We have offices in various locations throughout the world. Substantially all of our offices are located in leased premises. We maintain our corporate headquarters at 200 E. Randolph Street in Chicago, Illinois, where we occupy approximately 327,000 square feet of space under an operating lease agreement that expires in 2013. There are two five-year renewal options at current market rates. We also occupy significant space at 199 Water Street in New York, New York (339,000 square feet under a lease expiring in 2018), Devonshire Square and 55 Bishopsgate in London, United Kingdom (279,000 square feet under leases expiring in 2018 and 2023, respectively), 1000 N. Milwaukee Avenue in Glenview, Illinois (230,000 square feet under a lease expiring in 2017), and own a building at Paalbergweg 2-4, Amsterdam, the Netherlands (150,000 square feet).
In general, no difficulty is anticipated in negotiating renewals as leases expire or in finding other satisfactory space if the premises become unavailable. We believe that the facilities we occupy are adequate for the purposes for which they are currently used and are well maintained. In certain circumstances, we may have unused space and may seek to sublet such space to third parties, depending upon the demands for office space in the locations involved. See Note 10 "Lease Commitments" of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for information with respect to our lease commitments at December 31, 2009.
(1)In 2008, we completed the acquisition of Benfield. In connection with the acquisition, we recorded intangible assets of $1.7 billion.
(4)In 2006, we adopted an accounting standard that required us to reflect the funded status of the pension and postretirement plans in our Consolidated Statements of Financial Position, which reduced total equity by $349 million. Retrospective application was not permitted.
(6)Effective January 1, 2009, we adopted additional guidance regarding participating securities and computing net income per share using the two-class method. Prior years' basic and diluted net income per share have been adjusted to conform to the new guidance.
The challenging global recession continues to provide significant headwinds for our business. We continue to operate in a soft insurance pricing market, as property and casualty rates continue to decline. In addition to pricing declines, volume is negatively impacted by the current economic environment, which places pressure on our business in three primary ways:
•declining insurable risks due to decreasing asset values, including property values, shipment volumes, payroll and number of active employees,
Our revenue for 2009 was negatively impacted as a result of this difficult market environment. We continue to demonstrate expense discipline, holding expenses to last year's levels while we continue to invest in our businesses.
•Achieved an adjusted pretax margin, as defined under the caption "Review of Consolidated Results - General" below, of 17.2% for Aon overall, 20% for the Risk and Insurance Brokerage Services segment, and 17.4% for the Consulting segment.
•Diluted earnings per share from continuing operations attributable to Aon's stockholders increased 7% to $2.19 per share in 2009, from $2.04 per share in 2008.
•Operating expenses of $6.6 billion were comparable with last year, as favorable foreign currency translation, restructuring and other operational expense savings, lower E&O costs resulting from insurance recoveries, a net pension curtailment gain recognized in 2009 of $78 million related to the decision to cease crediting future benefits relating to salary and service in our U.S. and Canada defined benefit pension plans, and a reduction in incentive compensation were offset by the increased expenses associated with the Benfield merger and other acquisitions and higher restructuring charges.
We use adjusted pretax margin as a measure of core operating performance of our Risk and Insurance Brokerage Services and Consulting businesses. Adjusted pretax margin excludes the impact of restructuring charges and certain non-recurring costs such as pension curtailments, costs for anti-bribery and compliance initiatives and Benfield integration costs. This supplemental information related to adjusted pretax margin represents a measure not in accordance with U.S. GAAP, and should be viewed in addition to, not instead of, our Consolidated Statements of Income. A reconciliation of this non-GAAP measure to the reported pretax margin is as follows (in millions):
Compensation and benefits increased by $16 million, essentially even with 2008. This increase reflects a $70 million, or 2%, increase in the Risk and Insurance Brokerage Services segment and a $7 million, or 12%, increase in unallocated expenses, partially offset by a $61 million, or 7%, decrease in the Consulting segment. The slight increase overall from last year was driven by the impact of Benfield and higher restructuring costs, which were offset by favorable foreign currency translation, restructuring savings, gains related to the pension curtailments and lower incentive compensation.
Interest expense declined $4 million, due primarily to the impact of favorable foreign exchange rates, which was mostly offset by higher interest rates following the third quarter issuance of €500 million ($721 million at December 31, 2009 exchange rates) of long-term debt at a 6.25% coupon, which replaced debt borrowed at lower rates under our Euro credit facility.
Income from continuing operations before income taxes was $949 million, an 8% increase from $879 million in 2008. The improvement was driven by the additional earnings from Benfield and other acquisitions, restructuring and other operational expense savings, and the net pension curtailment gain, which more than offset the impact of higher restructuring costs, lower fiduciary investment and interest income and unfavorable foreign currency translation.
The effective tax rate on income from continuing operations was 28.2% and 27.5% for 2009 and 2008, respectively. The increase reflects the changes in the mix between our U.S. and international pretax income.
Income from continuing operations increased to $681 million ($2.19 diluted net income per share) from $637 million ($2.04 diluted net income per share) in 2008. Currency fluctuations negatively impacted income from continuing operations in 2009 by $0.02 per diluted share when the 2008 Consolidated Statement of Income is translated using 2009 foreign exchange rates. Income from continuing operations in 2008 was positively impacted by $0.16 per diluted share due to currency fluctuations between 2007 and 2008.
Compensation and benefits increased by $240 million, or 6%, in 2008 compared to 2007. This increase reflects a $250 million, or 7%, increase in the Risk and Insurance Brokerage Services segment, which more than offset an $8 million, or 1%, decline in the Consulting segment and a $2 million, or 3%, decrease in unallocated expenses. The overall 6% increase was primarily driven by higher restructuring expenses, the impact of acquisitions, unfavorable foreign currency translation, and higher salaries and incentive costs, partially offset by restructuring and pension expense savings.
Other general expenses increased by $117 million, or 6%, in 2008 compared to 2007. This increase reflects a $137 million, or 9%, increase in the Risk and Insurance Brokerage Services segment, partially offset by a $9 million, or 3%, decrease in the Consulting segment and an $11 million decrease in unallocated expenses. The increase was driven by higher E&O expenses, costs related to our FCPA and anti-corruption reviews and related compliance initiatives, increased restructuring charges, higher
expense due to increased amortization resulting from recent acquisitions, and higher depreciation from restructuring-related impairments and higher software amortization. These increases were partially offset by foreign currency transaction gains and one-time expenses in 2007 relating to the settlement of litigation for acquired employees in our U.K. reinsurance business.
Interest income decreased $6 million, or 6%, from 2007, resulting from lower non-liquidating distributions from our PEPS I investment of $29 million and lower global interest rates, partially offset by interest income on higher invested balances from selling CICA and Sterling.
Income from continuing operations before income taxes was $879 million, a 14% decrease from $1,023 million in 2007. The decrease was driven by higher restructuring costs, costs associated with acquiring Benfield, and expenses related to FCPA and anti-corruption investigations and compliance initiatives, which more than offset organic revenue growth in both of our segments and the favorable impact of foreign exchange.
The effective tax rate on income from continuing operations was 27.5% in 2008 and 34.0% in 2007 primarily due to changes in the mix between our U.S. and international pretax income.
Income from continuing operations declined to $637 million ($2.04 diluted net income per share) in 2008 from $675 million ($2.04 diluted net income per share) in 2007. Currency fluctuations positively impacted income from continuing operations in 2008 by $0.16 per diluted share when the 2007 Consolidated Statement of Income is translated using 2008 foreign exchange rates.
We announced a global restructuring plan ("Aon Benfield Plan") in conjunction with our 2008 merger with Benfield. The restructuring plan is intended to integrate and streamline operations across the combined Aon Benfield organization. The Aon Benfield Plan includes an estimated 700 job eliminations. Additionally, duplicate space and assets will be abandoned. We originally estimated that this plan would result in cumulative costs totaling approximately $185 million over a three-year period, of which $104 million was recorded as part of the Benfield purchase price allocation and $81 million of which was expected to result in future charges to earnings. During 2009, we reduced the Benfield purchase price allocation by $49 million to reflect actual severance costs being lower than originally estimated. We currently estimate the Plan will result in cumulative costs totaling approximately $155 million, of which $55 million was recorded as part of the purchase price allocation, $55 million has been recorded in earnings and we estimate an additional $45 million will be recorded in future earnings.
All costs associated with the Aon Benfield Plan are included in the Risk and Insurance Brokerage Services segment. Charges related to the restructuring are included in Compensation and benefits and Other general expenses in the Consolidated Statements of Income. We expect these restructuring activities and related expenses to affect continuing operations into 2011.
The restructuring plan, before any potential reinvestment of savings, is expected to deliver cumulative cost savings of approximately $90 to $100 million in 2010 and $122 million in 2011. We estimate that we realized approximately $45 million of cost savings in 2009. The actual savings, total costs and timing of the restructuring plan may vary from those estimated due to changes in the scope, underlying assumptions of the plan, and foreign exchange rates.
The following is a summary of the restructuring and related expenses by type that have been incurred and are estimated to be incurred through the end of the restructuring initiative related to the 2007 Plan (in millions):
Workforce reductions reflect a cash expense, and we may recognize the expense before making payments to the individuals. Asset impairments are non-cash expenses. Lease consolidation accruals reflect the present value of our future cash outflows. Other costs associated with restructuring are cash expenses, which are expensed in the period in which they are incurred.
The following table summarizes actual restructuring and related expenses by segment that have been incurred and are estimated to be incurred through the end of the restructuring initiative, related to the 2007 Plan (in millions):
Our balance sheet and strong cash flow provide us with financial flexibility to create long-term value for our shareholders. This was highlighted by the repurchase of $590 million of common stock during 2009 and the authorization of a new $2 billion share repurchase program. Aon's liquidity needs are primarily for operating expenses, acquisitions, share repurchases, restructuring, funding pension obligations and paying dividends to shareholders.
Net cash provided by operating activities in 2009 decreased $584 million compared with 2008, due primarily to the change in client-held funds. Excluding the change in client-held funds, cash provided from operating activities increased $31 million compared to 2008. The primary contributors to cash flow from operations, excluding the change in client-held funds, in 2009 were net income (adjusted for non-cash items) of $1.3 billion and $67 million of restructuring expense in excess of cash payments, partially offset by $404 million of cash contributions to our major defined pension plans in excess of pension expense, net of curtailment gains, a $105 million decrease in current income taxes, a $63 million increase in receivables, a $54 million decrease in accounts payable and accrued liabilities, and a $266 million decrease in other assets and liabilities. The large pension cash contributions are primarily driven by new funding agreements for our U.K. pension plans completed during the year. Pension contributions for the year ended December 31, 2009 were $437 million. In 2010, we expect to contribute approximately $381 million to our pension plans. Payments made for our various restructuring programs amounted to $327 million during 2009, and are expected to be $290 million in 2010.
Cash used for investing activities was $139 million in 2009, primarily comprised of $274 million paid to acquire 14 businesses, including Allied North America and FCC Global Insurance Services, $158 million paid to purchase long-term investments, and $140 million for capital expenditures, partially offset by $332 million of net proceeds from the sales of short- and long-term investments.
Cash used for financing activities in 2009 was $617 million. The net impact of treasury stock transactions reflects the purchase of $590 million of treasury shares, partially offset by the proceeds from the exercise of stock options and the issuance of shares purchased through the employee stock purchase plan. During 2009, we received $684 million from the issuance of long-term debt, primarily €500 million ($721 million at December 31, 2009 exchange rates) of 6.25% senior unsecured debentures. These funds were primarily used to pay down our borrowings under our Euro credit
Cash used for financing activities in 2008 was $2.2 billion. This was primarily comprised of $1.9 billion of share repurchase activity, less the proceeds from the exercise of stock options; the net repayment of debt of $386 million, almost entirely related to our Euro credit facility; and dividends of $171 million.
Cash used for financing activities in 2007 was $553 million. This reflects $714 million of net repayments of debt, partially offset by $806 million of new debt issuances. Share repurchase activity used $751 million and dividend payments of $176 million were paid to shareholders.
As disclosed in Note 17, "Fair Value and Financial Instruments," of the Notes to Consolidated Financial Statements, the majority of our investments carried at fair value are money market funds. Money market funds are carried at cost as an approximation of fair value. Based on market convention, we consider cost a practical and expedient measure of fair value. These money market funds are held throughout the world with various financial institutions. We do not believe that there are any market liquidity issues affecting the fair value of these investments.
As of December 31, 2009, our investments in money market funds and highly liquid debt instruments had a fair value of $2.1 billion and are reported as cash equivalents, short-term investments or fiduciary assets in the Consolidated Statements of Financial Position depending on their nature and initial maturity.
The following table summarizes our fiduciary assets and non-fiduciary cash and short-term investments as of December 31, 2009 (in millions):
In December 2009, we cancelled our $600 million U.S. bank credit facility, which was due to expire in February 2010, and replaced it with a $400 million, three-year unsecured revolving credit facility. Sixteen banks are participating in the facility, which is for general corporate purposes, including a commercial paper backstop. Additionally, at December 31, 2009, we have a five-year €650 million
For both our U.S. and Euro facilities, we are required to maintain a ratio of consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) to consolidated interest expense of 4 to 1 and a ratio of consolidated debt to EBITDA of not greater than 3 to 1. We were in compliance with all covenants as of December 31, 2009.
We have outstanding letters of credit ("LOCs") totaling approximately $153 million at December 31, 2009. These letters of credit are for the benefit of Virginia Surety Company ("VSC") related to a non-performance risk of reinsurers of VSC's worker's compensation business in California, a LOC that secures deductible retentions for our own workers compensation program, and LOCs to cover the beneficiaries related to our Canadian pension plan scheme, secure one of our U.S. pension plans, and to cover contingent payments for taxes and other business obligations to third parties.
