In August 2018, Aon will move to 1 Liberty Plaza, New York, New York. The Company has signed a 10 year lease for 240,000 square feet to replace the 199 Water Street location.
Represents insurance premium receivables from clients as well as cash and investments held in a fiduciary capacity.
In the twelve months ended December 31, 2017, the Company recorded a gain on sale, net of taxes, of $779 million and a non-cash impairment charge to its tradenames associated with the Divested Business of $380 million as these assets were not sold to the Buyer. Additionally, effective May 1, 2017, consistent with operating as one segment, the Company has implemented a three-year strategy to transition to a unified Aon brand. As a result, Aon commenced amortization of all indefinite lived tradenames and prospectively accelerated amortization of its finite lived tradenames over the three-year period. The accelerated amortization and impairment charge are included in Amortization and impairment of intangible assets on the Consolidated Statement of Income.
Due to the factors set forth above, income from continuing operations was $435 million in 2017, a decrease of $818 million, or 65%, from 2016.
Cash flow provided by operating activities was $669 million in 2017, a decrease of $1.2 billion, or 63%, from $1.8 billion in 2016, due primarily to cash tax payments of approximately $940 million associated with the Divested Business, $280 million of cash payments for restructuring charges, and $45 million of transaction costs related to the Divested Business, partially offset by operational improvement.
Adjusted operating margin, a non-GAAP measure defined under the caption “Review of Consolidated Results - Adjusted Operating Margin,” was 23.4% in 2017, compared to 21.6% in the prior year. The increase in adjusted operating margin primarily reflects organic revenue growth of 4%, core operational improvement, and $165 million of savings related to restructuring and other operational improvement initiatives.
Adjusted diluted earnings per share from continuing operations, a non-GAAP measure defined under the caption “Review of Consolidated Results - Adjusted Diluted Earnings per Share,” was $6.52 per share in 2017, an increase of $0.94 per share, or 17%, from $5.58 per share in 2016. The increase demonstrates solid operational performance and effective capital management, highlighted by a record $2.4 billion of share repurchase during 2017, partially offset by a higher effective tax rate and losses recognized in other expense.
Commercial Risk Solutions organic revenue growth was 2% in 2017 driven by growth across nearly every geography, with particular strength in U.S. Retail driven by record new business generation and strong management of the renewal book portfolio.
Retirement Solutions organic revenue growth was 3% in 2017 driven by double-digit growth in investment consulting, primarily for delegated investment management, as well as solid growth in the Talent, Rewards, and Performance practice.
Health Solutions organic revenue growth was 7% in 2017 driven primarily by strong growth in health & benefits brokerage, in both the Americas and internationally.
Data & Analytic Services organic revenue growth was 6% in 2017 driven by strong growth across Affinity, with particular strength in the U.S.
Other general expenses increased $236 million in 2017, or 23%, compared to 2016. The increase was primarily driven by $131 million of restructuring costs, a $71 million increase in expenses associated with acquisitions, net of divestitures, $28 million of costs related to regulatory and compliance matters, and an increase in expense associated with 4% organic revenue growth, partially offset by $20 million of savings related to restructuring and other operational improvement initiatives and a $15 million decrease in expenses related to the sale of the Divested Business in the prior year period.
On February 9, 2017, the Company entered into a Purchase Agreement with the Buyer to sell the Divested Business. The Company has retrospectively classified the results of the Divested Business as discontinued operations in the Company’s Consolidated Statements of Income for all periods presented. Income from discontinued operations, net of tax, increased $651 million to $828 million compared to 2016. This increase was primarily driven by the gain on sale of the Divested Business.
Total revenue decreased by 1%, or $71 million, to $9.4 billion in 2016, compared to $9.5 billion in 2015. The decrease was driven by a 3% unfavorable impact from foreign currency translation and a 2% decrease related to acquisitions, net of divestitures, partially offset by organic revenue growth of 4%.
Commercial Risk Solutions organic revenue growth was 2% in 2016 driven by record business generation in U.S. retail and strong growth in Latin America, Asia, and Pacific regions, despite economic weakness in certain countries.
Retirement Solutions organic revenue growth was 2% in 2016 driven by growth in investment consulting, primarily for delegated investment management.
Health Solutions organic revenue growth was 13% in 2016 driven by solid growth in health & benefits brokerage, highlighted by double-digit growth across Asia and EMEA, and double-digit growth in healthcare exchanges.
Compensation and benefits increased $82 million, or 1%, in 2016 compared to 2015. The increase was primarily driven by a $220 million increase in non-cash expense related to certain pension settlements and an increase in expense associated with 4% organic revenue growth, partially offset by a $169 million favorable impact from foreign currency translation and a $97 million decrease in expenses related to acquisitions, net of divestitures.
Information technology decreased $3 million, or 1%, in 2016 compared to 2015. This decrease was primarily driven by a $12 million favorable impact from foreign currency translation and a $7 million decrease in the core expense base resulting from acquisitions, net of divestitures, partially offset by an increase in expense associated with 4% organic revenue growth.
Amortization and impairment of intangibles decreased $16 million, or 9%, in 2016 compared to 2015. This decrease was primarily driven by an $8 million favorable impact from foreign currency translation.
Other general expenses decreased $164 million, or 14%, in 2016 compared to 2015. This decrease was primarily driven by a $176 million decrease in expense related to legacy litigation incurred in 2015, a $43 million favorable impact from currency translation, and a $39 million decrease in the core expense base resulting from acquisitions, net of divestitures, partially offset by an increase in expense to support 4% organic revenue growth, and $15 million of transaction costs related to the Divested Business.
Interest income was $9 million in 2016, a decrease of $5 million, or 36%, from 2015, due to marginally lower average interest rates globally.
Other income decreased $64 million from $100 million in 2015 to $36 million in 2016. Other income in 2016 includes $39 million in net gains on disposition of businesses and equity earnings of $13 million, partially offset by a $14 million net loss on certain financial instruments and foreign exchange losses of $2 million. Other income in 2015 includes, among other things, $82 million in net gains on disposition of businesses, foreign exchange gains of $30 million, and equity earnings of $13 million, partially offset by a $24 million net loss on certain financial instruments.
Due to the factors discussed above, income from continuing operations before income taxes was $1,401 million in 2016, a 2% decrease from $1,428 million in 2015.
Currency impact is determined by translating prior period's revenue at this period's foreign exchange rates.
Organic revenue growth includes the impact of intercompany activity and excludes the impact of changes in foreign exchange rates, acquisitions, divestitures, transfers between business units, and fiduciary investment income.
We use adjusted operating margin as a non-GAAP measure of core operating performance of the Company. Adjusted operating margin excludes the impact of certain items, as listed below, because management does not believe these expenses reflect our core operating performance. This supplemental information related to adjusted operating margin represents a measure not in accordance with U.S. GAAP, and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.
We also use adjusted diluted earnings per share as a non-GAAP measure of our core operating performance. Adjusted diluted earnings per share excludes the items identified above, plus related income taxes because management does not believe these expenses are representative of our core earnings. This supplemental information related to adjusted diluted earnings per share represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.
Adjusted income from discontinued operations, net of tax, excludes gain on sale and intangible asset amortization on discontinued operations of $1,964 million and $11 million for the year ended December 31, 2017. Adjusted income from discontinued operations, net of tax, excludes intangible asset amortization on discontinued operations of $120 million and $141 million, respectively, for the years ended December 31, 2016 and 2015. The effective tax rates used in the U.S. GAAP financial statements for discontinued operations were 58.9%, 34.0%, and 35.2%, respectively, for the years ended December 31, 2017, 2016, and 2015. After adjusting to exclude the applicable tax impact associated with the gain on sale and intangible asset amortization, the adjusted effective tax rates for discontinued operations were 11.7%, 30.2%, and 31.1% for the years ended December 31, 2017, 2016, and 2015.
In 2017, we initiated a global restructuring plan (the “Restructuring Plan”) in connection with the sale of the Divested Business. The Restructuring Plan is intended to streamline operations across the organization and deliver greater efficiency, insight and connectivity. We expect these restructuring activities and related expenses to affect continuing operations through 2019, including an estimated 4,200 to 4,800 role eliminations. We expect to result in cumulative costs of approximately $1,025 million through the end of the plan, consisting of approximately $450 million in employee termination costs, $130 million in technology rationalization costs, $85 million in real estate consolidation costs, $50 million in non-cash asset impairments, such as expense taken on software no longer in use, and $310 million in other costs including certain separation costs associated with the sale of the Divested Business. We estimate that our annualized savings from the Restructuring Plan and other operational improvement initiatives will be approximately $450 million by the end of 2019.
The following table summarizes restructuring and separation costs by type that have been incurred through December 31, 2017 and are estimated to be incurred through the end of the Restructuring Plan (in millions). Estimated remaining costs may be revised in future periods as these assumptions are updated:
Actual costs, when incurred, may vary due to changes in the assumptions built into this plan. Significant assumptions that may change when plans are finalized and implemented include, but are not limited to, changes in severance calculations, changes in the assumptions underlying sublease loss calculations due to changing market conditions, and changes in the overall analysis that might cause the Company to add or cancel component initiatives.
Contract termination costs included within Technology rationalization for the year ended December 31, 2017 were $1 million. Contract termination costs included within Lease consolidations for the year ended December 31, 2017 were $8 million. Contact termination costs included within Other costs associated with restructuring and separation were $3 million. Total estimated contract termination costs to be incurred under the Restructuring Plan associated with Technology rationalizations, Lease consolidations, and Other costs associated with restructuring and separation, respectively, are $10 million, $80 million, and $10 million.
As of December 31, 2017, our liabilities for the Restructuring Plan were as follows (in millions):
Cash on our balance sheet includes funds available for general corporate purposes, as well as amounts restricted as to their use. Funds held on behalf of clients in a fiduciary capacity are segregated and shown together with uncollected insurance premiums in Fiduciary assets in the Consolidated Statement of Financial Position, with a corresponding amount in Fiduciary liabilities. Fiduciary funds generally cannot be used for general corporate purposes and are not a source of liquidity for us.
Cash and cash equivalents and Short-term investments increased $569 million to $1,285 million in 2017 as compared to 2016. During 2017, sources of funds in 2017 included proceeds from the sale of businesses of $4,246 million. During 2017, cash flow from operating activities decreased $1,160 million to $669 million. Additional primary uses of funds in 2017 included share repurchases of $2.4 billion, acquisitions of businesses of $1,029 million, dividends to shareholders of $364 million, repayments of debt, net of issuances of $345 million, and purchases of short-term investments of $232 million.
Net cash provided by operating activities during 2017 decreased $1,592 million, or 68%, to $734 million compared to 2016. Net cash provided by operating activities for continuing operations during 2017 decreased $1,160 million, or 63%, from the prior year, to $669 million. Net cash provided by operating activities for discontinued operations during 2017 decreased $432 million, or 87%, from the prior year, to $65 million. These amounts represent net income reported, as adjusted for gains or losses on sales of businesses, financial instruments, and foreign exchange, and our non-cash expenses, which include share-based compensation,
depreciation, amortization, and impairments, as well as changes in working capital that relate primarily to the timing of payments of accounts payable and accrued liabilities and the collection of receivables. The total decrease in operating cash from the prior year was primarily driven by higher cash tax charges, largely related to the sale of the Divested Business, and an increase in pension contributions.
Net cash flow provided by investing activities in 2017 was $2,787 million. The primary drivers of cash flow provided by investing activities were $4,246 million of sale of businesses and $4 million of net purchases of long-term investments, partially offset by $1,029 million for acquisitions of businesses, net of cash acquired, $232 million of net purchases of short-term investments, $183 million for capital expenditures from continuing operations and $19 million for capital expenditures from discontinued operations.
Net cash flow used for investing activities in 2016 was $954 million. The primary drivers of cash flow used for investing activities were $879 million for acquisitions of businesses, net of cash acquired, $156 million for capital expenditures from continuing operations, $66 million for capital expenditures from discontinued operations, and $21 million of net purchases of long-term investments, partially offset by $107 million of sale of businesses and $61 million of net sales of short-term investments.
At December 31, 2017, our Cash and cash equivalents and Short-term investments were $1,285 million, an increase of $569 million from December 31, 2016, primarily related to proceeds from the sale of businesses of $4,246 million and $669 million in net cash provided by operating activities from continuing operations, partially offset by share repurchases of $2,399 million, payments for the acquisition of businesses of $1,029 million, cash dividends of $364 million, the repayments of debt, net of issuances, of $345 million, and purchase of short-term investments of $232 million. Of the total balance as of December 31, 2017, $96 million was restricted as to its use, which was comprised of $57 million of operating funds in the U.K., as required by the FCA, and $39 million held as collateral for various business purposes. At December 31, 2017, $3.0 billion of cash and cash equivalents and short-term investments were held in the U.S. and overdrawn cash and cash equivalents and short-term investments of $1.7 billion were held in other countries. We maintain multi-currency cash pools with third-party banks in which various Aon entities participate. Individual Aon entities are permitted to overdraw on their individual accounts provided the overall balance
As disclosed in Note 15 “Fair Value Measurements and Financial Instruments” of the Notes to Consolidated Financial Statements, the majority of our investments carried at fair value are money market funds. These money market funds are held throughout the world with various financial institutions. We are not aware of any market liquidity issues that would materially impact the fair value of these investments.
During 2017, the Company repurchased 18.0 million shares at an average price per share of $133.67, for a total cost of $2.4 billion and recorded an additional $12.0 million of costs associated with the repurchases to retained earnings. Included in the 18.0 million shares were 118 thousand shares that did not settle until January 2018. These shares were settled at an average price per share of $134.41 and total cost of $15.9 million. During 2016, the Company repurchased 12.2 million shares at an average price
During 2017, 2016, and 2015, we paid dividends of $364 million, $345 million, and $323 million, respectively, to holders of our Class A Ordinary Shares. Dividends paid per Class A Ordinary Share were $1.41, $1.29, and $1.15 for the years ended December 31, 2017, 2016, and 2015, respectively.
As a company incorporated in England and Wales, we are required under U.K. law to have available “distributable reserves” to make share repurchases or pay dividends to shareholders. Distributable reserves may be created through the earnings of the U.K. parent company. Distributable reserves are not linked to a U.S. GAAP reported amount (e.g., retained earnings). As of December 31, 2017 and 2016, we had distributable reserves in excess of $1.2 billion and $1.6 billion, respectively. We believe that we will have sufficient distributable reserves to fund shareholder dividends, if and to the extent declared, for the foreseeable future.
Total debt at December 31, 2017 was $6.0 billion, a decrease of $239 million compared to December 31, 2016. Commercial paper activity during the years ended December 31, 2017 and 2016 is as follows:
On September 3, 2015, we filed a shelf registration statement with the SEC, registering the offer and sale from time to time of an indeterminate amount of, among other securities, debt securities, preference shares, Class A Ordinary Shares, and convertible securities. Our ability to access the market as a source of liquidity is dependent on investor demand, market conditions and other factors.
The major rating agencies’ ratings of our debt at February 20, 2018 appear in the table below.
A downgrade in the credit ratings of our senior debt and commercial paper could increase our borrowing costs, reduce or eliminate our access to debt capital, reduce our financial flexibility, increase our commercial paper interest rates, or restrict our access to the commercial paper market altogether, and/or impact future pension contribution requirements.
We have certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. The maximum exposure with respect to such contractual contingent guarantees was approximately $95 million at December 31, 2017, which is unchanged as compared to December 31, 2016.
We do not have material exposure related to off balance sheet arrangements. Our cash flows from operations, borrowing availability, and overall liquidity are subject to risks and uncertainties. See Item 1, “Information Concerning Forward-Looking Statements,” and Item 1A, “Risk Factors.”
Summarized in the table below are our contractual obligations and commitments as of December 31, 2017. Payments by year due are estimated as follows (in millions):
Pension and other postretirement benefit plan obligations include estimates of our minimum funding requirements pursuant to the Employee Retirement Income Security Act (“ERISA”) and other regulations, as well as minimum funding requirements agreed with the trustees of our U.K. pension plans. Additional amounts may be agreed to with, or required by, the U.K. pension plan trustees. Nonqualified pension and other postretirement benefit obligations are based on estimated future benefit payments. We may make additional discretionary contributions.
In 2017, our principal U.K. subsidiary agreed with the trustees of one of the U.K. plans to contribute £44 million ($59 million at December 31, 2017 exchange rates) through 2019 which is estimated to bring the plan to 100% funded basis. Contributions were based on the 2016 valuation and no further contributions are forecasted after 2019. The trustees of the plan have certain rights to request that our U.K. subsidiary advance an amount equal to an actuarially determined winding-up deficit. As of December 31, 2017, the estimated winding-up deficit was £122 million ($163 million at December 31, 2017 exchange rates). The trustees of the plan have accepted in practice the agreed-upon schedule of contributions detailed above and have not requested the winding-up deficit be paid.
Purchase obligations are defined as agreements to purchase goods and services that are enforceable and legally binding on us, and that specifies all significant terms, including the goods to be purchased or services to be rendered, the price at which the goods or services are to be rendered, and the timing of the transactions. Most of our purchase obligations are related to purchases of information technology services or other service contracts. Purchase obligations exclude $280 million of liabilities for uncertain tax positions due to our inability to reasonably estimate the period(s) when potential cash settlements will be made.
Our Consolidated Financial Statements and Notes thereto have been prepared in accordance with U.S. GAAP. To prepare these financial statements, we make estimates, assumptions, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented.
The method used to account for workforce reduction costs depends on whether the costs result from an ongoing severance plan or are one-time costs. We account for relevant expenses as severance costs when we have an established severance policy, statutory requirements dictate the severance amounts, or we have an established pattern of paying by a specific formula. We recognize these costs when the likelihood of future settlement is probable and the amount of the related benefit is reasonably estimable, or on a straight-line basis over the remaining service period, if applicable.
Asset impairments are accounted for in the period when they become known. Furthermore, we record impairments by reducing the book value to the net present value of future cash flows (in situations where the asset had an identifiable cash flow stream) or accelerating the depreciation to reflect the revised useful life. Asset impairments are included in Depreciation of fixed assets in the Consolidated Statements of Income.
Revenues are recognized when they are earned and realized or realizable. The Company considers revenues to be earned and realized or realizable when all of the following four conditions are met: (1) persuasive evidence of an arrangement exists, (2) the arrangement fee is fixed or determinable, (3) delivery or performance has occurred, and (4) collectability is reasonably assured.
For brokerage commissions, revenue is typically recognized at the completion of the placement process or over a period of time based on the transfer of value to customers or as the remuneration becomes determinable, assuming all four criteria required to recognize revenue have been met. The placement process is typically considered complete on the effective date of the related policy. Commission revenues are recorded net of allowances for estimated policy cancellations, which are determined based on an evaluation of historical and current cancellation data.
Unrecognized gains and losses that have been deferred in Other comprehensive income, as previously described, are amortized into Compensation and benefits expense as a component of periodic pension expense based on the average life expectancy of the U.S., the Netherlands, Canada, and U.K. plan members. We amortize any prior service expense or credits that arise as a result of plan changes over a period consistent with the amortization of gains and losses.
The unrecognized prior service cost (credit) at December 31, 2017 was $5 million, $19 million, and $(7) million for the U.S., U.K. and other plans, respectively.
The following table summarizes the expected long-term rate of return on plan assets for future pension expense as of December 31, 2017:
Holding all other assumptions constant, the following table reflects what a 25 basis point increase and decrease in our estimated discount rate would have on our projected benefit obligation at December 31, 2017 (in millions):
Holding all other assumptions constant, the following table reflects what a 25 basis point increase and decrease in our estimated discount rate would have on our estimated 2018 pension expense (in millions):
Holding other assumptions constant, the following table reflects what a 25 basis point increase and decrease in our estimated long-term rate of return on plan assets would have on our estimated 2018 pension expense (in millions):
Goodwill is not amortized, but rather tested for impairment at least annually in the fourth quarter. In the fourth quarter, we also test the acquired tradenames for impairment. We test more frequently if there are indicators of impairment or whenever business circumstances suggest that the carrying value of goodwill or trademarks may not be recoverable. These indicators may include a sustained significant decline in our share price and market capitalization, a decline in our expected future cash flows, or a significant adverse change in legal factors or in the business climate, among others. No events occurred during 2017 that indicate the existence of an impairment with respect to our reported goodwill or tradenames.
The goodwill impairment test is initially a qualitative analysis to determine if it is “more likely than not” that the fair value of each reporting unit exceeds the carrying value, including goodwill, of the corresponding reporting unit. If the “more likely than not” threshold is not met, then the goodwill impairment test becomes a two-step analysis. Step 1 requires the fair value of each reporting unit to be compared to its book value. Management must apply judgment in determining the estimated fair value of the reporting units. If the fair value of a reporting unit is determined to be greater than the carrying value of the reporting unit, goodwill and trademarks are deemed not to be impaired and no further testing is necessary. If the fair value of a reporting unit is less than the carrying value, we perform Step 2. Step 2 uses the calculated fair value of the reporting unit to perform a hypothetical purchase price allocation to the fair value of the assets and liabilities of the reporting unit. The difference between the fair value of the reporting unit calculated in Step 1 and the fair value of the underlying assets and liabilities of the reporting unit is the implied fair value of the reporting unit’s goodwill. A charge is recorded in the financial statements if the carrying value of the reporting unit’s goodwill is greater than its implied fair value.
In determining the fair value of our reporting units, we use a discounted cash flow (“DCF”) model based on our most current forecasts. We discount the related cash flow forecasts using the weighted-average cost of capital method at the date of evaluation. Preparation of forecasts and selection of the discount rate for use in the DCF model involve significant judgments, and changes in these estimates could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We also use market multiples which are obtained from quoted prices of comparable companies to corroborate our DCF model results. The combined estimated fair value of our reporting units from our DCF model often results in a premium over our market capitalization, commonly referred to as a control premium. We believe the implied control premium determined by our impairment analysis is reasonable based upon historic data of premiums paid on actual transactions within our industry. Based on tests performed in both 2017 and 2016, there was no indication of goodwill impairment, and no further testing was required.
Performance share awards (“PSAs”) are performance-based awards for which vesting is dependent on the achievement of certain objectives. Such objectives may be made on a personal, group or company level. We estimate the fair value of the awards based on the market price of the underlying stock on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period.
Compensation cost is recognized over the performance period. The number of shares issued on the vesting date will vary depending on the actual performance objectives achieved. We make assessments of future performance using subjective estimates, such as long-term plans. As a result, changes in the underlying assumptions could have a material impact on the compensation expense recognized.
The largest performance-based share-based payment award plan is the Leadership Performance Plan (“LPP”), which has a three-year performance period. The 2015 to 2017 performance period ended on December 31, 2017, the 2014 to 2016 performance period ended on December 31, 2016 and the 2013 to 2015 performance period ended on December 31, 2015. The LPP currently has two open performance periods: 2016 to 2018 and 2017 to 2019. A 10% upward adjustment in our estimated performance achievement percentage for both open performance periods would have increased our 2017 expense by approximately $5.9 million, while a 10% downward adjustment would have decreased our expense by approximately $5.9 million. As the percent of expected performance increases or decreases, the potential change in expense can go from 0% to 200% of the targeted total expense.
We earn income in numerous countries and this income is subject to the laws of taxing jurisdictions within those countries.
We base the carrying values of liabilities and assets for income taxes currently payable and receivable on management’s interpretation of applicable tax laws, and incorporate management’s assumptions and judgments about using tax planning strategies in various taxing jurisdictions. Using different estimates, assumptions, and judgments in accounting for income taxes, especially those that deploy tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and changes in our results of operations.
Note 2 “Summary of Significant Accounting Principles and Practices” of the Notes to Consolidated Financial Statements contains a summary of our significant accounting policies, including a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable.
We have audited the accompanying consolidated statement of financial position of Aon plc (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Beginning in the first quarter of 2017, the Company began operating as one segment that includes all of Aon’s continuing operations, which provides advice and solutions to clients focused on risk, retirement, and health through five revenue lines that make up the Company’s principal products and services. Refer to Note 17 “Segment Information” for additional information.
Commissions, fees and other and Fiduciary investment income are now reported as one Total revenue line item; and
Prior period comparable financial information has been reclassified to conform to this presentation.
The accompanying consolidated financial statements include the accounts of Aon plc and those entities in which the Company has a controlling financial interest. To determine if Aon holds a controlling financial interest in an entity, the Company first evaluates if it is required to apply the variable interest entity (VIE) model to the entity, otherwise, the entity is evaluated under the voting interest model. Where Aon holds rights that give it the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, combined with a variable interest that gives the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, the Company has a controlling financial interest in that VIE. Aon holds a controlling financial interest in entities that are not VIEs where it, directly or indirectly, holds more than 50% of the voting rights or where it exercises control through substantive participating rights or as a general partner.
Revenues are recognized when they are earned and realized or realizable. The Company considers revenues to be earned and realized or realizable when all of the following four conditions are met: (1) persuasive evidence of an arrangement exists, (2) the arrangement fee is fixed or determinable, (3) delivery or performance has occurred, and (4) collectibility is reasonably assured.
Share-based payments to employees, including grants of restricted share units and performance share awards, are measured based on estimated grant date fair value. The Company recognizes compensation expense over the requisite service period for awards expected to ultimately vest. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
The Company records net period cost relating to its pension and other postretirement benefit plans based on calculations that include various actuarial assumptions, including discount rates, assumed rates of return on plan assets, inflation rates, mortality rates, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and modifies these assumptions based on current rates and trends. The effects of gains, losses, and prior service costs and credits are amortized over future service periods or future estimated lives if the plans are frozen. The funded status of each plan, calculated as the fair value of plan assets less the benefit obligation, is reflected in the Company’s Consolidated Statements of Financial Position using a December 31 measurement date.
The Company’s allowance for doubtful accounts with respect to receivables is based on a combination of factors, including evaluation of historical write-offs, aging of balances, and other qualitative and quantitative analyses. Receivables, net included an allowance for doubtful accounts of $59 million and $56 million at December 31, 2017 and 2016, respectively.
Goodwill represents the excess of acquisition cost over the fair value of the net assets in the acquisition of a business. Goodwill is allocated to various reporting units, which are one reporting level below the operating segment. Upon disposition of a business entity, goodwill is allocated to the disposed entity based on the fair value of that entity compared to the fair value of the reporting unit in which it was included. Goodwill is not amortized, but instead is tested for impairment at least annually. The goodwill impairment test is performed at the reporting unit level. The Company initially performs a qualitative analysis to determine if it is more likely than not that the goodwill balance is impaired. If such a determination is made, then the Company will perform a two-step quantitative analysis. First, the fair value of each reporting unit is compared to its carrying value. If the fair value of the reporting unit is less than its carrying value, the Company performs a hypothetical purchase price allocation based on the reporting unit’s fair value to determine the fair value of the reporting unit’s goodwill. Any resulting difference will be a charge to Amortization and impairment of intangible assets in the Consolidated Statements of Income in the period in which the determination is made. Fair value is determined using a combination of present value techniques and market prices of comparable businesses.
Intangible assets are comprised primarily of customer-related and contract-based, tradenames and technology assets. Amortization basis and estimated useful lives by intangible asset type are generally as follows:
In order for a derivative to qualify for hedge accounting, the derivative must be formally designated as a fair value, cash flow, or a net investment hedge by documenting the relationship between the derivative and the hedged item. The documentation must include a description of the hedging instrument, the hedged item, the risk being hedged, Aon’s risk management objective and strategy for undertaking the hedge, the method for assessing the effectiveness of the hedge, and the method for measuring hedge ineffectiveness. Additionally, the hedge relationship must be expected to be highly effective at offsetting changes in either the fair value or cash flows of the hedged item at both the inception of the hedge and on an ongoing basis. Aon assesses the ongoing effectiveness of its hedges and measures and records hedge ineffectiveness, if any, at the end of each quarter or more frequently if facts and circumstances require.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted into law and the new legislation contains several key tax provisions that impact the Company, including a reduction of the corporate income tax rate to 21% effective for tax years beginning after December 31, 2017 and the Transition Tax, among others. The Company is required to recognize the effect of the tax law changes in the period of enactment, including the determination of the Transition Tax and re-measuring our U.S. deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows registrants to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Reform Act was passed late in the fourth quarter of 2017 and ongoing guidance and accounting interpretation is expected over the next 12 months, we consider the accounting for certain items to be provisional due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118. Refer to Note 10 “Income Taxes” for additional information and a detailed description of the items for which the accounting is provisional.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement and treated as discrete items in the reporting period. Further, excess tax benefits are required to be classified along with other income tax cash flows as an operating activity. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
The Company adopted this guidance on January 1, 2017, with the following impacts:
An increase to Deferred tax assets on the Consolidated Statement of Financial Position of $49 million through a cumulative-effect adjustment to Retained earnings for excess tax benefits not previously recognized, and
The recognition of $54 million, or $0.21 per share, income tax benefit from continuing operations related to excess tax benefits in the Consolidated Statement of Income for the year ended December 31, 2017.
Adoption of the guidance was applied prospectively on the Consolidated Statement of Cash Flows and prior period comparable information was not restated. Other elements of the guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Upon adoption of the guidance, the Company expects the presentation of results to reflect a change in operating income offset by an equal and offsetting change in other income (expense) for each period, as follows:
In January 2017, the FASB issued new accounting guidance on simplifying the test for goodwill impairment. Currently the standard requires an entity to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit. The new guidance removes Step 2. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. An entity will apply the new guidance on a prospective basis. The new guidance is effective for Aon in the first quarter of 2020 and early adoption is permitted for annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact and period of adoption that the standard will have on the Consolidated Financial Statements.
In October 2016, the FASB issued new accounting guidance on the income tax consequences of intra-entity asset transfers other than inventory. The guidance will require that the seller and buyer recognize the consolidated current and deferred income tax consequences of a transaction in the period the transaction occurs rather than deferring to a future period and recognizing those consequences when the asset has been sold to an outside party or otherwise recovered through use (i.e. depreciated, amortized, or impaired). An entity will apply the new guidance on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The new guidance is effective for Aon in the first quarter of 2018. Upon the adoption of this guidance on January 1, 2018, the Company expects to recognize adjustments to Deferred tax assets, Deferred tax liabilities, and Other non-current assets on the Consolidated Statement of Financial Position through a cumulative adjustment to Retained earnings of approximately $15 million.
In February 2016, the FASB issued new accounting guidance on leases, which requires lessees to recognize assets and liabilities for most leases. Under the new guidance, a lessee should recognize in the Consolidated Statement of Financial Position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current U.S. GAAP standards. The new standard will be effective for the Company in the first quarter of 2019, with early application permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The Company is currently evaluating the period of adoption.
In January 2016, the FASB issued new accounting guidance on recognition and measurement of financial assets and financial liabilities. The amendments in the new guidance make targeted improvements, which include the requirement to measure equity investments with readily determinable fair values at fair value through net income, simplification of the impairment assessment for equity investments without readily determinable fair values, adjustments to existing and additional disclosure requirements, and additional tax considerations. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values, including disclosure requirements, should be applied prospectively to equity investments that exist as of the date of adoption of the guidance. The guidance is effective for the Company in the first quarter of 2018 and early adoption
The Company has assessed the impacts of the new accounting standard and has implemented accounting and operational processes and controls to ensure compliance with the new standard.
The most significant impacts of the new standard to the Company are expected to be as follows:
The Company currently recognizes revenue either at a point in time or over a period of time based on the transfer of value to customers or as the remuneration becomes determinable. Under the new standard, the revenue related to certain brokerage services recognized over a period of time will be recognized on the effective date of the associated policies when control of the policy transfers to the customer. As a result, revenue from these arrangements will be recognized in earlier periods under the new standard in comparison to the current guidance and will change the timing and amount of revenue recognized for annual and interim periods. This change is anticipated to result in a significant shift in timing of interim revenue for Reinsurance Solutions and to a lesser extent, certain other brokerage services.
The new standard provides guidance on accounting for certain revenue-related costs including when to capitalize costs associated with obtaining and fulfilling a contract. The majority of these costs are currently expensed as incurred under existing U.S. GAAP. Assets recognized for the costs to obtain a contract, which includes certain sales commissions, will be amortized on a systematic basis that is consistent with the transfer of the services to which the asset relates, considering anticipated renewals when applicable. For situations where the renewal period is one year or less and renewal costs are commensurate with the initial contract, the Company plans to apply a practical expedient and recognize the costs of obtaining a contract as an expense when incurred. Assets recognized as costs to fulfill a contract, which includes internal costs related to pre-placement broking activities, as well as other costs, will be amortized on a systematic basis that is consistent with the transfer of the services to which the asset relates, which is generally expected to be less than one year.
Includes a provisional estimate of $222 million for the Transition Tax. Refer to Note 10 “Income Taxes” for further information.
In the year ended December 31, 2017, the Company recorded an estimated gain on sale, net of taxes, of $779 million and a non-cash impairment charge to its tradenames associated with the Divested Business of $380 million as these assets were not sold to the Buyer. The impairment charge is included in Amortization and impairment of intangible assets on the Consolidated Statement of Income for year ended December 31, 2017.
The Company has classified the results of the Divested Business as discontinued operations in the Company’s Consolidated Statements of Income for all periods presented. Additionally, the assets and liabilities of the Divested Business were retrospectively classified as discontinued operations in the Company’s Consolidated Statements of Financial Position upon triggering held for sale criteria in February 2017. These assets and liabilities were sold on May 1, 2017.
Upon triggering held for sale criteria in February 2017, Aon ceased depreciating and amortizing all long-lived assets included in discontinued operations. Total operating expenses for the years ended December 31, 2017, 2016, and 2015 include, respectively, $8 million, $70 million, and $65 million of depreciation of fixed assets and $11 million, $120 million, and $141 million of intangible asset amortization.
All assets and liabilities associated with the Divested Business were sold on May 1, 2017.
From the inception of the Restructuring Plan through December 31, 2017, the Company has eliminated 2,630 positions and incurred total expenses of $497 million for restructuring and related separation costs. These charges are included in Compensation and benefits, Information technology, Premises, Depreciation of fixed assets, and Other general expenses in the accompanying Consolidated Statements of Income.
On October 31, 2017, the Company completed the transaction to acquire Lenzi Paolo Broker di Assicurazioni S.r.l., an insurance broker based in Italy.
On June 1, 2016, the Company completed the transaction to acquire Univers Workplace Solutions, a leading elective benefit enrollment and communication services firm based in New Jersey.
On April 11, 2016, the Company completed the transaction to acquire Nexus Insurance Brokers Limited and Bayfair Insurance Centre Limited, insurance brokerage firms located in New Zealand.
On February 1, 2016, the Company completed the transaction to acquire Modern Survey, an employee survey and talent analytics solutions provider based in Minneapolis.
Amortization expense and impairment charges from finite lived intangible assets were $704 million, $157 million, and $173 million for the years ended December 31, 2017, 2016, and 2015 respectively.
During the first quarter of 2017, the CAD 375 million ($296 million at December 31, 2017 exchange rates) 4.76% Senior Notes due March 2018 were classified as Short-term debt and current portion of long-term debt in the Consolidated Statements of Financial Position as the date of maturity is less than one year.
Each of the notes issued by Aon plc and described above is fully and unconditionally guaranteed by Aon Corporation. The 4.76% Senior Notes due March 2018 identified in the table above were issued by a Canadian subsidiary of Aon Corporation and are fully and unconditionally guaranteed by Aon plc and Aon Corporation. Refer to Note 18 “Guarantee of Registered Securities” for additional information regarding guarantees of outstanding debt securities. Each of the notes described above and identified in the table above contains customary representations, warranties, and covenants, and the Company was in compliance with all such covenants as of December 31, 2017.
As of December 31, 2017, Aon plc had two primary committed credit facility outstanding: its $900 million multi-currency U.S. credit facility expiring in February 2021 (the “2021 Facility”) and its $400 million multi-currency U.S. credit facility expiring in October 2022 (the “2022 Facility”). The 2022 Facility was entered into on October 19, 2017.
At December 31, 2017, future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows (in millions):
SAB 118 summarizes three categories to be applied to each component of tax reform at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Reform Act.
The Company recorded a provisional estimate of $264 million income tax expense for the Transition Tax. The Company expects to pay additional U.S. federal cash taxes of approximately $264 million on the deemed mandatory repatriation, payable over eight years. The Transition Tax is based on estimates of post-1986 earnings and profits and related foreign tax credits of its U.S.-owned foreign subsidiaries as of November 2, 2017 and December 31, 2017, whichever amount is higher, and may change materially as the Company refines those estimates and as the Company further analyzes present and future regulations and other guidance interpreting the Transition Tax provision. It could also change depending on certain events that could occur after December 31, 2017
The Company recorded a provisional estimate of $86 million income tax expense for the re-measurement of deferred tax assets and liabilities as a result of the reduction in the U.S. corporate income tax rate from 35% to 21%. The Company
The Company has changed its assertion and is no longer permanently reinvested on the earnings subject to the Transition Tax. The Company has recorded a provisional estimate of local country income taxes, state income taxes, and withholding taxes in the amount of $39 million as of December 31, 2017. The tax estimate is provisional due to the fact that additional analysis of the Company’s complex legal entity structure is required as well as a more detailed analysis of the local country tax laws where the pools of undistributed earnings exist.
The Company was not able to make a reasonable estimate of the allocation between continuing and discontinued operations of the tax benefit from foreign tax credits and related valuation allowance release. As a result, the Company continued to account for this item based on our existing accounting under GAAP and the provisions of the tax laws that were in effect prior to enactment of the Tax Reform Act.
Due to the Tax Reform Act, provisional estimates were accrued as of December 31, 2017 for the Transition Tax and the re-measurement of U.S. deferred tax assets and liabilities from 35% to 21%.
As a result of the deemed mandatory repatriation provisions in the Tax Reform Act, the Company included an estimated $3.2 billion of undistributed earnings from foreign subsidiaries in income subject to U.S. tax at reduced tax rates. The Company intends to limit distributions to earnings previously taxed in the U.S. or to earnings that would qualify for the 100% dividends received deduction provided for in the Tax Reform Act. As of December 31, 2017, the Company has accrued a provisional estimate of $39 million for local country income and withholding taxes on those undistributed earnings that are not permanently reinvested.
The Company had the following operating and capital loss carryforwards (in millions):
During 2012, the Company was granted a tax holiday for the period from October 1, 2012 through September 30, 2022, with respect to withholding taxes and certain income derived from services in Singapore. This tax holiday and reduced withholding tax rate may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The benefit realized was approximately $45 million, $46 million, and $23 million during the years ended December 31, 2017, 2016, and 2015, respectively. The impact of this tax holiday on diluted earnings per share was $0.17, $0.17, and $0.08 during the years ended December 31, 2017, 2016, and 2015, respectively.
The Company’s liability for uncertain tax positions as of December 31, 2017, 2016, and 2015, includes $219 million, $240 million, and $200 million, respectively, related to amounts that would impact the effective tax rate if recognized. It is possible that the amount of unrecognized tax benefits may change in the next twelve months; however, the Company does not expect the change to have a significant impact on its consolidated statements of income or consolidated balance sheets. These changes may be the result of settlements of ongoing audits. At this time, an estimate of the range of the reasonably possible outcomes within the twelve months cannot be made.
Changes in Accumulated other comprehensive loss by component, net of related tax, are as follows (in millions):
Reclassifications from this category included in Accumulated other comprehensive loss are recorded in Compensation and benefits.
In July 2017, the Company made a non-cash contribution of approximately $80 million to its U.S. pension plan.
Amounts recognized in Accumulated other comprehensive loss (income) that have not yet been recognized as components of net periodic benefit cost at December 31, 2017 and 2016 consist of (in millions):
In 2017, U.S. plans with a projected benefit obligation (“PBO”) and an accumulated benefit obligation (“ABO”) in excess of the fair value of plan assets had a PBO of $3.2 billion, an ABO of $3.2 billion, and plan assets with a fair value of $2.0 billion. U.K. plans with a PBO in excess of the fair value of plan assets had a PBO of $52 million and plan assets with a fair value of $30 million, and U.K. plans with an ABO in excess of the fair value of plan assets had an ABO of $52 million and plan assets with a fair value of $30 million. Other plans with a PBO in excess of the fair value of plan assets had a PBO of $1.4 billion and plan assets with a fair value of $1.2 billion, and other plans with an ABO in excess of the fair value of plan assets had an ABO of $1.3 billion and plan assets with a fair value of $1.2 billion.
In March 2017, the Company approved a plan to offer a voluntary one-time lump sum payment option to certain eligible employees of the Company’s U.K. pension plans that, if accepted, would settle the Company’s pension obligations to them. The lump sum cash payment offer will close during the first quarter of 2018. In total for 2017, lump sum payments from plan assets of £371 million ($496 million using December 31, 2017 exchange rates) were paid. As a result of this settlement, the Company remeasured the assets and liabilities of the U.K. pension plan during the fourth quarter of 2017, which in aggregate resulted in a reduction to the projected benefit obligation of £325 million ($434 million using December 31, 2017 exchange rates) as well as a non-cash settlement charge of £93 million ($125 million using average December 31, 2017 exchange rate) in the fourth quarter of 2017. An additional non-cash settlement charge is expected in the first quarter of 2018.
No plan assets are expected to be returned to the Company during 2018.
The fair values of the Company’s U.S. pension plan assets at December 31, 2017 and December 31, 2016, by asset category, are as follows (in millions):
The fair values of the Company’s major U.K. pension plan assets at December 31, 2017 and December 31, 2016, by asset category, are as follows (in millions):
Consists of various equity, fixed income, commodity, and real estate mutual fund type investment vehicles.
The fair values of the Company’s other major pension plan assets at December 31, 2017 and December 31, 2016, by asset category, are as follows (in millions):
Based on current assumptions, in 2018, the Company expects to contribute approximately $92 million, $63 million, and $22 million to its U.K., U.S. and other significant international pension plans, respectively.
Amounts recognized in Accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31, 2017 are $1 million and $3 million of prior service credit and net gain, respectively. The amount in Accumulated other comprehensive income expected to be recognized as a component of net periodic benefit cost during 2018 is $1.4 million and $0.1 million of net gain and prior service credit, respectively.
The fair value of RSUs that vested during 2017, 2016 and 2015 was $197 million, $200 million, and $196 million, respectively.
Unamortized deferred compensation expense amounted to $341 million as of December 31, 2017, with a remaining weighted-average amortization period of approximately 2.1 years.
The vesting of PSAs is contingent upon meeting a cumulative level of earnings per share related performance over a three-year period. The actual issue of shares may range from 0-200% of the target number of PSAs granted, based on the terms of the plan and level of achievement of the related performance target. The grant date fair value of PSAs is based upon the market price of Aon plc ordinary shares at the date of grant. The performance conditions are not considered in the determination of the grant date fair value for these awards. Compensation expense is recognized over the performance period based on management’s estimate of the number of units expected to vest. Management evaluates on a quarterly basis its estimate of the actual number of shares expected to be issued at the end of the programs. The cumulative effect of the change in estimate is recognized in the period of change as an adjustment to Compensation and benefits expense, if necessary. Dividend equivalents are not paid on PSAs.
Information regarding the Company’s target PSAs granted and shares that would be issued at current performance levels for PSAs granted during the years ended December 31, 2017, 2016, and 2015, respectively, is as follows (shares in thousands and dollars in millions, except fair value):
The Company also uses foreign exchange derivatives, typically forward contracts and options, to economically hedge the currency exposure of the Company’s global liquidity profile, including monetary assets or liabilities that are denominated in a non-functional currency of an entity, typically on a rolling 30-day basis, but may be for up to one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other income (expense) in the Consolidated Statements of Income.
Included within Other current assets ($9 million in 2017 and $5 million in 2016) or Other non-current assets ($23 million in 2017 and $9 million in 2016).
Included within Other current liabilities ($3 million in 2017 and $6 million in 2016) or Other non-current liabilities ($3 million in 2017 and $7 million in 2016).
These contracts typically are for 30-day durations and executed close to the last day of the most recent reporting month, thereby resulting in nominal fair values at the balance sheet date.
The amounts of derivative gains (loss) reclassified from Accumulated Other Comprehensive Loss into Income (effective portion) are as follows (in millions):
The amount of gain (loss) recognized in income on the ineffective portion of derivatives for 2017, 2016, and 2015 was immaterial.
The Company uses non-derivative financial instruments to protect the value of its investments in a number of foreign subsidiaries. In 2016, the Company designated a portion of its Euro-denominated commercial paper issuances as a non-derivative hedge of the foreign currency exposure of a net investment in its European operations. The change in fair value of the designated portion of the Euro-denominated commercial paper due to changes in foreign currency exchange rates is recorded in Foreign currency translation adjustment, a component of Accumulated other comprehensive income (loss), to the extent it is effective as a hedge. The foreign currency translation adjustment of the hedged net investments that is also recorded in Accumulated other comprehensive income (loss). Ineffective portions of net investment hedges, if any, are reclassified from Accumulated other comprehensive income (loss) into earnings during the period of change.
Accounting standards establish a three tier fair value hierarchy that prioritizes the inputs used in measuring fair values as follows:
The following tables present the categorization of the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2017 and December 31, 2016, respectively (in millions):
Refer to Note 14 “Derivatives and Hedging” for additional information regarding the Company’s derivatives and hedging activity.
The fair value of debt is classified as Level 2 of the fair value hierarchy. The following table discloses the Company’s financial instruments where the carrying amounts and fair values differ (in millions):
Aon and its subsidiaries are subject to numerous claims, tax assessments, lawsuits and proceedings that arise in the ordinary course of business, which include errors and omissions (“E&O”) claims. The damages claimed in these matters are or may be substantial, including, in many instances, claims for punitive, treble or extraordinary damages. While Aon maintains meaningful E&O insurance and other insurance programs to provide protection against certain losses that arise in such matters, Aon has exhausted or materially depleted its coverage under some of the policies that protect the Company and, consequently, is self-insured or materially self-insured for some claims. Accruals for these exposures, and related insurance receivables, when applicable, are included in the Consolidated Statements of Financial Position and have been recognized in Other general expenses in the Consolidated Statements of Income to the extent that losses are deemed probable and are reasonably estimable. These amounts are adjusted from time to time as developments warrant. Matters that are not probable and reasonably estimable are not accrued for in the financial statements.
On October 3, 2017, Christchurch City Council (“CCC”) invoked arbitration to pursue a claim that it asserts against Aon New Zealand. Aon provided insurance broking services to CCC in relation to CCC’s 2010-2011 material damage and business interruption program. In December 2015, CCC settled its property and business interruption claim for its losses arising from the 2010-2011 Canterbury earthquakes against the underwriter of its material damage and business interruption program and the reinsurers of that underwriter. CCC contends that acts and omissions by Aon caused CCC to recover less in that settlement than it otherwise would have. CCC claims damages of approximately NZD $528 million ($372 million at December 31, 2017 exchange rates) plus interest and costs. Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims.
In April 2017, the FCA announced an investigation relating to suspected competition law breaches in the aviation and aerospace broking industry, which, for Aon in 2016, represented less than $100 million in global revenue. The European Commission has now assumed jurisdiction over the investigation in place of the FCA. Other antitrust agencies outside the European Commission are also conducting formal or informal investigations regarding these matters. Aon intends to work diligently with all antitrust agencies concerned to ensure they can carry out their work as efficiently as possible. At this time, in light of the uncertainties and many variables involved, we cannot estimate the ultimate impact on our company from these investigations or any related private litigation, nor any damages, penalties, or fines related to them. There can be no assurance that the ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results or operations, or liquidity.
Aon UK Limited is an indirect wholly-owned subsidiary of the Company. Our Forms 10-Q for the second and third quarters of 2017 anticipated that Aon UK Limited’s interactions with the FCA (its primary financial regulator in the UK) concerning Aon UK Limited’s systems and controls might result in additional charges above the amounts accrued for in connection with those interactions. Although Aon continues to interact as a matter of course with the FCA, the specific reviews and interactions that Aon anticipated might result in additional charges have concluded without those additional charges materializing.
On June 1, 2007, the International Road Transport Union (“IRU”) sued Aon in the Geneva Tribunal of First Instance in Switzerland. IRU alleges, among other things, that, between 1995 and 2004, a business acquired by Aon and, later, an Aon subsidiary (1) accepted commissions for certain insurance placements that violated a fee agreement entered between the parties and (2) negligently failed to ask certain insurance carriers to contribute to the IRU’s risk management costs. IRU sought damages of approximately CHF 46 million ($47 million at June 30, 2017 exchange rates) and $3 million, plus legal fees and interest of approximately $30 million. On December 2, 2014, the Geneva Tribunal of First Instance entered a judgment that accepted some, and rejected other, of IRU’s claims. The judgment awarded IRU CHF 16.8 million ($17 million at June 30, 2017 exchange rates) and $3.1 million, plus interest and adverse costs. The entire amount of the judgment, including interest through December 31, 2014, totaled CHF 27.9 million ($28 million at December 31, 2014 exchange rates) and $5 million. On January 26, 2015, in return for IRU agreeing not to appeal the bulk of its dismissed claims, the Aon subsidiary agreed not to appeal a part of the judgment and to pay IRU CHF 12.8 million ($14 million at January 31, 2015 exchange rates) and $4.7 million without Aon admitting liability. The Aon subsidiary appealed those aspects of the judgment it retained the right to appeal. IRU did not appeal. After the Geneva Appellate Court affirmed the judgment of the Geneva Tribunal of First Instance, the Aon subsidiary filed an appeal with the Swiss Federal Tribunal. By judgment issued June 16, 2017, the Swiss Federal Tribunal affirmed in part and reversed in part the appellate judgment and remanded the case to the appellate court. IRU and Aon subsidiary agreed that the Aon subsidiary would pay IRU CHF 15.0 million ($15 million at June 30, 2017 exchange rates) and $344,000. As a result of this agreement, the legal proceedings between IRU and the Aon subsidiary have been discontinued.
In connection with the redomicile of Aon’s headquarters (the “Redomestication”), the Company on April 2, 2012 entered into various agreements pursuant to which it agreed to guarantee the obligations of its subsidiaries arising under issued and outstanding debt securities. Those agreements included the (1) Amended and Restated Indenture, dated as of April 2, 2012, among Aon Corporation, Aon plc, and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) (amending and restating the Indenture, dated as of September 10, 2010, between Aon Corporation and the Trustee), (2) Amended and Restated Indenture, dated as of April 2, 2012, among Aon Corporation, Aon plc and the Trustee (amending and restating the Indenture, dated as of December 16, 2002, between Aon Corporation and the Trustee), (3) Amended and Restated Indenture, dated as of April 2, 2012, among Aon Corporation, Aon plc and the Trustee (amending and restating the Indenture, dated as of January 13, 1997, as supplemented by the First Supplemental Indenture, dated as of January 13, 1997), and (4) First Supplemental Indenture, dated as of April 2, 2012, among Aon Finance N.S. 1, ULC, as issuer, Aon Corporation, as guarantor, Aon plc, as guarantor, and Computershare Trust Company of Canada, as trustee.
The Company provides a variety of guarantees and indemnifications to its customers and others. The maximum potential amount of future payments represents the notional amounts that could become payable under the guarantees and indemnifications if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or other methods. These amounts may bear no relationship to the expected future payments, if any, for these guarantees and indemnifications. Any anticipated amounts payable are included in the Company’s Consolidated Financial Statements, and are recorded at fair value.
Revenue from continuing operations for each of the Company’s principal product and service lines is as follows (in millions):
As Aon is operating as one segment, segment profit or loss is consistent with consolidated reporting as disclosed on the Consolidated Statements of Income.
As described in Note 16 “Commitments and Contingencies,” in connection with the Redomestication, Aon plc entered into various agreements pursuant to which it agreed to guarantee the obligations of Aon Corporation arising under issued and outstanding debt securities, including the 5.00% Notes due September 2020, the 8.205% Notes due January 2027 and the 6.25% Notes due September 2040 (collectively, the “Aon Corp Notes”). Aon Corporation is a 100% indirectly owned subsidiary of Aon plc. All guarantees of Aon plc are full and unconditional. There are no other subsidiaries of Aon plc that are guarantors of the Aon Corp Notes.
In addition, Aon Corporation entered into an agreement pursuant to which it agreed to guarantee the obligations of Aon plc arising under the 4.250% Notes due 2042 exchanged for Aon Corporation’s outstanding 8.205% Notes due January 2027 and also agreed to guarantee the obligations of Aon plc arising under the 4.45% Notes due 2043, the 4.00% Notes due November 2023, the 2.875%
Notes due May 2026, the 3.50% Notes due June 2024, the 4.60% Notes due June 2044, the 4.75% Notes due May 2045, the 2.80% Notes due March 2021, and the 3.875% Notes due December 2025 (collectively, the “Aon plc Notes”). In each case, the guarantee of Aon Corporation is full and unconditional. There are no subsidiaries of Aon plc, other than Aon Corporation, that are guarantors of the Aon plc Notes. As a result of the existence of these guarantees, the Company has elected to present the financial information set forth in this footnote in accordance with Rule 3-10 of Regulation S-X.
The following tables set forth Condensed Consolidating Statements of Income and Condensed Consolidating Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015, Condensed Consolidating Statements of Financial Position as of December 31, 2017 and December 31, 2016, and Condensed Consolidating Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015, in accordance with Rule 3-10 of Regulation S-X. The condensed consolidating financial information includes the accounts of Aon plc, the accounts of Aon Corporation, and the combined accounts of the non-guarantor subsidiaries. The condensed consolidating financial statements are presented in all periods as a merger under common control. The principal consolidating adjustments are to eliminate the investment in subsidiaries and intercompany balances and transactions.
As described in Note 1 “Basis of Presentation,” and consistent with the Company’s Consolidated Financial Statements, the following tables present the financial results of the Divested Business as discontinued operations for all periods presented within non-guarantor Subsidiaries. The impact of intercompany transactions have been reflected within continuing operations in the Condensed Consolidating Financial Statements.
Selected quarterly financial data for the years ended December 31, 2017 and 2016 are as follows (in millions, except per share data):