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 currently occupy are adequate for the purposes for which they are being 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 9 “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 as of December 31, 2017.
Aon plc is a leading global professional services firm that provides advice and solutions to clients focused on risk, retirement, and health, delivering distinctive client value via innovative and effective risk management and workforce productivity solutions. Management is leading a set of initiatives designed to strengthen Aon and unite the firm with one portfolio of capability enabled by proprietary data and analytics and one operating model to deliver additional insight, connectivity, and efficiency. The divestiture of the benefits administration and business process outsourcing in the second quarter of 2017 represents the next step of our strategy, reinforces our focus to provide advice and solutions, and further aligns our portfolio around our clients’ highest priorities. Further, it reinforces our ROIC decision-making process and emphasis on operating cash flow.
On February 9, 2017, the Company entered into a Purchase Agreement with Tempo Acquisition, LLC to sell the Divested Business to the Buyer, an entity formed and controlled by affiliates of The Blackstone Group L.P., and certain designated purchasers that are direct or indirect subsidiaries of the Buyer.
On May 1, 2017, the Buyer purchased all of the outstanding equity interests in each of the Divested Business’ subsidiaries, plus certain related assets and liabilities, for a purchase price of $4.3 billion in cash paid at closing, subject to customary adjustments set forth in the Purchase Agreement, and deferred consideration of up to $500 million. Cash proceeds after customary adjustments and before taxes due were $4.2 billion.
Aon and the Buyer entered into certain transaction related agreements at the closing, including two commercial agreements, a transition services agreement, certain intellectual property license agreements, sub-leases and other customary agreements. Aon expects to continue to be a significant client of the Divested Business and the Divested Business has agreed to use Aon for its broking and other services for a specified period of time.
The following is a summary of our 2017 financial results from continuing operations:
Revenue increased 6%, or $589 million, to $10.0 billion in 2017 compared to 2016, reflecting 4% organic revenue growth and a 2% increase related to acquisitions, net of divestitures. Organic revenue growth for the year was driven by growth across every major revenue line, with particular strength in Reinsurance Solutions, Health Solutions, and Data & Analytic Services
Operating expenses increased $1.2 billion, or 16%, to $9.0 billion in 2017 compared to 2016 due primarily to $497 million of restructuring costs, a $380 million non-cash impairment charge to the indefinite lived tradenames associated with the sale of the Divested Business, a $258 million increase in expenses related to acquisitions, net of divestitures, $143 million of accelerated amortization related to tradenames, and an increase in expense associated with 4% organic revenue growth, partially offset by $165 million of savings related to restructuring and other operational improvement initiatives and a $92 million decrease in expenses related to certain pension settlements.
Operating margin decreased to 9.8% in 2017 from 17.4% in 2016. The decrease in operating margin from the prior year is primarily driven by an increase in operating expenses, described above, partially offset by organic revenue growth of 4% and core operational improvement.
Organic revenue growth, a non-GAAP measure defined under the caption “Review of Consolidated Results - Organic Revenue Growth,” was 4% in 2017, comparable to 4% organic growth in the prior year. Organic revenue growth was driven by growth across every major revenue line, with particular strength in Reinsurance Solutions, Health Solutions, and Data & Analytic Services.
Total revenue increased by 6%, or $589 million, to $10.0 billion in 2017, compared to $9.4 billion in 2016. The increase was driven by 4% organic revenue growth and a 2% increase related to acquisitions, net of divestitures. Organic revenue growth for the year was driven by growth across every major revenue line, with particular strength in Reinsurance Solutions, Health Solutions, and Data & Analytic Services.
Reinsurance Solutions organic revenue growth was 6% in 2017 driven by growth across all major product lines, highlighted by continued net new business generation in the treaty portfolio, growth in facultative placements, and strong growth in capital markets.
Compensation and benefits increased $402 million in 2017, or 7%, compared to 2016. The increase was primarily driven by $299 million of restructuring charges, a $154 million increase in expenses related to acquisitions, net of divestitures, and an increase in expense associated with 4% organic revenue growth, partially offset by $104 million of savings related to restructuring and other operational improvement initiatives and a $92 million decrease in expenses related to certain pension settlements.
Information technology, which represents costs associated with supporting and maintaining our infrastructure, increased $33 million 2017, or 9%, compared to 2016. The increase was primarily driven by $33 million of restructuring costs, a $7 million increase in expenses related to acquisitions, net of divestitures, as well as investments in growth, partially offset by $37 million of savings related to restructuring and other operational improvement initiatives.
Premises, which represents the cost of occupying offices in various locations throughout the world, increased $5 million in 2017, or 1%, compared to 2016. The increase was primarily driven by an $11 million increase in expenses related to acquisitions, net of divestitures, and $8 million of restructuring costs, partially offset by $3 million of savings related to restructuring and other operational improvement initiatives.
Other income (expense) decreased $75 million from $36 million in 2016 to $(39) million in 2017. Other expense in 2017 includes, among other things, a $37 million unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and $16 million in net losses on the disposition of businesses, partially offset by $12 million of equity earnings and $2 million of gains on certain financial instruments. Other income in 2016 includes $39 million in net gains on the disposition of businesses and $13 million in equity earnings, partially offset by a $2 million unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and $14 million of losses on certain financial instruments.
Due to factors discussed above, income from continuing operations before income taxes was $685 million in 2017, a 51% decrease from $1.4 billion in 2016.
Net income attributable to Aon shareholders decreased to $1.2 billion, or $4.70 per diluted share, in 2017, compared to $1.4 billion, or $5.16 per diluted share, in 2016.
Premises decreased $19 million, or 5%, in 2016 compared to 2015. This decrease was primarily driven by a $13 million favorable impact from foreign currency translation.
Interest expense was $282 million in 2016, an increase of $9 million, or 3%, from 2015. The increase in interest expense primarily reflects an increase in total debt outstanding.
The effective tax rate on net income from continuing operations was 10.6% in 2016 and 12.3% in 2015. The 2016 and 2015 tax rates reflect changes in the geographical distribution of income, the impact from certain pension settlements in the second and fourth quarters of 2016, a reduction in U.S. income resulting from the settlement of legacy litigation in the second quarter of 2015, and the impact of certain discrete items.
On February 9, 2017, the Company entered into a Purchase Agreement with the Buyer to sell the Divested Business. The Company has retrospectively classified the results of the Divested Business as discontinued operations in the Company’s Consolidated Statements of Income for all periods presented. Income from discontinued operations, net of tax, increased $8 million in 2016, compared to $169 million in 2015, driven by increased operating income growth.
In our discussion of consolidated results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.
Fiduciary investment income for the years ended December 31, 2017, 2016, and 2015 respectively, was $32 million, $22 million, and $21 million.
A reconciliation of this non-GAAP measure to reported Diluted earnings per share is as follows:
The effective tax rate used in the U.S. GAAP financial statements for continuing operations were 36.5%, 10.6%, and 12.3%, respectively, for the years ended December 31, 2017, 2016, and 2015. Tax expense was adjusted to exclude the estimated impact of the Tax Cuts and Jobs Act, including the impact of the transition tax imposed on our accumulated foreign earnings and the re-measurement of the carrying value of our U.S. net deferred tax assets due to the lower corporate tax rate. The provisional estimate of the impact of U.S. Tax Reform is based on Aon’s initial analysis of the Tax Cuts and Jobs Act and may be adjusted in future periods due to, among other things, additional analysis performed by Aon and additional guidance that may be issued by the U.S. Department of Treasury (see Note 10 in these notes to the consolidated financial statements for additional information). Further, adjusted items are generally taxed at the estimated annual effective
tax rate, except for the applicable tax impact associated with estimated restructuring expenses, accelerated tradename amortization, impairment charges, regulatory and compliance provisions, and non-cash pension settlement charges, which are adjusted at the related jurisdictional rate. After adjusting to exclude the applicable tax impact, the adjusted effective tax rates for continuing operations were 14.9%, 13.9%, and 14.9%, respectively, for the years ended December 31, 2017, 2016, and 2015.
A reconciliation of this non-GAAP measure to cash flow provided by operations is as follows (in millions):
We conduct business in more than 120 countries and, because of this, foreign currency exchange rate fluctuations have a significant impact on our business. Foreign currency 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 meaningful information about our operations, we have provided an illustration of the impact of foreign currency exchange rate fluctuations on our financial results. The methodology used to calculate this impact isolates the impact of the change in currencies between periods by translating the last year’s revenue, expenses, and net income using the current year’s foreign currency exchange rates.
Translating prior year results at current year foreign currency exchange rates, currency fluctuations had an $0.12 favorable impact on net income per diluted share during the year ended December 31, 2017. Currency fluctuations had no impact on net income per diluted share during the year ended December 31, 2016, when 2015 results were translated at 2016 rates. Currency fluctuations had a $0.43 unfavorable impact on net income per diluted share during the year ended December 31, 2015, when 2014 results were translated at 2015 rates.
Other costs associated with the Restructuring Plan include those to separate the Divested Business, as well as moving costs and consulting and legal fees. These costs are generally recognized when incurred.
The FCA is conducting a market study to assess how effectively competition is working in the wholesale insurance broker sector in the UK in which Aon, through its subsidiaries, participates. The FCA has indicated that the purpose of a market study is to assess the extent to which the market is working well in the interests of customers and to identify features of the market that may impact competition. Depending on the study’s findings, the FCA may require remedies in order to correct any features found to be preventing, restricting or distorting competition. The study is in its very early stages and we are unable to estimate the impact, if any, on Aon’s business at this time.
We believe that our balance sheet and strong cash flow provide us with adequate liquidity. Our primary sources of liquidity are cash flow from operations, available cash reserves, and debt capacity available under our credit facilities. Our primary uses of liquidity are operating expenses, capital expenditures, acquisitions, share repurchases, pension obligations, and shareholder dividends. We believe that cash flows from operations, available credit facilities and the capital markets will be sufficient to meet our liquidity needs, including principal and interest payments on debt obligations, capital expenditures, pension contributions, and anticipated working capital requirements, for the foreseeable future.
Pension cash contributions were $146 million during 2017, as compared to $123 million during 2016. In 2018, we expect to contribute approximately $177 million to our pension plans, with the majority attributable to non-U.S. pension plans, which are subject to changes in foreign exchange rates. On July 1, 2017, the Company made non-cash contributions of approximately $80 million to its U.S. pension plan.
We expect cash generated by operations for 2017 to be sufficient to service our debt and contractual obligations, finance capital expenditures, repurchase shares under the Repurchase Program, and pay dividends to our shareholders. Although cash from operations is expected to be sufficient to service these activities, we have the ability to access commercial paper markets or borrow under our credit facilities to accommodate any timing differences in cash flows. We have committed credit facilities of approximately $1.3 billion, all of which was available at December 31, 2017, and can access these facilities on a same-day or next-day basis. Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed.
Net cash flow used for investing activities in 2015 was $138 million. The primary drivers of cash flow used for investing activities were $200 million for capital expenditures from continuing operations, $90 million for capital expenditures from discontinued operations, $46 million of net purchases of long-term investments, and $16 million for acquisitions of businesses, net of cash acquired, partially offset by sales of businesses of $205 million and net sales of short-term investments of $9 million.
Net cash flow used for financing activities during 2017 was $3.3 billion. The primary drivers of cash used for financing activities were share repurchases of $2.4 billion, dividends paid to shareholders of $364 million, repayments of debt, net of issuances, of $345 million, and net cash payments of $121 million related to issuance of shares for employee benefit programs.
Net cash flow used for financing activities during 2015 was $1.7 billion. The primary drivers of cash flow used for financing activities were $1.6 billion, dividends paid to shareholders of $323 million, and net cash payments of $30 million related to issuance of shares for employee benefit programs, partially offset by issuances of debt, net of repayments, of $253 million.
does not fall below zero. At December 31, 2017 and 2016, non-U.S. cash balances of one or more entities were negative; however, the overall balance was positive.
At December 31, 2016, our Cash and cash equivalents and Short-term investments were $716 million, a decrease of $22 million from December 31, 2015, primarily related to share repurchases of $1,257 million, payments for the acquisition of businesses of $879 million, dividends to shareholders of $345 million, and capital expenditures from continuing operations of $156 million, partially offset by $1,829 million in net cash provided by operating activities from continuing operations, the net issuances of debt of $522 million, and proceeds for the sale of businesses of $107 million. Of the total balance as of December 31, 2016, $82 million was restricted as to its use, which was comprised of $53 million of operating funds in the U.K., as required by the FCA, and $29 million held as collateral for various business purposes. At December 31, 2016, $1.9 billion of Cash and cash equivalents and Short-term investments were held in the U.S. and overdrawn Cash and cash equivalents and Short-term investments of $1.2 billion were held in other countries. Due to differences in tax rates, the repatriation of funds from certain countries into the U.S. could have an unfavorable tax impact.
As of December 31, 2017, our investments in money market funds had a fair value of $1.8 billion and are reported as Short-term investments or Fiduciary assets in the Consolidated Statements of Financial Position depending on their nature.
The following table summarizes our Fiduciary assets, non-fiduciary Cash and cash equivalents, and Short-term investments as of December 31, 2017 (in millions):
The Repurchase Program was established in April 2012 with up to $5.0 billion in authorized repurchases, and was increased by $5.0 billion in authorized repurchases in each of November 2014 and February 2017 for a total of $15.0 billion in repurchase authorizations.
Under the Repurchase Program, Class A Ordinary Shares may be repurchased through the open market or in privately negotiated transactions based on prevailing market conditions, and will be funded from available capital.
per share of $102.66 for a total cost of $1.3 billion and recorded an additional $6.0 million of costs associated with the repurchases to retained earnings. At December 31, 2017, the remaining authorized amount for share repurchase under the Repurchase Program was $5.4 billion. Under the Repurchase Program, the Company has repurchased a total of 108.2 million shares for an aggregate cost of approximately $9.6 billion.
For information regarding share repurchases made during the fourth quarter of 2017, see Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” as previously described.
The proceeds of the commercial paper issuances were used primarily for short-term working capital needs.
On May 27, 2016, $500 million of 3.125% Senior Notes due May 2016 issued by Aon Corporation matured and were repaid in full.
As of December 31, 2017, we had two committed credit facilities outstanding: its $900 million multi-currency U.S. credit facility expiring in February 2021 (the “2021 Facility”) and a $400 million multi-currency U.S. credit facility expiring in October 2022 (the “2022 Facility”). The 2022 Facility was entered into on October 19, 2017. Each of these facilities is intended to support our commercial paper obligations and our general working capital needs. In addition, each of these facilities includes customary representations, warranties, and covenants, including financial covenants that require us to maintain specified ratios of adjusted consolidated EBITDA to consolidated interest expense and consolidated debt to consolidated adjusted EBITDA, tested quarterly. At December 31, 2017, we did not have borrowings under either the 2021 or the 2022 Facility, and we were in compliance with the financial covenants and all other covenants contained therein during the twelve months ended December 31, 2017.
In connection with the sale of the Divested Business, we guaranteed future operating lease commitments related to certain facilities assumed by the Buyer. We are obligated to perform under the guarantees if the Divested Business defaults on the leases at any time during the remainder of the lease agreements, which expire on various dates through 2024. As of December 31, 2017, the undiscounted maximum potential future payments under the lease guarantee were $100 million, with an estimated fair value of $23 million.
Additionally, we are subject to performance guarantee requirements under certain client arrangements that were assumed by the Buyer. Should the Divested Business fail to perform as required by the terms of the arrangements, we would be required to fulfill the remaining contract terms, which expire on various dates through 2023. As of December 31, 2017, the undiscounted maximum potential future payments under the performance guarantees were $212 million, which an estimated fair value of $1 million.
We have entered into a number of arrangements whereby our performance on certain obligations is guaranteed by a third party through the issuance of a letter of credit (“LOCs”). We had total LOCs outstanding of approximately $96 million at December 31, 2017, compared to $90 million at December 31, 2016. These LOCs cover the beneficiaries related to certain of our U.S. and Canadian non-qualified pension plan schemes and secure deductible retentions for our own workers compensation program. We also have obtained LOCs to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at our international subsidiaries.
At December 31, 2017, our net assets, representing total assets minus total liabilities, were $4.6 billion, a decrease from $5.5 billion at December 31, 2016. The decrease was due primarily to share repurchases of $2.4 billion, and dividends to shareholders of $364 million, partially offset by Net income of $1.3 billion for the year ended December 31, 2017, and a decrease in Accumulated other comprehensive loss of $416 million related primarily to foreign currency translation. Working capital increased by $271 million from $651 million at December 31, 2016 to $922 million at December 31, 2017.
Accumulated other comprehensive loss decreased $416 million to $3,496 million at December 31, 2017 as compared to $3,912 million at December 31, 2016, which was primarily driven by the following:
positive net foreign currency translation adjustments of $385 million, which are attributable to the weakening of the U.S. dollar against certain foreign currencies;
a decrease of $19 million due to the amortization of net actuarial losses related to pension obligations; and
In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning restructuring, revenue recognition, 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 use to prepare these Consolidated Financial Statements.
Revenues from health care exchange arrangements are typically recognized upon successful enrollment of participants, net of a reserve for estimated cancellations, assuming all four criteria to recognize revenue have been met.
We sponsor defined benefit pension plans throughout the world. Our most significant plans are located in the U.S., the U.K., the Netherlands, and Canada, which are closed to new entrants. We have ceased crediting future benefits relating to salary and services for our U.S., U.K., Netherlands, and Canadian plans to the extent statutorily permitted.
In 2016 and 2017, we used a full-yield curve approach in the estimation of the service and interest cost components of net periodic pension and postretirement benefit cost for our major pension and other postretirement benefit plans; this was obtained by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. In 2015 and prior years, we had estimated these components of net periodic pension and postretirement benefit cost by applying a single weighted-average discount rate, derived from the yield curve and used to measure the benefit obligation at the beginning of the period.
As of December 31, 2017, our 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.
The following table discloses our unrecognized actuarial gains and losses, the number of years over which we are amortizing the experience loss, and the estimated 2018 amortization of loss by country (millions, except amortization period):
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, 2017, the market-related value of assets was $1.9 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. Instead, we record and present the funded status in the Consolidated Statements of Financial Position based on the fair value of the plan assets. As of December 31, 2017, the fair value of plan assets was $2.0 billion.
Goodwill represents the excess of cost over the fair market value of the net assets acquired. We classify our intangible assets acquired as either tradenames, customer-related and contract-based, or technology and other.
We perform impairment reviews at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component.
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, 2017. If we are required to record impairment charges in the future, they could materially impact our results of operations.
We assess carryforwards and tax credits for realization as a reduction of future taxable income by using a “more likely than not” determination.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated February 20, 2018, expressed an unqualified opinion thereon.
On February 9, 2017, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with Tempo Acquisition, LLC (the “Buyer”), an entity formed and controlled by affiliates of The Blackstone Group L.P. Pursuant to the Purchase Agreement, the Company sold its benefits administration and business process outsourcing business (the “Divested Business”) to the Buyer and certain designated purchasers that are direct or indirect subsidiaries of the Buyer (the “Transaction”). As a result, the Divested Business’s financial results are reflected in the Consolidated Statements of Income, Consolidated Statements of Financial Position, and Consolidated Statements of Cash Flows, retrospectively, as discontinued operations beginning in the first quarter of 2017. Additionally, all of the Notes to Consolidated Financial Statements have been retrospectively restated to only include the impacts of continuing operations, unless noted otherwise. The Transaction closed on May 1, 2017. Refer to Note 4 “Discontinued Operations” for additional information.
As a result of these initiatives, Aon made the following changes to its presentation of the Consolidated Statements of Income beginning in the first quarter of 2017:
Other general expenses has been further broken out to provide greater clarity into charges related to Information technology, Premises, Depreciation of fixed assets, and Amortization and impairment of intangible assets.
The Company believes this presentation provides greater clarity into the risks and opportunities that management believes are important and allows users of the financial statements to assess the performance in the same way as the Chief Operating Decision Maker (the “CODM”).
Beginning in the first quarter of 2017, the Company began presenting Shares issued - employee benefit plans and Shares issued - employee compensation as one line item on the Consolidated Statements of Shareholders’ Equity titled Shares issued - employee stock compensation plans.
Fees paid by clients for consulting or other non-brokerage services are typically charged on an hourly, project or fixed-fee basis. Revenues from time-and-materials or cost-plus arrangements are recognized as services are performed, assuming all four criteria to recognize revenue have been met. Revenues from fixed-fee contracts are recognized as services are provided using a proportional-performance model or at the completion of a project based on facts and circumstances of the client arrangement. Revenues from investment income on funds held on behalf of clients are recognized as services are performed, assuming all four criteria to recognize revenue have been met. Reimbursements received for out-of-pocket expenses are recorded as a component of revenues.
Potentially issuable shares are not included in the computation of diluted income per share if their inclusion would be antidilutive.
At December 31, 2017, Cash and cash equivalents and Short-term investments totaled $1,285 million compared to $716 million at December 31, 2016. Of the total balance, $96 million and $82 million was restricted as to its use at December 31, 2017 and 2016, respectively. Included within the December 31, 2017 and 2016 balances, respectively, were £42.7 million ($57.1 million at December 31, 2017 exchanges rates) and £43.3 million ($53.2 million at December 31, 2016 exchange rates) of operating funds required to be held by the Company in the U.K. by the FCA, which were included in Short-term investments.
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 in earnings each period, unless the derivative is designated and qualifies as a cash flow or net investment hedge.
The Company has historically designated the following hedging relationships for certain transactions: (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 operation (“net investment hedge”).
Certain of the Company’s non-U.S. operations use their respective local currency as their functional currency. These operations that do not have the U.S. dollar as their functional currency translate their financial statements 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 in net foreign currency translation adjustments within the Consolidated Statements of Shareholders’ Equity. Gains and losses from the remeasurement of monetary assets and liabilities that are denominated in a non-functional currency are included in Other income (expense) within the Company’s Consolidated Statements of Income.
Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively
verified. Deferred tax assets are realized by having sufficient future taxable income to allow the related tax benefits to reduce taxes otherwise payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carry-forwards, taxable income in carry-back years, and tax planning strategies that are both prudent and feasible.
In August 2017, the FASB issued new accounting guidance on targeted improvements to accounting for hedging activities. The new guidance amends its hedge accounting model to enable entities to better portray their risk management activities in the financial statements. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and requires the effect of a hedging instrument to be presented in the same income statement line as the hedged item. An entity will apply the new guidance on a modified retrospective basis with a cumulative effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the period of adoption. Changes to income statement presentation and financial statement disclosures will be applied prospectively. The new guidance is effective for Aon in the first quarter of 2019 and early adoption is permitted. The Company is currently evaluating the impact that the standard will have on the Consolidated Financial Statements and the period in which it plans to adopt.
In March 2017, the FASB issued new accounting guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. An entity will apply the new guidance retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the Consolidated Statement of Income and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension costs and net periodic postretirement benefit cost in assets. The new guidance allows a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company does not expect to apply the practical expedient upon adoption of the guidance. The new guidance is effective for Aon in the first quarter of 2018. The adoption of this guidance will have no impact on the net income of the Company.
The years ended December 31, 2017 and 2016, include non-cash settlement expenses of $128 million and $220 million, respectively, related to certain pension plans. Refer to Note 12 “Employee Benefits” for further information.
In August 2016, the FASB issued new accounting guidance on the classification of certain cash receipts and cash payments. Under the new guidance, an entity will no longer have discretion to choose the classification for a number of transactions, including contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. The new standard will be effective for the Company in the first quarter of 2018, with early application permitted. An entity will apply the new guidance through retrospective adjustment to all periods presented. The retrospective approach includes a practical expedient that entities may apply should retrospective application be impracticable; in this case, the amendments for these issues may be applied prospectively as of the earliest date practicable. The guidance will not have a material impact on the Company’s Consolidated Statements of Cash Flows.
A preliminary assessment to determine the impacts of the new accounting standard has been performed and it is expected to have a significant impact on the Company’s Consolidated Statements of Financial Position and related disclosures. The Company is also currently implementing accounting and operational processes which will be impacted by the new standard.
is permitted. The adoption of this guidance on January 1, 2018 is not expected to have a significant impact on the Company’s Consolidated Financial Statements.
In May 2014, the FASB issued a new accounting standard on revenue from contracts with customers, which, when effective, will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of the standard is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The standard is effective for Aon in the first quarter of 2018. Two methods of transition are permitted upon adoption: full retrospective and modified retrospective. The Company will adopt this standard in the first quarter of 2018 using a modified retrospective adoption approach. Under this approach, prior periods will not be restated. Rather, revenues and other disclosures for prior periods will be provided in the notes to the financial statements as previously reported under the current revenue standard, and the cumulative effect of initially applying the new standard will be recognized as an increase to retained earnings as of January 1, 2018. The Company estimates this adjustment to be approximately $400-600 million.
Depreciation expense, which includes software amortization, was $187 million, $162 million, and $164 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Includes a provisional estimate of $42 million for the current portion of the Transition Tax. Refer to Note 10 “Income Taxes” for further information.
On February 9, 2017, the Company entered into the Purchase Agreement with Tempo Acquisition, LLC to sell its benefits administration and business process outsourcing business to the Buyer.
The financial results of the Divested Business for the years ended December 31, 2017, 2016, and 2015 are presented as Income from discontinued operations, net of tax, on the Company’s Consolidated Statements of Income. The following table presents the financial results of the Divested Business (in millions):
The following table presents the aggregate carrying amounts of the classes of assets and liabilities presented as discontinued operations within the Company’s Consolidated Statements of Financial Position (in millions):
In 2017, Aon initiated a global restructuring plan (the “Restructuring Plan”) in connection with the sale of the Divested Business. The Restructuring Plan is intended to streamline operations across the organization and deliver greater efficiency, insight, and connectivity. The Company expects these restructuring activities and related expenses to affect continuing operations through 2019, including an estimated 4,200 to 4,800 role eliminations. The Restructuring Plan is expected to result in cumulative costs of approximately $1,025 million through the end of the plan, consisting of approximately $450 million in employee termination costs, $130 million in technology rationalization costs, $85 million in lease consolidation costs, $50 million in non-cash asset impairments, and $310 million in other costs, including certain separation costs associated with the sale of the Divested Business.
The following table summarizes restructuring and separation costs by type that have been incurred through December 31, 2017 and are estimated to be incurred through the end of the Restructuring Plan (in millions). Estimated costs may be revised in future periods as these assumptions are updated:
Contract termination costs included within Technology rationalization for the year ended December 31, 2017 were $1 million. Contract termination costs included within Lease consolidations for the year ended December 31, 2017 were $8 million. Contract termination costs included within Other costs associated with restructuring and separation were $3 million for the year ended December 31, 2017. Total estimated contract termination costs to be incurred under the Restructuring Plan associated with Technology rationalizations, Lease consolidations, and Other costs associated with restructuring and separation, respectively, are $10 million, $80 million, and $10 million.
The changes in the Company’s liabilities for the Restructuring Plan as of December 31, 2017 are as follows (in millions):
Intangible assets are primarily customer-related and contract-based assets. Those intangible assets acquired as part of a business acquisition in 2017 had a weighted average useful economic life of 16 years. Acquisition related costs incurred and recognized within Other general expenses for the year ended December 31, 2017 were $13 million. Total revenue for these acquisitions included in the Company’s Consolidated Statement of Income for the year ended December 31, 2017 was approximately $50 million.
The results of operations of these acquisitions are included in the Consolidated Financial Statements as of the respective acquisition dates. The results of operations of the Company would not have been materially different if these acquisitions had been reported from the beginning of the period in which they were acquired.
On December 29, 2017, the Company completed the transaction to acquire Baltolink UADBB, a regional broker based in Lithuania.
On October 2, 2017, the Company completed the transaction to acquire Portus Consulting, an independent employee benefits firm based in the United Kingdom.
On August 28, 2017, the Company completed the transaction to acquire a certain portfolio in the Charlotte office of The Hays Group, Inc. d/b/a Hays Companies.
On July 27, 2017, the Company completed the transaction to acquire Grupo Innovac Sociedad de Correduría de Seguros, S.A, an insurance broker based in Valencia, Spain.
On May 31, 2017, the Company completed the transaction to acquire SchneiderGolling IFFOXX Assekuranzmakler AG and SchneiderGolling Industrie Assekuranzmaklergesellschaft mbH from SchneiderGolling Gruppe, a property and casualty broker based in Southern Germany.
On January 19, 2017, the Company completed the transaction to acquire VERO Management AG, an insurance broker and risk advisor based in Austria.
On December 26, 2016, the Company completed the transaction to acquire Admix, a leading health and benefits brokerage and solutions firm based in Brazil.
On November 11, 2016 the Company completed the transaction to acquire CoCubes, a leading hiring assessment company based in India.
On August 19, 2016, the Company completed the transaction to acquire Cammack Health LLC, a leading health and benefits consulting firm that serves large health care organizations in the Eastern region of the U.S., including health plans, health systems and employers.
On January 1, 2016, the Company completed the transaction to acquire Globe Events Management, an insurance, retirement, and investment consulting business based in Australia.
In addition to the Divested Business described in Note 4 “Discontinued Operations”, the Company completed nine dispositions during the year ended December 31, 2017. The Company completed five dispositions during the year ended December 31, 2016 and seven dispositions during the year ended December 31, 2015.
Total pretax losses, net of gains, for the year ended December 31, 2017 was $16 million. Total pretax gains, net of losses, for the years ended December 31, 2016, and 2015, were $39 million, and $82 million, respectively. Gains and losses recognized as a result of a disposition are included in Other income (expense) in the Consolidated Statements of Income.
Prior to May 1, 2017, finite lived tradenames were classified within Technology and other. As of December 31, 2016, $29 million of gross carrying amount and $7 million of accumulated amortization related to finite-lived tradenames were reclassified from Technology and other to Tradenames.
In the second quarter of 2017, and in connection with the completion of the sale of the Divested Business, the Company recognized a non-cash impairment charge to the associated tradenames of $380 million. The fair value of the tradenames was determined using the Relief from Royalty Method. This impairment was included in Amortization and impairment of intangible assets on the Consolidated Statement of Income. Refer to Note 4 “Discontinued Operations” for further information.
Additionally, effective May 1, 2017, and consistent with operating as one segment, the Company implemented a three-year strategy to transition to a unified Aon brand. As a result, Aon commenced amortization of all indefinite-lived tradenames and prospectively accelerated amortization of its finite lived tradenames over the three-year period. The change in estimated useful life resulted in additional amortization expense, net of tax, to continuing operations of $116 million, or $0.44 per share, for the year ended December 31, 2017.
The estimated future amortization for finite-lived intangible assets as of December 31, 2017 is as follows (in millions):
On March 1, 2016, Aon plc issued $750 million of 3.875% Senior Notes due December 2025. The Company used the proceeds of the issuance for general corporate purposes.
Each of these facilities includes customary representations, warranties, and covenants, including financial covenants that require Aon plc to maintain specified ratios of adjusted consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) to consolidated interest expense and consolidated debt to adjusted consolidated EBITDA, in each case, tested quarterly. At December 31, 2017, Aon plc did not have borrowings under either the 2021 Facility or the 2022 Facility, and was in compliance with all covenants contained therein during the twelve months ended December 31, 2017.
On December 22, 2017, the Tax Reform Act was enacted. The Tax Reform Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017 and the Transition Tax.
The Company has recognized provisional estimates in its consolidated financial statements for the year ended December 31, 2017 for the items described below. The ultimate impact may differ from these provisional amounts, possibly by a material amount, due to additional analysis of the law, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and/or actions the Company may take as a result of the Tax Reform Act.
continues to refine its calculation as it gains a more thorough understanding of the impact of the Tax Reform Act, particularly as it applies to deductions related to executive compensation and purchased assets.
Other significant provisions of the Tax Reform Act that are not yet effective but may impact income taxes in future years include: an exemption from U.S. tax on dividends of future foreign earnings, additional limitations on deductibility of interest payable to related and unrelated lenders, further limitations on the deductibility of executive compensation, an alternative Base Erosion and Anti-Abuse Tax that limits deductions for certain amounts payable to foreign affiliates, and an additional U.S. tax on certain future foreign subsidiary earnings, whether or not distributed, (i.e., global intangible low-taxed income or “GILTI”). The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.
The Company performs a reconciliation of the income tax provisions based on its domicile and statutory rate at each reporting period. The 2017, 2016, and 2015 reconciliations are based on the U.K. statutory corporate tax rate of 19.3%, 20.0%, and 20.3%, respectively. The reconciliation to the provisions from continuing operations reflected in the Consolidated Financial Statements is as follows:
The Company determines the adjustment for taxes on international operations based on the difference between the statutory tax rate applicable to earnings in each foreign jurisdiction and the enacted rate of 19.3%, 20.0% and 20.3% at December 31, 2017, 2016, and 2015, respectively. The benefit to the Company’s effective income tax rate from taxes on international operations relates to benefits from lower-taxed global operations, primarily due to the use of global funding structures. Restructuring charges and the impairment and amortization of tradenames, primarily in the U.S., were the significant drivers of the change from 2016 to 2017.
Valuation allowances have been established primarily with regard to the tax benefits of certain net operating loss and capital loss carryforwards. Valuation allowances increased by $6 million as of December 31, 2017, when compared to December 31, 2016. The change is primarily attributable to a capital loss generated by the liquidation of an entity which required a valuation allowance offset by the release of certain valuation allowances.
As a company incorporated in England and Wales, Aon is required under U.K. law to have available “distributable reserves” to make share repurchases or pay dividends to shareholders. Distributable reserves may be created through the earnings of the U.K. parent company and, among other methods, through a reduction in share capital approved by the English Companies Court. Distributable reserves are not directly linked to a U.S. GAAP reported amount (e.g., retained earnings). As of December 31, 2017 and 2016, the Company had distributable reserves in excess of $1.2 billion and $1.6 billion, respectively.
Aon has a share repurchase program authorized by the Company’s Board of Directors (the “Repurchase Program”). The Repurchase Program was established in April 2012 with up to $5.0 billion in authorized repurchases, and was increased by $5.0 billion in authorized repurchases in each of November 2014 and February 2017 for a total of $15.0 billion in repurchase authorizations.
Potentially issuable shares are not included in the computation of diluted net income per share if their inclusion would be antidilutive. There were no shares excluded from the calculation for in 2017, 2016, or 2015.
During 2017, 2016, and 2015, the Company paid dividends of $364 million, $345 million, and $323 million, respectively, to holders of its Class A Ordinary Shares. Dividends paid per Class A Ordinary Share were $1.41, $1.29 and $1.15 for the years ended December 31, 2017, 2016, and 2015 respectively.
The following tables provide a reconciliation of the changes in the projected benefit obligations and fair value of assets for the years ended December 31, 2017 and 2016 and a statement of the funded status as of December 31, 2017 and 2016, for the material U.K., U.S., and other major plans, which are located in the Netherlands, and Canada. These plans represent approximately 92% of the Company’s projected benefit obligations.
In March 2016, the Company entered into an insurance contract that covers a portion of the assets within select U.K. pension schemes. The transaction resulted in a decrease of $267 million in both Prepaid pension assets and Accumulated other comprehensive income.
The following table provides the components of net periodic benefit (income) cost for the plans (in millions):
In 2016 and 2017, the Company used a full-yield curve approach in the estimation of the service and interest cost components of net periodic pension and postretirement benefit cost for its major pension and other postretirement benefit plans; this was obtained by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. In 2015 and prior years, the Company had estimated these components of net periodic pension and postretirement benefit cost by applying a single weighted-average discount rate, derived from the yield curve and used to measure the benefit obligation at the beginning of the period.
In March 2016, the Company announced a plan to offer a voluntary one-time lump sum payment option to certain eligible former employees under one of the Company’s U.K. pension plans that, if accepted, would settle the Company’s pension obligations to them. The lump sum cash payment offer closed during the second quarter of 2016. In total, lump sum payments from plan assets of £116 million ($159 million using June 30, 2016 exchange rates) were paid. As a result of this settlement, the Company remeasured the assets and liabilities of the U.K. pension plan during the second quarter of 2016, which in aggregate resulted in a reduction to the projected benefit obligation of £103 million ($141 million using June 30, 2016 Exchange rates) as well as a non-cash settlement charge of £42 million ($61 million using average June 30, 2016 exchange rate) in the second quarter of 2016.
U.S. pension plans are frozen and therefore not impacted by compensation increases or price inflation.
The amounts in Accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2018, not including voluntary one-time lump sum payments, are $61 million in the U.S. and $42 million outside the U.S.
To determine the expected long-term rate of return on plan assets, the historical performance, investment community forecasts and current market conditions are analyzed to develop expected returns for each asset class used by the plans. The expected returns for each asset class are weighted by the target allocations of the plans. The expected return of 7.88% on U.S. plan assets reflects a portfolio that is seeking asset growth through a higher equity allocation while maintaining prudent risk levels. The portfolio contains certain assets that have historically resulted in higher returns, as well as other financial instruments to minimize downside risk.
The Company determined the fair value of plan assets through numerous procedures based on the asset class and available information. Refer to Note 15 “Fair Value Measurements and Financial Instruments” for a description of the procedures performed to determine the fair value of the plan assets.
The following table presents the changes in the Level 3 fair-value category in the Company’s U.K. pension plans for the years ended December 31, 2017 and December 31, 2016 (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 55% equity investments, 25% 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 be 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 generally 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, 2017, the weighted average targeted allocation for the U.K. and non-U.S. plans was 13% for equity investments, 78% for fixed income investments, and 9% for other investments.
Estimated future benefit payments for plans, not including voluntary one-time lump sum payments, are as follows at December 31, 2017 (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, 2017 and 2016 for the Company’s other significant postretirement benefit plans located in the U.S. and Canada (in millions):
To contribute $4 million to fund significant other postretirement benefit plans during 2018.
Estimated future benefit payments will be approximately $4 million each year for 2018 through 2022, and $194 million in aggregate for 2023-2027.
The accumulated postretirement benefit obligation is increased by $6 million and decreased by $5 million by a respective 1% increase or decrease to the assumed healthcare trend rate. The service cost and interest cost components of net periodic benefits cost is increased by $0.5 million and decreased by $0.5 million by a respective 1% increase or decrease to the assumed healthcare trend rate.
For most of the participants in the U.S. plan, Aon’s liability for future plan cost increases for pre-65 and Medical Supplement plan coverage is limited to 5% per annum. Although the net employer trend rates range from 4% to 9% per year, because of this cap, these plans are effectively limited to 5% per year in the future.
The following table summarizes share-based compensation expense recognized in the Consolidated Statements of Income in Compensation and benefits (in millions):
During 2017, the Company issued approximately 0.9 million shares in connection with performance achievements related to the 2014-2016 Leadership Performance Plan (“LPP”) cycle. During 2016, the Company issued approximately 1.3 million shares in connection with performance achievements related to the 2013-2015 LPP cycle. During 2015, the Company issued approximately 1.6 million shares in connection with performance achievements related to the 2012-2014 LPP cycle.
The Company recorded a gain of $7.0 million for 2017 and a loss of $0.2 million and $8 million for 2016 and 2015, respectively, in Other income (expense) for foreign exchange derivatives not designated or qualifying as hedges.
As of December 31, 2017, the Company had no outstanding Euro-denominated commercial paper designated as a hedge of the foreign currency exposure of its net investment in its European operations. As of December 31, 2017, the unrealized gain recognized in Accumulated other comprehensive income (loss) related to the net investment non derivative hedging instrument was immaterial.
Money market funds consist of institutional prime, treasury, and government money market funds. The Company reviews treasury and government money market funds to obtain reasonable assurance that the fund net asset value is $1 per share, and reviews the floating net asset value of institutional prime money market funds for reasonableness.
Real estate and REITs consist of publicly traded real estate investment trusts (“REITs”) and direct real estate investments. Level 1 REITs are valued using the closing stock price on a national securities exchange. Non Level 1 values are based on the proportionate share of ownership in the underlying net asset value as determined by the investment manager. The Company independently reviews the listing of Level 1 REIT securities in the portfolio and agrees the closing stock prices to a national securities exchange. The Company gains an understanding of the investment guidelines and valuation policies of the non Level
There were no transfers of assets or liabilities between fair value hierarchy levels during 2017 or 2016. The Company recognized no realized or unrealized gains or losses in the Consolidated Statements of Income related to assets and liabilities measured at fair value using unobservable inputs in 2017, 2016, or 2015.
The Company has included in the current matters described below certain matters in which (1) loss is probable (2) loss is reasonably possible; that is, more than remote but not probable, or (3) there exists the reasonable possibility of loss greater than the accrued amount. In addition, the Company may from time to time disclose matters for which the probability of loss could be remote but the claim amounts associated with such matters are potentially significant. The reasonably possible range of loss for the matters described below, in excess of amounts that are deemed probable and estimable and therefore already accrued, is estimated to be between $0 and $0.3 billion, exclusive of any insurance coverage. These estimates are based on currently available information. As available information changes, the matters for which Aon is able to estimate may change, and the estimates themselves may change. In addition, many estimates involve significant judgment and uncertainty. For example, at the time of making an estimate, Aon may only have limited information about the facts underlying the claim, and predictions and assumptions about future court rulings and outcomes may prove to be inaccurate. Although management at present believes that the ultimate outcome of all matters described below, individually or in the aggregate, will not have a material adverse effect on the consolidated financial position of Aon, legal proceedings are subject to inherent uncertainties and unfavorable rulings or other events. Unfavorable resolutions could include substantial monetary or punitive damages imposed on Aon or its subsidiaries. If unfavorable outcomes of these matters were to occur, future results of operations or cash flows for any particular quarterly or annual period could be materially adversely affected.
A retail insurance brokerage subsidiary of Aon was sued on September 14, 2010 in the Chancery Court for Davidson County, Tennessee Twentieth Judicial District, at Nashville 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 in coverage from numerous insurers with whom this Aon subsidiary placed the client’s property insurance coverage. The insurers contend that only $50 million in coverage (which has already been paid) 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. In addition, Opry Mills seeks prejudgment interest, attorneys’ fees and enhanced damages which could substantially increase Aon’s exposure. In March 2015, the trial court granted partial summary judgment in favor of plaintiffs and against the insurers, holding generally that the plaintiffs are entitled to $200 million in coverage under the language of the policies. In August 2015, a jury returned a verdict in favor of Opry Mills and against the insurers in the amount of $204 million. On January 26, 2018, the Tennessee Court of Appeals reversed and remanded, reversing summary judgment in favor of plaintiffs and concluding that coverage is limited to $50 million. Aon believes it has meritorious defenses and intends to vigorously defend itself against these claims.
A pensions consulting and administration subsidiary of Aon provided advisory services to the Trustees of the Gleeds pension fund in the United Kingdom and, on occasion, to the relevant employer of the fund. In April 2014, the High Court, Chancery Division, London found that certain governing documents of the fund that sought to alter the fund’s benefit structure and that had been
drafted by Aon were procedurally defective and therefore invalid. No lawsuit naming Aon as a party was filed, although a tolling agreement was entered. The High Court decision says that the additional liabilities in the pension fund resulting from the alleged defect in governing documents amount to approximately £45 million ($60 million at December 31, 2017 exchange rates). In December 2014, the Court of Appeal granted the employer leave to appeal the High Court decision. At a hearing in October 2016, the Court of Appeal approved a settlement of the pending litigation. On October 31, 2016, the fund’s trustees and employer sued Aon in the High Court, Chancery Division, London, alleging negligence and breach of duty in relation to the governing documents. The proceedings were served on Aon on December 20, 2016. The claimants seek damages of approximately £70 million ($94 million at December 31, 2017 exchange rates). Aon believes that it has meritorious defenses and intends to vigorously defend itself against this claim.
On June 29, 2015, Lyttelton Port Company Limited (“LPC”) sued Aon New Zealand in the Christchurch Registry of the High Court of New Zealand. LPC alleges, among other things, that Aon was negligent and in breach of contract in arranging LPC’s property insurance program for the period covering June 30, 2010, to June 30, 2011. LPC contends that acts and omissions by Aon caused LPC to recover less than it otherwise would have from insurers for losses suffered in the 2010/2011 Canterbury earthquakes. LPC claims damages of approximately NZD $184 million ($130 million at December 31, 2017 exchange rates) plus interest and costs. Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims.
Additionally, the Company is subject to performance guarantee requirements under certain client arrangements that were assumed by the Buyer. Should the Divested Business fail to perform as required by the terms of the arrangements, the Company would be required to fulfill the remaining contract terms, which expire on various dates through 2023. As of December 31, 2017, the undiscounted maximum potential future payments under the performance guarantees were $212 million, with an estimated fair value of $1 million.
The Company has certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. The maximum exposure with respect to such contractual contingent guarantees was approximately $95 million at December 31, 2017, which is unchanged as compared to December 31, 2016.
Beginning in the first quarter of 2017 and following the transaction described in Note 4 “Discontinued Operations,” the Company began leading a set of initiatives designed to strengthen Aon and unite the firm with one portfolio of capability enabled by proprietary data and analytics and one operating model to deliver additional insight, connectivity and efficiency. These initiatives reinforce Aon’s return on invested capital (“ROIC”) decision-making process and emphasis on free cash flow. The Company is now operating as one segment that includes all of Aon’s continuing operations, which as a global professional services firm provides advice and solutions to clients focused on risk, retirement, and health through five revenue lines which make up its principal products and services. The CODM assesses the performance of the Company and allocates resources based on one company: Aon United.
Prior period comparative segment information has been restated to conform with current year presentation. In prior periods, the Company did not include unallocated expenses in segment operating income, which represented corporate governance costs not allocated to the previous operating segments. These costs are now reflected within operating expenses for the current and prior period.
Revenues are generally attributed to geographic areas based on the location of the resources producing the revenues. Intercompany revenues and expenses are eliminated in consolidated results. Consolidated Revenue by geographic area, which is attributed on the basis of where the services are performed, is as follows (in millions):