Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Marsh & McLennan Companies, Inc. and its consolidated subsidiaries (the "Company") is a global professional services firm offering clients advice and solutions in risk, strategy and people. Its businesses include: Marsh, the insurance broker, intermediary and risk advisor; Guy Carpenter, the risk and reinsurance specialist; Mercer, the provider of HR and Investment related financial advice and services; and Oliver Wyman Group, the management, economic and brand consultancy. With over 65,000 colleagues worldwide and annual revenue of $15 billion, the Company provides analysis, advice and transactional capabilities to clients in more than 130 countries.

The Company conducts business through two segments:

•	Risk and Insurance Services includes risk management activities (risk advice, risk transfer and risk control and mitigation solutions) as well as insurance and reinsurance broking and services. The Company conducts business in this segment through Marsh and Guy Carpenter.

•	Consulting includes health, wealth and career consulting services and products, and specialized management, economic and brand consulting services. The Company conducts business in this segment through Mercer and Oliver Wyman Group.

We describe the primary sources of revenue and categories of expense for each segment below, in our discussion of segment financial results. A reconciliation of segment operating income to total operating income is included in Note 17 to the consolidated financial statements included in Part II, Item 8 in this report. The accounting policies used for each segment are the same as those used for the consolidated financial statements.

Pending Acquisition

On September 18, 2018, the Company announced that it had reached agreement on the terms of a recommended cash acquisition of Jardine Lloyd Thompson Group plc ("JLT"), a public company organized under the laws of England and Wales (the "JLT Transaction"). Under the terms of the Transaction, JLT shareholders will receive £19.15 in cash for each JLT share, which values JLT’s existing issued and to be issued share capital at approximately £4.3 billion (or approximately $5.6 billion based on an exchange rate of U.S. $1.31:£1). The Company intends to implement the Transaction by way of a scheme of arrangement under Part 26 of the United Kingdom Companies Act 2006, as amended. In addition, the Company expects to repay existing JLT debt in connection with the closing of the Transaction.

The Transaction was approved by JLT shareholders on November 7, 2018. The Transaction remains subject to conditions and certain further terms, including, among others, (i) the sanction of the Transaction by the High Court of Justice in England and Wales, (ii) completion of the transaction no later than December 31, 2019 and (iii) the receipt of certain antitrust, regulatory and other approvals. Subject to the satisfaction or waiver of all relevant conditions, the Transaction is expected to be completed in the spring of 2019.

This Management's Discussion & Analysis ("MD&A") contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See "Information Concerning Forward-Looking Statements" at the outset of this report.

Consolidated Results of Operations

For the Years Ended December 31, (In millions, except per share figures)	2018				2017				2016
Revenue	$	14,950			$	14,024			$	13,211
Expense
Compensation and Benefits	8,605				8,085				7,694
Other Operating Expenses	3,584				3,284				3,086
Operating Expenses	12,189				11,369				10,780
Operating Income	$	2,761			$	2,655			$	2,431
Income from Continuing Operations	$	1,670			$	1,510			$	1,795
Discontinued Operations, Net of Tax	—				2				—
Net Income Before Non-Controlling Interests	$	1,670			$	1,512			$	1,795
Net Income Attributable to the Company	$	1,650			$	1,492			$	1,768
Basic net income per share
– Continuing operations	$	3.26			$	2.91			$	3.41
– Net income attributable to the Company	$	3.26			$	2.91			$	3.41
Diluted net income per share
– Continuing operations	$	3.23			$	2.87			$	3.38
– Net income attributable to the Company	$	3.23			$	2.87			$	3.38
Average number of shares outstanding
– Basic	506				513				519
– Diluted	511				519				524
Shares outstanding at December 31,	504				509				514

In 2018, the Company’s results of operations and earnings per share were significantly impacted by the following items:

•

In connection with the Transaction, to hedge the risk of appreciation of the GBP-denominated purchase price relative to the U.S. dollar, in September 2018, the Company entered into a deal contingent foreign exchange contract (the "FX Contract") to, solely upon consummation of the Transaction, purchase £5.2 billion and sell a corresponding amount of U.S. dollars at a contracted exchange rate. The FX Contract is discussed in Note 11 to the consolidated financial statements. An unrealized loss of $325 million related to the fair value changes to this derivative has been recognized in the consolidated statement of income for the year ended December 31, 2018, largely due to the depreciation of the GBP from September 2018. The Company expects to record fair value gains and losses, which may be significant, through its income statement until the completion of the Transaction.

•

To secure funding for the Transaction, the Company entered into a bridge loan agreement with aggregate commitments of £5.2 billion in September 2018. The Company paid approximately $35 million of customary upfront fees related to the bridge loan, which are being amortized as interest expense based on the period of time the facility is expected to be in effect. The Company recorded interest expense of approximately $30 million for the year ended December 31, 2018 related to the amortization of the bridge loan fees. The commitments under the bridge loan agreement were reduced by £3.79 billion as a result of a $5 billion aggregate amount of senior notes issued in January 2019.

•

In addition, to hedge the economic risk of increases in interest rates prior to its issuance of senior notes in January 2019, in the fourth quarter of 2018, the Company entered into Treasury lock contracts related to $2 billion of the expected debt. These economic hedges were not designated as accounting hedges. The Company recorded an unrealized loss of $116 million related to the changes in the fair value of these derivatives in the consolidated statement of income for the year

ended December 31, 2018. In January 2019, upon issuance of the $5 billion of senior notes, the Company settled the Treasury lock contracts and made a payment to its counter party for $122 million. An additional charge of $6 million will be recorded in the first quarter of 2019 related to the settlement of the Treasury lock derivatives.

•

The Company owns approximately 33% of the common stock of Alexander Forbes ("AF"), a South African company listed on the Johannesburg Stock Exchange, which it purchased in 2014 for 7.50 South African Rand per share. Based on the duration of time and the extent to which the shares traded below their cost, the Company concluded the decline in value of the investment was other than temporary and recorded a charge of $83 million in the 2018 consolidated statement of income.

•

Pension Settlement charge – The Defined Benefit Pension Plans in the U.K. allow participants an option for the payment of a lump sum distribution from plan assets before retirement in full satisfaction of the retirement benefits due to the participant as well as any survivor’s benefit. The Company’s policy under applicable U.S. GAAP is to treat these lump sum payments as a partial settlement of the plan liability if they exceed the sum of service cost plus interest cost components of net period pension cost of a plan for the year ("settlement thresholds"). The amount of lump sum payments through December 31, 2018 exceeded the settlement thresholds in two of the U.K. plans. The Company recorded non-cash settlement charges, primarily related to these plans of $42 million in December 2018 in the consolidated statement of income, of which approximately 90% impacted Risk and Insurance Services.

In 2017, the Company’s results of operations and earnings per share were impacted, in part, by two significant items:

•

U.S. tax reform – On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"). The TCJA provides for a reduction in the U.S. corporate tax rate to 21% and the creation of a territorial tax system. The TCJA also changes the deductibility of certain expenses, primarily executive officers compensation. An aggregate charge of $460 million was recorded in the fourth quarter of 2017 as a result of the enactment of the TCJA. The TCJA provides for a transition to the territorial system through a deemed repatriation tax (the "transition tax") on undistributed earnings of non-U.S. subsidiaries. The Company recorded a provisional charge of $240 million in the fourth quarter of 2017 as an estimate of U.S. transition taxes and ancillary effects, including state taxes and foreign withholding taxes related to the change in permanent reinvestment status with respect to our pre-2018 foreign earnings. This transition tax is payable over eight years. The reduction of the U.S. corporate tax rate from 35% to 21%, reduces the value of the U.S. deferred tax assets and liabilities, accordingly, a net charge of $220 million was also recorded in the fourth quarter of 2017 in the consolidated statement of income.

•	Pension Settlement charge – Similar to the item discussed above, the Company recorded a non-cash settlement charge, primarily related to its U.K. plans of $54 million in 2017, of which approximately 85% impacted Risk and Insurance Services.

