Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Principles and Practices
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The consolidated financial
statements include the accounts of Aon Corporation and its majority-owned subsidiaries ("Aon" or the "Company"), excluding special-purpose entities ("SPEs") considered variable interest entities
("VIEs") for which Aon is not the primary beneficiary. All material intercompany accounts and transactions have been eliminated.
The
preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from the amounts reported.
Certain
amounts in prior years' consolidated financial statements and footnotes related to discontinued operations have been reclassified to conform to the 2007 presentation. As a result
of the pending sale of the Company's CICA and Sterling subsidiaries, the assets and liabilities of these subsidiaries have been reclassified to assets held for sale and liabilities held for sale,
respectively. Due to the nature of operations, insurance underwriting organizations generally do not classify assets and liabilities on their statements of financial position as current and
noncurrent, and Aon had previously not reported a classified statement of financial position. Due to the pending sales of a majority of the underwriting
operations (see Note 5), at December 31, 2007 Aon has reported its statements of financial position on a classified basis.
Segment Reporting
Aon classifies its businesses into two operating segments: Risk and Insurance Brokerage Services and Consulting. Unallocated income and expense, when combined
with the operating segments and after the elimination of intersegment revenues, totals to the amounts included in the consolidated financial statements. Results relating to Aon's accident, health and
life operations, which were previously reported in a separate Insurance Underwriting segment, have been reclassified to discontinued operations for all periods presented. The remaining operations that
were previously reported in the Insurance Underwriting segment, which relate to property and casualty insurance that is in runoff, are now included in unallocated income and expense for all periods
presented.
Revenue Recognition
Revenue is recognized when all elements of revenue recognition exist. Those elements are (1) persuasive evidence of an agreement with the client,
(2) a fixed and determinable price for services, (3) those services have been rendered, and (4) collectibility is reasonably assured.
Commissions and Fees
Commission revenue is primarily recognized at the later of the billing or the effective date of the related insurance policy, net of an allowance for estimated
policy cancellations. The allowance is based on an evaluation of relevant historical data. Where all of the elements of revenue recognition have been met, but processing has not yet occurred in the
billing system due to timing, an accrual is recorded based on an analysis of the specific transactions. For policies that are billed in installments, revenue is recognized when Aon has sufficient
information to estimate the amounts. When insurance underwriters directly bill clients, Aon's revenue is recognized when the cash is received or amounts due to Aon become determinable. Commissions on
premium adjustments are recognized as they occur.
72
Fees
for claims and consulting services are recognized when the services are rendered. For some clients, Aon has outsourcing arrangements that are spread over multiple years. Revenues
received from these arrangements are recorded on a gross basis, inclusive of amounts ultimately passed through to subcontractors, as long as Aon maintains the performance obligation, and are recorded
ratably over the life of the contract.
Reinsurance
Reinsurance premiums, commissions and expense reimbursements on reinsured business are accounted for consistently with the accounting for the original policies
issued and the terms of the reinsurance contracts. Reinsurance receivables and prepaid reinsurance premium amounts are reported as assets.
Income Taxes
Deferred income taxes are provided 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. Valuation allowances are recognized when, based on available evidence, it is more likely than not that a net deferred tax
asset may not be realized.
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. Net
income available for common stockholders is net of all preferred stock dividends. Diluted net income per share is computed by dividing net income available for common stockholders by the
weighted-average number of common shares outstanding, plus the dilutive effect of stock options and awards. The dilutive effect of stock options and awards is calculated under the treasury stock
method using the average market price for the period. Certain common stock equivalents related to options were not included in the computation of diluted income per share because those options'
exercise price was greater than the average market price of the common shares. The number of options excluded from the calculation was 5 million in 2007, 8 million in 2006 and
18 million in 2005. Aon includes 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 were included in the computation of diluted net income per share (see Note 7 for further information).
73
Income
per share is calculated as follows:
(millions, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Income from continuing operations
|
|
$
|
672
|
|
$
|
447
|
|
$
|
416
|
|
Income from discontinued operations, net of tax
|
|
|
192
|
|
|
272
|
|
|
319
|
|
Cumulative effect of a change in accounting
|
|
|
|
|
|
|
|
|
|
|
|
Principle, net of tax
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
Net income
|
|
|
864
|
|
|
720
|
|
|
735
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Net income for basic per share calculation
|
|
|
864
|
|
|
720
|
|
|
733
|
|
Interest expense on convertible debt securities,
|
|
|
|
|
|
|
|
|
|
|
|
net of tax
|
|
|
5
|
|
|
7
|
|
|
7
|
|
|
|
Net income for diluted per share calculation
|
|
$
|
869
|
|
$
|
727
|
|
$
|
740
|
|
|
|
Basic shares outstanding
|
|
|
298
|
|
|
317
|
|
|
322
|
|
Effect of convertible debt securities
|
|
|
11
|
|
|
14
|
|
|
14
|
|
Common stock equivalents
|
|
|
14
|
|
|
11
|
|
|
5
|
|
|
|
Diluted potential common shares
|
|
|
323
|
|
|
342
|
|
|
341
|
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.25
|
|
$
|
1.41
|
|
$
|
1.28
|
|
|
Discontinued operations
|
|
|
0.65
|
|
|
0.86
|
|
|
0.99
|
|
|
Cumulative effect of a change in accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
principle, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.90
|
|
$
|
2.27
|
|
$
|
2.27
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.10
|
|
$
|
1.33
|
|
$
|
1.24
|
|
|
Discontinued operations
|
|
|
0.59
|
|
|
0.80
|
|
|
0.93
|
|
|
Cumulative effect of a change in accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
principle, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.69
|
|
$
|
2.13
|
|
$
|
2.17
|
|
|
|
Changes in Accounting Principles
Stock Compensation Plans
Prior to 2006, Aon was subject to Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to
Employees,
in accounting for its stock-based compensation plans. Under APB No. 25, no compensation expense was recognized for stock options when the exercise price of
the options equaled the market price of the stock at the date of grant. Compensation expense for stock awards was based on the market price at the date of the award and was recognized on a
straight-line basis over the vesting period. Compensation expense for options with an exercise price less than the market price at the date of grant was based on the intrinsic value at the
date of grant.
On
January 1, 2006, Aon adopted Financial Accounting Standards Board ("FASB") Statement No. 123 (revised 2004),
Share-Based
Payment
("Statement No. 123(R)"), which requires the measurement and recognition of compensation expense for all share-based payments to employees including grants of
employee stock options and awards as well as employee stock purchases related to the Employee Stock Purchase Plan, based on estimated fair value. Aon adopted Statement No. 123 (R) using
the modified prospective transition method. In accordance with the modified prospective
74
transition
method, the Company's consolidated financial statements for prior periods have not been restated for the adoption of Statement No. 123(R).
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.
Stock-based compensation expense recognized in Aon's consolidated statements of income for the years ended December 31, 2007 and 2006 includes compensation expense for stock-based payment
awards granted prior to, but not yet vested as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of Statement No. 123, and
compensation expense for stock-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of Statement
No. 123(R). Because stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Statement No. 123(R)
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The adoption of Statement
No. 123(R) resulted in recording a cumulative effect of an accounting change as of January 1, 2006 of $1 million, net of tax, due to the requirement to adjust compensation
recognized through that date on restricted stock units (RSUs) to reflect forfeitures on an estimated method rather than the previous method, as they occurred. Upon adoption of Statement
No. 123(R), Aon also changed
its method of valuation for stock options granted beginning in 2006 to a lattice-binomial option-pricing model from the Black-Scholes option-pricing model, which was previously used for Aon's pro
forma information required under Statement No. 123. See Note 12 for further discussion of the effect of adopting Statement No. 123(R) on the Company's consolidated financial
statements.
Pensions and Other Postretirement Plans
On December 31, 2006, the Company adopted FASB Statement No. 158,
Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans
,
an amendment of FASB Statements No 87, 88, 106, and 132(R)
. Statement No. 158 requires plan
sponsors of defined benefit pension and other postretirement benefit plans (collectively, "postretirement benefit plans") to recognize the funded status of their postretirement benefit plans in the
statement of financial position, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end statement of financial position, and provide additional
disclosures. Adoption of the measurement date provisions of Statement No. 158 resulted in the Company changing the measurement date of its U.S. plans (previously November 30) and U.K.
plans (previously September 30) to December 31. The impact of adopting Statement No. 158 was a decrease to stockholders' equity of $349 million and $33 million for
the funded status and measurement date provisions, respectively. See Note 11 for further discussion of the effect of adopting Statement No. 158 on the Company's consolidated financial
statements.
Uncertain Tax Positions
Aon adopted the provisions of FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
, on January 1, 2007. FIN 48 clarified the accounting for uncertainty in income taxes which are recognized in a
company's financial statements in accordance with Statement No. 109. FIN 48 prescribes recognition and measurement provisions for a tax position taken, or expected to be taken, in a
company's tax return. As a result of the implementation of FIN 48, Aon did not recognize any material adjustments in the liability for unrecognized tax benefits. See Note 8 for further
discussion of the effect of adopting FIN 48 on the Company's consolidated financial statements.
Cash
Cash includes cash balances and investments with initial maturities of three months or less.
75
Short-term investments
Short-term investments include certificates of deposit, money market funds and highly liquid debt instruments purchased with maturities in excess of
three months and up to one year and are carried at amortized cost, which approximates fair value. Short-term investments also include fixed maturity securities that mature within a year,
and are reported at fair value based on quoted market prices.
Aon
maintained premium trust bank accounts for premiums collected from insureds but not yet remitted to insurance companies of $3.1 billion and $2.9 billion at
December 31, 2007 and 2006, respectively. These funds and a corresponding liability are included in short-term investments and insurance premiums payable, respectively, in the
accompanying consolidated statements of financial position.
Receivables and Insurance Premiums Payable
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 receivables on 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 insurance
premiums payable on 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.
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. Total receivables included an allowance for doubtful accounts of $95 million and $89 million at
December 31, 2007 and 2006, respectively.
Property and Equipment
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 7 years. The weighted-average original life of Aon's software at December 31, 2007 is 4.7 years.
76
The
components of net property and equipment are as follows:
(millions) As of December 31
|
|
2007
|
|
2006
|
|
Software
|
|
$
|
607
|
|
$
|
583
|
Leasehold improvements
|
|
|
412
|
|
|
374
|
Furniture, fixtures and equipment
|
|
|
263
|
|
|
267
|
Computer equipment
|
|
|
227
|
|
|
298
|
Land and buildings
|
|
|
88
|
|
|
80
|
Automobiles and aircraft
|
|
|
41
|
|
|
25
|
Capital in progress
|
|
|
15
|
|
|
20
|
|
|
|
|
|
|
1,653
|
|
|
1,647
|
Less: Accumulated depreciation
|
|
|
1,155
|
|
|
1,191
|
|
Property and equipment, net
|
|
$
|
498
|
|
$
|
456
|
|
Depreciation expense for the years ended December 31, 2007, 2006 and 2005 was $154 million, $185 million and $205 million,
respectively.
Long-term Investments
Fixed-maturity securities
are classified as available for sale and are reported at fair value based on quoted
market prices. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and the accretion of discounts to maturity, which are included in investment income.
Private equity investments
are generally carried at cost, which the Company believes approximates fair value, except where Aon has
significant influence, in which case they are carried using the equity method of accounting.
Unrealized
gains and losses on fixed maturity securities and marketable equity securities are excluded from income and are recorded directly in stockholders' equity as accumulated other
comprehensive income or loss, net of deferred income taxes.
Endurance common stock and warrants
Aon previously held investments in common stock and stock purchase warrants in
Endurance Specialty Holdings, Ltd. ("Endurance"), a Bermuda-based insurance and reinsurance company. In 2004, Aon sold virtually all of its common stock investment in Endurance. In conjunction
with the initial common stock investment, Aon also received 4.1 million stock purchase warrants, which allowed Aon to purchase additional Endurance common stock through December 2011. The
warrants were recorded in the financial statements at fair value, with changes in fair value included in investment income. On March 31, 2006, Aon contributed all of the Endurance warrants to
its U.K. pension plans. The change in the fair value was included in income and was a decrease of $14 million in 2006 and an increase of $8 million in 2005.
Limited partnership investments
are carried using the equity method of accounting. Certain of the limited partnerships in which Aon
invests have holdings in publicly-traded equity securities. Changes in market value of these indirectly-held equity securities flow through the limited partnerships' financial statements.
Aon's proportionate share of these valuation changes is included in unallocated income.
General
Income or loss on the disposal of investments is calculated using the amortized cost of the security sold and
is reported in investment income in the consolidated statements of income.
Declines
in the fair value of investments are evaluated for other-than-temporary impairment on a quarterly basis. The assessment of whether impairments have
occurred is based on management's evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors and all relevant information about the security
issuer and uses its best judgment in evaluating the cause of the decline and the prospects for recovery in the near-term. Impairment losses for declines
77
in
the value of investments which are attributable to issuer-specific events are evaluated on a case-by-case basis and recognized when the decline in fair value is judged to be
other-than-temporary. For fixed-maturity investments with unrealized losses due to market conditions or industry-related events where Aon has the positive intent and ability to
hold the investment for a period of time sufficient to allow a market recovery or to maturity, declines in value below cost are considered to be temporary.
Reserves
for certain other investments are established based on an evaluation of the respective investment portfolio and current economic conditions. Write-downs and changes in reserves
are included in investment income in the consolidated statements of income. In general, Aon ceases to accrue investment income when interest or dividend payments are in arrears.
Accounting
policies relating to derivative financial instruments are discussed in Note 13.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair values of financial instruments:
Cash and cash equivalents, including short-term investments:
Carrying amounts approximate fair value.
Fixed-maturity and equity securities:
Fair value is based on quoted market prices or on estimated values obtained from
independent pricing services, if they are not actively traded.
Derivative financial instruments:
Fair value is based on quoted prices for exchange-traded instruments or the cost to
terminate or offset with other contracts.
Other investments
are comprised of Aon's investment in private equity investments and limited partnerships. Carrying amounts approximate
fair value.
Debt:
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.
Policy and Contract Claims
Policy and contract claim liabilities represent estimates for reported claims, as well as provisions for losses incurred but not reported. Claim liabilities are
based on historical experience and are estimates of the ultimate amount to be paid when the claims are settled. The estimates are subject to the effects of trends in claim severity and frequency. The
process of estimating and establishing policy and contract liabilities is inherently uncertain and the actual ultimate cost of a claim may vary materially from the estimated amount reserved. The
estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.
Foreign Currency Translation
Foreign revenues and expenses are translated at average exchange rates. Foreign assets and liabilities are translated at year-end exchange rates. Net
foreign exchange gains and losses on translation are reported in stockholders' equity, in accumulated other comprehensive income or loss ("OCI"), net of applicable deferred income taxes.
New Accounting Pronouncements
In September 2006, the FASB issued Statement 157,
Fair Value Measurements
, which provides enhanced guidance for
using fair value to measure assets and liabilities. Statement No. 157 also requires expanded disclosure of the methods employed when assets and liabilities are measured and the
78
effect
of fair value measurements on earnings. Statement No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. Statement
No. 157 does not expand the use of fair value in any new circumstances. Statement No. 157 is effective for Aon in 2008. In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
, which permits entities to choose to measure many financial instruments and certain
other items at fair value. Statement No. 159 is effective for Aon in 2008. The Company does not expect a material impact upon adoption of these Statements.
In
December 2007, the FASB issued Statement No. 141 (revised 2007),
Business Combinations
("Statement No. 141(R)") and
Statement No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.
Statement No. 141(R)
replaces Statement No. 141 and applies to all transactions or other events in which an entity obtains control over one or more businesses. This Statement 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 noncontroling interest in the acquiree, at the full amounts of their fair values. Statement No. 141(R) also
changes the requirements for recognizing assets acquired and liabilities assumed arising from contingencies, and requires direct acquisition costs to be expensed.
Statement
No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.
This Statement also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. Statement No. 160
requires retrospective adjustments, for all periods presented, of stockholders' equity and net income for noncontrolling interests.
Both
Statements are effective for Aon as of January 1, 2009. Early adoption is prohibited. Aon is currently evaluating these Statements to determine what impact, if any, they will
have on its consolidated financial statements.
79
2. Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) and the related tax effects are as follows:
(millions) Year ended December 31, 2007
|
Pretax
|
|
Income Tax
(Expense)
Benefit
|
|
Net
of Tax
|
|
|
|
Net derivative gains arising during the year
|
$
|
29
|
|
$
|
(9
|
)
|
$
|
20
|
|
Reclassification adjustment
|
|
(16
|
)
|
|
5
|
|
|
(11
|
)
|
|
|
Net change in derivative gains
|
|
13
|
|
|
(4
|
)
|
|
9
|
|
Unrealized losses arising during the year
|
|
(19
|
)
|
|
9
|
|
|
(10
|
)
|
Reclassification adjustment
|
|
20
|
|
|
(7
|
)
|
|
13
|
|
|
|
Net change in unrealized investment gains
|
|
1
|
|
|
2
|
|
|
3
|
|
Net foreign exchange translation
|
|
300
|
|
|
(134
|
)
|
|
166
|
|
Net post-retirement benefit obligation
|
|
173
|
|
|
(67
|
)
|
|
106
|
|
|
|
Total other comprehensive income
|
$
|
486
|
|
$
|
(202
|
)
|
$
|
284
|
|
|
|
(millions) Year ended December 31, 2006
|
Pretax
|
|
Income Tax
(Expense)
Benefit
|
|
Net
of Tax
|
|
|
|
Net derivative gains arising during the year
|
$
|
31
|
|
$
|
(12
|
)
|
$
|
19
|
|
Reclassification adjustment
|
|
11
|
|
|
(4
|
)
|
|
7
|
|
|
|
Net change in derivative gains
|
|
42
|
|
|
(16
|
)
|
|
26
|
|
Unrealized gains arising during the year
|
|
10
|
|
|
(3
|
)
|
|
7
|
|
Reclassification adjustment
|
|
19
|
|
|
(5
|
)
|
|
14
|
|
|
|
Net change in unrealized investment gains
|
|
29
|
|
|
(8
|
)
|
|
21
|
|
Net foreign exchange translation
|
|
238
|
|
|
(1
|
)
|
|
237
|
|
Net additional minimum pension liability
|
|
321
|
|
|
(111
|
)
|
|
210
|
|
|
|
Total other comprehensive income
|
$
|
630
|
|
$
|
(136
|
)
|
$
|
494
|
|
|
|
(millions) Year ended December 31, 2005
|
Pretax
|
|
Income Tax
(Expense)
Benefit
|
|
Net
of Tax
|
|
|
|
Net derivative losses arising during the year
|
$
|
(20
|
)
|
$
|
8
|
|
$
|
(12
|
)
|
Reclassification adjustment
|
|
(64
|
)
|
|
25
|
|
|
(39
|
)
|
|
|
Net change in derivative losses
|
|
(84
|
)
|
|
33
|
|
|
(51
|
)
|
Unrealized losses arising during the year
|
|
(8
|
)
|
|
3
|
|
|
(5
|
)
|
Reclassification adjustment
|
|
(8
|
)
|
|
3
|
|
|
(5
|
)
|
|
|
Net change in unrealized investment losses
|
|
(16
|
)
|
|
6
|
|
|
(10
|
)
|
Net foreign exchange translation
|
|
(248
|
)
|
|
8
|
|
|
(240
|
)
|
Net additional minimum pension liability
|
|
(253
|
)
|
|
80
|
|
|
(173
|
)
|
|
|
Total other comprehensive loss
|
$
|
(601
|
)
|
$
|
127
|
|
$
|
(474
|
)
|
|
|
80
The components of accumulated other comprehensive loss, net of related tax, are as follows:
(millions) As of December 31
|
2007
|
|
2006
|
|
2005
|
|
|
|
Net derivative gains (losses)
|
$
|
24
|
|
$
|
15
|
|
$
|
(11
|
)
|
Net unrealized investment gains
|
|
76
|
|
|
73
|
|
|
52
|
|
Net foreign exchange translation
|
|
284
|
|
|
118
|
|
|
(119
|
)
|
Postretirement plans
|
|
(1,110
|
)
|
|
(1,216
|
)
|
|
(1,077
|
)
|
|
|
|
Accumulated other comprehensive loss
|
$
|
(726
|
)
|
$
|
(1,010
|
)
|
$
|
(1,155
|
)
|
|
|
81
3. Business Combinations
In 2007, 2006 and 2005, Aon completed a number of acquisitions, primarily related to its insurance brokerage operations. The following table
includes the aggregate amounts paid and intangible assets recorded as a result of the acquisitions. Amounts paid include cash paid for current year's acquisitions as well as installment payments made
during the year for previous years' acquisitions. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized.
(millions) Years ended December 31
|
2007
|
|
2006
|
|
2005
|
|
Amounts paid:
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
251
|
|
$
|
138
|
|
$
|
81
|
|
Common stock
|
|
|
|
|
|
|
|
5
|
|
|
|
Total
|
$
|
251
|
|
$
|
138
|
|
$
|
86
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
149
|
|
$
|
122
|
|
$
|
67
|
|
Other intangible assets
|
|
92
|
|
|
66
|
|
|
39
|
|
|
|
Total
|
$
|
241
|
|
$
|
188
|
|
$
|
106
|
|
Internal funds, short-term borrowings and common stock financed the acquisitions.
The
results of operations of these acquisitions are included in the 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.
82
4. Restructuring Charges
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 2,700 job eliminations beginning in the third quarter of 2007 and continuing into 2009. The Company also expects to close or consolidate
several offices resulting in sublease losses or lease buy-outs. The Company estimates that the 2007 Plan will result in cumulative pretax charges totaling approximately
$360 million. Expenses will include workforce reduction and 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, other general expenses and depreciation and amortization in the accompanying consolidated statements of income. The Company
expects the restructuring and related expenses to affect continuing operations through the end of 2009.
Below
is a summary of 2007 restructuring and related expenses by type incurred and estimated to be incurred through the end of the restructuring initiative.
(millions)
|
|
Actual
2007
|
|
Estimated
Total (1)
|
|
Workforce reduction
|
|
$
|
17
|
|
$
|
220
|
Lease consolidation
|
|
|
22
|
|
|
79
|
Asset impairments
|
|
|
4
|
|
|
41
|
Other costs associated with restructuring
|
|
|
3
|
|
|
20
|
|
Total restructuring and related expenses
|
|
$
|
46
|
|
$
|
360
|
|
-
(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 approved include,
but are not limited to, changes in severance calculations, changes in the assumptions underlying sublease loss calculations due to changing market conditions, and changes in the overall analysis that
might cause the Company to add or cancel component initiatives.
The
following is a summary of actual restructuring and related expenses incurred and estimated to be incurred through the end of the restructuring initiative, by segment.
(millions)
|
|
Actual
2007
|
|
Estimated
Total
|
|
Risk and Insurance Brokerage Services
|
|
$
|
41
|
|
$
|
320
|
Consulting
|
|
|
5
|
|
|
40
|
|
Total restructuring and related expenses
|
|
$
|
46
|
|
$
|
360
|
|
As of December 31, 2007, the Company's liabilities for the 2007 Plan are as follows:
(millions)
|
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
|
|
Expensed in 2007
|
|
|
42
|
|
Cash payments in 2007
|
|
|
(17
|
)
|
|
|
Balance at December 31, 2007
|
|
$
|
25
|
|
|
|
83
2005 Restructuring Plan
In 2005, the Company commenced a restructuring that resulted in cumulative pretax charges totaling $366 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, other
general expenses and depreciation and amortization in the accompanying consolidated statements of income.
The
following is a summary of the restructuring and related expenses incurred by type.
(millions)
|
|
2005
|
|
2006
|
|
2007
|
|
Total
|
|
Workforce reduction
|
|
$
|
116
|
|
$
|
116
|
|
$
|
21
|
|
$
|
253
|
Lease consolidation
|
|
|
20
|
|
|
27
|
|
|
13
|
|
|
60
|
Asset impairments
|
|
|
17
|
|
|
12
|
|
|
3
|
|
|
32
|
Other related expenses
|
|
|
5
|
|
|
12
|
|
|
4
|
|
|
21
|
|
Total restructuring and related expenses
|
|
$
|
158
|
|
$
|
167
|
|
$
|
41
|
|
$
|
366
|
|
The following is a summary of the restructuring and related expenses incurred by segment.
(millions)
|
|
2005
|
|
2006
|
|
2007
|
|
Total
|
|
Risk and Insurance Brokerage Services
|
|
$
|
143
|
|
$
|
136
|
|
$
|
33
|
|
$
|
312
|
Consulting
|
|
|
8
|
|
|
20
|
|
|
6
|
|
|
34
|
Unallocated
|
|
|
4
|
|
|
3
|
|
|
|
|
|
7
|
|
|
|
Total restructuring and related expenses continuing operations
|
|
|
155
|
|
|
159
|
|
|
39
|
|
|
353
|
Discontinued operations
|
|
|
3
|
|
|
8
|
|
|
2
|
|
|
13
|
|
Total restructuring and related expenses
|
|
$
|
158
|
|
$
|
167
|
|
$
|
41
|
|
$
|
366
|
|
The following table sets forth the activity related to the 2005 restructuring plan liabilities.
(millions)
|
|
|
|
|
|
Balance at January 1, 2005
|
|
$
|
|
|
Expensed in 2005
|
|
|
141
|
|
Cash payments in 2005
|
|
|
(23
|
)
|
Foreign currency revaluation
|
|
|
(2
|
)
|
|
|
|
|
Balance at December 31, 2005
|
|
|
116
|
|
Expensed in 2006
|
|
|
155
|
|
Cash payments in 2006
|
|
|
(141
|
)
|
Foreign currency revaluation
|
|
|
4
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
134
|
|
Expensed in 2007
|
|
|
38
|
|
Cash payments in 2007
|
|
|
(110
|
)
|
Foreign currency revaluation
|
|
|
1
|
|
|
|
Balance at December 31, 2007
|
|
$
|
63
|
|
|
|
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.
84
5. Disposal of Operations
Continuing Operations
In 2007, Aon sold Media Professionals, Inc. and two other, smaller operations, which were included in the Risk and Insurance Brokerage Services segment.
Total pretax gains of $32 million were recognized on these sales, which are included in other general expenses in the consolidated statement of income. Also in 2007, Aon sold 25% of its
Botswana subsidiary, which is included in the Risk and Insurance Brokerage Services segment. A pretax gain of $4 million was recognized on the sale, which is included in other general expenses
in the consolidated statements of income. These disposals did not meet the criteria for discontinued operations reporting.
Discontinued Operations
In fourth quarter 2007, the Company announced that it had signed separate definitive agreements to sell its CICA and Sterling subsidiaries. These two subsidiaries
were previously included in the Insurance Underwriting segment. The CICA business is being sold to ACE Limited for cash consideration of $2.4 billion. Sterling is being sold to Munich Re Group
for cash consideration of $352 million. Additionally, it is expected that CICA will pay a $325 million dividend to Aon before the sale transaction is completed. Both transactions are
expected to be completed in the second quarter of 2008. The dispositions are subject to various closing conditions, including receipt of certain required regulatory approvals.
In
2006, Aon sold the following businesses:
-
-
Aon
Warranty Group ("AWG") and its worldwide warranty and credit operations, which was previously included in the Insurance Underwriting segment. A pretax gain of
$16 million was recognized on the sale.
-
-
Construction
Program Group ("CPG"), a managing general underwriter whose policies were underwritten by Aon's property and casualty operation. Results of CPG were previously
included in both the Risk and Insurance Brokerage Services and Insurance Underwriting segments. A pretax gain of $27 million was recognized on the sale.
Goodwill
was allocated to these businesses based on their estimated fair value compared to the fair value of the reporting units in which they were previously included.
In
2005, Aon sold Swett & Crawford ("Swett"), its U.S.-based wholesale insurance brokerage unit. Previously, Swett was included in the Risk and Insurance Brokerage Services
segment. The sale resulted in a pretax gain of $239 million.
A&A Discontinued Operations
Prior to its acquisition by Aon, Alexander & Alexander Services, Inc. ("A&A") discontinued its property and casualty insurance underwriting operations in 1985,
some of which were then placed into runoff, with the remainder sold in 1987. In connection with those sales, A&A provided indemnities to the purchaser for various estimated and potential liabilities,
including provisions to cover future losses attributable to insurance pooling arrangements, a stop-loss reinsurance agreement and actions or omissions by various underwriting agencies
previously managed by an A&A subsidiary.
As
of December 31, 2007 and 2006, the liabilities associated with the foregoing indemnities were included in other non-current liabilities in the consolidated
statements of financial position. Such liabilities amounted to $69 million and $81 million, respectively. Reinsurance recoverables and other assets related to these liabilities are
$87 million and $94 million, respectively. The remaining insurance liabilities represent estimates of known and future claims expected to be settled over the next 20 to 30 years,
principally with regards to asbestos, pollution and other health exposures. Although these
85
insurance
liabilities represent a best estimate of the probable liabilities, adverse developments may occur given the nature of the information available and the variables inherent in the estimation
processes. In 2006, an agreement was reached relating to the settlement of certain legacy reinsurance claims, which resulted in a pretax gain, net of expenses, of $13 million. In 2005, a pretax
expense of $11 million was recorded for consulting and legal costs related to completed and contemplated settlements and actuarial refinements to claims reserves and reinsurance recoverables.
The
operating results of all these businesses are classified as discontinued operations, and prior years' operating results have been reclassified to discontinued operations, as follows.
(millions) Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
CICA and Sterling
|
|
$
|
2,502
|
|
$
|
2,073
|
|
$
|
1,874
|
|
|
|
AWG
|
|
|
|
|
|
1,115
|
|
|
1,103
|
|
|
|
CPG
|
|
|
|
|
|
242
|
|
|
209
|
|
|
|
Swett
|
|
|
|
|
|
|
|
|
183
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,502
|
|
$
|
3,430
|
|
$
|
3,379
|
|
|
|
Pretax gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
CICA and Sterling
|
|
$
|
323
|
|
$
|
257
|
|
$
|
232
|
|
|
|
AWG
|
|
|
|
|
|
94
|
|
|
99
|
|
|
|
CPG
|
|
|
|
|
|
11
|
|
|
54
|
|
|
|
Swett
|
|
|
|
|
|
|
|
|
2
|
|
|
|
Other
|
|
|
3
|
|
|
11
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
326
|
|
|
373
|
|
|
379
|
|
|
Gain (loss) on sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
AWG
|
|
|
(12
|
)
|
|
16
|
|
|
|
|
|
|
CPG
|
|
|
2
|
|
|
27
|
|
|
|
|
|
|
Swett
|
|
|
|
|
|
|
|
|
239
|
|
|
|
U.K. brokerage units
|
|
|
|
|
|
2
|
|
|
(3
|
)
|
|
|
Other
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
46
|
|
|
236
|
|
|
|
Total pretax gain
|
|
$
|
316
|
|
$
|
419
|
|
$
|
615
|
|
|
|
After-tax gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
$
|
189
|
|
$
|
263
|
|
$
|
218
|
|
|
|
Sale
|
|
|
3
|
|
|
9
|
|
|
101
|
|
|
|
|
|
|
Total
|
|
$
|
192
|
|
$
|
272
|
|
$
|
319
|
|
|
|
86
In accordance with FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets
, Aon has reclassified the assets and liabilities of both CICA and Sterling to assets held-for-sale and liabilities
held-for-sale, respectively, in the December 31, 2007 and 2006 consolidated statements of financial position.
The
assets and liabilities reclassified are as follows:
|
As of December 31
|
|
|
|
|
(millions)
|
2007
|
|
2006
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed maturities
|
$
|
2,826
|
|
$
|
2,596
|
|
|
|
All other investments
|
|
398
|
|
|
114
|
|
|
Receivables
|
|
61
|
|
|
115
|
|
|
Reinsurance recoverables
|
|
358
|
|
|
566
|
|
|
Deferred policy acquisition costs
|
|
594
|
|
|
547
|
|
|
Goodwill and other intangible assets
|
|
11
|
|
|
13
|
|
|
Property and equipment and other assets
|
|
140
|
|
|
99
|
|
|
|
|
|
Total assets
|
$
|
4,388
|
|
$
|
4,050
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Policy liabilities:
|
|
|
|
|
|
|
|
|
Future policy benefits
|
$
|
1,870
|
|
$
|
1,784
|
|
|
|
Policy and contract claims
|
|
488
|
|
|
506
|
|
|
|
Unearned premium reserves and other
|
|
291
|
|
|
399
|
|
|
General expenses and other liabilities
|
|
376
|
|
|
221
|
|
|
|
|
|
Total liabilities
|
$
|
3,025
|
|
$
|
2,910
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
Invested equity
|
$
|
1,321
|
|
$
|
1,134
|
|
|
Net unrealized investment losses
|
|
(23
|
)
|
|
(56
|
)
|
|
Net foreign exchange translation
|
|
65
|
|
|
62
|
|
|
|
|
|
Total equity
|
$
|
1,363
|
|
$
|
1,140
|
|
|
|
The balances of investments and invested equity have been reduced to reflect the anticipated dividend that CICA will remit to Aon prior to completion of the sales
transaction.
87
6. Investments
Aon's long-term investments are as follows:
(millions) As of December 31
|
2007
|
|
2006
|
|
Fixed maturities
|
$
|
100
|
|
$
|
185
|
Equity securities
|
|
1
|
|
|
1
|
PEPS I preferred stock
|
|
168
|
|
|
210
|
Other investments
|
|
148
|
|
|
133
|
|
|
$
|
417
|
|
$
|
529
|
|
The amortized cost and fair value of investments in fixed maturities by type and equity securities are as follows:
(millions) As of December 31, 2007
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Government:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
$
|
53
|
|
$
|
|
|
$
|
|
|
$
|
53
|
|
U.S. state and political subdivisions
|
|
1
|
|
|
|
|
|
|
|
|
1
|
|
Foreign governments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
60
|
|
|
|
|
|
|
|
|
60
|
|
|
Other
|
|
25
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
Total foreign governments
|
|
85
|
|
|
|
|
|
|
|
|
85
|
Corporate securities
|
|
11
|
|
|
|
|
|
|
|
|
11
|
|
|
Total fixed maturities
|
|
150
|
|
|
|
|
|
|
|
|
150
|
Total equity securities
|
|
1
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
Total
|
$
|
151
|
|
$
|
|
|
$
|
|
|
$
|
151
|
|
(millions) As of December 31, 2006
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Government:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
$
|
60
|
|
$
|
|
|
$
|
(2
|
)
|
$
|
58
|
|
U.S. state and political subdivisions
|
|
2
|
|
|
|
|
|
|
|
|
2
|
|
Foreign governments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
76
|
|
|
|
|
|
(2
|
)
|
|
74
|
|
|
Other
|
|
29
|
|
|
|
|
|
(1
|
)
|
|
28
|
|
|
|
|
|
Total foreign governments
|
|
105
|
|
|
|
|
|
(3
|
)
|
|
102
|
Corporate securities
|
|
31
|
|
|
|
|
|
|
|
|
31
|
Mortgage- and asset-backed securities
|
|
2
|
|
|
|
|
|
(1
|
)
|
|
1
|
|
|
Total fixed maturities
|
|
200
|
|
|
|
|
|
(6
|
)
|
|
194
|
Total equity securities
|
|
1
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
Total
|
$
|
201
|
|
$
|
|
|
$
|
(6
|
)
|
$
|
195
|
|
88
The amortized cost and fair value of fixed maturities by contractual maturity as of December 31, 2007, are as follows:
(millions)
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Due in one year or less
|
|
$
|
50
|
|
$
|
50
|
Due after one year through five years
|
|
|
52
|
|
|
52
|
Due after five years through ten years
|
|
|
47
|
|
|
47
|
Due after ten years
|
|
|
1
|
|
|
1
|
|
Total fixed maturities
|
|
$
|
150
|
|
$
|
150
|
|
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.
For
categorization purposes, Aon considers any rating of Baa or higher by Moody's Investor Services or equivalent rating agency to be investment grade. Aon's continuing operations have
no fixed maturities with an unrealized loss at December 31, 2007. Aon's fixed-maturity portfolio is subject to interest rate, market and credit risks. With a carrying value of approximately
$150 million at December 31, 2007, Aon's total fixed-maturity portfolio is approximately 96% investment grade based on market value. Aon's non publicly-traded fixed maturity portfolio
had a carrying value of $9 million. Valuations of these securities primarily reflect the fundamental analysis of the issuer and current market price of comparable securities.
Aon's
equity portfolio is comprised of a preferred stock not publicly traded. This portfolio is subject to interest rate, market, credit, illiquidity, concentration and operational
performance risks.
Limited Partnership Securitization.
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, established for victims of September 11 (51%). Approximately $171 million of investment grade fixed-maturity securities were sold by
PEPS I to unaffiliated third parties. PEPS I then paid Aon's insurance underwriting subsidiaries the $171 million in cash and issued to them 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 fixed-maturity securities in an amount equal to the unfunded limited partnership commitments, as
they are requested. Aon funded $2 million of commitments in both 2007 and 2006. As of December 31, 2007, these unfunded commitments amounted to $44 million. These commitments have
specific expiration dates and the general partners may decide not to draw on these commitments. The carrying value of the PEPS I preferred stock was $168 million and $210 million
at December 31, 2007 and 2006, respectively.
Prior
to 2007, income distributions received from PEPS I were limited to interest payments on various PEPS I debt instruments. Beginning in 2007, PEPS I had redeemed
or collateralized all of its debt, and as a result, began to pay preferred income distributions. In 2007, the Company received $61 million of income distributions from PEPS I, which are
included in investment income.
89
The
components of investment income are as follows:
(millions) Years ended December 31
|
2007
|
|
2006
|
|
2005
|
|
|
|
Short-term investments
|
$
|
228
|
|
$
|
193
|
|
$
|
129
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
8
|
|
|
11
|
|
|
10
|
|
|
Losses (1)
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
8
|
|
|
9
|
|
|
10
|
|
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
Interest, dividend and other income
|
|
61
|
|
|
|
|
|
6
|
|
|
Endurance warrants
|
|
|
|
|
(14
|
)
|
|
8
|
|
|
Net gains (losses) (1)
|
|
12
|
|
|
38
|
|
|
(3
|
)
|
|
|
|
|
|
Total
|
|
73
|
|
|
24
|
|
|
11
|
|
|
|
Gross investment income
|
|
309
|
|
|
226
|
|
|
150
|
|
Less: investment expenses
|
|
8
|
|
|
5
|
|
|
6
|
|
|
|
Investment income
|
$
|
301
|
|
$
|
221
|
|
$
|
144
|
|
|
|
-
(1)
-
Includes
other-than-temporary impairment write-downs of $2 million, $1 million and $3 million in 2007, 2006 and 2005, respectively.
The
components of net unrealized investment gains (losses), which include investments reported as held-for-sale, are as follows:
(millions) As of December 31
|
2007
|
|
2006
|
|
2005
|
|
|
|
Fixed maturities
|
$
|
(31
|
)
|
$
|
(49
|
)
|
$
|
(39
|
)
|
Equity securities
|
|
(4
|
)
|
|
(4
|
)
|
|
(1
|
)
|
Other investments
|
|
150
|
|
|
167
|
|
|
125
|
|
Deferred taxes
|
|
(39
|
)
|
|
(41
|
)
|
|
(33
|
)
|
|
|
Net unrealized investment gains
|
$
|
76
|
|
$
|
73
|
|
$
|
52
|
|
|
|
The pretax changes in net unrealized investment gains (losses), which include investments reported as held-for-sale, are as follows:
(millions) Years ended December 31
|
2007
|
|
2006
|
|
2005
|
|
|
|
Fixed maturities
|
$
|
18
|
|
$
|
(10
|
)
|
$
|
(51
|
)
|
Equity securities
|
|
|
|
|
(3
|
)
|
|
(2
|
)
|
Other investments
|
|
(17
|
)
|
|
42
|
|
|
37
|
|
|
|
Total
|
$
|
1
|
|
$
|
29
|
|
$
|
(16
|
)
|
|
|
Other
Securities on deposit with insurance regulatory authorities related to the Company's runoff property and casualty operations amounted to $5 million at
December 31, 2007.
At
December 31, 2007 and 2006, Aon had $66 million and $214 million, respectively, of non-income producing investments, which excludes derivatives that
are marked to
market through the income statement, as well as private equity investments carried on the equity method, held for at least twelve months, that have not declared dividends during 2007 and 2006.
90
7. Debt and Lease Commitments
Debt
The following is a summary of outstanding debt:
(millions) As of December 31
|
|
2007
|
|
2006
|
|
8.205% junior subordinated deferrable interest debentures, due January 2027
|
|
$
|
726
|
|
$
|
726
|
5.05% debt securities, due April 2011
|
|
|
382
|
|
|
323
|
7.375% debt securities, due December 2012
|
|
|
224
|
|
|
224
|
3.5% convertible debt securities, due November 2012
|
|
|
|
|
|
297
|
6.2% debt securities, due January 2007
|
|
|
|
|
|
250
|
Euro credit facility
|
|
|
795
|
|
|
403
|
Notes payable, due in varying installments, with interest at
|
|
|
|
|
|
|
|
|
1% to 15.9%
|
|
|
16
|
|
|
20
|
Other
|
|
|
2
|
|
|
42
|
|
Total debt
|
|
|
2,145
|
|
|
2,285
|
|
|
Less short-term debt
|
|
|
252
|
|
|
42
|
|
Total long-term debt
|
|
$
|
1,893
|
|
$
|
2,243
|
|
Aon created Aon Capital A, a wholly-owned statutory business 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 (subordinated
debt) to Aon Capital A. The Capital Securities are subject to mandatory redemption on January 1, 2027 (upon the maturity of the subordinated debt) or are redeemable in whole, but not in
part, at the option of Aon (through its prepayment of the subordinated debt) upon the occurrence of certain events. Interest is payable semi-annually on the Capital Securities. Aon
determined that it is not the primary beneficiary of Aon Capital A, a VIE, and, in accordance with FASB Interpretation No. 46(R),
Consolidation of Variable
Interest Entities
, Aon recorded long-term debt for the subordinated debt of $726 million.
In
April 2006, an indirect wholly-owned subsidiary of Aon issued CAD 375 million (U.S. $382 million at December 31, 2007 exchange rates) of 5.05% senior unsecured
debentures due in April 2011. The principal and interest on the debentures is unconditionally and irrevocably guaranteed by Aon. The net proceeds from the offering were used to repay outstanding
indebtedness under the Company's €650 million Euro credit facility.
Aon
issued $250 million of 6.2% debt securities that were due in January 2007. The interest rate on these debt securities was subject to adjustment in the event that Aon's credit
ratings change. Due to a rating downgrade in 2004, the interest rate on the 6.2% debt securities was increased to 6.95% effective January 2005. These securities were redeemed in January 2007.
In
November 2007, the Company redeemed all of its remaining outstanding 3
1
/
2
% Senior Convertible Debentures that were due in 2012. All of the holders of the Debentures
elected to convert their debentures into Aon common stock at a conversion rate of 46.5658 shares of common stock for each $1,000 principal amount of Debentures. As a result of this redemption and
earlier voluntary redemptions, approximately 14 million shares of Aon common stock were issued.
Certain
of Aon's European subsidiaries have a €650 million (U.S. $942 million) multi-currency revolving loan credit facility. This facility will mature in
October 2010, unless Aon opts to extend the facility. Commitment fees of 8.75 basis points are payable on the unused portion of the facility. At December 31, 2007, Aon has borrowed
€376 million and $250 million ($795 million) under this facility. At December 31, 2006, €307 million was borrowed. At
December 31, 2007, $250 million of the Euro
91
facility
is classified as short-term debt in the consolidated statements of financial position. Aon has guaranteed the obligations of its subsidiaries with respect to this facility.
Aon
maintains a $600 million, 5-year U.S. committed bank credit facility to support commercial paper and other short-term borrowings, which expires in
February 2010. This facility permits the issuance of up to $150 million in letters of credit. At December 31, 2007 and 2006, Aon had $20 million in letters of credit outstanding.
Based on Aon's current credit ratings, commitment fees of 10 basis points are payable on the unused portion of the facility.
For
both the U.S. and Euro facilities, Aon is required to maintain consolidated net worth, as defined, of at least $2.5 billion, 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
also has other foreign facilities available, which include a £37.5 million ($74 million) facility, a €25 million ($36 million)
facility, and a €20 million ($29 million) facility.
Outstanding
debt securities, including Aon Capital A's, 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 $548 million, $382 million and $225 million in 2010, 2011 and 2012, respectively.
Other
information related to Aon's debt is as follows:
Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Interest paid (millions)
|
|
$
|
147
|
|
$
|
130
|
|
$
|
130
|
|
Weighted-average interest rates short-term borrowings
|
|
|
5.1
|
%
|
|
4.4
|
%
|
|
3.5
|
%
|
|
|
Lease Commitments
Aon has noncancelable operating leases for certain office space, equipment and automobiles. 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 81% of Aon's lease obligations are for the use of office space. Rental expense for operating leases amounted to $368 million, $350 million and $337 million for 2007,
2006 and 2005, respectively, after deducting rentals from subleases ($40 million, $33 million and $29 million for 2007, 2006 and 2005, respectively).
At
December 31, 2007, 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:
(millions)
|
|
|
|
2008
|
|
$
|
317
|
2009
|
|
|
275
|
2010
|
|
|
236
|
2011
|
|
|
214
|
2012
|
|
|
191
|
Later years
|
|
|
597
|
|
Total minimum payments required
|
|
$
|
1,830
|
|
92
8. Income Taxes
Aon and its principal domestic subsidiaries are included in a consolidated life-nonlife federal income tax return. Aon's international
subsidiaries file various income tax returns in their jurisdictions.
Income
from continuing operations before provision for income tax and the provision for income tax consist of the following:
(millions) Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Income from continuing operations before provision for income tax:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
229
|
|
$
|
6
|
|
$
|
68
|
|
|
International
|
|
|
795
|
|
|
657
|
|
|
509
|
|
|
|
|
|
Total
|
|
$
|
1,024
|
|
$
|
663
|
|
$
|
577
|
|
|
|
Provision for income tax:
|
|
|
|
|
|
|
|
|
|
|
Current (credit):
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
62
|
|
$
|
85
|
|
$
|
(61
|
)
|
|
International
|
|
|
207
|
|
|
197
|
|
|
127
|
|
|
State
|
|
|
16
|
|
|
33
|
|
|
9
|
|
|
|
|
|
Total current
|
|
|
285
|
|
|
315
|
|
|
75
|
|
|
|
Deferred (credit):
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1
|
|
|
(94
|
)
|
|
36
|
|
|
International
|
|
|
65
|
|
|
16
|
|
|
36
|
|
|
State
|
|
|
1
|
|
|
(21
|
)
|
|
14
|
|
|
|
|
|
Total deferred
|
|
|
67
|
|
|
(99
|
)
|
|
86
|
|
|
|
Provision for income tax
|
|
$
|
352
|
|
$
|
216
|
|
$
|
161
|
|
|
|
Income from continuing operations before provision for income tax shown above is based on the location of the corporate 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:
Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Statutory tax rate
|
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
1.1
|
|
1.2
|
|
2.6
|
|
Taxes on international operations
|
|
(3.3
|
)
|
(3.7
|
)
|
(0.6
|
)
|
Nondeductible expenses
|
|
2.3
|
|
2.8
|
|
3.6
|
|
Adjustments to prior year tax requirements
|
|
(0.9
|
)
|
0.3
|
|
(9.0
|
)
|
Deferred tax adjustments, including statutory rate changes
|
|
1.3
|
|
(0.6
|
)
|
(2.4
|
)
|
Other net
|
|
(1.1
|
)
|
(2.4
|
)
|
(1.3
|
)
|
|
|
Effective tax rate
|
|
34.4
|
%
|
32.6
|
%
|
27.9
|
%
|
|
|
93
Significant components of Aon's deferred tax assets and liabilities are as follows:
(millions) As of December 31
|
|
2007
|
|
2006
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Employee benefit plans
|
|
$
|
579
|
|
$
|
661
|
|
|
Net operating loss and tax credit carryforwards
|
|
|
174
|
|
|
128
|
|
|
Other accrued expenses
|
|
|
110
|
|
|
140
|
|
|
Investment basis differences
|
|
|
76
|
|
|
46
|
|
|
Life and other insurance reserves
|
|
|
8
|
|
|
14
|
|
|
Other
|
|
|
30
|
|
|
14
|
|
|
|
|
|
|
|
|
977
|
|
|
1,003
|
|
Valuation allowance on deferred tax assets
|
|
|
(46
|
)
|
|
(44
|
)
|
|
|
|
|
|
|
Total
|
|
|
931
|
|
|
959
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(184
|
)
|
|
(161
|
)
|
|
Unrealized foreign exchange gains
|
|
|
(105
|
)
|
|
(14
|
)
|
|
Unrealized investment gains
|
|
|
(67
|
)
|
|
(62
|
)
|
|
Deferred revenue
|
|
|
(50
|
)
|
|
(22
|
)
|
|
Other accrued expenses
|
|
|
(35
|
)
|
|
(40
|
)
|
|
Other
|
|
|
(27
|
)
|
|
(14
|
)
|
|
|
|
|
|
|
Total
|
|
|
(468
|
)
|
|
(313
|
)
|
|
|
Net deferred tax asset
|
|
$
|
463
|
|
$
|
646
|
|
|
|
Valuation allowances have been established primarily with regard to the tax benefits of certain net operating loss and tax credit carryforwards. Valuation
allowances were increased to $46 million in 2007 from $44 million in 2006, attributable largely to the periodic reconciliation of previous provisions to filed or audited and agreed tax
returns. 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:
2007 $34 million; 2006 $21 million; and 2005 $5 million.
U.S.
deferred income taxes are not provided on unremitted foreign earnings that are considered permanently reinvested, which at December 31, 2007 amounted to approximately
$1.7 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, 2007, Aon had domestic federal operating loss carryforwards of $13 million that will expire at various dates from 2008 to 2022, state operating loss
carryforwards of $526 million that will expire at various dates from 2008 to 2026, and foreign operating and capital loss carryforwards of $395 million and $76 million,
respectively, nearly all of which are subject to indefinite carryforward.
The
amount of income taxes paid in 2007, 2006 and 2005 was $121 million, $431 million and $197 million, respectively.
Uncertain Tax Provisions
As described in Note 1, the Company adopted FIN 48 on January 1, 2007. The effect of adopting FIN 48 was not material to the Company's
financial statements.
94
The
following is a reconciliation of the Company's beginning and ending amount of unrecognized tax benefits (in millions).
Balance at January 1, 2007
|
|
$
|
53
|
|
Additions based on tax positions related to the current year
|
|
|
4
|
|
Additions for tax positions of prior years
|
|
|
24
|
|
Reductions for tax positions of prior years
|
|
|
(6
|
)
|
Settlements
|
|
|
(5
|
)
|
|
|
Balance at December 31, 2007
|
|
$
|
70
|
|
|
|
Of the amount included in the previous table, $57 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 interest and penalties related to unrecognized income tax benefits in its provision for income taxes. Aon accrued potential penalties and interest of less than
$1 million related to unrecognized tax positions during 2007. In total, as of December 31, 2007, Aon has recorded a liability for penalties and interest of $1 million and
$7 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 2004. The Internal Revenue Service commenced an examination of Aon's federal U.S. income tax returns for 2005 and 2006 in the fourth quarter of 2007.
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 2000.
95
9. Reinsurance and Claim Reserves
Aon's insurance subsidiaries both cede and assume reinsurance under reinsurance agreements. Aon's reinsurance consists primarily of certain
property and casualty lines that are in runoff. Aon's insurance subsidiaries remain liable to the extent that the reinsurers are unable to meet their obligations. As of November 30, 2006, in
connection with the sale of AWG, Aon sold Virginia Surety Company ("VSC"). VSC will continue to remain liable to policyholders to the extent reinsurers of the property and casualty business do not
meet their obligations. Aon has issued an indemnification which protects the purchaser from credit exposure related to the property and casualty reserves that have been reinsured. Aon has provided a
corporate guarantee with respect to these reinsurance recoverables. These reinsurance recoverables amount to $846 million at December 31, 2007.
A
summary of reinsurance activity in continuing operations is as follows:
(millions) Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
Ceded premiums earned
|
|
$
|
1
|
|
$
|
1
|
|
$
|
1
|
Ceded premiums written
|
|
|
|
|
|
12
|
|
|
2
|
Assumed premiums earned
|
|
|
3
|
|
|
28
|
|
|
57
|
Assumed premiums written
|
|
|
3
|
|
|
25
|
|
|
49
|
Ceded benefits to policyholders
|
|
|
1
|
|
|
|
|
|
|
|
Activity in the liability for policy and contract claims is summarized as follows:
(millions) Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
Liabilities at beginning of year
|
|
$
|
149
|
|
$
|
222
|
|
$
|
275
|
Incurred losses:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1
|
|
|
16
|
|
|
20
|
|
Prior years
|
|
|
7
|
|
|
81
|
|
|
30
|
|
|
|
Total
|
|
|
8
|
|
|
97
|
|
|
50
|
Payment of claims:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
|
|
|
15
|
|
|
7
|
|
Prior years
|
|
|
43
|
|
|
155
|
|
|
96
|
|
|
|
Total
|
|
|
43
|
|
|
170
|
|
|
103
|
|
Liabilities at end of year
|
|
$
|
114
|
|
$
|
149
|
|
$
|
222
|
|
In 2006, in connection with the sales of AWG and CPG, Aon completed a detailed review of all its property and casualty reserves. Based on the results of this
review, the Company increased its property and casualty reserves by approximately $102 million, reflecting adverse development, refined assumptions and additional claim information relating to
programs to be disposed of through sale or runoff. Aon recorded $81 million of this adjustment in continuing operations in other general expenses in the consolidated statement of income. The
remaining $21 million is not included in the preceding table because it relates to CPG and is recorded in discontinued operations. Of the $81 million recorded in continuing operations,
the majority related to National Program Services, an independent managing general underwriter that wrote habitational risk on behalf of Aon.
96
10. Stockholders' Equity
Common Stock
In November 2005, Aon's Board of Directors authorized the repurchase of up to $1 billion of Aon's common stock. In November 2006, the Board increased that
amount to $2 billion. In December 2007, the Board increased the authorization amount to $4.6 billion. 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 2007, the Company repurchased 19.1 million shares at a cost of $751 million. In 2006, the Company repurchased 28.4 million shares at a cost of
$1,048 million. Aon repurchased 0.7 million shares at a cost of $25 million in 2005. In 2008 through February 27, the Company has repurchased 6.7 million shares at a
cost of $286 million.
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
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.
In
November 2007, the Company redeemed all of its remaining outstanding 3
1
/
2
% Senior Convertible Debentures that were due in 2012. All of the holders of the Debentures
elected to convert their debentures into Aon common stock at a conversion rate of 46.5658 shares of common stock for each $1,000 principal amount of Debentures. As a result of this redemption and
earlier voluntary redemptions, approximately 14 million shares of Aon common stock were issued in 2007.
Dividends
A summary of dividends paid is as follows:
(millions) Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
Redeemable preferred stock
|
|
$
|
|
|
$
|
|
|
$
|
2
|
Common stock
|
|
|
176
|
|
|
189
|
|
|
191
|
|
Total dividends paid
|
|
$
|
176
|
|
$
|
189
|
|
$
|
193
|
|
Dividends paid per common share were $0.60 for the years ended December 31, 2007, 2006 and 2005.
Statutory Capital and Dividend Restrictions
State insurance laws and regulations prescribe accounting practices for determining statutory capital and surplus and net income for insurance companies and
require, among other matters, the filing of financial statements prepared in accordance with statutory accounting practices prescribed or permitted for insurance companies. State insurance laws and
regulations in the U.S. also require the maintenance of a minimum capital and surplus based on various factors. At December 31, 2007, the Company's insurance subsidiaries were in compliance
with these minimum requirements. Statutory capital and surplus of the insurance subsidiaries were $971 million and $870 million at December 31, 2007 and 2006, respectively.
Statutory net income of the insurance subsidiaries were $259 million, $206 million and $159 million for the years ended December 31, 2007, 2006 and 2005, respectively.
97
Dividends
paid by the Company's insurance subsidiaries are limited by state insurance regulations. The insurance regulator in each state of domicile may disapprove any dividend that,
together with other dividends paid by a subsidiary in the prior twelve months, exceeds the regulatory maximum as computed for the subsidiary based on its statutory capital and surplus and net income.
As a result, the capital and surplus of the subsidiaries available for transfer to the parent company are limited. As of December 31, 2007, payments of dividend amounts in excess of
$273 million may be subject to approval by regulatory authorities.
In
addition to compliance requirements of state insurance laws and regulations in the U.S., the Company has foreign subsidiaries and branches that are required to meet various regulatory
requirements in their respective jurisdictions.
98
11. Employee Benefits
Defined Contribution Savings Plans
Aon subsidiaries maintain 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 accompanying consolidated statements of income, is as follows (in millions):
|
2007
|
|
2006
|
|
2005
|
|
U.S.
|
$
|
49
|
|
$
|
49
|
|
$
|
47
|
U.K.
|
|
37
|
|
|
19
|
|
|
20
|
|
|
$
|
86
|
|
$
|
68
|
|
$
|
67
|
|
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.
Effective
January 1, 2007, future benefits in the Company's U.S. defined benefit pension plan are calculated based on a "career average pay" formula instead of a "final average
pay" formula. The change affected approximately 11,000 active employees covered by the U.S. plan. Effective March 31, 2007, the Company ceased crediting future benefits relating to salary and
service in its U.K. defined benefit pension plans. The change affected approximately 1,700 active employees covered by the U.K. plans.
Adoption of Statement No. 158
On December 31, 2006, Aon adopted the recognition, disclosure and measurement date provisions of Statement No. 158. This Statement required Aon to
recognize the funded status of its post-retirement benefit plans in the December 31, 2006 statement of financial position, with a corresponding adjustment to accumulated other
comprehensive loss, net of tax. The adjustment to accumulated other comprehensive loss at adoption represents net unrecognized actuarial losses and unrecognized prior service costs which were
previously netted against the plan's funded status in Aon's statement of financial position pursuant to the provisions of Statement No. 87. These amounts will be subsequently recognized as net
periodic benefit cost pursuant to Aon's historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net
periodic benefit cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic pension cost on
the same basis as the amounts recognized in accumulated other comprehensive loss at adoption of Statement No. 158.
99
The
incremental effects of adopting the provisions of Statement No. 158 on Aon's statement of financial position at December 31, 2006 are presented in the following table.
Had Aon not been required to adopt Statement No. 158 at December 31, 2006, it would have recognized an additional minimum liability pursuant to the provisions of Statement No. 87.
The effect of recognizing the additional minimum liability is included in the table below in the column labeled "Prior to Adopting of Statement No. 158."
|
At December 31, 2006
|
|
|
|
|
(millions)
|
Prior to
Adopting
Statement
No. 158
|
|
Effect of
Adopting
Statement
No. 158
|
|
As Reported at
December 31,
2006
|
|
|
|
Intangible pension asset and prepaid pension asset (included in other non-current assets)
|
$
|
1,009
|
|
$
|
(146
|
)
|
$
|
863
|
|
Accrued pension and other benefit liabilities (included in pension, post-employment and post-retirement liabilities)
|
|
(1,108
|
)
|
|
(357
|
)
|
|
(1,465
|
)
|
Deferred income taxes
|
|
473
|
|
|
154
|
|
|
627
|
|
Accumulated other comprehensive loss
|
|
661
|
|
|
349
|
|
|
1,010
|
|
|
|
100
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, 2007 and
2006 and a statement of the funded status as of December 31, 2007 and 2006, 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. The Company will retain the obligations and assets related to the participation of CICA and Sterling employees in the Company's
U.S. and Canadian pension plans.
|
U.S.
|
|
International
|
|
|
|
|
|
|
(millions)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
$
|
1,706
|
|
$
|
1,758
|
|
$
|
5,239
|
|
$
|
4,499
|
|
Service cost
|
|
50
|
|
|
66
|
|
|
35
|
|
|
88
|
|
Interest cost
|
|
99
|
|
|
109
|
|
|
273
|
|
|
288
|
|
Participant contributions
|
|
|
|
|
|
|
|
3
|
|
|
5
|
|
Plan amendment
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
Curtailment
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
Plan transfer
|
|
|
|
|
|
|
|
14
|
|
|
|
|
Actuarial loss
|
|
16
|
|
|
33
|
|
|
346
|
|
|
89
|
|
Benefit payments
|
|
(76
|
)
|
|
(84
|
)
|
|
(166
|
)
|
|
(173
|
)
|
Change in discount rate
|
|
(118
|
)
|
|
(31
|
)
|
|
(540
|
)
|
|
(124
|
)
|
Foreign exchange translation
|
|
|
|
|
|
|
|
139
|
|
|
567
|
|
|
|
End of period
|
$
|
1,677
|
|
$
|
1,706
|
|
$
|
5,298
|
|
$
|
5,239
|
|
|
|
Accumulated benefit obligation at end of period
|
$
|
1,672
|
|
$
|
1,706
|
|
$
|
5,225
|
|
$
|
4,837
|
|
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
$
|
1,457
|
|
$
|
1,326
|
|
$
|
4,286
|
|
$
|
3,121
|
|
Actual return on plan assets
|
|
111
|
|
|
210
|
|
|
40
|
|
|
476
|
|
Participant contributions
|
|
|
|
|
|
|
|
3
|
|
|
5
|
|
Employer contributions
|
|
22
|
|
|
5
|
|
|
189
|
|
|
424
|
|
Plan transfer
|
|
|
|
|
|
|
|
10
|
|
|
|
|
Benefit payments
|
|
(76
|
)
|
|
(84
|
)
|
|
(166
|
)
|
|
(173
|
)
|
Foreign exchange translation
|
|
|
|
|
|
|
|
116
|
|
|
433
|
|
|
|
End of period
|
$
|
1,514
|
|
$
|
1,457
|
|
$
|
4,478
|
|
$
|
4,286
|
|
|
|
Market related value at end of period
|
$
|
1,508
|
|
$
|
1,421
|
|
$
|
4,478
|
|
$
|
4,286
|
|
|
|
Funded status at end of period
|
$
|
(163
|
)
|
$
|
(249
|
)
|
$
|
(820
|
)
|
$
|
(953
|
)
|
Unrecognized prior-service cost (credit)
|
|
(104
|
)
|
|
(119
|
)
|
|
5
|
|
|
6
|
|
Unrecognized loss
|
|
347
|
|
|
485
|
|
|
1,733
|
|
|
1,708
|
|
|
|
Net amount recognized
|
$
|
80
|
|
$
|
117
|
|
$
|
918
|
|
$
|
761
|
|
|
|
101
Amounts recognized in the statements of financial position consist of:
Prepaid benefit cost (included in other non-current assets)
|
$
|
35
|
|
$
|
|
|
$
|
68
|
|
$
|
42
|
|
Accrued benefit liability (included in pension, post-employment and post-retirement liabilities)
|
|
(198
|
)
|
|
(249
|
)
|
|
(888
|
)
|
|
(995
|
)
|
Accumulated other comprehensive loss
|
|
243
|
|
|
366
|
|
|
1,738
|
|
|
1,714
|
|
|
|
Net amount recognized
|
$
|
80
|
|
$
|
117
|
|
$
|
918
|
|
$
|
761
|
|
|
|
Amounts recognized in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31,
2007 and 2006 consist of:
|
U.S.
|
|
International
|
|
|
|
|
(millions)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net loss
|
$
|
347
|
|
$
|
485
|
|
$
|
1,733
|
|
$
|
1,708
|
Prior service cost (credit)
|
|
(104
|
)
|
|
(119
|
)
|
|
5
|
|
|
6
|
|
|
$
|
243
|
|
$
|
366
|
|
$
|
1,738
|
|
$
|
1,714
|
|
In 2007, 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 $198 million, an ABO of $198 million and no plan assets. International plans with a PBO in excess of the fair value of plan assets had a PBO of $4.8 billion and plan assets
with a fair value of $4.0 billion, and plans with an ABO in excess of the fair value of plan assets had an ABO of $4.8 billion and plan assets with a fair value of $4.0 billion.
In
2006, U.S. plans with a PBO and ABO in excess of the fair value of plan assets had a PBO of $1.7 billion, an ABO of $1.7 billion and plan assets with a fair value of
$1.5 billion. International plans with a PBO in excess of the fair value of plan assets had a PBO of $4.8 billion and plan assets with a fair value of $3.8 billion, and plans with
an ABO in excess of the fair value of plan assets had an ABO of $4.3 billion and plan assets with a fair value of $3.7 billion.
The
following table provides the components of net periodic benefit cost for the plans:
|
U.S.
|
|
International
|
|
|
|
|
|
|
(millions)
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Service cost
|
$
|
50
|
|
$
|
61
|
|
$
|
62
|
|
$
|
35
|
|
$
|
74
|
|
$
|
68
|
|
Interest cost
|
|
99
|
|
|
101
|
|
|
93
|
|
|
273
|
|
|
237
|
|
|
211
|
|
Expected return on plan assets
|
|
(120
|
)
|
|
(114
|
)
|
|
(93
|
)
|
|
(314
|
)
|
|
(243
|
)
|
|
(195
|
)
|
Amortization of prior-service cost
|
|
(15
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
1
|
|
|
2
|
|
|
2
|
|
Amortization of net loss
|
|
45
|
|
|
50
|
|
|
39
|
|
|
50
|
|
|
99
|
|
|
76
|
|
|
|
Net periodic benefit cost
|
$
|
59
|
|
$
|
96
|
|
$
|
99
|
|
$
|
45
|
|
$
|
169
|
|
$
|
162
|
|
|
|
The weighted-average assumptions used to determine future benefit obligations are as follows:
|
U.S.
|
|
International
|
|
|
|
|
|
|
(millions)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
Discount rate
|
6.39
|
%
|
5.88
|
%
|
5.50 5.75
|
%
|
4.65 5.25
|
%
|
Rate of compensation increase
|
3.50
|
%
|
3.50
|
%
|
3.25 3.50
|
%
|
3.25 3.50
|
%
|
|
|
102
The weighted-average assumptions used to determine the net periodic benefit cost are as follows:
|
U.S.
|
|
International
|
|
|
|
|
|
|
(millions)
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Discount rate
|
5.88
|
%
|
5.75
|
%
|
6.00
|
%
|
4.65 5.25
|
%
|
4.00 5.25
|
%
|
4.50 6.00
|
%
|
Expected return on plan assets
|
8.60
|
|
8.35
|
|
8.50
|
|
6.00 7.20
|
|
6.00 7.10
|
|
6.00 7.25
|
|
Rate of compensation increase
|
3.50
|
|
3.50
|
|
3.50
|
|
3.25 3.50
|
|
3.25 3.50
|
|
3.25 3.50
|
|
|
|
The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2008 are as follows:
(millions)
|
U.S.
|
|
International
|
|
Net loss
|
$
|
23
|
|
$
|
42
|
Prior service cost (credit)
|
|
(15
|
)
|
|
1
|
|
|
$
|
8
|
|
$
|
43
|
|
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.
103
Plan Assets
Aon's pension plan asset allocation as of December 31, 2007 and 2006 is as follows:
|
U.S.
|
|
International
|
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets
|
|
|
|
Fair Value of Plan Assets
|
|
|
|
|
|
|
Weighted
Average
Target
Allocation
|
|
|
|
|
Target
Allocation
|
|
Asset Class
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
Equities
|
80
|
%
|
76
|
%
|
80
|
%
|
63
|
%
|
63
|
%
|
65
|
%
|
|
|
|
Domestic equities
|
45
|
|
41
|
|
41
|
|
|
|
|
|
|
|
|
International equities
|
15
|
|
20
|
|
19
|
|
|
|
58
|
|
60
|
|
|
|
|
Total equities
|
60
|
|
61
|
|
60
|
|
|
|
58
|
|
60
|
|
|
|
|
Limited partnerships and other
|
15
|
|
11
|
|
13
|
|
|
|
|
|
|
|
|
Real estate and REITs
|
5
|
|
4
|
|
7
|
|
|
|
5
|
|
5
|
|
|
|
Debt securities
|
20
|
|
24
|
|
20
|
|
37
|
%
|
37
|
|
35
|
|
|
|
|
Fixed maturities
|
20
|
|
21
|
|
17
|
|
|
|
34
|
|
32
|
|
|
Invested cash
|
No target
|
|
3
|
|
3
|
|
|
|
3
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
100
|
%
|
|
|
100
|
%
|
100
|
%
|
|
|
|
|
|
|
|
|
|
No plan assets are expected to be returned to the Company during 2008.
Investment Policy and Strategy
The U.S. investment policy, as established by the Aon Pension Plan Investment Committee, seeks reasonable asset growth at prudent risk levels within target
allocations. 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 Aon Pension Plan Investment Committee. 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, within asset allocation ranges as shown above, 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.
Cash Flows
Contributions
Based on current assumptions, Aon expects to contribute $8 million and $187 million, respectively, to its U.S. and international pension plans
during 2008 to satisfy minimum funding requirements.
104
Estimated Future Benefit Payments
Estimated future benefit payments for plans are as follows at December 31, 2007:
(millions)
|
U.S.
|
|
International
|
|
2008
|
$
|
74
|
|
$
|
157
|
2009
|
|
77
|
|
|
166
|
2010
|
|
82
|
|
|
175
|
2011
|
|
86
|
|
|
184
|
2012
|
|
90
|
|
|
197
|
2013 2017
|
|
536
|
|
|
1,153
|
|
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, 2007 and 2006 for the Company's other post-retirement benefit plan (in millions).
|
2007
|
|
2006
|
|
|
|
Accumulated projected benefit obligation
|
$
|
(56
|
)
|
$
|
(76
|
)
|
Fair value of plan assets
|
|
8
|
|
|
8
|
|
Funded status
|
|
(48
|
)
|
|
(68
|
)
|
Net amount recognized
|
|
(78
|
)
|
|
(82
|
)
|
|
|
The net periodic benefit cost recognized for the Company's other post-retirement benefit plans was $1 million, $5 million, and
$6 million in 2007, 2006, and 2005, respectively. Amounts recognized in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost at
December 31, 2007 are $5 million and $25 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 2008 is $4 million of prior service credit.
The
weighted-average discount rate used to determine future benefit obligations was 6.29%, 5.85%, and 5.75% for 2007, 2006, and 2005, respectively. The weighted-average discount rate
used to determine net periodic benefit cost was 5.85%, 5.75%, and 6.0% for 2007, 2006, and 2005, respectively.
Based
on current assumptions, Aon expects:
-
-
To
contribute $6 million to fund other post-retirement benefit plans during 2008.
-
-
Estimated
future pension benefit payments will be approximately $5 million each year for the years 2008-2012 and $20 million in aggregate for
2013-2017.
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 2007.
105
12. Stock Compensation Plans
Aon's Stock Incentive Plan (as amended and restated) (the "Plan") provides for the grant of non-qualified and incentive stock options,
stock appreciation rights, restricted stock and restricted stock units ("RSUs"). The annual rate at which awards are granted each year is based upon financial and competitive business conditions. The
number of shares authorized to be issued under the plan is equal to 18% of the number of common shares outstanding.
Compensation expense
Stock based compensation expense recognized during 2007 and 2006, which includes RSUs, stock options, performance plan awards and stock purchases related to the
Employee Stock Purchase Plan, are based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in
Aon's consolidated statements of income for 2007 and 2006 includes compensation expense for stock-based payment awards granted prior to, but not yet vested as of December 31, 2005 based on the
grant date fair value estimated in accordance with the pro forma provisions of Statement No. 123, and compensation expense for the stock-based payment awards granted subsequent to
December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of Statement No. 123(R). 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.
The
following table summarizes stock-based compensation expense related to all stock-based payments recognized in continuing operations in the consolidated statements of income in
compensation and benefits.
(millions) Years ended December 31
|
2007
|
|
2006
|
|
2005
|
|
RSUs
|
$
|
109
|
|
$
|
94
|
|
$
|
66
|
Performance plans
|
|
55
|
|
|
24
|
|
|
|
Stock options
|
|
22
|
|
|
22
|
|
|
2
|
Employee stock purchase plan
|
|
3
|
|
|
4
|
|
|
|
|
|
Total stock-based compensation expense
|
|
189
|
|
|
144
|
|
|
68
|
Tax benefit
|
|
64
|
|
|
49
|
|
|
25
|
|
Stock-based compensation expense, net of tax
|
$
|
125
|
|
$
|
95
|
|
$
|
43
|
|
106
The following table illustrates pro forma net income and pro forma earnings per share as if Aon had applied the fair value recognition provisions of FASB
Statement No. 123,
Accounting for Stock-Based Compensation
, to stock-based employee compensation in 2005.
(millions, except per share data)
|
|
|
|
Net income, as reported
|
$
|
735
|
|
Add:
|
|
Stock-based compensation expense included in reported net income, net of tax
|
|
47
|
|
Deduct:
|
|
Stock-based compensation expense determined under fair value method for all awards and options, net of tax
|
|
(59
|
)
|
|
|
Pro forma net income
|
$
|
723
|
|
|
|
Net income per share:
|
|
|
|
|
Basic
|
|
|
|
|
|
As reported
|
$
|
2.27
|
|
|
|
Pro forma
|
|
2.23
|
|
|
Diluted
|
|
|
|
|
|
As reported
|
$
|
2.17
|
|
|
|
Pro forma
|
|
2.14
|
|
|
|
The fair value per share of options granted in 2005 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
Dividend yield
|
2.3
|
%
|
Expected volatility
|
30.0
|
%
|
Risk-free interest rate
|
4.0
|
%
|
Expected term life beyond vesting date (in years):
|
1.0
|
|
|
|
Stock Awards
Stock awards, in the form of RSUs, are granted to certain executives and key employees of Aon. Prior to 2006, RSUs granted to employees were service-based.
Beginning with awards granted in 2006, awards to employees may consist of performance-based RSUs and service-based RSUs. Service-based awards generally vest between five and ten years from the date of
grant. For most employees, individual incentive compensation over $50,000 is partially paid in RSUs, which vest ratably over three
years. Stock awards are issued as they vest. In years prior to 2006, in certain circumstances, an employee was able to elect to defer the receipt of vested shares to a later date. With certain limited
exceptions, any break in continuous employment will cause forfeiture of all unvested awards. The compensation cost associated with each stock award is amortized 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, 2007, 2006 and 2005, the number of shares
available for stock awards is included with options available for grant.
In
2007 and 2006, performance-based RSUs were granted to certain executives and key employees, whose vesting 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 condition is not considered in the determination of grant date fair value of these awards. Compensation cost 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 cost will be 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
107
from
0-200% of the number of units granted, based on the plan. Dividend equivalents are generally not paid on the performance-based RSUs.
Information
regarding Aon's performance-based plans as of December 31, 2007 and 2006 follows:
(shares in thousands, dollars in millions)
|
2007
|
|
2006
|
|
Potential RSUs to be issued based on current performance levels
|
|
4,860
|
|
|
2,560
|
Shares forfeited during the year
|
|
109
|
|
|
49
|
RSUs awarded during the year
|
|
9
|
|
|
30
|
Unamortized expense, based on current performance levels
|
$
|
92
|
|
$
|
71
|
|
A summary of the status of Aon's non-vested stock awards is as follows:
Years ended December 31
|
2007
|
|
2006
|
|
2005
|
|
(shares in thousands)
|
Shares
|
|
Fair
Value
|
|
Shares
|
|
Fair
Value
|
|
Shares
|
|
Intrinsic
Value
|
|
Non-vested at beginning of year
|
12,870
|
|
$
|
28
|
|
11,641
|
|
$
|
25
|
|
8,738
|
|
$
|
28
|
Granted
|
4,270
|
|
|
39
|
|
3,646
|
|
|
37
|
|
4,727
|
|
|
24
|
Vested
|
(2,158
|
)
|
|
28
|
|
(1,809
|
)
|
|
25
|
|
(1,145
|
)
|
|
28
|
Forfeited
|
(832
|
)
|
|
34
|
|
(608
|
)
|
|
27
|
|
(679
|
)
|
|
29
|
|
Non-vested at end of year
|
14,150
|
|
$
|
31
|
|
12,870
|
|
$
|
28
|
|
11,641
|
|
$
|
26
|
|
Stock Options
Options to purchase common stock are granted to certain executives and key employees of Aon and its subsidiaries 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.
Upon
adoption of Statement No. 123(R), Aon changed its method of valuation for stock options granted beginning in 2006 to a lattice-binomial option-pricing model from the
Black-Scholes option-pricing model, which was previously used for Aon's pro forma information required under Statement No. 123. 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. Aon uses historical data to estimate option exercise and employee terminations within the valuation model, stratifying between executives and key employees. 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.
108
The
following weighted average assumptions were used to estimate fair value.
Year ended December 31
|
2007
|
|
2006
|
|
|
Executives
|
|
Key
Employees
|
|
Executives
|
|
Key
Employees
|
|
Weighted average volatility
|
|
26.4%
|
|
|
26.8%
|
|
|
30.5%
|
|
|
29.6%
|
Expected dividend yield
|
|
1.6%
|
|
|
1.6%
|
|
|
2.3%
|
|
|
2.3%
|
Risk-free rate
|
|
4.6%
|
|
|
4.6%
|
|
|
4.4%
|
|
|
4.6%
|
|
Weighted average estimated fair value
|
$
|
10.36
|
|
$
|
11.69
|
|
$
|
11.08
|
|
$
|
10.75
|
|
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 expected life of option grants made during both 2007 and 2006 were 5 years for executives and 6 years for key employees.
A
summary of the status of Aon's stock options and related information are as follows:
Years ended December 31
|
2007
|
|
2006
|
|
2005
|
|
(shares in thousands)
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Beginning outstanding
|
32,889
|
|
$
|
30
|
|
34,851
|
|
$
|
29
|
|
33,400
|
|
$
|
29
|
Granted
|
2,012
|
|
|
40
|
|
2,905
|
|
|
39
|
|
6,223
|
|
|
24
|
Exercised
|
(7,903
|
)
|
|
29
|
|
(4,007
|
)
|
|
27
|
|
(2,396
|
)
|
|
24
|
Forfeited and expired
|
(519
|
)
|
|
32
|
|
(860
|
)
|
|
29
|
|
(2,376
|
)
|
|
28
|
|
Ending outstanding
|
26,479
|
|
|
31
|
|
32,889
|
|
|
30
|
|
34,851
|
|
|
29
|
|
Exercisable at end of year
|
14,880
|
|
|
31
|
|
18,411
|
|
|
32
|
|
18,371
|
|
|
32
|
|
Shares available for grant
|
9,795
|
|
|
|
|
6,359
|
|
|
|
|
10,322
|
|
|
|
|
A summary of options outstanding and exercisable as of December 31, 2007 is as follows (shares in thousands):
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Range of
Exercise
Prices
|
|
Shares
Outstanding
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
Weighted
Average
Exercise
Price
|
|
Shares
Exercisable
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
$14.92 $22.86
|
|
4,525
|
|
5.62
|
|
$
|
20.99
|
|
3,660
|
|
|
|
$
|
20.65
|
22.94 25.51
|
|
5,538
|
|
5.78
|
|
|
24.60
|
|
1,984
|
|
|
|
|
23.96
|
25.70 30.78
|
|
4,147
|
|
5.98
|
|
|
27.33
|
|
1,172
|
|
|
|
|
28.11
|
31.19 35.73
|
|
4,304
|
|
4.19
|
|
|
34.41
|
|
3,115
|
|
|
|
|
34.04
|
35.76 41.20
|
|
4,678
|
|
4.63
|
|
|
38.08
|
|
2,688
|
|
|
|
|
37.50
|
41.37 47.88
|
|
3,287
|
|
2.86
|
|
|
43.38
|
|
2,261
|
|
|
|
|
43.40
|
|
|
|
|
|
$14.92 $47.88
|
|
26,479
|
|
4.96
|
|
$
|
30.71
|
|
14,880
|
|
3.60
|
|
$
|
30.98
|
|
|
|
|
|
109
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
$47.69 as of December 31, 2007, which would have been received by the option holders had those option holders exercised their options as of that date. At December 31, 2007, the aggregate
intrinsic value of options outstanding was $449 million, of which $249 million was exercisable.
The
aggregate intrinsic value of options exercised during 2007, 2006 and 2005 was $83 million, $45 million and $20 million, respectively.
Unamortized
deferred compensation expense, which includes both options and awards, amounted to $321 million as of December 31, 2007, with a remaining weighted-average
amortization period of approximately 2.2 years.
Cash
received from the exercise of stock options was $230 million, $121 million, and $63 million during 2007, 2006, 2005, respectively. The tax benefit realized from
stock options exercised was $29 million, $14 million and $3 million in 2007, 2006 and 2005, respectively.
During
2007, a majority of option exercises and award vestings were satisfied through the reissuance of treasury shares.
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 2007, 2006, and 2005, 405,000 shares, 457,000 shares and 697,000 shares, respectively, were issued to employees under the plan. Compensation expense
recognized was approximately $3 million in both 2007 and 2006. There was no compensation expense associated with this plan in 2005.
United Kingdom
Aon also has an employee stock purchase plan that for 2006, provided for the purchase of a maximum of 525,000 shares of Aon common stock by eligible U.K.
employees after a 3-year period and which is similar to the U.S. plan described above. The number of shares eligible for purchase is approved by Aon's Board of Directors on a yearly basis
and for 2007 no opportunity for purchase occurred. In 2007, less than 1,000 shares were issued under the plan. No shares were issued under the plan in 2006 or 2005. In 2007 and 2006,
compensation expense recognized was less than $1 million each year. There was no compensation expense associated with this plan in 2005.
110
13. Financial Instruments
Financial Risk Management
Aon is exposed to market risk from changes in foreign currency exchange rates, interest rates and equity security prices. To manage the risk related to these
exposures, Aon enters into various derivative transactions. The derivatives have the effect of reducing 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 master netting agreements, entering into non-exchange-traded derivatives with highly rated major financial
institutions and by using exchange-traded instruments. Aon closely monitors the credit-worthiness of, and exposure to, its counterparties. At December 31, 2007 and 2006, Aon placed cash and
securities relating to these derivative contracts in escrow amounting to $5 million and $9 million, respectively.
Accounting Policy for Derivative Instruments
All derivative instruments are recognized in the consolidated statements of financial position at fair value. Unless otherwise noted, derivative instruments with
a positive fair value are reported in
receivables and derivative instruments with a negative fair value are reported in other current liabilities in the consolidated statements of financial position. Where Aon has entered into master
netting agreements with counterparties, the derivative positions are netted by program and are reported accordingly in receivables or other current 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.
FASB
Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities,
identifies three hedging relationships where
a derivative (hedging instrument) may qualify for hedge accounting: (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 will include a description of the hedging instrument, the hedge 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 at the end of each quarter.
For
a fair value hedge, the change in fair value of the hedging instrument and the change in fair value of the hedged item attributable to the risk being hedged are both recognized
currently in earnings. Aon did not enter into any fair value hedges in 2007. For a cash flow hedge, the effective portion of the change in fair value of a hedging instrument is recognized in OCI and
subsequently
111
reclassified
to 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 reported 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 investment income or other general expenses
(depending on the hedged exposure) in the current period's consolidated statement of income.
Aon
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, Aon will continue to carry the derivative in the consolidated statements of
financial position at its fair value, recognize subsequent changes in the fair value of the derivative in current-period earnings, cease to adjust the hedged asset or liability for changes in its fair
value, and begin to amortize 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, Aon will continue to carry the derivative in the consolidated statements of
financial position at its fair value, recognize subsequent changes in the fair value of the derivative in current-period earnings, and continue to defer the derivative gain or loss in accumulated OCI
until the hedged forecasted transaction affects earnings. If the hedged forecasted transaction is probable of not 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 would be reclassified immediately to earnings.
Foreign Exchange Risk Management
Certain of Aon's foreign brokerage subsidiaries, primarily in the U.K., receive revenues in currencies (primarily in U.S. dollars) that differ from their
functional currencies. The foreign subsidiary's functional currency revenue will fluctuate as the currency exchange rates change. To reduce this variability, Aon uses foreign exchange forwards and
over-the-counter options to hedge the foreign exchange risk of the forecasted revenue for up to a maximum of three years in the future. Aon has designated these derivatives as
cash flow hedges of its forecasted foreign currency denominated revenue. As of December 31, 2007, a $9 million pretax gain has been deferred to OCI, $10 million of which is
expected to be reclassified to earnings as an adjustment to other general expenses in 2008. Deferred gains or losses will be reclassified from OCI to other general expenses when the hedged revenue is
recognized. The hedge had no material ineffectiveness in either 2007 or 2006. For the year ended December 31, 2007, the Company recognized immaterial losses on cash flow hedges that were
discontinued due to forecast revisions. Aon also uses forward contracts, which have not been designated as hedges for accounting purposes, to hedge economic risks that arise from fluctuations in the
currency exchange rates. Changes in the fair value of these derivatives are recorded in other general expenses in the consolidated statements of income.
Aon
uses over-the-counter basket options to reduce the impact of foreign currency fluctuations on the translation of the financial statements of Aon's foreign
operations. These derivatives are not eligible for hedge accounting treatment and changes in the fair value of these derivatives are recorded in other general expenses in the consolidated statements
of income.
112
Aon
also uses foreign currency forward contracts to offset foreign exchange risk associated with foreign denominated (primarily British pounds) intercompany notes. These derivatives were
not designated as a hedge because changes in their fair value were largely offset in earnings by remeasuring the notes for changes in spot exchange rates. Changes in the fair value of these
derivatives were recorded in other general expenses in the consolidated statements of income.
Aon
also uses foreign currency forward contracts to hedge certain of its net investments in foreign underwriting operations (primarily Canadian dollar, Euro and British pound). During
2007 and 2006, this hedge had no ineffectiveness, and a $26 million and $24 million cumulative pretax loss has been included in OCI at December 31, 2007 and 2006, respectively.
In
2005, Aon subsidiaries entered into cross-currency swaps to hedge the foreign currency risks associated with foreign denominated fixed-rate term intercompany borrowings.
These swaps have been designated as cash flow hedges. As of December 31, 2007, an $8 million pretax gain had been deferred to OCI, of which a $2 million pretax loss is expected to
be reclassified to earnings in 2008 as an adjustment to interest expense. The reclassification from OCI will offset the related transaction gain or loss arising from the remeasurement of the borrowing
due to changes in spot exchange rates and to record interest income at the interest rate implicit in the derivative. This hedge had no material ineffectiveness in 2007 or 2006.
Several
of Aon's subsidiaries have negotiated outsourcing service agreements in currencies that differ from their functional currencies; primarily the Philippine Peso and the Indian
Rupee. The subsidiary's functional currency expense will fluctuate as the currency exchange rates change. To reduce this variability, Aon uses foreign exchange forwards to hedge the foreign exchange
risk of the forecasted expense for the life of the contract or up to six years. Aon has designated these derivatives as cash flow hedges of its forecasted foreign currency denominated expense. As of
December 31, 2007, a $3 million pretax gain has been deferred to OCI, $1 million of which is expected to be reclassified to earnings as an adjustment to other general expenses in
2008. Deferred gains or losses will be reclassified from OCI to other general expenses when the hedged revenue is recognized. The hedge did not have any ineffectiveness in 2007.
Interest Rate Risk Management
Aon enters into receive-fixed-pay-floating interest rate swaps which are designated as cash flow hedges of the interest rate risk of a
portion of Aon's U.S. dollar and Euro
denominated brokerage funds held on behalf of U.S., European, and U.K. clients and other U.S., European, and U.K. operating funds. Forecasted deposit balances are hedged up to a maximum of three years
into the future. Changes in the fair value of the swaps are recorded in OCI and will be reclassified to earnings as an adjustment to investment income over the term of the swap. As of
December 31, 2007, a $16 million pretax gain related to this hedge was recorded in OCI, $2 million of which is expected to be reclassified to investment income in 2008. This hedge
had no material ineffectiveness in 2007 or 2006.
Premium Financing Operations
Certain of Aon's U.S., U.K., Canadian and Australian subsidiaries originate short-term loans (generally with terms of 12 months or less) to
businesses to finance their insurance premium obligations, and then sell these premium finance agreements in securitization transactions that meet the criteria for sale accounting under FASB Statement
No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
. These sales involve SPEs, which are
considered qualified special purpose entities ("QSPEs") according to Statement No. 140 and multi-seller, non-qualified bank commercial paper conduit SPEs ("Bank SPEs") that are
variable interest entities
113
according
to FIN 46. Statement No. 140 provides that a QSPE should not be consolidated in the financial statements of a transferor or its affiliates (Aon's subsidiaries).
The
Company has analyzed qualitative and quantitative factors related to Aon subsidiaries' interests in the Bank SPEs and has determined that these subsidiaries are not the sponsors of
the Bank SPEs. Additionally, independent third parties (i) have made substantial equity investments in the Bank SPEs, (ii) have voting control of the Bank SPEs, and
(iii) generally bear the risks and rewards of ownership of the assets of the Bank SPEs. Aon has concluded that non-consolidation of the Bank SPEs is appropriate in accordance with
FIN 46 given that the subsidiaries do not have significant variable interests.
Through
the securitization agreements, Aon, or one of its QSPEs, sells undivided interests in specified premium finance agreements to the Bank SPEs. The aggregate amount advanced on
premium finance agreements sold to the Bank SPEs at any one time is limited by the securitization agreements to a maximum of $1.8 billion at both December 31, 2007 and 2006. The Bank
SPEs had advanced $1.5 billion and $1.7 billion at December 31, 2007 and 2006, respectively. The origination and sale of eligible premium finance agreements that are sold to the
Bank SPEs increase available advances, and collections (administered by Aon) on previously sold agreements reduce available advances.
Aon
records gains associated with the sale of receivables. When Aon calculates the gains, all anticipated fees related to this facility are included. The gains included in commissions,
fees and other
in the consolidated statements of income were $64 million, $63 million and $65 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Aon
records at fair value its retained interest in the sold premium finance agreements, and reports it in receivables in the consolidated statements of financial position. Aon also
retains servicing rights for sold agreements and earns servicing fee income over the servicing period. The servicing fees are included in the gain/loss calculation. At December 31, 2007 and
2006, the fair value of the servicing rights approximates the estimated costs to service the receivables and accordingly, Aon has not recorded any servicing assets or liabilities related to this
servicing activity.
Aon
estimates fair value by discounting estimated future cash flows from its retained interest in the sold receivables using discount rates that approximate current market rates and
expected future prepayment rates.
The
Bank SPEs bear the credit risks on the receivables, subject to limited recourse in the form of over-collateralization required on the sale of the receivables.
All
but the Australian facility require Aon to maintain consolidated net worth, as defined, of at least $2.5 billion, consolidated EBITDA to consolidated net interest of at least
4 to 1 and consolidated indebtedness to consolidated EBITDA of no more than 3 to 1.
Aon
intends to renew the conduit facilities when they expire. If there were adverse bank, regulatory, tax or accounting rule changes, Aon's access to the conduit facilities and special
purpose vehicles would be restricted. Following the appropriate accounting standards, these special purpose vehicles are not included in Aon's consolidated financial statements.
Fair Value of Financial Instruments
Accounting standards require the disclosure of fair values for certain financial instruments. The fair value disclosures are not intended to encompass various
other non-financial instruments or other intangible assets related to Aon's business. Accordingly, care should be exercised in deriving conclusions about Aon's business or financial
condition based on the fair value disclosures. The basis for determining the fair value of financial instruments is discussed in Note 1. The carrying value approximates or equals fair value for
the following instruments: cash, receivables, short-term
114
investments,
fixed maturity investments, equity securities, other investments, derivative assets and liabilities, insurance premiums payable, short-term debt and accounts payable and
accrued liabilities. The following table discloses the Company's financial instruments where the carrying amounts and fair values differ:
(millions) As of December 31
|
|
2007
|
|
2006
|
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Long-term debt
|
|
$
|
1,893
|
|
$
|
1,920
|
|
$
|
2,243
|
|
$
|
2,561
|
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.
Guarantees
associated with Aon's limited partnership securitization are disclosed in Note 6. Indemnities related to discontinued operations are disclosed in Note 5.
Guarantees with respect to reinsurance recoverables associated with the sale of AWG are disclosed in Note 9.
Aon
and its subsidiaries have issued letters of credit to cover contingent payments of approximately $4 million for taxes and other business obligations to third parties. Amounts
are accrued in the consolidated financial statements for these letters of credit to the extent they 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 $15 million at December 31,
2007.
Aon
expects that as prudent business interests dictate, additional guarantees and indemnifications may be issued from time to time.
115
14. Goodwill and Other 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. Goodwill is not amortized but is instead subject to impairment testing at least annually. The impairment testing requires Aon to compare the
fair value of its reporting units to their carrying value to determine if there is potential impairment of goodwill. If the fair value of a reporting unit is less than its carrying value at the
valuation date, an impairment loss would be recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than the recorded amount of goodwill. Fair value is
estimated based on various valuation approaches. In the fourth quarter 2007 and 2006, Aon completed its annual impairment review that affirmed there was no impairment as of October 1 (the
annual evaluation date).
When
a business entity is sold, 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.
The
changes in the net carrying amount of goodwill by operating segment for the years ended December 31, 2007 and 2006, respectively, are as follows:
(millions)
|
|
Risk and
Insurance
Brokerage
Services
|
|
Consulting
|
|
Total
|
|
|
|
Balance as of January 1, 2007
|
|
$
|
4,142
|
|
$
|
379
|
|
$
|
4,521
|
|
Goodwill acquired
|
|
|
155
|
|
|
1
|
|
|
156
|
|
Goodwill related to disposals
|
|
|
(11
|
)
|
|
|
|
|
(11
|
)
|
Foreign currency revaluation
|
|
|
261
|
|
|
8
|
|
|
269
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
4,547
|
|
$
|
388
|
|
$
|
4,935
|
|
|
|
Balance as of January 1, 2006
|
|
$
|
3,753
|
|
$
|
378
|
|
$
|
4,131
|
|
Goodwill acquired
|
|
|
124
|
|
|
1
|
|
|
125
|
|
Goodwill related to disposals
|
|
|
(11
|
)
|
|
|
|
|
(11
|
)
|
Foreign currency revaluation
|
|
|
276
|
|
|
|
|
|
276
|
|
|
|
Balance as of December 31, 2006
|
|
$
|
4,142
|
|
$
|
379
|
|
$
|
4,521
|
|
|
|
Other intangible assets are classified into two categories:
-
-
"Customer
Related and Contract Based" include client lists as well as non-compete covenants, and
-
-
"Marketing,
Technology and Other" are all other purchased intangibles not included in the preceding categories.
116
Other
intangible assets by asset class are as follows:
(millions)
|
|
Customer
Related and
Contract Based
|
|
Marketing,
Technology
and Other
|
|
Total
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
206
|
|
$
|
332
|
|
$
|
538
|
|
Accumulated amortization
|
|
|
168
|
|
|
166
|
|
|
334
|
|
|
Net carrying amount
|
|
$
|
38
|
|
$
|
166
|
|
$
|
204
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
232
|
|
$
|
245
|
|
$
|
477
|
|
Accumulated amortization
|
|
|
203
|
|
|
129
|
|
|
332
|
|
|
Net carrying amount
|
|
$
|
29
|
|
$
|
116
|
|
$
|
145
|
|
The cost of other intangible assets is being amortized over a range of 2 to 10 years, with a weighted average original life of 8 years. Amortization
expense for intangible assets for the years ending December 31, 2008, 2009, 2010, 2011 and 2012 is estimated to be $37 million, $35 million, $32 million, $28 million
and $20 million, respectively.
When
impairment indicators arise, Aon assesses the recoverability of its intangible assets through an analysis of expected future cash flows.
117
15. Contingencies
Aon and its subsidiaries are subject to numerous claims, tax assessments, lawsuits and proceedings that arise in the ordinary course of business.
The damages claimed in these matters are or may be substantial, including, in many instances, claims for punitive, treble or extraordinary damages. Aon has purchased errors and omissions ("E&O")
insurance and other appropriate insurance to provide protection against losses that arise in such matters. Accruals for these items, 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.
In
2004, Aon, other insurance brokers, insurers and numerous other industry participants received subpoenas and other requests for information from the office of the Attorney General of
the State of New York and from other states relating to certain practices in the insurance industry. On March 4, 2005, Aon entered into an agreement (the "Settlement Agreement") with the
Attorney General of the State of New York, the Superintendent of Insurance of the State of New York, the Attorney General of the State of Connecticut, the Illinois Attorney General and the Director of
the Division of Insurance, Illinois Department of Financial and Professional Regulation (collectively, the "State Agencies") to resolve all the issues related to investigations conducted by the State
Agencies. The 2005 Settlement Agreement, under which Aon distributed funds to certain clients and implemented business reforms, has been described in detail in Aon's previous financial filings. Aon
has also entered into a comprehensive settlement agreement, under the auspices of the NAIC, with numerous other states that incorporate these same business reforms.
Purported
clients have also filed civil litigation against Aon and other companies under a variety of laws and legal theories relating to broker compensation practices and other issues
under investigation by New York and other states. As previously reported, a putative class action styled
Daniel v. Aon (Affinity)
has been pending in
the Circuit Court of Cook County, Illinois since August 1999. In March 2005, the Court gave preliminary approval to a nationwide class action settlement under which Aon agreed to pay a total of
$38 million to its policyholders. The Court granted final approval to the settlement in March 2006. Parties that objected to the settlement have appealed.
Beginning
in June 2004, a number of other putative class actions were filed against Aon and other companies by purported classes of clients 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.
Beginning
in late October 2004, several putative securities class actions were filed against Aon in the U.S. District Court for the Northern District of Illinois. Also beginning in late
October 2004, several putative ERISA class actions were filed against Aon in the U.S. District Court for the Northern District of Illinois. 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. With
respect to the various securities and ERISA class actions, we are unable to estimate a range of possible losses, as these actions have not yet progressed to the stages where damages, if any, can be
estimated.
118
Following
inquiries from regulators, the Company commenced an internal review of its compliance with certain U.S. and non-U.S. anti-bribery laws, including the
U.S. Foreign Corrupt Practices Act ("FCPA"). An outside law firm with significant experience in the area is overseeing the review. Certain governmental agencies, including the U.K. Financial Services
Authority, the City of London police, the U.S. Securities and Exchange Commission, and the U.S. Department of Justice, are also investigating 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 these matters will be concluded, or what regulatory or other outcomes may result.
A
financial institution in the U.K. called Standard Life Assurance Ltd. brought an action in London Commercial Court against Aon seeking more than £50 million ($99
million at December 31, 2007 exchange rates) for alleged errors or omissions in the placement of a professional indemnity policy with certain underwriters. In a decision issued on February 13,
2008, the court construed the relevant policy language to excuse underwriters from paying Standard Life and concluded that Aon was negligent in not seeking changes to the language. The court granted
Aon leave to file an interlocutory appeal on these issues and stated in granting leave that the issue in the case was a "difficult question of construction on which views may legitimately differ." Aon
believes that the decision is incorrect, is appealing this decision and, if the appeal is unsuccessful, will vigorously contest other issues that have not yet been litigated in the Commercial Court.
Aon further believes that, as a result of an indemnity given to Aon by a third party, Aon may be entitled to indemnification in whole or part should it ultimately suffer a loss in this matter. Because
of the uncertainty inherent in the appeals process, the
ability to contest issues in subsequent proceedings, the potential indemnity, and potential recoveries from Aon's errors and omissions insurance, Aon is unable to predict at this time the probable
loss, if any, from this matter.
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.
119
16. 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, totals to the amounts in the accompanying consolidated financial statements. Results relating to Aon's
accident, health and life operations, which were previously reported in a separate Insurance Underwriting segment, have been reclassified to discontinued operations for all periods presented. The
remaining operations that were previously reported in the Insurance Underwriting segment, which relate to property and casualty insurance that is in runoff, are now included in unallocated income and
expense for all periods presented.
The
accounting policies of the operating segments are the same as those described in Note 1, except that the disaggregated financial results have been prepared using a management
approach, which is consistent with the basis and manner in which Aon senior management internally disaggregates financial information for the purposes of assisting in making internal operating
decisions. Aon evaluates performance based on stand-alone operating segment income before income taxes and generally accounts for intersegment revenue as if the revenue were from third parties, that
is, considered by management to be at current market prices.
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 other general expenses.
Consolidated
revenue by geographic area is as follows:
(millions)
|
|
Total
|
|
United States
|
|
Americas other than U.S.
|
|
United Kingdom
|
|
Europe,
Middle East,
& Africa
|
|
Asia Pacific
|
|
Years ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
7,471
|
|
$
|
2,855
|
|
$
|
809
|
|
$
|
1,305
|
|
$
|
1,876
|
|
$
|
626
|
|
2006
|
|
|
6,881
|
|
|
2,789
|
|
|
723
|
|
|
1,172
|
|
|
1,636
|
|
|
561
|
|
2005
|
|
|
6,651
|
|
|
2,726
|
|
|
646
|
|
|
1,226
|
|
|
1,530
|
|
|
523
|
|
The Risk and Insurance Brokerage Services segment consists principally of Aon's retail and reinsurance brokerage operations, as well as related insurance
services, including underwriting management, captive insurance company management services, and premium financing.
The
Consulting segment provides a broad range of consulting services. These services are delivered predominantly to corporate clientele utilizing two subsegments (Consulting Services and
Outsourcing) that operate in the following practice areas: Consulting Servicesemployee benefits, compensation, management consulting, communications, strategic human resource consulting
and financial advisory and litigation consulting, and Outsourcinghuman resource outsourcing.
120
Revenue
by subsegment is as follows:
(millions) Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Risk management and insurance brokerage:
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
2,405
|
|
$
|
2,319
|
|
$
|
2,139
|
|
|
United Kingdom
|
|
|
815
|
|
|
732
|
|
|
792
|
|
|
Europe, Middle East & Africa
|
|
|
1,375
|
|
|
1,177
|
|
|
1,150
|
|
|
Asia Pacific
|
|
|
506
|
|
|
478
|
|
|
441
|
|
Reinsurance brokerage and related services
|
|
|
958
|
|
|
922
|
|
|
845
|
|
|
|
|
|
|
Total Risk and Insurance Brokerage Services
|
|
|
6,059
|
|
|
5,628
|
|
|
5,367
|
|
Consulting services
|
|
|
1,117
|
|
|
989
|
|
|
981
|
|
Outsourcing
|
|
|
235
|
|
|
293
|
|
|
274
|
|
|
|
|
|
|
Total Consulting
|
|
|
1,352
|
|
|
1,282
|
|
|
1,255
|
|
|
|
Intersegment revenues
|
|
|
(29
|
)
|
|
(59
|
)
|
|
(46
|
)
|
|
|
|
|
Total operating segments
|
|
|
7,382
|
|
|
6,851
|
|
|
6,576
|
|
Unallocated income
|
|
|
89
|
|
|
30
|
|
|
75
|
|
|
|
Total revenue
|
|
$
|
7,471
|
|
$
|
6,881
|
|
$
|
6,651
|
|
|
|
Selected information for Aon's operating segments is as follows:
|
|
|
Risk and Insurance
Brokerage Services
|
|
|
|
|
|
|
|
|
Consulting
|
(millions) Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
Revenue by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,159
|
|
$
|
2,133
|
|
$
|
1,982
|
|
$
|
657
|
|
$
|
708
|
|
$
|
730
|
|
Americas, other than U.S.
|
|
|
661
|
|
|
586
|
|
|
530
|
|
|
121
|
|
|
113
|
|
|
100
|
|
United Kingdom
|
|
|
1,036
|
|
|
946
|
|
|
1,021
|
|
|
275
|
|
|
228
|
|
|
206
|
|
Europe, Middle East & Africa
|
|
|
1,636
|
|
|
1,439
|
|
|
1,344
|
|
|
240
|
|
|
197
|
|
|
186
|
|
Asia Pacific
|
|
|
567
|
|
|
524
|
|
|
490
|
|
|
59
|
|
|
36
|
|
|
33
|
|
|
|
Total revenues (1)
|
|
|
6,059
|
|
|
5,628
|
|
|
5,367
|
|
|
1,352
|
|
|
1,282
|
|
|
1,255
|
Compensation and benefits
|
|
|
3,498
|
|
|
3,362
|
|
|
3,253
|
|
|
823
|
|
|
811
|
|
|
780
|
Other general expenses (2)
|
|
|
1,524
|
|
|
1,425
|
|
|
1,412
|
|
|
340
|
|
|
351
|
|
|
365
|
|
|
|
Total expenses
|
|
|
5,022
|
|
|
4,787
|
|
|
4,665
|
|
|
1,163
|
|
|
1,162
|
|
|
1,145
|
|
|
|
Income before income tax
|
|
$
|
1,037
|
|
$
|
841
|
|
$
|
702
|
|
$
|
189
|
|
$
|
120
|
|
$
|
110
|
|
Identifiable assets at December 31
|
|
$
|
12,783
|
|
$
|
12,869
|
|
$
|
12,500
|
|
$
|
305
|
|
$
|
348
|
|
$
|
319
|
-
(1)
-
Excludes
the elimination of intersegment revenues and expenses of $29 million, $59 million and $46 million for 2007, 2006 and 2005, respectively.
-
(2)
-
Includes
depreciation and amortization expense.
Unallocated
income consists of investment income from equity, fixed-maturity and short-term investments. These investments may also include non-income producing
equities.
Unallocated
expenses include administrative costs not attributable to the operating segments, such as corporate governance costs. Interest expense represents the cost of worldwide debt
obligations.
Aon
has ceased writing property and casualty insurance. Property & Casualty represents revenue and related expenses of the remaining runoff operations.
121
A
reconciliation of segment income before tax to income from continuing operations before provision for income tax is as follows:
(millions) Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Risk and Insurance Brokerage Services
|
|
$
|
1,037
|
|
$
|
841
|
|
$
|
702
|
|
Consulting
|
|
|
189
|
|
|
120
|
|
|
110
|
|
|
|
|
|
|
Segment income before income tax
|
|
|
1,226
|
|
|
961
|
|
|
812
|
|
Unallocated investment income
|
|
|
81
|
|
|
15
|
|
|
5
|
|
Unallocated expenses
|
|
|
(132
|
)
|
|
(106
|
)
|
|
(112
|
)
|
Property & Casualty revenue
|
|
|
8
|
|
|
15
|
|
|
70
|
|
Property & Casualty expenses
|
|
|
(21
|
)
|
|
(93
|
)
|
|
(73
|
)
|
Interest expense
|
|
|
(138
|
)
|
|
(129
|
)
|
|
(125
|
)
|
|
|
|
|
Income from continuing operations before provision for income tax
|
|
$
|
1,024
|
|
$
|
663
|
|
$
|
577
|
|
|
|
Selected information for Aon's investment income is as follows:
(millions) Years ended December 31
|
|
2007
|
|
2006
|
|
2005
|
|
Risk and Insurance Brokerage Services (primarily short-term investments)
|
|
$
|
206
|
|
$
|
196
|
|
$
|
129
|
Consulting (primarily short-term investments)
|
|
|
9
|
|
|
5
|
|
|
4
|
Unallocated (primarily equity, other investments and limited partnerships)
|
|
|
86
|
|
|
20
|
|
|
11
|
|
|
|
Total investment income
|
|
$
|
301
|
|
$
|
221
|
|
$
|
144
|
|
122
17. Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the years ended December 31, 2007 and 2006 are as follows (in millions, except per share data):
|
|
1Q
|
|
2Q
|
|
3Q
|
|
4Q
|
|
2007
|
|
INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions, fees and other
|
|
$
|
1,729
|
|
$
|
1,776
|
|
$
|
1,698
|
|
$
|
1,967
|
|
$
|
7,170
|
|
Investment income
|
|
|
69
|
|
|
90
|
|
|
77
|
|
|
65
|
|
|
301
|
|
|
|
|
|
Total revenue
|
|
$
|
1,798
|
|
$
|
1,866
|
|
$
|
1,775
|
|
$
|
2,032
|
|
$
|
7,471
|
|
|
|
|
Income from continuing operations
|
|
$
|
165
|
|
$
|
183
|
|
$
|
134
|
|
$
|
190
|
|
$
|
672
|
|
Income from discontinued operations
|
|
|
48
|
|
|
57
|
|
|
70
|
|
|
17
|
|
|
192
|
|
|
|
|
Net income
|
|
$
|
213
|
|
$
|
240
|
|
$
|
204
|
|
$
|
207
|
|
$
|
864
|
|
PER SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.51
|
|
$
|
0.57
|
|
$
|
0.42
|
|
$
|
0.59
|
|
$
|
2.10
|
|
|
Income from discontinued operations
|
|
|
0.15
|
|
|
0.18
|
|
|
0.22
|
|
|
0.05
|
|
|
0.59
|
|
|
|
|
|
Net income
|
|
$
|
0.66
|
|
$
|
0.75
|
|
$
|
0.64
|
|
$
|
0.64
|
|
$
|
2.69
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.55
|
|
$
|
0.62
|
|
$
|
0.45
|
|
$
|
0.63
|
|
$
|
2.25
|
|
|
Income from discontinued operations
|
|
|
0.16
|
|
|
0.19
|
|
|
0.24
|
|
|
0.06
|
|
|
0.65
|
|
|
|
|
|
Net income
|
|
$
|
0.71
|
|
$
|
0.81
|
|
$
|
0.69
|
|
$
|
0.69
|
|
$
|
2.90
|
|
COMMON STOCK DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share
|
|
$
|
0.15
|
|
$
|
0.15
|
|
$
|
0.15
|
|
$
|
0.15
|
|
$
|
0.60
|
|
Stockholders' equity per share
|
|
|
17.92
|
|
|
18.25
|
|
|
19.24
|
|
|
20.42
|
|
|
20.42
|
|
Price range
|
|
|
39.27-34.30
|
|
|
44.26-37.73
|
|
|
45.14-39.71
|
|
|
51.32-42.23
|
|
|
51.32-34.30
|
|
Shares outstanding
|
|
|
293.6
|
|
|
292.8
|
|
|
291.8
|
|
|
304.6
|
|
|
304.6
|
|
Average monthly trading volume
|
|
|
22.4
|
|
|
23.7
|
|
|
23.4
|
|
|
18.9
|
|
|
22.1
|
|
|
|
1Q
|
|
2Q
|
|
3Q
|
|
4Q
|
|
2006
|
|
INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions, fees and other
|
|
$
|
1,610
|
|
$
|
1,644
|
|
$
|
1,581
|
|
$
|
1,825
|
|
$
|
6,660
|
|
Investment income
|
|
|
59
|
|
|
51
|
|
|
55
|
|
|
56
|
|
|
221
|
|
|
|
|
|
Total revenue
|
|
$
|
1,669
|
|
$
|
1,695
|
|
$
|
1,636
|
|
$
|
1,881
|
|
$
|
6,881
|
|
|
|
|
Income from continuing operations
|
|
$
|
136
|
|
$
|
121
|
|
$
|
47
|
|
$
|
143
|
|
$
|
447
|
|
Income from discontinued operations
|
|
|
61
|
|
|
72
|
|
|
59
|
|
|
80
|
|
|
272
|
|
Cumulative effect of change in accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
principle, net of tax (1)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
Net income
|
|
$
|
198
|
|
$
|
193
|
|
$
|
106
|
|
$
|
223
|
|
$
|
720
|
|
PER SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.40
|
|
$
|
0.36
|
|
$
|
0.15
|
|
$
|
0.43
|
|
$
|
1.33
|
|
|
Income from discontinued operations
|
|
|
0.17
|
|
|
0.21
|
|
|
0.17
|
|
|
0.24
|
|
|
0.80
|
|
|
Cumulative effect of change in accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
principle (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.57
|
|
$
|
0.57
|
|
$
|
0.32
|
|
$
|
0.67
|
|
$
|
2.13
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.42
|
|
$
|
0.37
|
|
$
|
0.15
|
|
$
|
0.46
|
|
$
|
1.41
|
|
|
Income from discontinued operations
|
|
|
0.19
|
|
|
0.23
|
|
|
0.19
|
|
|
0.26
|
|
|
0.86
|
|
|
Cumulative effect of change in accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
principle (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.61
|
|
$
|
0.60
|
|
$
|
0.34
|
|
$
|
0.72
|
|
$
|
2.27
|
|
COMMON STOCK DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share
|
|
$
|
0.15
|
|
$
|
0.15
|
|
$
|
0.15
|
|
$
|
0.15
|
|
$
|
0.60
|
|
Stockholders' equity per share
|
|
|
16.71
|
|
|
17.20
|
|
|
17.40
|
|
|
17.42
|
|
|
17.42
|
|
Price range
|
|
|
42.16-33.45
|
|
|
42.76-32.94
|
|
|
35.30-31.01
|
|
|
37.11-33.07
|
|
|
42.76-31.01
|
|
Shares outstanding
|
|
|
318.7
|
|
|
314.5
|
|
|
309.7
|
|
|
299.6
|
|
|
299.6
|
|
Average monthly trading volume
|
|
|
28.4
|
|
|
30.6
|
|
|
21.5
|
|
|
22.8
|
|
|
25.8
|
|
-
(1)
-
Adoption
of FASB Statement No. 123(R), "Share-Based Payments," effective January 1, 2006, net of tax.
123
SCHEDULE I
Aon Corporation
(Parent Company)
CONDENSED STATEMENTS OF FINANCIAL POSITION
|
|
As of December 31
|
|
(millions)
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
$
|
6,590
|
|
$
|
5,925
|
|
|
Other investments
|
|
|
242
|
|
|
317
|
|
|
Notes receivable subsidiaries
|
|
|
235
|
|
|
40
|
|
|
Cash and cash equivalents
|
|
|
817
|
|
|
994
|
|
|
Other assets
|
|
|
236
|
|
|
199
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,120
|
|
$
|
7,475
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
726
|
|
$
|
726
|
|
|
Notes payable subsidiaries
|
|
|
642
|
|
|
390
|
|
|
7.375% long-term debt securities
|
|
|
224
|
|
|
224
|
|
|
3.5% long-term debt securities
|
|
|
|
|
|
297
|
|
|
6.2% long-term debt securities
|
|
|
|
|
|
250
|
|
|
Accrued expenses and other liabilities
|
|
|
307
|
|
|
370
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,899
|
|
|
2,257
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
361
|
|
|
347
|
|
|
Additional paid-in capital
|
|
|
3,064
|
|
|
2,583
|
|
|
Accumulated other comprehensive loss
|
|
|
(726
|
)
|
|
(1,010
|
)
|
|
Retained earnings
|
|
|
5,607
|
|
|
4,992
|
|
|
Less treasury stock at cost
|
|
|
(2,085
|
)
|
|
(1,694
|
)
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
6,221
|
|
|
5,218
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
8,120
|
|
$
|
7,475
|
|
|
|
|
|
|
|
See notes to condensed financial statements.
124
SCHEDULE I
(Continued)
Aon Corporation
(Parent Company)
CONDENSED STATEMENTS OF INCOME
|
|
Years Ended December 31
|
|
(millions)
|
|
2007
|
|
2006
|
|
2005
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
$
|
520
|
|
$
|
1,139
|
|
$
|
915
|
|
|
Other investment income
|
|
|
105
|
|
|
31
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
625
|
|
|
1,170
|
|
|
936
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
Operating and administrative
|
|
|
12
|
|
|
4
|
|
|
12
|
|
|
Interest subsidiaries
|
|
|
36
|
|
|
31
|
|
|
26
|
|
|
Interest other
|
|
|
86
|
|
|
104
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
134
|
|
|
139
|
|
|
149
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
|
|
|
491
|
|
|
1,031
|
|
|
787
|
|
|
|
Income tax benefit
|
|
|
12
|
|
|
43
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
503
|
|
|
1,074
|
|
|
838
|
|
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
|
|
|
361
|
|
|
(354
|
)
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
864
|
|
$
|
720
|
|
$
|
735
|
|
|
|
|
|
|
|
|
|
See notes to condensed financial statements.
125
SCHEDULE I
(Continued)
Aon Corporation
(Parent Company)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
Years Ended December 31
|
|
(millions)
|
|
2007
|
|
2006
|
|
2005
|
|
Cash Flows From Operating Activities
|
|
$
|
507
|
|
$
|
855
|
|
$
|
929
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
144
|
|
|
701
|
|
|
93
|
|
|
Other investments
|
|
|
60
|
|
|
(41
|
)
|
|
(5
|
)
|
|
Notes receivables from subsidiaries
|
|
|
(186
|
)
|
|
(14
|
)
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by Investing Activities
|
|
|
18
|
|
|
646
|
|
|
127
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock transactions net
|
|
|
(523
|
)
|
|
(966
|
)
|
|
(25
|
)
|
|
Issuance of common stock
|
|
|
28
|
|
|
50
|
|
|
76
|
|
|
Redemption of preferred stock
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
Issuance of notes payable and long-term debt
|
|
|
|
|
|
1
|
|
|
|
|
|
Repayment of notes payable and long-term debt
|
|
|
(250
|
)
|
|
|
|
|
(250
|
)
|
|
Notes payable to subsidiaries
|
|
|
219
|
|
|
(240
|
)
|
|
(25
|
)
|
|
Cash dividends to stockholders
|
|
|
(176
|
)
|
|
(189
|
)
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash Used by Financing Activities
|
|
|
(702
|
)
|
|
(1,344
|
)
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(177
|
)
|
|
157
|
|
|
589
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
994
|
|
|
837
|
|
|
248
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
817
|
|
$
|
994
|
|
$
|
837
|
|
|
|
|
|
|
|
|
|
See notes to condensed financial statements.
126
SCHEDULE I
(Continued)
Aon Corporation
(Parent Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
-
(1)
-
See
notes to consolidated financial statements included in Item 15(a).
-
(2)
-
Investments
in subsidiaries include approximately $3.3 billion invested in countries outside of the U.S., primarily denominated in the British Pound, the Euro, the Canadian
dollar and the Australian dollar.
-
(3)
-
Guarantees
and Indemnifications
Aon
provides a variety of guarantees and indemnifications to its customers and others to allow Aon or others to complete a wide variety of business transactions. 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. Aon does not currently
anticipate making future payments to any of its subsidiaries, or third parties on behalf of its subsidiaries, for these guarantees and indemnifications.
A
bank provides overdraft facilities for certain of Aon's foreign subsidiaries. Aon has guaranteed repayment of these facilities in the unlikely event that the foreign subsidiaries are unable to
repay. Aon has also issued guarantees and/or other letters of support for various bank lines and various other credit facilities for certain of its foreign operations (including the Euro credit
facility discussed in Note 7 to the consolidated financial statements). Aon's maximum potential liability with regard to these exposures was $795 million at December 31, 2007.
As
of November 30, 2006 in connection with the sale of AWG, Aon sold VSC. VSC will continue to remain liable to policyholders to the extent reinsurers of the property and casualty business do
not meet their obligations. As a result, at both December 31, 2007 and December 31, 2006, Aon no longer reports reinsurance recoverables related to its property and casualty business,
which was not part of the sale of AWG. Aon has provided a corporate guarantee with respect to these reinsurance recoverables, which amounts to $846 million at December 31, 2007.
Aon
has a liability for its commitment to contribute $6 million to the Aon Memorial Education Fund to support the educational needs of the children of Aon employees who were victims of the
September 11, 2001 attacks.
Aon
has guaranteed the obligations of one of its major Netherlands' subsidiaries through 2007. Management believes there is sufficient operating cash flow, liquidity and equity at this subsidiary to
cover current obligations and future obligations as they come due.
Aon
has issued various other guarantees for miscellaneous purposes at its international subsidiaries for $19 million.
Aon
expects that as prudent business interests dictate, additional guarantees and indemnifications may be issued from time to time.
127