Edgar Filing: MARSH & MCLENNAN COMPANIES, INC.

MMC- 09.30.2012 10Q

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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 September 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 October 31, 2012, there were outstanding 544,386,722 shares of common stock, par value $1.00 per share, of the registrant.

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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 trade sanctions laws such as the Iran Threat Reduction and Syria Human Rights Act of 2012, 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 import and export restrictions;


▪	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.

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TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION		4

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	4

	CONSOLIDATED STATEMENTS OF INCOME	4

	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	5

	CONSOLIDATED BALANCE SHEETS	6

	CONSOLIDATED BALANCE SHEETS (Continued)	7

	CONSOLIDATED STATEMENTS OF CASH FLOWS	8

	CONSOLIDATED STATEMENTS OF EQUITY	9

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	10

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS	30
	OF OPERATIONS
ITEM 3.	QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK	40

ITEM 4.	CONTROLS & PROCEDURES	43

PART II. OTHER INFORMATION		44

ITEM 1.	LEGAL PROCEEDINGS	44

ITEM 1A.	RISK FACTORS	44

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45

ITEM 4.	MINE SAFETY DISCLOSURE	45

ITEM 5.	OTHER INFORMATION	45

ITEM 6.	EXHIBITS	45

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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)	2012			2011			2012			2011
Revenue	$	2,845		$	2,806		$	8,922		$	8,618
Expense:
Compensation and benefits	1,760			1,753			5,332			5,202
Other operating expenses	707			743			2,167			2,169
Operating expenses	2,467			2,496			7,499			7,371
Operating income	378			310			1,423			1,247
Interest income	6			9			18			21
Interest expense	(44		)	(49		)	(135		)	(149		)
Cost of extinguishment of debt	—			(72		)	—			(72		)
Investment (loss) income	(4		)	—			20			13
Income before income taxes	336			198			1,326			1,060
Income tax expense	90			65			387			322
Income from continuing operations	246			133			939			738
Discontinued operations, net of tax	1			2			(1		)	17
Net income before non-controlling interests	247			135			938			755
Less: Net income attributable to non-controlling interests	6			5			21			18
Net income attributable to the Company	$	241		$	130		$	917		$	737
Basic net income per share – Continuing operations	$	0.44		$	0.24		$	1.68		$	1.32
– Net income attributable to the Company	$	0.44		$	0.24		$	1.68		$	1.35
Diluted net income per share – Continuing operations	$	0.43		$	0.23		$	1.66		$	1.30
– Net income attributable to the Company	$	0.44		$	0.24		$	1.66		$	1.33
Average number of shares outstanding – Basic	544			540			544			543
– Diluted	552			549			552			552
Shares outstanding at September 30	544			538			544			538

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

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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2012			2011			2012			2011
Net income before non-controlling interests	$	247		$	135		$	938		$	755
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	171			(349		)	142			(112		)
Unrealized investment loss	—			(1		)	(1		)	(6		)
Gain (loss) related to pension/post-retirement plans	(72		)	130			62			124
Other comprehensive income (loss), before tax	99			(220		)	203			6
Income tax expense (credit) on other comprehensive income (loss)	(11		)	35			20			39
Other comprehensive income (loss), net of tax	110			(255		)	183			(33		)
Comprehensive income	357			(120		)	1,121			722
Less: Comprehensive income attributable to non-controlling interest	(6		)	(5		)	(21		)	(18		)
Comprehensive income attributable to the Company	$	351		$	(125	)	$	1,100		$	704

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, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	2,044		$	2,113
Receivables
Commissions and fees	2,871			2,676
Advanced premiums and claims	63			86
Other	234			249
	3,168			3,011
Less-allowance for doubtful accounts and cancellations	(109		)	(105		)
Net receivables	3,059			2,906
Current deferred tax assets	334			376
Other current assets	214			253
Total current assets	5,651			5,648
Goodwill and intangible assets	7,113			6,963
Fixed assets (net of accumulated depreciation and amortization of $ 1,551 at September 30, 2012 and $1,469 at December 31, 2011)	807			804
Pension related assets	225			39
Deferred tax assets	1,192			1,205
Other assets	748			795
	$	15,736		$	15,454

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, 2012			December 31, 2011
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt	$	259		$	260
Accounts payable and accrued liabilities	1,742			2,016
Accrued compensation and employee benefits	1,225			1,400
Accrued income taxes	154			63
Dividends payable	126			—
Total current liabilities	3,506			3,739
Fiduciary liabilities	4,044			4,082
Less – cash and investments held in a fiduciary capacity	(4,044		)	(4,082		)
	—			—
Long-term debt	2,660			2,668
Pension, post-retirement and post-employment benefits	1,594			1,655
Liabilities for errors and omissions	476			468
Other liabilities	920			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 September 30, 2012
and December 31, 2011	561			561
Additional paid-in capital	1,076			1,156
Retained earnings	8,371			7,949
Accumulated other comprehensive loss	(3,005		)	(3,188		)
Non-controlling interests	70			57
	7,073			6,535
Less – treasury shares, at cost, 16,865,990 shares at September 30, 2012
and 21,463,226 shares at December 31, 2011	(493		)	(595		)
Total equity	6,580			5,940
	$	15,736		$	15,454

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

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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



For the Nine Months Ended September 30,
(In millions of dollars)	2012			2011
Operating cash flows:
Net income before non-controlling interests	$	938		$	755
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization of fixed assets and capitalized software	201			200
Amortization of intangible assets	53			50
Intangible asset impairment	8			—
Adjustments to acquisition related contingent consideration liability	(32		)	—
Charge for early extinguishment of debt	—			72
Provision for deferred income taxes	18			91
Gain on investments	(19		)	(12		)
Loss on disposition of assets	13			1
Stock option expense	23			16
Changes in assets and liabilities:
Net receivables	(148		)	122
Other current assets	19			(83		)
Other assets	(204		)	(184		)
Accounts payable and accrued liabilities	(208		)	90
Accrued compensation and employee benefits	(176		)	(188		)
Accrued income taxes	88			12
Other liabilities	201			93
Effect of exchange rate changes	(25		)	(40		)
Net cash provided by operations	750			995
Financing cash flows:
Purchase of treasury shares	(180		)	(361		)
Proceeds from issuance of debt	248			496
Repayments of debt	(257		)	(8		)
Payments for early extinguishment of debt	—			(672		)
Purchase of non-controlling interests	—			(21		)
Shares withheld for taxes on vested units – treasury shares	(92		)	(90		)
Issuance of common stock	151			123
Payments of contingent consideration for acquisitions	(20		)	—
Distributions of non-controlling interests	(5		)	—
Dividends paid	(369		)	(358		)
Net cash used for financing activities	(524		)	(891		)
Investing cash flows:
Capital expenditures	(249		)	(205		)
Net sales of long-term investments	26			64
Proceeds from sales of fixed assets	4			4
Dispositions	2			1
Acquisitions	(153		)	(134		)
Other, net	1			(3		)
Net cash used for investing activities	(369		)	(273		)
Effect of exchange rate changes on cash and cash equivalents	74			(11		)
Decrease in cash and cash equivalents	(69		)	(180		)
Cash and cash equivalents at beginning of period	2,113			1,894
Cash and cash equivalents at end of period	$	2,044		$	1,714

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

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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)



For the Nine Months Ended September 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	(45		)	(50		)
Issuance of shares under stock compensation plans and employee stock purchase plans and related tax impact	(36		)	(10		)
Purchase of subsidiary shares from non-controlling interests	1			(2		)
Balance, end of period	$	1,076		$	1,123
RETAINED EARNINGS
Balance, beginning of year	$	7,949		$	7,436
Net income attributable to the Company	917			737
Dividend equivalents declared (per share amounts: $0.90 in 2012 and $0.86 in 2011)	(6		)	(11		)
Dividends declared – (per share amounts: $0.90 in 2012 and $0.86 in 2011)	(489		)	(466		)
Balance, end of period	$	8,371		$	7,696
ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS)
Balance, beginning of year	$	(3,188	)	$	(2,300	)
Foreign currency translation adjustments	152			(113		)
Unrealized investment holding losses, net of reclassification adjustments	(2		)	(5		)
Net changes under benefit plans, net of tax	33			85
Balance, end of period	$	(3,005	)	$	(2,333	)
TREASURY SHARES
Balance, beginning of year	$	(595	)	$	(514	)
Issuance of shares under stock compensation plans and employee stock purchase plans	282			235
Purchase of treasury shares	(180		)	(361		)
Balance, end of period	$	(493	)	$	(640	)
NON-CONTROLLING INTERESTS
Balance, beginning of year	$	57		$	47
Net income attributable to non-controlling interests	21			18
Distributions	(5		)	—
Other changes	(3		)	(7		)
Balance, end of period	$	70		$	58
TOTAL EQUITY	$	6,580		$	6,465

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 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. In August 2012, Marsh acquired Rosenfeld-Einstein, a South Carolina-based employee benefits service provider, and Eidson Insurance, a property/casualty and employee benefits services firm located in Florida.

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 nine-month periods ended September 30, 2012 and 2011.

Investment (Loss) Income

The caption “Investment (loss) income” 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

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temporary declines in the value of debt and available for sale securities and the change in value of the Company’s holdings in certain private equity funds, including equity method gains (losses) on its investment in Trident II, a limited partnership. The Company’s investments may include direct investments in insurance or consulting companies and investments in private equity funds. The company recorded equity method gains/(losses) on its investment in Trident II, of $(1) million and $0 million for the three months ended September 30, 2012 and 2011 , respectively, and $23 million and $14 million for the nine months ended September 30, 2012 and 2011, respectively.

At September 30, 2012, the Company’s investment in Trident II was approximately $66 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 2012 was 26.8% compared with 32.8% in the third 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. In addition, the lower rate in the current period reflects several tax benefits, including the benefit from recording previously unrecognized tax benefits as a result of expiring statutes of limitations for U.S. federal tax years 2006 and 2008, and a favorable permanent difference related to a tax-free adjustment to the estimated liability for contingent consideration. These benefits were partially offset by charges to increase unrecognized tax benefits for certain operations in Asia and U.S. tax costs related to actions taken during the quarter to reduce positions in the Euro currency held by certain of the Company's non-U.S. operations. The effective tax rate for the first nine months of 2012 and 2011 was 29.2% and 30.4%, respectively. The decline primarily reflects the effects of the aforementioned items as well as a lower estimated annual effective tax rate in the current year. The statute of limitations for the 2007 federal tax return remains open in connection with the IRS review of the Company's carryback of Foreign Tax Credits from 2009 to 2007.

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 were approximately $143 million at both September 30, 2012 and December 31, 2011. Of the total unrecognized tax benefits at September 30, 2012 and December 31, 2011, $94 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 $20 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 $31 million and $36 million for the nine-month periods ended September 30, 2012 and 2011, respectively. The Consulting segment recorded fiduciary interest income of $2 million for the the nine-month period ended September 30, 2012 and $3 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 $5 million and $62 million of fixed income securities classified as available for sale at September 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 September 30, 2012 and December 31, 2011, respectively.

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Net uncollected premiums and claims and the related payables amounted to $10 billion at September 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 $16 billion of assets in trusts or funds for which Mercer’s management or trustee 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 September 30,				Nine Months Ended September 30,
(In millions, except per share figures)	2012		2011		2012		2011
Net income from continuing operations	$	246	$	133	$	939	$	738
Less: Net income attributable to non-controlling interests	6		5		21		18
Net income from continuing operations attributable to the Company	240		128		918		720
Less: Portion attributable to participating securities	—		1		2		5
Net income attributable to common shares for basic earnings per share	$	240	$	127	$	916	$	715
Basic weighted average common shares outstanding	544		540		544		543



Basic EPS Calculation - Net Income	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions, except per share figures)	2012		2011		2012		2011
Net income attributable to the Company	$	241	$	130	$	917	$	737
Less: Portion attributable to participating securities	—		1		2		5
Net income attributable to common shares for basic earnings per share	$	241	$	129	$	915	$	732
Basic weighted average common shares outstanding	544		540		544		543

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Diluted EPS Calculation - Continuing Operations	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions, except per share figures)	2012		2011		2012		2011
Net income from continuing operations	$	246	$	133	$	939	$	738
Less: Net income attributable to non-controlling interests	6		5		21		18
Net income from continuing operations attributable to the Company	240		128		918		720
Less: Portion attributable to participating securities	—		1		2		5
Net income attributable to common shares for diluted earnings per share	$	240	$	127	$	916	$	715
Basic weighted average common shares outstanding	544		540		544		543
Dilutive effect of potentially issuable common shares	8		9		8		9
Diluted weighted average common shares outstanding	552		549		552		552
Average stock price used to calculate common stock equivalents	$	33.53	$	28.87	$	32.60	$	29.27



Diluted EPS Calculation - Net Income	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions, except per share figures)	2012		2011		2012		2011
Net income attributable to the Company	$	241	$	130	$	917	$	737
Less: Portion attributable to participating securities	—		1		2		5
Net income attributable to common shares for diluted earnings per share	$	241	$	129	$	915	$	732
Basic weighted average common shares outstanding	544		540		544		543
Dilutive effect of potentially issuable common shares	8		9		8		9
Diluted weighted average common shares outstanding	552		549		552		552
Average stock price used to calculate common stock equivalents	$	33.53	$	28.87	$	32.60	$	29.27

There were 35.1 million and 40.5 million stock options outstanding as of September 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 nine-month periods ended September 30, 2012 and 2011.



(In millions of dollars)	2012			2011
Assets acquired, excluding cash	$	160		$	148
Liabilities assumed	(39		)	(19		)
Contingent/deferred purchase consideration	(19		)	(16		)
Net cash outflow for current year acquisitions	102			113
Purchase of other intangibles	—			2
Contingent payments from prior years' acquisitions	—			3
Deferred purchase consideration from prior years' acquisitions	51			16
Net cash outflow for acquisitions	$	153		$	134



(In millions of dollars)	2012		2011
Interest paid	$	150	$	163
Income taxes paid/(refunded)	$	237	$	(37	)

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The Company had non-cash issuances of common stock under its share-based payment plan of $187 million and $191 million for the nine months ended September 30, 2012 and 2011. The Company recorded stock-based compensation expense related to equity awards of $117 million and $124 million for the nine-month periods ended September 30, 2012 and 2011, respectively.

6. Other Comprehensive Income (Loss)

The components of other comprehensive income (loss) for the three- and nine-month periods ended September 30, 2012 and 2011 are as follows:



Three Months Ended September 30,	2012									2011
(In millions of dollars)	Pre-Tax			Tax			Net of Tax			Pre-Tax			Tax			Net of Tax
Foreign currency translation adjustments	$	171		$	4		$	167		$	(349	)	$	(1	)	$	(348	)
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		)	(6		)	(2		)	(8		)	(3		)	(5		)
Net actuarial losses	68			52			16			51			18			33
Subtotal	60			46			14			43			15			28
Foreign currency translation adjustments	(132		)	(60		)	(72		)	87			21			66
Pension/post-retirement plans (gains) losses	(72		)	(14		)	(58		)	130			36			94
Other comprehensive income (loss)	$	99		$	(11	)	$	110		$	(220	)	$	35		$	(255	)



