquire;
changes in the funded status of our global defined benefit pension plans and the impact of any increased pension funding resulting from those changes;
the impact of any regional, national or global political, economic, regulatory or market conditions on our results of operations and financial condition;
the impact on our net income caused by fluctuations in foreign currency exchange rates;
the impact on our net income or cash flows and our effective tax rate in a particular period caused by settled tax audits and expired statutes of limitation;
the extent to which we retain existing clients and attract new business, and our ability to incentivize and retain key employees;
our exposure to potential criminal sanctions or civil remedies if we fail to comply with foreign and U.S. laws and regulations that are applicable to our international operations, including import and export requirements, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the UK Bribery Act 2010, local laws prohibiting corrupt payments to government officials, as well as various trade sanctions laws;
the impact of competition, including with respect to pricing;
the potential impact of rating agency actions on our cost of financing and ability to borrow, as well as on our operating costs and competitive position;
our ability to successfully recover should we experience a disaster or other business continuity problem;
changes in applicable tax or accounting requirements; and
potential income statement effects from the application of FASB's ASC Topic No. 740 (“Income Taxes”) regarding accounting treatment of uncertain tax benefits and valuation allowances, including the effect of any subsequent adjustments to the estimates we use in applying this accounting standard.
 

The factors identified above are not exhaustive. Marsh & McLennan Companies and its subsidiaries operate in a dynamic business environment in which new risks may emerge frequently. Accordingly, we caution readers not to place undue reliance on the above forward-looking statements, which speak only as of the dates on which they are made. The Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which it is made. Further information concerning Marsh & McLennan Companies and its businesses, including information about factors that could materially affect our results of operations and financial condition, is contained in the Company's filings with the Securities and Exchange Commission, including the “Risk Factors” section of our most recently filed Annual Report on Form 10-K.




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TABLE OF CONTENTS
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.


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PART I.    FINANCIAL INFORMATION
 
Item 1.
Financial Statements.

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share figures)
2011

 
2010

 
2011

 
2010

Revenue
$
2,806

 
$
2,524

 
$
8,618

 
$
7,765

Expense:
 
 
 
 
 
 
 
Compensation and benefits
1,753

 
1,586

 
5,202

 
4,775

Other operating expenses
743

 
699

 
2,169

 
2,376

Operating expenses
2,496

 
2,285

 
7,371

 
7,151

Operating income
310

 
239

 
1,247

 
614

Interest income
9

 
6

 
21

 
13

Interest expense
(49
)
 
(60
)
 
(149
)
 
(180
)
Cost of extinguishment of debt
(72
)
 

 
(72
)
 

Investment income (loss)

 
(2
)
 
13

 
24

Income before income taxes
198

 
183

 
1,060

 
471

Income tax expense
65

 
55

 
322

 
98

Income from continuing operations
133

 
128

 
738

 
373

Discontinued operations, net of tax
2

 
43

 
17

 
292

Net income before non-controlling interests
135

 
171

 
755

 
665

Less: Net income attributable to non-controlling interests
5

 
3

 
18

 
13

Net income attributable to the Company
$
130

 
$
168

 
$
737

 
$
652

Basic net income per share – Continuing operations
$
0.24

 
$
0.23

 
$
1.32

 
$
0.66

– Net income attributable to the Company
$
0.24

 
$
0.30

 
$
1.35

 
$
1.19

Diluted net income per share – Continuing operations
$
0.23

 
$
0.22

 
$
1.30

 
$
0.65

 –Net income attributable to the Company
$
0.24

 
$
0.30

 
$
1.33

 
$
1.18

Average number of shares outstanding – Basic
540

 
543

 
543

 
539

                               – Diluted
549

 
548

 
552

 
543

Shares outstanding at September 30,
538

 
543

 
538

 
543

The accompanying notes are an integral part of these consolidated statements.


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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(In millions of dollars)
September 30,
2011

 
December 31,
2010

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,714

 
$
1,894

Receivables
 
 
 
Commissions and fees
2,682

 
2,544

Advanced premiums and claims
83

 
96

Income tax receivable
46

 
323

Other
226

 
186

 
3,037

 
3,149

Less-allowance for doubtful accounts and cancellations
(112
)
 
(114
)
Net receivables
2,925

 
3,035

Other current assets
391

 
347

Total current assets
5,030

 
5,276

Goodwill and intangible assets
6,933

 
6,823

Fixed assets
(net of accumulated depreciation and amortization of $1,483 at September 30, 2011 and $1,411 at December 31, 2010)
804

 
822

Pension related assets
477

 
265

Deferred tax assets
1,084

 
1,205

Other assets
793

 
919

 
$
15,121

 
$
15,310

 
The accompanying notes are an integral part of these consolidated statements.


