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1. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The consolidated financial statements include the accounts of Aon Corporation and its majority-owned subsidiaries and variable interest entities ("VIEs") for which Aon is considered to be the primary beneficiary ("Aon" or the "Company"). The consolidated financial statements exclude special-purpose entities ("SPEs") considered VIEs for which Aon is not the primary beneficiary. All material intercompany accounts and transactions have been eliminated. Management has reviewed all material subsequent events through February 26, 2010, the date the financial statements were issued, to determine whether any event required either recognition or disclosure in the financial statements. Reclassifications 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. Use of Estimates 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. |
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2. Summary of Significant Accounting Principles and Practices Revenue Recognition 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. Investment income is recognized as it is earned. Stock Compensation Costs The Company recognizes compensation expense for all share-based payments to employees, including grants of employee stock options and restricted stock and restricted stock units ("RSUs"), as well as employee stock purchases related to the Employee Stock Purchase Plan, based on estimated fair value. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Because stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Retirement Benefits The Company records annual expenses relating to its pension benefits and other post-employment plans based on calculations that include various actuarial assumptions, including discount rates, assumed asset rates of return, inflation rates, mortality rates, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to these assumptions based on current rates and trends. The effects of the gains, losses, and prior service costs and credits are amortized over future service periods or future estimated lives if the plans are frozen. The funded status of each plan, calculated as the fair value of plan assets less the accumulated projected benefit obligation, is reflected in the Company's Consolidated Statement of Financial Position using a December 31 measurement date. Income per Share Basic net income per share is computed by dividing net income available for common stockholders by the weighted-average number of common shares outstanding, including participating securities, which consist of unvested stock awards with non-forfeitable rights to dividends. Diluted net income per share is computed by dividing net income by the weighted-average number of common shares outstanding, plus the dilutive effect of stock options and awards. The diluted earnings per share calculation reflects the more dilutive effect of either (1) the two-class method that assumes that the participating securities have not been exercised, or (2) the treasury stock method. Certain common stock equivalents related primarily to options were not included in the computation of diluted income per share because their inclusion would have been antidilutive. Aon has included in its diluted net income per share computation the impact of any contingently convertible instruments regardless of whether the market price trigger has been met. Prior to their redemption in November 2007, Aon's 3.5% convertible debt securities, which were issued in November 2002, were able to be converted into a maximum of 14 million shares of Aon common stock, and these shares, and the associated interest, were included in the computation of diluted net income per share for 2007. Since redemption of these securities, Aon has had no convertible debt securities outstanding. Cash and Cash Equivalents Cash and cash equivalents include cash balances and all highly liquid investments with initial maturities of three months or less. Cash and cash equivalents included restricted balances of $85 million and $254 million at December 31, 2009 and 2008, respectively. Short-term Investments 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. Fiduciary Assets and Liabilities 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. Allowance for Doubtful Accounts Aon's policy for estimating allowances for doubtful accounts with respect to receivables is to record an allowance based on a historical evaluation of write-offs, aging of balances and other qualitative and quantitative analyses. Receivables included an allowance for doubtful accounts of $92 million and $101 million at December 31, 2009 and 2008, respectively. Fixed Assets 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. Investments The Company accounts for investments as follows:
The Company assesses any declines in the fair value of investments to determine whether such declines are other-than-temporary. This assessment is made considering all available evidence, including changes in general market conditions, specific industry and individual company data, the length of time and the extent to which the fair value has been less than cost, the financial condition and the near-term prospects of the entity issuing the security, and the Company's ability and intent to hold the investment until recovery of its cost basis. Other-than-temporary impairments of investments are recorded as part of Other income (expense) in the Company's Consolidated Statement of Income in the period in which the determination is made. Goodwill and Intangible Assets Goodwill represents the excess of cost over the fair market value of the net assets acquired. Goodwill is allocated to various reporting units, which are one reporting level below the operating segment. Upon disposition of a business entity, goodwill is allocated to the disposed entity based on the fair value of that entity compared to the fair value of the reporting unit in which it is included. Goodwill is not amortized, but instead is tested for impairment at least annually. The goodwill impairment test is performed at the reporting unit level and is a two-step analysis. First, the fair value of each reporting unit is compared to its book value. If the fair value of the reporting unit is less than its book value, the Company performs a hypothetical purchase price allocation based on the reporting unit's fair value to determine the fair value of the reporting unit's goodwill. Fair value is determined using a combination of present value techniques and market prices of comparable businesses. Intangible assets include trademarks, customer related and contract based assets representing primarily client lists and non-compete covenants, and marketing and technology related assets. These intangible assets, with the exception of trademarks, are amortized over periods ranging from 1 to 12 years, with a weighted average original life of 10 years. Trademarks are not amortized as such assets have been determined to have indefinite useful lives. Similar to goodwill, trademarks are tested at least annually for impairments using an analysis of expected future cash flows. Interim impairment testing may be performed when events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. Derivatives All derivative instruments are recognized in the Consolidated Statements of Financial Position at fair value. Where the Company has entered into master netting agreements with counterparties, the derivative positions are netted by counterparty and are reported accordingly in Other assets or Other liabilities. Changes in the fair value of derivative instruments are recognized immediately in earnings, unless the derivative is designated as a hedge and qualifies for hedge accounting. The Company has historically acquired the following derivative instruments: (i) a hedge of the change in fair value of a recognized asset or liability or firm commitment ("fair value hedge"), (ii) a hedge of the variability in cash flows from a recognized variable-rate asset or liability or forecasted transaction ("cash flow hedge"), and (iii) a hedge of the net investment in a foreign subsidiary ("net investment hedge"). Under hedge accounting, recognition of derivative gains and losses can be matched in the same period with that of the hedged exposure and thereby minimize earnings volatility. 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. Fair value hedges are marked-to-market and the resulting gain or loss is recognized currently in earnings. For a cash flow hedge that qualifies for hedge accounting, the effective portion of the change in fair value of a hedging instrument is recognized in Other Comprehensive Income ("OCI") and subsequently recognized in income when the hedged item affects earnings. The ineffective portion of the change in fair value of a cash flow hedge is recognized immediately in earnings. For a net investment hedge, the effective portion of the change in fair value of the hedging instrument is recognized in OCI as part of the cumulative translation adjustment, while the ineffective portion is recognized immediately in earnings. 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. The Company discontinues hedge accounting prospectively when (1) the derivative expires or is sold, terminated, or exercised, (2) it determines that the derivative is no longer effective in offsetting changes in the hedged item's fair value or cash flows, (3) a hedged forecasted transaction is no longer probable of occurring in the time period described in the hedge documentation, (4) the hedged item matures or is sold, or (5) management elects to discontinue hedge accounting voluntarily. When hedge accounting is discontinued because the derivative no longer qualifies as a fair value hedge, the Company continues to carry the derivative in the Consolidated Statements of Financial Position at its fair value, recognizes subsequent changes in the fair value of the derivative in the Consolidated Statements of Income, ceases to adjust the hedged asset or liability for changes in its fair value, and amortizes the hedged item's cumulative basis adjustment into earnings over the remaining life of the hedged item using a method that approximates the level-yield method. 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. Foreign Currency 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. Income Taxes Deferred income taxes are recognized for the effect of temporary differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted marginal tax rates and laws that are currently in effect. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the period when the rate change is enacted. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified. Deferred tax assets are realized by having sufficient future taxable income to allow the related tax benefits to reduce taxes otherwise payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carry-forwards, taxable income in carry-back years and tax planning strategies that are both prudent and feasible. The Company recognizes the effect of income tax positions only if sustaining those positions is more likely than not. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs. The Company records penalties and interest related to unrecognized tax benefits in Income taxes in the Company's Consolidated Statements of Income. Changes in Accounting Principles Business Combinations and Noncontrolling Interests On January 1, 2009, the Company adopted revised principles related to business combinations and noncontrolling interests. The revised principle on business combinations applies to all transactions or other events in which an entity obtains control over one or more businesses. It requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Business combinations achieved in stages require recognition of the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values when control is obtained. This revision also changes the requirements for recognizing assets acquired and liabilities assumed arising from contingencies, and requires direct acquisition costs to be expensed. In addition, it provides certain changes to income tax accounting for business combinations which apply to both new and previously existing business combinations. In April 2009, additional guidance was issued which revised certain business combination guidance related to accounting for contingent liabilities assumed in a business combination. The Company has adopted this guidance in conjunction with the adoption of the revised principles related to business combinations. The adoption of the revised principles related to business combinations has not had a material impact on the consolidated financial statements. The revised principle related to noncontrolling interests establishes accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. The revised principle clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a separate component of equity in the Consolidated Statements of Financial Position. The revised principle requires retrospective adjustments, for all periods presented, of stockholders' equity and net income for noncontrolling interests. In addition to these financial reporting changes, the revised principle provides for significant changes in accounting related to changes in ownership of noncontrolling interests. Changes in Aon's controlling financial interests in consolidated subsidiaries that do not result in a loss of control are accounted for as equity transactions similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in a loss of control and deconsolidation, any retained ownership interests are remeasured at fair value with the gain or loss reported in net income. In previous periods, noncontrolling interests for operating subsidiaries were reported in Other general expenses in the Consolidated Statements of Income. Prior period amounts have been restated to conform to the current year's presentation. The 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):
The revised principle also requires that net income be adjusted to include the net income attributable to the noncontrolling interests and a new separate caption for net income attributable to Aon stockholders be presented in the Consolidated Statements of Income. The adoption of this new guidance increased net income by $16 million and $13 million for 2008 and 2007, respectively. Net income attributable to Aon stockholders equals net income as previously reported prior to the adoption of the new guidance. Participating Securities Effective January 1, 2009, the Company adopted new guidance which states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities, as defined, and therefore should be included in computing basic and diluted earnings per share using the two class method. Certain of Aon's restricted stock awards allow the holder to receive a non-forfeitable dividend equivalent. The impact of the basic and diluted net income per share was as follows:
Income from continuing operations, income from discontinued operations and net income, attributable to participating securities, were as follows (in millions):
Weighted average shares outstanding (in millions):
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. Fair Value The Company adopted the following guidance effective April 1, 2009:
The adoption of the preceding guidance did not have a material impact on the Company's consolidated financial statements. Pensions and Other Postretirement Benefits In December 2008, the FASB issued an amendment to current principles regarding employers' disclosures about pensions and other postretirement benefits. These changes provide guidance as to an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. This amendment requires pension and other postretirement plan disclosures be expanded to include investment allocation decisions, the fair value of each major category of plan assets based on the nature and risks of assets in the plans, and inputs and valuation techniques used to develop fair value measurements of plan assets. See Note 13 for these disclosures. Recent Accounting Pronouncements 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. In September 2009, the FASB issued guidance updating current principles related to revenue recognition when there are multiple-element arrangements. This revised guidance relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting and modifies the manner in which the transaction consideration is allocated across the separately identifiable deliverables. The guidance also expands the disclosures required for multiple-element revenue arrangements. These changes will be effective for Aon beginning in the first quarter of 2011, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or modified after the adoption date. Early adoption is 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. |
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3. Discontinued Operations Property and Casualty Operations 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. AIS Management Corporation In 2008, Aon reached a definitive agreement to sell AIS Management Corporation ("AIS"), which was previously included in the Risk and Insurance Brokerage Services segment, to Mercury General Corporation, for $120 million in cash at closing, plus a potential earn-out of up to $35 million payable over the two years following the completion of the agreement. The disposition was completed in January 2009 and resulted in a pretax gain of $86 million. As of February 26, 2010, Aon had not received any of this potential earn-out. Accident, Life & Health Operations In April 2008, the Company sold its Combined Insurance Company of America ("CICA") subsidiary to ACE Limited and its Sterling Life Insurance Company ("Sterling") subsidiary to Munich Re Group. These two subsidiaries were previously included in the Company's former Insurance Underwriting segment. After final adjustments, Aon received $2.525 billion in cash for CICA and $341 million in cash for Sterling. Additionally, CICA paid a $325 million dividend to Aon before the sale transaction was completed. A pretax gain of $1.4 billion was recognized on the sale of these businesses, which included the reversal of the cumulative translation adjustment account (related to selling CICA's foreign entities) of $134 million. In 2009, the Company recognized a $55 million foreign tax credit carryback related to the sale of CICA. 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):
Aon reclassified the assets and liabilities of AIS and the P&C Operations to assets held-for-sale and liabilities held-for-sale, respectively, in the December 31, 2008 Consolidated Statements of Financial Position, as follows (in millions):
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4. Other Financial Data Statement of Income Information Other Income (Expense) Other income (expense) consists of the following (in millions):
Statement of Financial Position Information Fixed Assets, net The components of fixed assets, net are as follows (in millions):
Depreciation expense, which includes software amortization, was $149 million, $157 million and $154 million for the years ended December 31, 2009, 2008, and 2007, respectively. |
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5. Acquisitions and Dispositions In 2009, the Company completed the acquisitions of Allied North America, FCC Global Insurance Services and Carpenter Moore Insurance Services which are included in the Risk and Insurance Brokerage Services segment. The following table includes the aggregate amount paid and the preliminary allocation value of intangible assets recorded as a result of these and the other acquisitions made during 2009, 2008 and 2007. Due to the timing of these acquisitions, the Company is in the process of obtaining third-party valuations for the intangible assets other than goodwill that were acquired in 2009, and therefore the allocation of the purchase prices is still subject to refinement.
Internal funds and short-term borrowings financed these acquisitions. 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. Benfield In November 2008, Aon completed the acquisition of the shares of Benfield, a leading independent reinsurance intermediary, with more than 50 locations worldwide. The Company purchased all of the outstanding shares of common and preferred stock of Benfield for $1,281 million in cash. The total cost of the acquisition also included direct costs of the transaction totaling $32 million. Benfield is known for its client service, analytic capability and innovation. The results of Benfield's operations were included in the Company's consolidated financial statements from the date of closing. In connection with the acquisition, the Company recorded net tangible assets, goodwill and other intangibles which are reported within the Risk and Insurance Brokerage Services segment. None of the goodwill is deductible for tax purposes. Of the acquired intangible assets, $128 million was assigned to registered trademarks, which were determined to have indefinite useful lives. Of the remaining balance of intangible assets acquired, $449 million was assigned to customer relationships, and $2 million was assigned to non-competition agreements, which are being amortized over weighted average useful lives of 12 and 1 years, respectively. The following unaudited pro forma consolidated results of operations assume that the merger of Benfield was completed as of January 1 for each of the fiscal years shown below (in millions, except per share amounts):
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. Dispositions 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):
Cananwill Some of Aon's U.S. ("Cananwill"), U.K., Canadian, and Australian subsidiaries (together "Cananwill International") originated short-term loans (generally with terms of 12 months or less) to businesses to finance their insurance premium obligations, and then sold these premium finance agreements to unaffiliated companies, typically bank special purpose entities ("SPE's") in whole loan securitization transactions that met the criteria for sales accounting. 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 the unearned premium from the insurance carrier. The Company does not expect to incur any significant losses related to this guarantee. In June and July of 2009, the Company entered into agreements with third parties with respect to Aon's Cananwill International operations. As a result of these agreements, these third parties began originating, financing and servicing premium finance loans generated by referrals from Aon's brokerage operations. The third parties did not acquire the existing portfolio of Aon's premium finance loans, and as such, the Company did not extend any guarantees under these agreements. 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. Aon also records receivables in respect of its retained interest in the premium finance agreements sold to the SPE's. These retained interests are recorded at fair value which is determined by discounting estimated future cash flows using discount rates that are commensurate with the underlying risk, expected future prepayment rates, and credit loss estimates. At December 31, 2009 and 2008 the balance of retained interests was zero and $99 million, respectively. Aon retained servicing rights for sold agreements, and earned servicing fee income over the servicing period. Because the servicing fees represent adequate compensation for the servicing of the receivables, the Company has not recorded any servicing assets or liabilities. Other Dispositions 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. In 2008, Aon sold four small operations. Total pretax gains of $13 million were recognized on these sales, which are included in Other income (expense) in the Consolidated Statements of Income. In 2007, Aon sold three small operations and a 25% share of another small operation, which were all included in the Risk and Insurance Brokerage Services segment. Total pretax gains of $40 million were recognized on these sales, which are included in Other income (expense) in the Consolidated Statements of Income. |
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6. Goodwill and Other Intangible Assets The changes in the net carrying amount of goodwill by operating segment for the years ended December 31, 2009 and 2008, respectively, are as follows (in millions):
In 2009, the Company finalized the Benfield purchase price allocation, adjusting goodwill principally for the completion of third party valuation reports, the impact of changes in actual employee severance costs compared to original estimates and the resolution of certain tax matters. Other intangible assets by asset class are as follows (in millions):
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):
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7. Restructuring Aon Benfield Restructuring Plan The Company announced a global restructuring plan ("Aon Benfield Plan") in conjunction with its acquisition of Benfield in 2008. The restructuring plan is intended to integrate and streamline operations across the combined Aon Benfield organization. The Aon Benfield Plan includes an estimated 700 job eliminations. Additionally, duplicate space and assets will be abandoned. The Company originally estimated that this plan would result in cumulative costs totaling approximately $185 million over a three-year period, of which $104 million was recorded as part of the Benfield purchase price allocation and $81 million of which was expected to result in future charges to earnings. During 2009, the Company reduced the Benfield purchase price allocation by $49 million to reflect actual severance costs being lower than originally estimated. The Company currently estimates the Plan will result in cumulative costs totaling approximately $155 million, of which $55 million was recorded as part of the purchase price allocation, $55 million has been recorded in earnings during 2009, and an estimated additional $45 million will be recorded in future earnings. As of December 31, 2009, approximately 530 jobs have been eliminated under this Plan. Total payments of $67 million have been made under this Plan to date. All costs associated with the Aon Benfield Plan are included in the Risk and Insurance Brokerage Services segment. Charges related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Consolidated Statements of Income. The Company expects these restructuring activities and related expenses to affect continuing operations into 2011. The following summarizes the 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 Benfield Plan (in millions):
2007 Restructuring Plan In 2007, the Company announced a global restructuring plan intended to create a more streamlined organization and reduce future expense growth to better serve clients ("2007 Plan"). The 2007 Plan includes an estimated 4,600 job eliminations. As of December 31, 2009, approximately 3,100 positions have been eliminated. The Company has closed or consolidated several offices resulting in sublease losses or lease buy-outs. The Company currently estimates 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 accompanying Consolidated Statements of Income. The Company expects the restructuring and related expenses to affect continuing operations through the first half of 2010. 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):
The following summarizes the restructuring and related expenses by segment that have been incurred and are estimated to be incurred through the end of the restructuring initiative, related to the 2007 Plan (in millions):
2005 Restructuring Plan In 2005, the Company commenced a restructuring that resulted in cumulative pretax charges totaling $369 million, including workforce reductions, lease consolidation costs, asset impairments and other expenses necessary to implement the restructuring initiative. Costs related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Consolidated Statements of Income. The following is a summary of the restructuring and related expenses incurred by type that have been incurred (in millions):
The following is a summary of the restructuring and related expenses by segment that have been incurred (in millions):
As of December 31, 2009, the Company's liabilities for its restructuring plans are as follows (in millions):
Aon's unpaid restructuring liabilities are included in both Accounts payable and accrued liabilities and Other non-current liabilities in the Consolidated Statements of Financial Position. |
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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. Premium trust balances and a corresponding liability are included in fiduciary assets and fiduciary liabilities in the accompanying Consolidated Statements of Financial Position. The Company's interest-bearing assets are included in the following categories in the Consolidated Statements of Financial Position (in millions):
The Company's investments are as follows (in millions):
PEPS I Preferred Stock In 2001, Aon sold the vast majority of its limited partnership (LP) portfolio, valued at $450 million, to PEPS I, a QSPE. The common stock interest in PEPS I is held by a limited liability company which is owned by Aon (49%) and by a charitable trust, which is not controlled by Aon (51%). Aon does not include the assets and liabilities or operations of PEPS I in its consolidated financial statements. Approximately $171 million of investment grade fixed-maturity securities were sold by PEPS I to unaffiliated third parties. PEPS I then paid Aon $171 million in cash and issued to Aon an additional $279 million in fixed-maturity and preferred stock securities. 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. Prior to 2007, income distributions received from PEPS I were limited to interest payments on PEPS I debt instruments. Beginning in 2007, PEPS I had redeemed or collateralized all of its debt, and began to pay preferred income distributions to Aon. Whether Aon receives additional preferred returns will depend on the performance of the underlying limited partnership interests, which is expected to vary from period to period. Aon does not control the timing of the distribution. In 2009, 2008, and 2007, Aon received $6 million, $32 million and $61 million, respectively, of income distributions from PEPS I, which are included in Interest income. 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. |
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9. Debt The following is a summary of outstanding debt (in millions):
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. Certain of Aon's European subsidiaries have a 650 million ($937 million at December 31, 2009 exchange rates) multi-currency revolving loan credit facility. This facility will mature in October 2010. Commitment fees of 8.75 basis points are payable on the unused portion of the facility. At December 31, 2009, Aon had no borrowings under this facility. At December 31, 2008, 431 million ($605 million at December 31, 2008 exchange rates) was borrowed. Aon has guaranteed the obligations of its subsidiaries with respect to this facility. 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. Outstanding debt securities are not redeemable by Aon prior to maturity. There are no sinking fund provisions. Interest is payable semi-annually on most debt securities. Repayments of long-term debt are as follows (in millions):
The weighted-average interest rates on Aon's short-term borrowings were 1.5%, 4.5%, and 5.1% for the years ended December 31, 2009, 2008 and 2007, respectively. |
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10. Lease Commitments Aon leases office facilities, equipment and automobiles under noncancelable operating leases. These leases expire at various dates and may contain renewal and expansion options. In addition to base rental costs, occupancy lease agreements generally provide for rent escalations resulting from increased assessments for real estate taxes and other charges. Approximately 88% of Aon's lease obligations are for the use of office space. Rental expenses for operating leases are as follows (in millions):
At December 31, 2009, future minimum rental payments required under operating leases for continuing operations that have initial or remaining noncancelable lease terms in excess of one year, net of sublease rental income, most of which pertain to real estate leases, are as follows (in millions):
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11. Income Taxes Aon and its principal domestic subsidiaries are included in a consolidated federal income tax return. Aon's international subsidiaries file various income tax returns in their jurisdictions. Income from continuing operations before income taxes and the provision for income tax consist of the following (in millions):
Income from continuing operations before income taxes shown above is based on the location of the business unit to which such earnings are attributable. However, because such earnings in some cases may be subject to taxation in more than one country, the income tax provision shown above as U.S. or International may not correspond to the geographic attribution of the earnings. A reconciliation of the income tax provisions based on the U.S. statutory corporate tax rate to the provisions reflected in the Consolidated Financial Statements is as follows:
The components of Aon's deferred tax assets and liabilities are as follows (in millions):
Deferred income taxes (assets and liabilities have been netted by jurisdiction) have been classified in the Consolidated Statements of Financial Position as follows (in millions):
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. At December 31, 2009, Aon had domestic federal operating loss carryforwards of $7 million that will expire at various dates from 2010 to 2024, state operating loss carryforwards of $513 million that will expire at various dates from 2010 to 2028, and foreign operating and capital loss carryforwards of $453 million and $252 million, respectively, nearly all of which are subject to indefinite carryforward. Unrecognized Tax Benefits The following is a reconciliation of the Company's beginning and ending amount of unrecognized tax benefits (in millions):
As of December 31, 2009, $61 million of unrecognized tax benefits would impact the effective tax rate if recognized. Aon does not expect the unrecognized tax positions to change significantly over the next twelve months. The Company recognizes penalties and interest related to unrecognized income tax benefits in its provision for income taxes. Aon accrued potential penalties of less than $1 million during each of 2009, 2008 and 2007. Aon accrued interest of $2 million during 2009 and less than $1 million during both 2008 and 2007. As of December 31, 2009 and 2008, Aon has recorded a liability for penalties of $5 million and $4 million, respectively, and for interest of $18 million and $14 million, respectively. Aon and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as various state and international jurisdictions. Aon has substantially concluded all U.S. federal income tax matters for years through 2006. Material U.S. state and local income tax jurisdiction examinations have been concluded for years through 2002. Aon has concluded income tax examinations in its primary international jurisdictions through 2002. |
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12. Stockholders' Equity Common Stock Aon's Board of Directors has authorized the Company to repurchase up to $4.6 billion of its outstanding common stock. Shares may be repurchased through the open market or in privately negotiated transactions from time to time, based on prevailing market conditions, and will be funded from available capital. Any repurchased shares will be available for employee stock plans and for other corporate purposes. In 2009, Aon repurchased 15.1 million shares at a cost of $590 million. In 2008, Aon repurchased 42.6 million shares at a cost of $1.9 billion. In 2007, Aon repurchased 19.1 million shares at a cost of $751 million. Since inception of its share repurchase program in 2005, the Company has repurchased a total of 105.8 million shares for an aggregate cost of $4.3 billion. As of December 31, 2009, the Company was authorized to purchase up to $265 million of additional shares under the current stock repurchase program. The timing and amount of future purchases will be based on market and other conditions. In January 2010, the Company's 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. In connection with the acquisition of two entities controlled by Aon's then-Chairman and Chief Executive Officer in 2001, Aon obtained approximately 22.4 million shares of its common stock. These treasury shares are restricted as to their reissuance. 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. Dividends 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. Other Comprehensive Income (Loss) The components of other comprehensive income (loss) and the related tax effects are as follows (in millions):
The components of accumulated other comprehensive loss, net of related tax, are as follows (in millions):
The pretax changes in net unrealized investment gains (losses), which include investments reported as assets held-for sale, are as follows (in millions):
The components of net unrealized investment gains, which include investments reported as assets held-for-sale, are as follows (in millions):
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13. Employee Benefits Defined Contribution Savings Plans Aon maintains defined contribution savings plans for the benefit of its U.S. and U.K. employees. The expense recognized for these plans, which is included in Compensation and benefits and Discontinued operations in the Consolidated Statements of Income, is as follows (in millions):
Pension and Other Post-retirement Benefits Aon sponsors defined benefit pension and post-retirement health and welfare plans that provide retirement, medical, and life insurance benefits. The post-retirement healthcare plans are contributory, with retiree contributions adjusted annually; the life insurance and pension plans are noncontributory. The Company's U.S., U.K., and Canadian plans are closed to new entrants. Effective January 1, 2009, the Company's Netherlands plan was also closed to new entrants. Effective April 1, 2009, the Company ceased crediting future benefits relating to salary and service in its U.S. defined benefit pension plan. This change affected approximately 6,000 active employees covered by the U.S. plan. For those employees, the Company increased its contribution to the defined contribution savings plan. In 2010 and 2011, the Company will cease crediting future benefits relating to service in its Canadian defined benefit pension plans. This change will affect approximately 950 active employees. Pension Plans The following tables provide a reconciliation of the changes in the benefit obligations and fair value of assets for the years ended December 31, 2009 and 2008 and a statement of the funded status as of December 31, 2009 and 2008, for the U.S. plans and material international plans, which are located in the U.K., the Netherlands, and Canada. These plans represent approximately 95% of the Company's pension obligations.
Amounts recognized in the Consolidated Statements of Financial Position consist of (in millions):
Amounts recognized in Accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31, 2009 and 2008 consist of (in millions):
In 2009, U.S. plans with a projected benefit obligation ("PBO") and an accumulated benefit obligation ("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 $1.2 billion. International plans with a PBO in excess of the fair value of plan assets had a PBO of $4.4 billion and plan assets with a fair value of $3.6 billion, and plans with an ABO in excess of the fair value of plan assets had an ABO of $3.9 billion and plan assets with a fair value of $3.2 billion. 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. The following table provides the components of net periodic benefit cost for the plans (in millions):
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. In 2009, a curtailment gain of $10 million was recognized in discontinued operations resulting from the sale of CICA. The curtailment gain relates to the Company's U.S. Retiree Health and Welfare Plan, in which CICA employees were allowed to participate through the end of 2008, pursuant to the terms of the sale. In 2008, a pension curtailment gain of $13 million was recognized in discontinued operations resulting from the sale of CICA. The weighted-average assumptions used to determine future benefit obligations are as follows:
The weighted-average assumptions used to determine the net periodic benefit cost are as follows:
The amounts in Accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2010 are as follows (in millions):
Expected Return on Plan Assets To determine the expected long-term rate of return on plan assets, the historical performance, investment community forecasts and current market conditions are analyzed to develop expected returns for each asset class used by the plans. The expected returns for each asset class are weighted by the target allocations of the plans. No plan assets are expected to be returned to the Company during 2010. Fair value of plan assets The fair values of Aon's U.S. pension plan assets at December 31, 2009, by asset category, are as follows (in millions):
Alternative investments consist of limited partnerships, private equity, and hedge funds. The following table presents the changes in the Level 3 fair-value category for the year ended December 31, 2009 (in millions):
The fair values of Aon's major international pension plan assets at December 31, 2009, by asset category, are as follows (in millions):
Alternative investments consist of limited partnerships, private equity, and hedge funds. The following table presents the changes in the Level 3 fair-value category for the year ended December 31, 2009 (in millions):
Investment Policy and Strategy The U.S. investment policy, as established by the Aon Retirement Plan Governance and Investment Committee ("RPGIC"), seeks reasonable asset growth at prudent risk levels within target allocations, which are 42% equity investments, 38% fixed income investments, and 20% other investments. Aon believes that plan assets are well-diversified and are of appropriate quality. The investment portfolio asset allocation is reviewed quarterly and re-balanced to within policy target allocations. The investment policy is reviewed at least annually and revised, as deemed appropriate by the RPGIC. The investment policies for international plans are established by the local pension plan trustees and seek to maintain the plans' ability to meet liabilities and to comply with local minimum funding requirements. Plan assets are invested in diversified portfolios that provide adequate levels of return at an acceptable level of risk. The investment policies are reviewed at least annually and revised, as deemed appropriate to ensure that the objectives are being met. At December 31, 2009, the weighted average targeted allocation for the international plans was 46% for equity investments, 49% for fixed income investments, and 5% for all other types of investments. Cash Flows Contributions Based on current assumptions, Aon expects to contribute approximately $30 million and $351 million, respectively, to its U.S. and international pension plans during 2010. Estimated Future Benefit Payments Estimated future benefit payments for plans are as follows at December 31, 2009 (in millions):
U.S. Other Post-Retirement Benefits The following table provides an overview of the accumulated projected benefit obligation, fair value of plan assets, funded status and net amount recognized as of December 31, 2009 and 2008 for the Company's other post-retirement benefit plans (in millions):
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. Based on current assumptions, Aon expects:
Aon's liability for future plan cost increases for pre-65 and Medical Supplement plan coverage is limited to 5% per annum. Because of this cap, net employer trend rates for these plans are effectively limited to 5% per year in the future. During 2007, Aon recognized a plan amendment which phases out post-65 retiree coverage over the next three years. As a result, a 1% change in assumed healthcare cost trend rates has no effect on the service and interest cost components of net periodic post-retirement healthcare benefit cost or on the accumulated post-retirement benefit obligation for the measurement period ended in 2009. |
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14. Stock Compensation Plans The following table summarizes stock-based compensation expense recognized in continuing operations in the Consolidated Statements of Income in Compensation and benefits (in millions):
During 2009, the Company converted its stock administration system to a new service provider. In connection with this conversion, a reconciliation of the methodologies and estimates utilized was performed, which resulted in a $12 million reduction of expense for the year ended December 31, 2009. Stock Awards Stock awards, in the form of RSUs, are granted to certain employees and consist of both performance-based and service-based RSUs. Service-based awards generally vest between three and ten years from the date of grant. The fair value of service-based awards is based upon the market price of the underlying common stock at the date of grant. With certain limited exceptions, any break in continuous employment will cause the forfeiture of all unvested awards. Compensation expense associated with stock awards is recognized over the service period using the straight-line method. Dividend equivalents are paid on certain service-based RSUs, based on the initial grant amount. At December 31, 2009, 2008 and 2007, the number of shares available for stock awards is included with options available for grant. 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):
Information regarding Aon's performance-based plans as of December 31, 2009, 2008 and 2007 follows (shares in thousands, dollars in millions):
The fair value of awards that vested during 2009, 2008 and 2007 was $223 million, $107 million and $65 million, respectively. Stock Options Options to purchase common stock are granted to certain employees, generally at 100% of market value on the date of grant. Generally, employees are required to complete two continuous years of service before the options begin to vest in increments until the completion of a 4-year period of continuous employment, although a number of options were granted that require five continuous years of service before all options would vest. The maximum contractual term on stock options is generally ten years from the date of grant. Aon uses a lattice-binomial option-pricing model to value stock options. Lattice-based option valuation models utilize a range of assumptions over the expected term of the options. Expected volatilities are based on the average of the historical volatility of Aon's stock price and the implied volatility of traded options and Aon's stock. In 2008 and prior years, Aon used historical data to estimate option exercise and employee terminations within the lattice-binomial option-pricing model, stratified between executives and key employees. Beginning in 2009, after reviewing additional historical data, the valuation model stratifies employees between those receiving LPP options, Special Stock Plan ("SSP") options, and all other option grants. The Company believes that this stratification better represents prospective stock option exercise patterns. The expected dividend yield assumption is based on the Company's historical and expected future dividend rate. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of employee stock options represents the weighted-average period stock options are expected to remain outstanding and is a derived output of the lattice-binomial model. The weighted average assumptions, the weighted average expected life and estimated fair value of employee stock options are summarized as follows:
In connection with the LPP Plan, the Company granted the following number of stock options at the noted exercise price: 2009 1 million shares at $39 per share, 2008 820,000 shares at $41 per share and 2007 880,000 shares at $38 per share. In connection with its incentive compensation plans, the Company granted the following number of stock options at the noted exercise price: 2009 550,000 shares at $37 per share, 2008 710,000 shares at $46 per share and 2007 1.1 million shares at $42 per share. A summary of the status of Aon's stock options and related information is as follows (shares in thousands):
A summary of options outstanding and exercisable as of December 31, 2009 is as follows (shares in thousands):
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. Other information related to the Company's stock options is as follows (in millions):
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. Employee Stock Purchase Plan United States Aon has an employee stock purchase plan that provides for the purchase of a maximum of 7.5 million shares of Aon's common stock by eligible U.S. employees. Under the plan, shares of Aon's common stock may be purchased at 3-month intervals at 85% of the lower of the fair market value of the common stock on the first or the last day of each 3-month period. In 2009, 2008, and 2007, 323,000 shares, 320,000 shares and 405,000 shares, respectively, were issued to employees under the plan. Compensation expense recognized was $3 million each in 2009, 2008 and 2007. United Kingdom Aon also has an employee stock purchase for eligible U.K. employees that provides for the purchase of shares after a 3-year period and which is similar to the U.S. plan described above. Three-year periods began in 2008 and 2006, allowing for the purchase of a maximum of 200,000 and 525,000 shares, respectively. In 2009, 2008 and 2007, 201,000 shares, 6,000 shares and less than 1,000 shares, respectively, were issued under the plan. In 2009, $1 million of compensation expense was recognized. In 2008 and 2007, compensation expense recognized was less than $1 million each year. |
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15. Derivatives and Hedging Aon is exposed to market risk primarily from changes in foreign currency exchange rates and interest rates. To manage the risk related to these exposures, Aon enters into various derivative transactions that reduce Aon's market risks by creating offsetting market exposures. Aon does not enter into derivative transactions for trading purposes. 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. Foreign Exchange Risk Management Aon and its subsidiaries are exposed to foreign exchange risk when they receive revenues, pay expenses, or enter into intercompany loans denominated in a currency that differs from their functional currency. Aon uses foreign exchange derivatives, typically forward contracts, options and cross currency swaps, to reduce its overall exposure to the effects of currency fluctuations on cash flows. Aon has hedged these exposures up to six years in the future. Aon has designated foreign exchange derivatives with a notional amount of $2.0 billion at December 31, 2009 as cash flow hedges of these exposures. As of December 31, 2009, a $14 million pretax loss has been deferred to OCI related to these hedges, of which a $21 million loss is expected to be reclassified to earnings in 2010. These hedges had no material ineffectiveness in 2009, 2008 or 2007. In addition, as of December 31, 2009, Aon has $112 million notional amount of foreign exchange derivatives not designated or qualifying as cash flow hedges offsetting these exposures. Aon also uses foreign exchange derivatives, typically forward contracts and options, to hedge its net investments in foreign operations for up to four years in the future. As of December 31, 2009, the notional amount outstanding was $1.7 billion and no gain or loss has been deferred to OCI related to this hedge. This hedge had no ineffectiveness in 2009, 2008 or 2007. 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. Interest Rate Risk Management 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. As of December 31, 2009, the fair values of derivative instruments are as follows:
The amounts of derivative gains (losses) recognized in the consolidated financial statements for the year ended December 31, 2009, are as follows (in millions):
The amount of gain (loss) recognized in income on the ineffective portion of derivatives for 2009, 2008 and 2007 was negligible. In 2009, Aon recorded $11 million of losses in other general expenses for foreign exchange derivatives not designated or qualifying as hedges. |
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16. Variable Interest Entities Aon did not consolidate any VIEs at December 31, 2009. As of December 31, 2008, the following VIEs were consolidated:
At December 31, 2008, Aon held a majority equity interest in the Juniperus Class A shares and bore a majority of the expected residual returns and losses. Aon also had a majority voting interest in JCHL and absorbed a majority of JCHL's expected residual returns and losses. Aon was considered the primary beneficiary of both companies, and as such these entities were consolidated. As of December 31, 2009, Aon's interests had been reduced to 38% and 39% for Juniperus and JCHL, respectively and Aon was no longer deemed to be the primary beneficiary. Consequently, these entities are no longer consolidated by Aon and prospectively will be accounted for using the equity method of accounting. Juniperus and JCHL had combined assets and liabilities of $121 million and $22 million, respectively, at December 31, 2008. Aon recognized $36 million of pretax income from Juniperus and JCHL for the year ended December 31, 2009. Aon's potential loss at December 31, 2009 is limited to its investment in the VIEs of $73 million, which is recorded in investments in the Consolidated Statements of Financial Position at December 31, 2009. Aon previously owned the majority economic equity interest in Globe Re Limited ("Globe Re"), a VIE which provided reinsurance coverage for a defined portfolio of property catastrophe reinsurance contracts underwritten by a third party for a limited period which ended June 1, 2009. Aon consolidated Globe Re as it was deemed to be the primary beneficiary. In connection with the winding up of its operations, during 2009 Globe Re repaid its $100 million of short-term debt from available cash. Also in 2009, Aon's equity investment in Globe Re was repaid. Aon recognized $2 million of pretax income from Globe Re in 2009. Globe Re was fully liquidated in 2009. |
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17. Fair Value and Financial Instruments Accounting standards establish a three tier fair value hierarchy which prioritizes the inputs used in measuring fair values as follows:
At December 31, 2009, Aon's Level 3 fair value measurements primarily consists of its PEPS I investment and guarantees. 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. Other investments carried at fair value consists primarily of the Company's investment in PEPS I. Fair value is based on valuations received from the general partners of the limited partnership interests held by PEPS I. 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. Retained interests in the sold premium finance agreements of Aon's premium financing operations were recorded at fair value by discounting estimated future cash flows using discount rates that are commensurate with the underlying risk, expected future prepayment rates, and credit loss estimates. Guarantees are carried at fair value, which is based on discounted estimated future cash flows using published historical cumulative default rates and discount rates commensurate with the underlying exposure. Debt is carried at outstanding principal balance. Fair value is based on quoted market prices or estimates using discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements. The following tables present the categorization of the Company's assets and liabilities that are measured at fair value on a recurring basis at December 31, 2009 and 2008 (in millions):
The following table presents the changes in the Level 3 fair-value category in 2009 and 2008 (in millions):
Gains (losses), both realized and unrealized, included in income in 2009 and 2008 are as follows (in millions):
The majority of the Company's financial instruments are either carried at fair value or have a carrying amount that approximates fair value. The following table discloses the Company's financial instruments where the carrying amounts and fair values differ (in millions):
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18. 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 accruals and receivables are adjusted from time to time as developments warrant. Amounts related to settlement provisions are recorded in Other general expenses in the Consolidated Statements of Income. At the time of the 2004-05 investigation of the insurance industry by the Attorney General of New York ("NYAG") 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. Plaintiffs have appealed these dismissals. Aon believes it has meritorious defenses in all of these cases and intends to vigorously defend itself against these claims. The outcome of these lawsuits, and any losses or other payments that may occur as a result, cannot be predicted at this time. Also at the time of the NYAG investigation, putative classes filed actions against Aon in the U.S. District Court for the Northern District of Illinois under the federal securities laws and ERISA. Plaintiffs in the federal securities class action originally submitted purported expert reports estimating a range of alleged damages of $353 million to $490 million, and plaintiffs in the ERISA class actions originally submitted revised purported expert reports estimating a range of alleged damages of $74 million to $349 million. To protect against the uncertain outcome of litigation and to contain exposure to the Company, Aon settled the securities suit for $30 million in 2009 and has reached an agreement in principle to settle the ERISA suit for $1.8 million. On November 24, 2009, the Court entered a final order approving the settlement and dismissing the securities suit. The proposed ERISA settlement is subject to documentation, notice and court approval. 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. A putative class action, Buckner v. Resource Life, is pending in state court in Columbus, Georgia against a former subsidiary of Aon, Resource Life Insurance Company. The complaint alleges that Resource Life, which wrote policies insuring repayment of auto loans, was obligated to identify and return unearned premiums to policyholders whose loans terminated before the end of their scheduled 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. 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 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 which are deemed to be probable and estimable are accrued in Aon's consolidated financial statements. 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 total letters of credit ("LOCs") outstanding for approximately $153 million at December 31, 2009. A letter of credit for approximately $91 million is for the benefit of Virginia Surety Company ("VSC") related to a non-performance risk of reinsurers of VSC's worker's compensation business in California. In connection with the sale of the P&C operations completed in August 2009, the purchaser agreed to use commercially reasonable efforts to replace Aon's LOC related to VSC and to indemnify Aon for any losses suffered by Aon arising out of this LOC. A letter of credit for approximately CAD 42 million ($40 million at December 31, 2009 exchange rates) was put in place to cover the beneficiaries related to Aon's Canadian pension plan scheme. A LOC for $12 million secures deductible retentions on Aon's own workers compensation program. An $8 million letter of credit secures one of the U.S. pension plans. Aon has issued letters of credit to cover contingent payments of approximately $2 million for taxes and other business obligations to third parties. Aon has also issued various other guarantees for miscellaneous purposes at its international subsidiaries for $14 million. Amounts are accrued in the consolidated financial statements to the extent the guarantees are probable and estimable. 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 expects that as prudent business interests dictate, additional guarantees and indemnifications may be issued from time to time. |
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19. Segment Information 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. Aon's total revenue is as follows (in millions):
Commissions, fees and other revenues by product are as follows (in millions):
Fiduciary investment income by segment is as follows (in millions):
Selected information for Aon's operating segments is as follows (in millions):
A reconciliation of segment income before tax to income from continuing operations before income taxes is as follows (in millions):
Unallocated revenue consists of revenue from the Company's equity ownership in insurance investments. 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. Revenues are generally attributed to geographic areas based on the location of the resources producing the revenues. Intercompany revenues and expenses are eliminated in computing consolidated revenues and operating expenses. Consolidated revenue by geographic area is as follows (in millions):
Consolidated long-lived assets by geographic area are as follows (in millions):
A reconciliation of segment assets to Aon's total assets is as follows (in millions):
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20. Quarterly Financial Data (Unaudited) Selected quarterly financial data for the years ended December 31, 2009 and 2008 are as follows (in millions, except per share data):
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