AON PLC, 10-Q filed on 5/4/2010
Quarterly Report
Condensed Consolidated Statements of Income (USD $)
Share data in Millions, except Per Share data
3 Months Ended
Mar. 31,
2010
2009
Condensed Consolidated Statements of Income
 
 
Revenue
 
 
Commissions, fees and other
$ 1,891,000,000 
$ 1,821,000,000 
Fiduciary investment income
13,000,000 
25,000,000 
Total revenue
1,904,000,000 
1,846,000,000 
Expenses
 
 
Compensation and benefits
1,163,000,000 
1,014,000,000 
Other general expenses
468,000,000 
466,000,000 
Total operating expenses
1,631,000,000 
1,480,000,000 
Operating Income
273,000,000 
366,000,000 
Interest income
1,000,000 
7,000,000 
Interest expense
(34,000,000)
(29,000,000)
Other income (expense)
7,000,000 
(1,000,000)
Income from continuing operations before income taxes
247,000,000 
343,000,000 
Income taxes
61,000,000 
108,000,000 
Income from continuing operations
186,000,000 
235,000,000 
Income from discontinued operations before income taxes
2,000,000 
91,000,000 
Income taxes
2,000,000 
41,000,000 
Income from discontinued operations
 
50,000,000 
Net income
186,000,000 
285,000,000 
Less: Net income attributable to noncontrolling interests
8,000,000 
5,000,000 
Net income attributable to Aon stockholders
178,000,000 
280,000,000 
Net income attributable to Aon stockholders
 
 
Income from continuing operations
178,000,000 
230,000,000 
Income from discontinued operations
 
50,000,000 
Net income
178,000,000 
280,000,000 
Basic net income per share attributable to Aon stockholders
 
 
Continuing operations (in dollars per share)
0.65 
0.81 
Discontinued operations (in dollars per share)
 
0.18 
Net income (in dollars per share)
0.65 
0.99 
Diluted net income per share attributable to Aon stockholders
 
 
Continuing operations (in dollars per share)
0.63 
0.79 
Discontinued operations (in dollars per share)
 
0.17 
Net income (in dollars per share)
0.63 
0.96 
Cash dividends per share paid on common stock (in dollars per share)
0.15 
0.15 
Weighted average common shares outstanding - basic (in shares)
275.9 
284.3 
Weighted average common shares outstanding - diluted (in shares)
283.4 
292.0 
Condensed Consolidated Statements of Financial Position (USD $)
In Millions
Mar. 31, 2010
Dec. 31, 2009
ASSETS
 
 
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 422 
$ 217 
Short-term investments
312 
422 
Receivables, net
1,983 
2,052 
Fiduciary assets
11,089 
10,835 
Other current assets
462 
463 
Total Current Assets
14,268 
13,989 
Goodwill
5,887 
6,078 
Intangible assets, net
770 
791 
Fixed assets, net
452 
461 
Investments
308 
319 
Other non-current assets
1,274 
1,320 
TOTAL ASSETS
22,959 
22,958 
LIABILITIES & STOCKHOLDERS' EQUITY
 
 
LIABILITIES
 
 
CURRENT LIABILITIES:
 
 
Fiduciary liabilities
11,089 
10,835 
Short-term debt and current portion of long-term debt
84 
10 
Accounts payable and accrued liabilities
1,269 
1,535 
Other current liabilities
334 
260 
Total Current Liabilities
12,776 
12,640 
Long-term debt
2,013 
1,998 
Pension and other post employment liabilities
1,770 
1,889 
Other non-current liabilities
943 
1,000 
TOTAL LIABILITIES
17,502 
17,527 
EQUITY:
 
 
Common stock-$1 par value Authorized: 750 shares (issued: 3/31/10 - 362.7; 12/31/09 - 362.7)
363 
363 
Additional paid-in capital
3,135 
3,215 
Retained earnings
7,500 
7,335 
Treasury stock at cost (shares: 3/31/10 - 93.2; 12/31/09 - 96.4)
(3,725)
(3,859)
Accumulated other comprehensive loss
(1,871)
(1,675)
TOTAL AON STOCKHOLDERS' EQUITY
5,402 
5,379 
Noncontrolling interests
55 
52 
TOTAL EQUITY
5,457 
5,431 
TOTAL LIABILITIES AND EQUITY
$ 22,959 
$ 22,958 
Condensed Consolidated Statements of Financial Position (Parenthetical)
Share data in Millions, except Per Share data
Mar. 31, 2010
Dec. 31, 2009
Condensed Consolidated Statements of Financial Position
 
 
Common stock, par value (in dollars per share)
Common stock, Authorized shares
750 
750 
Common stock, issued shares
362.7 
362.7 
Treasury stock, shares
93.2 
96.4 
Condensed Consolidated Statement of Stockholders' Equity (USD $)
In Millions
Common Stock and Additional Paid-in Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Loss, Net of Tax
Noncontrolling Interests
Total
1/1/2010 - 3/31/2010
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Balance
$ 3,578 
$ 7,335 
$ (3,859)
$ (1,675)
$ 52 
$ 5,431 
Balance (in shares)
362.7 
 
 
 
 
 
Adoption of new accounting guidance
 
44 
 
(44)
 
 
Balance as adjusted
3,578 
7,379 
(3,859)
(1,719)
52 
5,431 
Balance as adjusted (in shares)
362.7 
 
 
 
 
 
Net income
 
178 
 
 
186 
Shares issued - employee benefit plans
31 
 
 
 
 
31 
Shares purchased
 
 
(50)
 
 
(50)
Shares reissued - employee benefit plans
(184)
(16)
184 
 
 
(16)
Tax benefit - employee benefit plans
 
 
 
 
Stock-based compensation
66 
 
 
 
 
66 
Dividends to stockholders
 
(41)
 
 
 
(41)
Change in net derivative gains/losses
 
 
 
(24)
 
(24)
Net foreign currency translation adjustments
 
 
 
(141)
 
(141)
Net post-retirement benefit obligations
 
 
 
13 
 
13 
Purchase of subsidiary shares from noncontrolling interests
(2)
 
 
 
(4)
(6)
Capital contribution by noncontrolling interests
 
 
 
 
Dividends paid to noncontrolling interests on subsidiary common stock
 
 
 
 
(3)
(3)
Balance
3,498 
7,500 
(3,725)
(1,871)
55 
5,457 
Balance (in shares)
362.7 
 
 
 
 
 
Balance as adjusted
 
 
 
 
 
 
Balance as adjusted (in shares)
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions
3 Months Ended
Mar. 31,
2010
2009
Condensed Consolidated Statements of Cash Flows
 
 
Cash Flows from Operating Activities:
 
 
Net income
$ 186 
$ 285 
Adjustments to reconcile net income to cash provided by operating activities:
 
 
Gains from sale of businesses, net
(6)
(92)
Depreciation and amortization
58 
60 
Stock-based compensation expense
66 
40 
Deferred income taxes
(12)
14 
Change in assets and liabilities:
 
 
Change in funds held on behalf of clients
396 
512 
Receivables, net
45 
179 
Accounts payable and accrued liabilities
(274)
(260)
Restructuring reserves
(1)
(8)
Current income taxes
65 
82 
Pension and other post employment liabilities
(55)
(142)
Other assets and liabilities
(4)
(117)
Cash Provided by Operating Activities
464 
553 
Cash Flows from Investing Activities:
 
 
Sales of long-term investments
66 
Purchase of long-term investments
(10)
(12)
Net sales (purchases) of short-term investments - non-fiduciary
97 
(193)
Net purchases of short-term investments - funds held on behalf of clients
(396)
(512)
Acquisition of businesses, net of cash acquired
(47)
(33)
Proceeds from sale of businesses
 
128 
Capital expenditures
(33)
(21)
Cash Used for Investing Activities
(323)
(636)
Cash Flows from Financing Activities:
 
 
Purchase of treasury stock
(50)
 
Issuance of stock for employee benefit plans
35 
55 
Issuance (repayments) of debt
73 
(1)
Cash dividends to stockholders
(41)
(41)
Cash Provided by Financing Activities
17 
13 
Effect of Exchange Rate Changes on Cash
47 
(11)
Net Increase (Decrease) in Cash and Cash Equivalents
205 
(81)
Cash and Cash Equivalents at Beginning of Period
217 
582 
Cash and Cash Equivalents at End of Period
422 
501 
Supplemental disclosures:
 
 
Interest paid
30 
37 
Income taxes paid, net of refunds
$ 10 
$ 53 
Basis of Presentation
Basis of Presentation

1.  Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include all normal recurring adjustments which Aon Corporation (“Aon” or the “Company”) considers necessary to present fairly the Company’s consolidated financial statements for all periods presented.  The consolidated financial statements include the accounts of Aon and its majority-owned subsidiaries and variable interest entities (“VIEs”) for which Aon is considered to be the primary beneficiary.  The consolidated financial statements exclude VIEs for which Aon is not the primary beneficiary. All material intercompany accounts and transactions have been eliminated.

 

Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  The results for the three months ended March 31, 2010 are not necessarily indicative of operating results that may be expected for the full year ending December 31, 2010.

 

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.  Management adjusts such estimates and assumptions when facts and circumstances dictate.  Illiquid credit markets, volatile equity markets, and foreign currency movements have combined to increase the uncertainty inherent in such estimates and assumptions.  As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.  Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Accounting Principles and Practices
Accounting Principles and Practices

2.  Accounting Principles and Practices

 

Changes in Accounting Principles

On January 1, 2010, the Company adopted guidance amending current principles related to the transfers of financial assets and the consolidation of VIEs.  This guidance eliminates the concept of a qualifying special-purpose entity (“QSPE”) and the related exception for applying consolidation guidance, creates more stringent conditions for reporting the transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets.  Consequently, former QSPEs are evaluated for consolidation based on the updated VIE guidance.  In addition, the new guidance requires companies to take a qualitative approach in determining a VIE’s primary beneficiary and requires companies to more frequently reassess whether they must consolidate VIEs.  Additional year-end and interim period disclosures are also required outlining a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the Company’s financial statements.  See Note 9 regarding the consolidation of Private Equity Partnership Structures I, LLC (“PEPS I”).

 

On January 1, 2010, the Company adopted guidance requiring additional disclosures regarding fair value measurements.  The amended guidance requires entities to disclose additional information regarding assets and liabilities that are transferred between levels of the fair value hierarchy.  This guidance also clarifies existing guidance pertaining to the level of disaggregation at which fair value disclosures should be made and the requirements to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements.  See Note 15 for these disclosures.  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 what additional disclosures, if any, will be required.

 

Recent Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (“FASB”) issued guidance updating current principles related to revenue recognition when there are multiple-element arrangements.  This revised guidance relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting and modifies the manner in which the transaction consideration is allocated across the separately identifiable deliverables.  The guidance also expands the disclosures required for multiple-element revenue arrangements.  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.

Cash and Cash Equivalents
Cash and Cash Equivalents

3.  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 $186 million and $85 million at March 31, 2010 and December 31, 2009, respectively.

Other Income (Expense)
Other Income (Expense)

4.  Other Income (Expense)

 

Other income (expense) consists of the following (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

Equity income of non-consolidated subsidiaries

 

$

2

 

$

1

 

Realized gain on sale of investments

 

1

 

 

Gain (loss) on disposal of businesses, net

 

4

 

(1

)

Other

 

 

(1

)

 

 

$

7

 

$

(1

)

Acquisitions and Dispositions
Acquisitions and Dispositions

5.  Acquisitions and Dispositions

 

Acquisitions

In first quarter 2010, the Company completed the acquisition of the JP Morgan Compensation and Benefit Strategies Division of JP Morgan Retirement Plan Services, LLC, which is included in the Consulting segment, as well as seven other companies, which are included in the Risk and Insurance Brokerage Services segment.  In first quarter 2009, the Company completed the acquisition of four companies, all of which were included in the Risk and Insurance Brokerage Services segment.  The following table includes the aggregate amount paid and the intangible assets recorded as a result of the acquisitions made during the first quarter 2010 and 2009.  For certain of the acquisitions made in the first quarter 2010, the Company is in the process of obtaining third-party valuations for the intangible assets other than goodwill, and therefore, at quarter end the allocation of the purchase prices are still subject to refinement.

 

 

 

Three months ended March 31,

 

(millions)

 

2010

 

2009

 

Cash paid

 

$

47

 

$

26

 

 

 

 

 

 

 

Intangible assets:

 

 

 

 

 

Goodwill

 

$

35

 

$

11

 

Other intangible assets

 

33

 

13

 

 

 

$

68

 

$

24

 

 

The results of operations of these acquisitions are included in the condensed consolidated financial statements from the dates they were acquired.  These acquisitions would not produce a materially different result if they had been reported from the beginning of the period.

 

Dispositions - Continuing Operations

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 (“SPEs”), in whole loan securitization transactions that met the criteria for sales accounting.  Cananwill’s results were included in the Risk and Insurance Brokerage Services segment.

 

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 first quarter 2009 and $5 million in 2008, and is included in Other income (expense) in the Condensed Consolidated Statements of Income.  Aon may receive up to $10 million from the buyer over the two years following the sale 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.  As of March 31, 2010, Aon had received $5 million from the buyer, which is recorded in Other income (expense) in the Condensed Consolidated Statements of Income.

 

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 March 31, 2010, was $4 million, if losses exceed the historical credit loss reserve for the business.  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.

 

Dispositions - Discontinued Operations

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 in first quarter 2009.  As of March 31, 2010, Aon had not received any of this potential earn-out.

 

The operating results of all businesses classified as discontinued operations are as follows (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

Revenues

 

$

 

$

1

 

 

 

 

 

 

 

Income (loss) before income taxes:

 

 

 

 

 

Operations

 

$

 

$

(2

)

Gain on sale:

 

 

 

 

 

AIS

 

 

86

 

Other

 

2

 

7

 

 

 

2

 

91

 

Income taxes

 

2

 

41

 

Net Income

 

$

 

$

50

 

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

6.  Goodwill and Other Intangible Assets

 

The changes in the net carrying amount of goodwill by operating segment for the three months ended March 31, 2010 are as follows (in millions):

 

 

 

Risk and
Insurance
Brokerage
Services

 

Consulting

 

Total

 

Balance as of December 31, 2009

 

$

5,693

 

$

385

 

$

6,078

 

Goodwill related to current year acquisitions

 

4

 

31

 

35

 

Goodwill related to prior year acquisitions

 

1

 

 

1

 

Foreign currency revaluation

 

(228

)

1

 

(227

)

Balance as of March 31, 2010

 

$

5,470

 

$

417

 

$

5,887

 

 

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

 

 

 

March 31, 2010

 

December 31, 2009

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Trademarks

 

$

134

 

$

 

$

136

 

$

 

Customer Related and Contract Based

 

759

 

248

 

757

 

234

 

Marketing, Technology and Other

 

370

 

245

 

376

 

244

 

 

 

$

1,263

 

$

493

 

$

1,269

 

$

478

 

 

Amortization expense on intangible assets was $27 million and $23 million for the three months ended March 31, 2010 and 2009, respectively.  As of March 31, 2010, the estimated amortization for intangible assets is as follows (in millions):

 

Remainder of 2010

 

$

72

 

2011

 

103

 

2012

 

93

 

2013

 

84

 

2014

 

73

 

Thereafter

 

211

 

 

 

$

636

 

Restructuring
Restructuring

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, of which approximately 575 jobs have been eliminated as of March 31, 2010.  Additionally, duplicate space and assets will be abandoned.  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, $64 million has been recorded in earnings to date, and an estimated additional $36 million will be recorded in future earnings.  Expenses include workforce reduction, lease consolidation costs, asset impairments, as well as other expenses necessary to implement the restructuring initiative.  The Company recorded $9 million of restructuring and related charges in the first three months of both 2010 and 2009.  Total payments of $85 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.  Costs related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Condensed 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):

 

 

 

Actual

 

Estimated

 

 

 

Purchase

 

 

 

 

 

 

 

Total Cost for

 

 

 

Price

 

 

 

First Quarter

 

Total to

 

Restructuring

 

 

 

Allocation

 

2009

 

2010

 

Date

 

Period (1)

 

Workforce reduction

 

$

32

 

$

38

 

$

5

 

$

75

 

$

93

 

Lease consolidation

 

22

 

14

 

3

 

39

 

55

 

Asset impairments

 

 

2

 

 

2

 

4

 

Other costs associated with restructuring (2)

 

1

 

1

 

1

 

3

 

3

 

Total restructuring and related expenses

 

$

55

 

$

55

 

$

9

 

$

119

 

$

155

 

 

 

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

 

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

 

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 March 31, 2010, approximately 3,775 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.  The Company recorded $67 million and $34 million of restructuring and related charges in the first three months of 2010 and 2009, respectively. Costs related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Condensed Consolidated Statements of Income.  The Company expects the restructuring activities 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

Actual

 

Total Cost for

 

 

 

 

 

 

 

 

 

First Quarter

 

Total to

 

Restructuring

 

 

 

2007

 

2008

 

2009

 

2010

 

Date

 

Period (1)

 

Workforce reduction

 

$

17

 

$

166

 

$

251

 

$

57

 

$

491

 

$

510

 

Lease consolidation

 

22

 

38

 

78

 

6

 

144

 

149

 

Asset impairments

 

4

 

18

 

15

 

1

 

38

 

39

 

Other costs associated with restructuring (2)

 

3

 

29

 

13

 

3

 

48

 

52

 

Total restructuring and related expenses

 

$

46

 

$

251

 

$

357

 

$

67

 

$

721

 

$

750

 

 

 

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

 

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

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

Actual

 

Total Cost for

 

 

 

 

 

 

 

 

 

First Quarter

 

Total to

 

Restructuring

 

 

 

2007

 

2008

 

2009

 

2010

 

Date

 

Period

 

Risk and Insurance Brokerage Services

 

$

41

 

$

234

 

$

322

 

$

60

 

$

657

 

$

683

 

Consulting

 

5

 

17

 

35

 

7

 

64

 

67

 

Total restructuring and related expenses

 

$

46

 

$

251

 

$

357

 

$

67

 

$

721

 

$

750

 

 

Restructuring Liabilities

As of March 31, 2010, the Company’s liabilities for its restructuring plans are as follows (in millions):

 

 

 

Benfield
Plan

 

2007
Plan

 

2005
Plan

 

Total

 

Balance at January 1, 2009

 

$

104

 

$

101

 

$

28

 

$

233

 

Expensed in 2009

 

53

 

342

 

(1

)

394

 

Cash payments in 2009

 

(67

)

(248

)

(12

)

(327

)

Purchase accounting adjustment

 

(49

)

 

 

(49

)

Foreign exchange translation

 

4

 

7

 

1

 

12

 

Balance at December 31, 2009

 

45

 

202

 

16

 

263

 

Expensed in 2010

 

9

 

66

 

 

75

 

Cash payments in 2010

 

(18

)

(56

)

(2

)

(76

)

Foreign exchange translation

 

(2

)

(7

)

 

(9

)

Balance at March 31, 2010

 

$

34

 

$

205

 

$

14

 

$

253

 

 

Aon’s unpaid restructuring liabilities are included in Accounts payable and accrued liabilities and Other non-current liabilities in the Condensed Consolidated Statements of Financial Position.

Investments
Investments

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 Condensed Consolidated Statements of Financial Position.

 

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

 

 

 

March 31,
2010

 

December 31,
2009

 

Cash and cash equivalents

 

$

422

 

$

217

 

Short-term investments

 

312

 

422

 

Fiduciary assets

 

3,600

 

3,329

 

Investments

 

308

 

319

 

 

 

$

4,642

 

$

4,287

 

 

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

 

 

 

March 31,
2010

 

December 31,
2009

 

Equity method investments

 

$

183

 

$

113

 

Cost method investments

 

59

 

54

 

Other investments

 

52

 

49

 

Fixed-maturity securities

 

14

 

16

 

PEPS I preferred stock

 

 

87

 

 

 

$

308

 

$

319

 

Variable Interest Entities
Variable Interest Entities

9.  Variable Interest Entities

 

Consolidated Variable Interest Entities

In 2001, Aon sold the vast majority of its limited partnership (“LP”) portfolio, valued at $450 million, to PEPS I, a QSPE.  In accordance with recently issued VIE guidance, former QSPEs must now be assessed to determine if they are VIEs. Aon has concluded that PEPS I is a VIE and that it holds a variable interest in PEPS I.  Aon has also concluded that it is the primary beneficiary of PEPS I, as it has the power to direct the activities that most significantly impact economic performance and it has the obligation or right to absorb losses or receive benefits that could potentially be significant to PEPS I. As a result of adopting this new guidance, Aon consolidated PEPS I effective January 1, 2010.  The financial statement impact of consolidating PEPS I resulted in:

 

·                  The removal of the $87 million PEPS I preferred stock, previously reported in investments, and

·                  The addition of $77 million of equity method investments in LP’s; cash of $57 million, of which $52 million is restricted; long-term debt of $47 million; a decrease in accumulated other comprehensive income net of tax of $44 million; and an increase in retained earnings of $44 million.

 

As part of the original transaction, Aon is required to purchase from PEPS I additional securities equal to the unfunded LP commitments, as they are requested.  These securities are rated below investment grade. Aon funded less than $1 million of commitments in first quarter 2010.  As of March 31, 2010, the unfunded commitments were $42 million.  The commitments have specific expiration dates and the general partners may decide not to draw on these commitments.

 

Unconsolidated Variable Interest Entities

At March 31, 2010, Aon held a 38% interest in Juniperus Insurance Opportunity Fund Limited (Juniperus), which is an investment vehicle that invests in an actively managed and diversified portfolio of insurance risks.  Aon has concluded that Juniperus is a variable interest entity.  However, Aon has concluded that it is not the primary beneficiary as it lacks the power to direct the activities of Juniperus that most significantly impact economic performance.  The investment in Juniperus is accounted for using the equity method of accounting.

 

Aon’s potential loss at March 31, 2010 is limited to its investment in Juniperus of $70 million, which is recorded in Investments in the Condensed Consolidated Statements of Financial Position.  Aon has not provided any financing to Juniperus other than previously contractually required amounts.

Debt
Debt

10.                 Debt

 

At March 31, 2010, the Company had borrowed $75 million under its five-year €650 million ($872 million at March 31, 2010 exchange rates) multi-currency foreign credit facility (“Euro credit facility”).  This borrowing is included in Short-term debt and current portion of long-term debt in the Condensed Consolidated Statements of Financial Position.

 

As a result of adopting new guidance on VIEs, Aon consolidated PEPS I effective January 1, 2010, and recorded $47 million of long-term debt in the Condensed Consolidated Statements of Financial Position.

Stockholders' Equity
Stockholder's Equity

11.  Stockholders’ Equity

 

Common Stock

Under the share repurchase program begun in 2005, 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 cash.  Any repurchased shares will be available for employee stock plans and for other corporate purposes.  In first quarter 2010, Aon repurchased 1.2 million shares at a cost of $50 million.  Since the inception of this share repurchase program, the Company has repurchased a total of 107.1 million shares for an aggregate cost of $4.4 billion.    As of March 31, 2010, the Company was authorized to purchase up to $215 million of additional shares under this 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 first quarter 2010, Aon reissued 4.3 million shares of treasury stock for employee benefit plans and 86,000 shares of treasury stock in connection with employee stock purchase plans.  In first quarter 2009, Aon issued 966,000 new shares of common stock for employee benefit plans and reissued approximately 4.0 million shares of treasury stock for employee benefit plans and 69,000 shares in connection with employee stock purchase plans.

 

Participating Securities

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

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

Income from continuing operations

 

$

4

 

$

6

 

Income from discontinued operations

 

 

1

 

Net income

 

$

4

 

$

7

 

 

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

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

Shares for basic earnings per share (1)

 

275.9

 

284.3

 

Common stock equivalents

 

7.5

 

7.7

 

Shares for diluted earnings per share

 

283.4

 

292.0

 

 

 

(1)          Includes 6.5 million and 7.3 million of participating securities for the three months ended March 31, 2010 and 2009, respectively.

 

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 for both the three months ended March 31 2010 and 2009.

 

Other Comprehensive Income (Loss)

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

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

Net income

 

$

186

 

$

285

 

Net derivative losses

 

(24

)

(9

)

Net unrealized investment losses

 

 

(8

)

Net foreign currnecy translation adjustments

 

(141

)

(94

)

Net post-retirement benefit obligations

 

13

 

56

 

Comprehensive income

 

34

 

230

 

Less: Comprehensive income attributable to noncontrolling interests

 

8

 

5

 

Comprehensive income attributable to Aon stockholders

 

$

26

 

$

225

 

 

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

 

 

 

March 31, 
2010

 

Janaury 1, 
2010 (1)

 

December 
31, 2009

 

Net derivative losses

 

$

(24

)

$

 

$

 

Net unrealized investment gains

 

 

 

44

 

Net foreign currency translation adjustments

 

160

 

301

 

301

 

Net post-retirement benefit obligations

 

(2,007

)

(2,020

)

(2,020

)

Accumulated other comprehensive loss, net of tax

 

$

(1,871

)

$

(1,719

)

$

(1,675

)

 

 

(1) Reflects impact of adopting new accounting guidance which resulted in the consolidation of PEPS I effective January 1, 2010.

Employee Benefits
Employee Benefits

12.  Employee Benefits

 

Pension Plans

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

 

 

 

Three months ended March 31,

 

 

 

U.S.

 

International

 

 

 

2010

 

2009

 

2010

 

2009

 

Service cost

 

$

 

$

 

$

3

 

$

4

 

Interest cost

 

31

 

31

 

62

 

54

 

Expected return on plan assets

 

(30

)

(26

)

(60

)

(52

)

Amortization of prior-service cost

 

 

(1

)

 

1

 

Amortization of net loss

 

6

 

12

 

14

 

9

 

Net periodic benefit cost

 

$

7

 

$

16

 

$

19

 

$

16

 

 

In first quarter 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, which is reported in Compensation and benefits in the Condensed Consolidated Statements of Income.

 

Also in first quarter 2009, a curtailment gain of $10 million was recognized in discontinued operations resulting from the sale of our Combined Insurance Company of America (“CICA”) subsidiary.  The curtailment gain related 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.

 

Based on current assumptions, in 2010 Aon plans to contribute $30 million and $326 million to its U.S. and material international defined benefit pension plans, respectively.  As of March 31, 2010, contributions of $6 million have been made to the U.S. pension plans and $75 million to its material international pension plans.

Stock Compensation Plans
Stock Compensation Plans

13.  Stock Compensation Plans

 

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

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

Restricted stock units (“RSUs”)

 

$

41

 

$

34

 

Performance plans

 

19

 

5

 

Stock options

 

5

 

 

Employee stock purchase plans

 

1

 

1

 

Total stock-based compensation expense

 

$

66

 

$

40

 

 

During the first half of 2009, the Company converted its stock administration system to a new service provider.  In connection with this conversion, a reconciliation of the methodologies utilized was performed, which resulted in a $16 million reduction of expense for the three months ended March 31, 2009.

 

Stock Awards

During the first three months of 2010, the Company granted approximately 1.6 million shares in connection with the completion of the 2007 Leadership Performance Plan (“LPP”) cycle.  During the first three months of 2009, the Company granted approximately 2.0 million shares in connection with the completion of the 2006 LPP cycle.  In addition, during the first three months of both 2010 and 2009, the Company granted restricted shares of approximately 1.9 million 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):

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

 

 

Shares

 

Fair
Value (1)

 

Shares

 

Fair
Value (1)

 

Non-vested at beginning of period

 

12,850

 

$

36

 

14,060

 

$

35

 

Granted

 

3,495

 

39

 

3,855

 

39

 

Vested

 

(4,290

)

37

 

(4,127

)

39

 

Forfeited

 

(125

)

37

 

(89

)

38

 

Non-vested at end of period

 

11,930

 

36

 

13,699

 

35

 

 

 

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

 

Information regarding Aon’s performance-based plans follows (shares in thousands, dollars in millions):

 

 

 

As of March 31

 

 

 

2010

 

2009

 

Potential RSUs to be issued based on current performance levels

 

7,408

 

5,258

 

Unamortized expense, based on current performance levels

 

$

187

 

$

117

 

 

Stock Options

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

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

 

 

All Other
Options

 

LPP
Options

 

Special
Stock Plan
Options

 

All Other
Options

 

Weighted average volatility

 

28.5

%

35.5

%

35.5

%

35.5

%

Expected dividend yield

 

1.6

%

1.3

%

1.3

%

1.3

%

Risk-free rate

 

3.0

%

1.6

%

1.8

%

2.0

%

 

 

 

 

 

 

 

 

 

 

Weighted average expected life, in years

 

6.1

 

4.4

 

5.6

 

6.5

 

Weighted average estimated fair value per share

 

$

10.36

 

$

12.25

 

$

13.77

 

$

14.60

 

 

In connection with its incentive compensation plans in the first quarter 2010, the Company granted 141,000 stock options at $38 per share. Beginning in the first quarter 2010, the Company eliminated the grant of options under two of its key equity award programs, the LPP and the Special Stock Program, in order to manage share usage and expense.  In 2009, in connection with the 2009 LPP Plan, the Company granted 1.0 million shares at $39 per share.

 

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

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

 

 

Shares

 

Weighted-
Average
Exercise
Price

 

Shares

 

Weighted-
Average
Exercise
Price

 

Outstanding at beginning of period

 

15,937

 

$

33

 

19,666

 

$

31

 

Granted

 

141

 

38

 

975

 

39

 

Exercised

 

(1,274

)

29

 

(1,963

)

26

 

Forfeited and expired

 

(177

)

29

 

(467

)

42

 

Outstanding at end of period

 

14,627

 

33

 

18,211

 

32

 

Exercisable at end of period

 

9,428

 

32

 

9,301

 

31

 

 

The weighted average remaining contractual life, in years, of outstanding options was 4.0 years and 4.6 years at March 31, 2010 and 2009, respectively.

 

The aggregate intrinsic value represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing stock price of $42.71 as of March 31, 2010, which would have been received by the option holders had those option holders exercised their options as of that date.  At March 31, 2010, the aggregate intrinsic value of options outstanding was $141 million, of which $100 million was exercisable.

 

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

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

Aggregate intrinsic value of stock options exercised

 

$

15

 

$

31

 

Cash received from the exercise of stock options

 

32

 

52

 

Tax benefit realized from the exercise of stock options

 

1

 

11

 

 

Unamortized deferred compensation expense, which includes both options and awards, amounted to $308 million as of March 31, 2010, with a remaining weighted-average amortization period of approximately 2.0 years.

Derivatives and Hedging
Derivatives and Hedging

14.  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 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 March 31, 2010, all 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 $68 million from counterparties and pledged collateral of $25 million to counterparties for derivatives subject to collateral support arrangements as of March 31, 2010.

 

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 $2.4 billion at March 31, 2010 as cash flow hedges of these exposures.  As of March 31, 2010, a $50 million pretax loss has been deferred to OCI related to these hedges, of which $30 million is expected to be reclassified to earnings in the next twelve months.  These hedges had no material ineffectiveness in either the first three months of 2010 or 2009.  As of March 31, 2010, Aon also has $129 million notional amount of foreign exchange derivatives not designated or qualifying as cash flow hedges offsetting its exposures to foreign exchange risks.

 

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 March 31, 2010, the notional amount outstanding was $1.5 billion and a $73 million gain has been deferred to OCI related to this hedge.  This hedge had no ineffectiveness in either the first three months of 2010 or 2009.

 

Aon also uses foreign exchange derivatives, typically forward contracts and options, with a notional amount of $67 million at March 31, 2010, to reduce the impact of foreign currency fluctuations on the translation of the financial statements of Aon’s foreign operations and to manage the currency exposure of Aon’s global liquidity profile for one year in the future.  These derivatives are not eligible for hedge accounting treatment.

 

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 $1.4 billion at March 31, 2010 as cash flow hedges of this exposure.  As of March 31, 2010, a $10 million pretax gain has been deferred to OCI related to this hedge, all of which is expected to be reclassified to earnings during the next twelve months.  This hedge had no material ineffectiveness in either the first three months of 2010 or 2009.

 

In 2009, a subsidiary of Aon issued €500 million ($671 million at March 31, 2010 exchange rates) 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 ($335 million at March 31, 2010 exchange rates) at March 31, 2010 as a fair value hedge of this exposure.  This hedge did not have any ineffectiveness in either the first three months of 2010 or 2009.

 

As of March 31, 2010, the fair values of derivative instruments are as follows (in millions):

 

 

 

Derivative Assets

 

Derivative Liabilities

 

 

 

Balance Sheet
Location

 

Fair
Value

 

Balance Sheet
Location

 

Fair
Value

 

Derivatives accounted for as hedges:

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Other assets

 

$

28

 

Other liabilities

 

$

2

 

Foreign exchange contracts

 

Other assets

 

229

 

Other liabilities

 

180

 

Total

 

 

 

257

 

 

 

182

 

 

 

 

 

 

 

 

 

 

 

Derivatives not accounted for as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other assets

 

3

 

Other liabilities

 

2

 

Total

 

 

 

$

260

 

 

 

$

184

 

 

The amounts of derivative gains (losses) recognized in the Condensed Consolidated Statements of Income for the first three months of 2010 and 2009 are as follows (in millions):

 

Three months ended March 31, 2010

 

 

 

Amount of Gain
(Loss) Recognized in
OCI on Derivative
(Effective Portion)

 

Location of Gain (Loss)
Reclassified from OCI into
Income (Effective Portion)

 

Amount of Gain (Loss)
Reclassified from OCI
into Income (Effective
Portion)

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

Interest rate contracts

 

$

2

 

Investment income

 

$

6

 

Foreign exchange contracts

 

(75

)

Other general expenses and interest expense

 

(39

)

Total

 

$

(73

)

 

 

$

(33

)

 

 

 

 

 

 

 

 

Foreign net investment hedges:

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

73

 

N/A

 

$

 

 

 

 

Amount of Gain
(Loss) Recognized in
Income on
Derivative

 

Hedged item in Fair Value
Hedge Relationships

 

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

 

Location of Gain
(Loss) Recognized in
Income on Derivative
and Related Hedged
Item

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

7

 

Fixed rate debt

 

$

(6

)

Interest expense

 

 

Three months ended March 31, 2009

 

 

 

Amount of Gain
(Loss) Recognized in
OCI on Derivative
(Effective Portion)

 

Location of Gain (Loss)
Reclassified from OCI into
Income (Effective Portion)

 

Amount of Gain (Loss)
Reclassified from OCI
into Income (Effective
Portion)

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

3

 

Investment income

 

$

10

 

Foreign exchange contracts

 

(13

)

Other general expenses and interest expense

 

(7

)

Total

 

$

(10

)

 

 

$

3

 

 

 

 

 

 

 

 

 

Foreign net investment hedges:

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

(4

)

N/A

 

$

 

 

The amount of gain (loss) recognized in income on the ineffective portion of derivatives for the first three months of 2010 and 2009 was negligible.

 

In the first quarter of both 2010 and 2009, Aon recorded a loss of $1 million in Other general expenses for foreign exchange derivatives not designated or qualifying as hedges.

Fair Value and Financial Instruments
Fair Value and Financial Instruments

15.  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:

 

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

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

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

 

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

 

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

 

Fixed-maturity securities are carried at fair value, which is based on quoted market prices or on estimated values if they are not actively traded.  In some cases where a market price is available, the Company will make use of acceptable expedients (such as matrix pricing) to estimate fair value.

 

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

 

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.

 

The following table presents, for each of the fair-value hierarchy levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2010 (in millions):

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets

 

Other

 

Unobservable

 

 

 

Balance at

 

for Identical

 

Observable

 

Inputs

 

 

 

March 31, 2010

 

Assets (Level 1)

 

Inputs (Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds and highly liquid debt securities (1)

 

$

2,295

 

$

2,158

 

$

137

 

$

 

Fixed maturity securities

 

 

 

 

 

 

 

 

 

Corporate bonds

 

11

 

 

 

11

 

Government bonds

 

3

 

 

3

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

26

 

 

26

 

 

Foreign exchange contracts

 

151

 

 

151

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

101

 

 

101

 

 

Guarantees

 

4

 

 

 

4

 

 

 

(1) Includes $2,158 million of money market funds and $137 million of highly liquid debt securities that are classified as Fiduciary assets, Short-term investments or Cash equivalents in the Condensed Consolidated Statements of Financial Position, depending on their nature and initial maturity.  See Note 8 for additional information regarding the Company’s investments.

 

The following table presents the changes in the Level 3 fair-value category for the three months ended March 31, 2010 (in millions):

 

 

 

Fair Value Measurements Using Level 3 Inputs

 

 

 

Other

 

 

 

 

 

Investments

 

Guarantees

 

Balance at December 31, 2009

 

$

100

 

$

(4

)

Total gains (losses):

 

 

 

 

 

Included in earnings

 

 

 

Included in other comprehensive income

 

(1

)

 

Purchases and sales

 

(1

)

 

Transfers (1)

 

(87

)

 

Balance at March 31, 2010

 

$

11

 

$

(4

)

 

 

(1) Transfers represent the removal of the investment in PEPS I preferred stock as a result of consolidating PEPS I on January 1, 2010.  See Note 9 for further information.

 

There are no realized or unrealized gains or losses related to assets and liabilities measured at fair value using level three inputs  included in income for the three months ended March 31, 2010.

 

The following table discloses the Company’s financial instruments where the carrying amounts and fair values differ (in millions):

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Value

 

Value

 

Value

 

Value

 

Long-term debt

 

$

2,013

 

$

2,138

 

$

1,998

 

$

2,086

 

 

The fair value of debt is based on quoted market prices or estimates using discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements.

Commitments and Contingencies
Commitments and Contingencies

16.  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 Condensed 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 securities settlement and dismissing the securities suit.  The proposed ERISA settlement is subject to 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, which is set for argument on June 30, 2010. 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.

 

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

 

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

 

Guarantees and Indemnifications

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 9. 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 $151 million at March 31, 2010.  These letters of credit are 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, a LOC that secures deductible retentions for our own workers compensation program, and LOCs to cover the beneficiaries related to our Canadian pension plan scheme, secure one of our U.S. pension plans, and to cover contingent payments for taxes and other business obligations to third parties.  Aon has also issued various other guarantees for miscellaneous purposes at its international subsidiaries.  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 $6 million at March 31, 2010.

 

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

Segment Information
Segment Information

17.  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 Condensed 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):

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

Risk and Insurance Brokerage Services

 

$

1,587

 

$

1,543

 

Consulting

 

322

 

309

 

Intersegment elimination

 

(5

)

(6

)

Total revenue

 

$

1,904

 

$

1,846

 

 

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

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

Retail brokerage

 

$

1,186

 

$

1,124

 

Reinsurance brokerage

 

388

 

395

 

Total Risk and Insurance Brokerage Services Segment

 

1,574

 

1,519

 

Consulting services

 

275

 

263

 

Outsourcing

 

47

 

45

 

Total Consulting Segment

 

322

 

308

 

Intersegment elimination

 

(5

)

(6

)

Total commissions, fees and other revenue

 

$

1,891

 

$

1,821

 

 

Fiduciary investment income by segment is as follows (in millions):

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

Risk and Insurance Brokerage Services

 

$

13

 

$

24

 

Consulting

 

 

1

 

Total fiduciary investment income

 

$

13

 

$

25

 

 

A reconciliation of segment operating income to total income from continuing operations before income taxes is as follows (in millions):

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

Risk and Insurance Brokerage Services

 

$

257

 

$

323

 

Consulting

 

49

 

70

 

Unallocated expenses

 

(33

)

(27

)

Total operating income

 

273

 

366

 

Interest income

 

1

 

7

 

Interest expense

 

(34

)

(29

)

Other income (expense)

 

7

 

(1

)

Income from continuing operations before income taxes

 

$

247

 

$

343

 

 

Revenues are generally attributed to geographic areas based on the location of the resources producing the revenues. Intercompany revenues are eliminated in computing consolidated revenues.  Consolidated revenue by geographic area is as follows (in millions):

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

United States

 

$

643

 

$

650

 

Americas other than U.S.

 

198

 

172

 

United Kingdom

 

274

 

292

 

Europe, Middle East and Africa

 

650

 

613

 

Asia Pacific

 

139

 

119

 

Total

 

$

1,904

 

$

1,846

 

Document and Entity Information
3 Months Ended
Mar. 31, 2010
Document and Entity Information
 
Entity Registrant Name
AON CORP 
Entity Central Index Key
0000315293 
Document Type
10-Q 
Document Period End Date
03/31/2010 
Amendment Flag
FALSE 
Current Fiscal Year End Date
12/31 
Entity Filer Category
Large Accelerated Filer 
Entity Common Stock, Shares Outstanding
269,418,951 
Document Fiscal Year Focus
2010 
Document Fiscal Period Focus
Q1