Consolidated operating income increased 4%, to $2.8 billion in 2018 compared with $2.7 billion in 2017, reflecting the impact of 7% increases in both revenue and operating expenses. Income before income taxes decreased 15%, to $2.2 billion. This decrease primarily resulted from the significant items discussed above (the "significant items"), which reduced income before taxes by 21%, and more than offset the increase in operating income. Net income attributable to the Company ("after tax income") increased 11%, of which 9% was due to the year-over-year increase in operating earnings and investment income related to the change in fair value of equity securities, partly offset by the significant items discussed above and higher interest expense. The year over year impact of the significant items was 2% of the increase.

Diluted earnings per share increased 13% to $3.23 in 2018 compared with $2.87 in 2017. This increase primarily resulted from an increase in operating earnings and investment income related to the change in fair value of equity securities, partly offset by the significant items discussed above and higher interest expense, as well as a 2% decrease in the average number of shares outstanding. The negative earnings per share impact of the significant items was in 2018, largely offset by the year-over-year impact of the

$460 million charge in 2017 related to U.S. tax reform, which together resulted in a net increase of approximately $.06 in diluted earnings per share.

Average diluted shares outstanding for 2018 decreased to 511 million, compared with 519 million during 2017. Share repurchases during the year were partly offset by the shares issued related to vesting of share awards and the exercise of employee stock options.

Risk and Insurance Services operating income increased $133 million, or 8%, in 2018 compared with 2017. Revenue increased 8%, reflecting a 5% increase on an underlying basis and a 3% increase from acquisitions. Expense increased 8% or 5% on an underlying basis in 2018 compared with 2017.

Consulting operating income decreased $11 million, or 1%, to $1.1 billion in 2018 compared with 2017, reflecting the combined impact of a 5% growth in revenue and 6% in expense.

Consolidated operating income increased 9%, to $2.7 billion, in 2017 compared to $2.4 billion in 2016, reflecting the combined impact of a 6% increase in revenue and a 5% increase in expenses as compared to the prior year.

Risk and Insurance Services operating income increased $150 million, or 9% in 2017 compared with 2016. Revenue increased 7% reflecting a 3% increase on an underlying basis and a 4% increase from acquisitions. Expense increased 6% compared with 2016.

Consulting operating income increased $72 million, or 7%, to $1.1 billion in 2017 compared with 2016, reflecting the combined impact of 5% growth for both revenue and expense.

Consolidated Revenue and Expense

Revenue - Components of Change

The Company conducts business in many countries. As a result, foreign exchange rate movements may impact period-to-period comparisons of revenue. Similarly, certain other items such as the revenue impact of acquisitions and dispositions, including transfers among businesses, and the impact of the new revenue standard, ASC 606, may impact period-to-period comparisons of revenue. Underlying revenue measures the change in revenue from one period to another by isolating these impacts. The impact of foreign currency exchange fluctuations, acquisitions and dispositions, including transfers among businesses, on the Company’s operating revenues by segment was as follows:

	Year Ended December 31,											Components of Revenue Change*
(In millions, except percentage figures)	2018				2017				% Change GAAP Revenue			Currency Impact			Acquisitions/ Dispositions/ Other Impact			Revenue Standard Impact			Underlying Revenue
Risk and Insurance Services
Marsh	$	6,877			$	6,404			7	%		—			3	%		—			4	%
Guy Carpenter	1,286				1,187				8	%		1	%		—			—			7	%
Subtotal	8,163				7,591				8	%		1	%		3	%		—			5	%
Fiduciary Interest Income	65				39
Total Risk and Insurance Services	8,228				7,630				8	%		—			3	%		—			5	%
Consulting
Mercer	4,732				4,528				5	%		1	%		1	%		—			3	%
Oliver Wyman Group	2,047				1,916				7	%		1	%		—			—			5	%
Total Consulting	6,779				6,444				5	%		1	%		1	%		—			3	%
Corporate/Eliminations	(57		)		(50		)
Total Revenue	$	14,950			$	14,024			7	%		1	%		2	%		—			4	%
* Components of revenue change may not add due to rounding.

The following table provides more detailed revenue information for certain of the components presented above:

	Year Ended December 31,											Components of Revenue Change*
(In millions, except percentage figures)	2018				2017				% Change GAAP Revenue			Currency Impact			Acquisitions/ Dispositions/ Other			Revenue Standard Impact			Underlying Revenue
Marsh:
EMEA	$	2,132			$	2,033			5	%		3	%		1	%		—			—
Asia Pacific	683				645				6	%		—			—			—			5	%
Latin America	400				404				(1	)%		(10	)%		3	%		—			6	%
Total International	3,215				3,082				4	%		1	%		1	%		—			2	%
U.S./Canada	3,662				3,322				10	%		—			5	%		—			6	%
Total Marsh	$	6,877			$	6,404			7	%		—			3	%		—			4	%
Mercer:
Defined Benefit Consulting & Administration	$	1,279			$	1,381			(7	)%		1	%		(5	)%		—			(4	)%
Investment Management & Related Services	906				767				18	%		—			9	%		—			9	%
Total Wealth	2,185				2,148				2	%		1	%		—			—			1	%
Health	1,735				1,648				5	%		—			1	%		—			4	%
Career	812				732				11	%		—			6	%		—			5	%
Total Mercer	$	4,732			$	4,528			5	%		1	%		1	%		—			3	%
Underlying revenue measures the change in revenue using consistent currency exchange rates, excluding the impact of certain items that affect comparability such as: acquisitions, dispositions, transfers among businesses, changes in estimate methodology and the impact of the new revenue standard.
* Components of revenue change may not add due to rounding.

	Year Ended December 31,											Components of Revenue Change*
(In millions, except percentage figures)	2017				2016				% Change GAAP Revenue			Currency Impact		Acquisitions/ Dispositions/ Other			Underlying Revenue
Risk and Insurance Services
Marsh	$	6,404			$	5,976			7	%		—		5	%		3	%
Guy Carpenter	1,187				1,141				4	%		—		—			4	%
Subtotal	7,591				7,117				7	%		—		4	%		3	%
Fiduciary Interest Income	39				26
Total Risk and Insurance Services	7,630				7,143				7	%		—		4	%		3	%
Consulting
Mercer	4,528				4,323				5	%		—		2	%		2	%
Oliver Wyman Group	1,916				1,789				7	%		—		—			7	%
Total Consulting	6,444				6,112				5	%		—		2	%		4	%
Corporate/Eliminations	(50		)		(44		)
Total Revenue	$	14,024			$	13,211			6	%		—		3	%		3	%
* Components of revenue change may not add due to rounding.

The following table provides more detailed revenue information for certain of the components presented above:

	Year Ended December 31,											Components of Revenue Change*
(In millions, except percentage figures)	2017				2016				% Change GAAP Revenue			Currency Impact			Acquisitions/ Dispositions/ Other			Underlying Revenue
Marsh:
EMEA	$	2,033			$	1,924			6	%		(1	)%		7	%		—
Asia Pacific	645				635				2	%		—			(5	)%		6	%
Latin America	404				374				8	%		(3	)%		3	%		7	%
Total International	3,082				2,933				5	%		(1	)%		4	%		2	%
U.S. / Canada	3,322				3,043				9	%		—			6	%		4	%
Total Marsh	$	6,404			$	5,976			7	%		—			5	%		3	%
Mercer:
Defined Benefit Consulting & Administration	$	1,381			$	1,447			(5	)%		(1	)%		(2	)%		(2	)%
Investment Management & Related Services	767				606				26	%		1	%		15	%		10	%
Total Wealth	2,148				2,053				5	%		—			3	%		2	%
Health	1,648				1,588				4	%		—			2	%		2	%
Career	732				682				7	%		—			2	%		5	%
Total Mercer	$	4,528			$	4,323			5	%		—			2	%		2	%
Underlying revenue measures the change in revenue using consistent currency exchange rates, excluding the impact of certain items that affect comparability such as: acquisitions, dispositions, transfers among businesses and changes in estimate methodology.
Effective January 1, 2017, Mercer established a Wealth business reflecting a unified client strategy for its former Retirement and Investment business. The 2016 information in the chart above has been conformed to the current presentation.
* Components of revenue change may not add due to rounding.

Revenue

Consolidated revenue was $15 billion in 2018, an increase of 7%, or 4% on an underlying basis. Revenue in the Risk and Insurance Services segment increased 8% in 2018 compared with 2017, or 5% on an underlying basis. Revenue increased 4% and 7% on an underlying basis at Marsh and Guy Carpenter, respectively, as compared with 2017. The Consulting segment's revenue increased 5% compared with 2017, or 3% on an underlying basis. Revenue increased 3% and 5% on an underlying basis at Mercer and Oliver Wyman Group, respectively, as compared with 2017. As discussed in more detail in Note 2 of the consolidated financial statements, the adoption of the new revenue standard shifted income among quarters from historical patterns, but did not have a significant year-over-year impact on annual revenue.

Consolidated revenue was $14 billion in 2017, an increase of 6%, or 3% on an underlying basis. Revenue in the Risk and Insurance Services segment increased 7% in 2017 compared with 2016, or 3% on an underlying basis. Revenue increased 3% and 4% on an underlying basis at Marsh and Guy Carpenter, respectively, as compared with 2016. The Consulting segment's revenue increased 5% compared with 2016, or 4% on an underlying basis. Revenue increased 2% and 7% on an underlying basis at Mercer and Oliver Wyman Group, respectively, as compared with 2016.

Operating Expense

Consolidated operating expenses increased 7% in 2018 compared with 2017, or 5% on an underlying basis. The increase in underlying expenses is primarily due to higher base salaries, incentive compensation, asset based fees, recoverable expenses and costs associated with the acquisition of JLT as well as the impact of severance and consulting costs related to the Marsh simplification initiative and Mercer business restructure discussed below under "Risk and Insurance Services" and "Consulting", respectively.

Consolidated operating expenses increased 5% in 2017 compared with 2016, or 2% on an underlying basis. The increase in underlying expenses was primarily due to higher base salaries and incentive compensation costs, partly offset by lower costs related to liabilities for errors and omissions.

Risk and Insurance Services

In the Risk and Insurance Services segment, the Company’s subsidiaries and other affiliated entities act as brokers, agents or consultants for insureds, insurance underwriters and other brokers in the areas of risk management, insurance broking and insurance program management services, primarily under the name of Marsh; and engage in reinsurance broking, catastrophe and financial modeling services and related advisory functions, primarily under the name of Guy Carpenter.

Marsh and Guy Carpenter are compensated for brokerage and consulting services primarily through fees paid by clients or commissions paid out of premiums charged by insurance and reinsurance companies. Commission rates vary in amount depending upon the type of insurance or reinsurance coverage provided, the particular insurer or reinsurer, the capacity in which the broker acts and negotiates with clients. Revenues can be affected by premium rate levels in the insurance/reinsurance markets, the amount of risk retained by insurance and reinsurance clients themselves and by the value of the risks that have been insured since commission-based compensation is frequently related to the premiums paid by insureds/reinsureds. In many cases, fee compensation may be negotiated in advance, based on the type of risk, coverage required and service provided by the Company and ultimately, the extent of the risk placed into the insurance market or retained by the client. The trends and comparisons of revenue from one period to the next can be affected by changes in premium rate levels, fluctuations in client risk retention and increases or decreases in the value of risks that have been insured, as well as new and lost business, and the volume of business from new and existing clients.

Marsh also receives other compensation from insurance companies, separate from retail fees and commissions. This compensation includes, among other things, payment for consulting and analytics services provided to insurers; administrative and other services provided to or on behalf of insurers (including services relating to the administration and management of quota share, panels and other facilities in which insurers participate); and contingent commissions. Marsh and Guy Carpenter also receive interest income on certain funds (such as premiums and claims proceeds) held in a fiduciary capacity for others. The investment of fiduciary funds is regulated by state and other insurance authorities. These regulations typically require segregation of fiduciary funds and limit the types of investments that may be made with them. Interest income from these investments varies depending on the amount of funds invested and applicable interest rates, both of which vary from time to time. For presentation purposes, fiduciary interest is segregated from the other revenues of Marsh and Guy Carpenter and separately presented within the segment, as shown in the revenue by segments charts presented earlier in this MD&A.

The results of operations for the Risk and Insurance Services segment are presented below:

(In millions of dollars, except percentages)	2018				2017				2016
Revenue	$	8,228			$	7,630			$	7,143
Compensation and Benefits	4,485				4,171				3,904
Other Operating Expenses	1,879				1,728				1,658
Operating Expenses	6,364				5,899				5,562
Operating Income	$	1,864			$	1,731			$	1,581
Operating Income Margin	22.7		%		22.7		%		22.1		%

Revenue

Revenue in the Risk and Insurance Services segment increased 8% in 2018 compared with 2017, due to a 5% growth in underlying revenue and 3% growth from acquisitions. The adoption of the new revenue standard shifted revenue among quarters from historical patterns, but did not have a significant year-over-year impact on annual revenue.

In Marsh, revenue increased 7% to $6.9 billion in 2018 as compared with 2017, reflecting a 4% increase on an underlying basis and a 3% increase from acquisitions. U.S./Canada had underlying revenue growth of 6%. International operations increased 2% on an underlying basis, reflecting increases of 5% in Asia Pacific and 6% in Latin America, while growth in EMEA was flat.

Guy Carpenter’s revenue increased 8% to $1.3 billion in 2018 compared with 2017, or 7% on an underlying basis.

Fiduciary interest income was $65 million in 2018 compared with $39 million in 2017 due to the combined effect of higher average invested funds and higher interest rates.

The Risk and Insurance Services segment completed twelve acquisitions during 2018. Information regarding those acquisitions is included in Note 4 to the consolidated financial statements.

Revenue in the Risk and Insurance Services segment increased 7% in 2017 compared with 2016, due to a 3% growth in underlying revenue and 4% growth from acquisitions.

In Marsh, revenue increased 7% to $6.4 billion in 2017 as compared with 2016, reflecting a 3% increase on an underlying basis and a 5% increase from acquisitions. U.S./Canada had underlying revenue growth of 4%. International operations increased 2% on an underlying basis, reflecting increases of 6% in Asia Pacific and 7% in Latin America, while growth in EMEA was flat.

Guy Carpenter’s revenue increased 4% to $1.2 billion in 2017 compared with 2016, for both a reported and underlying basis.

Fiduciary interest income was $39 million in 2017 compared with $26 million in 2016 due to the combined effect of higher average invested funds and higher interest rates.

The Risk and Insurance Services segment completed seven acquisitions during 2017.

Expense

Expense in the Risk and Insurance Services segment increased 8% in 2018 compared with 2017, reflecting increases of 5% on an underlying basis, 2% from acquisitions and 1% from the impact of foreign currency.

During 2018, Marsh initiated a program to simplify the organization through reduced management layers and more common structures across regions and businesses to more closely align with its more formalized segmentation strategy across large risk management, middle market corporate, and small commercial & personal segments. These efforts are expected to create increased efficiencies and additional capacity for reinvestment in people and technology. The Company incurred restructuring severance and consulting costs related to this initiative of $96 million in 2018.

During the year, restructuring and related charges increased underlying expenses by approximately 2%. The remaining increase in underlying expense was primarily due to higher base salaries and incentive compensation.

Expense in the Risk and Insurance Services segment increased 6% in 2017 compared with 2016, reflecting a 2% increase on an underlying basis and a 5% increase from acquisitions. The underlying expense increase is primarily due to higher base salaries and incentive compensation costs, partly offset by lower costs related to liabilities for errors and omissions.

Consulting

The Company conducts business in its Consulting segment through two main business groups, Mercer and Oliver Wyman Group. Mercer provides consulting expertise, advice, services and solutions in the areas of health, wealth and career. Oliver Wyman Group provides specialized management, economic and brand consulting services.

Effective January 1, 2017, Mercer merged its investment and retirement businesses into a newly-created wealth business. We believe this combination better aligns Mercer’s investment management capabilities globally.

The major component of revenue in the Consulting business is fees paid by clients for advice and services. Mercer, principally through its health line of business, also earns revenue in the form of commissions received from insurance companies for the placement of group (and occasionally individual) insurance contracts, primarily life, health and accident coverages. Revenue for Mercer’s investment management business and certain of Mercer’s defined contribution administration services consists principally of fees based on assets under management or administration.

Revenue in the Consulting segment is affected by, among other things, global economic conditions, including changes in clients’ particular industries and markets. Revenue is also affected by competition due to the introduction of new products and services, broad trends in employee demographics, including levels of employment, the effect of government policies and regulations, and fluctuations in interest and foreign exchange rates. Revenues from the provision of investment management services and retirement trust and administrative services are significantly affected by the level of assets under management or administration, which is impacted by securities market performance.

For the investment management business, revenues from the majority of funds are included on a gross basis in accordance with U.S. GAAP and include reimbursable expenses incurred by professional staff and sub-advisory fees, and the related expenses are included in other operating expenses.

The results of operations for the Consulting segment are presented below:

(In millions of dollars, except percentages)	2018				2017				2016
Revenue	$	6,779			$	6,444			$	6,112
Compensation and Benefits	3,760				3,573				3,450
Other Operating Expenses	1,920				1,761				1,624
Operating Expenses	5,680				5,334				5,074
Operating Income	$	1,099			$	1,110			$	1,038
Operating Income Margin	16.2		%		17.2		%		17.0		%

Revenue

Consulting revenue in 2018 increased 5% compared with 2017, reflecting a 3% increase on an underlying basis, 1% growth from acquisitions and a 1% increase from the impact of foreign currency translation. The adoption of the new revenue recognition guidance did not have a significant impact on the timing of revenue recognition or the year-over-year amount of annual revenue in the segment in 2018.

Mercer's revenue in 2018 increased 5% over the prior year to $4.7 billion, or 3% on an underlying basis. Mercer's year over year revenue comparison also reflects an increases of 1% from acquisitions and 1% from the impact of foreign currency translation. The underlying revenue growth reflects an increase in Career of 5%, Health of 4% and Wealth of 1%. Within Wealth, Investment Management & Related Services increased 9% while Defined Benefit Consulting & Administration decreased 4% compared with the prior year. Oliver Wyman Group’s revenue increased 7% in 2018 compared with 2017, or 5% on an underlying basis.

The Consulting segment completed eight acquisitions during 2018. Information regarding these acquisitions is included in Note 4 to the consolidated financial statements.

Consulting revenue in 2017 increased 5% compared with 2016, reflecting a 4% increase on an underlying basis and 2% growth from acquisitions. Mercer’s revenue increased 5% to $4.5 billion over the prior year, or 2% on an underlying basis. Mercer's year over year revenue growth also reflects an increase of 2% from acquisitions. The underlying revenue growth reflects an increase in Career of 5%, Health of 2% and Wealth of 2%. Within Wealth, Investment Management & Related Services increased 10% while Defined Benefit Consulting & Administration decreased 2% compared with the prior year. Oliver Wyman Group’s revenue increased 7% in 2017 compared with 2016, on both a reported and underlying basis.

The Consulting segment completed three acquisitions during 2017.

Expense

Consulting expense in 2018 increased 6% compared with 2017, reflecting increases of 5% on an underlying basis, 1% from the impact of acquisitions and 1% from the impact of foreign currency translation. The increase in underlying expense reflects higher base salaries, asset based fees and recoverable expenses and costs incurred of $51 million associated with a business restructuring at Mercer initiated in the fourth quarter of 2018. The Company expects to incur additional costs of approximately $20-30 million in 2019 related to this initiative.

Consulting expense in 2017 increased 5% compared with 2016, reflecting an increase of 3% on an underlying basis and a 3% increase from the impact of acquisitions. The increase in underlying expense

reflects higher base salaries, asset based fees and outside service costs, partly offset by lower severance costs and lower costs related to liabilities for errors and omissions.

Corporate and Other

Corporate expense in 2018 was $202 million compared with $186 million in 2017. The increase in expense is primarily due to costs related to the pending acquisition of JLT.

Corporate expense in 2017 was $186 million compared with $188 million in 2016. The decrease in expense is primarily due to lower consulting, occupancy and general insurance costs.

Other Corporate Items

Interest

Interest income earned on corporate funds amounted to $11 million in 2018 compared with $9 million in 2017. Interest expense in 2018 was $290 million compared with $237 million in 2017. The increase in interest expense was primarily due to higher average debt outstanding in 2018 and bridge loan financing fees related to the pending acquisition of JLT.

Interest income earned on corporate funds amounted to $9 million in 2017 compared with $5 million in 2016. The decrease is due to the combined effects of a lower level of invested funds and lower interest rates. Interest expense in 2017 was $237 million compared with $189 million in 2016 due to higher average outstanding debt in 2017.

Investment Income

The caption "Investment income" in the consolidated statements of income comprises realized and unrealized gains and losses from investments. It includes, when applicable, other-than-temporary declines in the value of securities, mark-to-market increases/decreases in equity investments with readily determinable fair values and equity method gains or losses on its investments in private equity funds. The Company's investments may include direct investments in insurance, consulting or other strategically linked companies and investments in private equity funds.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2018, the Company prospectively adopted a new accounting standard that requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The Company holds certain equity investments that under legacy U.S. GAAP were previously treated as available for sale securities, whereby the mark-to-market change was recorded to other comprehensive income in its consolidated balance sheet. The Company recorded a cumulative-effect adjustment increase to retained earnings as of the beginning of the period of adoption of $14 million, reflecting the reclassification of cumulative unrealized gains, net of tax, as of December 31, 2017 from other comprehensive income to retained earnings. Therefore, prior periods have not been restated.

The Company recorded a net investment loss of $12 million in 2018. The net investment loss reflects the impact of an $83 million charge recorded in 2018 related to an other than temporary decline in the Company's equity method investment in Alexander Forbes (see Note 10 to the consolidated financial statements) partly offset by investment gains of $54 million related to mark-to-market changes in equity securities (discussed above) and $17 million related to investments in private equity funds and other investments. The Company recorded net investment income of $15 million in 2017 compared to less than $1 million in 2016. The increase in 2017 versus 2016 was primarily due to a gain on the sale of an investment and higher equity method gains related to the Company's investments in private equity funds.

Income Taxes

On December 22, 2017, the U.S. tax legislation commonly known as the "Tax Cuts and Jobs Act" (the "TCJA") significantly changed the U.S. Internal Revenue Code of 1986, as amended. The TCJA generally became effective on January 1, 2018. The TCJA provided for a reduction in the U.S. corporate tax rate to 21% and the creation of a new method of taxing non-U.S. based operations. The TCJA also changed the deductibility of certain expenses, primarily executive officers’ compensation and interest. In the fourth quarter of 2017 the Company recorded a provisional charge of $460 million related to the enactment of

the TCJA. As discussed in Note 7 to the consolidated financial statements, this provisional charge was adjusted in 2018.

The TCJA provided for a transition to a new method of taxing non-U.S. based operations via a transition tax on undistributed earnings of non-U.S. subsidiaries. The Company recorded a provisional charge of $240 million in the fourth quarter of 2017 as an estimate of U.S. transition taxes and ancillary effects, including state taxes and foreign withholding taxes related to the change in permanent reinvestment status with respect to our pre-2018 foreign earnings. This transition tax is payable over eight years. The reduction of the U.S. corporate tax rate from 35% to 21% reduced the value of the U.S. deferred tax assets and liabilities; accordingly, a charge of $220 million was recorded. Adjustments during 2018 to the provisional estimates of transition taxes and U.S. deferred tax assets and liabilities decreased income tax expense by $5 million. These amounts are now final, and the Company does not expect further adjustments to the initial provisional charge.

The Company's consolidated effective tax rate was 25.6%, 42.9%, and 27.6% in 2018, 2017 and 2016, respectively. The rate in 2018 reflects ongoing impacts of the TCJA, primarily the reduced 21% U.S. statutory tax rate and certain tax planning benefits, largely offset by higher estimated costs from the new method of taxing non-U.S. based operations, greater disallowance of compensation and entertainment deductions, the effect of a charge related to the Company’s investment in Alexander Forbes as discussed in Note 10 and a decrease in excess tax benefits related to share compensation primarily due to the lower U.S. tax rate. The rates in 2017 and 2016 reflect foreign operations taxed at rates below the 35% U.S. statutory tax rate, including the effect of repatriation. The tax rates in all periods reflect the impact of discrete tax matters, tax legislation, and nontaxable adjustments to contingent acquisition consideration.

The effective tax rate is sensitive to the geographic mix and repatriation of the Company's earnings, which may result in higher or lower tax rates. Thus, a shift in the mix of profits among jurisdictions can affect the effective tax rate. In 2018, pre-tax income in the U.K., Barbados, Canada, Australia, and Ireland accounted for approximately 60% of the Company's total non-U.S. pre-tax income, with effective rates in those countries of 26%, 1%, 28%, 27% and 10%, respectively.

The TCJA is expected to provide an ongoing benefit to our effective tax rate and U.S. cash tax liabilities due to the significantly lower U.S. statutory tax rate and the quasi-territorial system.

As a U.S. domiciled parent holding company, Marsh & McLennan Companies, Inc. is the issuer of essentially all of the Company's external indebtedness, and incurs the related interest expense in the U.S. Further, most senior executive and oversight functions are conducted in the U.S. and the associated costs are incurred primarily in the United States.

The mandatory taxation of accumulated undistributed foreign earnings through the transition tax substantially changed the economic considerations of continued permanent investment of those accumulated earnings, a key component of our global capital strategy. As a result of the transition tax, the Company anticipates repatriating most of the accumulated earnings that was previously intended to be permanently re-invested outside of the U.S. We continue to evaluate our global investment and repatriation strategy in light of expected relief from U.S. tax reform under the new quasi-territorial tax regime for future foreign earnings.

The effective tax rate may vary significantly from period to period for the foreseeable future. It is sensitive to the geographic mix of and repatriation of the Company's earnings, which may result in higher or lower effective tax rates. Losses in certain jurisdictions cannot be offset by earnings from other operations, and may require valuation allowances that affect the rate, depending on estimates of the realizability of associated deferred tax assets. The effective tax rate is also sensitive to changes in unrecognized tax benefits, including the impact of settled tax audits and expired statutes of limitation.

The realization of deferred tax assets depends on generating future taxable income during the periods in which the tax benefits are deductible or creditable. Tax liabilities are determined and assessed jurisdictionally by legal entity or filing group. Certain taxing jurisdictions allow or require combined or consolidated tax filings. The Company assessed the realizability of its deferred tax assets. The Company considered all available evidence, including the existence of a recent history of losses, placing particular weight on evidence that could be objectively verified. A valuation allowance was recorded to reduce deferred tax assets to the amount that the Company believes is more likely than not to be realized.

Changes in tax laws, rulings, policies or related legal and regulatory interpretations occur frequently and may also have significant favorable or adverse impacts on our effective tax rate.

Liquidity and Capital Resources

The Company is organized as a legal entity separate and distinct from its operating subsidiaries. As the Company does not have significant operations of its own, the Company is dependent upon dividends and other payments from its operating subsidiaries to pay principal and interest on its outstanding debt obligations, pay dividends to stockholders, repurchase its shares and pay corporate expenses. The Company can also provide financial support to its operating subsidiaries for acquisitions, investments and certain parts of their business that require liquidity, such as the capital markets business of Guy Carpenter. Other sources of liquidity include borrowing facilities discussed below in financing cash flows.

The Company derives a significant portion of its revenue and operating profit from operating subsidiaries located outside of the United States. Funds from those operating subsidiaries are regularly repatriated to the United States out of annual earnings. At December 31, 2018, the Company had approximately $917 million of cash and cash equivalents in its foreign operations, which includes $168 million of operating funds required to be maintained for regulatory requirements or as collateral under certain captive insurance arrangements. The Company expects to continue its practice of repatriating available funds from its non-U.S. operating subsidiaries out of current annual earnings. Where appropriate, a portion of the current year earnings will continue to be permanently reinvested. With respect to repatriating 2017 and prior earnings, the Company has evaluated such factors as its short- and long-term capital needs, acquisition and borrowing strategies, and the availability of cash for repatriation for each of its subsidiaries. The Company has determined that, in general, its permanent reinvestment assertions, in light of the enactment of the Tax Cuts and Jobs Act, should allow the Company to repatriate previously taxed earnings from the deemed repatriations as cash becomes available.

During 2018, the Company recorded foreign currency translation adjustments which decreased net equity by $529 million. Continued strengthening of the U.S. dollar against foreign currencies would further reduce the translated U.S. dollar value of the Company’s net investments in its non-U.S. subsidiaries, as well as the translated U.S. dollar value of cash repatriations from those subsidiaries.

Cash on our consolidated balance sheets includes funds available for general corporate purposes. Funds held on behalf of clients in a fiduciary capacity are segregated and shown separately in the consolidated balance sheets as an offset to fiduciary liabilities. Fiduciary funds cannot be used for general corporate purposes, and should not be considered as a source of liquidity for the Company.

Operating Cash Flows

The Company generated $2.4 billion of cash from operations in 2018, compared with $1.9 billion in 2017. These amounts reflect the net income of the Company during those periods, excluding gains or losses from investments, adjusted for non-cash charges and changes in working capital which relate primarily to the timing of payments of accrued liabilities or receipts of assets and pension contributions.

Pension-Related Items

Contributions

During 2018, the Company contributed $30 million to its U.S. pension plans and $82 million to non-U.S. pension plans compared to contributions of $85 million to U.S. plans and $229 million to non-U.S. plans in 2017.

In the United States, contributions to the tax-qualified defined benefit plans are based on ERISA guidelines and the Company generally expects to maintain a funded status of 80% or more of the liability determined under the ERISA guidelines. In 2018 the Company made $30 million of contributions to its non-qualified plans. The Company expects to contribute approximately $28 million to its U.S. pension plans in 2019.

The Company contributed $21 million to the U.K. plans in 2018, including an expense allowance of approximately $9 million. Based on the funding test carried out at November 1, 2018, the Company contributions to the U.K. plans in 2019 are expected to be approximately $11 million, including the expense allowance.

Outside the United States, the Company has a large number of non-U.S. defined benefit pension plans, the largest of which are in the U.K., which comprise approximately 81% of non-U.S. plan assets at December 31, 2018. Contribution rates for non-U.S. plans are generally based on local funding practices and statutory requirements, which may differ significantly from measurements under U.S. GAAP. In the U.K., the assumptions used to determine pension contributions are the result of legally-prescribed negotiations between the Company and the plans' Trustee that typically occur every three years in conjunction with the actuarial valuation of the plans. Currently, this results in a lower funded status than under U.S. GAAP and may result in contributions irrespective of the U.S. GAAP funded status. In November 2016, the Company and the Trustee of the U.K. Defined Benefits Plans agreed to a funding deficit recovery plan for the U.K. defined benefit pension plans. The current agreement with the Trustee sets out the annual deficit contributions which would be due based on the deficit at December 31, 2015. The funding level is subject to re-assessment, in most cases on November 1 of each year. If the funding level on November 1 is sufficient, no deficit funding contributions will be required in the following year, and the contribution amount will be deferred. The funding level was re-assessed on November 1, 2018 and no deficit funding contributions are required in 2019. The funding level will be re-assessed on November 1, 2019. As part of a long-term strategy, which depends on having greater influence over asset allocation and overall investment decisions, in November 2016 the Company renewed its agreement to support annual deficit contributions by the U.K. operating companies under certain circumstances, up to GBP 450 million over a seven-year period.

In the aggregate, the Company expects to contribute approximately $65 million to its non-U.S. defined benefit plans in 2019, comprising approximately $54 million to plans outside of the U.K. and $11 million to the U.K. plans.

Changes to Pension Plans

In March 2017, the Company modified its defined benefit pension plans in Canada to discontinue further benefit accruals for participants after December 31, 2017 and replaced them with a defined contribution arrangement. The Company also amended its post-retirement benefits plan in Canada so that individuals who retire after April 1, 2019 will not be eligible to participate, except in certain situations. The Company re-measured the assets and liabilities of the plans, based on assumptions and market conditions on the amendment date.

In October 2016, the Company modified its U.S. defined benefit pension plans to discontinue further benefit accruals for participants after December 31, 2016. At the same time, the Company amended its U.S. defined contribution retirement plans for most of its U.S. employees to add an automatic Company contribution equal to 4% of eligible base pay beginning on January 1, 2017. This new Company contribution, together with the Company’s current matching contribution, provides eligible U.S. employees with the opportunity to receive a total contribution of up to 7% of eligible base pay. As required under GAAP, the defined benefit plans that were significantly impacted by the modification were re-measured in October 2016 using market data and assumptions as of the modification date. The net periodic pension expense recognized in 2016 reflects the weighted average costs of the December 31, 2015 measurement and the October 2016 re-measurement. In addition, the U.S. qualified plans were merged effective December 30, 2016, since no participants would be receiving benefit accruals after December 2016.

Changes in Funded Status and Expense

The year-over-year change in the funded status of the Company's pension plans is impacted by the difference between actual and assumed results, particularly with regard to return on assets, and changes in the discount rate, as well as the amount of Company contributions, if any. Unrecognized actuarial losses were approximately $1.9 billion and $2.6 billion at December 31, 2018 for the U.S. plans and non-U.S. plans, respectively, compared with $1.8 billion and $2.6 billion at December 31, 2017. The increase in the U.S. was primarily due to a decrease in asset values partly offset by the impact of an increase in the discount rate used to measure plan liabilities. The actuarial loss related to the non-U.S. plans was unchanged as a decrease in the value of the plans' assets was offset by the impact of increases in the discount rate used to measure the plans' liabilities, the impact of the U.K. settlement in the fourth quarter of 2018 discussed above and by the impact of foreign exchange translation. In the past several years, the amount of unamortized losses has been significantly impacted, both positively and negatively, by actual asset performance and changes in discount rates. The discount rate used to measure plan liabilities

increased in both the U.S. and the U.K. (the Company's largest plans) in 2018. The discount rate used to measure plan liabilities decreased in 2017 and in 2016. The decreases in 2017 and 2016 followed an increase in 2015. An increase in the discount rate decreases the measured plan benefit obligation, resulting in actuarial gains, while a decrease in the discount rate increases the measured plan obligation, resulting in actuarial losses. During 2018, the Company's defined benefit pension plan assets had losses of 7.4% and 1.0% in the U.S. and U.K., respectively. During 2017, the Company's defined benefit pension plan assets had actual returns of 19.3% and 9.1% in the U.S. and U.K., respectively. During 2016, the Company's defined benefit pension plan assets had actual returns of 9.8% in the U.S. and 22.1% in the U.K.

Overall, based on the measurement at December 31, 2018, expenses related to the Company’s defined benefit plans are expected to decrease in 2019 by approximately $51 million compared to 2018, reflecting an increase in U.S. plans of $8 million and a decrease in non-U.S. plans of approximately $59 million, primarily in the U.K. The decrease in non-U.S. plans is primarily in the U.K., and reflects a lower charge for amortization of the net actuarial loss as well as the reduction in the 2018 net benefit credit by the $42 million settlement charge discussed previously. The recognition of a similar charge in 2019 and the amount of such a charge, if any, is dependent upon whether participant lump sum elections reach or exceed the settlement threshold.

Prior to 2016, service and interest costs were estimated using a single weighted average discount rate derived from the yield curves used to measure the benefit obligations at the beginning of the period. In 2016, the Company changed the approach used to estimate the service and interest cost components of net periodic benefit cost for its significant non-U.S. plans. This change in approach was made to improve the correlation between the projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. The change did not impact the measurement of the plans’ total projected benefit obligation. The Company accounted for this change as a change in estimate, that was applied prospectively beginning in 2016 and resulted in pension expense being approximately $45 million lower in 2016 than if the prior approach had been used.

The Company’s accounting policies for its defined benefit pension plans, including the selection of and sensitivity to assumptions, are discussed below under Management’s Discussion of Critical Accounting Policies. For additional information regarding the Company’s retirement plans, see Note 8 to the consolidated financial statements.

Financing Cash Flows

Net cash used for financing activities was $1.3 billion in 2018 compared with $1.0 billion used in 2017.

Debt

The Company increased outstanding debt by approximately $340 million in 2018 and $680 million in 2017.

The Company has established a short-term debt financing program of up to $1.5 billion through the issuance of commercial paper. The proceeds from the issuance of commercial paper are used for general corporate purposes. The Company had no commercial paper outstanding at December 31, 2018.

In October 2018, the Company repaid $250 million of maturing senior notes.

In March 2018, the Company issued $600 million of 4.20% senior notes due 2048. The Company used the net proceeds for general corporate purposes.

In January 2017, the Company issued $500 million of 2.75% senior notes due in 2022 and $500 million of 4.35% senior notes due in 2047. The Company used the net proceeds for general corporate purposes, which included the repayment of a $250 million debt maturity in April 2017.

In March 2016, the Company issued $350 million of 3.30% seven-year senior notes. The Company used the net proceeds from this issuance for general corporate purposes.

Subsequent Event

As part of the Company’s planned financing for the proposed acquisition of JLT, the Company issued $5 billion aggregate amount of senior notes in January 2019. The various tranches consisted of $700 million of 3.50% senior notes due 2020, $1 billion of 3.875% senior notes due 2024, $1.25 billion of 4.375%

senior notes due 2029, $500 million of 4.75% senior notes due 2039, $1.25 billion of 4.90% senior notes due 2049 and $300 million floating rate senior notes due 2021. The Company intends to use the net proceeds to fund, in part, the pending acquisition of JLT, including the payment of related fees and expenses, and to repay certain JLT indebtedness.

Credit Facilities

On September 18, 2018, the Company entered into a bridge loan agreement to secure funding for the proposed JLT transaction. The Company paid approximately $35 million of customary upfront fees related to the bridge loan, which are being amortized as interest expense based on the period of time the facility is expected to be in effect (including any loans outstanding). The bridge loan agreement is discussed in more detail in Note 13 of the consolidated financial statements.

In October 2018, the Company and certain of its foreign subsidiaries increased its multi-currency five-year unsecured revolving credit facility from $1.5 billion to $1.8 billion. The interest rate on this facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. This facility expires in October 2023 and requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. There were no borrowings outstanding under this facility at December 31, 2018.

The Company also maintains other credit facilities, guarantees and letters of credit with various banks, aggregating $594 million at December 31, 2018 and $624 million at December 31, 2017. There were no outstanding borrowings under these facilities at December 31, 2018 or December 31, 2017.

The Company's senior debt is currently rated A- by Standard & Poor's and Baa1 by Moody's. The Company's short-term debt is currently rated A-2 by Standard & Poor's and P-2 by Moody's. The Company carries a negative outlook from both firms.

Share Repurchases

During 2018, the Company repurchased 8.2 million shares of its common stock for total consideration of $675 million at an average price per share of $82.61. In November 2016, the Board of Directors authorized an increase in the Company’s share repurchase program, which supersedes any prior authorization, allowing management to buy back up to $2.5 billion of the Company’s common stock. As of December 31, 2018, the Company remained authorized to purchase additional shares of its common stock up to a value of approximately $866 million. There is no time limit on this authorization.

During 2017, the Company repurchased 11.5 million shares of its common stock for total consideration of $900 million at an average price per share of $77.93.

Dividends

The Company paid total dividends of $807 million in 2018 ($1.58 per share), $740 million in 2017 ($1.43 per share) and $682 million in 2016 ($1.30 per share).

Contingent Payments Related To Acquisitions

During 2018, the Company paid $91 million of contingent payments related to acquisitions made in prior years. These payments are split between financing and operating cash flows in the consolidated statements of cash flows. Payments of $55 million related to the contingent consideration liability that was recorded on the date of acquisition are reflected as financing cash flows. Payments related to increases in the contingent consideration liability subsequent to the date of acquisition of $36 million are reflected as operating cash flows. Remaining estimated future contingent consideration payments of $183 million for acquisitions completed in 2018 and in prior years are included in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheet at December 31, 2018. The Company paid deferred purchase consideration related to prior years' acquisitions of $62 million, $55 million and $54 million in the years ended December 31, 2018, 2017 and 2016, respectively. Remaining deferred cash payments of approximately $139 million are included in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheet at December 31, 2018.

In 2017, the Company paid $108 million of contingent payments related to acquisitions made in prior periods, of which $81 million was reported as financing cash flows and $27 million as operating cash flows. In 2016, the Company made $86 million of contingent payments related to acquisitions made in prior periods, of which $44 million was reported as financing cash flows and $42 million as operating cash flows.

Derivatives

In connection with the JLT Transaction, to hedge the risk of appreciation of the GBP-denominated purchase price relative to the U.S. dollar, on September 20, 2018, the Company entered into the FX Contract to, solely upon consummation of the Transaction, purchase £5.2 billion and sell a corresponding amount of U.S dollars at a contracted exchange rate. The FX Contract is discussed in Note 11 to the consolidated financial statements. An unrealized loss of $325 million related to the change in fair value of this derivative has been recognized in the consolidated statement of income for year ended December 31, 2018, primarily related to the depreciation of the GBP. The FX Contract does not qualify for hedge accounting treatment under applicable accounting guidance. The Company expects to record fair value gains and losses, which may be significant, through its income statement until the completion of the Transaction.

In connection with the JLT Transaction, to hedge the risk of increases in future interest rates prior to its issuance of senior notes, in the fourth quarter of 2018, the Company entered into Treasury locks related to $2 billion of the expected debt. The fair value at December 31, 2018 is based on the published treasury rate plus forward premium as of December 31, 2018 compared to the all in rate at the inception of the contract. The contracts were not designated as an accounting hedge.The Company recorded an unrealized loss of $116 million related to the change in the fair value of these derivatives in the consolidated statement of income for the twelve months ended December 31, 2018. In January 2019, upon issuance of the $5 billion of senior notes, the Company settled the treasury lock derivatives and made a payment to its counter party for $122 million. An additional charge of $6 million will be recorded in the first quarter of 2019 related to the settlement of the Treasury lock derivatives.

Investing Cash Flows

Net cash used for investing activities amounted to $1.1 billion in 2018 compared with $956 million used for investing activities in 2017.

The Company paid $884 million and $655 million, net of cash acquired, for acquisitions it made during 2018 and 2017, respectively.

The Company’s additions to fixed assets and capitalized software, which amounted to $314 million in 2018 and $302 million in 2017, primarily relate to computer equipment purchases, the refurbishing and modernizing of office facilities and software development costs.

The Company has commitments for potential future investments of approximately $43 million in four private equity funds that invest primarily in financial services companies.

Commitments and Obligations

The following sets forth the Company’s future contractual obligations by the types identified in the table below as of December 31, 2018:

	Payment due by Period
Contractual Obligations (In millions of dollars)	Total				Within 1 Year				1-3 Years				4-5 Years				After 5 Years
Current portion of long-term debt	$	314			$	314			$	—			$	—			$	—
Long-term debt	5,548				—				1,032				1,132				3,384
Interest on long-term debt	2,473				224				414				330				1,505
Net operating leases	2,071				329				574				447				721
Service agreements	259				189				51				15				4
Other long-term obligations	359				109				197				53				—
Total	$	11,024			$	1,165			$	2,268			$	1,977			$	5,614

The chart does not include the senior notes issued in January 2019 discussed above. The above does not include the liability for unrecognized tax benefits of $78 million as the Company is unable to reasonably predict the timing of settlement of these liabilities, other than approximately $3 million that may become payable during 2019. The above does not include net pension liabilities of approximately $1.8 billion because the timing and amount of ultimate payment of such liability is dependent upon future

events, including, but not limited to, future returns on plan assets and changes in the discount rate used to measure the liabilities. The above does not include the remaining transitional tax payments related to the TCJA of $171 million. The above does not include expected payments related to the pending acquisition of JLT. The amounts of estimated future benefits payments to be made from pension plan assets are disclosed in Note 8 to the consolidated financial statements. In 2019, the Company expects to contribute approximately $28 million and $65 million to its U.S. and non-U.S. defined benefit pension plans, respectively.

Management’s Discussion of Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and judgments that affect reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Management considers the policies discussed below to be critical to understanding the Company’s financial statements because their application places the most significant demands on management’s judgment, and requires management to make estimates about the effect of matters that are inherently uncertain. Actual results may differ from those estimates.

Revenue Recognition

The adoption of the new revenue standard on January 1, 2018 has increased the significance of judgments and estimates management must make to apply the guidance. In particular, in the Risk and Insurance Services segment, judgments related to the amount of variable revenue consideration to ultimately be received on placement of quota share reinsurance treaties and contingent commission from insurers, which was previously recognized when the contingency was resolved, now requires significant judgments and estimates.

Under the new standard, certain costs to obtain or fulfill a contract that were previously expensed as incurred have been capitalized. The Company capitalizes the incremental costs to obtain contracts primarily related to commissions or sales bonus payments. These deferred costs are amortized over the expected life of the underlying customer relationships. The Company also capitalizes certain pre-placement costs that are considered fulfillment costs that are amortized at a point in time when the associated revenue is recognized.

Management also makes significant judgments and estimates to measure the progress toward completing performance obligations and realization rates for consideration related to contracts as well as potential performance-based fees in the Consulting segment.

See Note 2 to the consolidated financial statements for additional information.

Legal and Other Loss Contingencies

The Company and its subsidiaries are subject to numerous claims, lawsuits and proceedings including claims for errors and omissions ("E&O"). GAAP requires that a liability be recorded when a loss is both probable and reasonably estimable. Significant management judgment is required to apply this guidance. The Company utilizes case level reviews by inside and outside counsel, an internal actuarial analysis by Oliver Wyman Group, a subsidiary of the Company, and other methods to estimate potential losses. The liability is reviewed quarterly and adjusted as developments warrant. In many cases, the Company has not recorded a liability, other than for legal fees to defend the claim, because we are unable, at the present time, to make a determination that a loss is both probable and reasonably estimable. Given the unpredictability of E&O claims and of litigation that could flow from them, it is possible that an adverse outcome in a particular matter could have a material adverse effect on the Company’s businesses, results of operations, financial condition or cash flow in a given quarterly or annual period.

In addition, to the extent that insurance coverage is available, significant management judgment is required to determine the amount of recoveries that are probable of collection under the Company’s various insurance programs.

Retirement Benefits

The Company maintains qualified and non-qualified defined benefit pension and defined contribution plans for its eligible U.S. employees and a variety of defined benefit and defined contribution plans for its eligible non-U.S. 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 in U.S. and applicable foreign laws.

The Company recognizes the funded status of its over-funded defined benefit pension and retiree medical plans as a net benefit plan asset and its unfunded and underfunded plans as a net benefit plan liability. The gains or losses and prior service costs or credits that have not been recognized as components of net periodic costs are recorded as a component of Accumulated Other Comprehensive Income ("AOCI"), net of tax, in the Company’s consolidated balance sheets. The gains and losses that exceed specified corridors are amortized prospectively out of AOCI over a period that approximates the remaining life expectancy of participants in plans where substantially all participants are inactive or the average remaining service period of active participants for plans with active participants. The vast majority of unrecognized losses relate to inactive plans and are amortized over the remaining life expectancy of the participants.

The determination of net periodic pension cost is based on a number of assumptions, including an expected long-term rate of return on plan assets, the discount rate, mortality and assumed rate of salary increase. The assumptions used in the calculation of net periodic pension costs and pension liabilities are disclosed in Note 8 to the consolidated financial statements. The assumptions for expected rate of return on plan assets and the discount rate are discussed in more detail below.

The long-term rate of return on plan assets assumption is determined for each plan based on the facts and circumstances that exist as of the measurement date, and the specific portfolio mix of each plan’s assets. The Company utilizes a model developed by Mercer, a subsidiary of the Company, to assist in the determination of this assumption. The model takes into account several factors, including: actual and target portfolio allocation; investment, administrative and trading expenses incurred directly by the plan trust; historical portfolio performance; relevant forward-looking economic analysis; and expected returns, variances and correlations for different asset classes. These measures are used to determine probabilities using standard statistical techniques to calculate a range of expected returns on the portfolio.

The target asset allocation for the U.S. Plans is 64% equities and equity alternatives and 36% fixed income. At December 31, 2018, the actual allocation for the U.S. Plans was 62% equities and equity alternatives and 38% fixed income. At the end of 2018, the target asset allocation for the U.K. Plans, which comprise approximately 81% of non-U.S. Plan assets, was 34% equities and equity alternatives and 66% fixed income. At December 31, 2018, the actual allocation for the U.K. Plans was 34% equities and equity alternatives and 66% fixed income.

The discount rate selected for each U.S. Plan is based on a model bond portfolio with coupons and redemptions that closely match the expected liability cash flows from the plan. Discount rates for non-U.S. plans are based on appropriate bond indices adjusted for duration; in the U.K., the plan duration is reflected using the Mercer yield curve.

The table below shows the weighted average assumed rate of return and the discount rate at the December 31, 2018 measurement date (for measuring pension expense in 2019) for the total Company, the U.S. and the Rest of World ("ROW").

	Total Company			U.S.			ROW
Assumed Rate of Return on Plan Assets	5.74	%		7.95	%		4.87	%
Discount Rate	3.48	%		4.45	%		2.89	%

Holding all other assumptions constant, a half-percentage point change in the rate of return on plan assets and discount rate assumptions would affect net periodic pension cost for the U.S. and U.K. plans, which together comprise approximately 84% of total pension plan liabilities, as follows:

	0.5 Percentage Point Increase								0.5 Percentage Point Decrease
(In millions of dollars)	U.S.				U.K.				U.S.				U.K.
Assumed Rate of Return on Plan Assets	$	(22	)		$	(40	)		$	22			$	40
Discount Rate	$	(1	)		$	(4	)		$	—			$	3

The impact of discount rate changes shown above relates to the increase or decrease in actuarial gains or losses being amortized through net periodic pension cost, as well as the increase or decrease in interest expense, with all other facts and assumptions held constant. It does not contemplate nor include potential future impacts a change in the interest rate environment and discount rates might cause, such as the impact on the market value of the plans’ assets. Changing the discount rate and leaving the other assumptions constant also may not be representative of the impact on expense, because the long-term rates of inflation and salary increases are often correlated with the discount rate. Changes in these assumptions will not necessarily have a linear impact on the net periodic pension cost.

The Company contributes to certain health care and life insurance benefits provided to its retired employees. The cost of these post-retirement benefits for employees in the U.S. is accrued during the period up to the date employees are eligible to retire, but is funded by the Company as incurred. The key assumptions and sensitivity to changes in the assumed health care cost trend rate are discussed in Note 8 to the consolidated financial statements.

Income Taxes

The Company's tax rate reflects its income, statutory tax rates and tax planning in the various jurisdictions in which it operates. In 2017, the Company's tax expense was significantly impacted by the enactment of the TCJA, which is discussed in more detail in Note 7 to the consolidated financial statements included in this report. Significant judgment is required in determining the annual effective tax rate and in evaluating uncertain tax positions. The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step involves recognition. The Company determines whether it is more likely than not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position derive from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority. Uncertain tax positions are evaluated based upon the facts and circumstances that exist at each reporting period and involve significant management judgment. Subsequent changes in judgment based upon new information may lead to changes in recognition, derecognition, and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue.

Certain items are included in the Company's tax returns at different times than the items are reflected in the financial statements. As a result, the annual tax expense reflected in the consolidated statements of income is different than that reported in the tax returns. Some of these differences are permanent, such as expenses that are not deductible in the returns, and some differences are temporary and reverse over time, such as depreciation expense. Temporary differences create deferred tax assets and liabilities, which are measured at existing tax rates. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred, or expense for which a deduction has been taken already in the tax return but the expense has not yet been recognized in the financial statements. Deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which a benefit has already been recorded in the financial statements. The Company evaluates all significant available positive and negative evidence, including the existence of losses in recent years and its forecast of future taxable income by jurisdiction, in assessing the need for a valuation allowance. The Company also considers tax planning strategies that would result in realization of deferred tax assets, and the presence of taxable income in prior period tax filings in jurisdictions that allow for the carryback of tax attributes pursuant to the applicable tax law. The underlying assumptions the Company uses in forecasting future taxable income require significant judgment and take into account the Company's recent performance. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which temporary differences or carry-forwards are deductible or creditable. Valuation allowances are established for deferred tax

assets when it is estimated that it is more likely than not that future taxable income will be insufficient to fully use a deduction or credit in that jurisdiction.

Fair Value Determinations

Goodwill Impairment Testing – 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 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 value 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 qualitative assessment in the third quarter of 2018 and concluded that a two-step goodwill impairment test was not required in 2018 and that goodwill was not impaired.

Share-Based Payment

The guidance for accounting for share-based payments requires, among other things, that the estimated fair value of stock options be charged to earnings. Significant management judgment is required to determine the appropriate assumptions for inputs such as volatility and expected term necessary to estimate option values. In addition, management judgment is required to analyze the terms of the plans and awards granted thereunder to determine if awards will be treated as equity awards or liability awards, as defined by the accounting guidance.

As of December 31, 2018, there was $17 million of unrecognized compensation cost related to stock option awards. The weighted-average period over which the costs are expected to be recognized is 1.24 years. Also as of December 31, 2018, there was $238.9 million of unrecognized compensation cost related to the Company’s restricted stock, restricted stock unit and performance stock unit awards. The weighted-average period over which that cost is expected to be recognized is approximately 1.02 years.

See Note 9 to the consolidated financial statements for additional information regarding accounting for share-based payments.

Investments and Derivatives

Although not directly recorded in the Company’s consolidated balance sheets, the Company's defined benefit pension plans hold investments of approximately $14.4 billion, which include private equity and other non-liquid investments. The fair value of the plan investments determines, in part, the over-or under-funded status of those plans, which is included in the Company’s consolidated balance sheets. The Company also has minority positions in certain equity securities (primarily Alexander Forbes) as well as approximately $80 million of investments in private equity funds accounted for using the equity method of accounting.

The Company reviews the carrying value of its investments (both direct and held through its pension plans) to determine if any valuation adjustments are appropriate under the applicable accounting pronouncements. The Company bases its review on the facts and circumstances as they relate to each investment. In those instances where quoted market prices are not available, particularly for private equity funds, significant management judgment is required to determine the appropriate value of the Company’s investments. Fair value of investments in private equity funds is determined by the funds’ investment managers. Factors considered in determining the fair value of private equity investments include: implied valuation of recently completed financing rounds that included sophisticated outside investors; performance multiples of comparable public companies; restrictions on the sale or disposal of the investments; trading characteristics of the securities; and the relative size of the holdings in comparison to other private investors and the public market float.

In connection with the JLT Transaction, the Company entered into several derivative contracts, described in Note 11 to the consolidated financial statements. These derivative contracts are recorded at fair value

at the end of each period, with the change in fair value recorded in the consolidated statements of income. Determining the fair value of these contracts, in particular the deal contingent foreign exchange contract, requires significant management judgments or estimates about the potential closing dates of the transaction and remaining value of the deal contingency feature.

New Accounting Pronouncements

Note 1 to the consolidated financial statements contains a summary of the Company’s significant accounting policies, including a discussion of recently issued accounting pronouncements and their impact or potential future impact on the Company’s financial results, if determinable, under the sub-heading "New Accounting Pronouncements".