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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
 
(In millions of dollars)
September 30,
2011

 
December 31,
2010

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
260

 
$
8

Accounts payable and accrued liabilities
1,819

 
1,741

Accrued compensation and employee benefits
1,106

 
1,294

Accrued income taxes
80

 
62

Dividends payable
119

 

Total current liabilities
3,384

 
3,105

Fiduciary liabilities
4,118

 
3,824

Less – cash and investments held in a fiduciary capacity
(4,118
)
 
(3,824
)
 

 

Long-term debt
2,670

 
3,026

Pension, postretirement and postemployment benefits
1,148

 
1,211

Liabilities for errors and omissions
446

 
430

Other liabilities
1,008

 
1,123

Commitments and contingencies
 
 
 
Equity:
 
 
 
Preferred stock, $1 par value, authorized 6,000,000 shares, none issued

 

Common stock, $1 par value, authorized
 
 
 
1,600,000,000 shares, issued 560,641,640 shares at September 30, 2011 and December 31, 2010
561

 
561

Additional paid-in capital
1,123

 
1,185

Retained earnings
7,696

 
7,436

Accumulated other comprehensive loss
(2,333
)
 
(2,300
)
Non-controlling interests
58

 
47

 
7,105

 
6,929

Less – treasury shares, at cost, 23,079,851 shares at September 30, 2011 and 20,132,120 shares at December 31, 2010
(640
)
 
(514
)
Total equity
6,465

 
6,415

 
$
15,121

 
$
15,310

The accompanying notes are an integral part of these consolidated statements.


- 6 -


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30,
 
 
 
(In millions of dollars)
2011

 
2010

Operating cash flows:
 
 
 
Net income before non-controlling interests
$
755

 
$
665

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization of fixed assets and capitalized software
200

 
222

Amortization of intangible assets
50

 
52

Charge for early extinguishment of debt
72

 

Provision for deferred income taxes
91

 
(40
)
Gain on investments
(12
)
 
(21
)
Loss (gain) on disposition of assets
1

 
(23
)
Stock option expense
16

 
14

Changes in assets and liabilities:
 
 
 
Net receivables
122

 
(248
)
Other current assets
(83
)
 
(16
)
Other assets
(184
)
 
(167
)
Accounts payable and accrued liabilities
90

 
(33
)
Accrued compensation and employee benefits
(188
)
 
(269
)
Accrued income taxes
12

 
(23
)
Other liabilities
93

 
(117
)
Effect of exchange rate changes
(40
)
 
54

Net cash provided by operations
995

 
50

Financing cash flows:
 
 
 
Purchase of treasury shares
(361
)
 

Proceeds from issuance of debt
496

 

Repayments of debt
(8
)
 
(557
)
Payments for early extinguishment of debt
(672
)
 

Purchase of non-controlling interests
(21
)
 
(15
)
Shares withheld for taxes on vested units – treasury shares
(90
)
 
(54
)
Issuance of common stock
123

 
28

Dividends paid
(358
)
 
(333
)
Net cash used for financing activities
(891
)
 
(931
)
Investing cash flows:
 
 
 
Capital expenditures
(205
)
 
(193
)
Net sales of long-term investments
64

 
58

Proceeds from sales of fixed assets
4

 
3

Dispositions
1

 
1,194

Acquisitions
(134
)
 
(248
)
Other, net
(3
)
 
3

Net cash provided by (used for) investing activities
(273
)
 
817

Effect of exchange rate changes on cash and cash equivalents
(11
)
 
(18
)
Decrease in cash and cash equivalents
(180
)
 
(82
)
Cash and cash equivalents at beginning of period
1,894

 
1,777

Cash and cash equivalents at end of period
$
1,714

 
$
1,695

The accompanying notes are an integral part of these consolidated statements.

- 7 -


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
(Unaudited)
 
For the Nine Months Ended September 30,
 
 
 
(In millions, except per share figures)
2011

 
2010

COMMON STOCK
 
 
 
Balance, beginning and end of year
$
561

 
$
561

ADDITIONAL PAID-IN CAPITAL
 
 
 
Balance, beginning of year
$
1,185

 
$
1,211

Change in accrued stock compensation costs
(50
)
 
(25
)
Issuance of shares under stock compensation plans and employee stock purchase plans and related tax impact
(10
)
 
(12
)
Purchase of subsidiary shares from non-controlling interests
(2
)
 

Issuance of shares for acquisitions

 
(15
)
Balance, end of period
$
1,123

 
$
1,159

RETAINED EARNINGS
 
 
 
Balance, beginning of year
$
7,436

 
$
7,033

Net income attributable to the Company (a)
737

 
652

Dividend equivalents paid
(11
)
 
(12
)
Dividends declared – (per share amounts: $0.86 in 2011 and $0.81 in 2010)
(466
)
 
(437
)
Balance, end of period
$
7,696

 
$
7,236

ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS)
 
 
 
Balance, beginning of year
$
(2,300
)
 
$
(2,171
)
Foreign currency translation adjustments (b)
(113
)
 
(44
)
Unrealized investment holding losses, net of reclassification adjustments (c)
(5
)
 
(11
)
Net changes under benefit plans, net of tax (d)
85

 
88

Balance, end of period
$
(2,333
)
 
$
(2,138
)
TREASURY SHARES
 
 
 
Balance, beginning of year
$
(514
)
 
$
(806
)
Issuance of shares under stock compensation plans and employee stock purchase plans
235

 
160

Issuance of shares for acquisitions

 
198

Purchase of treasury shares
(361
)
 

Balance, end of period
$
(640
)
 
$
(448
)
NON-CONTROLLING INTERESTS
 
 
 
Balance, beginning of year
$
47

 
$
35

Net income attributable to non-controlling interests (e)
18

 
13

Other changes
(7
)
 
(3
)
Balance, end of period
$
58

 
$
45

TOTAL EQUITY
$
6,465

 
$
6,415

TOTAL COMPREHENSIVE INCOME (a+b+c+d+e)
$
722

 
$
698

The accompanying notes are an integral part of these consolidated statements.

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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.     Nature of Operations
Marsh & McLennan Companies, Inc. (“the Company”), a global professional services firm, is organized based on the different services that it offers. Under this organizational structure, the Company’s two business segments are Risk and Insurance Services and Consulting.
The Risk and Insurance Services segment provides risk management and insurance broking, reinsurance broking and insurance program management services for businesses, public entities, insurance companies, associations, professional services organizations, and private clients. The Company conducts business in this segment through Marsh and Guy Carpenter.
In January 2011, Marsh acquired RJF Agencies, an independent insurance agency in the upper Midwest region of the U.S. In February 2011, Marsh acquired Hampton Roads Bonding, a surety bonding agency for commercial, road, utility, maritime and government contractors in the state of Virginia, and the Boston office of Kinloch Consulting Group, Inc. In July 2011, Marsh acquired Prescott Pailet Benefits, an employee benefits broker in the state of Texas.
In the first quarter of 2010, Marsh acquired Haake Companies, Inc., an insurance broking firm in the Midwest region and Thomas Rutherfoord, Inc., an insurance broking firm in the Southeast and mid-Atlantic regions of the U.S. In the second quarter of 2010, Marsh acquired HSBC Insurance Brokers Ltd., an international provider of risk intermediary and risk advisory services and the Bostonian Group Insurance Agency, Inc. and Bostonian Solutions, Inc. (collectively the “Bostonian Group”), a regional insurance brokerage in New England. In the fourth quarter of 2010 Marsh acquired Trion, a U.S. private benefits specialist and SBS, a Georgia-based benefits brokerage and consulting firm.
The Consulting segment provides advice and services to the managements of organizations in the area of human resource consulting, comprising retirement and investments, health and benefits, outsourcing and talent; and strategy and risk management consulting, comprising management, economic and brand consulting. The Company conducts business in this segment through Mercer and Oliver Wyman Group. In the first quarter of 2011, Mercer acquired Hammond Associates, an investment consulting company for endowments and foundations in the U.S. In June 2011, Mercer acquired Evaluation Associates LLC, an investment consulting firm. In July 2011, Mercer acquired Mahoney Associates, a health and benefits advisory firm based in south Florida. In July 2010, Mercer acquired Innovative Process Administration (“IPA”), a provider of health and benefit recordkeeping and employee enrollment technology. In August 2010, Mercer acquired ORC Worldwide, a premier provider of HR knowledge, data and solutions for professionals in numerous industries.
On August 3, 2010, the Company completed the sale of Kroll, the Company’s former Risk Consulting & Technology segment, to Altegrity, Inc. (“Altegrity”) for cash consideration of $1.13 billion. In the first quarter of 2010, Kroll completed the sale of Kroll Laboratory Specialists (“KLS”). The gain on the sale of Kroll and related tax benefits and the after-tax loss on the sale of KLS, along with Kroll’s, and KLS’s 2010 comparative results of operations are included in discontinued operations in 2010.
With the sale of Kroll in August 2010, along with previous divestiture transactions between 2008 and 2010, the Company has divested its entire Risk Consulting & Technology segment. The run-off of the Company’s involvement in the Corporate Advisory and Restructuring business (“CARG”), previously part of Risk Consulting & Technology, in which the Company has “continuing involvement” as defined in SEC Staff Accounting Bulletin Topic 5e, is now managed by the Company’s corporate departments. Consequently, the financial results of the CARG businesses are included in “Corporate” for segment reporting purposes.

2.     Principles of Consolidation and Other Matters
The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to such rules and regulations for interim filings, although the Company believes that the information and disclosures presented are adequate to make such information and disclosure not misleading. These consolidated financial statements should be read in conjunction with the

- 9 -


consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 10-K”).
The financial information contained herein reflects all adjustments consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s results of operations for the three and nine-month periods ended September 30, 2011 and 2010.
Investment Income (Loss)
The caption “investment income (loss)” in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in current earnings. It includes, when applicable, other than temporary declines in the value of available for sale securities and the change in value of the Company’s holdings in certain private equity funds. The Company’s investments may include direct investments in insurance or consulting companies and investments in private equity funds. This line includes equity method gains/(losses) of $0 million and $(4) million for the three months ended September 30, 2011 and 2010, respectively, and $14 million and $13 million for the nine months ended September 30, 2011 and 2010, respectively.
The Company has an investment in Trident II limited partnership, a private equity investment fund. At September 30, 2011, the Company’s investment in Trident II was approximately $84 million, reflected in other assets in the consolidated balance sheet. The Company’s maximum exposure to loss is equal to its investment plus any calls on its remaining capital commitment of $67 million. Since this fund is closed to new investments, none of the remaining capital commitment is expected to be called.
Income Taxes
The Company’s effective tax rate in the third quarter of 2011 was 32.8%. The rate reflects non-U.S. earnings subject to tax at rates below the U.S. statutory rate, partially offset by a deferred tax charge from re-measuring deferred tax assets for legislation that reduced tax rates in the U.K. The 30.4% effective tax rate for the first nine months of 2011 primarily reflects non-U.S. earnings subject to tax at rates below the U.S. statutory rate.
The Company reported an effective tax rate of 30.0% in the third quarter of 2010. The 20.8% effective tax rate for the first nine months of 2010 primarily reflects the combination of the tax benefit related to the Alaska settlement, determined at U.S. tax rates, with other pretax income that is subject to lower average effective tax rates applicable worldwide. Excluding the impact of the Alaska settlement, the effective tax rate for the first nine months of 2010 was 29.6%.
The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. When appropriate, the Company establishes liabilities for uncertain tax positions in relation to the potential assessments, including the possible assessment of penalties. When establishing this liability, the Company considers a number of relevant factors under penalty statutes, including appropriate disclosure of the tax return position, the existence of legal authority supporting the Company’s position, and reliance on the opinion of professional tax advisors.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in the tax return. The Company’s gross unrecognized tax benefits decreased from $199 million at December 31, 2010 to $154 million at September 30, 2011, primarily reflecting the effective settlement of issues on audit. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $80 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.
Other Matters Impacting Results in Prior Periods
In June 2010, the Company settled a lawsuit brought by the Alaska Retirement Management Board (“ARMB”) against Mercer. Under the terms of the settlement agreement, Mercer paid $500 million, of which $100 million was covered by insurance, and recognized a charge of $400 million in the second quarter of 2010.

3.     Fiduciary Assets and Liabilities
In its capacity as an insurance broker or agent, the Company collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters. The Company also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims proceeds are held

- 10 -


by the Company in a fiduciary capacity. Risk and Insurance Services revenue includes interest on fiduciary funds of $36 million and $33 million for the nine-month periods ended September 30, 2011 and 2010. The Consulting segment recorded fiduciary interest income of $3 million in each of the nine-month periods ended September 30, 2011 and 2010. Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities.
Fiduciary assets include approximately $102 million and $283 million of fixed income securities classified as available for sale at September 30, 2011 and December 31, 2010, respectively. Unrealized gains or losses from available for sale securities are recorded in other comprehensive income until the securities are disposed of, mature or recognized as an other than temporary impairment. Unrealized gains, net of tax, were $1 million and $5 million at September 30, 2011 and December 31, 2010, respectively.
Net uncollected premiums and claims and the related payables amounted to $9.1 billion at both September 30, 2011 and December 31, 2010. The Company is not a principal to the contracts under which the right to receive premiums or the right to receive reimbursement of insured losses arises. Net uncollected premiums and claims and the related payables are, therefore, not assets and liabilities of the Company and are not included in the accompanying consolidated balance sheets.
In certain instances, the Company advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. These advances are made from corporate funds and are reflected in the accompanying consolidated balance sheets as receivables.

4.    Per Share Data
Under the accounting guidance which applies to the calculation of earnings per share (“EPS”) for share-based payment awards with rights to dividends or dividend equivalents, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the computation of basic and dilutive EPS using the two-class method.
Basic net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income attributable to common shares by the weighted average number of outstanding shares of the Company’s common stock.
Diluted net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income attributable to common shares by the weighted average number of outstanding shares of the Company’s common stock, which have been adjusted for the dilutive effect of potentially issuable common shares (excluding those that are considered participating securities). The diluted earnings per share calculation reflects the more dilutive effect of either (a) the two-class method that assumes that the participating securities have not been exercised or (b) the treasury stock method. Reconciliation of the applicable income components used for diluted earnings per share and basic weighted average common shares outstanding to diluted weighted average common shares outstanding is presented below.
 
Basic EPS Calculation
Continuing Operations
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share figures)
2011

 
2010

 
2011

 
2010

Net income from continuing operations
$
133

 
$
128

 
$
738

 
$
373

Less: Net income attributable to non-controlling interests
5

 
3

 
18

 
13

Net income from continuing operations attributable to the Company
128

 
125

 
720

 
360

Less: Portion attributable to participating securities
1

 
3

 
5

 
7

Net income attributable to common shares for basic earnings per share
$
127

 
$
122

 
$
715

 
$
353

Basic weighted average common shares outstanding
540

 
543

 
543

 
539


- 11 -


Basic EPS Calculation
Net Income
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share figures)
2011

 
2010

 
2011

 
2010

Net income attributable to the Company
$
130

 
$
168

 
$
737

 
$
652

Less: Portion attributable to participating securities
1

 
3

 
5

 
11

Net income attributable to common shares for basic earnings per share
$
129

 
$
165

 
$
732

 
$
641

Basic weighted average common shares outstanding
540

 
543

 
543

 
539

Diluted EPS Calculation
Continuing Operations
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share figures)
2011

 
2010

 
2011

 
2010

Net income from continuing operations
$
133

 
$
128

 
$
738

 
$
373

Less: Net income attributable to non-controlling interests
5

 
3

 
18

 
13

Net income from continuing operations attributable to the Company
128

 
125

 
720

 
360

Less: Portion attributable to participating securities
1

 
3

 
5

 
7

Net income attributable to common shares for diluted earnings per share
$
127

 
$
122

 
$
715

 
$
353

Basic weighted average common shares outstanding
540

 
543

 
543

 
539

Dilutive effect of potentially issuable common shares
9

 
5

 
9

 
4

Diluted weighted average common shares outstanding
549

 
548

 
552

 
543

Average stock price used to calculate common stock equivalents
$
28.87

 
$
23.58

 
$
29.27

 
$
23.19

Diluted EPS Calculation
Net Income
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share figures)
2011

 
2010

 
2011

 
2010

Net income attributable to the Company
$
130

 
$
168

 
$
737

 
$
652

Less: Portion attributable to participating securities
1

 
3

 
5

 
11

Net income attributable to common shares for diluted earnings per share
$
129

 
$
165

 
$
732

 
$
641

Basic weighted average common shares outstanding
540

 
543

 
543

 
539

Dilutive effect of potentially issuable common shares
9

 
5

 
9

 
4

Diluted weighted average common shares outstanding
549

 
548

 
552

 
543

Average stock price used to calculate common stock equivalents
$
28.87

 
$
23.58

 
$
29.27

 
$
23.19

There were 40.5 million and 44.1 million stock options outstanding as of September 30, 2011 and 2010, respectively.

5.    Supplemental Disclosures to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning acquisitions, interest and income taxes paid for the nine-month periods ended September 30, 2011 and 2010.
 

- 12 -


(In millions of dollars)
2011

 
2010

Assets acquired, excluding cash
$
148

 
$
633

Liabilities assumed
(19
)
 
(163
)
Shares issued (7.6 million shares in 2010)

 
(183
)
Contingent/deferred purchase consideration
(16
)
 
(65
)
Net cash outflow for current year acquisitions
113

 
222

Purchase of other intangibles
2

 
3

Contingent payments from prior years' acquisitions
3

 
2

Deferred purchase consideration from prior years' acquisitions
16

 
21

Net cash outflow for acquisitions
$
134

 
$
248


(In millions of dollars)
2011

 
2010

Interest paid
$
163

 
$
182

Income taxes (refunded)/paid
$
(37
)
 
$
82

The Company had non-cash issuances of common stock under its share-based payment plan of $191 million and $173 million for the nine months ended September 30, 2011 and 2010, respectively. The Company recorded stock-based compensation expense related to equity awards of $124 million and $130 million for the nine month periods ended September 30, 2011 and 2010, respectively.
The consolidated statement of cash flows for the period ended September 30, 2010 includes the cash flow impact of discontinued operations in each cash flow category. The cash flow impact of discontinued operations from the operating, financing and investing cash flow categories in 2010 is as follows:
 
For the Year Ended September 30,
 
(In millions of dollars)
2010

Net cash used for operations
$
(22
)
Net cash used for investing activities
$
(14
)
Effect of exchange rate changes on cash and cash equivalents
$
(2
)
The information above excludes the cash flow impacts of actual disposal transactions related to discontinued operations because the Company believes these transactions to be cash flows attributable to the parent company, arising from its decision to dispose of the discontinued operation. In the first nine months of 2010, the Company’s cash flow reflects cash provided by investing activities of $1.13 billion from the disposal of Kroll and $110 million related to the disposition of KLS.

6.    Comprehensive Income
The components of comprehensive income for the nine-month periods ended September 30, 2011 and 2010 are as follows:
 

- 13 -


(In millions of dollars)
2011

 
2010

Foreign currency translation adjustments, net of income tax expense (credit) ($1 for 2011 and $(3) for 2010)
$
(113
)
 
$
(44
)
Unrealized investment holding losses, net of income tax credit ($1 for 2011 and $4 for 2010)
(5
)
 
(11
)
(Losses) gains related to pension/retiree plans, net of income tax expense ($39 for 2011 and $34 for 2010)
85

 
88

Other comprehensive (loss) income
(33
)
 
33

Net income before non-controlling interests
755

 
665

Comprehensive income before non-controlling interests
722

 
698

Less: Comprehensive income attributable to non-controlling interests
(18
)
 
(13
)
Comprehensive income attributable to the Company
$
704

 
$
685



7.     Acquisitions
During the first nine months of 2011 the Company made four acquisitions in its Risk and Insurance Services segment and three in its Consulting segment. In January 2011, Marsh acquired RJF Agencies, Inc., an independent insurance broking firm in the Midwest. In February 2011, Marsh acquired Hampton Roads Bonding, a surety bonding agency for commercial, road, utility, maritime and government contractors in the state of Virginia, and the Boston office of Kinloch Consulting Group, Inc. In July 2011, Marsh acquired Prescott Pailet Benefits, an employee benefits broker in the state of Texas. These acquisitions were made to expand Marsh’s share in the middle-market through Marsh & McLennan Agency.
In January 2011, Mercer acquired Hammond Associates, an investment consulting company for endowments and foundations in the U.S. In June 2011, Mercer acquired Evaluation Associates LLC, an investment consulting firm. In July 2011, Mercer acquired Mahoney Associates, a health and benefits advisory firm based in south Florida.
Total purchase consideration for the 2011 acquisitions was $132 million which consisted of cash paid of $116 million and estimated contingent consideration of $16 million. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over two to four years. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. The Company also paid $19 million of deferred purchase and contingent consideration related to acquisitions made in prior years. In addition, the Company paid $2 million to purchase other intangible assets during the first nine months of 2011.
In the second quarter of 2011, Marsh acquired the remaining minority interest of a previously majority owned entity for total purchase consideration of $8 million and accounted for this acquisition under the accounting guidance for consolidations and non-controlling interests. This guidance requires that changes in a parent’s ownership interest while retaining financial controlling interest in a subsidiary be accounted for as an equity transaction. Stepping up the acquired assets to fair value or the recording of goodwill is not permitted. Therefore, the Company recorded a decrease to additional paid-in capital in 2011 of $2 million related to this transaction.
In the first quarter of 2011, the Company paid deferred purchase consideration of $13 million related to the purchase in 2009 of the minority interest of a previously controlled entity.
The following table presents the preliminary allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their fair values (amounts in millions):
 

- 14 -


Cash
$
116

Contingent consideration
16

Total Consideration
$
132

Allocation of purchase price:
 
Cash and cash equivalents
$
3

Accounts receivable, net
6

Property, plant, and equipment
2

Intangible assets
54

Goodwill
86

Total assets acquired
151

Current liabilities
12

Other liabilities
7

Total liabilities assumed
19

Net assets acquired
$
132

Prior Year Acquisitions
During the first nine months of 2010, the Company made four acquisitions in its Risk and Insurance Services segment and two acquisitions in its Consulting segment.
In July 2010, Mercer acquired IPA, a provider of health and benefit record-keeping and employee enrollment technology. In August 2010, Mercer acquired ORC Worldwide, a premier provider of HR knowledge, data and solutions for professionals in numerous industries.
During the first three quarters of 2010, the Company made four acquisitions in its Risk and Insurance Services segment. In February 2010, Marsh acquired Haake Companies, Inc., an independent insurance broking firm in the Midwest. In March 2010, Marsh acquired Thomas Rutherfoord, Inc., an insurance broking firm in the Southeast and mid-Atlantic regions in the U.S. On April 30, 2010, Marsh acquired the Bostonian Group, one of the largest regional insurance borkerages in New England. These acquisitions were made to expand Marsh’s share in the middle-market through Marsh & McLennan Agency. On April 1, 2010, Marsh completed the acquisition of HSBC Insurance Brokers Ltd. This transaction deepens Marsh’s presence in the U.K., Hong Kong, Singapore, China and the Middle East. As part of the acquisition agreement, Marsh also entered into a strategic partnership with HSBC Bank that gives the Company preferred access to provide insurance broking and risk management services to HSBC and their corporate and private clients.
Total purchase consideration for the six acquisitions made during the first nine months of 2010 was $530 million which consisted of cash paid of $282 million, the issuance of 7.6 million shares with a fair value of $183 million, and estimated contingent consideration of $65 million. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over two to four years. The fair value of the contingent consideration was based on earnings projections of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized.
In 2010, the Company also paid $21 million of deferred purchase consideration and $2 million of contingent purchase consideration related to acquisitions made in prior years and $3 million to purchase other intangible assets.
In the first quarter of 2010, the Company paid deferred purchase consideration of $15 million related to the purchase in 2009 of the minority interest of a previously controlled entity.
Pro-Forma Information
While the Company does not believe its acquisitions are material in the aggregate, the following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during 2011 and 2010. In accordance with accounting guidance related to pro-forma disclosures, the information presented for current year acquisitions is as if they occurred on January 1, 2010. The pro-forma information adjusts for the effects of amortization of acquired intangibles. The unaudited pro-forma financial data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved if such acquisitions had occurred on the dates

- 15 -


indicated, nor is it necessarily indicative of future consolidated results.

  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share data)
2011

 
2010

 
2011

 
2010

Revenue
$
2,806

 
$
2,568

 
$
8,630

 
$
7,985

Income from continuing operations
$
133

 
$
131

 
$
741

 
$
383

Net income attributable to the Company
$
131

 
$
171

 
$
739

 
$
661

Basic net income per share:
 
 
 
 
 
 
 
– Continuing operations
$
0.24

 
$
0.23

 
$
1.32

 
$
0.67

– Net income attributable to the Company
$
0.24

 
$
0.31

 
$
1.35

 
$
1.20

Diluted net income per share:
 
 
 
 
 
 
 
– Continuing operations
$
0.23

 
$
0.23

 
$
1.30

 
$
0.67

– Net income attributable to the Company
$
0.24

 
$
0.31

 
$
1.33

 
$
1.19

The Consolidated Statements of Income for the three and nine months ended September 30, 2011 include approximately $21 million of revenue and $2 million of net operating income and approximately $55 million of revenue and $8 million of net operating income, respectively, related to acquisitions made during 2011.

8.     Dispositions
In the first quarter of 2010, Kroll completed the sale of KLS and on August 3, 2010, the Company completed the sale of Kroll to Altegrity.
Kroll’s results of operations are reported as discontinued operations in the Company’s consolidated statements of income. The nine months ended September 30, 2010 also includes the gain on the sale of Kroll and related tax benefits and the loss on the sale of KLS, which includes the tax provision of $36 million on the sale. Discontinued operations for the nine months ended September 30, 2011 primarily relates to an insurance recovery for legal fees incurred at Putnam prior to its sale and a tax recovery under the indemnity related to the Putnam sale.
The Company’s tax basis in its investment in the stock of Kroll at the time of sale exceeded the recorded amount primarily as a result of prior impairments of goodwill recognized for financial reporting, but not tax. Prior to the second quarter of 2010, a tax benefit was not recorded for this temporary difference because it was not apparent in the foreseeable future that it would reverse in a transaction that would result in a tax benefit. Since Kroll met the criteria for classification as a discontinued operation in the second quarter of 2010, the Company determined that it had the ability to carry back the capital loss realized against prior realized capital gains. Therefore, a $265 million deferred tax benefit was recorded in discontinued operations in the second quarter of 2010 to establish a deferred tax asset.
Summarized Statements of Income data for discontinued operations is as follows:
 

- 16 -


  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions of dollars except per share figures)
2011

 
2010

 
2011

 
2010

Kroll Operations
 
 
 
 
 
 
 
Revenue
$

 
$
56

 
$

 
$
381

Expense

 
52

 

 
345

Net operating income

 
4

 

 
36

Income tax

 
1

 

 
16

Income from Kroll operations, net of tax

 
3

 

 
20

Other discontinued operations, net of tax

 
(7
)
 

 
(7
)
Income (loss) from discontinued operations, net of tax

 
(4
)
 

 
13

Disposals of discontinued operations
3

 
35

 
11

 
42

Income tax (credit) expense
1

 
(12
)
 
(6
)
 
(237
)
Disposals of discontinued operations, net of tax
2

 
47

 
17

 
279

Discontinued operations, net of tax
$
2

 
$
43

 
$
17

 
$
292

Discontinued operations, net of tax per share
 
 
 
 
 
 
 
– Basic
$

 
$
0.07

 
$
0.03

 
$
0.53

– Diluted
$
0.01

 
$
0.08

 
$
0.03

 
$
0.53


9.    Goodwill and Other Intangibles
The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment test for each of its reporting units during the third quarter of each year. The Company adopted new accounting provisions in the third quarter of 2011. Under this guidance, a company may first assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. The Company considered numerous issues, which included the excess of fair value over carrying value in its most recent estimate of reporting unit fair values, whether significant acquisitions or dispositions occurred which might alter the fair values of its reporting units, macroeconomic conditions and their potential impact on reporting unit fair values, actual performance compared with budget and prior projections used in its estimation of reporting unit fair values, industry and market conditions, and the year over year change in the Company's share price.
Based on its qualitative evaluation, the Company concluded that a two-step goodwill impairment test was not required.
Other intangible assets that are not deemed to have an indefinite life are amortized over their estimated lives and reviewed for impairment upon the occurrence of certain triggering events in accordance with applicable accounting literature.
Changes in the carrying amount of goodwill are as follows:
 
(In millions of dollars)
2011

 
2010

Balance as of January 1, as reported(a)
$
6,420

 
$
5,990

Goodwill acquired
88

 
349

Other adjustments(b)
31

 
(53
)
Balance at September 30,
$
6,539

 
$
6,286


(a) 
Amounts in 2010 exclude goodwill and accumulated impairment losses related to Kroll, which were reclassified to discontinued operations.
(b) 
Primarily foreign exchange.
Goodwill allocable to the Company’s reportable segments is as follows: Risk & Insurance Services, $4.4 billion and Consulting, $2.1 billion.

- 17 -


Amortized intangible assets consist of the cost of client lists, client relationships and trade names acquired. The gross cost and accumulated amortization is as follows:

  
September 30, 2011
 
December 31, 2010
(In millions of dollars)
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

 
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

Amortized intangibles
$
642

 
$
248

 
$
394

 
$
615

 
$
212

 
$
403

Aggregate amortization expense for the nine months ended September 30, 2011 and 2010 was $50 million and $36 million, respectively, and the estimated future aggregate amortization expense is as follows:
 
For the Years Ending December 31,
 
(In millions of dollars)
Estimated Expense

2011 (excludes amortization through Sept 30, 2011)
$
17

2012
63

2013
56

2014
51

2015
43

Subsequent years
164

 
$
394


10.     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 in ASC Topic No. 820 (“Fair Value Measurements and Disclosures”). 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, most U.S. Government and agency securities, money market mutual funds and certain other sovereign government obligations).
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

- 18 -


example, certain mortgage loans).
Assets and liabilities utilizing Level 2 inputs include corporate and mutual funds and senior notes.
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).
Valuation Techniques
Equity Securities & Mutual Funds
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. If no sales are reported, the security is valued at its last reported bid price.
Other Sovereign Government Obligations, Municipal Bonds and Corporate Bonds
The investments listed in the caption above are valued on the basis of valuations furnished by an independent pricing service approved by the trustees or dealers. Such services or dealers determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships, generally recognized by institutional traders, between securities.
Interest Rate Swap Derivative
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. (See Note 12)
Senior Notes due 2014
The fair value of the first $250 million of Senior Notes maturing in 2014 is estimated to be the carrying value of those notes adjusted by the fair value of the interest rate swap derivative, discussed above. 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 will be recorded on the balance sheet. The carrying value of the debt related to these swaps will be adjusted by an equal amount. (See Note 12)
Contingent Consideration Liability
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 two to four years. The fair value of contingent consideration is estimated as the present value of future cash flows that would result 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 September 30, 2011 and December 31, 2010.
 

- 19 -


(In millions of dollars)
Identical Assets
(Level 1)
 
Observable Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
  
09/30/11

 
12/31/10

 
09/30/11

 
12/31/10

 
09/30/11

 
12/31/10

 
09/30/11

 
12/31/10

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exchange traded equity securities
$

 
$
1

 
$

 
$

 
$

 
$

 
$

 
$
1

Mutual funds(a)
127

 
137

 

 

 

 

 
127

 
137

Money market funds(b)
59

 
8

 

 

 

 

 
59

 
8

Interest rate swap derivatives(c)

 

 
7

 

 

 

 
7

 

Total assets measured at fair value
$
186

 
$
146

 
$
7

 
$

 
$

 
$

 
$
193

 
$
146

Fiduciary Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and local obligations (including non-U.S. locales)
$

 
$

 
$
19

 
$
68

 
$

 
$

 
$
19

 
$
68

Other sovereign government obligations and supranational agencies

 

 
80

 
185

 

 

 
80

 
185

Corporate and other debt

 

 
3

 
30

 

 

 
3

 
30

Money market funds
119

 
152

 

 

 

 

 
119

 
152

Total fiduciary assets measured at fair value
$
119

 
$
152

 
$
102

 
$
283

 
$

 
$

 
$
221

 
$
435

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liability(d)
$

 
$

 
$

 
$

 
$
119

 
$
106

 
$
119

 
$
106

Senior Notes due 2014(e)
$

 
$

 
$
257

 
$

 
$

 
$

 
$
257

 
$

Total liabilities measured at fair value
$

 
$

 
$
257

 
$

 
$
119

 
$
106

 
$
376

 
$
106

(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 other receivables 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 nine month period ended September 30, 2011, there were no assets that transferred between Level 1 and Level 2.
The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities for the quarter ended September 30, 2011 that represent contingent consideration related to acquisitions:
 
  
Fair Value,
Beginning of
Period
 
Additions
 
Payments
 
Revaluation
Impact
 
Fair Value,
End of Period
Contingent consideration
$
106

 
16

 
(6
)
 
3

 
$
119

The fair value of the contingent liability is based on projections of revenue and earnings for the acquired entities that are reassessed on a quarterly basis.
11.    Retirement Benefits
The Company maintains qualified and non-qualified defined benefit pension plans for its U.S. and non-U.S. eligible employees. The Company’s policy for funding its tax qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth by U.S. law and the laws of the non-U.S. jurisdictions in which the Company offers defined benefit plans.
The target asset allocation for the U.S. Plan is 58% equities and 42% fixed income. At the end of the third quarter of 2011, the actual allocation for the U.S. Plan was 57% equities and 43% fixed income. The target asset allocation for

- 20 -


the U.K. Plan, which comprises approximately 82% of non-U.S. Plan assets, is 58% equities and 42% fixed income. At the end of the third quarter of 2011, the actual allocation for the U.K. Plan was 49% equities and 51% fixed income.
The components of the net periodic benefit cost for defined benefit and other post-retirement plans are as follows:
 
Combined U.S. and significant non-U.S. Plan
Pension
 
Postretirement
For the Three Months Ended September 30,
Benefits
 
Benefits
(In millions of dollars)
2011

 
2010

 
2011

 
2010

Service cost
$
55

 
$
49

 
$
1

 
$

Interest cost
153

 
145

 
2

 
4

Expected return on plan assets
(223
)
 
(204
)
 

 

Amortization of prior service credit
(5
)
 
(5
)
 
(3
)
 
(3
)
Recognized actuarial loss (credit)
54

 
36

 
(3
)
 

Net periodic benefit cost (credit)
$
34