XLON:MHM Marsh & McLennan Companies Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
_____________________________________________ 
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 July 31, 2012, there were outstanding 544,195,564 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; the impact of foreign currency exchange rates; our effective tax rates; the impact of competition; 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, 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 in the U.S. and the U.K.;
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, including the European debt crisis and market perceptions concerning the stability of the Euro;
the impact of changes in interest rates and deterioration of counterparty credit quality on our results related to our cash balances and investment portfolios, including corporate and fiduciary funds;
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 our geographic reach, the sophistication and quality of our services, our pricing relative to competitors, our customers' option to self-insure or utilize internal resources instead of consultants, and our corporate tax rates relative to our competitors;
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;
our ability to maintain adequate physical, technical and administrative safeguards to protect the security of our data;
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.



TABLE OF CONTENTS
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.


- 2 -


PART I.    FINANCIAL INFORMATION
 
Item 1.
Financial Statements.

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions, except per share figures)
2012

 
2011

 
2012

 
2011

Revenue
$
3,026

 
$
2,928

 
$
6,077

 
$
5,812

Expense:
 
 
 
 
 
 
 
Compensation and benefits
1,776

 
1,728

 
3,572

 
3,449

Other operating expenses
732

 
735

 
1,460

 
1,426

Operating expenses
2,508

 
2,463

 
5,032

 
4,875

Operating income
518

 
465

 
1,045

 
937

Interest income
6

 
5

 
12

 
12

Interest expense
(45
)
 
(49
)
 
(91
)
 
(100
)
Investment income (loss)
4

 
(6
)
 
24

 
13

Income before income taxes
483

 
415

 
990

 
862

Income tax expense
144

 
129

 
297

 
257

Income from continuing operations
339

 
286

 
693

 
605

Discontinued operations, net of tax
(2
)
 
3

 
(2
)
 
15

Net income before non-controlling interests
337

 
289

 
691

 
620

Less: Net income attributable to non-controlling interests
8

 
7

 
15

 
13

Net income attributable to the Company
$
329

 
$
282

 
$
676

 
$
607

Basic net income per share – Continuing operations
$
0.61

 
$
0.51

 
$
1.24

 
$
1.08

– Net income attributable to the Company
$
0.60

 
$
0.51

 
$
1.24

 
$
1.10

Diluted net income per share – Continuing operations
$
0.60

 
$
0.50

 
$
1.23

 
$
1.06

Net income attributable to the Company
$
0.59

 
$
0.50

 
$
1.22

 
$
1.09

Average number of shares outstanding – Basic
545

 
547

 
544

 
545

                               – Diluted
553

 
555

 
552

 
554

Shares outstanding at June 30,
544

 
541

 
544

 
541

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


- 3 -


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three Months Ended
June 30,
Six Months Ended
June 30,
(In millions)
2012

 
2011

2012

 
2011

Net income before non-controlling interests
$
337

 
$
289

$
691

 
$
620

Other Comprehensive Income (loss), before tax:
 
 
 
 
 
 
    Foreign currency translation adjustments
(191
)
 
64

(29
)
 
237

    Unrealized investment loss

 
(1
)
(1
)
 
(5
)
    Gain (loss) related to pension/post-retirement plans
120

 
58

134

 
(6
)
Other comprehensive income (loss), before tax
(71
)
 
121

104

 
226

Income tax expense (credit) on other comprehensive income (loss)
21

 
16

31

 
4

Other comprehensive income (loss), net of tax
(92
)
 
105

73

 
222

Comprehensive income
245

 
394

764

 
842

Less: Comprehensive income attributable to non-controlling interest
(8
)
 
(7
)
(15
)
 
(13
)
Comprehensive income attributable to the Company
$
237

 
$
387

$
749

 
$
829


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

- 4 -


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(In millions of dollars)
June 30,
2012

 
December 31,
2011

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,504

 
$
2,113

Receivables
 
 
 
Commissions and fees
2,905

 
2,676

Advanced premiums and claims
66

 
86

Other
238

 
249

 
3,209

 
3,011

Less-allowance for doubtful accounts and cancellations
(107
)
 
(105
)
Net receivables
3,102

 
2,906

Current deferred tax assets
381

 
376

Other current assets
208

 
253

Total current assets
5,195

 
5,648

Goodwill and intangible assets
7,086

 
6,963

Fixed assets
(net of accumulated depreciation and amortization of $1,535 at June 30, 2012 and $1,469 at December 31, 2011)
800

 
804

Pension related assets
140

 
39

Deferred tax assets
1,153

 
1,205

Other assets
828

 
795

 
$
15,202

 
$
15,454

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


- 5 -


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
 
(In millions of dollars)
June 30,
2012

 
December 31,
2011

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
259

 
$
260

Accounts payable and accrued liabilities
1,758

 
2,016

Accrued compensation and employee benefits
916

 
1,400

Accrued income taxes
111

 
63

Dividends payable
126

 

Total current liabilities
3,170

 
3,739

Fiduciary liabilities
4,449

 
4,082

Less – cash and investments held in a fiduciary capacity
(4,449
)
 
(4,082
)
 

 

Long-term debt
2,663

 
2,668

Pension, post-retirement and post-employment benefits
1,574

 
1,655

Liabilities for errors and omissions
466

 
468

Other liabilities
985

 
984

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 June 30, 2012 and
 
 
 
   December 31, 2011
561

 
561

Additional paid-in capital
1,053

 
1,156

Retained earnings
8,257

 
7,949

Accumulated other comprehensive loss
(3,115
)
 
(3,188
)
Non-controlling interests
71

 
57

 
6,827

 
6,535

Less – treasury shares, at cost, 16,852,064 shares at June 30, 2012 and
 
 
 
   21,463,226 shares at December 31, 2011
(483
)
 
(595
)
Total equity
6,344

 
5,940

 
$
15,202

 
$
15,454

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 Six Months Ended June 30,
 
 
 
(In millions of dollars)
2012

 
2011

Operating cash flows:
 
 
 
Net income before non-controlling interests
$
691

 
$
620

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization of fixed assets and capitalized software
133

 
133

Amortization of intangible assets
34

 
32

Provision for deferred income taxes
25

 
73

Gain on investments
(24
)
 
(13
)
Loss on disposition of assets
12

 
1

Stock option expense
20

 
12

Changes in assets and liabilities:
 
 
 
Net receivables
(193
)
 
(70
)
Other current assets
(29
)
 
(75
)
Other assets
(37
)
 
(145
)
Accounts payable and accrued liabilities
(218
)
 
148

Accrued compensation and employee benefits
(484
)
 
(422
)
Accrued income taxes
49

 
43

Other liabilities
68

 
64

Effect of exchange rate changes
19

 
(71
)
Net cash provided by operations
66

 
330

Financing cash flows:
 
 
 
Purchase of treasury shares
(100
)
 
(235
)
Proceeds from issuance of debt
248

 

Repayments of debt
(254
)
 
(6
)
Purchase of non-controlling interests

 
(21
)
Shares withheld for taxes on vested units – treasury shares
(89
)
 
(86
)
Issuance of common stock
95

 
112

Payments of contingent consideration for acquisitions
(14
)
 

Distributions of non-controlling interests
(4
)
 

Dividends paid
(242
)
 
(235
)
Net cash used for financing activities
(360
)
 
(471
)
Investing cash flows:
 
 
 
Capital expenditures
(149
)
 
(142
)
Net (purchases) sales of long-term investments
(8
)
 
33

Proceeds from sales of fixed assets
1

 
1

Dispositions
2

 
1

Acquisitions
(129
)
 
(113
)
Other, net
(1
)
 
(1
)
Net cash used for investing activities
(284
)
 
(221
)
Effect of exchange rate changes on cash and cash equivalents
(31
)
 
127

Decrease in cash and cash equivalents
(609
)
 
(235
)
Cash and cash equivalents at beginning of period
2,113

 
1,894

Cash and cash equivalents at end of period
$
1,504

 
$
1,659

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

- 7 -


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
For the Six Months Ended June 30,
 
 
 
(In millions, except per share figures)
2012

 
2011

COMMON STOCK
 
 
 
Balance, beginning and end of period
$
561

 
$
561

ADDITIONAL PAID-IN CAPITAL
 
 
 
Balance, beginning of year
$
1,156

 
$
1,185

Change in accrued stock compensation costs
(79
)
 
(85
)
Issuance of shares under stock compensation plans and employee stock purchase plans and related tax impact
(25
)
 
(6
)
Purchase of subsidiary shares from non-controlling interests
1

 
(2
)
Balance, end of period
$
1,053

 
$
1,092

RETAINED EARNINGS
 
 
 
Balance, beginning of year
$
7,949

 
$
7,436

Net income attributable to the Company
676

 
607

Dividend equivalents declared (per share amounts: $0.67 in 2012 and $0.64 in 2011)
(4
)
 
(7
)
Dividends declared – (per share amounts: $0.67 in 2012 and $0.64 in 2011)
(364
)
 
(348
)
Balance, end of period
$
8,257

 
$
7,688

ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS)
 
 
 
Balance, beginning of year
$
(3,188
)
 
$
(2,300
)
Foreign currency translation adjustments
(15
)
 
235

Unrealized investment holding losses, net of reclassification adjustments
(3
)
 
(4
)
Net changes under benefit plans, net of tax
91

 
(9
)
Balance, end of period
$
(3,115
)
 
$
(2,078
)
TREASURY SHARES
 
 
 
Balance, beginning of year
$
(595
)
 
$
(514
)
Issuance of shares under stock compensation plans and employee stock purchase plans
212

 
213

Purchase of treasury shares
(100
)
 
(235
)
Balance, end of period
$
(483
)
 
$
(536
)
NON-CONTROLLING INTERESTS
 
 
 
Balance, beginning of year
$
57

 
$
47

Net income attributable to non-controlling interests
15

 
13

Distributions
(4
)
 
(4
)
Other changes
3

 
(3
)
Balance, end of period
$
71

 
$
53

TOTAL EQUITY
$
6,344

 
$
6,780

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

- 8 -


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 2012, Marsh acquired Alexander Forbes' South African brokerage operations, including Alexander Forbes Risk Services and related ancillary operations and insurance broking operations in Botswana and Namibia. In March 2012, Marsh acquired KSPH, LLC, a middle-market employee benefits agency based in Virginia, and Cosmos Services (America) Inc., the U.S. insurance brokerage subsidiary of ITOCHU Corp., which specializes in commercial property/casualty, personal lines, and employee benefits brokerage services to U.S. subsidiaries of Japanese companies. In June 2012, Marsh acquired Progressive Benefits Solutions, an employee benefits agency based in North Carolina, and Security Insurance Services, Inc., a Wisconsin-based insurance agency which offers property/casualty and employee benefits products and services to individuals and businesses.
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 February 2012, Mercer acquired the remaining 49% of Yokogawa-ORC, a global mobility firm based in Japan, and Pensjon & Finans, a leading Norway-based financial investment and pension consulting firm. In March 2012, Mercer acquired REPCA, a France-based broking and advising firm for employer health and benefits plans.
On August 3, 2010, the Company completed the sale of Kroll, the Company's former Risk Consulting & Technology segment. With the sale of Kroll, 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 consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 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 six-month periods ended June 30, 2012 and 2011.
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

- 9 -


consulting companies and investments in private equity funds. This line includes equity method gains/(losses) of $4 million and $(4) million for the three months ended June 30, 2012 and 2011, respectively, and $24 million and $14 million for the six months ended June 30, 2012 and 2011, respectively.
The Company has an investment in Trident II limited partnership, a private equity investment fund. At June 30, 2012, the Company’s investment in Trident II was approximately $100 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 second quarter of 2012 was 29.8% compared with 31.1% in the second quarter of 2011. These rates reflect non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation. The effective tax rate for the first six months of 2012 and 2011 was 30% and 29.8%, respectively. The 29.8% effective tax rate for the first six months of 2011 includes a benefit from the effective settlement of the IRS audits for the tax years from 2006 to 2008. Excluding this benefit, the effective tax rate for the first six months of of 2011 was 31.4%.
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 evaluating the potential imposition of penalties, 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 the advice 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 increased to $176 million at June 30, 2012 from $143 million at December 31, 2011. Of the total unrecognized tax benefits at June 30, 2012 and December 31, 2011, $108 million and $102 million, respectively, represent the amount that, if recognized, would favorably affect the effective tax rate in a future period. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $50 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.

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 by the Company in a fiduciary capacity. Risk and Insurance Services revenue includes interest on fiduciary funds of $21 million and $22 million for the six-month periods ended June 30, 2012 and 2011, respectively. The Consulting segment recorded fiduciary interest income of $1 million for the the six-month period ended June 30, 2012 and $2 million for the same period in 2011. 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 $19 million and $62 million of fixed income securities classified as available for sale at June 30, 2012 and December 31, 2011, respectively. Unrealized gains or losses from available for sale securities are recorded in other comprehensive income until the securities are disposed of, mature or a loss is recognized as an other than temporary impairment. Unrealized gains, net of tax, were $0 million and $2 million at June 30, 2012 and December 31, 2011, respectively.
Net uncollected premiums and claims and the related payables amounted to $11 billion at June 30, 2012 and $9 billion at December 31, 2011. 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.
Mercer manages approximately $17 billion of assets in trusts or funds for which Mercer’s management or trustee

- 10 -


fee is considered a variable interest. Mercer is not the primary beneficiary of these trusts or funds. Mercer’s only variable interest in any of these trusts or funds is its unpaid fees, if any. Mercer’s maximum exposure to loss of its interests is, therefore, limited to collection of its fees.

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 non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the computation.
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 EPS 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 EPS 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
June 30,
 
Six Months Ended
June 30,
(In millions, except per share figures)
2012

 
2011

 
2012

 
2011

Net income from continuing operations
$
339

 
$
286

 
$
693

 
$
605

Less: Net income attributable to non-controlling interests
8

 
7

 
15

 
13

Net income from continuing operations attributable to the Company
331

 
279

 
678

 
592

Less: Portion attributable to participating securities

 
1

 
1

 
4

Net income attributable to common shares for basic earnings per share
$
331

 
$
278

 
$
677

 
$
588

Basic weighted average common shares outstanding
545

 
547

 
544

 
545

Basic EPS Calculation - Net Income
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions, except per share figures)
2012

 
2011

 
2012

 
2011

Net income attributable to the Company
$
329

 
$
282

 
$
676

 
$
607

Less: Portion attributable to participating securities

 
2

 
1

 
4

Net income attributable to common shares for basic earnings per share
$
329

 
$
280

 
$
675

 
$
603

Basic weighted average common shares outstanding
545

 
547

 
544

 
545


- 11 -


Diluted EPS Calculation - Continuing Operations
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions, except per share figures)
2012

 
2011

 
2012

 
2011

Net income from continuing operations
$
339

 
$
286

 
$
693

 
$
605

Less: Net income attributable to non-controlling interests
8

 
7

 
15

 
13

Net income from continuing operations attributable to the Company
331

 
279

 
678

 
592

Less: Portion attributable to participating securities

 
1

 
1

 
4

Net income attributable to common shares for diluted earnings per share
$
331

 
$
278

 
$
677

 
$
588

Basic weighted average common shares outstanding
545

 
547

 
544

 
545

Dilutive effect of potentially issuable common shares
8

 
8

 
8

 
9

Diluted weighted average common shares outstanding
553

 
555

 
552

 
554

Average stock price used to calculate common stock equivalents
$
32.31

 
$
30.03

 
$
32.13

 
$
29.47

Diluted EPS Calculation - Net Income
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions, except per share figures)
2012

 
2011

 
2012

 
2011

Net income attributable to the Company
$
329

 
$
282

 
$
676

 
$
607

Less: Portion attributable to participating securities

 
2

 
1

 
4

Net income attributable to common shares for diluted earnings per share
$
329

 
$
280

 
$
675

 
$
603

Basic weighted average common shares outstanding
545

 
547

 
544

 
545

Dilutive effect of potentially issuable common shares
8

 
8

 
8

 
9

Diluted weighted average common shares outstanding
553

 
555

 
552

 
554

Average stock price used to calculate common stock equivalents
$
32.31

 
$
30.03

 
$
32.13

 
$
29.47

There were 37.3 million and 41.4 million stock options outstanding as of June 30, 2012 and 2011, 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 six-month periods ended June 30, 2012 and 2011.
 
(In millions of dollars)
2012

 
2011

Assets acquired, excluding cash
$
131

 
$
128

Liabilities assumed
(31
)
 
(17
)
Contingent/deferred purchase consideration
(18
)
 
(13
)
Net cash outflow for current year acquisitions
82

 
98

Deferred purchase consideration from prior years' acquisitions
47

 
15

Net cash outflow for acquisitions
$
129

 
$
113

(In millions of dollars)
2012

 
2011

Interest paid
$
92

 
$
100

Income taxes paid/(refunded)
$
160

 
$
(112
)
The Company had non-cash issuances of common stock under its share-based payment plan of $181 million for each of the six-month periods ended June 30, 2012 and 2011. The Company recorded stock-based compensation expense related to equity awards of $80 million and $83 million for the six-month periods ended June 30, 2012 and

- 12 -


2011, respectively.

- 13 -



6.    Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) for the three and six-month periods ended June 30, 2012 and 2011 are as follows:
Three Months Ended June 30,
2012
 
2011
(In millions of dollars)
Pre-Tax

Tax
Net of Tax
 
Pre-Tax

Tax
Net of Tax
Foreign currency translation adjustments
$
(191
)
$
(14
)
$
(177
)
 
$
64

$

$
64

Unrealized investment gains (losses)

1

(1
)
 
(1
)

(1
)
Pension/post-retirement plans:
 
 
 
 
 
 
 
Amortization of losses (gains) included in net periodic pension cost:
 
 
 
 
 
 
 
Prior service gains
(8
)

(8
)
 
(8
)
(3
)
(5
)
Net actuarial losses
68

1

67

 
54

22

32

Subtotal
60

1

59

 
46

19

27

Foreign currency translation adjustments
60

33

27

 
12

(3
)
15

Pension/post-retirement plans (gains) losses
120

34

86

 
58

16

42

Other comprehensive income (loss)
$
(71
)
$
21

$
(92
)
 
$
121

$
16

$
105


Six Months Ended June 30,
2012
 
2011
(In millions of dollars)
Pre-Tax
Tax
Net of Tax
 
Pre-Tax
Tax
Net of Tax
Foreign currency translation adjustments
$
(29
)
$
(14
)
$
(15
)
 
$
237

$
2

$
235

Unrealized investment gains (losses)
(1
)
2

(3
)
 
(5
)
(1
)
(4
)
Pension/post-retirement plans:


 
 
 
 


 
Amortization of losses (gains) included in net periodic pension cost:


 
 
 
 


 
Prior service gains
(16
)
(5
)
(11
)
 
(16
)
(5
)
(11
)
Net actuarial losses
134

43

91

 
109

34

75

Subtotal
118

38

80

 
93

29

64

Foreign currency translation adjustments
16

5

11

 
(99
)
(26
)
(73
)
Pension/post-retirement plans (gains) losses
134

43

91

 
(6
)
3

(9
)
Other comprehensive income (loss)
$
104

$
31

$
73

 
$
226

$
4

$
222




7.     Acquisitions
During the first six months of 2012, the Company made five acquisitions in its Risk and Insurance Services segment and three in its Consulting segment. In January 2012, Marsh acquired Alexander Forbes' South African brokerage operations, including Alexander Forbes Risk Services and related ancillary operations and insurance broking operations in Botswana and Namibia. In March 2012, Marsh acquired KSPH, LLC, a middle-market employee benefits agency based in Virginia, and Cosmos Services (America) Inc., the U.S. insurance brokerage subsidiary of ITOCHU Corp., which specializes in commercial property/casualty, personal lines, and employee benefits brokerage services to U.S. subsidiaries of Japanese companies. In February 2012, Mercer acquired the remaining 49% of Yokogawa-ORC, a global mobility firm based in Japan, which was previously accounted for under the equity method, and Pensjon & Finans, a leading Norway-based financial investment and pension consulting firm. In March 2012, Mercer acquired REPCA, a France-based broking and advisory firm for employer health and benefits plans. In June 2012, Marsh acquired Progressive Benefits Solutions, an employee benefits agency based in North

- 14 -


Carolina, and Security Insurance Services, Inc., a Wisconsin-based insurance agency which offers property/casualty and employee benefits products and services to individuals and businesses.
Total purchase consideration for the 2012 acquisitions was $183 million, which consisted of cash paid of $103 million, deferred purchase and estimated contingent consideration of $18 million, and cash held in escrow of $62 million at December 31, 2011 that was released in the first quarter of 2012. 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 $61 million of deferred purchase and contingent consideration related to acquisitions made in prior years.
The following table presents the preliminary allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their fair values:
 
For the Six Months Ended June 30,
 
(Amounts in millions)
2012

Cash (includes $62 million held in escrow at 12/31/11)
$
165

Estimated fair value of contingent consideration
18

Total Consideration
$
183

Allocation of purchase price:
 
Cash and cash equivalents
$
21

Accounts receivable, net
3

Property, plant, and equipment
2

Intangible assets
81

Goodwill
113

Other assets
5

Total assets acquired
225

Current liabilities
9

Other liabilities
33

Total liabilities assumed
42

Net assets acquired
$
183

Prior Year Acquisitions
During 2011, the Company made seven acquisitions in its Risk and Insurance Services segment and five 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. In October 2011, Marsh acquired the employee benefits division of Kaeding, Ernst & Co, a Massachusetts-based employee benefits, life insurance and financial planning consulting firm. In November 2011, Marsh acquired Gallagher & Associates, Inc., a property and casualty insurance agency based in Minnesota. In November 2011, Marsh acquired Seitlin Insurance, an insurance firm based in South Florida. 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. In August 2011, Mercer acquired Censeo Corporation, a human resource consulting firm based in Florida. In December 2011, Mercer acquired Alicia Smith & Associates, a Medicaid policy consulting firm based in Washington, D.C.
Total purchase consideration for acquisitions made during the first six months of 2011 was $114 million which consisted of cash paid of $101 million and estimated contingent consideration of $13 million. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over two to four years. The fair

- 15 -


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 the first six months of 2011, the Company also paid $15 million of deferred purchase consideration related to acquisitions made in prior years.
In the second quarter of 2011, Marsh purchased the remaining minority interest of a previously majority owned entity for total purchase consideration of $8 million and accounted for this acquisition under the 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 also paid deferred purchase consideration of $13 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 2012 and 2011. 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, 2011. 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 indicated, nor is it necessarily indicative of future consolidated results.

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions, except per share data)
2012

 
2011

 
2012

 
2011

Revenue
$
3,030

 
$
2,974

 
$
6,092

 
$
5,908

Income from continuing operations
$
340

 
$
289

 
$
695

 
$
605

Net income attributable to the Company
$
330

 
$
285

 
$
678

 
$
606

Basic net income per share:
 
 
 
 
 
 
 
– Continuing operations
$
0.61

 
$
0.51

 
$
1.25

 
$
1.08

– Net income attributable to the Company
$
0.60

 
$
0.52

 
$
1.24

 
$
1.10

Diluted net income per share:
 
 
 
 
 
 
 
– Continuing operations
$
0.60

 
$
0.50

 
$
1.23

 
$
1.06

– Net income attributable to the Company
$
0.60

 
$
0.51

 
$
1.23

 
$
1.09

The Consolidated Statements of Income for the three and six months ended June 30, 2012 include approximately $24 million of revenue and $6 million of net operating income and approximately $45 million of revenue and $8 million of net operating income, respectively, related to acquisitions made during 2012.

8.     Dispositions

Summarized Statements of Income data for discontinued operations is as follows:
 

- 16 -


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions of dollars, except per share figures)
2012

 
2011

 
2012

 
2011

Other discontinued operations, net of tax
$
(2
)
 
$

 
$
(2
)
 
$

Income (loss) from discontinued operations, net of tax
(2
)
 

 
(2
)
 

Disposals of discontinued operations

 
8

 

 
8

Income tax (credit) expense

 
5

 

 
(7
)
Disposals of discontinued operations, net of tax

 
3

 

 
15

Discontinued operations, net of tax
$
(2
)
 
$
3

 
$
(2
)
 
$
15

Discontinued operations, net of tax per share
 
 
 
 
 
 
 
– Basic
$
(0.01
)
 
$

 
$

 
$
0.02

– Diluted
$
(0.01
)
 
$

 
$
(0.01
)
 
$
0.03


Discontinued operations for the six months ended June 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.

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.
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:
 
June 30,
 
 
 
(In millions of dollars)
2012

 
2011

Balance as of January 1, as reported
$
6,562

 
$
6,420

Goodwill acquired
113

 
76

Other adjustments(a)
(32
)
 
99

Balance at June 30,
$
6,643

 
$
6,595

(a) 
Primarily foreign exchange.
Goodwill allocable to the Company’s reportable segments is as follows: Risk & Insurance Services, $4.6 billion and Consulting, $2.0 billion.
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:
  
June 30, 2012
 
December 31, 2011
(In millions of dollars)
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

 
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

Amortized intangibles
$
747

 
$
304

 
$
443

 
$
666

 
$
265

 
$
401


- 17 -


Aggregate amortization expense for the six months ended June 30, 2012 and 2011 was $34 million and $32 million, respectively, and the estimated future aggregate amortization expense is as follows:
 
For the Years Ending December 31,
 
(In millions of dollars)
Estimated Expense

2012 (excludes amortization through June 30, 2012)
$
34

2013
64

2014
60

2015
57

2016
46

Subsequent years
182

 
$
443


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. 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).
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).
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 - Level 1
Investments for which market quotations are readily available are valued at the sale price on their principal

- 18 -


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 - Level 2
The investments in this caption, primarily investments in Germany and France, are valued on the basis of valuations furnished by an independent pricing service. 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 - Level 2
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 - Level 2
The fair value of the first $250 million of Senior Notes maturing in 2014 is estimated to be the amortized cost 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 - Level 3
Purchase consideration for some acquisitions made by the Company includes contingent consideration arrangements. Contingent consideration arrangements are primarily based on achieving 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 June 30, 2012 and December 31, 2011.
 

- 19 -


 
Identical Assets
(Level 1)
 
Observable Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
(In millions of dollars)
06/30/12

 
12/31/11

 
06/30/12

 
12/31/11

 
06/30/12

 
12/31/11

 
06/30/12

 
12/31/11

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds(a)
$
131

 
$
134

 
$

 
$

 
$

 
$

 
$
131

 
$
134

Money market funds(b)
194

 
226

 

 

 

 

 
194

 
226

Interest rate swap derivatives(c)

 

 
7

 
7

 

 

 
7

 
7

Total assets measured at fair value
$
325

 
$
360

 
$
7

 
$
7

 
$

 
$

 
$
332

 
$
367

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

 
$

 
$
6

 
$
13

 
$

 
$

 
$
6

 
$
13

Other sovereign government obligations and supranational agencies

 

 
13

 
47

 

 

 
13

 
47

Corporate and other debt

 

 

 
2

 

 

 

 
2

Money market funds
218

 
186

 

 

 

 

 
218

 
186

Total fiduciary assets measured at fair value
$
218

 
$
186

 
$
19

 
$
62

 
$

 
$

 
$
237

 
$
248

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liability(d)
$

 
$

 
$

 
$

 
$
116

 
$
110

 
$
116

 
$
110

Senior Notes due 2014(e)

 

 
257

 
257

 

 

 
257

 
257

Total liabilities measured at fair value
$

 
$

 
$
257

 
$
257

 
$
116

 
$
110

 
$
373

 
$
367

(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 six-month period ended June 30, 2012, there were no assets or liabilities that transferred between Level 1 and Level 2 or between Level 2 and Level 3.
The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities for the six month period ended June 30, 2012 that represent contingent consideration related to acquisitions:
 
(In millions of dollars)
Fair Value,
December 31, 2011
 
Additions
 
Payments
 
Revaluation
Impact
 
Fair Value,
June 30, 2012
Contingent consideration
$
110

 
$
18

 
$
(14
)
 
$
2

 
$
116

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. A 5% increase in the above mentioned projections would increase the liability by approximately $20 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $30 million.


- 20 -



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 equity alternatives and 42% fixed income. At the end of the second quarter of 2012, the actual allocation for the U.S. Plan was 57% equities and equity alternatives and 43% fixed income. The target asset allocation for the U.K. Plans, which comprises approximately 80% of non-U.S. Plan assets, is 53% equities and equity alternatives and 47% fixed income. At the end of the second quarter of 2012, the actual allocation for the U.K. Plan was 51% equities and equity alternatives and 49% fixed income. The assets of the Company's defined benefit plans are well-diversified and are managed in accordance with applicable laws and with the goal of maximizing the plans' real return within acceptable risk parameters. The Company uses threshold-based portfolio re-balancing to ensure the actual portfolio remains consistent with target asset allocation ranges.
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. Plans
Pension
 
Postretirement
For the Three Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2012

 
2011

 
2012

 
2011

Service cost
$
60

 
$
58

 
$

 
$
1

Interest cost
149

 
153

 
3

 
4

Expected return on plan assets
(225
)
 
(224
)
 

 

Amortization of prior service credit
(5
)
 
(4
)
 
(3
)
 
(4
)
Recognized actuarial loss
68

 
53

 

 

Net periodic benefit cost
$
47

 
$
36

 
$

 
$
1

 
 
 
 
 
 
 
 
Combined U.S. and significant non-U.S. Plans
Pension
 
Postretirement
For the Six Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2012

 
2011

 
2012

 
2011

Service cost
$
121

 
$
114

 
$
2

 
$
3

Interest cost
297

 
305

 
6

 
7

Expected return on plan assets
(451
)
 
(445
)
 

 

Amortization of prior service credit
(10
)
 
(9
)
 
(6
)
 
(7
)
Recognized actuarial loss
134

 
108

 

 

Net periodic benefit cost
$
91

 
$
73

 
$
2

 
$
3

 
 
 
 
 
 
 
 
U.S. Plans only
Pension
 
Postretirement
For the Three Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2012

 
2011

 
2012

 
2011

Service cost
$
23

 
$
21

 
$

 
$
1

Interest cost
58

 
57

 
2

 
3

Expected return on plan assets
(80
)
 
(78
)
 

 

Amortization of prior service credit
(4
)
 
(4
)
 
(3
)
 
(4
)
Recognized actuarial loss (credit)
39

 
24

 
(1
)
 

Net periodic benefit cost (credit)
$
36

 
$
20

 
$
(2
)
 
$


- 21 -


U.S. Plans only
Pension
 
Postretirement
For the Six Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2012

 
2011

 
2012

 
2011

Service cost
$
47

 
$
42

 
$
1

 
$
2

Interest cost
115

 
115

 
4

 
5

Expected return on plan assets
(161
)
 
(157
)
 

 

Amortization of prior service credit
(8
)
 
(8
)
 
(6
)
 
(7
)
Recognized actuarial loss (credit)
76

 
50

 
(1
)
 

Net periodic benefit cost (credit)
$
69

 
$
42

 
$
(2
)
 
$

 
 
 
 
 
 
 
 
Significant non-U.S. Plans only
Pension
 
Postretirement
For the Three Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2012

 
2011

 
2012

 
2011

Service cost
$
37

 
$
37

 
$

 
$

Interest cost
91

 
96

 
1

 
1

Expected return on plan assets
(145
)
 
(146
)
 

 

Amortization of prior service cost
(1
)
 

 

 

Recognized actuarial loss
29

 
29

 
1

 

Net periodic benefit cost
$
11

 
$
16

 
$
2

 
$
1

Significant non-U.S. Plans only
Pension
 
Postretirement
For the Six Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2012

 
2011

 
2012

 
2011

Service cost
$
74

 
$
72

 
$
1

 
$
1

Interest cost
182

 
190

 
2

 
2

Expected return on plan assets
(290
)
 
(288
)
 

 

Amortization of prior service cost
(2
)
 
(1
)
 

 

Recognized actuarial loss
58

 
58

 
1

 

Net periodic benefit cost
$
22

 
$
31

 
$
4

 
$
3


- 22 -


The weighted average actuarial assumptions utilized to calculate the net periodic benefit costs for the U.S. and significant non-U.S. defined benefit plans are as follows: