XFRA:9H6 Aon PLC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 1-7933

 

Aon plc

(Exact Name of Registrant as Specified in Its Charter)

 

ENGLAND AND WALES

 

98-1030901

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

8 DEVONSHIRE SQUARE, LONDON, ENGLAND

 

EC2M 4PL

(Address of Principal Executive Offices)

 

(Zip Code)

 

+44 20 7623 5500

(Registrant’s Telephone Number,
Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o  NO x

 

Number of Class A Ordinary Shares of Aon plc, $0.01 nominal value, outstanding as of April 2, 2012:  326,415,020

 

 

 



 

Part I Financial Information

ITEM 1. FINANCIAL STATEMENTS

 

Aon plc

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

Three Months Ended

 

(millions, except per share data) 

 

Mar. 31, 2012

 

Mar. 31, 2011

 

Revenue

 

 

 

 

 

Commissions, fees and other

 

$

2,829

 

$

2,748

 

Fiduciary investment income

 

12

 

11

 

Total revenue

 

2,841

 

2,759

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Compensation and benefits

 

1,661

 

1,597

 

Other general expenses

 

778

 

764

 

Total operating expenses

 

2,439

 

2,361

 

Operating income

 

402

 

398

 

Interest income

 

3

 

6

 

Interest expense

 

(59

)

(63

)

Other income

 

 

15

 

Income from continuing operations before income taxes

 

346

 

356

 

Income taxes

 

97

 

103

 

Income from continuing operations

 

249

 

253

 

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

 

4

 

Income taxes

 

 

2

 

Income from discontinued operations

 

 

2

 

 

 

 

 

 

 

Net income

 

249

 

255

 

Less: Net income attributable to noncontrolling interests

 

11

 

9

 

Net income attributable to Aon stockholders

 

$

238

 

$

246

 

 

 

 

 

 

 

Net income attributable to Aon stockholders

 

 

 

 

 

Income from continuing operations

 

$

238

 

$

244

 

Income from discontinued operations

 

 

2

 

Net income

 

$

238

 

$

246

 

Basic net income per share attributable to Aon stockholders

 

 

 

 

 

Continuing operations

 

$

0.72

 

$

0.72

 

Discontinued operations

 

$

 

$

 

Net income

 

$

0.72

 

$

0.72

 

 

 

 

 

 

 

Diluted net income per share attributable to Aon stockholders

 

 

 

 

 

Continuing operations

 

$

0.71

 

$

0.71

 

Discontinued operations

 

$

 

$

 

Net income

 

$

0.71

 

$

0.71

 

Cash dividends per share paid on common stock

 

$

0.15

 

$

0.15

 

Weighted average common shares outstanding - basic

 

332.4

 

339.4

 

Weighted average common shares outstanding - diluted

 

336.6

 

345.4

 

 

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited).

 

2



 

Aon plc

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended

 

(millions) 

 

Mar. 31, 2012

 

Mar. 31, 2011

 

 

 

 

 

 

 

Net income

 

$

249

 

$

255

 

Less: Net income attributable to noncontrolling interests

 

11

 

9

 

Net income attributable to Aon stockholders

 

238

 

246

 

Other comprehensive income, net of tax:

 

 

 

 

 

Change in derivative gains/losses

 

7

 

(4

)

Foreign currency translation adjustments

 

104

 

195

 

Post-retirement benefit obligation

 

21

 

12

 

Total other comprehensive income, net of tax

 

132

 

203

 

Less: Other comprehensive income attributable to noncontrolling interests

 

1

 

 

Total other comprehensive income attributable to Aon stockholders

 

131

 

203

 

Comprehensive income attributable to Aon stockholders

 

$

369

 

$

449

 

 

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited).

 

3



 

Aon plc

Condensed Consolidated Statements of Financial Position

 

(millions, except par value) 

 

Mar. 31, 2012

 

Dec. 31, 2011

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

323

 

$

272

 

Short-term investments

 

510

 

785

 

Receivables, net

 

3,164

 

3,183

 

Fiduciary assets

 

11,795

 

10,838

 

Other current assets

 

415

 

427

 

Total Current Assets

 

16,207

 

15,505

 

Goodwill

 

8,896

 

8,770

 

Intangible assets, net

 

3,203

 

3,276

 

Fixed assets, net

 

808

 

783

 

Investments

 

211

 

239

 

Other non-current assets

 

946

 

979

 

TOTAL ASSETS

 

$

30,271

 

$

29,552

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

LIABILITIES

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Fiduciary liabilities

 

$

11,795

 

$

10,838

 

Short-term debt and current portion of long-term debt

 

286

 

337

 

Accounts payable and accrued liabilities

 

1,432

 

1,832

 

Other current liabilities

 

739

 

753

 

Total Current Liabilities

 

14,252

 

13,760

 

Long-term debt

 

4,168

 

4,155

 

Pension, other post retirement, and post employment liabilities

 

2,072

 

2,192

 

Other non-current liabilities

 

1,363

 

1,325

 

TOTAL LIABILITIES

 

21,855

 

21,432

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Common stock-$1 par value

 

386

 

386

 

Authorized: 750 shares (issued: 2012 - 386.4; 2011 - 386.4)

 

 

 

 

 

Additional paid-in capital

 

3,913

 

4,021

 

Retained earnings

 

8,770

 

8,594

 

Treasury stock at cost (shares: 2012 - 60.0; 2011 - 61.6)

 

(2,472

)

(2,553

)

Accumulated other comprehensive loss

 

(2,239

)

(2,370

)

TOTAL AON STOCKHOLDERS’ EQUITY

 

8,358

 

8,078

 

Noncontrolling interests

 

58

 

42

 

TOTAL EQUITY

 

8,416

 

8,120

 

TOTAL LIABILITIES AND EQUITY

 

$

30,271

 

$

29,552

 

 

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited).

 

4



 

Aon plc

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

(millions)

 

Shares

 

Common
Stock and
Additional
Paid-in Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated Other
Comprehensive
Loss, Net of Tax

 

Non-controlling
Interests

 

Total

 

Balance at December 31, 2011

 

386.4

 

$

4,407

 

$

8,594

 

$

(2,553

)

$

(2,370

)

$

42

 

$

8,120

 

Net income

 

 

 

238

 

 

 

11

 

249

 

Shares issued - employee benefit plans

 

 

2

 

 

 

 

 

2

 

Shares purchased

 

 

 

 

(100

)

 

 

(100

)

Shares reissued - employee benefit plans

 

 

(181

)

(13

)

181

 

 

 

(13

)

Tax benefit - employee benefit plans

 

 

16

 

 

 

 

 

16

 

Stock compensation expense

 

 

55

 

 

 

 

 

55

 

Dividends to stockholders

 

 

 

(49

)

 

 

 

(49

)

Change in derivative gains/losses

 

 

 

 

 

7

 

 

7

 

Foreign currency translation adjustments

 

 

 

 

 

103

 

1

 

104

 

Post-retirement benefit obligation

 

 

 

 

 

21

 

 

21

 

Purchase of subsidiary shares from and sales to non-controlling interest

 

 

 

 

 

 

5

 

5

 

Dividends paid to non-controlling interests on subsidiary common stock

 

 

 

 

 

 

(1

)

(1

)

Balance at March 31, 2012

 

386.4

 

$

4,299

 

$

8,770

 

$

(2,472

)

$

(2,239

)

$

58

 

$

8,416

 

 

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited).

 

5



 

Aon plc

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended

 

(millions) 

 

March 31,
2012

 

March 31,
2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

249

 

255

 

Adjustments to reconcile net income to cash (used for) provided by operating activities:

 

 

 

 

 

Depreciation of fixed assets

 

55

 

53

 

Amortization of intangible assets

 

104

 

91

 

Stock compensation expense

 

55

 

74

 

Deferred income taxes

 

16

 

11

 

Change in assets and liabilities:

 

 

 

 

 

Fiduciary receivables

 

(644

)

181

 

Short-term investments - funds held on behalf of clients

 

(62

)

(427

)

Fiduciary liabilities

 

706

 

246

 

Receivables, net

 

61

 

108

 

Accounts payable and accrued liabilities

 

(451

)

(327

)

Restructuring reserves

 

(16

)

(28

)

Current income taxes

 

41

 

58

 

Pension and other post employment liabilities

 

(110

)

(81

)

Other assets and liabilities

 

(19

)

(59

)

CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES

 

(15

)

155

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Sales of long-term investments

 

36

 

17

 

Purchase of long-term investments

 

(3

)

(6

)

Net sales of short-term investments - non-fiduciary

 

283

 

218

 

Acquisition of businesses, net of cash acquired

 

(23

)

(3

)

Capital expenditures

 

(71

)

(56

)

CASH PROVIDED BY INVESTING ACTIVITIES

 

222

 

170

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Purchase of treasury stock

 

(100

)

(350

)

Issuance of stock for employee benefit plans

 

49

 

85

 

Issuance of debt

 

75

 

429

 

Repayment of debt

 

(140

)

(79

)

Cash dividends to stockholders

 

(49

)

(51

)

Dividends paid to noncontrolling interests

 

(1

)

 

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES

 

(166

)

34

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

10

 

(23

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

51

 

336

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

272

 

346

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

323

 

682

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

Interest paid

 

75

 

76

 

Income taxes paid, net of refunds

 

40

 

36

 

 

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited).

 

6



 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

1.  Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The Condensed Consolidated Financial Statements include the accounts of Aon plc and all controlled subsidiaries (“Aon” or the “Company”). All material intercompany accounts and transactions have been eliminated. The Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows for all periods presented.

 

Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The results for the three months ended March 31, 2012 are not necessarily indicative of operating results that may be expected for the full year ending December 31, 2012.

 

Company Redomestication

 

On April 2, 2012, the Company completed the reorganization of the corporate structure of the group of companies controlled by its predecessor, Aon Corporation, as holding company of the Aon group, pursuant to which Aon Corporation merged with one of its indirect, wholly-owned subsidiaries and Aon plc became the publicly-held parent company of the Aon group. This transaction is referred to as the Redomestication. In the Redomestication, each issued and outstanding share of Aon Corporation common stock held by stockholders of Aon Corporation was converted into the right to receive one Class A Ordinary Share, nominal value $0.01 per share, of Aon plc. Likewise, equity incentive and compensation plans were assumed by Aon plc and amended to provide that those plans will now provide for the award and issuance of Aon plc Class A Ordinary Shares on a one-for-one basis. Shares of treasury stock of Aon Corporation were cancelled in the Redomestication. Any references to “Aon”, “the Company”, “us”, or “we,” or any similar references relating to periods before the Redomestication shall be construed as references to Aon Corporation, being the previous parent company of the Aon group.

 

Reclassification

 

Certain amounts in prior year’s Condensed Consolidated Financial Statements and related notes have been reclassified to conform to the 2012 presentation. In prior periods, remeasurement gains and losses from foreign currency transactions and related derivative instruments were recognized in Other general expenses in the Condensed Consolidated Statements of Income. These gains and losses are now included in Other income in the Condensed Consolidated Statements of Income and are disclosed in Note 4 to these Condensed Consolidated Financial Statements. The Company believes this provides greater clarity into the income generated from operations.

 

Use of Estimates

 

The preparation of the accompanying Condensed 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 revenues and expenses during the reporting period. These estimates and assumptions are based on management’s best estimates and judgments, which management believes to be reasonable based on facts and circumstances. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Aon adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, and foreign currency movements have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with definitive precision, actual results could differ significantly from these estimates. Future changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

 

2.  Accounting Principles and Practices

 

Changes in Accounting Principles

 

Goodwill Impairment

 

In September 2011, the Financial Accounting Standards Board (“FASB”) issued final guidance on goodwill impairment that gives an entity the option to perform a qualitative assessment that may eliminate the requirement to perform the annual two-step test. The current two-step test requires an entity to assess goodwill for impairment by quantitatively comparing the fair value of a reporting unit

 

7



 

with its carrying amount, including goodwill (Step 1). If the reporting unit’s fair value is less than its carrying amount, Step 2 of the test must be performed to measure the amount of goodwill impairment, if any. The recently issued guidance gives an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity concludes that this is the case, it must perform the two-step test. Otherwise, the two-step test is not required. The Company early adopted this guidance in the fourth quarter 2011. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

Comprehensive Income

 

In June 2011, the FASB issued guidance that updates principles related to the presentation of comprehensive income. The revised guidance requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements and eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance, which must be applied retroactively, is effective for Aon beginning in the first quarter of 2012. The adoption of this guidance affects only the presentation of these Condensed Consolidated Financial Statements, and has no effect on the financial condition, results of operations or cash flows of the Company.

 

Fair Value Measurement

 

In May 2011, the FASB issued guidance that clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The additional required disclosures include quantitative information, sensitivity discussion, and description of the valuation process, as well as increased disclosure of unobservable inputs that are significant to the fair value measurement and transfers between Level 1 and Level 2. The guidance is effective for Aon beginning in the first quarter 2012. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

3.  Cash and Cash Equivalents and Short-Term Investments

 

Cash and cash equivalents include cash balances and all highly liquid investments with initial maturities of three months or less. Short-term investments include certificates of deposit, money market funds and highly liquid debt instruments purchased with initial maturities in excess of three months but less than one year and are carried at amortized cost, which approximates fair value.

 

The Company was required to hold £77 million of operating funds in the U.K., which were included in Short-term investments. These operating funds, when translated to U.S, dollars, were $123 million and $120 million at March 31, 2012 and December 31, 2011, respectively. Cash and cash equivalents included restricted balances of $90 million and $71 million at March 31, 2012 and December 31, 2011, respectively. The increase in restricted cash balances from December 31, 2011 is primarily due to increased requirements to hold cash and cash equivalents as collateral in Europe.

 

4.  Other Income

 

Other income consists of the following (in millions):

 

 

 

Three months ended
March 31,

 

 

 

2012

 

2011

 

Equity earnings

 

$

5

 

$

6

 

Realized gain on sale of investments

 

10

 

10

 

Foreign currency remeasurement losses

 

(18

)

(2

)

Hedging gain

 

2

 

 

Other

 

1

 

1

 

 

 

$

 

$

15

 

 

5.  Acquisitions and Dispositions

 

Acquisitions

 

During the three months ended March 31, 2012, the Company completed the acquisition of two businesses in the Risk Solutions segment. During the three months ended March 31, 2011, the Company completed the acquisition of one business in the Risk Solutions segment.

 

The following table includes the aggregate consideration transferred and the preliminary value of intangible assets recorded as a result of the Company’s acquisitions.

 

8



 

 

 

Three months ended March 31,

 

(millions)

 

2012

 

2011

 

Consideration transferred:

 

$

21

 

$

3

 

Intangible assets:

 

 

 

 

 

Goodwill

 

$

19

 

$

1

 

Other intangible assets:

 

8

 

3

 

Total

 

$

27

 

$

4

 

 

The results of operations of these acquisitions are included in the Condensed Consolidated Financial Statements as of the acquisition date. 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.

 

Dispositions

 

During the three months ended March 31, 2012, the Company completed the sale of one business in the HR Solutions segment. No gain or loss was recognized on this sale. During the three months ended March 31, 2011, the Company did not complete any dispositions.

 

6.  Goodwill and Other Intangible Assets

 

The change in the carrying amount of goodwill by operating segment for the three months ended March 31, 2012 is as follows (in millions):

 

 

 

Risk
Solutions

 

HR
Solutions

 

Total

 

Balance as of December 31, 2011

 

$

5,557

 

$

3,213

 

$

8,770

 

Goodwill related to current year acquisitions

 

19

 

 

19

 

Goodwill related to prior year acquisitions

 

(4

)

 

(4

)

Transfer related to Health and Benefits Consulting (1)

 

321

 

(321

)

 

Foreign currency translation

 

88

 

23

 

111

 

Balance as of March 31, 2012

 

$

5,981

 

$

2,915

 

$

8,896

 

 


(1)   Effective January 1, 2012, the Health and Benefits Consulting business was transferred from the HR Solutions segment to the Risk Solutions segment.

 

Other intangible assets by asset class are as follows (in millions):

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Intangible assets with indefinite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

$

1,024

 

$

 

$

1,024

 

$

1,024

 

$

 

$

1,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

4

 

1

 

3

 

4

 

1

 

3

 

Customer Related and Contract Based

 

2,642

 

711

 

1,931

 

2,608

 

615

 

1,993

 

Marketing, Technology and Other

 

614

 

369

 

245

 

606

 

350

 

256

 

 

 

$

4,284

 

$

1,081

 

$

3,203

 

$

4,242

 

$

966

 

$

3,276

 

 

Amortization expense from intangible assets with finite lives was $104 million and $91 million for the three months ended March 31, 2012 and 2011, respectively.

 

The estimated future amortization for intangible assets as of March 31, 2012 is as follows (in millions):

 

9



 

 

 

HR Solutions

 

Risk Solutions

 

Total

 

Remainder of 2012

 

$

223

 

$

90

 

$

313

 

2013

 

276

 

101

 

377

 

2014

 

239

 

91

 

330

 

2015

 

209

 

76

 

285

 

2016

 

175

 

66

 

241

 

Thereafter

 

478

 

155

 

633

 

 

 

$

1,600

 

$

579

 

$

2,179

 

 

7.  Restructuring

 

Aon Hewitt Restructuring Plan

 

On October 14, 2010, Aon announced a global restructuring plan (“Aon Hewitt Plan”) in connection with the acquisition of Hewitt Associates, Inc.  The Aon Hewitt Plan is intended to streamline operations across the combined Aon Hewitt organization and includes an estimated 1,500 to 1,800 job eliminations. The Company expects these restructuring activities and related expenses to impact continuing operations into 2013. The Aon Hewitt Plan is expected to result in cumulative costs of approximately $325 million through the end of the plan, consisting of approximately $180 million in employee termination costs and approximately $145 million in real estate realization costs.

 

From the inception of the Aon Hewitt Plan through March 31, 2012, approximately 1,186 jobs have been eliminated and total expenses of $169 million have been incurred. The Company recorded $12 million and $23 million of restructuring and related charges in the three months ended March 31, 2012 and 2011, respectively. Charges related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Condensed Consolidated Statements of Income.

 

The following summarizes restructuring and related costs by type that have been incurred and are estimated to be incurred through the end of the restructuring initiative related to the Aon Hewitt Plan (in millions):

 

 

 

2010

 

2011

 

First Quarter
2012

 

Total
Inception to
Date

 

Estimated
Total Cost for
Restructuring
Plan (1)

 

Workforce reduction

 

$

49

 

$

64

 

$

7

 

$

120

 

$

180

 

Lease consolidation

 

3

 

32

 

4

 

39

 

95

 

Asset impairments

 

 

7

 

1

 

8

 

47

 

Other costs associated with restructuring (2)

 

 

2

 

 

2

 

3

 

Total restructuring and related expenses

 

$

52

 

$

105

 

$

12

 

$

169

 

$

325

 

 


(1)   Actual costs, when incurred, may vary due to changes in the assumptions built into this plan.  Significant assumptions that may change when plans are finalized and implemented include, but are not limited to, changes in severance calculations, changes in the assumptions underlying sublease loss calculations due to changing market conditions, and changes in the overall analysis that might cause the Company to add or cancel component initiatives.

 

(2)          Other costs associated with restructuring initiatives, including moving costs and consulting and legal fees, are recognized when incurred.

 

Effective January 1, 2012, the Health and Benefits Consulting business was transferred from the HR Solutions segment to the Risk Solutions segment. Restructuring costs associated with the Health and Benefits Consulting business are reflected in the Risk Solutions segment, including $41 million that was reclassified from the HR Solutions segment to the Risk Solutions segment for 2011. During the first quarter 2011, $23 million in restructuring expenses were recorded, $14 million of which related to the Health and Benefits Consulting business. The following summarizes the restructuring and related expenses, by segment, that have been incurred and are estimated to be incurred through the end of the restructuring initiative related to the Aon Hewitt Plan (in millions):

 

10



 

 

 

2010

 

2011

 

First Quarter
2012

 

Total
Inception to
Date

 

Estimated
Total Cost for
Restructuring
Plan

 

HR Solutions

 

$

52

 

$

49

 

$

9

 

$

110

 

$

257

 

Risk Solutions

 

 

56

 

3

 

59

 

68

 

Total restructuring and related expenses

 

$

52

 

$

105

 

$

12

 

$

169

 

$

325

 

 

Aon Benfield Restructuring Plan

 

The Company announced a global restructuring plan (“Aon Benfield Plan”) in conjunction with its acquisition of Benfield in 2008.  The Aon Benfield Plan was intended to integrate and streamline operations across the combined Aon Benfield organization.  The Aon Benfield Plan included 810 job eliminations. Additionally, duplicate space and assets was abandoned. The Company incurred all remaining costs for the Aon Benfield Plan in the first quarter 2012.

 

The Company recorded $8 million and $7 million of restructuring and related charges in the three months ended March 31, 2012 and 2011, respectively. All costs associated with the Aon Benfield Plan are included in the Risk Solutions segment. Charges related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Condensed Consolidated Statements of Income.

 

The following summarizes the restructuring and related costs by type that have been incurred through the end of the restructuring initiative related to the Aon Benfield Plan in the first quarter 2012 (in millions):

 

 

 

Purchase
Price
Allocation

 

2009

 

2010

 

2011

 

First Quarter
2012

 

Total Cost for
Restructuring
Plan

 

Workforce reduction

 

$

32

 

$

38

 

$

15

 

$

33

 

$

8

 

$

126

 

Lease consolidation

 

20

 

14

 

7

 

(15

)

 

26

 

Asset impairments

 

 

2

 

2

 

 

 

4

 

Other costs associated with restructuring

 

1

 

1

 

2

 

1

 

 

5

 

Total restructuring and related expenses

 

$

53

 

$

55

 

$

26

 

$

19

 

$

8

 

$

161

 

 

As of March 31, 2012, the Company’s liabilities for its restructuring plans are as follows (in millions):

 

 

 

Aon Hewitt
Plan

 

Aon Benfield
Plan

 

2007 Plan

 

Other

 

Total

 

Balance at January 1, 2011

 

88

 

26

 

113

 

10

 

237

 

Expensed

 

98

 

19

 

(12

)

 

105

 

Cash payments

 

(93

)

(24

)

(59

)

(2

)

(178

)

Foreign exchange translation and other

 

2

 

(1

)

8

 

 

9

 

Balance at December 31, 2011

 

$

95

 

$

20

 

$

50

 

$

8

 

$

173

 

Expensed

 

11

 

8

 

 

 

19

 

Cash payments

 

(19

)

(9

)

(6

)

(1

)

(35

)

Foreign exchange translation and other

 

1

 

2

 

(1

)

 

2

 

Balance at March 31, 2012

 

$

88

 

$

21

 

$

43

 

$

7

 

$

159

 

 

8.  Investments

 

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, and funds held under the terms of certain outsourcing agreements to pay certain obligations on behalf of clients.  Premium trust asset balances and a corresponding liability are included in Fiduciary assets and Fiduciary liabilities in the accompanying Condensed Consolidated Statements of Financial Position.

 

The Company’s interest-bearing assets and other investments are included in the following categories in the Condensed Consolidated Statements of Financial Position (in millions):

 

11



 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Cash and cash equivalents

 

$

323

 

$

272

 

Short-term investments

 

510

 

785

 

Fiduciary assets (1)

 

4,354

 

4,190

 

Investments

 

211

 

239

 

 

 

$

5,398

 

$

5,486

 

 


(1) Fiduciary assets includes funds held on behalf of clients but does not include fiduciary receivables.

 

The Company’s investments are as follows (in millions):

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Equity method investments (2)

 

$

135

 

$

164

 

Other investments, at cost

 

61

 

60

 

Fixed-maturity securities

 

15

 

15

 

 

 

$

211

 

$

239

 

 


(2) The reduction in equity method investments is primarily due to sales and redemptions.

 

9.  Debt

 

The Company uses the proceeds from the commercial paper market from time to time in order to meet short term working capital needs. At March 31, 2012, the Company had no commercial paper outstanding as compared to $50 million in commercial paper outstanding at December 31, 2011. The weighted average commercial paper outstanding for the three months ended March 31, 2012 was $20.9 million. The weighted average interest rate of the commercial paper for the same period was 0.47%.

 

On March 20, 2012, the Company entered into a $400 million five year credit agreement (“Revolving Credit Agreement”). Borrowings under the Revolving Credit Agreement will bear interest, at the Company’s option, at a rate equal to either (a) the rate for eurodollar deposits as reflected on the applicable Reuters LIBOR01 page for the interest period relevant to such borrowing (“Eurodollar Rate”), plus the applicable margin or (b) the highest of (i) the rate of interest publicly announced by Citibank as its prime rate, (ii) the federal funds effective rate from time to time plus 0.5% and (iii) the one month Eurodollar rate plus 1.0%, in each case plus the applicable margin. The applicable margin for borrowings under the Revolving Credit Agreement may change depending on achievement of certain public debt ratings. The Revolving Credit Agreement has a maturity date of March 20, 2017 and contains covenants with respect to the ratio of consolidated adjusted EBITDA to consolidated interest expense (which may not be less than 4.00 to 1.00) and the ratio of consolidated funded debt to consolidated adjusted EBITDA (which may not be more than the lower of (a) 3.25 to 1.00 or (b) the greater of (i) 3.00 to 1.00 or (ii) the lowest ratio of consolidated funded debt to consolidated adjusted EBITDA then set forth in certain of Aon’s other credit facilities), as well as other customary covenants, undertakings and events of default. In conjunction with the Company entering into the Revolving Credit Agreement, the prior revolving credit agreement dated December 4, 2009 was terminated. There were no borrowings on the Revolving Credit Agreement at March 31, 2012. On April 2, 2012, in connection with the Redomestication, Aon plc became party to the Revolving Credit Agreement and guaranteed the obligations of Aon Corporation thereunder. The Company was in compliance with all debt covenants at March 31, 2012.

 

10.  Stockholders’ Equity

 

Common Stock

 

In January 2010, the Company’s Board of Directors authorized a share repurchase program under which up to $2 billion of common stock may be repurchased (“2010 Share Repurchase Program”). Shares may be repurchased through the open market or in privately negotiated transactions, including structured repurchase programs, 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.

 

During the first quarter of 2012, the Company repurchased 2.1 million shares at an average price per share of $48.32 for a total cost of $100 million. During the first quarter 2011, the Company repurchased 6.8 million shares at an average price per share of $51.29 for a total cost of $350 million under the 2010 Share Repurchase Program as well as a previous program that was completed in the first quarter 2011. Since the inception of the 2010 Share Repurchase Program, the Company has repurchased a total of 18.2 million shares

 

12



 

for an aggregate cost of $913 million. As of March 31, 2012, the Company was authorized to purchase up to $1.1 billion of additional shares under the 2010 Share Repurchase Program.

 

As a result of the Redomestication, the 2010 Share Repurchase Program, which related to common stock of Aon Corporation, was no longer of effect. In April 2012, the Company’s Board of Directors authorized a share repurchase program under which up to $5 billion of Class A ordinary shares may be repurchased (“2012 Share Repurchase Program”). Under this program, 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.

 

During the three months ended March 31, 2012 the Company reissued 3.7 million shares of treasury stock for employee benefit programs, including 1.0 million shares related to stock option exercises, and 0.3 million shares in connection with employee stock purchase plans. In the three months ended March 31, 2011, Aon reissued 4.5 million shares of treasury stock for employee benefit programs, including 2.0 million shares related to stock option exercises and 0.1 million shares in connection with employee stock purchase plans. In addition, in the three months ended March 31, 2011, the Company issued 0.4 million shares of common stock in relation to the exercise of options issued to former holders of Hewitt options as part of the Hewitt acquisition.

 

Participating Securities

 

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and are included in computing basic and diluted earnings per share using the two class method. Certain of Aon’s restricted stock units allow the holder to receive a non-forfeitable dividend equivalent.

 

Income from continuing operations, income from discontinued operations and net income, attributable to participating securities, were as follows (in millions):

 

 

 

Three months ended
March 31,

 

 

 

2012

 

2011

 

Income from continuing operations

 

$

3

 

$

4

 

Income from discontinued operations

 

 

 

Net income

 

$

3

 

$

4

 

 

Weighted average shares outstanding are as follows (in millions):

 

 

 

Three months ended
March 31,

 

 

 

2012

 

2011

 

Shares for basic earnings per share (1)

 

332.4

 

339.4

 

Common stock equivalents

 

4.2

 

6.0

 

Shares for diluted earnings per share

 

336.6

 

345.4

 

 


(1)  Includes 4.9 million and 5.7 million of participating securities for the three months ended March 31, 2012 and 2011, respectively.

 

Certain common stock equivalents, primarily related to stock 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 1 million and 1 million for the three months ended March 31, 2012 and 2011, respectively.

 

13



 

Accumulated Other Comprehensive Loss

 

The components of Accumulated other comprehensive loss, net of related tax, are as follows (in millions):

 

 

 

March 31,
2012

 

December 31,
2011

 

Net derivative losses

 

$

(30

)

$

(37

)

Net foreign exchange translation adjustments

 

227

 

124

 

Net postretirement benefit obligations

 

(2,436

)

(2,457

)

Accumulated other comprehensive loss, net of tax

 

$

(2,239

)

$

(2,370

)

 

11.   Employee Benefits

 

The following table provides the components of the net periodic benefit cost for Aon’s U.S. pension plans, along with the most significant international defined benefit pension plans, which are located in the U.K., the Netherlands, and Canada (in millions):

 

 

 

Three months ended March 31,

 

 

 

U.S.

 

International

 

 

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

 

$

 

$

4

 

$

5

 

Interest cost

 

30

 

30

 

66

 

66

 

Expected return on plan assets

 

(32

)

(30

)

(80

)

(71

)

Amortization of net actuarial loss

 

11

 

8

 

14

 

13

 

Net periodic benefit cost

 

$

9

 

$

8

 

$

4

 

$

13

 

 

Based on current assumptions, during 2012, the Company plans to contribute $237 million and $304 million to its U.S. and most significant international defined benefit pension plans, respectively. During the first quarter 2012, contributions of $18 million have been made to the Company’s U.S. defined benefit pension plans and $105 million have been made to its most significant international defined benefit pension plans.

 

12.  Stock Compensation Plans

 

The following table summarizes share-based compensation expense recognized in the Condensed Consolidated Statements of Income in Compensation and benefits (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Restricted stock units (“RSUs”)

 

$

49

 

$

45

 

Performance Share Awards (“PSAs”)

 

2

 

25

 

Stock options

 

2

 

3

 

Employee stock purchase plans

 

2

 

1

 

Total share-based compensation expense

 

$

55

 

$

74

 

 

14



 

Stock Awards

 

A summary of the status of the Company’s RSUs is as follows (shares in thousands):

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

 

 

Shares

 

Fair Value (1)

 

Shares

 

Fair Value (1)

 

Non-vested at beginning of period

 

9,916

 

$

42

 

10,674

 

$

38

 

Granted

 

2,278

 

47

 

2,384

 

52

 

Vested

 

(2,022

)

43

 

(2,071

)

39

 

Forfeited

 

(179

)

44

 

(94

)

39

 

Non-vested at end of period

 

9,993

 

43

 

10,893

 

41

 

 


(1) Represents per share weighted average fair value of award at date of grant

 

Information as of March 31, 2012 regarding the Company’s PSAs granted during the three months ended March 31, 2012 and the years ended December 31, 2011 and 2010, respectively (shares in thousands, dollars in millions):

 

 

 

2012

 

2011

 

2010

 

Target PSAs granted

 

1,353

 

1,715

 

1,390

 

Fair value (1)

 

$

47

 

$

50

 

$

39

 

Number of shares that would be issued based on current performance levels

 

1,353

 

1,158

 

1,299

 

Unamortized expense, based on current performance levels

 

$

63

 

$

36

 

$

12

 

 


(1) Represents per share weighted average fair value of award at date of grant.

 

Stock Options

 

In connection with its incentive compensation plans, the Company did not grant any options in the first quarter of 2012. During the first quarter of 2011, the Company granted 80,000 stock options at a weighted average exercise price $53 per share.

 

The weighted average assumptions, the weighted average expected life and estimated fair value of employee stock options are summarized as follows:

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Weighted average volatility

 

N/A

 

26.1

%

Expected dividend yield

 

N/A

 

1.3

%

Risk-free rate

 

N/A

 

2.2

%

 

 

 

 

 

 

Weighted average expected life, in years

 

N/A

 

5.5

 

Weighted average estimated fair value per share

 

N/A

 

$

10.92

 

 

A summary of the status of Aon’s stock options and related information is as follows (shares in thousands):

 

15



 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

 

 

Shares

 

Weighted- Average
Exercise Price

 

Shares

 

Weighted- Average
Exercise Price

 

Beginning outstanding

 

9,116

 

$

32

 

13,919

 

$

32

 

Granted

 

 

 

80

 

53

 

Exercised

 

(1,032

)

35

 

(2,344

)

33

 

Forfeited and expired

 

(12

)

40

 

(127

)

37

 

Outstanding at end of period

 

8,072

 

31

 

11,528

 

32

 

Exercisable at end of period

 

7,173

 

30

 

9,461

 

30

 

 

The weighted average remaining contractual life of outstanding options was 3.1 years and 3.8 years at March 31, 2012 and 2011, respectively.

 

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 $49.06 as of March 31, 2012, which would have been received by the option holders had those option holders exercised their options as of that date.  At March 31, 2012, the aggregate intrinsic value of options outstanding was $144 million, of which $137 million was exercisable.

 

Other information related to the Company’s stock options is as follows (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Aggregate intrinsic value of stock options exercised

 

$

13

 

$

41

 

Cash received from the exercise of stock options

 

37

 

82

 

Tax benefit realized from the exercise of stock options

 

1

 

7

 

 

Unamortized deferred compensation expense, which includes both options and awards, amounted to $297 million as of March 31, 2012, with a remaining weighted-average amortization period of approximately 1.9 years.

 

13.  Derivatives and Hedging

 

The Company is exposed to certain market risks, including changes in foreign currency exchange rates and interest rates. To manage the risk related to these exposures, the Company enters into various derivative instruments that reduce these market risks by creating offsetting exposures. The Company does not enter into derivative instruments for trading or speculative purposes.

 

Foreign Exchange Risk Management

 

The Company and its subsidiaries are exposed to foreign exchange risk when they receive revenues, pay expenses, or enter into intercompany loans denominated in a currency that differs from their functional currency. The Company uses foreign exchange derivatives, typically forward contracts, options and cross currency swaps, to reduce its overall exposure to the effects of currency fluctuations on cash flows. These exposures are hedged, on average, for less than two years; however, in limited instances, the Company has hedged certain exposures up to five years in the future.

 

The Company also uses foreign exchange derivatives, typically forward contracts and options, to hedge its net investments in foreign operations for up to two years in the future.

 

The Company also uses foreign exchange derivatives, typically forward contracts and options, to manage the currency exposure of the Company’s global liquidity profile for one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other general expenses in the Condensed Consolidated Statements of Income.

 

16



 

Interest Rate Risk Management

 

The Company holds variable-rate short-term brokerage and other operating deposits. The Company 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 two years in the future.

 

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 the Company. The Company 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. The Company monitors the credit-worthiness of, and exposure to, its counterparties. As of March 31, 2012, all net derivative positions were free of credit risk contingent features. In addition, the Company did not receive or pledge collateral for any derivatives as of March 31, 2012.

 

The notional and fair values of derivative instruments are as follows (in millions):

 

 

 

Notional Amount

 

Derivative Assets (1)

 

Derivative Liabilities (2)

 

 

 

March 31,
2012

 

December 31,
2011

 

March 31,
2012

 

December 31,
2011

 

March 31,
2012

 

December 31,
2011

 

Derivatives accounted for as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

552

 

$

702

 

$

18

 

$

16

 

$

 

$

 

Foreign exchange contracts

 

1,377

 

1,297

 

169

 

140

 

205

 

188

 

Total

 

1,929

 

1,999

 

187

 

156

 

205

 

188

 

Derivatives not accounted for as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

228

 

246

 

1

 

1

 

1

 

1

 

Total

 

$

2,157

 

$

2,245

 

$

188

 

$

157

 

$

206

 

$

189

 

 


(1) Included within Other assets

(2) Included within Other liabilities

 

The amounts of derivative gains (losses) recognized in the Condensed Consolidated Financial Statements for the three months ended March 31, 2012 and 2011 are as follows (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Gain (Loss) recognized in Accumulated Other Comprehensive Loss:

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

Interest rate contracts

 

$

 

$

(2

)

Foreign exchange contracts

 

2

 

 

Total

 

$

2

 

$

(2

)

Foreign net investment hedges:

 

 

 

 

 

Foreign exchange contracts

 

$

(10

)

$

(13

)

Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into income (effective portion):

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

Interest rate contracts (1)

 

$

 

$

 

Foreign exchange contracts (2)

 

(8

)

2

 

Total

 

$

(8

)

$

2

 

Foreign net investment hedges:

 

 

 

 

 

Foreign exchange contracts

 

$

 

$

 

 


(1) Included within Fiduciary investment income and Interest expense

(2) Included within Other general expenses and Interest expense

 

17



 

 

 

Three months ended March 31,

 

 

 

Amount of Gain (Loss)
Recognized in Income on
Derviative (1)

 

Amount of Gain (Loss)
Recognized in Income on Related
Hedged Item (2)

 

 

 

2012

 

2011

 

2012

 

2011

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

2

 

$

(7

)

$

(2

)

$

8

 

 


(1) Relates to fixed rate debt

(2) Included in Interest expense

 

It is estimated that approximately $20 million of pretax losses currently included within Accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.

 

The amount of gain (loss) recognized in income on the ineffective portion of derivatives for the three months ended March 31, 2012 and 2011 was not material.

 

The Company recognized a gain of $5 million and a loss of  $1 million during the three months ended March 31, 2012 and 2011, respectively, related to foreign exchange derivatives not designated or qualifying as hedges. These amounts were recorded in Other general expenses in the Condensed Consolidated Statements of Income.

 

14.  Fair Value and Financial Instruments

 

Accounting standards establish a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

·                  Level 1 — observable inputs such as quoted prices for identical assets in active markets;

·                  Level 2 — inputs other than quoted prices for identical assets in active markets, that are observable either directly or indirectly; and

·                  Level 3 — unobservable inputs in which there is little or no market data which requires the use of valuation techniques and the development of assumptions.

 

The following methods and assumptions are used to estimate the fair values of the Company’s financial instruments:

 

Money market funds and highly liquid debt securities are carried at cost and amortized cost, respectively, as an approximation of fair value. Based on market convention, the Company considers cost a practical and expedient measure of fair value.

 

Cash, cash equivalents, and highly liquid debt instruments consist of cash and institutional short-term investment funds. The Company independently reviews the short-term investment funds to obtain reasonable assurance the fund net asset value is $1 per share.

 

Equity investments consist of domestic and international equity securities and exchange traded equity derivatives valued using the closing stock price on a national securities exchange. Over the counter equity derivatives are valued using observable inputs such as underlying prices of the equity security and volatility. The Company independently reviews the listing of Level 1 equity securities in the portfolio and agrees the closing stock prices to a national securities exchange, and on a sample basis, independently verifies the observable inputs for Level 2 equity derivatives and securities.

 

Fixed income investments consist of certain categories of bonds and derivatives. Corporate, government, and agency bonds are valued by pricing vendors who estimate fair value using recently executed transactions and proprietary models based on observable inputs, such as interest rate spreads, yield curves and credit risk. Asset-backed securities are valued by pricing vendors who estimate fair value using discounted cash flow models utilizing observable inputs based on trade and quote activity of securities with similar features. Fixed income derivatives are valued by pricing vendors using observable inputs such as interest rates and yield curves. The Company obtains a detailed understanding of the models, inputs, and assumptions used in developing prices provided by its vendors. This understanding includes extensive discussions with valuation resources at the vendor. During these discussions, the Company uses a fair value measurement questionnaire, which is part of the Company’s internal controls over financial reporting, to obtain the information necessary to assert the model, inputs and assumptions used comply with U.S. GAAP, including disclosure requirements. The Company also obtains observable inputs from the pricing vendor and independently verifies the observable inputs, as well as assesses assumptions used for reasonableness based on relevant market conditions and internal Company guidelines. If an assumption is deemed unreasonable, based on the Company’s guidelines, it is then reviewed by a member of management and the fair value estimate provided by the vendor is adjusted, if deemed appropriate. These adjustments do not occur frequently and have not historically been material to the fair value estimates used in the Condensed Consolidated Financial Statements.

 

18



 

Pooled funds consist of various equity, fixed income, commodity, and real estate mutual fund type investment vehicles. Pooled investment funds fair value is estimated based on the proportionate share ownership in the underlying net assets of the investment, which is based on the fair value of the underlying securities that trade on a national securities exchange. Where possible, the Company independently reviews the listing 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 fund and holds extensive discussions regarding fund performance with pooled fund managers. The Company obtains audited fund manager financial statements, when available. If the pooled fund is designed to replicate a publicly traded index, the Company compares the performance of the fund to the index to assess the reasonableness of the fair value measurement.

 

Alternative investments consist of limited partnerships, private equity and hedge funds. Alternative investment fair value is generally estimated based on the proportionate share ownership in the underlying net assets of the investment as determined by the general partner or investment manager. The valuations are based on various factors depending on investment strategy, proprietary models, and specific financial data or projections. The Company obtains audited fund manager financial statements, when available. The Company obtains a detailed understanding of the models, inputs and assumptions used in developing prices provided by the investment managers (or appropriate party). During these discussions with the investment managers, the Company uses a fair value measurement questionnaire, which is part of the Company’s internal controls over financial reporting, to obtain the information necessary to assert the model, inputs and assumptions used comply with U.S. GAAP, including disclosure requirements. The Company also obtains observable inputs from the investment manager and independently verifies the observable inputs, as well as assesses assumptions used for reasonableness based on relevant market conditions and internal Company guidelines. If an assumption is deemed unreasonable, based on the Company’s guidelines, it is then reviewed by a member of management and the fair value estimate provided by the vendor is adjusted, if deemed appropriate. These adjustments do not occur frequently and have not historically been material to the fair value estimates in the Condensed Consolidated Financial Statements.

 

Derivatives are carried at fair value, based upon industry standard valuation techniques that use, where possible, current market-based or independently sourced pricing inputs, such as interest rates, currency exchange rates, or implied volatilities.

 

Annuity contracts consist of insurance group annuity contracts purchased to match the pension benefit payment stream owed to certain selected plan participant demographics within a few major United Kingdom defined benefit plans. Annuity contracts are valued using a discounted cash flow model utilizing assumptions such as discount rate, mortality, and inflation. The Company independently verifies the observable inputs.

 

Real estate and REITs consist of publicly traded REITs and direct real estate investments. Level 1 REITs are valued using the closing stock price on a national securities exchange. The Level 3 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 Level 3 real estate funds and discusses performance with the fund managers. The Company obtains audited fund manager financial statements, when available. See the description of “Alternative Investments” for further detail on valuation procedures surrounding Level 3 REITs.

 

Guarantees are carried at fair value, which is based on discounted estimated cash flows using published historical cumulative default rates and discount rates commensurate with the underlying exposure.

 

Debt is carried at outstanding principal balance, less any unamortized discount or premium. Fair value is based on quoted market prices or estimates using discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements.

 

The following tables present the categorization of the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011 (in millions):

 

19



 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets

 

Other

 

Unobservable

 

 

 

Balance at

 

for Identical

 

Observable

 

Inputs

 

 

 

March 31, 2012

 

Assets (Level 1)

 

Inputs (Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds and highly liquid debt securities (1)

 

$

2,563

 

$

2,538

 

$

25

 

$

 

Other investments

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

 

 

 

 

 

 

 

Corporate bonds

 

12

 

 

 

12

 

Government bonds

 

3

 

 

3

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

18

 

 

18

 

 

Foreign exchange contracts

 

170

 

 

170

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

206

 

 

206

 

 

 


(1)  Includes $2,538 million of money market funds and $25 million of highly liquid debt securities that are classified as fiduciary assets, short-term investments or cash equivalents in the Condensed Consolidated Statements of Financial Position, depending on their nature and initial maturity.  See Note 8 “Investments” for additional information regarding the Company’s investments.

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets

 

Other

 

Unobservable

 

 

 

Balance at

 

for Identical

 

Observable

 

Inputs

 

 

 

December 31, 2011

 

Assets (Level 1)

 

Inputs (Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds and highly liquid debt securities (1)

 

$

2,428

 

$

2,403

 

$

25

 

$

 

Other investments

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

 

 

 

 

 

 

 

Corporate bonds

 

12

 

 

 

12

 

Government Bonds

 

3

 

 

3

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

16

 

 

16

 

 

Foreign exchange contracts

 

141

 

 

141

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

189

 

 

189

 

 

 


(1)  Includes $2,403 million of money market funds and $25 million of highly liquid debt securities that are classified as fiduciary assets, short-term investments or cash equivalents in the Condensed Consolidated Statements of Financial Position, depending on their nature and initial maturity.  See Note 8 “Investments” for additional information regarding the Company’s investments.

 

There were no transfers of assets or liabilities between fair value hierarchy levels in the three months ended March 31, 2012 and 2011, respectively. There were no realized or unrealized gains or losses recognized in the Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011, respectively, related to assets and liabilities measured at fair value using unobservable inputs.

 

The fair value of all long-term debt instruments is classified as Level 2. The following table discloses the Company’s financial instruments where the carrying amounts and fair values differ (in millions):

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Value

 

Value

 

Value

 

Value

 

Long-term debt

 

$

4,168

 

$

4,511

 

$

4,155

 

$

4,494

 

 

20



 

15.  Commitments and Contingencies

 

Legal

 

Aon and its subsidiaries are subject to numerous claims, tax assessments, lawsuits and proceedings that arise in the ordinary course of business, which frequently include errors and omissions (“E&O”) claims. The damages claimed in these matters are or may be substantial, including, in many instances, claims for punitive, treble or extraordinary damages. Aon has historically purchased E&O insurance and other insurance to provide protection against certain losses that arise in such matters. Aon has exhausted or materially depleted its coverage under some of the policies that protect the Company and, consequently, is self-insured or materially self-insured for some historical claims. Accruals for these exposures, and related insurance receivables, when applicable, have been provided to the extent that losses are deemed probable and are reasonably estimable. These amounts are adjusted from time to time as developments warrant.  Amounts related to settlement provisions are recorded in Other general expenses in the Condensed Consolidated Statements of Income.

 

At the time of the 2004-05 investigation of the insurance industry by the Attorney General of New York and other regulators, purported classes of clients filed civil litigation against Aon and other companies under a variety of legal theories, including state tort, contract, fiduciary duty, antitrust and statutory theories and federal antitrust and Racketeer Influenced and Corrupt Organizations Act (“RICO”) theories. The federal actions were consolidated in the U.S. District Court for the District of New Jersey, and a state court collective action was filed in California. In the New Jersey actions, the Court dismissed plaintiffs’ federal antitrust and RICO claims in separate orders in August and October 2007, respectively.  In August 2010, the U.S. Court of Appeals for the Third Circuit affirmed the dismissals of most, but not all, of the claims. In March 2011, Aon entered into a Memorandum of Understanding documenting a settlement of the civil cases consolidated in the U.S. District Court for the District of New Jersey. Under that agreement, Aon will pay $550,000 in exchange for dismissal of the class claims. This agreement received final approval in the trial court in March 2012. In April 2012, certain entities that had objected to the settlement filed notices of appeal from the trial court judgment. Several non-class claims brought by individual plaintiffs who opted out of the class action proceeding will remain pending, but the Company does not believe these present material exposure to the Company individually or in the aggregate. The outcome of these lawsuits, and the amount of any losses or other payments that may result, cannot be estimated at this time.

 

A retail insurance brokerage subsidiary of Aon provides insurance brokerage services to Northrop Grumman Corporation (“Northrop”). This Aon subsidiary placed Northrop’s excess property insurance program for the period covering 2005. Northrop suffered a substantial loss in August 2005 when Hurricane Katrina damaged Northrop’s facilities in the Gulf states. Northrop’s excess insurance carrier, Factory Mutual Insurance Company (“Factory Mutual”), denied coverage for the claim pursuant to a flood exclusion. Northrop sued Factory Mutual in the United States District Court for the Central District of California and later sought to add this Aon subsidiary as a defendant, asserting that if Northrop’s policy with Factory Mutual does not cover the losses suffered by Northrop stemming from Hurricane Katrina, then this Aon subsidiary will be responsible for Northrop’s losses.  On August 26, 2010, the court granted in large part Factory Mutual’s motion for partial summary judgment regarding the applicability of the flood exclusion and denied Northrop’s motion to add this Aon subsidiary as a defendant in the federal lawsuit.  On January 27, 2011, Northrop filed suit against this Aon subsidiary in state court in Los Angeles, California, pleading claims for negligence, breach of contract and negligent misrepresentation. Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims. The outcome of this lawsuit, and the amount of any losses or other payments that may result, cannot be estimated at this time.

 

Another retail insurance brokerage subsidiary of Aon has been sued in Tennessee state court by a client, Opry Mills Mall Limited Partnership (“Opry Mills”), that sustained flood damage to its property in May 2010. The lawsuit seeks $200 million from numerous insurers with whom this Aon subsidiary placed the client’s property insurance coverage. The insurers contend that only $50 million in coverage is available for the loss because the flood event occurred on property in a high hazard flood zone. Opry Mills is seeking full coverage from the insurers for the loss and has sued this Aon subsidiary in the alternative for the same $150 million difference on various theories of professional liability if the court determines there is not full coverage. Aon believes it has meritorious defenses and intends to vigorously defend itself against these claims. The outcome of this lawsuit, and the amount of any losses or other payments that may result, cannot be estimated at this time.

 

A pensions consulting and administration subsidiary of Hewitt prior to its acquisition by Aon provided advisory services to the Trustees of the Philips UK pension fund and the relevant employer of fund beneficiaries (together, “Philips”). In December 2011, the Aon subsidiary received notice of a potential claim alleging negligence and breach of duty. The notice asserts Philips’ right to claim damages related to Philips’ use of a credit default swap hedging strategy pursuant to the supply of the advisory services, which is said to have resulted in substantial damages to Philips. No lawsuit has yet been filed. Aon believes that it has meritorious defenses and intends to vigorously defend itself against these allegations. The outcome of this circumstance, and the amount of any losses or other payments that may result, cannot be estimated at this time.

 

21



 

From time to time, Aon’s clients may bring claims and take legal action pertaining to the performance of fiduciary responsibilities. Whether client claims and legal action related to the Company’s performance of fiduciary responsibilities are founded or unfounded, if such claims and legal actions are resolved in a manner unfavorable to the Company, they may adversely affect Aon’s financial results and materially impair the market perception of the Company and that of its products and services.

 

Although the ultimate outcome of all matters referred to above cannot be ascertained, and liabilities in indeterminate amounts may be imposed on Aon or its subsidiaries, on the basis of present information, amounts already provided, availability of insurance coverages and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the consolidated financial position of Aon. However, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by an unfavorable resolution of these matters.

 

Guarantees and Indemnifications

 

In connection with the Redomestication, the Company on April 2, 2012 entered various agreements pursuant to which it agreed to guarantee the obligations of its subsidiaries arising under issued and outstanding debt securities.  Those agreements included the (1) Amended and Restated Indenture, dated as of April 2, 2012, among Aon Corporation, Aon plc, and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) (amending and restating the Indenture, dated as of September 10, 2010, between Aon Corporation and the Trustee), (2) Amended and Restated Indenture, dated as of April 2, 2012, among Aon Corporation, Aon plc and the Trustee (amending and restating the Indenture, dated as of December 16, 2002, between Aon Corporation and the Trustee), (3) Amended and Restated Indenture, dated as of April 2, 2012, among Aon Corporation, Aon plc and the Trustee (amending and restating the Indenture, dated as of January 13, 1997, as supplemented by the First Supplemental Indenture, dated as of January 13, 1997) (4) First Supplemental Indenture, dated as of April 2, 2012, among Aon Finance, as issuer, Aon Corporation, as guarantor, Aon plc, as guarantor, and Computershare Trust Company of Canada, as trustee, and (5) Amended and Restated Trust Deed, among Aon Delaware, Aon UK, Aon Services Luxembourg & Co S.C.A. (formerly known as Aon Financial Services Luxembourg S.A.) (“Aon Luxembourg”) and BNY Mellon Corporate Trustee Services Limited, as trustee (the “Luxembourg Trustee”) (amending and restating the Trust Deed, dated as of July 1, 2009, as amended and restated on January 12, 2011, among Aon Delaware, Aon Luxembourg and the Luxembourg Trustee).

 

Effective as of the same date, the Company also entered into agreements pursuant to which it agreed to guarantee the obligations of its subsidiaries arising under the (1) $450,000,000 Term Credit Agreement dated June 15, 2011, among Aon Corporation, as borrower, Bank of America, N.A., as administrative agent and the other agents and lenders party thereto, (2) $400,000,000 Five-Year Agreement dated March 20, 2012, among Aon Corporation, as borrower, Citibank, N.A., as administrative agent and the other agents and lenders party thereto and (3) €650,000,000 Facility Agreement ($868 million at March 31, 2012 exchange rates), dated October 15, 2010, among Aon Corporation, the subsidiaries of Aon Corporation party thereto as borrowers, Citibank International plc, as agent, and the other agents and lenders party thereto, as amended on July 18, 2011.

 

Aon provides a variety of guarantees and indemnifications to its customers and others. The maximum potential amount of future payments represents the notional amounts that could become payable under the guarantees and indemnifications if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or other methods. These amounts may bear no relationship to the expected future payments, if any, for these guarantees and indemnifications. Any anticipated amounts payable that are deemed to be probable and reasonably estimable are included in the Company’s Condensed Consolidated Financial Statements.

 

Aon had total letters of credit (“LOCs”) outstanding for approximately $68 million at March 31, 2012, as compared to $75 million at December 31, 2011. These letters of credit cover the beneficiaries related to Aon’s Canadian pension plan scheme, secure deductible retentions on Aon’s own workers compensation program and one of the U.S. pension plans. Aon also has issued letters of credit to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at its international subsidiaries. Amounts are accrued in the Condensed Consolidated Financial Statements to the extent the guarantees are probable and estimable.

 

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 $23 million at March 31, 2012.

 

Aon has provided commitments to fund certain limited partnerships in which it has an interest in the event that the general partners request funding.  Some of these commitments have specific expiration dates and the maximum potential funding under these commitments was $60 million at March 31, 2012. During the three months ended March 31, 2012, the Company funded $3 million of these commitments.

 

Aon expects that, as prudent business interests dictate, additional guarantees and indemnifications may be issued from time to time.

 

16.  Related Party Transactions

 

During the first quarter 2012, the Company, in the ordinary course of business, provided retail brokerage, consulting and financial advisory services to, and received wholesale brokerage services from, an entity that is controlled by one of the Company’s stockholders. These transactions were negotiated on an arms-length basis and contain customary terms and conditions. Commissions and fee revenue from these transactions was $3 million and $1 million for the three months ended March 31, 2012 and 2011, respectively.

 

17.  Segment Information

 

The Company has two reportable segments:  Risk Solutions and HR Solutions. Unallocated income and expenses, when combined with the reportable segments and after the elimination of intersegment revenues and expenses, total to the amounts in the Condensed Consolidated Financial Statements.

 

Reportable 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 (“CODM”) uses financial information for the purposes of allocating resources and assessing performance. The CODM assesses performance based on operating income and generally accounts for inter-segment revenue as if the revenue were from third parties and at what management believes are current market prices. The Company does not present net assets by segment as this information is not reviewed by the CODM.

 

22



 

Risk Solutions acts as an advisor and insurance and reinsurance broker, helping clients manage their risks, via consultation, as well as negotiation and placement of insurance risk with insurance carriers through Aon’s global distribution network.

 

HR Solutions partners with organizations to solve their most complex benefits, talent and related financial challenges, and improve business performance by designing, implementing, communicating and administering a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies.

 

Effective January 1, 2012, the Health and Benefits Consulting business was transferred from the HR Solutions segment to the Risk Solutions segment. All prior year amounts have been adjusted to reflect that transfer.

 

Aon’s total revenue is as follows (in millions):

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Risk Solutions

 

$

1,905

 

$

1,851

 

HR Solutions

 

945

 

915

 

Intersegment elimination

 

(9

)

(7

)

Total operating segments

 

2,841

 

2,759

 

Unallocated

 

 

 

Total revenue

 

$

2,841

 

$

2,759

 

 

Commissions, fees and other revenues by product are as follows (in millions):

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Retail brokerage

 

$

1,494

 

$

1,453

 

Reinsurance brokerage

 

399

 

387

 

Total Risk Solutions Segment

 

1,893

 

1,840

 

Consulting services

 

380

 

371

 

Outsourcing

 

568

 

552

 

Intrasegment

 

(3

)

(8

)

Total HR Solutions Segment

 

945

 

915

 

Intersegment

 

(9

)

(7

)

Unallocated