Item 1. Financial Statements

117K characters. Original on sec.gov · Markdown

Item 1. Financial Statements

Aon plc

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
(millions, except per share data)2021202020212020
Revenue
Total revenue$2,702$2,385$9,113$8,101
Expenses
Compensation and benefits1,8351,3875,1824,270
Information technology130107359325
Premises9870251217
Depreciation of fixed assets5642138124
Amortization and impairment of intangible assets3650112205
Other general expense1,3482881,955892
Total operating expenses3,5031,9447,9976,033
Operating income (loss)(801)4411,1162,068
Interest income3395
Interest expense(80)(80)(237)(252)
Other income (expense)10—719
Income (loss) before income taxes(868)3648951,840
Income tax expense2382460356
Net income (loss)(891)2824351,484
Less: Net income attributable to noncontrolling interests974339
Net income (loss) attributable to Aon shareholders$(900)$275$392$1,445
Basic net income (loss) per share attributable to Aon shareholders$(3.99)$1.18$1.73$6.21
Diluted net income (loss) per share attributable to Aon shareholders$(3.99)$1.18$1.72$6.18
Weighted average ordinary shares outstanding - basic225.4232.6226.5232.8
Weighted average ordinary shares outstanding - diluted225.4233.5227.7233.9

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Aon plc

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
(millions)2021202020212020
Net income (loss)$(891)$282$435$1,484
Less: Net income attributable to noncontrolling interests974339
Net income (loss) attributable to Aon shareholders(900)2753921,445
Other comprehensive income (loss), net of tax:
Change in fair value of financial instruments(5)654
Foreign currency translation adjustments(153)173(108)(136)
Postretirement benefit obligation25208767
Total other comprehensive income (loss)(133)199(16)(65)
Less: Other comprehensive income attributable to noncontrolling interests—2—1
Total other comprehensive income (loss) attributable to Aon shareholders(133)197(16)(66)
Comprehensive income (loss) attributable to Aon shareholders$(1,033)$472$376$1,379

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Aon plc

Condensed Consolidated Statements of Financial Position

(Unaudited)
(millions, except nominal value)September 30, 2021December 31, 2020
Assets
Current assets
Cash and cash equivalents$609$884
Short-term investments310308
Receivables, net3,1173,070
Fiduciary assets14,01713,798
Other current assets687624
Total current assets18,74018,684
Goodwill8,5478,666
Intangible assets, net529640
Fixed assets, net541599
Operating lease right-of-use assets823911
Deferred tax assets761724
Prepaid pension1,3501,280
Other non-current assets525610
Total assets$31,816$32,114
Liabilities and equity
Liabilities
Current liabilities
Accounts payable and accrued liabilities$1,995$2,016
Short-term debt and current portion of long-term debt150448
Fiduciary liabilities14,01713,798
Other current liabilities1,3481,171
Total current liabilities17,51017,433
Long-term debt8,2507,281
Non-current operating lease liabilities817897
Deferred tax liabilities414262
Pension, other postretirement, and postemployment liabilities1,6071,763
Other non-current liabilities919895
Total liabilities29,51728,531
Equity
Ordinary shares - $0.01 nominal value Authorized: 500.0 shares (issued: 2021 - 221.4; 2020 - 225.5)22
Additional paid-in capital6,5296,312
Retained earnings (accumulated deficit)(445)1,042
Accumulated other comprehensive loss(3,877)(3,861)
Total Aon shareholders' equity2,2093,495
Noncontrolling interests9088
Total equity2,2993,583
Total liabilities and equity$31,816$32,114

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Aon plc

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

(millions)SharesOrdinary Shares and Additional Paid-in CapitalRetained Earnings (Accumulated Deficit)Accumulated Other Comprehensive Loss, Net of TaxNon- controlling InterestsTotal
Balance at January 1, 2021225.5$6,314$1,042$(3,861)$88$3,583
Net income——913—20933
Shares issued - employee stock compensation plans0.9(87)———(87)
Shares purchased(0.2)—(50)——(50)
Share-based compensation expense—131———131
Dividends to shareholders ($0.46 per share)——(104)——(104)
Net change in fair value of financial instruments———11—11
Net foreign currency translation adjustments———(70)—(70)
Net postretirement benefit obligation———29—29
Purchases of subsidiary shares from noncontrolling interests—(8)——(6)(14)
Dividends paid to noncontrolling interests on subsidiary common stock————(1)(1)
Balance at March 31, 2021226.2$6,350$1,801$(3,891)$101$4,361
Net income——379—14393
Shares issued - employee stock compensation plans0.5(52)———(52)
Shares purchased(1.1)—(242)——(242)
Share-based compensation expense—85———85
Dividends to shareholders ($0.51 per share)——(115)——(115)
Net change in fair value of financial instruments———(1)—(1)
Net foreign currency translation adjustments———115—115
Net postretirement benefit obligation———33—33
Dividends paid to noncontrolling interests on subsidiary common stock————(10)(10)
Balance at June 30, 2021225.6$6,383$1,823$(3,744)$105$4,567
Net income (loss)——(900)—9(891)
Shares issued - employee stock compensation plans0.218(1)——17
Shares purchased(4.4)—(1,251)——(1,251)
Share-based compensation expense—130———130
Dividends to shareholders ($0.51 per share)——(116)——(116)
Net change in fair value of financial instruments———(5)—(5)
Net foreign currency translation adjustments———(153)—(153)
Net postretirement benefit obligation———25—25
Dividends paid to noncontrolling interests on subsidiary common stock————(24)(24)
Balance at September 30, 2021221.4$6,531$(445)$(3,877)$90$2,299
(millions)SharesOrdinary Shares and Additional Paid-in CapitalRetained Earnings (Accumulated Deficit)Accumulated Other Comprehensive Loss, Net of TaxNon- controlling InterestsTotal
Balance at January 1, 2020232.1$6,154$1,248$(4,033)$74$3,443
Net income——772—19791
Shares issued - employee stock compensation plans1.2(112)———(112)
Shares purchased(2.2)—(463)——(463)
Share-based compensation expense—81———81
Dividends to shareholders ($0.44 per share)——(102)——(102)
Net change in fair value of financial instruments———(5)—(5)
Net foreign currency translation adjustments———(395)(2)(397)
Net postretirement benefit obligation———24—24
Balance at March 31, 2020231.1$6,123$1,455$(4,409)$91$3,260
Net income——398—13411
Shares issued - employee stock compensation plans0.4(45)———(45)
Share-based compensation expense—64———64
Dividends to shareholders ($0.44 per share)——(102)——(102)
Net change in fair value of financial instruments———3—3
Net foreign currency translation adjustments———87188
Net postretirement benefit obligation———23—23
Purchases of shares from noncontrolling interests—4——(4)—
Dividends paid to noncontrolling interests on subsidiary common stock————(7)(7)
Balance at June 30, 2020231.5$6,146$1,751$(4,296)$94$3,695
Net income——275—7282
Shares issued - employee stock compensation plans0.112——12
Shares purchased(2.4)—(500)——(500)
Share-based compensation expense—67———67
Dividends to shareholders ($0.44 per share)——(103)——(103)
Net change in fair value of financial instruments———6—6
Net foreign currency translation adjustments———1712173
Net postretirement benefit obligation———20—20
Purchases of shares from noncontrolling interests—(7)——(2)(9)
Dividends paid to noncontrolling interests on subsidiary common stock————(23)(23)
Balance at September 30, 2020229.2$6,218$1,423$(4,099)$78$3,620

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Aon plc

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended September 30,
(millions)20212020
Cash flows from operating activities
Net income$435$1,484
Adjustments to reconcile net income to cash provided by operating activities:
Gain from sales of businesses(2)(25)
Depreciation of fixed assets138124
Amortization and impairment of intangible assets112205
Share-based compensation expense346207
Deferred income taxes83(4)
Change in assets and liabilities:
Fiduciary receivables359(1,051)
Short-term investments — funds held on behalf of clients(786)(706)
Fiduciary liabilities4271,757
Receivables, net(79)193
Accounts payable and accrued liabilities22(191)
Current income taxes4734
Pension, other postretirement and postemployment liabilities(101)(117)
Other assets and liabilities250113
Cash provided by operating activities1,2512,023
Cash flows from investing activities
Proceeds from investments5134
Payments for investments(68)(80)
Net sales (purchases) of short-term investments — non-fiduciary(2)(312)
Acquisition of businesses, net of cash acquired(3)(368)
Sale of businesses, net of cash sold830
Capital expenditures(102)(119)
Cash used for investing activities(116)(815)
Cash flows from financing activities
Share repurchase(1,543)(963)
Issuance of shares for employee benefit plans(122)(141)
Issuance of debt3,1734,153
Repayment of debt(2,436)(3,857)
Cash dividends to shareholders(335)(307)
Noncontrolling interests and other financing activities(117)(31)
Cash used for financing activities(1,380)(1,146)
Effect of exchange rates on cash and cash equivalents(30)(31)
Net increase (decrease) in cash and cash equivalents(275)31
Cash and cash equivalents at beginning of period884790
Cash and cash equivalents at end of period$609$821
Supplemental disclosures:
Interest paid$193$214
Income taxes paid, net of refunds$330$326

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

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

Certain information and disclosures normally included in the Financial Statements prepared in accordance with U.S. GAAP have been condensed or omitted. The Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of operating results that may be expected for the full year ending December 31, 2021, particularly in light of the COVID-19 pandemic.

Reclassification

Certain amounts in the prior year's Condensed Consolidated Financial Statements have been reclassified to conform to the current year’s presentation. For both the three and nine months ended September 30, 2020, there was $1 million of income, including the related tax effect, from discontinued operations recognized in Net Income from discontinued operations in the Condensed Consolidated Statement of Income and Condensed Consolidated Statement of Cash Flows. This amount is now included in Other income (expense) in the Condensed Consolidated Statement of Income and Other assets and liabilities in the Condensed Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2020. There was no earnings per share impact.

In the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, the Company reported an effective tax rate on Net income from continuing operations of 22.6% and 19.4% for the three and nine months ended September 30, 2020, respectively. As a result of the reclassification noted above, the effective tax rate on Net income was 22.5% and 19.3% for the three and nine months ended September 30, 2020.

Additionally, for the nine months ended September 30, 2020, a $112 million cash outflow was classified as an adjustment to Net income from Restructuring reserves in the Condensed Consolidated Statement of Cash Flows. This amount is now included in Other assets and liabilities in the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2020. There was no impact on Cash provided by operating activities.

Disaggregation of Revenue

In the third quarter of 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. This new solution line 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 Condensed Consolidated Financial Statements, results of operations, or total organic revenue growth. Refer to Part I, Item 2, 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 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 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 Financial Statements in future periods.

2. Accounting Principles and Practices

All issued, but not yet effective, guidance has been deemed not applicable or not significant to the 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 Condensed 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.

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Commercial Risk Solutions$1,505$1,320$4,788$4,197
Reinsurance Solutions3533211,7751,617
Health Solutions4974231,5031,316
Wealth Solutions3513271,062984
Eliminations(4)(6)(15)(13)
Total revenue$2,702$2,385$9,113$8,101

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):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
United States$1,329$1,169$3,900$3,503
Americas other than United States230200748647
United Kingdom3403321,3681,276
Ireland22199463
Europe, Middle East, & Africa other than United Kingdom and Ireland4383722,0281,731
Asia Pacific343293975881
Total revenue$2,702$2,385$9,113$8,101

Contract Costs

An analysis of the changes in the net carrying amount of costs to fulfill contracts with customers are as follows (in millions):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Balance at beginning of period$222$193$339$335
Additions3402911,022883
Amortization(310)(266)(1,110)(995)
Impairment————
Foreign currency translation and other(3)2(2)(3)
Balance at end of period$249$220$249$220

An analysis of the changes in the net carrying amount of costs to obtain contracts with customers are as follows (in millions):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Balance at beginning of period$175$172$184$171
Additions12154043
Amortization(11)(12)(36)(35)
Impairment————
Foreign currency translation and other(2)1(14)(3)
Balance at end of period$174$176$174$176

4. Cash and Cash Equivalents and Short-Term Investments

Cash and cash equivalents include cash balances and all highly liquid instruments 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 September 30, 2021, Cash and cash equivalents and Short-term investments were $919 million compared to $1,192 million at December 31, 2020, a decrease of $273 million. Of the total balances, $162 million and $102 million were restricted as to their use at September 30, 2021 and December 31, 2020. Included within Short-term investments as of September 30, 2021 and December 31, 2020, respectively, were £84.3 million ($115.3 million at September 30, 2021 exchange 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 Financial Conduct Authority (the “FCA”), a U.K.-based regulator. In the third quarter of 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 £34.0 million.($46.5 million at September 30, 2021 exchange rates).

5. Other Financial Data

Condensed Consolidated Statements of Income Information

Other Income (Expense)

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

Three Months Ended September 30,Nine Months Ended September 30,
20212020 (1)20212020 (1)
Foreign currency remeasurement$20$(19)$11$21
Pension and other postretirement541910
Equity Earnings3173
Extinguishment of debt———(7)
Gain from disposal of business1—225
Financial Instruments and other(19)14(32)(33)
Total$10$—$7$19

(1)For the three and nine months ended September 30, 2020 the Company has included $1 million of income that was previously classified as Net income from discontinued operations. Refer to Note 1 “Basis of Presentation” for further information.

Condensed Consolidated Statements of Financial Position Information

Allowance for Doubtful Accounts

An analysis of the allowance for doubtful accounts is as follows (in millions):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Balance at beginning of period$102$84$98$77
Provision343019
Accounts written off, net of recoveries(8)—(31)(11)
Foreign currency translation and other1114
Balance at end of period$98$89$98$89

Other Current Assets

The components of Other current assets are as follows (in millions):

As ofSeptember 30, 2021December 31, 2020
Costs to fulfill contracts with customers (1)$249$339
Prepaid expenses146111
Taxes receivable7595
Assets held for sale (2)122—
Other9579
Total$687$624

(1)Refer to Note 3 “Revenue from Contracts with Customers” for further information.

(2)Refer to Note 6 “Acquisitions and Dispositions of Businesses” for further information.

Other Non-Current Assets

The components of Other non-current assets are as follows (in millions):

As ofSeptember 30, 2021December 31, 2020
Costs to obtain contracts with customers (1)$174$184
Taxes receivable97125
Leases7089
Investments6574
Other119138
Total$525$610

(1)Refer to Note 3 “Revenue from Contracts with Customers” for further information.

Other Current Liabilities

The components of Other current liabilities are as follows (in millions):

As ofSeptember 30, 2021December 31, 2020
Deferred revenue (1)$334$296
Taxes payable4280
Leases217234
Liabilities held for sale (2)38—
Other717561
Total$1,348$1,171

(1)During the three and nine months ended September 30, 2021, revenue of $104 million and $448 million, respectively, was recognized in the Condensed Consolidated Statements of Income. During the three and nine months ended September 30, 2020, revenue of $69 million and $357 million, respectively, was recognized in the Condensed Consolidated Statements of Income.

(2)Refer to Note 6 “Acquisitions and Dispositions of Businesses” for further information.

Other Non-Current Liabilities

The components of Other non-current liabilities are as follows (in millions):

As ofSeptember 30, 2021December 31, 2020
Taxes payable (1)$592$561
Leases5165
Deferred revenue6676
Compensation and benefits7953
Other131140
Total$919$895

(1)Includes $145 million for the non-current portion of the one-time mandatory transition tax on accumulated foreign earnings as of September 30, 2021 and December 31, 2020.

6. Acquisitions and Dispositions of Businesses

Completed Acquisitions

The Company completed one acquisition during the three and nine months ended September 30, 2021. The Company completed no acquisitions and six acquisitions during the three and nine months ended September 30, 2020.

2021 Acquisitions

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) for cash consideration transferred of $15 million. 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, which totaled $30 million. 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. The assets acquired and liabilities assumed as a result of this transaction had an insignificant impact on the Company’s Financial Statements. The results of operations of this acquisition are included in the Financial Statements as of the acquisition date. The Company’s results of operations would not have been materially different if this acquisition had been reported from the beginning of the period in which it was acquired.

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 two dispositions and three dispositions during the three and nine months ended September 30, 2021, respectively. The Company completed no dispositions and one disposition during the three and nine months ended September 30, 2020, respectively

The pretax gains and losses recognized in the Condensed Consolidated Statement of Income related to these dispositions were insignificant for the three and nine months ended September 30, 2021 and September 30, 2020. Refer to Note 5 “Other Financial Data” for further information on pretax gains recognized.

Assets and Liabilities Held for Sale

As of September 30, 2021, Aon classified certain assets and liabilities, including those related to the Aon Retiree Health Exchange™ business and other businesses, as held for sale due to management’s desire to exit certain operations. Total assets and liabilities held for sale were $122 million and $38 million, respectively. No valuation allowances related to these assets and liabilities have been recognized in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2021. The results of operations related to these assets and liabilities are included in continuing operations, as the criteria to be presented as a discontinued operation were not satisfied. The assets and liabilities related to the Aon Retiree Health Exchange™ business were disposed of on October 1, 2021.

Other Significant Activity

On March 9, 2020, Aon and Willis Towers Watson Public Limited Company, an Irish public limited company (“WTW”), 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 entered into a termination agreement with respect to the termination of the Business Combination Agreement, pursuant to which Aon paid $1 billion, an amount equivalent to the Termination Fee, under the Business Combination Agreement. Refer to “Termination of Business Combination Agreement” within Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information.

7. Goodwill and Other Intangible Assets

The changes in the net carrying amount of goodwill for the nine months ended September 30, 2021 are as follows (in millions):

Balance as of December 31, 2020$8,666
Goodwill related to current year acquisitions10
Goodwill related to disposals(1)
Foreign currency translation and other(128)
Balance as of September 30, 2021$8,547

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

September 30, 2021December 31, 2020
Gross Carrying AmountAccumulated Amortization and ImpairmentNet Carrying AmountGross Carrying AmountAccumulated Amortization and ImpairmentNet Carrying Amount
Customer-related and contract-based$2,314$1,842$472$2,337$1,775$562
Tradenames1413114131
Technology and other4133575643535877
Total$2,741$2,212$529$2,786$2,146$640

The estimated future amortization for finite-lived intangible assets as of September 30, 2021 is as follows (in millions):

Remainder of 2021$34
2022101
202390
202473
202559
202637
Thereafter135
Total$529

8. Debt

Notes

On August 23, 2021, Aon Corporation, a Delaware corporation (“Aon 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 of its 2.05% Senior Notes due August 2031 and $600 million of its 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, 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 $1.0 billion of its 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 intends to use the remainder to repay other borrowings and for general corporate purposes.

Revolving Credit Facilities

As of September 30, 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 earnings before interest, taxes, depreciation, and amortization (“EBITDA”) to consolidated interest expense and consolidated debt to adjusted consolidated EBITDA, in each case, tested quarterly. At September 30, 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 12 months ended September 30, 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 $900 million 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 September 30, 2021. The U.S. Program is fully and unconditionally guaranteed by Aon plc, Aon Global Limited, and Aon Global Holdings plc and the European Program is fully and unconditionally guaranteed by Aon plc, Aon Global Limited, and Aon Corporation.

Approximately $400 million of the Termination Fee (as defined in Part I, Item 2, 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 Condensed Consolidated Statements of Financial Position, is as follows (in millions):

September 30, 2021December 31, 2020
Commercial paper outstanding$150$—

The weighted average commercial paper outstanding and its related interest rates are as follows (in millions, except percentages):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Weighted average commercial paper outstanding$386$97$157$453
Weighted average interest rate of commercial paper outstanding0.09%2.45%0.11%1.47%

9. Income Taxes

The effective tax rates on Net income (loss) were (2.6)% and 51.4% for the three and nine months ended September 30, 2021, respectively. The effective tax rates on Net income were 22.5% and 19.3% for the three and nine months ended September 30, 2020, respectively. Refer to Note 1 “Basis of Presentation” for a discussion of certain amounts in the prior year's Condensed Consolidated Financial Statements which have been reclassified to conform to the current year’s presentation.

For the three months ended September 30, 2021, the Company reported tax expense of $23 million on a pretax loss of $(868) million, which resulted in an effective tax rate of (2.6)%. The primary driver of the quarter to date tax rate was the impact of the Termination Fee.

For the nine months ended September 30, 2021, the Company reported tax expense of $460 million on pretax income of $895 million, which resulted in an effective tax rate of 51.4%. The primary drivers of the year-to-date tax rate were the impact of the Termination Fee, the U.K. tax rate increase, and the tax benefit of share-based payments. The U.K. enacted legislation in the second quarter of 2021 which increases the corporate income tax rate from 19% to 25% with effect from April 1, 2023 and the Company remeasured its U.K. deferred tax assets and liabilities accordingly.

For the three months ended September, 2020, the tax rate was primarily driven by the geographical distribution of income and certain discrete items, including the tax rate increase in the U.K. In third quarter of 2020, the U.K. enacted legislation retroactively reinstating the 19% corporate income tax rate as of April 1, 2020 (the tax rate had dropped to 17% on April 1, 2020 under previously enacted legislation).

For the nine months ended September 30, 2020, the tax rate was primarily driven by the geographical distribution of income as well as certain discrete items, primarily the favorable impacts of share-based payments and the release of a valuation allowance offset by the tax rate increase in the U.K.

10. Shareholders’ Equity

Ordinary Shares

Aon has a share repurchase program authorized by the Company’s Board of Directors (the “Repurchase Program”). 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 for a total of $20.0 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):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Shares repurchased4.42.45.74.6
Average price per share$283.38$201.96$272.11$207.01
Costs recorded to retained earnings
Total repurchase cost$1,251$500$1,543$961
Additional associated costs———2
Total costs recorded to retained earnings$1,251$500$1,543$963

At September 30, 2021, the remaining authorized amount for share repurchases under the Repurchase Program was approximately $3.7 billion. Under the Repurchase Program, the Company has repurchased a total of 142.9 million shares for an aggregate cost of approximately $16.3 billion.

Net Income Per Share

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

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Basic weighted average ordinary shares outstanding225.4232.6226.5232.8
Dilutive effect of potentially issuable shares—0.91.21.1
Diluted weighted average ordinary shares outstanding225.4233.5227.7233.9

Potentially issuable shares are not included in the computation of Diluted net income (loss) per share attributable to Aon shareholders if their inclusion would be antidilutive. Due to the net loss for the three months ended September 30, 2021, 1.5 million shares were excluded from the calculation. There were no shares excluded from the calculation for the nine months ended September 30, 2021. There were no shares excluded from the calculation for the three and nine months ended September 30, 2020.

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 AdjustmentsPostretirement Benefit Obligation (2)Total
Balance at December 31, 2020$1$(1,045)$(2,817)$(3,861)
Other comprehensive income (loss) before reclassifications, net4(108)8(96)
Amounts reclassified from accumulated other comprehensive income
Amounts reclassified from accumulated other comprehensive income1—104105
Tax expense——(25)(25)
Amounts reclassified from accumulated other comprehensive income, net (3)1—7980
Net current period other comprehensive income (loss)5(108)87(16)
Balance at September 30, 2021$6$(1,153)$(2,730)$(3,877)
Change in Fair Value of Financial Instruments (1)Foreign Currency Translation AdjustmentsPostretirement Benefit Obligation (2)Total
Balance at December 31, 2019$(12)$(1,305)$(2,716)$(4,033)
Other comprehensive income (loss) before reclassifications, net(6)(137)(4)(147)
Amounts reclassified from accumulated other comprehensive income
Amounts reclassified from accumulated other comprehensive income13—94107
Tax expense(3)—(23)(26)
Amounts reclassified from accumulated other comprehensive income, net (3)10—7181
Net current period other comprehensive income (loss)4(137)67(66)
Balance at September 30, 2020$(8)$(1,442)$(2,649)$(4,099)

(1)Reclassifications from this category included in Accumulated other comprehensive loss are recorded in Total revenue, Interest expense, and Compensation and benefits in the Condensed 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 Condensed 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

The following table provides the components of the net periodic (benefit) cost recognized in the Condensed Consolidated Statements of Income for Aon’s significant U.K., U.S., and other major pension plans, which are located in the Netherlands and Canada. Service cost is reported in Compensation and benefits and all other components are reported in Other income (expense) as follows (in millions):

Three Months Ended September 30,
U.K.U.S.Other
202120202021202020212020
Service cost$—$—$—$—$—$—
Interest cost1622152235
Expected return on plan assets, net of administration expenses(34)(40)(33)(34)(8)(8)
Amortization of prior-service cost1—————
Amortization of net actuarial loss88191743
Total net periodic (benefit) cost$(9)$(10)$1$5$(1)$—
Nine Months Ended September 30,
U.K.U.S.Other
202120202021202020212020
Service cost$—$—$—$—$—$—
Interest cost49654364914
Expected return on plan assets, net of administration expenses(103)(118)(97)(100)(24)(25)
Amortization of prior-service cost31————
Amortization of net actuarial loss24235851119
Net periodic (benefit) cost(27)(29)415(4)(2)
Loss on pension settlement—2————
Total net periodic (benefit) cost$(27)$(27)$4$15$(4)$(2)

In the second quarter of 2020, the Company recognized a non-cash settlement charge of approximately £2 million ($2 million using June 30, 2020 exchange rates). Settlements from a certain U.K. pension plan exceeded the plan’s service and interest cost. This triggered settlement accounting which required the immediate recognition of a portion of the accumulated losses associated with the plan.

Contributions

Assuming no additional contributions are agreed to with, or required by, the pension plan trustees, the Company expects to make total cash contributions of approximately $8 million, $73 million, and $19 million, (at December 31, 2020 exchange rates) to its significant U.K., U.S., and other major pension plans, respectively, during 2021. In the first quarter of 2021, the Company revised its full year expected pension contributions in the U.S. following the enactment of the American Rescue Plan Act of 2021. The following table summarizes contributions made to the Company’s significant pension plans (in millions):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Contributions to U.K. pension plans$2$2$8$6
Contributions to U.S. pension plans8445482
Contributions to other major pension plans231214
Total contributions$12$49$74$102

12. Share-Based Compensation Plans

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

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Restricted share units (“RSUs”)$46$43$156$145
Performance share awards (“PSAs”)362113654
Employee share purchase plans and other (1)483548
Total share-based compensation expense$130$67$346$207

(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):

Nine Months Ended September 30,
20212020
SharesFair Value (1)SharesFair Value (1)
Non-vested at beginning of period3,309$1633,634$143
Granted1,164$2501,221$185
Vested(1,147)$151(1,316)$133
Forfeited(166)$176(138)$152
Non-vested at end of period3,160$1993,401$162

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

Unamortized deferred compensation expense amounted to $482 million as of September 30, 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 Condensed 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 nine months ended September 30, 2021 and the years ended December 31, 2020 and 2019, respectively (shares in thousands and dollars in millions, except fair value per share):

September 30, 2021December 31, 2020December 31, 2019
Target PSAs granted during period382500467
Weighted average fair value per share at date of grant$225$163$165
Number of shares that would be issued based on current performance levels376978890
Unamortized expense, based on current performance levels$70$65$11

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 Condensed 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 (expense) in the Condensed Consolidated Statements of Income.

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

Notional AmountNet 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)
September 30, 2021December 31, 2020September 30, 2021December 31, 2020September 30, 2021December 31, 2020
Foreign exchange contracts
Accounted for as hedges$628$633$33$33$—$—
Not accounted for as hedges (3)420367—111
Total$1,048$1,000$33$34$1$1

(1)Included within Other current assets ($22 million at September 30, 2021 and $11 million at December 31, 2020) or Other non-current assets ($11 million at September 30, 2021 and $23 million at December 31, 2020).

(2)Included within Other current liabilities ($1 million at September 30, 2021 and December 31, 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 Condensed Consolidated Financial Statements are as follows (in millions):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Gain (loss) recognized in Accumulated other comprehensive loss$(6)$5$5$(8)

The amounts of derivative gains (losses) reclassified from Accumulated other comprehensive loss to the Condensed Consolidated Statements of Income are as follows (in millions):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Total revenue$(1)$(3)$(2)$(12)
Compensation and benefits111—
Interest expense———(1)
Total$—$(2)$(1)$(13)

The Company estimates that approximately $8 million of pretax gains currently included within Accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.

During the three and nine months ended September 30, 2021, the Company recorded a loss of $17 million and $9 million, respectively, in Other income (expense) for foreign exchange derivatives not designated or qualifying as hedges. During the three and nine months ended September 30, 2020, the Company recorded a gain of $11 million and a loss of $27 million, respectively, in Other income (expense) 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 September 30, 2021 and December 31, 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 September 30, 2021 and December 31, 2020.

The Company did not reclassify any deferred gains or losses related to net investment hedges from Accumulated other comprehensive loss to earnings during the three and nine months ended September 30, 2021 and 2020.

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:

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.

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 discounted cash flow models utilizing observable inputs based on trade and quote activity of securities with similar features. Fixed income derivatives are valued by pricing vendors using observable inputs such as interest rates and yield curves. The Company obtains 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 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.

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 discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements.

The following tables present the categorization of the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020 (in millions):

Fair Value Measurements Using
Balance at September 30, 2021Quoted 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)$3,007$3,007$—$—
Other investments
Government bonds$1$—$1$—
Derivatives (2)
Gross foreign exchange contracts$42$—$42$—
Liabilities
Derivatives (2)
Gross foreign exchange contracts$9$—$9$—
Fair Value Measurements Using
Balance at December 31, 2020Quoted 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$38$—$38$—
Liabilities0
Derivatives (2)
Gross foreign exchange contracts$5$—$5$—

(1)Included within Fiduciary assets or Short-term investments in the Condensed 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 in the three and nine months ended September 30, 2021 or 2020. The Company recognized no realized or unrealized gains or losses in the Condensed Consolidated Statements of Income during the three and nine months ended September 30, 2021 or 2020 related to assets and liabilities measured at fair value using unobservable inputs.

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):

September 30, 2021December 31, 2020
Carrying ValueFair ValueCarrying ValueFair Value
Current portion of long-term debt$—$—$400$401
Long-term debt$8,250$9,370$7,281$8,752

15. Claims, Lawsuits, and Other Contingencies

Aon and its subsidiaries are subject to numerous claims, tax assessments, lawsuits, and proceedings that arise in the ordinary course of business, which frequently include errors and omissions (“E&O”) claims. The damages claimed in these matters are or may be substantial, including, in many instances, claims for punitive, treble, or extraordinary damages. 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 Condensed Consolidated Statements of Financial Position and have been recognized in Other general expense in the Condensed 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 is probable, (2) loss is reasonably possible (that is, more than remote but not probable), or (3) there exists the reasonable possibility of loss 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 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 $0.7 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, Christchurch City Council (“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 ($224 million at September 30, 2021 exchange rates) plus interest and costs. Aon believes 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 Employee Retirement Income Security Act of 1974 (“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. 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 UK 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 $15.5 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 ($40 million at September 30, 2021 exchange rates). Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims.

Aon Investments and Allianz Global Investors U.S. LLC (“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 National Employee Benefits Committee (the “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 Company’s 2012 redomestication to the U.K. (the “2012 Redomestication”), the Company on April 2, 2012 entered into various agreements pursuant to which it agreed to guarantee the obligations of its subsidiaries arising under issued and outstanding debt securities. Those agreements included the: (1) Amended and Restated Indenture, dated April 2, 2012, among Aon Corporation, Aon Global Limited, and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) (amending and restating the Indenture, dated September 10, 2010, between Aon Corporation and the Trustee); (2) Amended and Restated Indenture, dated April 2, 2012, among Aon Corporation, Aon Global Limited and the Trustee (amending and restating the Indenture, dated December 16, 2002, between Aon Corporation and the Trustee); and (3) Amended and Restated Indenture, dated April 2, 2012, among Aon Corporation, Aon Global Limited and the Trustee (amending and restating the Indenture, dated January 13, 1997, between Aon Corporation and the Trustee, as supplemented by the First Supplemental Indenture, dated January 13, 1997).

On April 1, 2020, a scheme of arrangement under English law was completed, as described in the proxy statement filed with the SEC on December 20, 2019 (the “Ireland Reorganization”). In connection with the Ireland Reorganization, Aon plc and Aon Global Holdings plc 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 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 2017, Aon executed a sale of its benefits administration and business process outsourcing business (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 September 30, 2021, the undiscounted maximum potential future payments under the lease guarantee is $43 million, with an estimated fair value of $5 million. No cash payments were made in connection with the lease commitments during the three and nine months ended September 30, 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 September 30, 2021, the undiscounted maximum potential future payments under the performance guarantees were $65 million, with an estimated fair value of less than $1 million. No cash payments were made in connection with the performance guarantees during the three and nine months ended September 30, 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 letters of credit (“LOCs”). The Company had total LOCs outstanding of approximately $74 million at September 30, 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 $105 million at September 30, 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 Chief Operating Decision Maker (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 Condensed Consolidated Statements of Income. Refer to Note 3 “Revenue from Contracts with Customers” for further information on revenue by principal service line.

Previous: Cover and table of contents · Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations