Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. The Consolidated Financial Statements include the accounts of Aon plc and all of its controlled subsidiaries (“Aon” or the “Company”). Intercompany accounts and transactions have been eliminated. The Consolidated Financial Statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows for all periods presented.
References in this report to “Aon,” the “Company,” “we,” “us,” or “our” for time periods prior to April 1, 2020 refer to Aon Global Limited. References in the Financial Statements to “Aon,” the “Company,” “we,” “us,” or “our” for time periods on or after April 1, 2020, refer to Aon plc.
Reclassification
Certain amounts in the prior year's Consolidated Financial Statements have been reclassified to conform to the current year’s presentation. For the years ended December 31, 2020 and December 31, 2019, there was $1 million of income and $1 million of loss, respectively, including the related tax effect, from discontinued operations recognized in Net Income from discontinued operations in the Consolidated Statements of Income and Consolidated Statements of Cash Flows. These amounts are now included in Other income in the Consolidated Statements of Income and Other assets and liabilities in the Consolidated Statements of Cash Flows for the years ended December 31, 2020 and December 31, 2019. There was no impact to the effective tax rate on Net income or earnings per share in either period.
Additionally, for the years ended December 31, 2020 and December 31, 2019, a cash outflow of $127 million and a cash inflow of $3 million, respectively, was classified as an adjustment to Net income from Restructuring reserves in the Consolidated Statements of Cash Flows. These amounts are now included in Other assets and liabilities in the Consolidated Statements of Cash Flows for the years ended December 31, 2020 and December 31, 2019. There was no impact on Cash provided by operating activities.
Disaggregation of Revenue
In 2021, the Company announced steps to further accelerate its Aon United strategy, which now includes four solution lines: Commercial Risk Solutions, Reinsurance Solutions, Health Solutions, and Wealth Solutions. Disaggregation of revenue by the new solution line’s structure is reflected in Note 3 “Revenue from Contracts with Customers”, where prior period amounts have been reclassified to conform to the current periods’ presentation. The changes in the solution line structure affect only the manner in which the Company's revenue results for the Company’s principal service lines were previously reported and have no impact on the Company's previously reported Consolidated Financial Statements, results of operations, or total organic revenue growth. Refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information about the changes in the presentation of our principal service line reporting. The Company continues to operate as one segment that includes all of the Company’s operations, refer to Note 16 “Segment Information” for further information.
Use of Estimates
The preparation of the accompanying Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of reserves and expenses. These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Management believes its estimates to be reasonable given the current facts available. Aon adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, foreign currency exchange rate movements, and the COVID-19 pandemic increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment would, if applicable, be reflected in the Consolidated Financial Statements in future periods.
Revision of Previously Issued Financial Statements
During the fourth quarter of 2021, the Company identified and corrected an immaterial presentation error related to funds held on behalf of clients in the Consolidated Statements of Cash Flows.
Based on an analysis of quantitative and qualitative factors in accordance with SEC Staff Accounting Bulletins 99 “Materiality” and 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, the Company concluded that these errors were immaterial, individually and in the aggregate, to the Consolidated Statements of Cash Flows as presented in the Company’s quarterly and annual financial statements previously filed in the Company’s Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. There was no impact to the Consolidated Statements of Income, Statements of Comprehensive Income, Statements of Financial Position, or Statements of Shareholders’ Equity for any period presented.
In preparing the Company’s Consolidated Statement of Cash Flows for the year ended December 31, 2021, the Company made appropriate revisions to its Consolidated Statements of Cash Flows for historical periods. Such changes are reflected for the years ended December 31, 2020 and 2019, included in these financial statements, and will also be reflected in the historical periods included in the Company’s subsequent quarterly and annual consolidated financial statements.
The impact to the Consolidated Statements of Cash Flows previously filed in Annual Reports on Form 10-K is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended
December 31, 2020 | | Year Ended
December 31, 2019 |
| As Reported | Effect of Change | As Revised | | As Reported | Effect of Change | As Revised |
| Cash provided by operating activities | $ | 2,783 | | $ | — | | $ | 2,783 | | | $ | 1,835 | | $ | — | | $ | 1,835 | |
| Cash used for investing activities | (679) | | — | | (679) | | | (229) | | — | | (229) | |
Cash provided by (used for) financing activities | (2,088) | | 316 | | (1,772) | | | (1,493) | | 1,246 | | (247) | |
Effect of exchange rates on cash and cash equivalents and funds held on behalf of clients | 78 | | 219 | | 297 | | | 21 | | 42 | | 63 | |
Net increase in cash and cash equivalents and funds held on behalf of clients | 94 | | 535 | | 629 | | | 134 | | 1,288 | | 1,422 | |
Cash and cash equivalents and funds held on behalf of clients at beginning of year | 790 | | 5,154 | | 5,944 | | | 656 | | 3,866 | | 4,522 | |
Cash and cash equivalents and funds held on behalf of clients at end of year | $ | 884 | | $ | 5,689 | | $ | 6,573 | | | $ | 790 | | $ | 5,154 | | $ | 5,944 | |
The impact to the Consolidated Statements of Cash Flows previously filed in unaudited Quarterly Reports on Form 10-Q is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, 2021 | | Six Months Ended
June 30, 2021 | | Nine Months Ended
September 30, 2021 |
| As Reported | Effect of Change | As Revised | | As Reported | Effect of Change | As Revised | | As Reported | Effect of Change | As Revised |
| Cash provided by operating activities | $ | 561 | | $ | — | | $ | 561 | | | $ | 1,345 | | $ | — | | $ | 1,345 | | | $ | 1,251 | | $ | — | | $ | 1,251 | |
| Cash provided by (used for) investing activities | 102 | | — | | 102 | | | (27) | | — | | (27) | | | (116) | | — | | (116) | |
Cash provided by (used for) financing activities | (709) | | 28 | | (681) | | | (1,122) | | 386 | | (736) | | | (1,380) | | 786 | | (594) | |
Effect of exchange rates on cash and cash equivalents and funds held on behalf of clients | (16) | | (18) | | (34) | | | 11 | | 18 | | 29 | | | (30) | | (63) | | (93) | |
Net increase (decrease) in cash and cash equivalents and funds held on behalf of clients | (62) | | 10 | | (52) | | | 207 | | 404 | | 611 | | | (275) | | 723 | | 448 | |
Cash and cash equivalents and funds held on behalf of clients at beginning of year | 884 | | 5,689 | | 6,573 | | | 884 | | 5,689 | | 6,573 | | | 884 | | 5,689 | | 6,573 | |
Cash and cash equivalents and funds held on behalf of clients at end of year | $ | 822 | | $ | 5,699 | | $ | 6,521 | | | $ | 1,091 | | $ | 6,093 | | $ | 7,184 | | | $ | 609 | | $ | 6,412 | | $ | 7,021 | |
2. Summary of Significant Accounting Principles and Practices
Revenue Recognition
The Company generates revenues primarily through commissions, compensation from insurance and reinsurance companies for services provided to them, and fees from customers. Commissions and fees for brokerage services vary depending upon several
factors, which may include the amount of premium, the type of insurance or reinsurance coverage provided, the particular services provided to a client, insurer, or reinsurer, and the capacity in which the Company acts. Compensation from insurance and reinsurance companies includes: (1) fees for consulting and analytics services and (2) fees and commissions for administrative and other services provided to or on behalf of insurers. In Aon’s capacity as an insurance and reinsurance broker, the service promised to the customer is placement of an effective insurance or reinsurance policy, respectively. At the completion of the insurance or reinsurance policy placement process once coverage is effective, the customer has obtained control over the services promised by the Company. Judgment is not typically required when assessing whether the coverage is effective. Fees from clients for advice and consulting services are dependent on the extent and value of the services provided. Payment terms for the Company’s principal service lines are discussed below; the Company believes these terms are consistent with current industry practices. Significant financing components are typically not present in Aon’s arrangements.
The Company recognizes revenue when control of the promised services is transferred to the customer in the amount that best reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements where control is transferred over time, an input or output method is applied that represents a faithful depiction of the progress towards completion of the performance obligation. For arrangements that include variable consideration, the Company assesses whether any amounts should be constrained. For arrangements that include multiple performance obligations, the Company allocates consideration based on their relative fair values.
Costs incurred by the Company in obtaining a contract are capitalized and amortized on a systematic basis that is consistent with the transfer of control of the services to which the asset relates, considering anticipated renewals when applicable. Certain contract related costs, including pre-placement brokerage costs, are capitalized as a cost to fulfill and are amortized on a systematic basis consistent with the transfer of control of the services to which the asset relates, which is generally less than one year.
The Company has elected to apply practical expedients to not disclose the revenue related to unsatisfied performance obligations if (1) the contract has an original duration of 1 year or less, (2) the Company has recognized revenue for the amount in which it has the right to bill, and (3) the variable consideration is allocated entirely to an unsatisfied performance obligation which is recognized as a series of distinct goods or services that form a single performance obligation.
Disaggregation of Revenue
The following is a description of principal service lines from which the Company generates its revenue:
Commercial Risk Solutions includes retail brokerage, specialty solutions, global risk consulting and captives management, and Affinity programs. Revenue primarily includes insurance commissions and fees for services rendered. Revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement using output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements recognized over time, various output measures, including units transferred and time elapsed, are utilized to provide a faithful depiction of the progress towards completion of the performance obligation. Revenue is recorded net of allowances for estimated policy cancellations, which are determined based on an evaluation of historical and current cancellation data. Commissions and fees for brokerage services may be invoiced near the effective date of the underlying policy or over the term of the arrangement in installments during the policy period.
Reinsurance Solutions includes treaty reinsurance, facultative reinsurance, and capital markets. Revenue primarily includes reinsurance commissions and fees for services rendered. Revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement using output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements recognized over time, various output measures, including units delivered and time elapsed, are utilized to provide a faithful depiction of the progress towards completion of the performance obligation. Commissions and fees for brokerage services may be invoiced at the inception of the reinsurance period for certain reinsurance brokerage, or more commonly, over the term of the arrangement in installments based on deposit or minimum premiums for most treaty reinsurance arrangements.
Health Solutions includes consulting and brokerage, Human Capital, and voluntary benefits and enrollment solutions. Revenue primarily includes insurance commissions and fees for services rendered. For brokerage commissions, revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services using input or output measures, including units delivered or time elapsed, to provide a faithful depiction of the progress towards completion of the performance obligation. Revenue from health care exchange arrangements is typically recognized upon successful enrollment
of participants. Commissions and fees for brokerage services may be invoiced at the effective date of the underlying policy or over the term of the arrangement in installments during the policy period. Payment terms for other services vary but are typically over the contract term in installments.
Wealth Solutions includes retirement consulting and pension administration, as well as investments. Revenue recognized for these arrangements is predominantly recognized over the term of the arrangement using input or output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services, or for certain arrangements, at a point in time upon completion of the services. For consulting arrangements recognized over time, revenue will be recognized based on a measure of progress that depicts the transfer of control of the services to the customer, utilizing an appropriate input or output measure to provide a reasonable assessment of the progress towards completion of the performance obligation including units delivered or time elapsed. Fees paid by customers for consulting services are typically charged on an hourly, project or fixed-fee basis, and revenue for these arrangements is typically recognized based on time incurred, days elapsed, or reports delivered. Revenue from time-and-materials or cost-plus arrangements are recognized as services are performed using input or output measures to provide a reasonable assessment of the progress towards completion of the performance obligation including hours worked, and revenue for these arrangements is typically recognized based on time and materials incurred. Reimbursements received for out-of-pocket expenses are generally recorded as a component of revenue. Payment terms vary but are typically over the contract term in installments.
Share-based Compensation Expense
Share-based payments to employees, including grants of RSUs and PSAs, are measured based on grant date fair value. For purposes of measuring share-based compensation expense, the Company considered whether an adjustment to the observable market price is necessary to reflect material nonpublic information that is known to us at the time the award is granted. No adjustments were necessary for the years ended December 31, 2021, 2020, or 2019. The Company recognizes compensation expense over the requisite service period for awards expected to ultimately vest. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
Pension and Other Postretirement Benefits
The Company records net periodic cost relating to its pension and other postretirement benefit plans based on calculations that include various actuarial assumptions, including discount rates, assumed rates of return on plan assets, inflation rates, mortality rates, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and modifies these assumptions based on current rates and trends. The effects of gains, losses, and prior service costs and credits are amortized over future service periods or future estimated lives if the plans are frozen as reflected in Other income within the Consolidated Statements of Income. The funded status of each plan, calculated as the fair value of plan assets less the benefit obligation, is reflected in the Company’s Consolidated Statements of Financial Position using a December 31 measurement date.
Earnings per Share
Basic earnings per share is computed by dividing net income available to ordinary shareholders by the weighted-average number of ordinary shares outstanding, including participating securities, which consist of unvested share awards with non-forfeitable rights to dividends. Diluted earnings per share is computed by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares outstanding, which have been adjusted for the dilutive effect of potentially issuable ordinary shares, including certain contingently issuable shares. The diluted earnings per share calculation reflects the more dilutive effect of either (1) the two-class method that assumes that the participating securities have not been exercised, or (2) the treasury stock method.
Potentially issuable shares are not included in the computation of diluted earnings per share if their inclusion would be antidilutive.
Cash and Cash Equivalents and Short-term Investments
Cash and cash equivalents include cash balances and all highly liquid investments with initial maturities of three months or less. Short-term investments consist of money market funds. The estimated fair value of Cash and cash equivalents and Short-term investments approximates their carrying values.
At December 31, 2021, Cash and cash equivalents and Short-term investments totaled $836 million compared to $1,192 million at December 31, 2020, a decrease of $356 million. Of the total balance, $160 million and $102 million was restricted as to its use at December 31, 2021 and 2020, respectively. Included within Short-term investments as of December 31, 2021 and 2020 balances, respectively, were £84.3 million ($112.8 million at December 31, 2021 exchanges rates) and £44.4 million ($60.2
million at December 31, 2020 exchange rates) of operating funds required to be held by the Company in the U.K. by the FCA, a U.K.-based regulator. During 2021, following discussions with the FCA, and to take into consideration the potential future effects from market volatility due to COVID-19, the Company changed the basis of calculating its liquidity requirement and increased the amount of funds held by £34.3 million ($45.9 million at December 31, 2021 exchange rates).
Fiduciary Assets and Liabilities
In its capacity as an insurance agent and broker, Aon collects premiums from insureds and, after deducting its commission, remits the premiums to the respective insurers. Aon also collects claims or refunds from insurers on behalf of insureds. Uncollected premiums from insureds and uncollected claims or refunds from insurers are recorded as Fiduciary assets in the Company’s Consolidated Statements of Financial Position. Unremitted insurance premiums and claims are held in a fiduciary capacity and the obligation to remit these funds is recorded as Fiduciary liabilities in the Consolidated Statements of Financial Position.
Funds held on behalf of clients represent fiduciary assets held by Aon for premiums collected from insureds but not yet remitted to insurance companies and claims collected from insurance companies but not yet remitted to insureds of $6.1 billion and $5.7 billion at December 31, 2021 and 2020, respectively. Fiduciary receivables were $8.3 billion and $8.1 billion at December 31, 2021 and 2020, respectively. These funds and a corresponding liability are included in Fiduciary assets and Fiduciary liabilities, respectively, in the accompanying Consolidated Statements of Financial Position.
Allowance for Doubtful Accounts
The Company’s estimate for allowance for credit losses with respect to receivables is based on a combination of factors, including evaluation of forward-looking information, historical write-offs, aging of balances, and other qualitative and quantitative analyses. Receivables, net included an allowance for doubtful accounts of $90 million and $98 million at December 31, 2021 and 2020, respectively.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. Included in this category are certain capitalized costs incurred during the application development stage related to directly obtaining, developing, or enhancing internal use software. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are generally as follows:
| | | | | | | | |
| Asset Description | | Estimated Useful Life |
| Software | | Lesser of the life of an associated license, or 4 to 7 years |
| Leasehold improvements | | Lesser of estimated useful life or lease term, not to exceed 10 years |
| Furniture, fixtures and equipment | | 4 to 10 years |
| Computer equipment | | 4 to 6 years |
| Buildings | | 35 years |
| Automobiles | | 6 years |
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition cost over the fair value of the net assets acquired in the acquisition of a business. Goodwill is allocated to applicable reporting units. Upon disposition of a business entity, goodwill is allocated to the disposed entity based on the fair value of that entity compared to the fair value of the reporting unit in which it was included. Goodwill is not amortized, but instead is tested for impairment at least annually. The goodwill impairment test is performed at the reporting unit level. The Company may initially perform a qualitative analysis to determine if it is more likely than not that the goodwill balance is impaired. If a qualitative assessment is not performed or if a determination is made that it is not more likely than not that their value of the reporting unit exceeds its carrying amount, then the Company will perform a quantitative analysis. If the fair value of a reporting unit is determined to be greater than the carrying value of the reporting unit, goodwill is deemed not to be impaired and no further testing is necessary. If the fair value of a reporting unit is less than the carrying value, a goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value limited to the total amount of the goodwill allocated to the reporting unit. Any resulting difference will be a charge to Amortization and impairment of intangible assets in the Consolidated Statements of Income in the period in which the determination is made. Fair value is determined using a combination of present value techniques and market prices of comparable businesses.
We classify our intangible assets acquired as either tradenames, customer-related and contract-based, or technology and other. Amortization basis and estimated useful lives by intangible asset type are generally as follows:
| | | | | | | | | | | | | | |
| Intangible Asset Description | | Amortization Basis | | Estimated Useful Life |
| Customer-related and contract-based | | In line with underlying cash flows | | 7 to 20 years |
| Technology and other | | Straight-line | | 5 to 7 years |
| Tradenames | | Straight-line | | 1 to 3 years |
Derivatives
Derivative instruments are recognized in the Consolidated Statements of Financial Position at fair value. Where the Company has entered into master netting agreements with counterparties, the derivative positions are netted by counterparties and are reported accordingly in other assets or other liabilities. Changes in the fair value of derivative instruments are recognized in earnings each period, unless the derivative is designated and qualifies as a cash flow or net investment hedge.
The Company has historically designated the following hedging relationships for certain transactions: (1) a hedge of the change in fair value of a recognized asset or liability or firm commitment (“fair value hedge”), (2) a hedge of the variability in cash flows from a recognized variable-rate asset or liability or forecasted transaction (“cash flow hedge”), and (3) a hedge of the net investment in a foreign operation (“net investment hedge”).
In order for a derivative to qualify for hedge accounting, the derivative must be formally designated as a fair value, cash flow, or a net investment hedge by documenting the relationship between the derivative and the hedged item. The documentation must include a description of the hedging instrument, the hedged item, the risk being hedged, Aon’s risk management objective and strategy for undertaking the hedge, and the method for assessing the effectiveness of the hedge. 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 the inception of the hedge and on an ongoing basis. Aon assesses the ongoing effectiveness of its hedges quarterly or more frequently if facts and circumstances require.
For a derivative designated as a fair value hedging instrument, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. For a cash flow hedge that qualifies for hedge accounting, the change in fair value of a hedging instrument is recognized in Accumulated Other Comprehensive Income and subsequently reclassified to earnings in the same period the hedged item impacts earnings. For a net investment hedge, the change in fair value of the hedging instrument is recognized in Accumulate Other Comprehensive Income as part of the cumulative translation adjustment.
Changes in the fair value of a derivative that is not designated as part of a hedging relationship (commonly referred to as an “economic hedge”) are recorded in Other income in the Consolidated Statements of Income in the period of change.
The Company discontinues hedge accounting prospectively when (1) the derivative expires or is sold, terminated, or exercised, (2) the qualifying criteria are no longer met, or (3) management removes the designation of the hedging relationship.
Foreign Currency
Certain of the Company’s non-U.S. operations use their respective local currency as their functional currency. These operations that do not have the U.S. dollar as their functional currency translate their financial statements at the current rates of exchange in effect at the balance sheet date and revenues and expenses using rates that approximate those in effect during the period. The resulting translation adjustments are included in Net foreign currency translation adjustments within the Consolidated Statements of Shareholders’ Equity. Further, gains and losses from the remeasurement of monetary assets and liabilities that are denominated in a non-functional currency of that entity are included in Other income within the Consolidated Statements of Income.
Income Taxes
Deferred income taxes are recognized for the effect of temporary differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted marginal tax rates and laws that are currently in effect. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the period when the rate change is enacted.
Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets are realized by having sufficient future taxable income to allow the related tax benefits to reduce taxes otherwise payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences,
future taxable income exclusive of reversing temporary differences and carry-forwards, taxable income in carry-back years, and tax planning strategies that are both prudent and feasible.
The Company recognizes the effect of income tax positions only if sustaining those positions is more likely than not. Tax positions that meet the more likely than not recognition threshold but are not highly certain are initially and subsequently measured based on the largest amount of benefit that is greater than 50% likely of being realized upon settlement with the taxing authority. Only information that is available at the reporting date is considered in the Company’s recognition and measurement analysis, and events or changes in facts and circumstances are accounted for in the period in which the event or change in circumstance occurs.
The Company records penalties and interest related to unrecognized tax benefits in Income taxes in the Company’s Consolidated Statements of Income.
Leases
The Company leases office facilities, equipment, and automobiles under operating and finance leases. The Company’s lease obligations are primarily for the use of office facilities. The Company evaluates if a leasing arrangement exists upon inception of a contract. A contract contains a lease if the contract conveys the right to control the use of identified tangible assets for a period of time in exchange for consideration. Identified property, plant, or equipment may include a physically distinct portion of a larger asset, or a portion of an asset that represents substantially all of the capacity of the asset but is not physically distinct. The Company assesses whether a contract implicitly contains the right to control the use of a tangible asset that is not already owned. In addition, the Company subleases certain real estate properties to third parties, which are classified as operating leases.
The Company’s leases expire at various dates and may contain renewal, expansion or termination options. The exercise of lease renewal and expansion options are typically at the Company’s sole discretion and are only included in the determination of the lease term if the Company is reasonably certain to exercise the option. In addition, the Company’s lease agreements typically do not contain any material residual value guarantees or restrictive covenants.
ROU assets and lease liabilities are based on the present value of the minimum lease payments over the lease term. The Company has elected the practical expedient related to lease and non-lease components, as an accounting policy election for all asset classes, which allows a lessee to not separate non-lease components from lease components and instead account for consideration received in a contract as a single lease component.
The Company made a policy election to not recognize ROU assets and lease liabilities that arise from leases with an initial term of twelve months or less in the Consolidated Statements of Financial Position. However, the Company recognized these lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term and variable lease payments in the period in which the expense was incurred. The Company chose to apply this accounting policy across all classes of underlying assets.
A portion of the Company’s lease agreements include variable lease payments that are not recorded in the initial measurement of the lease liability and ROU asset balances. For real estate arrangements, base rental payments may be escalated according to annual changes in the CPI or other indices. The escalated rental payments based on the estimated CPI at the lease commencement date are included within minimum rental payments; however, changes in CPI are considered variable in nature and are recognized as variable lease costs in the period in which the obligation is incurred. Additionally, real estate lease agreements may include other variable payments related to operating expenses charged by the landlord based on actual expenditures. Information technology equipment agreements may include variable payments based on usage of the equipment. These expenses are also recognized as variable lease costs in the period in which the expense is incurred.
The Company utilizes discount rates to determine the present value of the lease payments based on information available at the commencement date of the lease. As the rate implicit in each lease is not typically readily available, the Company uses an incremental borrowing rate based on factors such as the lease term and the economic environment where the lease exists to determine the appropriate present value of future lease payments. When determining the incremental borrowing rate, the Company considers the rate of interest it would pay on a secured borrowing in an amount equal to the lease payments for the underlying asset under similar terms.
Operating leases are included in Operating lease ROU assets, Other current liabilities, and Non-current operating lease liabilities in the Consolidated Statements of Financial Position. Finance leases are included in Other non-current assets, Other current liabilities, and Other non-current liabilities in the Consolidated Statements of Financial Position.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Aon plc and those entities in which the Company has a controlling financial interest. To determine if Aon holds a controlling financial interest in an entity, the Company first evaluates if it is required to apply the VIE model to the entity, otherwise, the entity is evaluated under the voting interest model. Where Aon holds rights that give it the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, combined with a variable interest that gives the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, the Company has a controlling financial interest in that VIE. The Company does not consolidate the VIEs and Aon’s interest in VIEs as of December 31, 2021 was insignificant. Aon holds a controlling financial interest in entities that are not VIEs where it, directly or indirectly, holds more than 50% of the voting rights or where it exercises control through substantive participating rights or as a general partner.
New Accounting Pronouncements
Adoption of New Accounting Standards
Contract Assets and Contract Liabilities Acquired in a Business Combination
In October 2021, FASB issued new accounting guidance related to the accounting for contract assets and contract liabilities from contracts with customers acquired in a business combination. The new guidance improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency. The new guidance requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with the current accounting standard on revenue from contracts with customers, ASC 606. The new guidance is effective for Aon in the first quarter of 2023, with early adoption permitted. The Company elected to early adopt this guidance in the fourth quarter of 2021. The Company adopted the new guidance on a prospective basis while applying the amendments to all business combinations that occurred during 2021 as required by the new guidance. The early adoption of the new guidance did not have a material impact on the Consolidated Financial Statements.
3. Revenue from Contracts with Customers
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers by principal service line (in millions). Prior year amounts from the Consolidated Financial Statements have been reclassified to conform to the current year’s presentation. Refer to Note 1 “Basis of Presentation” for further information regarding the changes to the Company’s principal service lines.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31 |
| | 2021 | | 2020 | | 2019 |
| Commercial Risk Solutions | | $ | 6,635 | | | $ | 5,861 | | | $ | 5,857 | |
| Reinsurance Solutions | | 1,997 | | | 1,814 | | | 1,686 | |
| Health Solutions | | 2,154 | | | 2,067 | | | 2,104 | |
| Wealth Solutions | | 1,426 | | | 1,341 | | | 1,380 | |
| Elimination | | (19) | | | (17) | | | (14) | |
| Total revenue | | $ | 12,193 | | | $ | 11,066 | | | $ | 11,013 | |
Consolidated revenue from contracts with customers by geographic area, which is attributed on the basis of where the services are performed, is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31 |
| | 2021 | | 2020 | | 2019 |
| U.S. | | $ | 5,459 | | | $ | 5,032 | | | $ | 5,016 | |
| Americas other than U.S. | | 1,027 | | | 911 | | | 919 | |
| U.K. | | 1,681 | | | 1,579 | | | 1,502 | |
| Ireland | | 127 | | | 84 | | | 75 | |
| Europe, Middle East, & Africa other than U.K. and Ireland | | 2,565 | | | 2,236 | | | 2,263 | |
| Asia Pacific | | 1,334 | | | 1,224 | | | 1,238 | |
| Total revenue | | $ | 12,193 | | | $ | 11,066 | | | $ | 11,013 | |
Contract Costs
Changes in the net carrying amount of costs to fulfill contracts with customers are as follows (in millions):
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Balance at beginning of period | | $ | 339 | | | $ | 335 | |
| Additions | | 1,504 | | | 1,360 | |
| Amortization | | (1,478) | | | (1,360) | |
| Impairment | | — | | | — | |
| Foreign currency translation and other | | (4) | | | 4 | |
| Balance at end of period | | $ | 361 | | | $ | 339 | |
Changes in the net carrying amount of costs to obtain contracts with customers are as follows (in millions):
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Balance at beginning of period | | $ | 184 | | | $ | 171 | |
| Additions | | 59 | | | 61 | |
| Amortization | | (48) | | | (47) | |
| Impairment | | — | | | — | |
| Foreign currency translation and other | | (16) | | | (1) | |
| Balance at end of period | | $ | 179 | | | $ | 184 | |
4. Other Financial Data
Consolidated Statements of Income Information
Other Income
The components of Other income are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2021 | | 2020 | | 2019 |
| Foreign currency remeasurement | $ | 26 | | | $ | (12) | | | $ | 9 | |
| Gain from disposals of business | 142 | | | 25 | | | 13 | |
| Pension and other postretirement | 21 | | | 13 | | | 9 | |
| Equity earnings | 8 | | | 4 | | | 4 | |
| Extinguishment of debt | — | | | (7) | | | — | |
| Financial instruments | (45) | | | (10) | | | (35) | |
| | | | | |
| Total | $ | 152 | | | $ | 13 | | | $ | — | |
Consolidated Statements of Financial Position Information
Allowance for Doubtful Accounts
Changes in the net carrying amount of allowance for doubtful accounts are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Balance at beginning of period | $ | 98 | | | $ | 70 | | | $ | 62 | |
Adoption of new accounting guidance (1) | — | | | 7 | | | — | |
| Adjusted balance at beginning of period | 98 | | | 77 | | | 62 | |
| Provision | 26 | | | 29 | | | 27 | |
| Accounts written off, net of recoveries | (37) | | | (6) | | | (19) | |
| Foreign currency translation and other | 3 | | | (2) | | | — | |
| Balance at end of period | $ | 90 | | | $ | 98 | | | $ | 70 | |
(1) The adoption of the new accounting standard on the measurement of credit losses on January 1, 2020 resulted in addition to the Allowance for doubtful accounts of $7 million. After tax impacts, this resulted in a $6 million decrease to Retained earnings. Refer to Note 2 “Summary of Significant Accounting Principles and Practices” for further information.
Other Current Assets
The components of Other current assets are as follows (in millions):
| | | | | | | | | | | |
| |
| As of December 31 | 2021 | | 2020 |
Costs to fulfill contracts with customers(1) | $ | 361 | | | $ | 339 | |
| Taxes receivable | 53 | | | 95 | |
| | | |
| Prepaid expenses | 137 | | | 111 | |
| | | |
| | | |
| Other | 165 | | | 79 | |
| Total | $ | 716 | | | $ | 624 | |
(1)Refer to Note 3 “Revenue from Contracts with Customers” for further information.
Fixed Assets, net
The components of Fixed assets, net are as follows (in millions):
| | | | | | | | | | | |
| As of December 31 | 2021 | | 2020 |
| Software | $ | 797 | | | $ | 808 | |
| Leasehold improvements | 425 | | | 375 | |
| Computer equipment | 268 | | | 249 | |
| Furniture, fixtures and equipment | 279 | | | 246 | |
| Construction in progress | 45 | | | 155 | |
| Other | 33 | | | 34 | |
Fixed assets, gross | 1,847 | | | 1,867 | |
| Less: Accumulated depreciation | 1,318 | | | 1,268 | |
Fixed assets, net | $ | 529 | | | $ | 599 | |
Depreciation expense, which includes software amortization, was $179 million, $167 million, and $172 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Other Non-current Assets
The components of Other non-current assets are as follows (in millions):
| | | | | | | | | | | |
| As of December 31 | 2021 | | 2020 |
Costs to obtain contracts with customers (1) | $ | 179 | | | $ | 184 | |
| Investments | 64 | | | 74 | |
Leases (2) | 63 | | | 89 | |
| Taxes receivable | 95 | | | 125 | |
| Other | 111 | | | 138 | |
| Total | $ | 512 | | | $ | 610 | |
(1) Refer to Note 3 “Revenue from Contracts with Customers” for further information.
(2) Refer to Note 8 “Lease Commitments” for further information.
Other Current Liabilities
The components of Other current liabilities are as follows (in millions):
| | | | | | | | | | | |
| As of December 31 | 2021 | | 2020 |
Deferred revenue (1) | $ | 321 | | | $ | 296 | |
| Taxes payable | 149 | | | 80 | |
| | | |
Leases (2) | 213 | | | 234 | |
| | | |
| Other | 648 | | | 561 | |
| Total | $ | 1,331 | | | $ | 1,171 | |
(1)$553 million and $454 million was recognized in the Consolidated Statements of Income during the years ended December 31, 2021 and December 31, 2020, respectively.
(2)Refer to Note 8 “Lease Commitments” for further information.
Other Non-current Liabilities
The components of Other non-current liabilities are as follows (in millions):
| | | | | | | | | | | |
| As of December 31 | 2021 | | 2020 |
Taxes payable (1) | $ | 609 | | | $ | 561 | |
Leases (2) | 46 | | | 65 | |
| Compensation and benefits | 58 | | | 53 | |
| Deferred revenue | 70 | | | 76 | |
| Other | 127 | | | 140 | |
| Total | $ | 910 | | | $ | 895 | |
(1)Includes $145 million for the non-current portion of the transition tax as of December 31, 2021 and December 31, 2020. Refer to Note 9 “Income Taxes” for further information on the transition tax.
(2)Refer to Note 8 “Lease Commitments” for further information.
5. Acquisitions and Dispositions of Businesses
Completed Acquisitions
The Company completed two acquisitions during the year ended December 31, 2021 and six acquisitions during the year ended December 31, 2020. The following table includes the preliminary fair values of consideration transferred, assets acquired, and liabilities assumed as a result of the Company’s acquisitions (in millions):
| | | | | |
| Year Ended
December 31, 2021 |
| Consideration transferred | |
| Cash | $ | 27 | |
| Deferred, contingent, and other consideration | 17 | |
| Aggregate consideration transferred | $ | 44 | |
| |
| Assets acquired | |
| |
| |
| Goodwill | 17 | |
| Other intangible assets | 13 | |
| |
Other assets (1) | 26 | |
| Total assets acquired | 56 | |
| Liabilities assumed | |
| |
| |
| Total liabilities assumed | 12 | |
| Net assets acquired | $ | 44 | |
(1) In the year ended December 31, 2021, cash and cash equivalents of $12 million and funds held on behalf of client of $1 million were acquired.
Intangible assets acquired include customer-related and contract-based assets. The intangible assets acquired as part of business acquisitions in 2021 had a weighted average useful economic life of 9 years. Acquisition related costs for completed acquisitions incurred and recognized within Other general expense for the year ended December 31, 2021 were insignificant.
The results of operations of these acquisitions are included in the Consolidated Financial Statements as of the respective acquisition dates. The Company’s results of operations would not have been materially different if these acquisitions had been reported from the beginning of the period in which they were acquired.
2021 Acquisitions
On December 22, 2021, the Company completed the transaction to acquire 100% share capital of For Welfare S.r.l, a company focused on bancassurance programs in Italy.
On September 1, 2021, the Company completed the transaction to acquire 51% of Aon India Insurance Brokers Limited (formerly known as Anviti Insurance Brokers Private Limited). Prior to the acquisition date, the Company accounted for its 49% interest in Anviti as an equity-method investment. The acquisition-date fair value of the previous equity interest was $15 million and is included in the measurement of consideration transferred. There was no significant impact as a result of remeasuring the carrying value of the Company’s prior equity interest in Anviti held before the business combination.
2020 Acquisitions
On April 6, 2020, the Company completed the acquisition of 100% share capital of Farmington Administrative Services LLC, a U.S.-based national provider of enrollment solutions and voluntary benefits, and certain assets of other Farmington companies.
On January 31, 2020, the Company completed the acquisition of 100% share capital of Cytelligence Inc., a Canadian-based cyber security firm that provides incident response advisory, digital forensic expertise, security consulting services, and cyber security training for employees to help organizations respond to cyber security threats and strengthen their security position.
On January 3, 2020, the Company completed the acquisition of 100% share capital of CoverWallet, Inc., a U.S.-based digital insurance platform for small- and medium-sized businesses.
On January 1, 2020, the Company completed the acquisition of 100% share capital of TRIUM GmbH Insurance Broker, an insurance broker based in Germany.
On January 1, 2020, the Company completed the acquisition of 100% share capital of Assimedia SA, an insurance broker based in Switzerland.
On January 1, 2020, the Company completed the acquisition of 100% share capital of Apollo Conseil et Courtage, an insurance broker based in France.
Completed Dispositions
The Company completed six dispositions during the year ended December 31, 2021, including the sale of Aon’s Retiree Health ExchangeTM business. The Company completed one disposition during the year ended December 31, 2020 and eight dispositions during the year ended December 31, 2019.
The pretax gains recognized related to dispositions were $142 million, $25 million, and $13 million for the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively. Gains recognized as a result of a disposition are included in Other income in the Consolidated Statements of Income. The pretax losses recognized in the Consolidated Statements of Income related to these dispositions were insignificant for the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively.
Other Significant Activity
On March 9, 2020, Aon and WTW, an Irish public limited company, entered into a business combination agreement (the “Business Combination Agreement”) with respect to a combination of the parties (the “Combination”). On July 26, 2021, Aon and WTW mutually agreed to terminate the Business Combination Agreement, (the “Termination Agreement”). Aon Corporation paid a $1 billion termination fee pursuant to the Termination Agreement. Refer to “Termination of Business Combination Agreement” within Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information.
6. Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the years ended December 31, 2021 and 2020, respectively, are as follows (in millions):
| | | | | |
| Balance as of January 1, 2020 | $ | 8,165 | |
| Goodwill related to current year acquisitions | 314 | |
| Goodwill related to disposals | (3) | |
| |
| Foreign currency translation and other | 190 | |
| Balance as of December 31, 2020 | $ | 8,666 | |
| Goodwill related to current year acquisitions | 17 | |
| Goodwill related to disposals | (37) | |
| |
| Foreign currency translation and other | (212) | |
| Balance as of December 31, 2021 | $ | 8,434 | |
Other intangible assets by asset class are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31 | 2021 | | 2020 |
| | Gross
Carrying
Amount | | Accumulated Amortization and Impairment | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated Amortization and Impairment | | Net
Carrying
Amount |
| Customer-related and contract-based | $ | 2,289 | | | $ | 1,848 | | | $ | 441 | | | $ | 2,337 | | | $ | 1,775 | | | $ | 562 | |
| Technology and other | 407 | | | 357 | | | 50 | | | 435 | | | 358 | | | 77 | |
Tradenames (1) | 14 | | | 13 | | | 1 | | | 14 | | | 13 | | | 1 | |
| Total | $ | 2,710 | | | $ | 2,218 | | | $ | 492 | | | $ | 2,786 | | | $ | 2,146 | | | $ | 640 | |
(1)In 2020, Aon wrote off $1.0 billion of fully amortized tradenames, including the Hewitt and Benfield tradenames. The company no longer expects to receive economic benefits from these tradenames.
Amortization expense and impairment charges from finite lived intangible assets were $147 million, $246 million, and $392 million for the years ended December 31, 2021, 2020, and 2019, respectively.
The estimated future amortization for finite-lived intangible assets as of December 31, 2021 is as follows (in millions):
| | | | | | | | |
| | Estimated Future Amortization |
| For the years ended | |
| 2022 | | $ | 100 | |
| 2023 | | 89 | |
| 2024 | | 72 | |
| 2025 | | 59 | |
| 2026 | | 37 | |
| Thereafter | | 135 | |
| Total | | $ | 492 | |
7. Debt
The following is a summary of outstanding debt (in millions):
| | | | | | | | | | | |
| As of December 31 | 2021 | | 2020 |
| Commercial paper | $ | 665 | | | $ | — | |
2.80% Senior Notes due March 2021 (1) | — | | | 400 | |
2.20% Senior Notes due November 2022 (2) | 499 | | | 498 | |
4.00% Senior Notes due November 2023 | 349 | | | 349 | |
3.50% Senior Notes due June 2024 | 598 | | | 597 | |
3.875% Senior Notes due December 2025 | 748 | | | 747 | |
2.875% Senior Notes due May 2026 (EUR 500M) | 563 | | | 606 | |
8.205% Junior Subordinated Notes due January 2027 | 521 | | | 521 | |
4.50% Senior Notes due December 2028 | 347 | | | 347 | |
3.75% Senior Notes due May 2029 | 745 | | | 744 | |
2.80% Senior Notes due May 2030 | 993 | | | 992 | |
2.05% Senior Notes due August 2031 | 396 | | | — | |
2.60% Senior Notes due December 2031 | 496 | | | — | |
6.25% Senior Notes due September 2040 | 296 | | | 296 | |
4.25% Senior Notes due December 2042 | 201 | | | 200 | |
4.45% Senior Notes due May 2043 | 247 | | | 247 | |
4.60% Senior Notes due June 2044 | 544 | | | 544 | |
4.75% Senior Notes due May 2045 | 593 | | | 593 | |
2.90% Senior Notes due August 2051 | 591 | | | — | |
| Other | — | | | 48 | |
| Total debt | 9,392 | | | 7,729 | |
| Less: Short-term debt and current portion of long-term debt | 1,164 | | | 448 | |
| Total long-term debt | $ | 8,228 | | | $ | 7,281 | |
(1)The 2.80% Senior Notes due March 2021 were repaid in full on February 16, 2021.
(2)The 2.20% Senior Notes due November 2021 were reclassified as Short-term debt and current portion of long-term debt in the Consolidated Statement of Financial Position as of December 31, 2021.
Notes
On December 2, 2021, Aon Corporation, a Delaware corporation, and Aon Global Holdings plc, a public limited company incorporated under the laws of England and Wales, both wholly owned subsidiaries of the company, co-issued $500 million aggregate principal amount of 2.60% Senior Notes set to mature on December 2, 2031. The Company intends to use the net proceeds of the offering for general corporate purposes.
On August 23, 2021, Aon Corporation, a Delaware corporation, and Aon Global Holdings plc, a public limited company formed under the laws of England and Wales, both wholly owned subsidiaries of the Company, co-issued $400 million 2.05% Senior Notes due August 2031 and $600 million of 2.90% Senior Notes due August 2051. The Company intends to use the net proceeds of the offering for general corporate purposes.
On January 13, 2021, Aon Global Limited, a limited company organized under the laws of England and Wales and a wholly owned subsidiary of Aon plc, issued an irrevocable notice of redemption to holders of its 2.80% Senior Notes for the redemption of all $400 million outstanding aggregate principal amount of the notes, which were set to mature in March 2021 and classified as Short-term debt and current portion of long-term debt as of December 31, 2020. The redemption date was on February 16, 2021 and resulted in an insignificant loss due to extinguishment.
On May 29, 2020, Aon Corporation, a Delaware corporation and a wholly owned subsidiary of Aon Corporation, issued an irrevocable notice of redemption to holders of its 5.00% Senior Notes, which were set to mature on September 30, 2020, for the redemption of all $600 million outstanding aggregate principal amount of the notes. The redemption date was on June 30, 2020 and resulted in a loss of $7 million due to extinguishment.
On May 12, 2020, Aon Corporation issued $1 billion 2.80% Senior Notes due May 2030. Aon Corporation used a portion of the net proceeds on June 30, 2020 to repay its outstanding 5.00% Senior Notes, which were set to mature on September 30, 2020. The Company used the remainder to repay other borrowings and for general corporate purposes.
Each of the notes issued by Aon Corporation is fully and unconditionally guaranteed by Aon Global Limited, Aon plc, and Aon Global Holding plc. Each of the notes issued by Aon Global Limited is fully and unconditionally guaranteed by Aon plc, Aon Global Holdings plc, and Aon Corporation. All guarantees of Aon plc and Aon Global Limited of the Co-Issued Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the Co-Issuers. Refer to “Guarantee of Registered Securities” within Part II Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information regarding guarantees of outstanding debt securities. Each of the notes described and identified in the table above contains customary representations, warranties, and covenants, and the Company was in compliance with all such covenants as of December 31, 2021.
Repayments of total debt as of December 31, 2021 are as follows (in millions):
| | | | | |
| 2022 | $ | 1,165 | |
| 2023 | 350 | |
| 2024 | 600 | |
| 2025 | 750 | |
| 2026 | 566 | |
| Thereafter | 6,077 | |
| Total Repayments | 9,508 | |
| Unamortized discounts, premiums, and debt issuance costs | (116) | |
| Total Debt | $ | 9,392 | |
Revolving Credit Facilities
As of December 31, 2021, Aon plc had two primary committed credit facilities outstanding: its $1.0 billion multi-currency U.S. credit facility expiring in September 2026 and its $750 million multi-currency U.S. credit facility expiring in October 2023. In aggregate, these two facilities provide $1.75 billion in available credit. The $1.0 billion credit facility was entered into on September 28, 2021 and replaced the $900 million credit facility, which was scheduled to mature on February 2, 2022.
Each of these primary committed credit facilities includes customary representations, warranties, and covenants, including financial covenants that require Aon to maintain specified ratios of adjusted consolidated EBITDA to consolidated interest expense and consolidated debt to adjusted consolidated EBITDA, in each case, tested quarterly. At December 31, 2021, Aon did not have borrowings under either of these primary committed credit facilities, and was in compliance with the financial covenants and all other covenants contained therein during the rolling year ended December 31, 2021.
Commercial Paper
Aon Corporation has established a U.S. commercial paper program (the “U.S. Program”) and Aon Global Holdings plc has established a European multi-currency commercial paper program (the “European Program” and, together with the U.S. Program, the “Commercial Paper Programs”). Commercial paper may be issued in aggregate principal amounts of up to
$1 billion under the U.S. Program and €625 million under the European Program, not to exceed the amount of the Company’s committed credit facilities, which was $1.75 billion at December 31, 2021. The aggregate capacity of the U.S. Program was increased in the fourth quarter of 2021 from $900 million to $1 billion. The aggregate capacity of the Commercial Paper Program remains fully backed by the Company’s committed credit facilities. The U.S. Program was fully and unconditionally guaranteed by Aon plc, Aon Global Limited, and Aon Global Holdings plc and the European Program was fully and unconditionally guaranteed by Aon plc, Aon Global Limited, and Aon Corporation.
Approximately $400 million of the Termination Fee (as defined in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations) was paid on July 27, 2021 using proceeds of commercial paper issued by Aon Corporation under the U.S. Program, where the aggregate principal was raised on July 26, 2021.
Commercial paper outstanding, which is included in Short-term debt and current portion of long-term debt in the Company’s Consolidated Statements of Financial Position, is as follows (in millions):
| | | | | | | | | | | | | | |
| As of December 31 | | 2021 | | 2020 |
| Commercial paper outstanding | | $ | 665 | | | $ | — | |
The weighted average commercial paper outstanding and its related interest rates are as follows (in millions, except percentages):
| | | | | | | | | | | | | | |
| | Years Ended December 31 |
| | 2021 | | 2020 |
| Weighted average commercial paper outstanding | | $ | 273 | | | $ | 343 | |
| Weighted average interest rate of commercial paper outstanding | | 0.01 | % | | 1.47 | % |
8. Lease Commitments
The classification of operating and finance lease asset and liability balances within the Consolidated Statements of Financial Position are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| As of December 31 | | 2021 | 2020 | | | | | | | | | | |
| Assets | | | | | | | | | | | | | |
| Operating lease assets | Operating lease right-of-use assets | $ | 786 | | $ | 911 | | | | | | | | | | | |
| Finance lease assets | Other non-current assets | 63 | | 89 | | | | | | | | | | | |
| Total lease assets | | $ | 849 | | $ | 1,000 | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | |
| Current lease liabilities | | | | | | | | | | | | | |
| Operating | Other current liabilities | $ | 194 | | $ | 204 | | | | | | | | | | | |
| Finance | Other current liabilities | 19 | | 30 | | | | | | | | | | | |
| Non-current lease liabilities | | | | | | | | | | | | | |
| Operating | Non-current operating lease liabilities | 772 | | 897 | | | | | | | | | | | |
| Finance | Other non-current liabilities | 46 | | 65 | | | | | | | | | | | |
| Total lease liabilities | | $ | 1,031 | | $ | 1,196 | | | | | | | | | | | |
The components of lease costs are as follows (in millions):
| | | | | | | | |
| Years Ended December 31 |
| 2021 | 2020 |
| Operating lease cost | $ | 217 | | $ | 221 | |
| Finance lease costs | | |
| Amortization of leased assets | 26 | | 25 | |
| Interest on lease liabilities | 1 | | 3 | |
| Variable lease cost | 49 | | 48 | |
Short-term lease cost (1) | 11 | | 10 | |
| Sublease income | (31) | | (32) | |
| Net lease cost | $ | 273 | | $ | 275 | |
(1) Short-term lease cost does not include expenses related to leases with a lease term of one month or less.
Weighted average remaining lease term and discount rate related to operating and finance leases are as follows:
| | | | | | | | | | | | | | | | | |
| As of December 31 | 2021 | 2020 | | | | | | | | | |
| Weighted average remaining lease term (years) | | | | | | | | | | | |
| Operating leases | 6.9 | 7.4 | | | | | | | | | |
| Finance leases | 3.6 | 4.2 | | | | | | | | | |
| Weighted average discount rate | | | | | | | | | | | |
| Operating leases | 2.8 | % | 2.9 | % | | | | | | | | | |
| Finance leases | 1.0 | % | 1.0 | % | | | | | | | | | |
Other cash and non-cash related activities are as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| Years Ended December 31 | | | | | | | | | | |
| 2021 | 2020 | | | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | | | | | |
| Operating cash flows for operating leases | $ | 244 | | $ | 236 | | | | | | | | | | | |
| | | | | | | | | | | | |
| Financing cash flows for finance leases | $ | 23 | | $ | 12 | | | | | | | | | | | |
| Non-cash related activities | | | | | | | | | | | | |
| ROU assets obtained in exchange for new operating lease liabilities | $ | 44 | | $ | 146 | | | | | | | | | | | |
| ROU assets obtained in exchange for new finance lease liabilities | $ | — | | $ | 13 | | | | | | | | | | | |
Operating lease ROU asset expense (1) | $ | 142 | | $ | 178 | | | | | | | | | | | |
Changes in Non-current operating lease liabilities (1) | $ | (125) | | $ | (47) | | | | | | | | | | | |
| | | | | | | | | | | | |
(1)The Company has recorded non-cash changes in Operating lease ROU assets and Non-current operating lease liabilities through Other assets and liabilities in Cash flows from operations within the Consolidated Statements of Cash Flows.
Maturity analysis of operating and finance leases as of December 31, 2021 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total | | |
| 2022 | $ | 207 | | | $ | 26 | | | $ | 233 | | | | | |
| 2023 | 175 | | | 20 | | | 195 | | | | | |
| 2024 | 144 | | | 18 | | | 162 | | | | | |
| 2025 | 121 | | | 10 | | | 131 | | | | | |
| 2026 | 110 | | | — | | | 110 | | | | | |
| Thereafter | 299 | | | — | | | 299 | | | | | |
| Total undiscounted future minimum lease payments | 1,056 | | | 74 | | | 1,130 | | | | | |
| Less: Imputed interest | (90) | | | (9) | | | (99) | | | | | |
| Present value of lease liabilities | $ | 966 | | | $ | 65 | | | $ | 1,031 | | | | | |
9. Income Taxes
Income before income tax and the provision for income tax consist of the following (in millions):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2021 | | 2020 | | 2019 |
| Income (loss) before income taxes: | | | | | |
| Ireland | $ | 15 | | | $ | (86) | | | $ | 200 | |
| U.K. | 549 | | | 634 | | | 228 | |
| U.S. | (818) | | | (28) | | | (220) | |
| Other | 2,185 | | | 1,946 | | | 1,662 | |
| Total | $ | 1,931 | | | $ | 2,466 | | | $ | 1,870 | |
| Income tax expense: | | | | | |
| Current: | | | | | |
| Ireland | $ | 2 | | | $ | 2 | | | $ | 1 | |
| U.K. | 50 | | | 30 | | | 20 | |
| U.S. federal | 197 | | | 126 | | | 22 | |
| U.S. state and local | 72 | | | 22 | | | 41 | |
| Other | 291 | | | 259 | | | 249 | |
| Total current tax expense | $ | 612 | | | $ | 439 | | | $ | 333 | |
| Deferred tax expense (benefit): | | | | | |
| Ireland | $ | (1) | | | $ | (1) | | | $ | (1) | |
| U.K. | 131 | | | 39 | | | 35 | |
| U.S. federal | (83) | | | (72) | | | (20) | |
| U.S. state and local | (30) | | | (4) | | | (27) | |
| Other | (6) | | | 47 | | | (23) | |
| Total deferred tax expense (benefit) | $ | 11 | | | $ | 9 | | | $ | (36) | |
| Total income tax expense | $ | 623 | | | $ | 448 | | | $ | 297 | |
Income before income taxes shown above is based on the location of the business unit to which such earnings are attributable for tax purposes. In addition, because the earnings shown above may, in some cases, be subject to taxation in more than one country, the income tax provision shown above as Ireland, U.K., U.S. or Other may not correspond to the geographic attribution of the earnings.
The Company performs a reconciliation of the income tax provisions based on its domicile and statutory rate at each reporting period. Due to the Reorganization, the 2021 and 2020 reconciliations are based on the Irish statutory corporate tax rate of 25.0%, while the 2019 reconciliation is based on the U.K. statutory corporate tax rate of 19.0%. The reconciliation to the provisions reflected in the Consolidated Financial Statements is as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2021 | | 2020 | | 2019 |
| Statutory tax rate | 25.0% | | 25.0% | | 19.0% |
| U.S. state income taxes, net of U.S. federal benefit | 1.5 | | 1.0 | | 0.5 |
Taxes on international operations (1) (4) | (15.4) | | (9.8) | | (6.0) |
| Nondeductible expenses | 3.3 | | 2.1 | | 1.6 |
| Adjustments to prior year tax requirements | (0.2) | | — | | 0.1 |
| Deferred tax adjustments, including statutory rate changes | 3.2 | | 0.7 | | — |
| Deferred tax adjustments, international earnings | 1.8 | | 0.7 | | — |
| Adjustments to valuation allowances | (0.2) | | — | | 1.8 |
| Change in uncertain tax positions | 2.1 | | 1.5 | | 2.2 |
Excess tax benefits related to shared based compensation (2) | (2.4) | | (2.2) | | (2.8) |
U.S. Tax Reform impact (3) | — | | — | | (0.3) |
| Capital Losses | — | | (1.8) | | — |
| Non-deductible transaction costs | 1.1 | | 1.3 | | — |
| Non-deductible termination fee | 12.9 | | — | | — |
| Other — net | (0.4) | | (0.3) | | (0.2) |
| Effective tax rate | 32.3% | | 18.2% | | 15.9% |
(1)The Company determines the adjustment for taxes on international operations based on the difference between the statutory tax rate applicable to earnings in each foreign jurisdiction and the enacted rate of 25.0%, 25.0% and 19.0% at December 31, 2021, 2020, and 2019, respectively. The benefit to the Company’s effective income tax rate from taxes on international operations relates to benefits from lower-taxed global operations, primarily due to the use of global funding structures and the tax holiday in Singapore.
(2)Excess tax benefits and deficiencies from share-based payment transactions are recognized as income tax expense or benefit in the Company’s Consolidated Statements of Income.
(3)The impact of the Tax Cuts and Jobs Act including adjustments to the Transition Tax.
(4)In July 2020, final U.S. tax regulations were issued regarding the GILTI high tax election, allowing taxpayers to exclude from GILTI the income of a Controlled Foreign Corporation that incurs a foreign tax rate more than 90% of the top U.S. corporate tax rate. A GILTI high tax election may be made on an annual basis, and taxpayers may choose to apply the election to taxable years beginning after December 31, 2017. The Company expects to make the GILTI high-tax election for 2021 and therefore recorded the impact of making the election.
The Company has elected to account for GILTI in the period in which it is incurred, and therefore has not provided deferred tax impacts of GILTI in its Consolidated Financial Statements.
The components of the Company’s deferred tax assets and liabilities are as follows (in millions):
| | | | | | | | | | | |
| As of December 31 | 2021 | | 2020 |
| Deferred tax assets: | | | |
| Net operating loss, capital loss, interest, and tax credit carryforwards | $ | 581 | | | $ | 653 | |
| Lease liabilities | 207 | | | 248 | |
| Employee benefit plans | 160 | | | 312 | |
| Other accrued expenses | 132 | | | 103 | |
| Accrued interest | 97 | | | — | |
Federal and state benefit of interest from uncertain tax positions (1) | 45 | | | 37 | |
| Deferred revenue | 36 | | | 36 | |
| Investment basis differences | 25 | | | 28 | |
| Lease and service guarantees | 1 | | | 2 | |
| Other | 25 | | | 17 | |
| Total | 1,309 | | | 1,436 | |
| Valuation allowance on deferred tax assets | (230) | | | (205) | |
| Total | $ | 1,079 | | | $ | 1,231 | |
| Deferred tax liabilities: | | | |
| Intangibles and property, plant and equipment | $ | (243) | | | $ | (291) | |
| Lease right-of-use asset | (173) | | | (211) | |
| Deferred costs | (159) | | | (141) | |
| Unremitted earnings | (58) | | | (37) | |
| Other accrued expenses | (27) | | | (22) | |
| Unrealized foreign exchange gains | (22) | | | (26) | |
| Other | (32) | | | (41) | |
| Total | $ | (714) | | | $ | (769) | |
| Net deferred tax asset | $ | 365 | | | $ | 462 | |
(1)The $37 million of Federal and state benefit of interest from uncertain tax positions as of December 31, 2020 was previously classified as Other.
Deferred income taxes (assets and liabilities have been netted by jurisdiction) have been classified in the Consolidated Statements of Financial Position as follows (in millions):
| | | | | | | | | | | |
| As of December 31 | 2021 | | 2020 |
| Deferred tax assets — non-current | 766 | | | 724 | |
| Deferred tax liabilities — non-current | (401) | | | (262) | |
| Net deferred tax asset | $ | 365 | | | $ | 462 | |
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjusts the valuation allowance accordingly. Considerations with respect to the realizability of deferred tax assets include the period of expiration of the deferred tax asset, historical earnings and projected future taxable income by jurisdiction as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Significant management judgment is required in determining the assumptions and estimates related to the amount and timing of future taxable income. Valuation allowances have been established primarily with regard to the tax benefits of certain net operating loss, capital loss, and interest carryforwards. Valuation allowances increased by $25 million as of December 31, 2021, when compared to December 31, 2020. The change is primarily attributable to the increase in the UK tax rate offset by the release of valuation allowances related to certain net operating and capital loss carryforwards.
The Company generally intends to limit distributions from foreign subsidiaries in excess of U.S. tax earnings and profits (except where distributions would be limited by available cash) and to limit repatriations from certain other jurisdictions that would otherwise generate a U.S. tax liability. As of December 31, 2021, the Company has accrued $58 million for local country income taxes, withholding taxes and state income taxes on those undistributed earnings that are not indefinitely reinvested. The Company has not provided for deferred taxes on outside basis differences in our investments in our foreign subsidiaries that are unrelated to these accumulated undistributed earnings, as these outside basis differences are indefinitely reinvested. A determination of the unrecognized deferred taxes related to these other components of our outside basis differences is not practicable.
The Company had the following carryforwards (in millions):
| | | | | | | | | | | |
| As of December 31 | 2021 | | 2020 |
| U.K. | | | |
| Operating loss carryforwards | $ | 41 | | | $ | 266 | |
| Capital loss carryforwards | $ | 573 | | | $ | 577 | |
| Interest carryforwards | $ | — | | | $ | 121 | |
| | | |
| U.S. | | | |
| Federal operating loss carryforwards | $ | 25 | | | $ | 49 | |
| Federal capital loss carryforwards | $ | 112 | | | $ | 112 | |
| Federal interest carryforwards | $ | 1,140 | | | $ | 1,220 | |
| | | |
| State operating loss carryforwards | $ | 398 | | | $ | 378 | |
| State capital loss carryforwards | $ | 123 | | | $ | 123 | |
| State interest carryforwards | $ | 551 | | | $ | 573 | |
| | | |
| Other Non-U.S. | | | |
| Operating loss carryforwards | $ | 301 | | | $ | 400 | |
| Capital loss carryforwards | $ | 35 | | | $ | 42 | |
| Interest carryforwards | $ | 26 | | | $ | 34 | |
| Other carryforwards | $ | 5 | | | $ | — | |
The U.K. operating losses, capital losses, and interest carryforward each have an indefinite carryforward period. The federal operating loss carryforwards generated through December 31, 2017 expire at various dates between 2034 and 2036 while federal operating loss carryforwards generated after this date have indefinite carryforward periods. State net operating losses as of December 31, 2021 have various carryforward periods and will begin to expire in 2022. Federal and state capital losses can be carried forward until 2023. Federal and state interest carryforwards have indefinite carryforward periods. Operating, capital losses, and other carryforwards in other non-U.S. jurisdictions have various carryforward periods and will begin to expire in 2022. The interest carryforwards in other non-U.S. jurisdictions have an indefinite carryforward period.
During 2012, the Company was granted a tax holiday for the period from October 1, 2012 through September 30, 2022, with respect to withholding taxes and certain income derived from services in Singapore. This tax holiday and reduced withholding tax rate may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The benefit realized was approximately $104 million, $97 million, and $90 million during the years ended December 31, 2021, 2020, and 2019, respectively. The impact of this tax holiday on diluted earnings per share was $0.46, $0.42, and $0.37 during the years ended December 31, 2021, 2020, and 2019, respectively.
Uncertain Tax Positions
The following is a reconciliation of the Company’s beginning and ending amount of uncertain tax positions (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Balance at January 1 | $ | 321 | | | $ | 299 | |
| Additions based on tax positions related to the current year | 33 | | | 25 | |
| Additions for tax positions of prior years | 7 | | | 7 | |
| Reductions for tax positions of prior years | (4) | | | (3) | |
| Settlements | — | | | — | |
| Business combinations | — | | | — | |
| Lapse of statute of limitations | (10) | | | (7) | |
| Foreign currency translation | — | | | — | |
| Balance at December 31 | $ | 347 | | | $ | 321 | |
The Company’s liability for uncertain tax positions as of December 31, 2021, 2020, and 2019, includes $295 million, $270 million, and $248 million, respectively, related to amounts that would impact the effective tax rate if recognized. It is possible that the amount of unrecognized tax benefits may change in the next twelve months; however, the Company does not expect the change to have a significant impact on its consolidated statements of income or consolidated balance sheets. These changes may be the result of settlements of ongoing audits. At this time, an estimate of the range of the reasonably possible outcomes within the next twelve months cannot be made.
The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes. The Company accrued potential interest and penalties of $22 million, $21 million, and $24 million in 2021, 2020, and 2019, respectively. The Company recorded a liability for interest and penalties of $142 million, $120 million, and $99 million as of December 31, 2021, 2020, and 2019, respectively.
The Company and its subsidiaries file income tax returns in their respective jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2007. Material U.S. state and local income tax jurisdiction examinations have been concluded for years through 2012. The Company has concluded income tax examinations in its primary non-U.S. jurisdictions through 2008.
10. Shareholders’ Equity
Distributable Profits
The Company is required under Irish law to have available “distributable profits” to make share repurchases or pay dividends to shareholders. Distributable profits are created through the earnings of the Irish parent company and, among other methods, through intercompany dividends or a reduction in share capital approved by the High Court of Ireland. Distributable profits are not linked to a U.S. GAAP reported amount (e.g., retained earnings). On July 26, 2021, we received approval from the High Court of Ireland to complete a reduction in share premium to create distributable profits of $34.0 billion to support the payment of possible future dividends or future share repurchases, if and to the extent declared by the directors in compliance with their duties under Irish law. As of December 31, 2021 and 2020, the Company had distributable profits in excess of $32.7 billion and $0.2 billion, respectively. We believe that we have the ability to create sufficient distributable profits for the foreseeable future.
Ordinary Shares
Aon has a share repurchase program authorized by the Company’s Board of Directors. The Repurchase Program was established in April 2012 with $5.0 billion in authorized repurchases and was increased by $5.0 billion in authorized repurchases in each of November 2014, June 2017, and November 2020, and by $7.5 billion in authorized repurchases in February 2022 for a total of $27.5 billion in repurchase authorizations.
Under the Repurchase Program, the Company’s class A ordinary 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.
The following table summarizes the Company’s share repurchase activity (in millions, except per share data):
| | | | | | | | | | | | | | |
| | Years Ended December 31 |
| | 2021 | | 2020 |
| Shares repurchased | | 12.4 | | | 8.5 | |
| Average price per share | | $ | 286.82 | | | $ | 206.28 | |
| Costs recorded to retained earnings | | | | |
| Total repurchase cost | | $ | 3,543 | | | $ | 1,761 | |
| Additional associated costs | | — | | | 2 | |
| Total costs recorded to retained earnings | | $ | 3,543 | | | $ | 1,763 | |
At December 31, 2021, the remaining authorized amount for share repurchases under the Repurchase Program was approximately $1.7 billion. Under the Repurchase Program, the Company has repurchased a total of 149.6 million shares for an aggregate cost of approximately $18.3 billion.
Weighted Average Ordinary Shares
Weighted average ordinary shares outstanding are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2021 | | 2020 | | 2019 |
| Basic weighted average ordinary shares outstanding | 224.7 | | | 231.9 | | | 238.6 | |
| Dilutive effect of potentially issuable shares | 1.4 | | | 1.2 | | | 2.0 | |
| Diluted weighted average ordinary shares outstanding | 226.1 | | | 233.1 | | | 240.6 | |
Potentially issuable shares are not included in the computation of Diluted net income per share attributable to Aon shareholders if their inclusion would be antidilutive. There were 0.3 million shares excluded from the calculation in 2021 and no shares excluded from the calculation in 2020 and 2019.
Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive loss by component, net of related tax, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Change in Fair Value of Financial Instruments (1) | | Foreign Currency Translation Adjustments | | Postretirement Benefit Obligation (2) | | Total |
| Balance at December 31, 2018 | (15) | | | (1,319) | | | (2,575) | | | (3,909) | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | |
| Other comprehensive income (loss) before reclassifications | (10) | | | 15 | | | (287) | | | (282) | |
| Tax benefit (expense) | 1 | | | (1) | | | 58 | | | 58 | |
| Other comprehensive income (loss) before reclassifications, net | (9) | | | 14 | | | (229) | | | (224) | |
| Amounts reclassified from accumulated other comprehensive income (loss): | | | | | | | |
| Amounts reclassified from accumulated other comprehensive income | 14 | | | — | | | 109 | | | 123 | |
| Tax expense | (2) | | | — | | | (21) | | | (23) | |
Amounts reclassified from accumulated other comprehensive income, net (3) | 12 | | | — | | | 88 | | | 100 | |
| Net current period other comprehensive income (loss) | 3 | | | 14 | | | (141) | | | (124) | |
| Balance at December 31, 2019 | (12) | | | (1,305) | | | (2,716) | | | (4,033) | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | |
| Other comprehensive income (loss) before reclassifications | 1 | | | 258 | | | (255) | | | 4 | |
| Tax benefit | — | | | 2 | | | 60 | | | 62 | |
| Other comprehensive income (loss) before reclassifications, net | 1 | | | 260 | | | (195) | | | 66 | |
| Amounts reclassified from accumulated other comprehensive income (loss): | | | | | | | |
| Amounts reclassified from accumulated other comprehensive income | 15 | | | — | | | 125 | | | 140 | |
| Tax expense | (3) | | | — | | | (31) | | | (34) | |
Amounts reclassified from accumulated other comprehensive income, net (3) | 12 | | | — | | | 94 | | | 106 | |
| Net current period other comprehensive income (loss) | 13 | | | 260 | | | (101) | | | 172 | |
| Balance at December 31, 2020 | $ | 1 | | | $ | (1,045) | | | $ | (2,817) | | | $ | (3,861) | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | |
| Other comprehensive income (loss) before reclassifications | — | | | (290) | | | 227 | | | (63) | |
| Tax benefit (expense) | — | | | 2 | | | (58) | | | (56) | |
| Other comprehensive income (loss) before reclassifications, net | — | | | (288) | | | 169 | | | (119) | |
| Amounts reclassified from accumulated other comprehensive income (loss): | | | | | | | |
| Amounts reclassified from accumulated other comprehensive income | 2 | | | — | | | 142 | | | 144 | |
| Tax expense | (1) | | | — | | | (34) | | | (35) | |
Amounts reclassified from accumulated other comprehensive income, net (3) | 1 | | | — | | | 108 | | | 109 | |
| Net current period other comprehensive income (loss) | 1 | | | (288) | | | 277 | | | (10) | |
| Balance at December 31, 2021 | $ | 2 | | | $ | (1,333) | | | $ | (2,540) | | | $ | (3,871) | |
(1)Reclassifications from this category included in Accumulated other comprehensive loss are recorded in Total revenue, Interest expense, and Compensation and benefits in the Consolidated Statements of Income. Refer to Note 13 “Derivatives and Hedging” for further information regarding the Company’s derivative and hedging activity.
(2)Reclassifications from this category included in Accumulated other comprehensive loss are recorded in Other income (expense) in the Consolidated Statements of Income.
(3)It is the Company’s policy to release income tax effects from Accumulated other comprehensive loss using the portfolio approach.
11. Employee Benefits
Defined Contribution Savings Plans
Aon maintains defined contribution savings plans for the benefit of its employees. The expense recognized for these plans is included in Compensation and benefits in the Consolidated Statements of Income. The expense for the significant plans in the U.S., U.K., Netherlands, and Canada is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2021 | | 2020 | | 2019 |
| U.S. | $ | 103 | | | $ | 87 | | | $ | 98 | |
| U.K. | 46 | | | 42 | | | 41 | |
| Netherlands and Canada | 35 | | | 26 | | | 25 | |
| Total | $ | 184 | | | $ | 155 | | | $ | 164 | |
Pension and Other Postretirement Benefits
The Company sponsors defined benefit pension and postretirement health and welfare plans that provide retirement, medical, and life insurance benefits. The postretirement health care plans are contributory, with retiree contributions adjusted annually, and the life insurance and pension plans are generally noncontributory. The significant U.S., U.K., Netherlands, and Canada pension plans are closed to new entrants.
Pension Plans
The following tables provide a reconciliation of the changes in the projected benefit obligations and fair value of assets for the years ended December 31, 2021 and 2020, and a statement of the funded status as of December 31, 2021 and 2020, for Aon’s significant U.K., U.S., and other major pension plans, which are located in the Netherlands and Canada. These plans represent approximately 90% of the Company’s projected benefit obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.K. | | U.S. | | Other |
| (millions) | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Change in projected benefit obligation | | | | | | | | | | | |
| At January 1 | $ | 5,406 | | | $ | 4,779 | | | $ | 3,380 | | | $ | 3,192 | | | $ | 1,625 | | | $ | 1,425 | |
| Service cost | 1 | | | — | | | — | | | — | | | — | | | — | |
| Interest cost | 65 | | | 88 | | | 57 | | | 85 | | | 12 | | | 19 | |
| Plan amendment | — | | | 3 | | | — | | | — | | | — | | | — | |
| Settlements | (14) | | | (7) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Actuarial (gain) loss | (292) | | | 520 | | | (103) | | | 274 | | | 24 | | | 112 | |
| Benefit payments | (189) | | | (209) | | | (170) | | | (171) | | | (47) | | | (44) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Foreign currency impact | (58) | | | 232 | | | — | | | — | | | (83) | | | 113 | |
| As of December 31 | $ | 4,919 | | | $ | 5,406 | | | $ | 3,164 | | | $ | 3,380 | | | $ | 1,531 | | | $ | 1,625 | |
| Accumulated benefit obligation at end of year | $ | 4,919 | | | $ | 5,406 | | | $ | 3,164 | | | $ | 3,380 | | | $ | 1,504 | | | $ | 1,592 | |
| Change in fair value of plan assets | | | | | | | | | | | |
| At January 1 | $ | 6,652 | | | $ | 5,959 | | | $ | 2,276 | | | $ | 2,066 | | | $ | 1,497 | | | $ | 1,303 | |
| Actual return on plan assets | (136) | | | 618 | | | 211 | | | 289 | | | 46 | | | 109 | |
| | | | | | | | | | | |
| Employer contributions | 9 | | | 8 | | | 61 | | | 92 | | | 17 | | | 20 | |
| Settlements | (14) | | | (7) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Benefit payments | (189) | | | (209) | | | (170) | | | (171) | | | (47) | | | (44) | |
| | | | | | | | | | | |
| Foreign currency impact | (76) | | | 283 | | | — | | | — | | | (83) | | | 109 | |
| As of December 31 | $ | 6,246 | | | $ | 6,652 | | | $ | 2,378 | | | $ | 2,276 | | | $ | 1,430 | | | $ | 1,497 | |
| Market related value at end of year | $ | 6,246 | | | $ | 6,652 | | | $ | 2,174 | | | $ | 2,076 | | | $ | 1,430 | | | $ | 1,497 | |
| Amount recognized in Statement of Financial Position as of December 31 | | | | | | | | | | | |
| Funded status | $ | 1,327 | | | $ | 1,246 | | | $ | (786) | | | $ | (1,104) | | | $ | (101) | | | $ | (128) | |
| Unrecognized prior-service cost | 40 | | | 43 | | | — | | | — | | | (6) | | | (7) | |
| Unrecognized loss | 1,215 | | | 1,286 | | | 1,551 | | | 1,812 | | | 489 | | | 521 | |
| Net amount recognized | $ | 2,582 | | | $ | 2,575 | | | $ | 765 | | | $ | 708 | | | $ | 382 | | | $ | 386 | |
Net actuarial gains decreased the benefit obligation in 2021 primarily due to the increase in the discount rates. During 2020, the net actuarial losses increased the benefit obligation primarily due to the decrease in discount rates.
In November 2020, the Company entered into an insurance contract that covers a portion of the assets within a select U.K. pension scheme. The transaction resulted in a decrease in Prepaid pension assets and Accumulated other comprehensive income of $94 million.
Amounts recognized in the Consolidated Statements of Financial Position consist of (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.K. | | U.S. | | Other |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Prepaid benefit cost (1) | $ | 1,344 | | | $ | 1,268 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Accrued benefit liability - current (2) | (1) | | | (1) | | | (52) | | | (52) | | | (5) | | | (5) | |
Accrued benefit liability - non-current (3) | (16) | | | (21) | | | (734) | | | (1,052) | | | (96) | | | (123) | |
| Accumulated other comprehensive loss | 1,255 | | | 1,329 | | | 1,551 | | | 1,812 | | | 483 | | | 514 | |
| Net amount recognized | $ | 2,582 | | | $ | 2,575 | | | $ | 765 | | | $ | 708 | | | $ | 382 | | | $ | 386 | |
(1)Included in Prepaid pension.
(2)Included in Other current liabilities.
(3)Included in Pension, other postretirement, and postemployment liabilities.
Amounts recognized in Accumulated other comprehensive loss (income) that have not yet been recognized as components of net periodic benefit cost at December 31, 2021 and 2020 consist of (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.K. | | U.S. | | Other |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Net loss | $ | 1,215 | | | $ | 1,286 | | | $ | 1,551 | | | $ | 1,812 | | | $ | 489 | | | $ | 521 | |
| Prior service cost (income) | 40 | | | 43 | | | — | | | — | | | (6) | | | (7) | |
| Total | $ | 1,255 | | | $ | 1,329 | | | $ | 1,551 | | | $ | 1,812 | | | $ | 483 | | | $ | 514 | |
In 2021, U.S. plans with a PBO and an ABO in excess of the fair value of plan assets had a PBO of $3.2 billion, an ABO of $3.2 billion, and plan assets with a fair value of $2.4 billion. U.K. plans with a PBO and an ABO in excess of the fair value of plan assets had a PBO of $17 million, an ABO of $17 million and no plan assets. Other plans with a PBO in excess of the fair value of plan assets had a PBO of $1.5 billion and plan assets with a fair value of $1.4 billion, and other plans with an ABO in excess of the fair value of plan assets had an ABO of $409 million and plan assets with a fair value of $326 million.
In 2020, U.S. plans with a PBO and an ABO in excess of the fair value of plan assets had a PBO of $3.3 billion, an ABO of $3.3 billion, and plan assets with a fair value of $2.2 billion. U.K. plans with a PBO and an ABO in excess of the fair value of plan assets had a PBO of $54 million, an ABO of $54 million and plan assets with a fair value of $32 million. Other plans with a PBO in excess of the fair value of plan assets had a PBO of $1.6 billion and plan assets with a fair value of $1.4 billion, and other plans with an ABO in excess of the fair value of plan assets had an ABO of $443 million and plan assets with a fair value of $342 million.
Service cost is reported in Compensation and benefits and all other components are reported in Other income (expense) as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.K. | | U.S. | | Other |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Service cost | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Interest cost | 65 | | | 88 | | | 109 | | | 57 | | | 85 | | | 108 | | | 12 | | | 19 | | | 27 | |
| Expected return on plan assets, net of administration expenses | (137) | | | (159) | | | (191) | | | (130) | | | (134) | | | (136) | | | (32) | | | (34) | | | (40) | |
| Amortization of prior-service cost | 2 | | | 2 | | | 1 | | | — | | | 1 | | | 2 | | | — | | | — | | | — | |
| Amortization of net actuarial loss | 32 | | | 30 | | | 29 | | | 78 | | | 68 | | | 53 | | | 15 | | | 12 | | | 12 | |
| Net periodic benefit (income) cost | (37) | | | (39) | | | (52) | | | 5 | | | 20 | | | 27 | | | (5) | | | (3) | | | (1) | |
| Settlement expense | 5 | | | 2 | | | 5 | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Total net periodic benefit cost (income) | $ | (32) | | | $ | (37) | | | $ | (47) | | | $ | 5 | | | $ | 20 | | | $ | 27 | | | $ | (5) | | | $ | (3) | | | $ | (1) | |
The Company uses a full-yield curve approach in the estimation of the service and interest cost components of net periodic pension and postretirement benefit cost for its major pension and other postretirement benefit plans. This estimation was obtained by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
Transfer payments from certain U.K. pension plans exceeded the plan’s service and interest cost in 2021, 2020, and 2019. This triggered settlement accounting which required immediate recognition of a portion of the accumulated losses associated with the plan. Consequently, the Company recognized a non-cash settlement charge for approximately £3 million in 2021 ($5 million using December 31, 2021 exchange rates), approximately £2 million in 2020 ($2 million using December 31, 2020 exchange rates), and approximately £4 million in 2019 ($5 million using December 31, 2019 exchange rates).
The weighted-average assumptions used to determine benefit obligations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.K. | | U.S. (1) | | Other |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Discount rate | 1.96% | | 1.45% | | 2.23 - 2.80% | | 1.74 - 2.45% | | 1.00 - 2.97% | | 0.38 - 2.47% |
| Rate of compensation increase | 3.62 - 4.12% | | 3.22 - 3.72% | | N/A | | N/A | | 1.00 - 3.00% | | 1.00 - 3.00% |
| Underlying price inflation | 2.52% | | 2.12% | | N/A | | N/A | | 2.00% | | 2.00% |
(1)U.S. pension plans are frozen and therefore not impacted by compensation increases or price inflation.
The weighted-average assumptions used to determine the net periodic benefit cost are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.K. | | U.S. | | Other |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Discount rate | 1.20% | | 1.89% | | 2.95% | | 1.12 - 1.79% | | 2.36 - 2.76% | | 3.92 - 4.26% | | 0.28 - 2.00% | | 0.74 - 2.90% | | 1.89 - 3.88% |
| Expected return on plan assets, net of administration expenses | 2.04% | | 2.74% | | 3.64% | | 2.65 - 6.56% | | 3.30- 7.04% | | 7.05% | | 1.70 - 2.65% | | 2.10 - 3.10% | | 2.50 - 4.10% |
| Rate of compensation increase | 3.22 - 3.72% | | 3.24 - 3.74% | | 3.73 - 4.23% | | N/A | | N/A | | N/A | | 1.00 - 3.00% | | 1.00 - 3.00% | | 1.00 - 3.00% |
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. The expected return of 6.56% on U.S. plan assets reflects a portfolio that is seeking asset growth through a higher equity allocation while maintaining prudent risk levels. The portfolio contains certain assets that have historically resulted in higher returns, as well as other financial instruments to minimize downside risk.
No plan assets are expected to be returned to the Company during 2022.
Fair value of plan assets
The Company determined the fair value of plan assets through numerous procedures based on the asset class and available information. Refer to Note 14 “Fair Value Measurements and Financial Instruments” for a description of the procedures performed to determine the fair value of the plan assets.
The fair values of the Company’s U.S. pension plan assets at December 31, 2021 and December 31, 2020, by asset category, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| Asset Category | Balance at December 31, 2021 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
Cash and cash equivalents (1) | $ | 93 | | | $ | 93 | | | $ | — | | | $ | — | |
| Equity investments: | | | | | | | |
| Equity securities | 86 | | | 86 | | | — | | | — | |
| Equity derivatives | 19 | | | — | | | 19 | | | — | |
Pooled funds (2) | 548 | | | — | | | — | | | — | |
| Fixed income investments: | | | | | | | |
| Corporate bonds | 249 | | | — | | | 249 | | | — | |
| Government and agency bonds | 230 | | | 192 | | | 38 | | | — | |
Pooled funds (2) | 838 | | | — | | | — | | | — | |
| Other investments: | | | | | | | |
Real estate (2) (3) | 156 | | | — | | | — | | | — | |
Alternative investments (2) (4) | 159 | | | — | | | — | | | — | |
| Total | $ | 2,378 | | | $ | 371 | | | $ | 306 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| Asset Category | Balance at December 31, 2020 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
Cash and cash equivalents (1) | $ | 79 | | | $ | 79 | | | $ | — | | | $ | — | |
| Equity investments: | | | | | | | |
| Equity securities | 207 | | | 207 | | | — | | | — | |
| Equity derivatives | 62 | | | — | | | 62 | | | — | |
Pooled funds (2) | 640 | | | 90 | | | — | | | — | |
| Fixed income investments: | | | | | | | |
| Corporate bonds | 167 | | | — | | | 167 | | | — | |
| Government and agency bonds | 233 | | | 200 | | | 33 | | | — | |
Pooled funds (2) | 543 | | | 212 | | | — | | | — | |
| Other investments: | | | | | | | |
| | | | | | | |
Real estate (2)(3) | 163 | | | — | | | — | | | — | |
Alternative investments (2) (4) | 182 | | | — | | | — | | | — | |
| Total | $ | 2,276 | | | $ | 788 | | | $ | 262 | | | $ | — | |
(1)Consists of cash and institutional short-term investment funds.
(2)Certain investments measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the above table are intended to permit reconciliation of the fair values to the amounts presented in the plan assets contained in this Note.
(3)Consists of property funds and trusts holding direct real estate investments.
(4)Consists of limited partnerships, private equity, and hedge funds.
The fair values of the Company’s major U.K. pension plan assets at December 31, 2021 and December 31, 2020, by asset category, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | Balance at December 31, 2021 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
Cash and cash equivalents (1) | $ | 872 | | | $ | 872 | | | $ | — | | | $ | — | |
| Equity investments: | | | | | | | |
Pooled funds (2) | — | | | — | | | — | | | — | |
| Fixed income investments: | | | | | | | |
Derivatives (3) | (1,640) | | | — | | | (1,640) | | | — | |
| | | | | | | |
| Government and agency bonds | 2,969 | | | 2,969 | | | — | | | — | |
| Annuities | 2,305 | | | — | | | — | | | 2,305 | |
Pooled funds (2) | 463 | | | — | | | — | | | — | |
| Other investments: | | | | | | | |
Real estate (2) (4) | 130 | | — | | | — | | | — | |
Pooled funds (2) (5) | 1,147 | | | — | | | — | | | — | |
| Total | $ | 6,246 | | | $ | 3,841 | | | $ | (1,640) | | | $ | 2,305 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | Balance at December 31, 2020 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
Cash and cash equivalents (1) | $ | 182 | | | $ | 182 | | | $ | — | | | $ | — | |
| Equity investments: | | | | | | | |
Pooled funds (2) | 4 | | | — | | | — | | | — | |
| Fixed income investments: | | | | | | | |
Derivatives (3) | (1,424) | | | — | | | (1,424) | | | — | |
| Corporate bonds | 4 | | | 4 | | | — | | | — | |
| Government and agency bonds | 2,872 | | | 2,872 | | | — | | | — | |
| Annuities | 2,625 | | | — | | | — | | | 2,625 | |
Pooled funds (2) | 875 | | | — | | | — | | | — | |
| Other investments: | | | | | | | |
Real estate (2) (4) | 117 | | — | | | — | | | — | |
Pooled funds (2) (5) | 1,397 | | | 4 | | | — | | | — | |
| Total | $ | 6,652 | | | $ | 3,062 | | | $ | (1,424) | | | $ | 2,625 | |
(1)Consists of cash and institutional short-term investment funds.
(2)Certain investments measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the above table are intended to permit reconciliation of the fair values to the amounts presented in the plan assets contained in this Note.
(3)Consists of equity securities and equity derivatives, including repurchase agreements.
(4)Consists of property funds and trusts holding direct real estate investments.
(5)Consists of multi-strategy limited partnerships, private equity, hedge funds, and collective investment schemes with a diversified portfolio of cash, equities, equity related securities, derivatives, and/or fixed income securities.
The following table presents the changes in the Level 3 fair-value category in the Company’s U.K. pension plans for the years ended December 31, 2021 and December 31, 2020 (in millions):
| | | | | |
| Fair Value Measurements Using Level 3 Inputs | Annuities |
| Balance at January 1, 2020 | $ | 1,849 | |
| Actual return on plan assets: | |
| Relating to assets still held at December 31, 2020 | 13 | |
| |
| |
| |
| Purchase, sales and settlements-net | 682 | |
| Foreign exchange | 81 | |
| Balance at December 31, 2020 | 2,625 | |
| Actual return on plan assets: | |
| Relating to assets still held at December 31, 2021 | (286) | |
| |
| |
| Purchases, sales and settlements-net | — | |
| Foreign exchange | (34) | |
| Balance at December 31, 2021 | $ | 2,305 | |
The fair values of the Company’s other major pension plan assets at December 31, 2021 and December 31, 2020, by asset category, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | Balance at December 31, 2021 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
Cash and cash equivalents (1) | $ | 29 | | | $ | 29 | | | $ | — | | | $ | — | |
| Equity investments: | | | | | | | |
| Equity securities | 72 | | | 72 | | | — | | | — | |
Pooled funds (2) | 316 | | | — | | | — | | | — | |
| Fixed income investments: | | | | | | | |
| Government and agency bonds | 350 | | | 350 | | | — | | | — | |
Pooled funds (2) | 597 | | | — | | | — | | | — | |
| Other investments: | | | | | | | |
Alternative investments (2) (3) | 55 | | | — | | | — | | | — | |
Real estate (2) (4) | 11 | | | — | | | — | | | — | |
| Total | $ | 1,430 | | | $ | 451 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | Balance at December 31, 2020 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
Cash and cash equivalents (1) | $ | 37 | | | $ | 37 | | | $ | — | | | $ | — | |
| Equity investments: | | | | | | | |
| Equity securities | 75 | | | 75 | | | — | | | — | |
Pooled funds (2) | 290 | | | — | | | — | | | — | |
| Fixed income investments: | | | | | | | |
| Government and agency bonds | 395 | | | 395 | | | — | | | — | |
Pooled funds (2) | 627 | | | — | | | — | | | — | |
| Other investments: | | | | | | | |
Alternative investments (2) (3) | 63 | | | — | | | — | | | — | |
Real estate (2) (4) | 10 | | | — | | | — | | | — | |
| Total | $ | 1,497 | | | $ | 507 | | | $ | — | | | $ | — | |
(1)Consists of cash and institutional short-term investment funds.
(2)Certain investments measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the above table are intended to permit reconciliation of the fair values to the amounts presented in the plan assets contained in this Note.
(3)Consists of limited partnerships, private equity, and hedge funds.
(4)Consists of property funds and trusts holding direct real estate investments.
Investment Policy and Strategy
The U.S. investment policy, as established by the RPGIC, seeks reasonable asset growth at prudent risk levels within weighted average target allocations. At December 31, 2021, the weighted average targeted allocation for the U.S. plans was 31% for equity investments, 54% for fixed income investments, and 15% for other investments. Aon believes that plan assets are well-diversified and are of appropriate quality. The investment portfolio asset allocation is reviewed quarterly and re-balanced to be within policy target allocations. The investment policy is reviewed at least annually and revised, as deemed appropriate by the RPGIC. The investment policies for international plans are generally established by the local pension plan trustees and seek to maintain the plans’ ability to meet liabilities and to comply with local minimum funding requirements. Plan assets are invested in diversified portfolios that provide adequate levels of return at an acceptable level of risk. The investment policies are reviewed at least annually and revised, as deemed appropriate to ensure that the objectives are being met. At December 31, 2021, the weighted average targeted allocation for the U.K. and non-U.S. plans was 6% for equity investments, 88% for fixed income investments, and 6% for other investments.
Cash Flows
Contributions
Based on current assumptions, in 2022, the Company expects to contribute approximately $7 million, $52 million, and $15 million to its significant U.K., U.S., and other major pension plans, respectively.
Estimated Future Benefit Payments
Estimated future benefit payments for plans, not including voluntary one-time lump sum payments, are as follows at December 31, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | U.K. | | U.S. | | Other |
| 2022 | | $ | 164 | | | $ | 193 | | | $ | 47 | |
| 2023 | | $ | 171 | | | $ | 191 | | | $ | 48 | |
| 2024 | | $ | 177 | | | $ | 193 | | | $ | 49 | |
| 2025 | | $ | 183 | | | $ | 193 | | | $ | 50 | |
| 2026 | | $ | 188 | | | $ | 183 | | | $ | 52 | |
| 2027 - 2031 | | $ | 1,017 | | | $ | 882 | | | $ | 275 | |
U.S. and Canadian Other Postretirement Benefits
The following table provides an overview of the accumulated PBO, fair value of plan assets, funded status and net amount recognized as of December 31, 2021 and 2020 for the Company’s other significant postretirement benefit plans located in the U.S. and Canada (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Accumulated projected benefit obligation | $ | 109 | | | $ | 117 | |
| Fair value of plan assets | 17 | | | 17 | |
| Funded status | (92) | | | (100) | |
| Unrecognized prior-service credit | (1) | | | (1) | |
| Unrecognized loss | 2 | | | 13 | |
| Net amount recognized | $ | (91) | | | $ | (88) | |
Other information related to the Company’s other postretirement benefit plans are as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Net periodic benefit cost recognized (millions) | $5 | | $4 | | $3 |
| Weighted-average discount rate used to determine future benefit obligations | 2.52 - 3.06% | | 2.10 - 2.58% | | 2.93 - 3.25% |
| Weighted-average discount rate used to determine net periodic benefit costs | 1.45 - 2.68% | | 2.93 - 3.25% | | 3.91 - 4.26% |
Based on current assumptions, the Company expects:
•The amount in Accumulated other comprehensive income expected to be recognized as a component of net periodic benefit cost during 2022 is $0.9 million net gain and $0.2 million of prior-service credit.
•To contribute $5 million to fund significant other postretirement benefit plans during 2022.
•Estimated future benefit payments will be approximately $5 million each year for 2022 through 2026, and $25 million in aggregate for 2027-2031.
12. Share-Based Compensation Plans
The following table summarizes share-based compensation expense recognized in the Consolidated Statements of Income in Compensation and benefits (in millions):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2021 | | 2020 | | 2019 |
| Restricted share units | $ | 204 | | | $ | 186 | | | $ | 198 | |
| Performance share awards | 189 | | | 116 | | | 110 | |
| | | | | |
Employee share purchase plans and other (1) | 56 | | | 10 | | | 9 | |
| Total share-based compensation expense | 449 | | | 312 | | | 317 | |
| Tax benefit | 87 | | | 61 | | | 66 | |
| Share-based compensation expense, net of tax | $ | 362 | | | $ | 251 | | | $ | 251 | |
| | | | | |
| | | | | |
(1) Includes expenses related to the Aon United Growth Ownership Plan.Restricted Share Units
RSUs generally vest between three and five years. The fair value of RSUs is based upon the market value of the Company’s class A ordinary shares at the date of grant. With certain limited exceptions, any break in continuous employment will cause the forfeiture of all non-vested awards. Compensation expense associated with RSUs is recognized on a straight-line basis over the requisite service period. Dividend equivalents are paid on certain RSUs, based on the initial grant amount.
The following table summarizes the status of the Company’s RSUs (shares in thousands, except fair value):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2021 | | 2020 | | 2019 |
| Shares | | Fair Value at Date of Grant (1) | | Shares | | Fair Value at Date of Grant (1) | | Shares | | Fair Value at Date of Grant (1) |
| Non-vested at beginning of year | 3,309 | | | $ | 163 | | | 3,634 | | | $ | 143 | | | 4,208 | | | $ | 120 | |
| Granted | 1,257 | | | $ | 253 | | | 1,329 | | | $ | 185 | | | 1,306 | | | $ | 175 | |
| Vested | (1,248) | | | $ | 151 | | | (1,426) | | | $ | 133 | | | (1,661) | | | $ | 113 | |
| Forfeited | (243) | | | $ | 184 | | | (228) | | | $ | 157 | | | (219) | | | $ | 131 | |
| Non-vested at end of year | 3,075 | | | $ | 203 | | | 3,309 | | | $ | 163 | | | 3,634 | | | $ | 143 | |
(1)Represents per share weighted average fair value of award at date of grant.
The fair value of RSUs that vested during 2021, 2020 and 2019 was $189 million, $190 million, and $187 million, respectively.
Unamortized deferred compensation expense amounted to $447 million as of December 31, 2021, with a remaining weighted average amortization period of approximately 2.1 years.
Performance Share Awards
The vesting of PSAs is contingent upon meeting a cumulative level of earnings per share related performance over a three-year period. The actual issuance of shares may range from 0-200% of the target number of PSAs granted, based on the terms of the plan and level of achievement of the related performance target. The grant date fair value of PSAs is based upon the market price of the Company’s class A ordinary shares at the date of grant. The performance conditions are not considered in the determination of the grant date fair value for these awards. Compensation expense is recognized over the performance period based on management’s estimate of the number of units expected to vest. Management evaluates its estimate of the actual number of shares expected to be issued at the end of the programs on a quarterly basis. The cumulative effect of the change in estimate is recognized in the period of change as an adjustment to Compensation and benefits in the Consolidated Statements of Income, if necessary. Dividend equivalents are not paid on PSAs.
The following table summarizes the Company’s target PSAs granted and shares that would be issued at current performance levels for PSAs granted during the years ended December 31, 2021, 2020, and 2019, respectively (shares in thousands and dollars in millions, except fair value):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Target PSAs granted during period | 382 | | | 500 | | | 467 | |
| Weighted average fair value per share at date of grant | $ | 225 | | | $ | 163 | | | $ | 165 | |
| Number of shares that would be issued based on current performance levels | 737 | | | 970 | | | 888 | |
| Unamortized expense, based on current performance levels | $ | 122 | | | $ | 51 | | | $ | — | |
During 2021, the Company issued approximately 0.5 million shares in connection with performance achievements related to the 2018-2020 LPP. During 2020, the Company issued approximately 0.6 million shares in connection with performance achievements related to the 2017-2019 LPP cycle. During 2019, the Company issued approximately 0.7 million shares in connection with performance achievements related to the 2016-2018 LPP cycle.
13. Derivatives and Hedging
The Company is exposed to market risks, including changes in foreign currency exchange rates and interest rates. To manage the risk related to these exposures, the Company enters into various derivative instruments that reduce these risks by creating offsetting exposures. The Company does not enter into derivative transactions for trading or speculative purposes.
Foreign Exchange Risk Management
The Company is exposed to foreign exchange risk when it earns revenues, pays expenses, enters into monetary intercompany transfers or other transactions denominated in a currency that differs from its functional currency. The Company uses foreign exchange derivatives, typically forward contracts, options and cross-currency swaps, to reduce its overall exposure to the effects of currency fluctuations on cash flows. These exposures are hedged, on average, for less than two years. These derivatives are accounted for as hedges, and changes in fair value are recorded each period in Other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income.
The Company also uses foreign exchange derivatives, typically forward contracts and options, to economically hedge the currency exposure of the Company’s global liquidity profile, including monetary assets or liabilities that are denominated in a non-functional currency of an entity, typically on a rolling 90-day basis, but may be for up to one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other income in the Consolidated Statements of Income.
The notional and fair values of derivative instruments are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional Amount | | Net Amount of Derivative Assets Presented in the Statements of Financial Position (1) | | Net Amount of Derivative Liabilities Presented in the Statements of Financial Position (2) |
| As of December 31 | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Foreign exchange contracts | | | | | | | | | | | |
| | | | | | | | | | | |
| Accounted for as hedges | $ | 629 | | | $ | 633 | | | $ | 27 | | | $ | 33 | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Not accounted for as hedges (3) | 412 | | | 367 | | | 2 | | | 1 | | | — | | | 1 | |
| Total | $ | 1,041 | | | $ | 1,000 | | | $ | 29 | | | $ | 34 | | | $ | — | | | $ | 1 | |
(1)Included within Other current assets ($21 million in 2021 and $11 million in 2020) or Other non-current assets ($8 million in 2021 and $23 million in 2020).
(2)Included within Other current liabilities ($1 million in 2020).
(3)These contracts typically are for 90-day durations and executed close to the last day of the most recent reporting month, thereby resulting in nominal fair values at the balance sheet date.
The amounts of derivative gains (losses) recognized in the Consolidated Financial Statements are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Gain (loss) recognized in Accumulated other comprehensive loss | | $ | — | | | $ | 1 | | | $ | (9) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The amounts of derivative gains (losses) reclassified from Accumulated other comprehensive loss to the Consolidated Statements of Income are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31 |
| | 2021 | | 2020 | | 2019 |
| Total revenue | | $ | (3) | | | $ | (14) | | | $ | (12) | |
| Compensation and benefits | | 1 | | | — | | | (1) | |
| Interest expense | | — | | | (1) | | | (1) | |
| Total | | $ | (2) | | | $ | (15) | | | $ | (14) | |
The Company estimates that approximately $5 million of pretax gains currently included within Accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.
The Company recorded a loss of $24 million in 2021, a gain of $1 million in 2020, and a loss of $18 million in 2019 in Other income for foreign exchange derivatives not designated or qualifying as hedges.
Net Investments in Foreign Operations Risk Management
The Company uses non-derivative financial instruments to protect the value of its investments in a number of foreign subsidiaries. The Company has designated a portion of its euro-denominated commercial paper issuances as a non-derivative hedge of the foreign currency exposure of a net investment in its European operations. The change in fair value of the designated portion of the euro-denominated commercial paper due to changes in foreign currency exchange rates is recorded in Foreign currency translation adjustment, a component of Accumulated other comprehensive loss, to the extent it is effective as a hedge. The foreign currency translation adjustment of the hedged net investments is also recorded in Accumulated other comprehensive loss. Ineffective portions of net investment hedges, if any, are reclassified from Accumulated other comprehensive loss into earnings during the period of change.
The Company had no outstanding euro-denominated commercial paper at December 31, 2021 and 2020 designated as a hedge of the foreign currency exposure of its net investment in its European operations. The unrealized gain recognized in Accumulated other comprehensive loss related to the net investment non-derivative hedging instrument was $29 million, as of December 31, 2021 and 2020.
The Company did not reclassify any deferred gains or losses related to net investment hedges from Accumulated other comprehensive loss to earnings for 2021, 2020, and 2019.
14. Fair Value Measurements and Financial Instruments
Accounting standards establish a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair values as follows:
•Level 1 — observable inputs such as quoted prices for identical assets in active markets;
•Level 2 — inputs other than quoted prices for identical assets in active markets, that are observable either directly or indirectly; and
•Level 3 — unobservable inputs in which there is little or no market data which requires the use of valuation techniques and the development of assumptions.
The following methods and assumptions are used to estimate the fair values of the Company’s financial instruments, including pension assets (refer to Note 11 “Employee Benefits”):
Money market funds consist of institutional prime, treasury, and government money market funds. The Company reviews treasury and government money market funds to obtain reasonable assurance that the fund net asset value is $1 per share and reviews the floating net asset value of institutional prime money market funds for reasonableness.
Cash and cash equivalents consist of cash and institutional short-term investment funds. The Company reviews the short-term investment funds to obtain reasonable assurance that the fund net asset value is $1 per share.
Equity investments consist of equity securities and equity derivatives valued using the closing stock price on a national securities exchange. Over the counter equity derivatives are valued using observable inputs such as underlying prices of the underlying security and volatility. On a sample basis the Company reviews the listing of Level 1 equity securities in the portfolio, agrees the closing stock prices to a national securities exchange, and independently verifies the observable inputs for Level 2 equity derivatives and securities.
Fixed income investments consist of certain categories of bonds and derivatives. Corporate, government, and agency bonds are valued by pricing vendors who estimate fair value using recently executed transactions and proprietary models based on observable inputs, such as interest rate spreads, yield curves, and credit risk. Asset-backed securities are valued by pricing vendors who estimate fair value using DCF models utilizing observable inputs based on trade and quote activity of securities with similar features. Fixed income derivatives are valued by pricing vendors using observable inputs such as interest rates and yield curves. The Company obtains an understanding of the models, inputs, and assumptions used in developing prices provided by its vendors through discussions with the fund managers. The Company independently verifies the observable inputs, as well as assesses assumptions used for reasonableness based on relevant market conditions and internal Company guidelines. If an assumption is deemed unreasonable, based on internal Company guidelines, it is then reviewed by management and the fair value estimate provided by the vendor is adjusted, if deemed appropriate. These adjustments do not occur frequently and historically are not material to the fair value estimates used in the Consolidated Financial Statements.
Pooled funds consist of various equity, fixed income, and real estate mutual fund type investment vehicles. Pooled investment funds fair value is estimated based on the proportionate share ownership in the underlying net assets of the investment, which is based on the fair value of the underlying securities. The underlying securities typically trade on a national securities exchange or may be valued by the fund managers using applicable models, inputs, and assumptions. The Company gains an understanding of the investment guidelines and valuation policies of the fund and discusses fund performance with pooled fund managers. The Company obtains audited fund manager financial statements, when available. If the pooled fund is designed to replicate a publicly traded index, the Company compares the performance of the fund to the index to assess the reasonableness of the fair value measurement.
Alternative investments consist of limited partnerships, private equity, and hedge funds. Alternative investment fair value is generally estimated based on the proportionate share ownership in the underlying net assets of the investment as determined by the general partner or investment manager. The valuations are based on various factors depending on investment strategy, proprietary models, and specific financial data or projections. The Company obtains audited fund manager financial statements, when available. The Company obtains a detailed understanding of the models, inputs, and assumptions used in developing prices provided by the investment managers, or appropriate party, through regular discussions. The Company also obtains the investment manger’s valuation policies and assesses the assumptions used for reasonableness based on relevant market conditions and internal Company guidelines. If an assumption is deemed unreasonable, based on the Company’s guidelines, it is then reviewed by management and the fair value estimate provided by the vendor is adjusted, if deemed appropriate. These
adjustments do not occur frequently and historically are not material to the fair value estimates in the Consolidated Financial Statements.
Derivatives are carried at fair value, based upon industry standard valuation techniques that use, where possible, current market-based or independently sourced pricing inputs, such as interest rates, currency exchange rates, or implied volatility.
Annuity contracts consist of insurance group annuity contracts purchased to match the pension benefit payment stream owed to certain selected plan participant demographics within a few major U.K. defined benefit plans. Annuity contracts are valued using a DCF model utilizing assumptions such as discount rate, mortality, and inflation.
Real estate and REITs consist of publicly traded REITs and direct real estate investments. Level 1 REITs are valued using the closing stock price on a national securities exchange. Non-Level 1 values are based on the proportionate share of ownership in the underlying net asset value as determined by the investment manager. The Company independently reviews the listing of Level 1 REIT securities in the portfolio and agrees the closing stock prices to a national securities exchange. The Company gains an understanding of the investment guidelines and valuation policies of the non-Level 1 real estate funds and discusses performance with the fund managers. The Company obtains audited fund manager financial statements, when available. See the description of “Alternative investments” for further detail on valuation procedures surrounding non-Level 1 REITs.
Debt is carried at outstanding principal balance, less any unamortized issuance costs, discount or premium. Fair value is based on quoted market prices or estimates using DCF analyses based on current borrowing rates for similar types of borrowing arrangements.
The following tables present the categorization of the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2021 and December 31, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | Balance at December 31, 2021 | | Quoted Prices in
Active Markets
for Identical
Assets (Level 1) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets | | | | | | | |
Money market funds (1) | $ | 2,918 | | | $ | 2,918 | | | $ | — | | | $ | — | |
| Other investments | | | | | | | |
| Government bonds | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | |
Derivatives (2) | | | | | | | |
| Gross foreign exchange contracts | $ | 40 | | | $ | — | | | $ | 40 | | | $ | — | |
| Liabilities | | | | | | | |
Derivatives (2) | | | | | | | |
| Gross foreign exchange contracts | $ | 11 | | | $ | — | | | $ | 11 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | Balance at December 31, 2020 | | Quoted Prices in
Active Markets
for Identical
Assets (Level 1) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets | | | | | | | |
Money market funds (1) | $ | 2,781 | | | $ | 2,781 | | | $ | — | | | $ | — | |
| Other investments | | | | | | | |
| Government bonds | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | |
| Equity investments | $ | 3 | | | $ | — | | | $ | 3 | | | $ | — | |
Derivatives (2) | | | | | | | |
| Gross foreign exchange contracts | $ | 38 | | | $ | — | | | $ | 38 | | | $ | — | |
| Liabilities | | | | | | | |
Derivatives (2) | | | | | | | |
| Gross foreign exchange contracts | $ | 5 | | | $ | — | | | $ | 5 | | | $ | — | |
(1)Included within Fiduciary assets or Short-term investments in the Consolidated Statements of Financial Position, depending on their nature and initial maturity.
(2)Refer to Note 13 “Derivatives and Hedging” for additional information regarding the Company’s derivatives and hedging activity.
There were no transfers of assets or liabilities between fair value hierarchy levels during 2021 or 2020. The Company recognized no realized or unrealized gains or losses in the Consolidated Statements of Income related to assets and liabilities measured at fair value using unobservable inputs in 2021, 2020, or 2019.
The fair value of debt is classified as Level 2 of the fair value hierarchy. The following table provides the carrying value and fair value for the Company’s term debt (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| As of December 31 | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Current portion of long-term debt | $ | 499 | | | $ | 507 | | | $ | 400 | | | $ | 401 | |
| Long-term debt | $ | 8,228 | | | $ | 9,204 | | | $ | 7,281 | | | $ | 8,752 | |
15. Claims, Lawsuits, and Other Contingencies
Legal
Aon and its subsidiaries are subject to numerous claims, tax assessments, lawsuits and proceedings that arise in the ordinary course of business, which frequently include E&O claims. The damages claimed in these matters are or may be substantial, including, in many instances, claims for punitive, treble, or extraordinary damages. While Aon maintains meaningful E&O insurance and other insurance programs to provide protection against certain losses that arise in such matters, Aon has exhausted or materially depleted its coverage under some of the policies that protect the Company and, consequently, is self-insured or materially self-insured for some claims. Accruals for these exposures, and related insurance receivables, when applicable, are included in the Consolidated Statements of Financial Position and have been recognized in Other general expense in the Consolidated Statements of Income to the extent that losses are deemed probable and are reasonably estimable. These amounts are adjusted from time to time as developments warrant. Matters that are not probable and reasonably estimable are not accrued for in the financial statements.
The Company has included in the current matters described below certain matters in which (1) loss (including interest and costs) is probable, (2) loss (including interest and costs) is reasonably possible (that is, more than remote but not probable), or (3) there exists the reasonable possibility of loss (including interest and costs) greater than the accrued amount. In addition, the Company may from time to time disclose matters for which the probability of loss could be remote but the claim amounts associated with such matters are potentially significant. The reasonably possible range of loss (including interest and costs) for the matters described below for which loss is estimable, in excess of amounts that are deemed probable and estimable and therefore already accrued, is estimated to be between $0 and $0.8 billion, exclusive of any insurance coverage. These estimates are based on available information as of the date of this filing. As available information changes, the matters for which Aon is able to estimate, and the estimates themselves, may change. In addition, many estimates involve significant judgment and uncertainty. For example, at the time of making an estimate, Aon may only have limited information about the facts underlying the claim and predictions and assumptions about future court rulings and outcomes may prove to be inaccurate. Although
management at present believes that the ultimate outcome of all matters described below, individually or in the aggregate, will not have a material adverse effect on the consolidated financial position of Aon, legal proceedings are subject to inherent uncertainties and unfavorable rulings or other events. Unfavorable resolutions could include substantial monetary or punitive damages imposed on Aon or its subsidiaries. If unfavorable outcomes of these matters were to occur, future results of operations or cash flows for any particular quarterly or annual period could be materially adversely affected.
Current Matters
On October 3, 2017, CCC invoked arbitration to pursue a claim that it asserts against Aon New Zealand. Aon provided insurance broking services to CCC in relation to CCC’s 2010-2011 material damage and business interruption program. In December 2015, CCC settled its property and business interruption claim for its losses arising from the 2010-2011 Canterbury earthquakes against the underwriter of its material damage and business interruption program and the reinsurers of that underwriter. CCC contends that acts and omissions by Aon caused CCC to recover less in that settlement than it otherwise would have. CCC claims damages of approximately NZD 320 million ($218 million at December 31, 2021 exchange rates) plus interest and costs. Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims.
Aon Hewitt Investment Consulting, Inc, now known as Aon Investments USA, Inc. (“Aon Investments”), Lowe’s Companies, Inc. and the Administrative Committee of Lowe’s Companies, Inc. (collectively “Lowe’s”) were sued on April 27, 2018 in the U.S. District Court for the Western District of North Carolina (the “Court”) in a class action lawsuit brought on behalf of participants in the Lowe’s 401(k) Plan (the “Plan”). Aon Investments provided investment consulting services to Lowe’s under the ERISA. The plaintiffs contend that in 2015 Lowe’s imprudently placed the Hewitt Growth Fund in the Plan’s lineup of investments, the Hewitt Growth Fund underperformed its benchmarks, and that Aon had a conflict of interest in recommending the proprietary fund for the Plan. The plaintiffs allege the Plan suffered over $200 million in investment losses when compared to the eight funds it replaced. The plaintiffs allege that Aon Investments breached its duties of loyalty and prudence pursuant to the ERISA statute. The matter was tried to the Court the last week of June 2021, and the Court entered judgment in favor of Aon on all claims on October 12, 2021. Plaintiffs have filed an appeal with the United States Court of Appeals for the Fourth Circuit. Aon believes it has meritorious defenses and intends to vigorously defend itself against these claims.
A retail insurance brokerage subsidiary of Aon was sued on September 6, 2018 in the United States District Court for the Southern District of New York by a client, Pilkington North America, Inc., that sustained damage from a tornado to its Ottawa, Illinois property. The lawsuit seeks between $45 million and $85 million in property and business interruption damages from either its insurer or Aon. The insurer contends that insurance proceeds were limited to $15 million in coverage by a windstorm sub-limit purportedly contained in the policy procured by Aon for Pilkington. The insurer therefore has tendered $15 million to Pilkington and denied coverage for the remainder of the loss. Pilkington sued the insurer and Aon seeking full coverage for the loss from the insurer or, in the alternative, seeking the same damages against Aon on various theories of professional liability if the court finds that the $15 million sub-limit applies to the claim. Aon believes it has meritorious defenses and intends to vigorously defend itself against these claims.
Aon faces legal action arising out of a fatal plane crash in November 2016. Aon U.K. Limited placed an aviation civil liability reinsurance policy for the Bolivian insurer of the airline. After the crash, the insurer determined that there was no coverage under the airline’s insurance policy due to the airline’s breach of various policy conditions. In November 2018, the owner of the aircraft filed a claim in Bolivia against Aon, the airline, the insurer and the insurance broker. The claim is for $16 million plus any liability the owner has to third parties. In November 2019, a federal prosecutor in Brazil filed a public civil action naming three Aon entities as defendants, along with the airline, the insurer, and the lead reinsurer. That claim seeks pecuniary damages for families affected by the crash in the sum of $300 million; or, in the alternative, $50 million; or, in the alternative, $25 million; plus “moral damages” of an equivalent sum. Separately, in March 2020, the Brazilian Federal Senate invited Aon to give evidence to a Parliamentary Commission of Inquiry in an investigation into the accident. Aon is cooperating with that inquiry. In August 2020, 43 individuals (surviving passengers and estates of the deceased) filed a motion in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida, seeking permission to commence proceedings against Aon (and the insurer and reinsurers) for claims totaling $844 million. Finally, in April 2021, representatives of 16 passengers issued a claim against Aon in the High Court in England seeking damages under the Fatal Accidents Act 1976 in the sum of £29 million ($39 million at December 31, 2021 exchange rates). Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims.
Aon Investments and AGI were sued on September 16, 2020, in the U.S. District Court for the Southern District of New York by the Blue Cross and Blue Shield Association NEBC. Aon Investments and its predecessors provided investment advisory services to NEBC since 2009. The NEBC contends that it suffered investment losses exceeding $2 billion in several Structured Alpha funds managed by AGI and recommended by Aon. The NEBC is pursuing claims against Aon Investments for breach of fiduciary duty and breach of cofiduciary duty. The NEBC alleges that Aon Investments and AGI are jointly and severally liable for damages, which include the restoration of investment losses, disgorgement of fees and profits, and attorneys’ fees. Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims.
In April 2017, the FCA announced an investigation relating to suspected competition law breaches in the aviation and aerospace broking industry, which, for Aon in 2016, represented less than $100 million in global revenue. The European Commission assumed jurisdiction over the investigation in place of the FCA, and the European Commission has now closed its investigation. Other antitrust agencies outside the E.U. are conducting formal or informal investigations regarding these matters. Aon intends to work diligently with all antitrust agencies concerned to ensure they can carry out their work as efficiently as possible. At this time, in light of the uncertainties and many variables involved, Aon cannot estimate the ultimate impact on our company from these investigations or any related private litigation, nor any damages, penalties, or fines related to them.
Guarantees and Indemnifications
The Company 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 are included in the Financial Statements and are recorded at fair value.
The Company expects that, as prudent business interests dictate, additional guarantees and indemnifications may be issued from time to time.
Guarantee of Registered Securities
In connection with the Reorganization, on April 1, 2020 Aon plc and Aon Global Holdings plc, a company incorporated under the laws of England and Wales, entered into various agreements pursuant to which they agreed to guarantee the obligations of Aon Corporation arising under issued and outstanding debt securities, which were previously guaranteed solely by Aon Global Limited and the obligations of Aon Global Limited arising under issued and outstanding debt securities, which were previously guaranteed solely by Aon Corporation. Those agreements include: (1) Second Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, and Aon Global Holdings plc and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) (amending and restating the Amended and Restated Indenture, dated April 2, 2012, among Aon Corporation, Aon Global Limited and the Trustee); (2) Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Indenture, dated December 12, 2012, among Aon Corporation, Aon Global Limited plc and the Trustee); (3) Second Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Amended and Restated Indenture, dated May 20, 2015, among Aon Corporation, Aon Global Limited and the Trustee); (4) Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Indenture, dated November 13, 2015, among Aon Corporation, Aon Global Limited and the Trustee); and (5) Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Indenture, dated December 3, 2018, among Aon Corporation, Aon Global Limited and the Trustee).
Sale of the Divested Business
In connection with the sale of the Divested Business, the Company guaranteed future operating lease commitments related to certain facilities assumed by the buyer. The Company is obligated to perform under the guarantees if the Divested Business defaults on such leases at any time during the remainder of the lease agreements, which expire on various dates through 2025. As of December 31, 2021, the undiscounted maximum potential future payments under the lease guarantee were $40 million, with an estimated fair value of $5 million. No cash payments were made in connection with the lease commitments during the year ended December 31, 2021.
Additionally, the Company is subject to performance guarantee requirements under certain client arrangements that were assumed by the buyer. Should the Divested Business fail to perform as required by the terms of the arrangements, the Company would be required to fulfill the remaining contract terms, which expire on various dates through 2023. As of December 31, 2021, the undiscounted maximum potential future payments under the performance guarantees were $52 million, with an estimated fair value of less than $1 million. No cash payments were made in connection to the performance guarantees during the year ended December 31, 2021.
Letters of Credit
Aon has entered into a number of arrangements whereby the Company’s performance on certain obligations is guaranteed by a third party through the issuance of LOCs. The Company had total LOCs outstanding of approximately $75 million at December 31, 2021, and $79 million at December 31, 2020. These LOCs cover the beneficiaries related to certain of Aon’s U.S. and Canadian non-qualified pension plan schemes and secure deductible retentions for Aon’s own workers compensation program. The Company has also obtained LOCs to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at its international subsidiaries.
Premium Payments
The Company has certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. The maximum exposure with respect to such contractual contingent guarantees was approximately $153 million at December 31, 2021 compared to $113 million at December 31, 2020.
16. Segment Information
The Company operates as one segment that includes all of Aon’s operations, which as a global professional services firm provides a broad range of risk, health, and wealth solutions through four solution lines which make up its principal products and services. The CODM assesses the performance of the Company and allocates resources based on one segment: Aon United.
The Company’s reportable operating segment has been determined using a management approach, which is consistent with the basis and manner in which the CODM uses financial information for the purposes of allocating resources and evaluating performance. The CODM assesses performance and allocates resources based on total Aon results against its key four metrics, including organic revenue growth, expense discipline, and collaborative behaviors that maximize value for Aon and its shareholders, regardless of which solution line it benefits.
As Aon operates as one segment, segment profit or loss is consistent with consolidated reporting as disclosed in the Consolidated Statements of Income. Refer to Note 3 “Revenue from Contracts with Customers” for further information on revenue by principal service line.
Consolidated long-lived assets, net by geographic area are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31 | Total | | United
States | | Americas other
than U.S. | | United
Kingdom | | Ireland | | Other Europe, Middle East, & Africa | | Asia
Pacific |
| 2021 | $ | 1,378 | | | 563 | | | 121 | | | 180 | | | 7 | | | 293 | | | 214 | |
| 2020 | $ | 1,599 | | | 681 | | | 127 | | | 213 | | | 11 | | | 357 | | | 210 | |