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 own one building at Pallbergweg 2-4, Amsterdam, the Netherlands (150,000 square feet). The following are additional significant leased properties, along with the occupied square footage and expiration.
The locations in Lincolnshire, Illinois, The Woodlands, Texas, Orlando, Florida, and Charlotte North Carolina, each of which were acquired as part of the Hewitt acquisition, are primarily dedicated to our HR Solutions business. The other locations listed above house personnel from each of our business segments.
(3)We have sold certain businesses whose results have been reclassified as discontinued operations, including AIS Management Corporation and our P&C Operations (both sold in 2009), Combined Insurance Company of America and Sterling Life Insurance Company (both sold in 2008), and Aon Warranty Group and Construction Program Group (both sold in 2006).
(5)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.
(8)Represents insurance premiums receivables from clients as well as cash and investments held in a fiduciary capacity.
The challenging global economic environment continues to provide headwinds for our business. This results in pricing pressures across our Risk and HR Solutions businesses. We continue to operate in a soft insurance pricing market, as property and casualty rates continue to decline, however, the level of exposure units, or volume, appears to be stabilizing. Exposure units have been negatively impacted by the global economy, which places pressure on our business in three primary ways:
•Adjusted operating margin, as defined under the caption "Review of Consolidated Results - General" below, was 17.6% for Aon overall, 20.4% for the Risk Solutions segment, and 14.9% for the HR Solutions segment. Adjusted operating margins expanded in the Risk Solutions segment, but declined in the HR Solutions segment and for the Company overall.
unfavorable foreign currency translation, and the net pension curtailment gain recognized in 2009 of $78 million related to our U.S. and Canada defined benefit pension plans. These increases were partially offset by lower restructuring charges of $240 million, lower incentive costs, and restructuring and other operational expense savings.
•Our consolidated operating margin from continuing operations for the year improved to 14.4% in 2010 from 13.4% in 2009. The improvement in operating margin reflects lower costs and increased benefits related to our restructuring initiatives, partially offset by the pension curtailment gain and pension adjustment described above.
not instead of, our Consolidated Statements of Income. A reconciliation of this non-GAAP measure to the reported operating margin is as follows (in millions):
Because we conduct business in more than 120 countries, foreign exchange rate fluctuations have a significant impact on our business. In comparison to the U.S. dollar, foreign exchange rate movements may be significant and may distort true period-to-period comparisons of changes in revenue or pretax income. Therefore, to give financial statement users more meaningful information about our operations, we have provided a discussion of the impact of foreign currency exchange rates on our financial results. The methodology used to calculate this impact isolates the impact of the change in
currencies between periods by translating last year's revenue, expenses and net income at this year's foreign exchange rates.
Other general expenses increased by $212 million, or 11%, in 2010 compared to 2009. This increase reflects a $251 million, or 81%, increase in the HR Solutions segment and a $24 million increase in unallocated expenses, which was partially offset by a $63 million, or 4%, decrease in the Risk Solutions segment. The overall increase was due largely to the impact of the Hewitt acquisition, reflecting the inclusion of operating expenses and intangible amortization from the acquisition date; higher E&O expenses as a result of the higher level of insurance recoveries in the prior year; the unfavorable impact of foreign currency translation; costs associated with the Manchester United Sponsorship, which commenced during the year; and other Hewitt related transaction and integration costs. These increased costs were partially offset by lower restructuring charges, restructuring savings, operational expense management, and Benfield integration costs in 2009.
Interest expense, which represents the cost of our worldwide debt obligations, increased $60 million, or 49%, from 2009 due mainly to an increase in the amount of debt outstanding related to the Hewitt acquisition, including $1.5 billion in notes and a $1.0 billion term loan, and $14 million in deferred financing costs attributable to a $1.5 billion Bridge Loan Facility that was put in place to finance the Hewitt acquisition, but was cancelled following the issuance of the notes.
There was no Other income in 2010 versus $34 million in 2009. This decrease is primarily due to $4 million in losses in 2010 compared to $13 million in gains in 2009 related to the disposal of several small businesses, an $8 million loss related to the early extinguishment of debt primarily acquired in the Hewitt acquisition in 2010, and a $5 million gain in 2009 from the extinguishment of $15 million of junior subordinated debentures.
The effective tax rate on income from continuing operations was 28.4% in 2010 and 28.2% in 2009. The 2010 rate reflects the impact of the Hewitt acquisition in the fourth quarter, a favorable U.S. pension expense adjustment, which had a tax rate of 40%, and deferred tax adjustments. The 2009 tax rate was negatively impacted by a non-cash deferred tax expense on the U.S. pension curtailment gain, which had a tax rate of 40%. The underlying tax rate for continuing operations was 28.5% in 2010 and is estimated to be approximately 30% for 2011, reflecting changes in geographical mix of income following the Hewitt acquisition.
Income from continuing operations increased to $759 million ($2.46 diluted net income per share) in 2010 from $681 million ($2.19 diluted net income per share) in 2009. Currency fluctuations positively impacted income from continuing operations in 2010 by $0.11 per diluted share, when the 2009 Consolidated Statement of Income is translated using 2010 foreign exchange rates.
Revenue increased by $67 million, or 1%, in 2009 compared to 2008. This increase reflects a $108 million, or 2%, increase in the Risk Solutions segment and a $49 million increase associated with corporate ownership in insurance investments obtained as part of the acquisition of Benfield in November 2008, partially offset by an $89 million, or 7%, decrease in the HR Solutions segment. This 2% increase in the Risk Solutions segment was primarily driven by increased commissions and fees attributable to Benfield, partially offset by a $95 million decrease in fiduciary investment income due to declines in global interest rates, the negative impact of foreign currency translation and a 1% decline in organic revenue reflecting the weak economic conditions globally. The 7% decrease in the HR Solutions segment was primarily driven by the negative impact of foreign currency translation, a 2% decline in organic revenue reflecting the impact of the economic downturn, and the impact of the previously announced termination of an outsourcing contract with AT&T.
Other general expenses decreased by $30 million, or 1%, in 2009 compared to 2008. This decrease reflects a $16 million, or 1%, decline in the Risk Solutions segment and a $23 million, or 7%, decrease in the HR Solutions segment, partially offset by a $9 million increase in unallocated expenses. The overall decline was driven by favorable foreign exchange, lower E&O expenses due to insurance recoveries, restructuring savings, operational expense management, and reduced costs related to our FCPA and anti-corruption reviews and related compliance initiatives. These items exceeded the impact of Benfield, including increased intangible amortization related to the merger, and higher restructuring charges.
Interest income, which represents income earned on operating cash balances and miscellaneous income-producing securities, decreased $48 million from 2008 and was driven mainly by lower investment balances and the global decline in interest rates in 2009.
Other income increased $33 million to $34 million in 2009. This increase in income is primarily a result of hedging losses associated with the Benfield acquisition in 2008, partially offset by lower equity income recognized in 2008.
Income from discontinued operations decreased $730 million to $111 million ($0.38 diluted net income per share) in 2009 from $841 million ($2.76 diluted net income per share) in 2008. The 2009
results include the recognition of a $55 million foreign tax credit carryback related to the sale of CICA, the gain on the sale of AIS, results from our P&C operations through the date of disposal, a curtailment gain on the post-retirement benefit plan related to the CICA disposal, and residual tax settlements related to our Aon Warranty Group disposal. The 2008 results include the gain on the sale of our CICA and Sterling subsidiaries ($935 million) and the operations of CICA and Sterling for the first quarter of 2008, partially offset by a loss recognized on our remaining P&C operations.
As of December 31, 2010, approximately 690 jobs have been eliminated under the Aon Benfield Plan. Total payments of $105 million have been made under this plan to date.
(1)Actual costs, when incurred, will vary due to changes in the assumptions built into this plan. Significant assumptions likely to 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 us to add or cancel component initiatives.
The Aon Benfield Plan, before any potential reinvestment of savings, is expected to deliver cumulative cost savings of approximately $122 million in 2011. We estimate that we realized approximately $100 million, and $45 million, of cost savings in 2010 and 2009, respectively. 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.
Net cash provided by operating activities in 2010 increased $380 million compared with 2009, with $109 million due to the change in funds held on behalf of clients. Excluding the change in client held funds, cash provided from operating activities increased $271 million compared to 2009. The primary contributors to cash flow from operations in 2010, excluding the change in funds held on behalf of clients, were net income (adjusted for non-cash items) of $1.4 billion, partially offset by a $280 million decrease in accounts payable and accrued liabilities, and a $130 million decrease related to our pension and other post employment plans. The decrease in accrued liabilities was primarily related to post-acquisition Hewitt incentive compensation payments. Cash contributions to our major defined pension plans in excess of pension expense were $130 million in 2010 and $404 million in 2009. Pension contributions during 2010 were $288 million and $437 million in 2009. In 2011, we expect to contribute $403 million to our major pension plans.
Cash used for investing activities in 2010 was $2.6 billion. Acquisitions used $2.0 billion, primarily related to the acquisition of Hewitt. Net purchases of non-fiduciary short-term investments used $337 million, and capital expenditures used $180 million. The sale of businesses used $30 million, consisting of proceeds from several small dispositions which were more than offset by a $38 million use of cash for a litigation settlement related to a previously disposed of business. Sales, net of purchases, of long-term investments provided $56 million.
Cash provided by investing activities was $1.4 billion in 2008. During 2008, we received $2.8 billion in proceeds from the sale of CICA and Sterling, partially offset by $1.1 billion paid for Benfield and other acquisitions.
Cash provided by financing activities during 2010 was $1.8 billion. During 2010 we received $2.9 billion from the issuance of debt, primarily a $600 million 3.5% note due in 2015, a $600 million 5% note due in 2020, a $300 million 6.25% note due 2040, and a $1 billion three-year term note due in 2013, all associated with the acquisition of Hewitt. Additionally, we borrowed $308 million from our Euro credit facility and $100 million of commercial paper during the year, which were repaid as of year end. We also repaid $299 million of debt assumed in the Hewitt acquisition. Other uses of cash include $250 million for share repurchases and $175 million for dividends to shareholders. Proceeds from the exercise of stock options and issuance of shares purchased through the employee stock purchase plan were $194 million.
Unremitted insurance premiums and claims are held by us in a fiduciary capacity. In addition, some of our outsourcing agreements require us to hold funds on behalf of clients to pay obligations on their behalf. The levels of fiduciary assets and liabilities can fluctuate significantly, depending on when we collect the premiums, claims and refunds, make payments to underwriters and insureds, collect funds from clients and make payments on their behalf, and foreign currency movements. Fiduciary assets, because of their nature, are required to be invested in very liquid securities with highly-rated, credit-worthy financial institutions. In our Consolidated Statements of Financial Position, the amount we report for fiduciary assets and fiduciary liabilities are equal. Our fiduciary assets included cash and investments of $3.5 billion and fiduciary receivables of $6.6 billion at December 31, 2010. While we earn investment income on the fiduciary assets held in cash and investments, the cash and investments are not owned by us, and cannot be used for general corporate purposes.
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.
The following table summarizes our fiduciary assets and non-fiduciary cash and investments as of December 31, 2010 (in millions):
For information regarding share repurchases made during the fourth quarter of 2010, see Item 5 - "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" above.
On June 8, 2009, we filed a registration statement with the SEC, registering the offer and sale from time to time of an indeterminate amount of, among other securities, debt, preferred stock, common stock and convertible securities. Our $1.5 billion in unsecured notes, sold on September 7, 2010 to finance the Hewitt acquisition, were issued under this registration statement. The availability of any further potential liquidity under this shelf registration statement is dependent on investor demand, market conditions and other factors. There can be no assurance regarding when, or if, we will issue any additional securities under the registration statement.
We have a three-year $400 million unsecured revolving credit facility in the U.S. ("U.S. Facility"). Sixteen banks are participating in the U.S. Facility, which is for general corporate purposes, including commercial paper support. Additionally, we have a five-year €650 million ($853 million at December 31, 2010 exchange rates) multi-currency foreign credit facility ("Euro Facility") available, which was entered into in October 2010 and expires in October 2015. The Euro Facility replaces a €650 million multi-currency revolving loan credit facility which was entered into in 2005 and expired in October 2010. At December 31, 2010, we had no borrowings under either of the credit facilities. We can access these facilities on a same-day basis.
As noted above, in connection with the Hewitt acquisition, we obtained a Term Loan Credit Facility which provided up to $1 billion of unsecured borrowings. Concurrent with this term loan, we also obtained a Bridge Loan Facility which provided unsecured bridge financing of up to $1.5 billion. In lieu of drawing under the Bridge Loan Facility, on September 7, 2010 we issued $1.5 billion in unsecured senior notes and terminated the Bridge Loan Facility. On the acquisition date, October 1, 2010, we drew down the $1.0 billion Term Loan Credit Facility.
A downgrade in the credit ratings of our senior debt and commercial paper would increase our borrowing costs, reduce or eliminate our access to capital, reduce our financial flexibility, and increase our commercial paper interest rates or possibly restrict our access to the commercial paper market altogether.
We have outstanding letters of credit ("LOCs") totaling $71 million at December 31, 2010. These LOCs cover the beneficiaries related to our Canadian pension plan scheme, cover deductible retentions for our workers compensation program, secure a sublease agreement for office space, secure one of our U.S. pension plans, and cover contingent payments for taxes and other business obligations to third parties. In addition, we have a contingent LOC for up to $85 million that is in support of a potential acquisition, which is expected to close in 2011.
Summarized in the table below are our contractual obligations and commitments as of December 31, 2010 (in millions):
(1)Pension and other postretirement benefit plan obligations include estimates of our minimum funding requirements, pursuant to ERISA and other regulations and 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.
(4)Excludes $70 million of unfunded commitments related to an investment in a limited partnership due to our inability to reasonably estimate the period(s) when the limited partnership will request funding.
At December 31, 2010, our net assets of $8.3 billion, representing total assets minus total liabilities, were $2.9 billion higher than the balance at December 31, 2009. Working capital increased $221 million to $1.6 billion.
•Total Receivables increased $649 million due primarily to the inclusion of Hewitt.
•Long-term debt increased by $2.0 billion, principally reflecting the draw down of $1.0 billion under the Term Loan Credit Facility, of which $25 million has been repaid and $100 million has been included in Short-term debt, and the issuance of $1.5 billion in notes to fund the Hewitt acquisition, partially offset by the early extinguishment of $299 million in debt assumed in the Hewitt acquisition, and the repayment of $47 million of debt held by PEPS I, a consolidated VIE.
Total debt at December 31, 2010 was $4.5 billion, an increase of $2.5 billion from December 31, 2009, due principally to the draw down of the $1.0 billion Term Credit Loan Facility and the issuance of $1.5 billion in unsecured senior notes related to the Hewitt acquisition (see Note 9 "Debt").
Equity at December 31, 2010 was $8.3 billion, an increase of $2.9 billion from December 31, 2009. The increase resulted primarily from $2.5 billion in shares issued in connection with the Hewitt acquisition, net income of $732 million and stock-based compensation of $221 million, which was partially offset by share repurchases of $250 million and $175 million of dividends to shareholders.
•reclassification of $44 million to Retained earnings due to the adoption, effective January 1, 2010, of new accounting guidance which resulted in the consolidation of PEPS I,
As part of the original transaction, we were required to purchase from PEPS I additional below investment grade securities equal to the unfunded limited partnership commitments, as they were requested. As of December 31, 2010, we are no longer required to purchase additional securities as a result of the repayment of the $47 million in long-term debt; however, we will continue to fund any unfunded equity commitments. The commitments have specific expiration dates and the general partners may decide not to draw on these commitments. We funded $1 million in 2010, did not fund any commitments in 2009, and funded $2 million in 2008. As of December 31, 2010, the unfunded commitments decreased to $13 million as some of the commitment periods have expired.
We previously owned an 85% 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 after-tax income from Globe Re in 2009, taking into account the share of net income attributable to non-controlling interests. Globe Re was fully liquidated in the third quarter of 2009.
Risk Solutions commissions, fees and other revenue was as follows (in millions):
Reconciliation of organic revenue growth to reported commissions, fees and other revenue growth for 2010 versus 2009 is as follows:
United Kingdom commissions, fees and other revenue declined 3% driven by unfavorable foreign currency translation and a 2% organic revenue decline reflecting weak market conditions and lower exposure units.
Europe, Middle East & Africa commissions, fees and other revenue increased 1% driven primarily by the net favorable impact of acquisitions offset by unfavorable foreign exchange rates. The flat organic revenue growth was principally due to weak economic conditions and lower exposure units in Continental Europe, partially offset by strong growth in the emerging markets of Middle East and Africa.
Asia Pacific commissions, fees and other revenue increased 14%, due to the favorable impact of foreign currency translation and 3% organic revenue growth, which was driven largely by growth in Australia, New Zealand and certain emerging markets, partially offset by declines in Japan and Hong Kong.
Reinsurance commissions, fees and other revenue decreased 3%. Organic revenue decreased 3% primarily resulting from decreases in pricing and higher retentions by insurers, primarily in treaty placements, partially offset by revenue growth in capital markets transaction and advisory services. Favorable foreign currency translation offset the unfavorable impact related to net dispositions.
Our HR Solutions segment generated approximately 25% of our consolidated total revenues in 2010 and provides a broad range of human capital services, as follows:
Beginning in late 2008, the disruption in the global credit markets and the deterioration of the financial markets created significant uncertainty in the marketplace. Weak economic conditions globally continued throughout 2010. The prolonged economic downturn is adversely impacting our clients' financial condition and therefore the levels of business activities in the industries and geographies where we operate. While we believe that the majority of our practices are well positioned to manage through this time, these challenges are reducing demand for some of our services and putting
continued pressure on pricing of those services, which is having an adverse effect on our new business and results of operations.
In 2010, Commissions, fees and other revenue of $2.1 billion was 67% higher than 2009, reflecting the impact of the Hewitt acquisition. Commissions, fees and other revenue were as follows (in millions):
Organic revenue growth was 1% in 2010, as detailed in the following reconciliation:
Consulting services increased $312 million or 29%, reflecting the inclusion of Hewitt revenue from the date of acquisition, organic revenue growth of 1%, driven mainly by solid growth in global compensation consulting, and favorable foreign currency translation.
Operating income was $234 million, an increase of $31 million, or 15%, from 2009. This increase was principally driven by the inclusion of Hewitt's operating results and expense savings driven by operational improvement, partially offset by higher restructuring costs, Hewitt related transaction and integration costs, and the net pension curtailment gain in 2009 of $20 million. Operating margins in this segment for 2010 were 11.1%, a decrease of 490 basis points from 16.0% in 2009, driven largely by the mix of businesses following the acquisition of Hewitt and the impact of higher amortization of intangibles expense associated with the Hewitt acquisition.
Most workforce reductions happen over a short span of time, so no discounting is necessary. However, we may discount the severance arrangement when we terminate employees who will provide no future service and we pay their severance over an extended period. Accretion of the discount occurs over the remaining life of the liability.
We defer the recognition of gains and losses that arise from events such as changes in the discount rate and actuarial assumptions, actual demographic experience and asset performance.
Unrecognized gains and losses are amortized as a component of pension expense based on the average expected future service of active employees for our plans in the Netherlands and Canada, or the average life expectancy of the U.S. and U.K. plan members. After the effective date of the plan amendments to cease crediting future benefits relating to service, unrecognized gains and losses will also be based on the average life expectancy of members in the Canadian plans. We amortize any prior service costs or credits which arise as a result of plan changes over a period consistent with the amortization of gains and losses.
As of December 31, 2010, the pension plans have deferred losses that have not yet been recognized through income in the consolidated financial statements. We amortize unrecognized actuarial losses outside of a corridor, which is defined as 10% of the greater of market-related value of plan assets or projected benefit obligation. To the extent not offset by future gains, incremental amortization as calculated above will continue to affect future pension expense similarly until fully amortized.
For the U.S. pension plans we use a market-related valuation of assets approach to determine the expected return on assets, which is a component of net periodic benefit cost recognized in the Consolidated Statements of Income. This approach recognizes 20% of any gains or losses in the current year's value of market-related assets, with the remaining 80% spread over the next four years. As this approach recognizes gains or losses over a five-year period, the future value of assets and therefore, our net periodic benefit cost will be impacted as previously deferred gains or losses are recorded. As of December 31, 2010, the market-related value of assets was $1.4 billion. We do not use the market-related valuation approach to determine the funded status of the U.S. plans recorded in the Consolidated Statements of Financial Position which is based on the fair value of the plan assets. As of December 31, 2010, the fair value of plan assets was $1.2 billion.
The U.S. pension plan asset allocation is based on approved allocations following adopted investment guidelines. The actual asset allocation at December 31, 2010 was 61% equity and 39% fixed income securities for the qualified plan.
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, 2010, the U.K. plans were invested 49% in equity and 51% in fixed income securities. The Netherlands' plan was invested 43% in equity and 57% in fixed income securities. The Canadian plan was invested 71% in equity and 29% in fixed income securities.
Holding all other assumptions constant, the following table reflects what a one hundred basis point increase and decrease in our estimated liability discount rate would have on our estimated 2011 pension expense (in millions):
The goodwill impairment test is a two step analysis. Step One 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 Two. Step Two 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 One 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.
The largest performance-based stock plan is the LPP, which has a three-year performance period. The 2008 to 2010 performance period ended on December 31, 2010, and the 2007 to 2009 performance period ended on December 31, 2009. The LPP currently has two ongoing performance periods: from 2009 to 2011 and 2010 to 2012. A 10% upward adjustment in our estimated performance achievement percentage for both LPP plans would have increased our 2010 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 base the carrying values of liabilities for income taxes currently payable 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 which deploy tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and changes in our results of operations.
•we may conduct future operations in certain tax jurisdictions where tax laws are not well developed, and it may be difficult to secure adequate professional guidance, and
•tax laws, regulations, agreements and treaties change frequently, requiring us to modify existing tax strategies to conform to such changes.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aon Corporation at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 2 and 16 to the financial statements, in 2010 the Company changed its method of accounting and reporting for variable interest entities.
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, 2010, 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 25, 2011 expressed an unqualified opinion thereon.
Certain amounts in prior years' consolidated financial statements and related notes have been reclassified to conform to the 2010 presentation.
In the Consolidated Statements of Income, income earned on certain equity method investments has been reclassified from Interest income to Other income in 2009 and 2008. Following these reclassifications, Interest income decreased by $14 million and $30 million in 2009 and 2008, respectively, and Other income increased by $14 million and $30 million in 2009 and 2008, respectively.
Changes in the presentation of the Consolidated Statements of Cash Flows for 2009 and 2008 were made to provide greater transparency into certain operating, investing and financing activities as follows:
•Depreciation and amortization were shown as a combined amount in the 2009 and 2008 presentation, but are now shown separately in the current presentation.
•The issuance of debt and repayment of debt are now each presented separately, regardless of whether the debt was long-term or short-term in duration. The prior years' presentation combined short-term debt issuances and repayments with long-term debt repayments as a single amount labeled "Repayment of debt". Issuance of long-term debt was shown separately.
•The dividends paid to non-controlling interests are now shown separately within financing activities. These amounts were included in operating activities in the prior years' presentation.
The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of reserves and expenses. These estimates and assumptions are based on management's best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Aon adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets,
volatile equity markets, and foreign currency movements have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Risk Solutions segment revenues include insurance commissions and fees for services rendered and investment income on funds held on behalf of clients. Revenues are recognized when they are realized or realizable. The Company considers revenues to be realized or realizable when there is persuasive evidence of an arrangement with a client, there is a fixed and determinable price, services have been rendered, and collectability is reasonably assured. For brokerage commissions, revenue is typically considered to be realized or realizable at the completion of the placement process, which generally occurs at the later of the effective date of the policy or when the client is billed. Commission revenues are recorded net of allowances for estimated policy cancellations, which are determined based on an evaluation of historical and current cancellation data. Commissions on premiums billed directly by insurance carriers are recognized as revenue when the Company has sufficient information to determine the amount that it is owed, which may not occur until cash is received from the insurance carrier. In instances when commissions relate to policy premiums that are billed in installments, revenue is recognized when the Company has sufficient information to determine the appropriate billing and the associated commission. Fees for services provided to clients are recognized ratably over the period that the services are rendered.
treatment of implementation fees, in the event that a client terminates an outsourcing service agreement prior to the end of the contract, any remaining deferred implementation costs would then be recognized into earnings over the remaining service period through the termination date.
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, based on the achievement of service or performance conditions. Because the 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 includes 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.
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 $60 million and $85 million at December 31, 2010 and 2009, respectively.
Short-term investments include certificates of deposit, money market funds and highly liquid debt instruments purchased with initial maturities in excess of three months but less than one year and are carried at amortized cost, which approximates fair value.
•Equity method investments - Aon accounts for limited partnership and other investments using the equity method of accounting if Aon has the ability to exercise significant influence over, but not control of, an investee. Significant influence generally represents an ownership interest between 20% and 50% of the voting stock of the investee, although for limited partnerships this could be as low as 3%, depending upon facts and circumstances. Under the equity method of accounting, investments are initially recorded at cost and are subsequently adjusted for additional capital contributions, distributions, and Aon's proportionate share of earnings or losses.
When hedge accounting is discontinued because the derivative no longer qualifies as a fair value hedge, the Company continues to carry the derivative in the Consolidated Statements of Financial Position at its fair value, recognizes subsequent changes in the fair value of the derivative in the Consolidated Statements of Income, ceases to adjust the hedged asset or liability for changes in its fair value, and amortizes the hedged item's cumulative basis adjustment into earnings over the remaining life of the hedged item using a method that approximates the level-yield method.
Certain of the Company's non-US operations use their respective local currency as their functional currency. Those operations that do not have the U.S. dollar as their functional currency translate assets and liabilities at the current rates of exchange in effect at the balance sheet date and revenues and expenses using rates that approximate those in effect during the period. The resulting translation adjustments are included as a component of stockholders' equity in Accumulated other comprehensive loss in the Consolidated Statements of Financial Position. For those operations that use the U.S. dollar as their functional currency, transactions denominated in the local currency are measured in U.S. dollars using the current rates of exchange for monetary assets and liabilities and historical rates of
On January 1, 2010, the Company adopted guidance amending current principles related to the transfers of financial assets and the consolidation of VIEs. This guidance eliminates the concept of a qualifying special-purpose entity ("QSPE") and the related exception for applying consolidation guidance, creates more stringent conditions for reporting the transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor's interest in transferred financial assets. Consequently, former QSPEs are evaluated for consolidation based on the updated VIE guidance. In addition, the new guidance requires companies to take a qualitative approach in determining a VIE's primary beneficiary and requires companies to more frequently reassess whether they must consolidate VIEs. Additional year-end and interim period disclosures are also required outlining a company's involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the Company's financial statements. See Note 16 "Variable Interest Entities" regarding the consolidation of Private Equity Partnership Structures I, LLC ("PEPS I").
On January 1, 2010, the Company adopted guidance requiring additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose additional information regarding assets and liabilities that are transferred between levels of the fair value hierarchy. This guidance also clarifies existing guidance pertaining to the level of disaggregation at which fair value disclosures should be made and the requirements to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. See Note 17
In September 2009, the Financial Accounting Standards Board ("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. The Company early adopted this guidance in the fourth quarter 2010 and applied its requirements to all revenue arrangements entered into or materially modified after January 1, 2010. The adoption of this guidance did not have a material impact on the Company's Consolidated Financial Statements.
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.
Income from continuing operations, income from discontinued operations and net income, attributable to participating securities, were as follows (in millions):
(1)Includes 6.1 million, 6.9 million, and 7.5 million of participating securities for the years ended December 31, 2010, 2009, and 2008, respectively.
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 benefit plan. This amendment requires pension and other postretirement benefit 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 "Employee Benefits" for these disclosures.
In 2008, Aon reached a definitive agreement to sell AIS Management Corporation ("AIS"), which was previously included in the Risk Solutions 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. The earn-out targets have not been met and therefore, Aon will not receive any of the potential earn-out payment.
(Loss) gain on sale - Other for 2010 includes predominately $38 million of expense for the settlement of legacy litigation related to the Buckner vs. Resource Life matter, which is discussed further in Note 18 "Commitments and Contingencies".
Depreciation expense, which includes software amortization, was $151 million, $149 million and $157 million for the years ended December 31, 2010, 2009, and 2008, respectively.
In 2010, the Company completed the acquisitions of Hewitt Associates, Inc. ("Hewitt"), and the JP Morgan Compensation and Benefit Strategies Division of JP Morgan Retirement Plan Services, LLC, both of which are included in the HR Solutions segment, as well as other companies, which are included in the Risk Solutions segment.
The aggregate consideration transferred and the preliminary value of intangible assets recorded as a result of the Company's acquisitions are as follows (in millions):
Approximately $42 million of future payments relating primarily to earnouts is included in the 2010 total consideration. These amounts are recorded in Other current liabilities and Other non-current liabilities in the Consolidated Statements of Financial Position.
The final consideration transferred to acquire all of Hewitt's stock is as follows:
assets acquired that could not be individually identified and separately recognized. Goodwill is not amortized and is not deductible for tax purposes.
•Amounts for intangible assets, property, equipment and capitalized software assets, pending finalization of valuation efforts.
•Amounts for contingencies, pending the finalization of the Company's assessment of the portfolio of contingencies.
A single estimate of fair value results from a complex series of the Company's judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company's judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations.
(1)Includes amortization related to identifiable intangible assets ($37 million), acquisition and integration costs ($18 million) and restructuring expenses ($52 million).
•Additional interest expense (approximately $43 million in 2010 and $77 million in 2009) associated with the incremental debt issued by the Company to partially finance the acquisition, the early retirement of Hewitt debt, and costs related to a bridge term loan credit agreement with certain financial institutions that has been terminated;
•The elimination of Hewitt's equity based compensation expense of $46 million in 2010 and $54 million in 2009. On the date of closing, all outstanding equity awards of Hewitt became fully vested and were converted at the effective time in accordance with the terms of the merger agreement. No compensation expense has been included in the unaudited pro forma consolidated results as the compensation programs for Aon Hewitt employees have not yet been determined and cannot be estimated; and
In November 2008, Aon completed the acquisition of the shares of Benfield, a leading independent reinsurance intermediary, with more than 50 locations worldwide. The Company purchased all of the outstanding shares of common and preferred stock of Benfield for $1.3 billion in cash. The total cost of the acquisition also included direct costs of the transaction totaling $32 million. Benfield is known for its client service, analytic capability and innovation. The results of Benfield's operations were included in the Company's consolidated financial statements from the date of closing.
Aon's Cananwill business in the U.S. ("Cananwill"), U.K., Canada, and Australia (together "Cananwill International") originated short-term loans to corporate clients to finance insurance premium obligations. These premium finance agreements were then sold to unaffiliated companies, typically bank Special Purpose Entities, in whole loan securitization transactions that met the criteria at that time for sales accounting. Cananwill's results were included in the Risk Solutions segment.
In June and July of 2009, the Company entered into agreements with third parties with respect to Aon's Cananwill International operations. As a result of these agreements, these third parties began originating, financing and servicing premium finance loans generated by referrals from Aon's brokerage operations. The third parties did not acquire the existing portfolio of Aon's premium finance loans, and as such, the Company did not extend any guarantees under these agreements.
During 2009, Aon sold nine small operations. Total pretax gains of $15 million were recognized on these sales, which are included in Other income in the Consolidated Statements of Income.
The changes in the net carrying amount of goodwill by operating segment for the years ended December 31, 2010 and 2009, respectively, are as follows (in millions):
As of December 31, 2010, approximately 360 jobs have been eliminated under the Aon Hewitt Plan and total expense of $52 million has been incurred. All costs associated with the Aon Hewitt Plan are included in the HR Solutions segment. Charges related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Consolidated Statements of Income.
recorded in earnings during 2010 and 2009, respectively, and an estimated additional $19 million will be recorded in future earnings.
As of December 31, 2010, approximately 690 jobs have been eliminated under the Aon Benfield Plan. Total payments of $105 million have been made under the Aon Benfield Plan, from inception to date.
(1)Other costs associated with restructuring initiatives include moving costs and consulting and legal fees. The following summarizes the restructuring and related expenses by segment that have been incurred related to the 2007 Plan (in millions):
On October 15, 2010, the Company entered into a new €650 million ($853 million at December 31, 2010 exchange rates) multi-currency revolving loan credit facility (the "Euro Facility") used by certain
of Aon's European subsidiaries. The Euro Facility replaced the previous facility which was entered into in October 2005 and matured in October 2010 (the "2005 Facility"). The Euro Facility expires in October 2015 and has commitment fees of 8.75 basis points payable on the unused portion of the facility, similar to the 2005 Facility. Aon has guaranteed the obligations of its subsidiaries with respect to this facility. The Company had no borrowings under the Euro Facility. At December 31, 2009, Aon had no borrowings under the 2005 Facility.
There are a number of covenants associated with both the U.S. and Euro facilities, the most significant of which require Aon to maintain a ratio of consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization), adjusted for Hewitt related transaction costs and up to $50 million in non-recurring cash charges ("Adjusted EBITDA"), to consolidated interest expense of 4 to 1 and a ratio of consolidated debt to Adjusted EBITDA, of not greater than 3 to 1. Aon was in compliance with all debt covenants as of December 31, 2010.
The weighted-average interest rates on Aon's short-term borrowings were 0.7%, 1.5%, and 4.5% for the years ended December 31, 2010, 2009 and 2008, respectively.
Income from continuing operations before income taxes shown above is based on the location of the business unit to which such earnings are attributable for tax purposes. However, taxable income may not correspond to the geographic attribution of the income from continuing operations before income taxes shown above due to the treatment of certain items such as the costs associated with the Hewitt acquisition. In addition, because the earnings shown above may in some cases 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.
U.S. deferred income taxes are not provided on unremitted foreign earnings that are considered permanently reinvested, which at December 31, 2010 amounted to approximately $2.7 billion. It is not practicable to determine the income tax liability that might be incurred if all such earnings were
remitted to the U.S. due to foreign tax credits and exclusions that may become available at the time of remittance.
At December 31, 2010, Aon had domestic federal operating loss carryforwards of $56 million that will expire at various dates from 2011 to 2024, state operating loss carryforwards of $610 million that will expire at various dates from 2011 to 2031, and foreign operating and capital loss carryforwards of $720 million and $251 million, respectively, nearly all of which are subject to indefinite carryforward.
Aon and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as various state and international jurisdictions. Aon has substantially concluded all U.S. federal income tax matters for years through 2006. Material U.S. state and local income tax jurisdiction examinations have been concluded for years through 2002. Aon has concluded income tax examinations in its primary international jurisdictions through 2004.
In December 2010, Aon retired 40 million shares of treasury stock.
(1)Reflects the impact of adopting new accounting guidance which resulted in the consolidation of PEPS I effective January 1, 2010.
The following tables provide a reconciliation of the changes in the benefit obligations and fair value of assets for the years ended December 31, 2010 and 2009 and a statement of the funded status as of December 31, 2010 and 2009, for the U.S. plans and material international plans, which are
Amounts recognized in Accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31, 2010 and 2009 consist of (in millions):
The following table provides the components of net periodic benefit cost for the plans (in millions):
In addition to the net periodic benefit cost shown above in 2010, the Company recorded a non-cash charge of $49 million ($29 million after-tax) with a corresponding credit to Accumulated other comprehensive income. This charge is included in Compensation and benefits in the Consolidated Statements of Income and represents the correction of an error in the calculation of pension expense for the Company's U.S. pension plan for the period from 1999 to the end of the first quarter of 2010.
In 2009, a curtailment gain of $10 million was recognized in discontinued operations resulting from the sale of CICA. The curtailment gain relates to the Company's U.S. Retiree Health and Welfare Plan, in which CICA employees were allowed to participate through the end of 2008, pursuant to the terms of the sale. In 2008, a pension curtailment gain of $13 million was recognized in discontinued operations resulting from the sale of CICA.
The weighted-average assumptions used to determine future benefit obligations are as follows:
The weighted-average assumptions used to determine the net periodic benefit cost are as follows:
(2)Valued using the closing stock price on a national securities exchange.
(4)Consists of limited partnerships, private equity and hedge funds. Valued at estimated fair value based on the proportionate share ownership of the investment as determined by the general partner or investment manager.
(5)Consists of long-dated options on a commodity index, which are valued using observable inputs such as underlying prices of the commodities and volatility.
(6)Consists of hedge funds, multi-asset strategy, private equity and infrastructure investments which are valued based on proportionate share ownership as determined by the investment manger.
(1)Valued using the net asset value (NAV) of the fund, which is based on the fair value of the underlying securities.
Estimated future benefit payments for plans are as follows at December 31, 2010 (in millions):
Other information related to the Company's material other post-retirement benefit plans are as follows:
•Estimated future benefit payments will be approximately $10 million each year for 2011-2015, and $49 million in aggregate for 2016-2020.
The accumulated post-retirement benefit obligation is increased by $4 million and decreased by $3 million by a respective 1% increase or decrease to the assumed health care trend rate. There is no
During 2009, the Company converted its stock administration system to a new service provider. In connection with this conversion, a reconciliation of the methodologies and estimates utilized was performed, which resulted in a $12 million reduction of expense for the year ended December 31, 2009.
Stock awards, in the form of RSUs, are granted to certain employees and consist of both performance-based and service-based RSUs. Service-based awards generally vest between three and ten years from the date of grant. The fair value of service-based awards is based upon the market value of the underlying common stock at the date of grant. With certain limited exceptions, any break in continuous employment will cause the forfeiture of all unvested awards. Compensation expense associated with stock awards is recognized over the service period. Dividend equivalents are paid on certain service-based RSUs, based on the initial grant amount.
Performance-based RSUs have been granted to certain employees. Vesting of these awards is contingent upon meeting various individual, divisional or company-wide performance conditions, including revenue generation or growth in revenue, pretax income or earnings per share over a one- to five-year period. The performance conditions are not considered in the determination of the grant date fair value for these awards. The fair value of performance-based awards is based upon the market price of the underlying common stock at the date of grant. Compensation expense is recognized over the performance period, and in certain cases an additional vesting period, based on management's estimate of the number of units expected to vest. Compensation expense is adjusted to reflect the actual number of shares paid out at the end of the programs. The actual payout of shares under these performance-based plans may range from 0-200% of the number of units granted, based on the plan. Dividend equivalents are generally not paid on the performance-based RSUs.
During 2010, the Company granted approximately 1.6 million shares in connection with the completion of the 2007 Leadership Performance Plan ("LPP") cycle and 84,000 shares related to other performance plans. During 2010, 2009 and 2008, the Company granted approximately 3.5 million,
3.7 million and 4.2 million restricted shares, respectively, in connection with the Company's incentive compensation plans.
Information regarding Aon's performance-based plans as of December 31, 2010, 2009 and 2008 follows (shares in thousands, dollars in millions):
The fair value of awards that vested during 2010, 2009 and 2008 was $235 million, $223 million, and $107 million, respectively.
Options to purchase common stock are granted to certain employees at 100% of market value on the date of grant. Commencing in 2010, the Company stopped granting stock options with the exception of historical contractual commitments. 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. Options issued under the LPP program vest ratable over 3 years with a six year term. The maximum contractual term on stock options is generally ten years from the date of grant.
Each outstanding vested Hewitt stock option was converted into a fully vested and exercisable option to purchase Aon Common Stock with the same terms and conditions as the Hewitt stock option. On the acquisition date, 4.5 million options to purchase Aon Common Stock were issued to former holders of Hewitt stock options and 2.3 million of these options remain outstanding and exercisable at December 31, 2010 .
The aggregate intrinsic value represents the total pretax intrinsic value, based on options with an exercise price less than the Company's closing stock price of $46.01 as of December 31, 2010, which would have been received by the option holders had those option holders exercised their options as of that date. At December 31, 2010, the aggregate intrinsic value of options outstanding was $196 million, of which $181 million was exercisable.
Unamortized deferred compensation expense, which includes both options and awards, amounted to $254 million as of December 31, 2010, with a remaining weighted-average amortization period of approximately 2.0 years.
Aon also uses foreign exchange derivatives, typically forward contracts and options, with a notional amount of $62 million at December 31, 2010, to reduce the impact of foreign currency fluctuations on the translation of the financial statements of Aon's foreign operations and to manage the currency exposure of Aon's global liquidity profile for one year in the future. These derivatives are not eligible for hedge accounting treatment.
OCI related to this hedge, all of which is expected to be reclassified to earnings in 2011. This hedge had no material ineffectiveness in 2010, 2009, or 2008.
The amount of gain (loss) recognized in income on the ineffective portion of derivatives for 2010, 2009 and 2008 was negligible.
In 2001, Aon sold the vast majority of its limited partnership (LP) portfolio, valued at $450 million, to PEPS I, a QSPE.
In accordance with the recently issued VIE guidance, former QSPEs must now be assessed to determine if they are VIEs. Aon concluded that PEPS I is a VIE and that it holds a variable interest in PEPS I. Aon also concluded that it is the primary beneficiary of PEPS I, as it has the power to direct the activities that most significantly impact economic performance and it has the obligation or right to absorb losses or receive benefits that could potentially be significant to PEPS I. As a result of adopting this new guidance, Aon consolidated PEPS I effective January 1, 2010. The financial statement impact of consolidating PEPS I resulted in:
In December 2010, a majority of the PEPS I restricted cash was used to repurchase $47 million of PEPS I long-term debt, which also resulted in the restrictions on the use of the remaining cash balances being removed.
As part of the original transaction, Aon was required to purchase from PEPS I additional below investment grade securities equal to the unfunded limited partnership commitments as they were requested. As of December 31, 2010, Aon is no longer required to purchase additional securities as a result of the repayment of the $47 million in long-term debt. However, Aon will continue to fund any unfunded equity commitments with specific expiration dates. Also, the general partners may decide not to draw on these commitments. Aon funded $1 million of commitments in 2010, did not fund any commitments in 2009, and funded $2 million of commitments in 2008. As of December 31, 2010, the unfunded commitments decreased to $13 million due to the expiration of some of the commitment periods.
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 distributions from the underlying limited partnerships. Prior to consolidating PEPS I beginning on January 1, 2010, Aon included income distributions from PEPS I in Other income, which were $6 million and $32 million in 2009 and 2008, respectively.
At December 31, 2008 and continuing through December 18, 2009, Aon consolidated Juniperus, which is an investment vehicle that invests in an actively managed and diversified portfolio of insurance risks, and Juniperus Capital Holdings Limited ("JCHL"), which provides investment management and related services to Juniperus.
companies, and as such, these entities were consolidated. As of December 18, 2009, the Company's equity interest in Juniperus declined to 38%, and it held a 39% voting and economic interest in JCHL. Based on the Company's holdings, it no longer was considered the primary beneficiary of either entity and has therefore deconsolidated both entities.
Accounting standards establish a three tier fair value hierarchy which prioritizes the inputs used in measuring fair values as follows:
Money market funds and highly liquid debt securities are carried at cost and amortized cost, respectively, as an approximation of fair value. Based on market convention, the Company considers cost a practical and expedient measure of fair value.
Derivatives are carried at fair value, based upon industry standard valuation techniques that use, where possible, current market-based or independently sourced pricing inputs, such as interest rates, currency exchange rates, or implied volatilities.
The following table presents the categorization of the Company's assets and liabilities that are measured at fair value on a recurring basis at December 31, 2010 and 2009 (in millions):
(1)Includes $2,591 million of money market funds and $27 million of highly liquid debt securities that are classified as fiduciary assets, short-term investments or cash equivalents in the Consolidated Statements of Financial Position, depending on their nature and initial maturity. See Note 8 "Investments" for additional information regarding the Company's investments.
(1)Includes $2,058 million of money market funds and $28 million of highly liquid debt securities that are classified as fiduciary assets, short-term investments or cash equivalents in the Consolidated Statements of Financial Position, depending on their nature and initial maturity. See Note 8 "Investments" for additional information regarding the Company's investments.
The following table presents the changes in the Level 3 fair-value category in 2010 and 2009 (in millions):
A putative class action, Buckner v Resource Life, was filed in state court in Columbus, Georgia, against a former subsidiary of Aon, Resource Life Insurance Company. The complaint alleged 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 terms. In connection with the sale of Resource Life in 2006, Aon agreed to indemnify Resource Life's buyer in certain respects relating to this action. In October 2009, the court certified a nationwide class of policyholders whose loans terminated before the end of their scheduled terms and who Resource Life cannot prove received a refund of unearned premium. Resource Life took an appeal from that decision. Also in October 2009, Aon filed a lawsuit in Illinois state court seeking a declaratory judgment with respect to the rights and obligations of Aon and Resource Life under the indemnity agreement. In July 2010, Aon entered into settlements of both cases, subject to providing notice to the Buckner class and obtaining court approval of the Buckner settlement. Aon agreed to pay $48 million on Resource Life's behalf in complete settlement with the plaintiff class in Buckner, of which a pretax
Another retail insurance brokerage subsidiary of Aon has been sued in Tennessee state court by a client, Opry Mills Mall Limited Partnership ("Opry Mills"), that sustained flood damage to its property in May 2010. The lawsuit seeks $200 million from numerous insurers with whom this Aon subsidiary placed the client's property insurance coverage. The insurers contend that only $50 million in coverage is available for the loss because the flood event occurred on property in a high hazard flood zone. Opry Mills is seeking full coverage from the insurers for the loss and has sued this Aon subsidiary in the alternative for the same $150 million difference on various theories of professional liability if the court determines there is not full coverage. Aon believes it has meritorious defenses and intends to vigorously defend itself against these claims. The outcome of the lawsuit, and any losses or other payments that may occur as a result, cannot be predicted at this time.
From time to time, Aon's clients may bring claims and take legal action pertaining to the performance of fiduciary responsibilities. Whether client claims and legal action related to the Company's performance of fiduciary responsibilities are founded or unfounded, if such claims and legal actions are resolved in a manner unfavorable to the Company, they may adversely affect Aon's financial results and materially impair the market perception of the Company and that of its products and services.
Commissions, fees and other revenues by product are as follows (in millions):
Unallocated revenue consists of revenue from the Company's equity ownership in investments.
Revenues are generally attributed to geographic areas based on the location of the resources producing the revenues. Intercompany revenues and expenses are eliminated in computing consolidated revenues and operating expenses.
Consolidated long-lived assets by geographic area are as follows (in millions):
A reconciliation of segment assets to Aon's total assets is as follows (in millions):
Selected quarterly financial data for the years ended December 31, 2010 and 2009 are as follows (in millions, except per share data):