Nine Months Ended September 30,	2012									2011
(In millions of dollars)	Pre-Tax			Tax			Net of Tax			Pre-Tax			Tax			Net of Tax
Foreign currency translation adjustments	$	142		$	(10	)	$	152		$	(112	)	$	1		$	(113	)
Unrealized investment gains (losses)	(1		)	1			(2		)	(6		)	(1		)	(5		)
Pension/post-retirement plans:
Amortization of losses (gains) included in net periodic pension cost:
Prior service gains	(24		)	(11		)	(13		)	(24		)	(8		)	(16		)
Net actuarial losses	202			95			107			160			52			108
Subtotal	178			84			94			136			44			92
Foreign currency translation adjustments	(116		)	(55		)	(61		)	(12		)	(5		)	(7		)
Pension/post-retirement plans (gains) losses	62			29			33			124			39			85
Other comprehensive income (loss)	$	203		$	20		$	183		$	6		$	39		$	(33	)

7. Acquisitions

During the first nine months of 2012, the Company made seven 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

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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 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. In August 2012 Marsh acquired Rosenfeld-Einstein, a South Carolina-based employee benefits service provider, and Eidson Insurance, a property/casualty and employee benefits services firm located in Florida.

Total purchase consideration for acquisitions made during the nine months of 2012 was $205 million, which consisted of cash paid of $124 million, deferred purchase and estimated contingent consideration of $19 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. During the nine-months ended September 30, 2012, the Company also paid $51 million of deferred purchase consideration and $20 million of 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 Nine Months Ended September 30,
(Amounts in millions)	2012
Cash (includes $62 million held in escrow at 12/31/11)	$	186
Estimated fair value of deferred/contingent consideration	19
Total Consideration	$	205
Allocation of purchase price:
Cash and cash equivalents	$	22
Accounts receivable, net	5
Property, plant, and equipment	3
Intangible assets	96
Goodwill	126
Other assets	3
Total assets acquired	255
Current liabilities	11
Other liabilities	39
Total liabilities assumed	50
Net assets acquired	$	205

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

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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 nine months of 2011 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 earnings projections of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. During the first nine-months of 2011, the Company also paid $19 million of deferred purchase 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 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.

Pending Acquisitions

Subsequent to September 30, 2012, Marsh made two additional acquisitions for an aggregate purchase price of approximately $60 million and given the timing of these transactions, the initial accounting for the business combinations is not yet complete.

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 September 30,				Nine Months Ended September 30,
(In millions, except per share data)	2012		2011		2012		2011
Revenue	$	2,848	$	2,850	$	8,946	$	8,762
Income from continuing operations	$	247	$	133	$	943	$	738
Net income attributable to the Company	$	242	$	130	$	921	$	737
Basic net income per share:
– Continuing operations	$	0.44	$	0.24	$	1.69	$	1.32
– Net income attributable to the Company	$	0.44	$	0.24	$	1.69	$	1.35
Diluted net income per share:
– Continuing operations	$	0.44	$	0.23	$	1.67	$	1.30
– Net income attributable to the Company	$	0.44	$	0.24	$	1.66	$	1.33

The Consolidated Statements of Income for the three and nine months ended September 30, 2012 include approximately $31 million of revenue and $6 million of net operating income and approximately $76 million of revenue and $15 million of net operating income, respectively, related to acquisitions made during 2012

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8. Dispositions

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



	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions of dollars, except per share figures)	2012		2011		2012			2011
Other discontinued operations, net of tax	$	1	$	—	$	(1	)	$	—
Income (loss) from discontinued operations, net of tax	1		—		(1		)	—
Disposals of discontinued operations	—		3		—			11
Income tax (credit) expense	—		1		—			(6		)
Disposals of discontinued operations, net of tax	—		2		—			17
Discontinued operations, net of tax	$	1	$	2	$	(1	)	$	17
Discontinued operations, net of tax per share
– Basic	$	—	$	—	$	—		$	0.03
– Diluted	$	0.01	$	0.01	$	—		$	0.03

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.

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. In accordance with applicable accounting guidance, the Company assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. The Company considered the totality of numerous factors, which included that the fair value of each reporting unit exceeded its carrying value by a substantial margin 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. The Company completed its evaluation in the third quarter of 2012 and concluded that a two-step goodwill impairment test was not required in 2012 and that goodwill was not impaired.

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:



September 30,
(In millions of dollars)	2012			2011
Balance as of January 1, as reported	$	6,562		$	6,420
Goodwill acquired	126			88
Other adjustments^(a)	(9		)	31
Balance at September 30,	$	6,679		$	6,539


^(a)	Reflects increases due to the impact of foreign exchange in both years. 2012 also reflects a reduction due to purchase accounting adjustments.

Goodwill allocable to the Company’s reportable segments is as follows: Risk & Insurance Services, $4.6 billion and Consulting, $2.1 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:

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	September 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	$	762	$	328	$	434	$	666	$	265	$	401

The Company recorded an intangible asset impairment charge of $8 million in the third quarter of 2012 in the Risk & Insurance Services segment.

Aggregate amortization expense for the nine months ended September 30, 2012 and 2011 was $53 million and $50 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 September 30, 2012)	$	17
2013	65
2014	61
2015	58
2016	47
Subsequent years	186
	$	434

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

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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 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.

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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, 2012 and December 31, 2011.



	Identical Assets (Level 1)				Observable Inputs (Level 2)				Unobservable Inputs (Level 3)				Total
(In millions of dollars)	09/30/12		12/31/11		09/30/12		12/31/11		09/30/12		12/31/11		09/30/12		12/31/11
Assets:
Financial instruments owned:
Mutual funds^(a)	$	137	$	134	$	—	$	—	$	—	$	—	$	137	$	134
Money market funds^(b)	284		226		—		—		—		—		284		226
Interest rate swap derivatives^(c)	—		—		6		7		—		—		6		7
Total assets measured at fair value	$	421	$	360	$	6	$	7	$	—	$	—	$	427	$	367
Fiduciary Assets:
State and local obligations (including non-U.S. locales)	$	—	$	—	$	5	$	13	$	—	$	—	$	5	$	13
Other sovereign government obligations and supranational agencies	—		—		—		47		—		—		—		47
Corporate and other debt	—		—		—		2		—		—		—		2
Money market funds	179		186		—		—		—		—		179		186
Total fiduciary assets measured at fair value	$	179	$	186	$	5	$	62	$	—	$	—	$	184	$	248
Liabilities:
Contingent consideration liability^(d)	$	—	$	—	$	—	$	—	$	77	$	110	$	77	$	110
Senior Notes due 2014^(e)	—		—		256		257		—		—		256		257
Total liabilities measured at fair value	$	—	$	—	$	256	$	257	$	77	$	110	$	333	$	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 nine-month period ended September 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 nine month period ended September 30, 2012 that represent contingent consideration related to acquisitions:



(In millions of dollars)	Fair Value, December 31, 2011		Additions		Payments			Revaluation Impact			Fair Value, September 30, 2012
Contingent consideration	$	110	$	19	$	(20	)	$	(32	)	$	77

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. As set forth in the table above, based on the Company's ongoing assessment of the fair value of contingent consideration, the Company recorded a net reduction in the estimated fair value of such liabilities for prior period acquisitions of $32 million in the nine-month period ended September 30, 2012. A 5% increase in the above mentioned projections would increase the liability by approximately $25 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $25 million.

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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 52% equities and equity alternatives and 48% fixed income. The assets of the Company's defined benefit plans are 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 September 30,	Benefits						Benefits
(In millions of dollars)	2012			2011			2012			2011
Service cost	$	59		$	55		$	1		$	1
Interest cost	148			153			3			2
Expected return on plan assets	(225		)	(223		)	—			—
Amortization of prior service credit	(4		)	(5		)	(3		)	(3		)
Recognized actuarial loss	67			54			—			(3		)
Net periodic benefit cost	$	45		$	34		$	1		$	(3	)

Combined U.S. and significant non-U.S. Plans	Pension						Postretirement
For the Nine Months Ended September 30,	Benefits						Benefits
(In millions of dollars)	2012			2011			2012			2011
Service cost	$	180		$	169		$	3		$	4
Interest cost	445			458			9			9
Expected return on plan assets	(676		)	(668		)	—			—
Amortization of prior service credit	(14		)	(14		)	(9		)	(10		)
Recognized actuarial loss	201			162			—			(3		)
Net periodic benefit cost	$	136		$	107		$	3		$	—

U.S. Plans only	Pension						Postretirement
For the Three Months Ended September 30,	Benefits						Benefits
(In millions of dollars)	2012			2011			2012			2011
Service cost	$	23		$	20		$	1		$	—
Interest cost	57			58			2			1
Expected return on plan assets	(80		)	(79		)	—			—
Amortization of prior service credit	(4		)	(4		)	(3		)	(3		)
Recognized actuarial loss (credit)	38			25			—			(3		)
Net periodic benefit cost (credit)	$	34		$	20		$	—		$	(5	)

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U.S. Plans only	Pension						Postretirement
For the Nine Months Ended September 30,	Benefits						Benefits
(In millions of dollars)	2012			2011			2012			2011
Service cost	$	70		$	62		$	2		$	2
Interest cost	172			173			6			6
Expected return on plan assets	(241		)	(236		)	—			—
Amortization of prior service credit	(12		)	(12		)	(9		)	(10		)
Recognized actuarial loss (credit)	114			75			(1		)	(3		)
Net periodic benefit cost (credit)	$	103		$	62		$	(2	)	$	(5	)




Significant non-U.S. Plans only	Pension						Postretirement
For the Three Months Ended September 30,	Benefits						Benefits
(In millions of dollars)	2012			2011			2012		2011
Service cost	$	36		$	35		$	—	$	1
Interest cost	91			95			1		1
Expected return on plan assets	(145		)	(144		)	—		—
Amortization of prior service cost	—			(1		)	—		—
Recognized actuarial loss	29			29			—		—
Net periodic benefit cost	$	11		$	14		$	1	$	2



Significant non-U.S. Plans only	Pension						Postretirement
For the Nine Months Ended September 30,	Benefits						Benefits
(In millions of dollars)	2012			2011			2012		2011
Service cost	$	110		$	107		$	1	$	2
Interest cost	273			285			3		3
Expected return on plan assets	(435		)	(432		)	—		—
Amortization of prior service cost	(2		)	(2		)	—		—
Recognized actuarial loss	87			87			1		—
Net periodic benefit cost	$	33		$	45		$	5	$	5

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Table of Contents

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:



Combined U.S. and significant non-U.S. Plans	Pension Benefits				Postretirement Benefits
September 30	2012		2011		2012		2011
Weighted average assumptions:
Expected return on plan assets	8.04	%	8.18	%	—	%	—	%
Discount rate	4.91	%	5.59	%	5.05	%	5.84	%
Rate of compensation increase	3.09	%	4.09	%	—	%	—	%

The Company made approximately $420 million of contributions to its U.S. and non-U.S. defined benefit plans in the first nine months of 2012, including discretionary contributions of $100 million to its U.S. qualified defined benefit plan and $100 million to its U.K. plans, and expects to contribute a total of approximately $100 million to its non-qualified U.S. and non-U.S. defined benefit plans during the remainder of 2012.

12. Debt

The Company’s outstanding debt is as follows:



(In millions of dollars)	September 30, 2012		December 31, 2011
Short-term:
Current portion of long-term debt	$	259	$	260
Long-term: