(2)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), Aon Warranty Group and Construction Program Group (both sold in 2006) and Swett & Crawford (sold in 2005).
(3)Effective January 1, 2009, we adopted a new accounting standard requiring non-controlling interests to be separately presented as a component of total equity. Prior years have been adjusted to conform to the new standard.
(5)Effective January 1, 2006, we adopted a new accounting standard on share-based payments.
(7)Represents insurance premium receivables from clients as well as cash and investments held in a fiduciary capacity.
•client cost-driven behavior, where clients are actively looking to reduce spending in order to meet budget reductions, and increase risk retention, as a result of prioritizing their total spending, and
•sector specific weakness, including financial services, construction, private equity, and mergers and acquisitions, all of which have been particularly impacted by the current recession.
We have made three key commitments to shareholders - grow organically, expand margins, and increase earnings per share. The following is our measure of performance against these three metrics for 2009:
•Organic revenue, as defined under the caption "Review of Consolidated Results - General" below, declined 1% as a result of weak economic conditions globally.
Additionally, the following is a summary of our 2009 financial results:
•Revenue increased $67 million, or 1%, to $7.6 billion, as additional revenue from the Benfield merger and other acquisitions was mainly offset by the negative effect of foreign currency translation and $97 million lower fiduciary investment income due to the decline in global interest rates.
•Our consolidated operating margin from continuing operations for the year improved from 12.5% in 2008 to 13.4% in 2009. The increase was principally driven by a 1% growth in revenue, along with expense management.
•Net income from continuing operations attributable to Aon stockholders increased 2% or $15 million from 2008 to $636 million.
In our discussion of operating results, we sometimes refer to supplemental information derived from consolidated financial information specifically related to organic revenue growth, adjusted pretax margin, and the impact of foreign exchange rate fluctuations on operating results.
We use supplemental information related to organic revenue growth to help us and our investors evaluate business growth from existing operations. Organic revenue growth excludes the impact of foreign exchange rate changes, acquisitions, divestitures, transfers between business units, fiduciary investment income, reimbursable expenses, and unusual items. Supplemental information related to organic growth represents a measure not in accordance with U.S. generally accepted accounting principles ("GAAP"), and should be viewed in addition to, not instead of, our Consolidated Statements of Income. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. Reconciliation of this non-GAAP measure, organic revenue growth percentages to the reported Commissions, fees and other revenue growth percentages, has been provided in the "Review by Segment" caption, below.
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.
Revenue increased by $67 million, or 1%, in 2009 compared to 2008. This increase reflects a $108 million, or 2%, increase in the Risk and Insurance Brokerage Services segment and a $49 million increase associated with corporate ownership in insurance investments obtained as part of the acquisition of Benfield Group Limited ("Benfield") in November 2008, partially offset by an $89 million, or 7%, decrease in the Consulting segment. This 2% increase in the Risk and Insurance Brokerage Services 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 Consulting 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 and Insurance Brokerage Services segment and a $23 million, or 7%, decrease in the Consulting 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.
Other income (expense) was $20 million of income for 2009 versus an expense of $29 million in 2008. This change reflects a $7 million decrease in income in the Risk and Insurance Brokerage Services segment, a $1 million increase in income in the Consulting segment, and a $55 million reduction in unallocated expenses. The $7 million decline in the Risk and Insurance Brokerage Services segment was primarily driven by a gain on the sale of land recognized in 2008 of $5 million and lower earnings from our non-consolidated subsidiaries, partially offset by higher gains on the disposal of several small subsidiaries. The $55 million improvement in unallocated expenses was due to $50 million of costs recognized in 2008 associated with acquiring Benfield, along with a $5 million gain recognized in 2009 on the extinguishment of $15 million of Junior Subordinated Debentures.
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 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 AWG 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.
Revenue increased by $294 million, or 4%, in 2008 compared to 2007. This increase principally reflects a $279 million, or 5%, increase in the Risk and Insurance Brokerage Services segment and an $11 million, or 1%, increase in the Consulting segment. The 5% increase in the Risk and Insurance Brokerage Services segment was primarily driven by organic growth in our reinsurance and most of our retail operations, as well as the impact of favorable foreign exchange rates. The small increase in the Consulting segment was primarily driven by growth in most major practice groups and geographies, mostly offset by the negative impact of the terminated outsourcing contract with AT&T.
Other income (expense) was $29 million of expense in 2008 versus income of $58 million in 2007. This change reflects a $25 million decrease in income in the Risk and Insurance Brokerage Services segment and a $62 million increase in unallocated expenses. The $25 million decline in the Risk and Insurance Brokerage Services segment was primarily driven by lower gains on the disposal of several small subsidiaries. The $62 million increase in unallocated expenses was due to $50 million of costs recognized in 2008 associated with acquiring Benfield, along with lower realized gains from the sale of investments.
Income from discontinued operations increased to $841 million ($2.76 diluted net income per share) in 2008 from $202 million ($0.62 diluted net income per share) in 2007. The 2008 results include the gain on the sale of our CICA and Sterling subsidiaries, the operations of CICA and Sterling for the first quarter of 2008, and the full-year operations of AIS. These gains were partially offset by a loss recognized on sale of our remaining P&C operations. The results in 2007 mainly reflected a full year of operations for CICA, Sterling, AIS and our remaining P&C operations.
As of December 31, 2009, approximately 530 jobs have been eliminated under this Plan. Total payments of $67 million have been made under the Aon Benfield Plan to date.
In 2007, we announced a global restructuring plan intended to create a more streamlined organization and reduce future expense growth to better serve clients ("2007 Plan"). The 2007 Plan includes an estimated 4,600 job eliminations. As of December 31, 2009, approximately 3,100 positions have been eliminated. We have closed or consolidated several offices resulting in sublease losses or lease buy-outs. We currently estimate that the 2007 Plan will result in cumulative pretax charges totaling approximately $750 million. Expenses include workforce reduction, lease consolidation costs, asset impairments, as well as other expenses necessary to implement the restructuring initiative. Costs related to the restructuring are included in Compensation and benefits and Other general expenses in the Consolidated Statements of Income. We expect the restructuring and related expenses to affect continuing operations through the first half of 2010. We estimate that we realized approximately $269 million of cost savings in 2009. We anticipate that these initiatives will lead to annualized cost savings, before any potential reinvestment of savings, of approximately $536 million by the end of 2010. However, there can be no assurances that we will achieve the targeted savings.
Liquidity is derived from the cash flows from our businesses and from financing activities. Cash on our balance sheets include funds available for general corporate purposes. Funds held on behalf of clients in a fiduciary capacity are segregated and shown together with insurance premiums receivable in Fiduciary assets in the Consolidated Statement of Financial Position, with a corresponding offset in Fiduciary liabilities. Fiduciary funds cannot be used for general corporate purposes, and should not be considered as a source of liquidity for Aon.
We use various financial measures to assist in capital deployment decision-making, including net cash provided by operations, free cash flow, net debt-to-capital and return on capital. We believe these measures are useful to investors in assessing our financial performance.
We expect cash generated by operations for 2010 to be sufficient to service debt and contractual obligations, fund cash requirements of our restructuring programs, finance capital expenditures, continue acquisition of shares under our share repurchase program, and continue paying dividends to our shareholders. Although 2010 cash from operations is expected to be sufficient to service these obligations, we have the ability to borrow under our credit facilities to accommodate timing differences in cash flows. We have committed credit facilities of approximately $1.3 billion that are currently undrawn and that can be accessed on a same-day basis. Additionally, we believe we could access capital markets for debt financing for longer-term funding, under current market conditions, if needed.
Net cash provided by operating activities in 2008 decreased $304 million compared with 2007. Excluding the change in client-held funds, cash provided from operating activities decreased $779 million compared to 2007, primarily attributable to a $765 million decrease in net income (adjusted for non-cash items), reflecting $376 million of taxes paid on the gain from the sales of CICA and Sterling, as well as $330 million less cash flow from the operations of our insurance underwriting subsidiaries, which were sold on April 1, 2008.
facility. We also used $100 million for the repayment of short-term debt related to a variable interest entity ("VIE") for which we were the primary beneficiary. Cash dividends of $165 million were paid to shareholders.
At December 31, 2009, our cash and cash equivalents and short-term investments were $639 million, a decrease of $627 million from December 31, 2008. Of the total balance recorded at December 31, 2009, approximately $85 million was restricted as to use. At December 31, 2009, $199 million of cash and cash equivalents and short-term investments were held in the U.S. and $440 million was held by our subsidiaries 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.
In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance underwriter. We also collect claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims are held by us in a fiduciary capacity. 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, 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 $3.3 billion and fiduciary receivables of $7.5 billion at December 31, 2009. 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.
Our Board of Directors has authorized us to repurchase up to $4.6 billion of our outstanding common stock. Shares may be repurchased through the open market or in privately negotiated transactions from time to time, based on prevailing market conditions, and will be funded from available capital. Any repurchased shares will be available for employee stock plans and for other corporate purposes. In 2009, we repurchased 15.1 million shares at a cost of $590 million. In 2008, we repurchased 42.6 million shares at a cost of $1.9 billion. In 2007, we repurchased 19.1 million shares at a cost of $751 million. Since the inception of our share repurchase program in 2005, we have repurchased a total of 105.8 million shares for an aggregate cost of $4.3 billion. As of December 31, 2009, we were authorized to purchase up to $265 million of additional shares under the current share repurchase program. The timing and amount of future purchases will be based on market and other conditions.
In January 2010, our Board of Directors authorized a new share repurchase program under which up to $2 billion of common stock may be repurchased from time to time depending on market conditions or other factors through open market or privately negotiated transactions. Repurchases will commence under the new share repurchase program upon conclusion of the existing program.
For information regarding share repurchases made during the fourth quarter of 2009, 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. We have not issued any securities under this registration statement. The availability of the 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 securities thereunder.
($937 million at December 31, 2009 exchange rates) multi-currency foreign credit facility available. At December 31, 2009, no amounts were outstanding under either facility.
The major rating agencies' ratings of our debt at February 24, 2010 appear in the table below.
There were no changes in our ratings or outlook during 2009.
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. Although we have committed backup lines, we cannot ensure that our financial position will not be adversely impacted if we were unable to access the commercial paper market.
We believe that cash flows from operations and available credit facilities will be sufficient to meet our liquidity needs, including capital expenditures and anticipated working capital requirements, for the foreseeable future. Our cash flows from operations, borrowing availability and overall liquidity are subject to risks and uncertainties. See Item 1, "Information Concerning Forward-Looking Statements" and Item 1A, "Risk Factors."
(4)As of December 31, 2009, we can exit an information technology contract for termination payments of $13 million. However, given the nature of this contract, we have included it in our contractual obligations table.
(5)Also included is a $318 million contract for claims outsourcing in the U.K. We can exit this obligation after 2013 for approximately $32 million.
At December 31, 2009, net assets of $5.4 billion, representing total assets minus total liabilities, were essentially equivalent to the balance at December 31, 2008. Working capital decreased $374 million to $1.3 billion.
•Goodwill increased $441 million, due principally to the impact of foreign currency translation and the acquisitions of several businesses during 2009.
•Short-term debt decreased $95 million, due principally to the repayment of $100 million in debt held at one of our formerly consolidated VIEs.
•Long-term debt increased by $126 million, principally reflecting the issuance of €500 million ($721 million at December 31, 2009 exchange rates) of 6.25% senior unsecured debentures due on July 1, 2014. Most of the net proceeds from the offering were used to repay $677 million of outstanding indebtedness under our Euro credit facility.
•Pension and other post employment liabilities increased $195 million, due to lower discount rates used by the plans, actuarial losses, adverse pension asset performance and the impact of foreign currency translation, partially offset by increased contributions made to the plans.
Equity at December 31, 2009 was $5.4 billion, an increase of $16 million from December 31, 2008. Net income of $792 million and stock compensation expense of $209 million in 2009 were almost completely offset by share repurchases of $590 million, a $213 million increase in accumulated other comprehensive loss, and $165 million of dividends to shareholders.
Accumulated other comprehensive loss increased $213 million since December 31, 2008, reflecting the following:
•an increase in the net post-retirement benefit obligation of $413 million, as a result of lower discount rates, actuarial losses and adverse pension asset performance,
In 2008, we signed a definitive agreement to sell the U.S. operations of Cananwill, our premium finance business. This disposition was completed in February 2009. In connection with this sale, we have guaranteed the collection of the principal amount of the premium finance notes sold to the buyer, which, at December 31, 2009, was $8 million. Historical losses in this business have been very low since the premium finance notes are generally fully collateralized by the lender's right, in the event of non-payment, to cancel the underlying insurance contract and collect the unearned premium from the insurance carrier. We do not expect to incur a significant loss related to this guarantee.
premium finance loans generated by referrals from our brokerage operations. The third parties did not acquire our existing portfolio of premium finance loans, and as such, we did not extend any guarantees under these agreements.
At December 31, 2008 and continuing through December 18, 2009, we consolidated the following VIEs:
During 2009 we continued to see a soft market, which began in 2007, in our retail brokerage product line. In 2007, we experienced a soft market in many business lines and in many geographic areas. In a "soft market," premium rates flatten or decrease, along with commission revenues, due to increased competition for market share among insurance carriers or increased underwriting capacity. Changes in premiums have a direct and potentially material impact on the insurance brokerage industry, as commission revenues are generally based on a percentage of the premiums paid by insureds. Prices fell throughout 2007, with the greatest declines seen in large and middle-market accounts. Prices continued to decline during 2008, although the rate of decline slowed toward the end of the year. In our reinsurance brokerage product line, pricing overall during 2009 was also down, although during a portion of the year it was flat to up slightly.
We operate in a highly competitive industry and compete with many retail insurance brokerage and agency firms, as well as with individual brokers, agents, and direct writers of insurance coverage. Specifically, we address the highly specialized product development and risk management needs of commercial enterprises, professional groups, insurance companies, governments, healthcare providers, and non-profit groups, among others; provide affinity products for professional liability, life, disability income, and personal lines for individuals, associations, and businesses; provide reinsurance services to insurance and reinsurance companies and other risk assumption entities by acting as brokers or intermediaries on all classes of reinsurance; provide investment banking products and services, including mergers and acquisitions and other financial advisory services, capital raising, contingent capital financing, insurance-linked securitizations and derivative applications; provide managing underwriting to independent agents and brokers as well as corporate clients; provide actuarial, loss prevention, and administrative services to businesses and consumers; and manage captive insurance companies.
Risk and Insurance Brokerage Services commissions, fees and other revenue was as follows (in millions):
of exiting a business in Japan, economic weakness in Asia and political unrest in Thailand, partially offset by growth in New Zealand and certain emerging markets.
Reinsurance commissions, fees and other revenue increased 48%, due mainly to the Benfield merger, partially offset by unfavorable foreign currency translation. Organic revenue is even with 2008, as growth in domestic treaty business and slightly higher pricing was offset by greater client retention, and declines in investment banking and facultative placements.
Operating income increased $54 million or 6% from 2008 to $900 million in 2009. In 2009, operating income margins in this segment were 14.3%, up 60 basis points from 13.7% in 2008. Contributing to increased operating income and margins were the merger with Benfield, lower E&O costs due to insurance recoveries, a pension curtailment gain of $54 million in 2009 versus a curtailment loss of $6 million in 2008, declines in anti-corruption and compliance initiative costs of $35 million, restructuring savings, and other cost savings initiatives.
Our Consulting segment generated 17% of our consolidated total revenues in 2009 and provides a broad range of human capital consulting services, as follows:
1.Health and Benefits advises clients about how to structure, fund, and administer employee benefit programs that attract, retain, and motivate employees. Benefits consulting include health and welfare, executive benefits, workforce strategies and productivity, absence management, benefits administration, data-driven health, compliance, employee commitment, investment advisory and elective benefits services.
Outsourcing offers employment processing, performance improvement, benefits administration and other employment-related services.
Beginning in late 2008 and continuing throughout 2009, the disruption in the global credit markets and the deterioration of the financial markets has created significant uncertainty in the marketplace. The prolonged economic downturn is adversely impacting our clients' financial condition and 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 depressing the price of those services, which is having an adverse effect on our new business and results of operations.
Operating income was $203 million, a decrease of $5 million, or 2%, from 2008. This decrease was principally driven by a 2% organic revenue decline, higher restructuring costs, and the unfavorable impact of foreign currency translation. These declines were partially offset by savings related to the 2007 restructuring plan, a $20 million gain from the pension curtailment, lower incentive compensation costs, and other cost saving initiatives. Operating income margins in this segment for 2009 were 16.0%, an increase of 70 basis points from 15.3% in 2008, as the impact of the revenue shortfall was more than offset by a reduction in expenses.
In 2009, we recognized $36 million of pretax income from Juniperus and JCHL. We recognized $16 million of after-tax income, after allocating the appropriate share of net income to the noncontrolling interests.
Interest expense, which represents the cost of our worldwide debt obligations, declined $4 million due primarily to the impact of favorable foreign exchange rates, which was mostly offset by higher interest rates following the third quarter issuance of €500 million ($721 million at December 31, 2009 exchange rates) of long-term debt at an interest rate of 6.25%, which replaced debt borrowed under our Euro credit facility.
We estimate our one-time workforce reduction costs related to exit and disposal activities not resulting from an ongoing severance plan based on the benefits available to the employees being
We established a restructuring plan related to our acquisition of Benfield ("Aon Benfield Plan"), which includes reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities and as part of the cost of the acquisition, we established liabilities, primarily for severance and excess facilities. We finalized our restructuring plans in the fourth quarter of 2009 and adjusted liabilities where necessary, with a corresponding decrease in goodwill.
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.
Our U.S., U.K. and Canadian pension plans were previously closed to new entrants. Effective January 1, 2009, our Netherlands plan was also closed to new entrants. In 2007, future benefit accruals relating to salary and service ceased in our U.K. plans. Effective April 1, 2009, we ceased crediting future benefits relating to salary and service for our two U.S. plans. As a result, we recognized a curtailment gain of $83 million in 2009. In 2010 and 2011, we will cease crediting future benefits relating to service in our Canadian pension plans. We recognized a curtailment loss of $5 million related to the Canadian pension plans in 2009.
As of December 31, 2009, 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 ("PBO"). To the extent not offset by future gains, incremental amortization as calculated above will continue to affect future pension expense similarly until fully amortized.
In determining the expected rate of return for the plan assets, we analyzed investment community forecasts and current market conditions to develop expected returns for each of the asset classes used by the plans. In particular, we surveyed multiple third party financial institutions and consultants to obtain long-term expected returns on each asset class, considered historical performance data by asset class over long periods, and weighted the expected returns for each asset class by target asset allocations of the plans.
The U.S. pension plan asset allocation is based on approved allocations following adopted investment guidelines. The actual asset allocation at December 31, 2009 was 60% equity and 40% fixed income securities for the qualified plan.
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 2010 pension expense (in millions):
Holding other assumptions constant, the following table reflects what a one hundred basis point increase and decrease in our estimated long-term rate of return on plan assets would have on our estimated 2010 pension expense (in millions):
We estimate contributions of approximately $381 million in 2010 as compared with $437 million in 2009.
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.
In determining the fair value of our reporting units, we use a discounted cash flow ("DCF") model based on our most current forecasts. We discount the related cash flow forecasts using the weighted-average cost of capital method at the date of evaluation. Preparation of forecasts and selection of the discount rate for use in the DCF model involve significant judgments, and changes in these estimates could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We also use market multiples which are obtained from quoted prices of comparable companies to corroborate our DCF model results. The combined estimated fair value of our reporting units from our DCF model often results in a premium over our market capitalization, commonly referred to as a control premium. We believe the implied control premium determined by our impairment analysis is reasonable based upon historic data of premiums paid on actual transactions within our industry. Based on tests performed in both 2009 and 2008, there was no indication of goodwill impairment, and no further testing was required.
We define a contingency as any material condition that involves a degree of uncertainty that will ultimately be resolved. Under U.S. GAAP, we are required to establish reserves for contingencies when a loss is probable and we can reasonably estimate its financial impact. We are required to assess the likelihood of material adverse judgments or outcomes as well as potential ranges or probability of losses. We determine the amount of reserves required, if any, for contingencies after carefully analyzing each individual issue. The required reserves may change due to new developments in each issue, or changes in approach, such as changing our settlement strategy. We do not recognize gain contingencies until the contingency is resolved.
We have audited the accompanying consolidated statements of financial position of Aon Corporation as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
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, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
Certain amounts in prior years' consolidated financial statements and related notes have been reclassified to conform to the 2009 presentation, including the reclassification of income earned on non-fiduciary operating funds to Interest income from Investment income, a component of Total revenue, and the reclassification of equity earnings on investments to Other income (expense) from Commissions, fees and other revenue in the Consolidated Statements of Income.
Following these reclassifications, Total revenue decreased by $103 million and $125 million in 2008 and 2007, respectively, Other general expenses increased by $1 million in 2008 and decreased $2 million in 2007, Other income (expense) increased by $10 million and $23 million in 2008 and 2007, respectively, and Interest income increased by $94 million and $100 million for 2008 and 2007, respectively.
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. We adjust 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 and Insurance Brokerage Services 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.
Consulting segment revenues consist primarily of fees paid by clients for consulting advice, commissions from insurance carriers for the placement of individual and group contracts, and outsourcing contracts. Commissions from insurance companies are recognized in the same manner as the Risk and Insurance Brokerage Services segment. Fees paid by clients 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, which is measured by the amount of time incurred. Revenues from fixed-fee contracts are recognized ratably over the term of the contract. Reimbursements received for out-of-pocket expenses are recorded as a component of revenues.
In its capacity as an insurance agent and broker, Aon collects premiums from insureds and, after deducting its commission, remits the premiums to the respective insurers. Aon also collects claims or refunds from insurers on behalf of insureds. Uncollected premiums from insureds and uncollected claims or refunds from insurers are recorded as fiduciary assets in the Company's Consolidated Statements of Financial Position. Unremitted insurance premiums and claims are held in a fiduciary capacity. The obligation to remit these funds is recorded as fiduciary liabilities in the Company's Consolidated Statement of Financial Position. The time frame that the Company holds such funds is dependent upon the date the insured remits the payment of the premium to Aon and the date Aon is required to forward those payments to the insurer.
Aon maintained premium trust balances for premiums collected from insureds but not yet remitted to insurance companies of $3.3 billion and $3.2 billion at December 31, 2009 and 2008, respectively. These funds and a corresponding liability are included in fiduciary assets and fiduciary liabilities, respectively, in the accompanying Consolidated Statements of Financial Position.
Property and equipment is stated at cost, less accumulated depreciation. Depreciation is generally calculated using the straight-line method over estimated useful lives. Included in this category is internal use software, which is software that is acquired, internally developed or modified solely to meet internal needs, with no plan to market externally. Costs related to directly obtaining, developing or upgrading internal use software are capitalized and amortized using the straight-line method over a range principally between 3 to 8 years. The weighted-average original life of Aon's software at December 31, 2009 is 4.7 years.
In order for a derivative to qualify for hedge accounting, the derivative must be formally designated as a fair value, cash flow, or a net investment hedge by documenting the relationship between the derivative and the hedged item. The documentation must include a description of the hedging instrument, the hedged item, the risk being hedged, Aon's risk management objective and strategy for undertaking the hedge, the method for assessing the effectiveness of the hedge, and the method for measuring hedge ineffectiveness. Additionally, the hedge relationship must be expected to be highly effective at offsetting changes in either the fair value or cash flows of the hedged item at both inception of the hedge and on an ongoing basis. Aon assesses the ongoing effectiveness of its hedges and measures and records hedge ineffectiveness, if any, at the end of each quarter.
Changes in the fair value of a derivative that is not designated as an accounting hedge (known as an "economic hedge") are recorded in either Interest income or Other general expenses (depending on the hedged exposure) in the Consolidated Statements of Income.
When hedge accounting is discontinued because the derivative no longer qualifies as a cash flow 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, and continues to defer the derivative gain or loss in accumulated OCI until the hedged forecasted transaction affects earnings. If the hedged forecasted transaction is not probable of occurring in the time period described in the hedge documentation or within a two month period of time thereafter, the deferred derivative gain or loss is immediately reflected in earnings.
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 Income 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 exchange for nonmonetary assets. Gains and losses from the remeasurement of monetary assets and liabilities are included in Other income (expense) within the Consolidated Statements of Income. The effect of foreign exchange gains and losses on the Consolidated Statements of Income was a loss of $26 million in 2009 and gains of $18 million and $11 million in 2008 and 2007, respectively. Included in these amounts were derivative hedging losses of $15 million in 2009 and $36 million in 2008 and gains of $16 million in 2007.
The principal effect on the prior years' balance sheets related to the adoption of the new guidance related to noncontrolling interests is summarized as follows (in millions):
income attributable to Aon stockholders equals net income as previously reported prior to the adoption of the new guidance.
Certain common stock equivalents primarily related to options were not included in the computation of diluted net income per share because their inclusion would have been antidilutive. The number of shares excluded from the calculation was 5 million, 3 million, and 5 million in 2009, 2008, and 2007, respectively.
•additional guidance for estimating fair value in accordance with current principles, when the volume and level of activity for the asset or liability has significantly decreased. This guidance also assists in identifying circumstances that indicate when a transaction is not orderly.
•disclosure guidance related to the fair value of financial instruments for interim reporting periods as well as in annual financial statements.
The adoption of the preceding guidance did not have a material impact on the Company's consolidated financial statements.
In June 2009, the FASB issued guidance amending current principles related to the transfers of financial assets and VIEs. This guidance eliminates the concept of a qualifying special-purpose entity ("QSPE"), 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. Former QSPEs will be evaluated for consolidation based on the updated VIE guidance. There are also changes to the approach a company must take 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 will also be required. These changes will be effective for Aon beginning in the first quarter of 2010. The Company believes that the adoption of this guidance will not have a material impact on the Company's consolidated financial statements.
permitted. The Company is currently evaluating this guidance to determine what impact, if any, it will have on its consolidated financial statements.
In January 2010, the FASB issued 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. These disclosures will be effective for Aon beginning in the first quarter of 2010. The guidance also requires entities to disclose information in the Level 3 rollforward about purchases, sales, issuances and settlements on a gross basis. These disclosures will be effective for Aon beginning in the first quarter of 2011. The Company is currently evaluating this guidance to determine additional disclosures, if any, that will be required.
In January 2009, the Company signed a definitive agreement to sell FFG Insurance Company ("FFG"), Atlanta International Insurance Company ("AIIC") and Citadel Insurance Company ("Citadel") (together the "P&C operations"). FFG and Citadel were property and casualty insurance operations that were in runoff. AIIC was a property and casualty insurance operation that was previously reported in discontinued operations. The sale was completed in August 2009. A pretax loss totaling $196 million was recognized, of which $5 million was recorded in 2009 and $191 million in 2008. As part of the sale, the purchaser also assumed an indemnification in respect to certain reinsured property and casualty balances. The fair value of this indemnification was $9 million at December 31, 2008.
The operating results of all these businesses are classified as discontinued operations, and prior years' operating results have been reclassified as discontinued operations, as follows (in millions):
The results of operations of these acquisitions are included in the consolidated financial statements from the dates they were acquired. These acquisitions, except for Benfield, would not produce a materially different result if they had been reported from the beginning of the period.
Pro forma data may not be indicative of the results that would have been obtained had the acquisition actually occurred at the beginning of the years presented, nor does it intend to be a projection of future results. The pro forma financial information include adjustments to historical Benfield numbers to conform results to U.S. GAAP from International Financial Reporting Standards and amortization charges from acquired intangibles and related tax effects.
In 2009, the Company completed the disposition of its U.S. premium finance business along with a number of smaller entities. The following table includes the gains or losses recorded as a result of these and other disposals made in 2009, 2008 and 2007 (in millions):
In December 2008, Aon signed a definitive agreement to sell the U.S. Cananwill operations. This disposition was completed in February 2009. A pretax loss of $7 million was recorded, of which $2 million was recorded in 2009 and $5 million in 2008, and is included in Other income (expense) in the Consolidated Statements of Income. Aon may receive up to $10 million from the buyer over the next two years based on the amount of insurance premiums and related obligations financed by the buyer over this period that are generated from certain of Cananwill's producers. Cananwill's results for the period up to the date of disposition are included in the Risk and Insurance Brokerage Services segment.
In connection with this sale, Aon has guaranteed the collection of the principal amount of the premium finance notes sold to the buyer, which, at December 31, 2009, was $8 million. Historical losses in this business have been very low since the premium finance notes are generally fully collateralized by the lender's right, in the event of non-payment, to cancel the underlying insurance contract and collect
Aon recorded gains on the sale of premium finance agreements of $18 million, $55 million and $64 million for the years ended December 31, 2009, 2008, and 2007, respectively. These gains are included in Commissions, fees and other revenue in the Consolidated Statements of Income.
During 2009, Aon completed the sale of nine other, smaller operations. Total pretax gains of $15 million were recognized on these sales, which are included in Other income (expense) in the Consolidated Statements of Income.
Amortization expense on intangible assets was $93 million, $65 million and $42 million for the years ended December 31, 2009, 2008 and 2007, respectively. The estimated future amortization for intangible assets as of December 31, 2009 is as follows (in millions):
The following summarizes the restructuring and related expenses by type that have been incurred and are estimated to be incurred through the end of the restructuring initiative related to the 2007 Plan (in millions):
(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 the Company to add or cancel component initiatives.
The following is a summary of the restructuring and related expenses by segment that have been incurred (in millions):
The Company earns income on cash balances and investments, as well as on premium trust balances that Aon maintains for premiums collected from insureds but not yet remitted to insurance companies. Premium trust balances and a corresponding liability are included in fiduciary assets and fiduciary liabilities in the accompanying Consolidated Statements of Financial Position.
As part of this transaction, Aon is required to purchase from PEPS I additional securities equal to the unfunded limited partnership commitments, as they are requested. These securities are rated below investment grade. Aon did not fund any commitments in 2009, but funded $2 million in 2008. As of December 31, 2009, the unfunded commitments were $42 million. The commitments have specific expiration dates and the partners may decide not to draw on these commitments.
The estimated fair value of Aon's preferred stock investments in PEPS I is derived primarily from valuations received for the general partners of the LP interests held by PEPS I.
On July 1, 2009, an indirect wholly-owned subsidiary of Aon issued €500 million ($721 million at December 31, 2009 exchange rates) of 6.25% senior unsecured debentures due on July 1, 2014. The payment of the principal and interest on the debentures is unconditionally and irrevocably guaranteed by Aon. Proceeds from the offering were used to repay the Company's $677 million outstanding indebtedness under its Euro credit facility.
In 1997, Aon created Aon Capital A, a wholly-owned statutory business trust ("Trust"), for the purpose of issuing mandatorily redeemable preferred capital securities ("Capital Securities"). Aon received cash and an investment in 100% of the common equity of Aon Capital A by issuing 8.205% Junior Subordinated Deferrable Interest Debentures (the "Debentures") to Aon Capital A. These transactions were structured such that the net cash flows from Aon to Aon Capital A matched the cash flows from Aon Capital A to the third party investors. Aon determined that it was not the primary beneficiary of Aon Capital A, a VIE, and, thus reflected the Debentures as long-term debt. During the first half of 2009, Aon repurchased $15 million face value of the Capital Securities for approximately $10 million, resulting in a $5 million gain, which was reported in Other income (expense) in the Consolidated Statement of Income. To facilitate the legal release of the obligation created through the Debentures associated with this repurchase and future repurchases, Aon dissolved the Trust effective June 25, 2009. This dissolution resulted in the exchange of the Capital Securities held by third parties for the Debentures. Also in connection with the dissolution of the Trust, the $24 million of common equity of Aon Capital A held by Aon was exchanged for $24 million of Debentures, which were then cancelled. Following these actions, $687 million of Debentures remain outstanding. The Debentures are subject to mandatory redemption on January 1, 2027 or are redeemable in whole, but not in part, at the option of Aon upon the occurrence of certain events.
In December 2009, Aon cancelled its $600 million; 5-year U.S. committed bank credit facility that was to expire in February 2010 and entered into a new $400 million, 3-year facility to support commercial paper and other short-term borrowings. Based on Aon's current credit ratings, commitment
fees of 35 basis points are payable on the unused portion of the facility. At December 31, 2009 Aon had no borrowings under this 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) to consolidated interest expense of 4 to 1 and a ratio of consolidated debt to EBITDA of not greater than 3 to 1. Aon was in compliance with all debt covenants as of December 31, 2009.
Valuation allowances have been established primarily with regard to the tax benefits of certain net operating loss and tax credit carryforwards. Valuation allowances increased by $147 million in 2009, primarily attributable to the recognition of the following items: a $75 million valuation allowance for U.S. foreign tax credit carryforwards, a $48 million increase in the valuation allowance for U.K. capital loss carryforwards, and an $11 million valuation allowance for a German interest expense carryforward. Although future earnings cannot be predicted with certainty, management believes that the realization of the net deferred tax asset is more likely than not.
Aon recognized, as an adjustment to additional paid-in-capital, income tax benefits attributable to employee stock compensation as follows: 2009 - $25 million; 2008 - $45 million; and 2007 - $40 million.
U.S. deferred income taxes are not provided on unremitted foreign earnings that are considered permanently reinvested, which at December 31, 2009 amounted to approximately $2.1 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.
In 2009, Aon issued 1.0 million new shares of common stock for employee benefit plans. In addition, Aon reissued 8.0 million shares of treasury stock for employee benefit programs and 0.5 million shares in connection with employee stock purchase plans. In 2008, Aon issued 0.4 million new shares of common stock for employee benefit plans. In addition, Aon reissued 9.1 million shares of treasury stock for employee benefit programs and 0.3 million shares in connection with employee stock purchase plans. In 2007, Aon issued 0.4 million new shares of common stock for employee benefit plans and 0.1 million shares in connection with employee stock purchase plans. In addition, Aon reissued 9.3 million shares of treasury stock for employee benefit programs and 0.3 million shares in connection with employee stock purchase plans.
During 2009, 2008, and 2007, Aon paid dividends on its common stock of $165 million, $171 million, and $176 million, respectively. Dividends paid per common share were $0.60 for each of the years ended December 31, 2009, 2008 and 2007.
The pretax changes in net unrealized investment gains (losses), which include investments reported as assets held-for sale, are as follows (in millions):
In 2008, U.S. plans with a PBO and ABO in excess of the fair value of plan assets had a PBO of $2.1 billion, an ABO of $2.1 billion, and plan assets of $1.1 billion. International plans with a PBO in excess of the fair value of plan assets had a PBO of $3.5 billion and plan assets with a fair value of $3.0 billion, and plans with an ABO in excess of the fair value of plan assets had an ABO of $3.0 billion and plan assets with a fair value of $2.5 billion.
In 2009, a curtailment gain of $83 million was recognized as a result of the Company ceasing crediting future benefits relating to salary and service of the U.S. defined benefit pension plan. Also in 2009, Aon recorded a $5 million curtailment charge attributable to a remeasurement resulting from the decision to cease service accruals for the Canadian plans beginning in 2010. In connection with the Company ceasing crediting future benefits relating to salary and service of the U.S. non-qualified defined benefit pension plan, a curtailment loss of $8 million was recognized in 2008. These items are reported in Compensation and benefits in the Consolidated Statements of Income.
The fair values of Aon's major international pension plan assets at December 31, 2009, by asset category, are as follows (in millions):
Other information related to the Company's other post-retirement benefit plans are as follows:
Amounts recognized in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost at December 31, 2009 are $5 million and $14 million of net gain and prior service credit, respectively. The amount in accumulated other comprehensive income expected to be recognized as a component of net periodic benefit cost during 2010 is $3 million of prior service credit.
•To contribute $5 million to fund other post-retirement benefit plans during 2010 and 2011.
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 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 2009, the Company granted approximately 2 million shares in connection with the completion of the 2006 Leadership Performance Plan ("LPP") cycle. During 2009, 2008 and 2007, the Company granted approximately 3.7 million, 4.2 million and 4.3 million restricted shares, respectively, in connection with the Company's incentive compensation plans.
A summary of the status of Aon's non-vested stock awards is as follows (shares in thousands):
The weighted average assumptions, the weighted average expected life and estimated fair value of employee stock options are summarized as follows:
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 $38.34 as of December 31, 2009, which would have been received by the option holders had those option holders exercised their options as of that date. At December 31, 2009, the aggregate intrinsic value of options outstanding was $103 million, of which $77 million was exercisable.
Unamortized deferred compensation expense, which includes both options and awards, amounted to $278 million as of December 31, 2009, with a remaining weighted-average amortization period of approximately 2.1 years.
Derivative transactions are governed by a uniform set of policies and procedures covering areas such as authorization, counterparty exposure and hedging practices. Positions are monitored using techniques such as market value and sensitivity analyses.
Certain derivatives also give rise to credit risks from the possible non-performance by counterparties. The credit risk is generally limited to the fair value of those contracts that are favorable to Aon. Aon has limited its credit risk by using International Swaps and Derivatives Association ("ISDA") master agreements, collateral and credit support arrangements, entering into non-exchange-traded derivatives with highly-rated major financial institutions and by using exchange-traded instruments. Aon monitors the credit-worthiness of, and exposure to, its counterparties. As of December 31, 2009, all net derivative liability positions were entered into pursuant to terms of ISDA master agreements, and were free of credit risk contingent features. In addition, Aon has received collateral of $14 million from counterparties and pledged collateral of $1 million to counterparties for derivatives subject to collateral support arrangements as of December 31, 2009.
Aon also uses foreign exchange derivatives, typically forward contracts and options, with a notional amount of $54 million at December 31, 2009, 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.
Aon holds variable rate short term brokerage and other operating deposits. Aon uses interest rate derivatives, typically swaps, to reduce its exposure to the effects of interest rate fluctuations on the forecasted interest receipts from these deposits for up to three years in the future. Aon has designated interest rate derivatives with a notional amount of $1.7 billion at December 31, 2009 as cash flow hedges of this exposure. As of December 31, 2009, a $14 million pretax gain has been deferred to OCI
related to this hedge, all of which is expected to be reclassified to earnings in 2010. This hedge had no material ineffectiveness in 2009, 2008 or 2007.
In 2009, a subsidiary of Aon issued €500 million of fixed rate debt due on July 1, 2014. Aon is exposed to changes in the fair value of the debt due to interest rate fluctuations. Aon uses receive-fixed-pay-floating interest rate swaps to reduce its exposure to the effects of interest rate fluctuations on the fair value of the debt. Aon has designated interest rate swaps with a notional amount of €250 million at December 31, 2009 as a fair value hedge of this exposure. This hedge did not have any ineffectiveness in 2009.
At December 31, 2009, Aon's Level 3 fair value measurements primarily consists of its PEPS I investment and guarantees.
(1)Includes $2,332 million of money market funds and $78 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.
Following inquiries from regulators, the Company commenced an internal review of its compliance with certain U.S. and non-U.S. anti-corruption laws, including the U.S. Foreign Corrupt Practices Act ("FCPA"). In January 2009, Aon Limited, Aon's principal U.K. brokerage subsidiary, entered into a settlement agreement with the FSA to pay a £5.25 million fine arising from its failure to exercise reasonable care to establish and maintain effective systems and controls to counter the risks of bribery arising from the use of overseas firms and individuals who helped it win business. The U.S. Securities and Exchange Commission ("SEC") and the U.S. Department of Justice ("DOJ") continue to investigate these matters. Aon is fully cooperating with these investigations and has agreed with the U.S. agencies to toll any applicable statute of limitations pending completion of the investigations. Based on current information, the Company is unable to predict at this time when the SEC and DOJ matters will be concluded, or what regulatory or other outcomes may result.
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. Aon believes that Resource Life has meritorious defenses, and Resource Life is vigorously defending 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 has taken 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. The outcome of the actions, and the amount of any losses or other payments that may result, cannot be predicted at this time.
Commitments associated with Aon's limited partnership securitization are disclosed in Note 8. Guarantees associated with the collection of the principal amount of the premium finance notes sold to the buyer of the Company's U.S. premium finance business are disclosed in Note 5.
Aon has certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. Costs associated with these guarantees, to the extent estimable and probable, are provided in Aon's allowance for doubtful accounts. The maximum exposure with respect to such contractual contingent guarantees was approximately $8 million at December 31, 2009.
Aon classifies its businesses into two operating segments: Risk and Insurance Brokerage Services and Consulting. Unallocated income and expenses, when combined with the operating segments and after the elimination of intersegment revenues and expenses, total to the amounts in the Consolidated Financial Statements.
Operating segments have been determined using a management approach, which is consistent with the basis and manner in which Aon's chief operating decision maker uses financial information for the purposes of allocating resources and evaluating performance. Aon evaluates performance based on stand-alone operating segment operating income and generally accounts for intersegment revenue as if the revenue were from third parties and at what management believes are current market prices.
The Risk and Insurance Brokerage Services business acts as an advisor and insurance broker, helping clients manage their risks, as well as negotiating and placing insurance risk with insurance carriers through our global distribution network.
The Consulting business provides advice and services to clients related to health and benefits, retirement, compensation, strategic human capital, and human resource outsourcing.
(1)Excludes the elimination of intersegment revenues of $26 million, $25 million and $29 million for 2009, 2008 and 2007, respectively.
Unallocated expenses include administrative or other costs not attributable to the operating segments, such as corporate governance costs and the costs associated with corporate investments. Interest income represents income earned primarily on operating cash balances and miscellaneous income producing securities. Interest expense represents the cost of worldwide debt obligations.
Selected quarterly financial data for the years ended December 31, 2009 and 2008 are as follows (in millions, except per share data):
(1)As noted in Note 2, the Company adopted additional guidance relating to the inclusion of participating securities in the computation of basic and diluted earnings per share using the two-class method. The amounts previously reported for the first and second quarters of 2009 for diluted earnings per share of $0.97 and $0.52 have been restated above to reflect the impact of this guidance. The amounts previously reported for the first and second quarters of 2008 for diluted earnings per share of $0.68 and $3.71 have been restated above to reflect the impact of this guidance.