Summarized in the table below are our contractual obligations and commitments as of December 31, 2009 (in millions):
(2)In 2007, our principal U.K subsidiary agreed with the trustees of one of the U.K. plans to contribute £9.4 million ($15 million) per year to that pension plan for the next six years, with the amount payable increasing by approximately 5% on each April 1. 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, 2009, the estimated winding-up deficit was £420 million ($671 million). 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.
(6)Excludes a $42 million commitment to purchase additional fixed-maturity securities from PEPS I, as the general partners may decide not to draw on these commitments.
(7)Excludes $61 million of liabilities for unrecognized tax benefits due to our inability to reasonably estimate the period(s) when cash settlements will be made.
Balance sheet categories that reflected large variances from last year included the following:
•Cash and short-term investments declined $627 million, resulting primarily from cash used for our ongoing share repurchase program, funding of our various pension plans, and the acquisition of subsidiaries.
Total debt at December 31, 2009 was $2.0 billion, an increase of $31 million from December 31, 2008. On July 1, 2009, one of our indirectly wholly-owned subsidiaries issued €500 million ($721 million at December 31, 2009 exchange rates) of 6.25% senior unsecured debentures due on July 1, 2014. The principal and interest on the debentures is unconditionally and irrevocably guaranteed by us. Most of the net proceeds from the offering were used to repay the $677 million outstanding under our Euro credit facility. During 2009, we repaid $100 million of short-term debt held at one of our VIEs that was fully liquidated in 2009, and also redeemed and cancelled a portion of our 8.205% Debentures. Our total debt as a percentage of total capital attributable to Aon shareholders was 27.2% and 27.1% at December 31, 2009 and 2008, respectively.
In 1997, we created Aon Capital A, a wholly-owned statutory business trust ("Trust"), for the purpose of issuing mandatorily redeemable preferred capital securities ("Capital Securities"). We received cash and 100% of the common equity of Aon Capital A by issuing 8.205% Junior Subordinated Deferrable Interest Debentures (the "Debentures") to Aon Capital A. These transactions were structured such that the net cash flows from Aon to Aon Capital A matched the cash flows from Aon Capital A to the third party investors. We determined that we were not the primary beneficiary of Aon Capital A, a VIE, and, thus reflected the Debentures as long-term debt. During the first half of 2009, we repurchased $15 million face value of the Capital Securities for approximately $10 million, resulting in a $5 million gain, which is reported in Other income (expense) in the Consolidated Statements of Income. To facilitate the legal release of the obligation created through the Debentures associated with this repurchase and future repurchases, we dissolved the Trust effective June 25, 2009. This dissolution resulted in the exchange of the Capital Securities held by third parties for the Debentures. Also in connection with the dissolution of the Trust, the $24 million of common equity of Aon Capital A held by us was exchanged for $24 million of Debentures, which were then cancelled. Following these actions, $687 million of Debentures remain outstanding as of December 31, 2009. The Debentures are subject to mandatory redemption on January 1, 2027 or are redeemable in whole, but not in part, at our option upon the occurrence of certain events.
•an improvement in net foreign currency translation adjustments of $199 million, which was attributable to the weakening of the U.S. dollar against foreign currencies,
Further details are included in Note 5 "Business Acquisitions and Dispositions" of the Notes to Consolidated Financial Statements.
•Juniperus Insurance Opportunity Fund Limited ("Juniperus"), which is an investment vehicle that invests in an actively managed and diversified portfolio of insurance risks, and
Prior to December 18, 2009, based on our percentage equity interest in the Juniperus Class A shares, we bore a majority of the expected residual return and losses. Similarly, our voting and economic interest percentage in JCHL required us to absorb a majority of JCHL's expected residual returns and losses. We were considered the primary beneficiary of both companies, and as such these entities were consolidated. As of December 18, 2009, our equity interest in Juniperus declined to 38%, and we held a 39% voting and economic interest in JCHL. Based on our holdings, we no longer are considered the primary beneficiary of either entity and have therefore deconsolidated both entities. Prospectively, their results will be accounted for using the equity method of accounting.
Juniperus and JCHL had combined assets and liabilities of $121 million and $22 million, respectively, at December 31, 2008. For the year ended December 31, 2009, we recognized $36 million of pretax income from Juniperus and JCHL. We recognized $16 million of after-tax income, after allocating the appropriate share of net income to the noncontrolling interests. Our potential loss at December 31, 2009 is limited to our investment in the VIEs, which is $73 million.
We previously owned the majority economic equity interest in Globe Re Limited ("Globe Re"), a VIE, which provided reinsurance coverage for a defined portfolio of property catastrophe reinsurance contracts underwritten by a third party for a limited period which ended June 1, 2009. We consolidated Globe Re as we were deemed to be the primary beneficiary. In connection with the winding up of its operations, Globe Re repaid its $100 million of short-term debt and our equity investment from available cash in 2009. We recognized $2 million of pretax income from Globe Re in 2009. Globe Re was fully liquidated in the third quarter of 2009.
•Risk and Insurance Brokerage Services - we act as an advisor and insurance broker, helping clients manage their risks, as well as negotiating and placing insurance risk with insurance carriers through our global distribution network.
•Consulting - we provide advice and services to clients related to health and benefits, retirement, compensation, strategic human capital, and human resource outsourcing.
Additionally, beginning in late 2008 and continuing throughout 2009, we faced difficult conditions as a result of unprecedented disruptions in the global economy, the repricing of credit risk and the deterioration of the financial markets. Continued volatility and further deterioration in the credit markets have reduced our customers' demand for our retail brokerage and reinsurance brokerage products, which have negatively hurt our operational results. In addition, overall capacity in the industry could decrease if a significant insurer either fails or withdraws from writing insurance coverages that we offer our clients. This failure could reduce our revenues and profitability, since we would no longer have access to certain lines and types of insurance.
Risk and Insurance Brokerage Services generated approximately 83% of our consolidated total revenues in 2009. Revenues are generated primarily through fees paid by clients, commissions and fees paid by insurance and reinsurance companies, and investment income on funds held on behalf of clients. Our revenues vary from quarter to quarter throughout the year as a result of the timing of our clients' policy renewals, the net effect of new and lost business, the timing of services provided to our clients, and the income we earn on investments, which is heavily influenced by short-term interest rates.
In 2009, commissions, fees and other revenue increased $203 million or 3% from 2008 driven primarily by the Benfield merger, partially offset by the impact of unfavorable foreign exchange rates and a decline in organic revenue of 1%.
Reconciliation of organic revenue growth to reported commissions, fees and other revenue growth for 2009 versus 2008 is as follows:
The 1% decline in Americas reflects unfavorable foreign currency translation, which more than offset a 1% increase in organic revenue, driven by strong growth in Latin America and growth in our U.S. Retail operations despite overall economic weakness, partially offset by declines in our Canadian operation.
United Kingdom commissions, fees and other revenue declined 12% driven by unfavorable foreign currency translation and a 6% organic revenue decline, reflecting weak market conditions as well as lower retentions and new business.
Asia Pacific commissions, fees and other revenue decreased 7%, due to the negative impact of foreign currency translation and a 1% decline in organic growth driven largely by the negative impact
These items were partially offset by an increase of $140 million in restructuring costs, $95 million of lower fiduciary investment income, Benfield integration costs and higher amortization of intangible assets obtained in the merger, and unfavorable foreign currency translation.
3.Compensation focuses on compensatory advisory/counsel including: compensation planning design, executive reward strategies, salary survey and benchmarking, market share studies and sales force effectiveness, with special expertise in the financial services and technology industries.
In 2009, commissions, fees and other revenue of $1.3 billion was 6% lower than 2008. Consulting commissions, fees and other revenue was as follows (in millions):
Organic revenue declined 2% in 2009, as detailed in the following reconciliation of organic revenue growth:
Consulting services decreased $64 million or 6%, reflecting unfavorable foreign exchange as well as declines in most major practice groups. International operations organic revenue was similar to last year.
Outsourcing revenue declined $23 million, or 11%, driven by unfavorable foreign exchange and the previously announced termination of our contract with AT&T, partially offset by modest growth in Canada.
A reconciliation of our segment income from continuing operations before income taxes to income from continuing operations before income taxes is as follows (in millions):
Unallocated revenue consists of revenue from our equity ownership in insurance investments, Juniperus and JCHL, obtained in the Benfield merger. No revenue from these investments was recognized in 2008.
Unallocated expenses include corporate governance costs not allocated to the operating segments and the costs associated with our ownership of insurance investments. These expenses decreased by $38 million in 2009 from $165 million in 2008, driven by $50 million of costs incurred in 2008 related to the merger with Benfield, partially offset by additional expenses of $13 million incurred in 2009 associated with our ownership in Juniperus and JCHL.
Interest income consists primarily of income earned on our operating cash balances and miscellaneous income producing securities. It does not include interest earned on funds held on behalf of clients. Interest income was $30 million in 2009, a decrease of $64 million from 2008, which was driven primarily by lower investment balances, the global decline in interest rates and a $26 million decrease in income from our PEPS I investment. In 2008, we had a large investment balance for part of the year due to cash received as a result of the sale of our CICA and Sterling subsidiaries.
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. To prepare these financial statements, we made 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.
In accordance with our policies, we regularly evaluate our estimates, assumptions and judgments, including those concerning restructuring, pensions, goodwill and other intangible assets, contingencies, share-based payments, and income taxes, and base our estimates, assumptions, and judgments on our historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we used to prepare these consolidated financial statements.
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.
terminated. We recognize these costs when we identify the specific classification (or functions) and locations of the employees being terminated, notify the employees who might be included in the termination, and expect to terminate employees within the legally required notification period. When employees are receiving incentives to stay beyond the legally required notification period, we record the cost of their severance over the remaining service period.
For the remaining lease term or severance payout, we decrease the liability for payments and increase the liability for accretion of the discount. The discount reflects our incremental borrowing rate, which matches the lifetime of the liability. Significant changes in the discount rate selected or the estimations of sublease income in the case of leases could impact the amounts recorded.
We recognize other costs associated with exit and disposal activities as they are incurred, including moving costs and consulting and legal fees.
There was no unrecognized prior service cost at December 31, 2009.
The investment policy for each U.K. pension plan is generally determined by the plans' trustees. Because there are several pension plans maintained in the U.K., our target allocation represents a weighted average of the target allocation of each plan. Further, target allocations are subject to change. In total, as of December 31, 2009, the U.K. plans were invested 51% in equity and 49% in fixed income securities.
As of December 31, 2009, the Netherlands' plan was invested 40% in equity and 60% in fixed income securities, and in total the Canadian plans were invested 71% in equity and 29% in fixed income securities.
Goodwill represents the excess of cost over the fair market value of the net assets acquired. We classify our intangible assets acquired as either trademarks, client lists, non-compete agreements, or other purchased intangibles. Our goodwill and other intangible balances at December 31, 2009 were $6.1 billion and $791 million, respectively, compared to $5.6 billion and $779 million, respectively, at December 31, 2008.
Although goodwill is not amortized, we test it for impairment at least annually in the fourth quarter. Beginning in 2009, we also test trademarks (which also are not amortized) that were acquired in conjunction with the Benfield merger 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 2009 or 2008 that indicate the existence of an impairment with respect to our reported goodwill or trademarks.
We review intangible assets that are being amortized for impairment whenever events or changes in circumstance indicate that their carrying amount may not be recoverable. There were no indications that the carrying values of amortizable intangible assets were impaired as of December 31, 2009 or 2008. If we are required to record impairment charges in the future, they could materially impact our results of operations.
Stock-based compensation expense is based on the value of the portion of share-based payment awards that we ultimately expect to vest during that period. Thus, we have reduced expense for estimated forfeitures. We estimate forfeitures at the time of grant based on our actual experience to date and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. When the terms of an award require no additional service, the award is fully expensed at the grant date. When awards are modified, we account for the incremental shares at the fair market value at the date of modification. Expense recognition begins on the date the service period begins, which can precede or be after the grant date, depending on the provisions of the award.
•base the risk-free rate for the contractual life of the option on the U.S. Treasury yield curve in effect at the time of grant.
Employees may either receive service-based restricted stock units ("RSUs") or performance-based awards, which ultimately result in the receipt of RSUs, if the employee achieves his or her objectives. Such objectives may be made on a personal, group or company level. We account for service-based awards by expensing the total award value over the service period. We calculate the total award value by multiplying the estimated total number of shares to be delivered by the fair value on the date of grant. We estimate forfeitures based on our actual historical experience and consider dividend discounts when determining the fair value of the RSUs. Performance-based RSUs may be immediately vested upon the end of the performance period or may have a future additional service period. Generally, our performance awards are fixed, which means we determine the fair value of the award at the grant date, estimate the number of shares to be delivered at the end of the performance period, and recognize the expense over the performance or vesting period, whichever is longer. These estimates take into account performance to date as well as an assessment of future performance. These assessments are made by management using subjective estimates, such as long-term plans. As a result, changes in the underlying assumptions could have a material impact on the expense recognized.
The largest performance-based stock plan is the LPP, which has a three-year performance period. The 2007 to 2009 performance period ended on December 31, 2009. The LPP currently has two ongoing performance periods: 2008 to 2010 and 2009 to 2011. A 10% upward adjustment in our estimated performance achievement percentage for both the 2008-2010 and 2009-2011 plans would have increased our 2009 expense by approximately $4 million, while a 10% downward adjustment would have decreased our expense by approximately $4 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 foreign countries and this income is subject to the laws of taxing jurisdictions within those countries, as well as U.S. federal and state tax laws. The estimated effective tax rate for the year is applied to our quarterly operating results. In the event that there is a significant unusual or discrete item recognized, or expected to be recognized, in our quarterly operating results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or discrete item. We consider the resolution of prior-year tax matters to be such items.
•the portion of our overall operations conducted in foreign tax jurisdictions has been increasing, and we anticipate this trend will continue,
As discussed in Note 2 to the financial statements, in 2009 the Company changed its method of accounting and reporting for noncontrolling interests.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Aon Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified opinion thereon.
Management has reviewed all material subsequent events through February 26, 2010, the date the financial statements were issued, to determine whether any event required either recognition or disclosure in the financial statements.
The Company recognizes compensation expense for all share-based payments to employees, including grants of employee stock options and restricted stock and restricted stock units ("RSUs"), as well as employee stock purchases related to the Employee Stock Purchase Plan, based on estimated fair value. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Because stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Basic net income per share is computed by dividing net income available for common stockholders by the weighted-average number of common shares outstanding, including participating securities, which consist of unvested stock awards with non-forfeitable rights to dividends. Diluted net income per share is computed by dividing net income by the weighted-average number of common shares outstanding, plus the dilutive effect of stock options and awards. The diluted earnings per share calculation reflects the more dilutive effect of either (1) the two-class method that assumes that the participating securities have not been exercised, or (2) the treasury stock method. Certain common stock equivalents related primarily to options were not included in the computation of diluted income per share because their inclusion would have been antidilutive. Aon has included in its diluted net income per share computation the impact of any contingently convertible instruments regardless of whether the market price trigger has been met. Prior to their redemption in November 2007, Aon's 3.5% convertible debt securities, which were issued in November 2002, were able to be converted into a maximum of 14 million shares of Aon common stock, and these shares, and the associated interest, were included in the computation of diluted net income per share for 2007. Since redemption of these securities, Aon has had no convertible debt securities outstanding.
Cash and cash equivalents include cash balances and all highly liquid investments with initial maturities of three months or less. Cash and cash equivalents included restricted balances of $85 million and $254 million at December 31, 2009 and 2008, respectively.
Aon's policy for estimating allowances for doubtful accounts with respect to receivables is to record an allowance based on a historical evaluation of write-offs, aging of balances and other qualitative and quantitative analyses. Receivables included an allowance for doubtful accounts of $92 million and $101 million at December 31, 2009 and 2008, respectively.
Goodwill represents the excess of cost over the fair market value of the net assets acquired. 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 is 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 and is a two-step analysis. First, the fair value of each reporting unit is compared to its book value. If the fair value of the reporting unit is less than its book 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. Fair value is determined using a combination of present value techniques and market prices of comparable businesses.
Intangible assets include trademarks, customer related and contract based assets representing primarily client lists and non-compete covenants, and marketing and technology related assets. These intangible assets, with the exception of trademarks, are amortized over periods ranging from 1 to 12 years, with a weighted average original life of 10 years. Trademarks are not amortized as such assets have been determined to have indefinite useful lives. Similar to goodwill, trademarks are tested at least annually for impairments using an analysis of expected future cash flows. Interim impairment testing may be performed when events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.
All derivative instruments are recognized in the Consolidated Statements of Financial Position at fair value. Where the Company has entered into master netting agreements with counterparties, the derivative positions are netted by counterparty and are reported accordingly in Other assets or Other liabilities. Changes in the fair value of derivative instruments are recognized immediately in earnings, unless the derivative is designated as a hedge and qualifies for hedge accounting.
The Company has historically acquired the following derivative instruments: (i) a hedge of the change in fair value of a recognized asset or liability or firm commitment ("fair value hedge"), (ii) a hedge of the variability in cash flows from a recognized variable-rate asset or liability or forecasted transaction ("cash flow hedge"), and (iii) a hedge of the net investment in a foreign subsidiary ("net investment hedge"). Under hedge accounting, recognition of derivative gains and losses can be matched in the same period with that of the hedged exposure and thereby minimize earnings volatility.
Fair value hedges are marked-to-market and the resulting gain or loss is recognized currently in earnings. For a cash flow hedge that qualifies for hedge accounting, the effective portion of the change in fair value of a hedging instrument is recognized in Other Comprehensive Income ("OCI") and subsequently recognized in income when the hedged item affects earnings. The ineffective portion of the change in fair value of a cash flow hedge is recognized immediately in earnings. For a net investment hedge, the effective portion of the change in fair value of the hedging instrument is recognized in OCI as part of the cumulative translation adjustment, while the ineffective portion is recognized immediately in earnings.
The Company discontinues hedge accounting prospectively when (1) the derivative expires or is sold, terminated, or exercised, (2) it determines that the derivative is no longer effective in offsetting changes in the hedged item's fair value or cash flows, (3) a hedged forecasted transaction is no longer probable of occurring in the time period described in the hedge documentation, (4) the hedged item matures or is sold, or (5) management elects to discontinue hedge accounting voluntarily.
Deferred income taxes are recognized for the effect of temporary differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted marginal tax rates and laws that are currently in effect. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the period when the rate change is enacted.
On January 1, 2009, the Company adopted revised principles related to business combinations and noncontrolling interests. The revised principle on business combinations applies to all transactions or other events in which an entity obtains control over one or more businesses. It requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Business combinations achieved in stages require recognition of the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values when control is obtained. This revision also changes the requirements for recognizing assets acquired and liabilities assumed arising from contingencies, and requires direct acquisition costs to be expensed. In addition, it provides certain changes to income tax accounting for business combinations which apply to both new and previously existing business combinations. In April 2009, additional guidance was issued which revised certain business combination guidance related to accounting for contingent liabilities assumed in a business combination. The Company has adopted this guidance in conjunction with the adoption of the revised principles related to business combinations. The adoption of the revised principles related to business combinations has not had a material impact on the consolidated financial statements.
The revised principle related to noncontrolling interests establishes accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. The revised principle clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a separate component of equity in the Consolidated Statements of Financial Position. The revised principle requires retrospective adjustments, for all periods presented, of stockholders' equity and net income for noncontrolling interests. In addition to these financial reporting changes, the revised principle provides for significant changes in accounting related to changes in ownership of noncontrolling interests. Changes in Aon's controlling financial interests in consolidated subsidiaries that do not result in a loss of control are accounted for as equity transactions similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in a loss of control and deconsolidation, any retained ownership interests are remeasured at fair value with the gain or loss reported in net income. In previous periods, noncontrolling interests for operating subsidiaries were reported in Other general expenses in the Consolidated Statements of Income. Prior period amounts have been restated to conform to the current year's presentation.
The revised principle also requires that net income be adjusted to include the net income attributable to the noncontrolling interests and a new separate caption for net income attributable to Aon stockholders be presented in the Consolidated Statements of Income. The adoption of this new guidance increased net income by $16 million and $13 million for 2008 and 2007, respectively. Net
(1)Includes 6.9 million, 7.5 million, and 7.5 million of participating securities for the years ended December 31, 2009, 2008, and 2007, respectively.
•guidance related to debt securities, which requires an entity to recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the non-credit component in other comprehensive income when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. Entities are required to record a cumulative effect adjustment for the non-credit component of previously recognized other-than-temporary impairments that meet certain criteria.
In December 2008, the FASB issued an amendment to current principles regarding employers' disclosures about pensions and other postretirement benefits. These changes provide guidance as to an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. This amendment requires pension and other postretirement plan disclosures be expanded to include investment allocation decisions, the fair value of each major category of plan assets based on the nature and risks of assets in the plans, and inputs and valuation techniques used to develop fair value measurements of plan assets. See Note 13 for these disclosures.
In September 2009, the FASB issued guidance updating current principles related to revenue recognition when there are multiple-element arrangements. This revised guidance relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting and modifies the manner in which the transaction consideration is allocated across the separately identifiable deliverables. The guidance also expands the disclosures required for multiple-element revenue arrangements. These changes will be effective for Aon beginning in the first quarter of 2011, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or modified after the adoption date. Early adoption is
In 2008, Aon reached a definitive agreement to sell AIS Management Corporation ("AIS"), which was previously included in the Risk and Insurance Brokerage Services segment, to Mercury General Corporation, for $120 million in cash at closing, plus a potential earn-out of up to $35 million payable over the two years following the completion of the agreement. The disposition was completed in January 2009 and resulted in a pretax gain of $86 million. As of February 26, 2010, Aon had not received any of this potential earn-out.
In April 2008, the Company sold its Combined Insurance Company of America ("CICA") subsidiary to ACE Limited and its Sterling Life Insurance Company ("Sterling") subsidiary to Munich Re Group. These two subsidiaries were previously included in the Company's former Insurance Underwriting segment. After final adjustments, Aon received $2.525 billion in cash for CICA and $341 million in cash for Sterling. Additionally, CICA paid a $325 million dividend to Aon before the sale transaction was completed. A pretax gain of $1.4 billion was recognized on the sale of these businesses, which included the reversal of the cumulative translation adjustment account (related to selling CICA's foreign entities) of $134 million. In 2009, the Company recognized a $55 million foreign tax credit carryback related to the sale of CICA.
Aon reclassified the assets and liabilities of AIS and the P&C Operations to assets held-for-sale and liabilities held-for-sale, respectively, in the December 31, 2008 Consolidated Statements of Financial Position, as follows (in millions):
The components of fixed assets, net are as follows (in millions):
Depreciation expense, which includes software amortization, was $149 million, $157 million and $154 million for the years ended December 31, 2009, 2008, and 2007, respectively.
In 2009, the Company completed the acquisitions of Allied North America, FCC Global Insurance Services and Carpenter Moore Insurance Services which are included in the Risk and Insurance Brokerage Services segment. The following table includes the aggregate amount paid and the preliminary allocation value of intangible assets recorded as a result of these and the other acquisitions made during 2009, 2008 and 2007. Due to the timing of these acquisitions, the Company is in the process of obtaining third-party valuations for the intangible assets other than goodwill that were acquired in 2009, and therefore the allocation of the purchase prices is still subject to refinement.
In connection with the acquisition, the Company recorded net tangible assets, goodwill and other intangibles which are reported within the Risk and Insurance Brokerage Services segment. None of the goodwill is deductible for tax purposes. Of the acquired intangible assets, $128 million was assigned to registered trademarks, which were determined to have indefinite useful lives. Of the remaining balance of intangible assets acquired, $449 million was assigned to customer relationships, and $2 million was assigned to non-competition agreements, which are being amortized over weighted average useful lives of 12 and 1 years, respectively.
Some of Aon's U.S. ("Cananwill"), U.K., Canadian, and Australian subsidiaries (together "Cananwill International") originated short-term loans (generally with terms of 12 months or less) to businesses to finance their insurance premium obligations, and then sold these premium finance agreements to unaffiliated companies, typically bank special purpose entities ("SPE's") in whole loan securitization transactions that met the criteria for sales accounting.
the unearned premium from the insurance carrier. The Company does not expect to incur any significant losses related to this guarantee.
In 2008, Aon sold four small operations. Total pretax gains of $13 million were recognized on these sales, which are included in Other income (expense) in the Consolidated Statements of Income.
In 2007, Aon sold three small operations and a 25% share of another small operation, which were all included in the Risk and Insurance Brokerage Services segment. Total pretax gains of $40 million were recognized on these sales, which are included in Other income (expense) in the Consolidated Statements of Income.
The changes in the net carrying amount of goodwill by operating segment for the years ended December 31, 2009 and 2008, respectively, are as follows (in millions):
The Company announced a global restructuring plan ("Aon Benfield Plan") in conjunction with its acquisition of Benfield in 2008. The restructuring plan is intended to integrate and streamline operations across the combined Aon Benfield organization. The Aon Benfield Plan includes an estimated 700 job eliminations. Additionally, duplicate space and assets will be abandoned. The Company originally estimated that this plan would result in cumulative costs totaling approximately $185 million over a three-year period, of which $104 million was recorded as part of the Benfield purchase price allocation and $81 million of which was expected to result in future charges to earnings. During 2009, the Company reduced the Benfield purchase price allocation by $49 million to reflect actual severance costs being lower than originally estimated. The Company currently estimates the Plan will result in cumulative costs totaling approximately $155 million, of which $55 million was recorded as part of the purchase price allocation, $55 million has been recorded in earnings during 2009, and an estimated additional $45 million will be recorded in future earnings.
As of December 31, 2009, approximately 530 jobs have been eliminated under this Plan. Total payments of $67 million have been made under this Plan to date.
All costs associated with the Aon Benfield Plan are included in the Risk and Insurance Brokerage Services segment. Charges related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Consolidated Statements of Income. The Company expects these restructuring activities and related expenses to affect continuing operations into 2011.
In 2007, the Company announced a global restructuring plan intended to create a more streamlined organization and reduce future expense growth to better serve clients ("2007 Plan"). The 2007 Plan includes an estimated 4,600 job eliminations. As of December 31, 2009, approximately 3,100 positions have been eliminated. The Company has closed or consolidated several offices resulting in
The following summarizes the restructuring and related expenses by segment that have been incurred and are estimated to be incurred through the end of the restructuring initiative, related to the 2007 Plan (in millions):
In 2005, the Company commenced a restructuring that resulted in cumulative pretax charges totaling $369 million, including workforce reductions, lease consolidation costs, asset impairments and other expenses necessary to implement the restructuring initiative. Costs related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Consolidated Statements of Income.
The following is a summary of the restructuring and related expenses incurred by type that have been incurred (in millions):
Aon's unpaid restructuring liabilities are included in both Accounts payable and accrued liabilities and Other non-current liabilities in the Consolidated Statements of Financial Position.
The Company's interest-bearing assets are included in the following categories in the Consolidated Statements of Financial Position (in millions):
Prior to 2007, income distributions received from PEPS I were limited to interest payments on PEPS I debt instruments. Beginning in 2007, PEPS I had redeemed or collateralized all of its debt, and began to pay preferred income distributions to Aon. Whether Aon receives additional preferred returns will depend on the performance of the underlying limited partnership interests, which is expected to vary from period to period. Aon does not control the timing of the distribution. In 2009, 2008, and 2007, Aon received $6 million, $32 million and $61 million, respectively, of income distributions from PEPS I, which are included in Interest income.
Certain of Aon's European subsidiaries have a €650 million ($937 million at December 31, 2009 exchange rates) multi-currency revolving loan credit facility. This facility will mature in October 2010. Commitment fees of 8.75 basis points are payable on the unused portion of the facility. At December 31, 2009, Aon had no borrowings under this facility. At December 31, 2008, €431 million ($605 million at December 31, 2008 exchange rates) was borrowed. Aon has guaranteed the obligations of its subsidiaries with respect to this facility.
Outstanding debt securities are not redeemable by Aon prior to maturity. There are no sinking fund provisions. Interest is payable semi-annually on most debt securities.
Aon leases office facilities, equipment and automobiles under noncancelable operating leases. These leases expire at various dates and may contain renewal and expansion options. In addition to base rental costs, occupancy lease agreements generally provide for rent escalations resulting from increased assessments for real estate taxes and other charges. Approximately 88% of Aon's lease obligations are for the use of office space.
At December 31, 2009, future minimum rental payments required under operating leases for continuing operations that have initial or remaining noncancelable lease terms in excess of one year, net of sublease rental income, most of which pertain to real estate leases, are as follows (in millions):
Income from continuing operations before income taxes and the provision for income tax consist of the following (in millions):
Income from continuing operations before income taxes shown above is based on the location of the business unit to which such earnings are attributable. However, because such earnings in some cases may be subject to taxation in more than one country, the income tax provision shown above as U.S. or International may not correspond to the geographic attribution of the earnings.
At December 31, 2009, Aon had domestic federal operating loss carryforwards of $7 million that will expire at various dates from 2010 to 2024, state operating loss carryforwards of $513 million that will expire at various dates from 2010 to 2028, and foreign operating and capital loss carryforwards of $453 million and $252 million, respectively, nearly all of which are subject to indefinite carryforward.
The Company recognizes penalties and interest related to unrecognized income tax benefits in its provision for income taxes. Aon accrued potential penalties of less than $1 million during each of 2009, 2008 and 2007. Aon accrued interest of $2 million during 2009 and less than $1 million during both 2008 and 2007. As of December 31, 2009 and 2008, Aon has recorded a liability for penalties of $5 million and $4 million, respectively, and for interest of $18 million and $14 million, respectively.
Aon's Board of Directors has authorized the Company to repurchase up to $4.6 billion of its outstanding common stock. Shares may be repurchased through the open market or in privately negotiated transactions from time to time, based on prevailing market conditions, and will be funded from available capital. Any repurchased shares will be available for employee stock plans and for other corporate purposes. In 2009, Aon repurchased 15.1 million shares at a cost of $590 million. In 2008, Aon repurchased 42.6 million shares at a cost of $1.9 billion. In 2007, Aon repurchased 19.1 million shares at a cost of $751 million. Since inception of its share repurchase program in 2005, the Company has repurchased a total of 105.8 million shares for an aggregate cost of $4.3 billion. As of December 31, 2009, the Company was authorized to purchase up to $265 million of additional shares under the current stock repurchase program. The timing and amount of future purchases will be based on market and other conditions.
Aon maintains defined contribution savings plans for the benefit of its U.S. and U.K. employees. The expense recognized for these plans, which is included in Compensation and benefits and Discontinued operations in the Consolidated Statements of Income, is as follows (in millions):
The Company's U.S., U.K., and Canadian plans are closed to new entrants. Effective January 1, 2009, the Company's Netherlands plan was also closed to new entrants. Effective April 1, 2009, the Company ceased crediting future benefits relating to salary and service in its U.S. defined benefit pension plan. This change affected approximately 6,000 active employees covered by the U.S. plan. For those employees, the Company increased its contribution to the defined contribution savings plan. In 2010 and 2011, the Company will cease crediting future benefits relating to service in its Canadian defined benefit pension plans. This change will affect approximately 950 active employees.
located in the U.K., the Netherlands, and Canada. These plans represent approximately 95% of the Company's pension obligations.
Amounts recognized in Accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31, 2009 and 2008 consist of (in millions):
No plan assets are expected to be returned to the Company during 2010.
The fair values of Aon's U.S. pension plan assets at December 31, 2009, by asset category, are as follows (in millions):
Alternative investments consist of limited partnerships, private equity, and hedge funds.
The following table presents the changes in the Level 3 fair-value category for the year ended December 31, 2009 (in millions):
The U.S. investment policy, as established by the Aon Retirement Plan Governance and Investment Committee ("RPGIC"), seeks reasonable asset growth at prudent risk levels within target allocations, which are 42% equity investments, 38% fixed income investments, and 20% other investments. Aon believes that plan assets are well-diversified and are of appropriate quality. The investment portfolio asset allocation is reviewed quarterly and re-balanced to within policy target allocations. The investment policy is reviewed at least annually and revised, as deemed appropriate by the RPGIC. The investment policies for international plans are established by the local pension plan trustees and seek to maintain the plans' ability to meet liabilities and to comply with local minimum funding requirements. Plan assets are invested in diversified portfolios that provide adequate levels of return at an acceptable level of risk. The investment policies are reviewed at least annually and revised, as deemed appropriate to ensure that the objectives are being met. At December 31, 2009, the weighted average targeted allocation for the international plans was 46% for equity investments, 49% for fixed income investments, and 5% for all other types of investments.
Based on current assumptions, Aon expects to contribute approximately $30 million and $351 million, respectively, to its U.S. and international pension plans during 2010.
Estimated future benefit payments for plans are as follows at December 31, 2009 (in millions):
The following table provides an overview of the accumulated projected benefit obligation, fair value of plan assets, funded status and net amount recognized as of December 31, 2009 and 2008 for the Company's other post-retirement benefit plans (in millions):
•Estimated future benefit payments will be approximately $5 million each year for 2010-2011, $4 million each year for the years 2012-2014 and $20 million in aggregate for 2015-2019.
(1)Represents weighted average fair value of award at date of grant Information regarding Aon's performance-based plans as of December 31, 2009, 2008 and 2007 follows (shares in thousands, dollars in millions):
The fair value of awards that vested during 2009, 2008 and 2007 was $223 million, $107 million and $65 million, respectively.
Options to purchase common stock are granted to certain employees, generally at 100% of market value on the date of grant. Generally, employees are required to complete two continuous years of service before the options begin to vest in increments until the completion of a 4-year period of continuous employment, although a number of options were granted that require five continuous years of service before all options would vest. The maximum contractual term on stock options is generally ten years from the date of grant.
Aon uses a lattice-binomial option-pricing model to value stock options. Lattice-based option valuation models utilize a range of assumptions over the expected term of the options. Expected volatilities are based on the average of the historical volatility of Aon's stock price and the implied volatility of traded options and Aon's stock. In 2008 and prior years, Aon used historical data to estimate option exercise and employee terminations within the lattice-binomial option-pricing model, stratified between executives and key employees. Beginning in 2009, after reviewing additional historical data, the valuation model stratifies employees between those receiving LPP options, Special Stock Plan ("SSP") options, and all other option grants. The Company believes that this stratification better represents prospective stock option exercise patterns. The expected dividend yield assumption is based on the Company's historical and expected future dividend rate. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of employee stock options represents the weighted-average period stock options are expected to remain outstanding and is a derived output of the lattice-binomial model.
In connection with the LPP Plan, the Company granted the following number of stock options at the noted exercise price: 2009 - 1 million shares at $39 per share, 2008 - 820,000 shares at $41 per share and 2007 - 880,000 shares at $38 per share. In connection with its incentive compensation plans, the Company granted the following number of stock options at the noted exercise price: 2009 - 550,000 shares at $37 per share, 2008 - 710,000 shares at $46 per share and 2007 - 1.1 million shares at $42 per share.
A summary of options outstanding and exercisable as of December 31, 2009 is as follows (shares in thousands):
Aon and its subsidiaries are exposed to foreign exchange risk when they receive revenues, pay expenses, or enter into intercompany loans denominated in a currency that differs from their functional currency. Aon uses foreign exchange derivatives, typically forward contracts, options and cross currency swaps, to reduce its overall exposure to the effects of currency fluctuations on cash flows. Aon has hedged these exposures up to six years in the future. Aon has designated foreign exchange derivatives with a notional amount of $2.0 billion at December 31, 2009 as cash flow hedges of these exposures. As of December 31, 2009, a $14 million pretax loss has been deferred to OCI related to these hedges, of which a $21 million loss is expected to be reclassified to earnings in 2010. These hedges had no material ineffectiveness in 2009, 2008 or 2007. In addition, as of December 31, 2009, Aon has $112 million notional amount of foreign exchange derivatives not designated or qualifying as cash flow hedges offsetting these exposures.
Aon also uses foreign exchange derivatives, typically forward contracts and options, to hedge its net investments in foreign operations for up to four years in the future. As of December 31, 2009, the notional amount outstanding was $1.7 billion and no gain or loss has been deferred to OCI related to this hedge. This hedge had no ineffectiveness in 2009, 2008 or 2007.
The amounts of derivative gains (losses) recognized in the consolidated financial statements for the year ended December 31, 2009, are as follows (in millions):
The amount of gain (loss) recognized in income on the ineffective portion of derivatives for 2009, 2008 and 2007 was negligible.
In 2009, Aon recorded $11 million of losses in other general expenses for foreign exchange derivatives not designated or qualifying as hedges.
Aon did not consolidate any VIEs at December 31, 2009. As of December 31, 2008, the following VIEs were consolidated:
Juniperus and JCHL had combined assets and liabilities of $121 million and $22 million, respectively, at December 31, 2008. Aon recognized $36 million of pretax income from Juniperus and JCHL for the year ended December 31, 2009. Aon's potential loss at December 31, 2009 is limited to its investment in the VIEs of $73 million, which is recorded in investments in the Consolidated Statements of Financial Position at December 31, 2009.
Aon previously owned the majority economic equity interest in Globe Re Limited ("Globe Re"), a VIE which provided reinsurance coverage for a defined portfolio of property catastrophe reinsurance contracts underwritten by a third party for a limited period which ended June 1, 2009. Aon consolidated Globe Re as it was deemed to be the primary beneficiary. In connection with the winding up of its operations, during 2009 Globe Re repaid its $100 million of short-term debt from available cash. Also in 2009, Aon's equity investment in Globe Re was repaid. Aon recognized $2 million of pretax income from Globe Re in 2009. Globe Re was fully liquidated in 2009.
•Level 1 - observable inputs such as quoted prices for identical assets in active markets;
Other investments carried at fair value consists primarily of the Company's investment in PEPS I. Fair value is based on valuations received from the general partners of the limited partnership interests held by PEPS I.
Debt is carried at outstanding principal balance. Fair value is based on quoted market prices or estimates using discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements.
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, 2009 and 2008 (in millions):
Gains (losses), both realized and unrealized, included in income in 2009 and 2008 are as follows (in millions):
The majority of the Company's financial instruments are either carried at fair value or have a carrying amount that approximates fair value.
Also at the time of the NYAG investigation, putative classes filed actions against Aon in the U.S. District Court for the Northern District of Illinois under the federal securities laws and ERISA. Plaintiffs in the federal securities class action originally submitted purported expert reports estimating a range of alleged damages of $353 million to $490 million, and plaintiffs in the ERISA class actions originally submitted revised purported expert reports estimating a range of alleged damages of $74 million to $349 million. To protect against the uncertain outcome of litigation and to contain exposure to the Company, Aon settled the securities suit for $30 million in 2009 and has reached an agreement in principle to settle the ERISA suit for $1.8 million. On November 24, 2009, the Court entered a final order approving the settlement and dismissing the securities suit. The proposed ERISA settlement is subject to documentation, notice and court approval.
A putative class action, Buckner v. Resource Life, is pending in state court in Columbus, Georgia against a former subsidiary of Aon, Resource Life Insurance Company. The complaint alleges that Resource Life, which wrote policies insuring repayment of auto loans, was obligated to identify and return unearned premiums to policyholders whose loans terminated before the end of their scheduled
Aon has total letters of credit ("LOCs") outstanding for approximately $153 million at December 31, 2009. A letter of credit for approximately $91 million is for the benefit of Virginia Surety Company ("VSC") related to a non-performance risk of reinsurers of VSC's worker's compensation business in California. In connection with the sale of the P&C operations completed in August 2009, the purchaser agreed to use commercially reasonable efforts to replace Aon's LOC related to VSC and to indemnify Aon for any losses suffered by Aon arising out of this LOC. A letter of credit for approximately CAD 42 million ($40 million at December 31, 2009 exchange rates) was put in place to cover the beneficiaries related to Aon's Canadian pension plan scheme. A LOC for $12 million secures deductible retentions on Aon's own workers compensation program. An $8 million letter of credit secures one of the U.S. pension plans. Aon has issued letters of credit to cover contingent payments of approximately $2 million for taxes and other business obligations to third parties. Aon has also issued various other guarantees for miscellaneous purposes at its international subsidiaries for $14 million. Amounts are accrued in the consolidated financial statements to the extent the guarantees are probable and estimable.
A reconciliation of segment income before tax to income from continuing operations before income taxes is as follows (in millions):
Unallocated revenue consists of revenue from the Company's equity ownership in insurance investments.