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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY OF THIRD QUARTER 2021 FINANCIAL RESULTS
Aon plc is a leading global professional services firm providing a broad range of risk, health, and wealth solutions. Through our experience, global reach, and comprehensive analytics, we are better able to help clients meet rapidly changing, increasingly complex, and interconnected challenges. We are committed to accelerating innovation to address unmet and evolving client needs, so that our clients are better informed, better advised, and able to make better decisions to protect and grow their business. Management is leading a set of initiatives designed to strengthen Aon and unite the firm with one portfolio of capability enabled by data and analytics and one operating model to deliver additional insight, connectivity, and efficiency.
Financial Results
The following is a summary of our third quarter of 2021 financial results.
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For the third quarter of 2021, revenue increased $317 million to $2.7 billion compared to the prior year period due primarily to organic revenue growth of 12% and a 2% favorable impact if prior year period results were translated at current period foreign exchange rates (“foreign currency translation”), partially offset by a 1% unfavorable impact from acquisitions, divestitures, and other. For the first nine months of 2021, revenue increased $1.0 billion, to $9.1 billion compared to the prior year period due primarily to organic revenue growth of 9% and a 3% favorable impact from foreign currency translation.
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Operating expenses for the third quarter of 2021 were $3.5 billion, an increase of $1.6 billion from the prior year period. The increase was due primarily to a $1.3 billion increase in charges related to terminating the combination with WTW and related costs, increased expenses associated with 12% organic revenue growth, a $65 million negative impact from the repatterning of discretionary expenses within the year, as previously described, and a $36 million unfavorable impact from foreign currency translation, partially offset by a $10 million decrease in amortization and impairment of intangible assets that occurred in the prior period. Operating expenses for the first nine months of 2021 were $8.0 billion, an increase of $2.0 billion compared to the prior year period primarily due to a $1.4 billion increase in charges related to terminating the combination with WTW and related costs, increased expenses associated with 9% organic revenue growth, a $207 million unfavorable impact from foreign currency translation, and a $200 million negative impact from the repatterning of discretionary expenses within the year, as previously described, partially offset by a $72 million decrease from accelerated amortization related to certain tradenames that were fully amortized in the second quarter of 2020.
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Operating margin decreased to (29.6)% in the third quarter of 2021 from 18.5% in the prior year period. The decrease was driven by an increase in operating expenses as listed above, partially offset by organic revenue growth of 12%. Operating margin for the first nine months of 2021 decreased to 12.2% from 25.5% in the prior year period. The decrease was driven by an increase in operating expenses as listed above, partially offset by organic revenue growth of 9%.
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Due to the factors set forth above, Net income (loss) decreased $1.2 billion to $(891) million for the third quarter of 2021 compared to the prior year period. During the first nine months of 2021, net income decreased $1.0 billion to $435 million compared to the first nine months of 2020.
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Diluted net income (loss) per share was $(3.99) for the third quarter of 2021 compared to $1.18 per share for the prior year period. During the first nine months of 2021, diluted earnings per share was $1.72 compared to $6.18 per share for the prior year period.
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Cash flows provided by operating activities was $1.3 billion for the first nine months of 2021, a decrease of $772 million from the prior year period, primarily due to the $1 billion termination fee payment and additional payments related to terminating the combination with WTW and related costs, partially offset by strong revenue growth and a $86 million decrease in restructuring cash outlays. The prior year period included near-term actions taken due to uncertainty surrounding COVID-19.
We focus on four key metrics not presented in accordance with U.S. GAAP that we communicate to shareholders: organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, and free cash flow. These non-GAAP metrics should be viewed in addition to, not instead of, our Financial Statements. The following is our measure of performance against these four metrics for the third quarter of 2021:
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Organic revenue growth is a non-GAAP measure defined under the caption “Review of Consolidated Results — Organic Revenue Growth.” Organic revenue growth was 12% for the third quarter of 2021. Organic revenue growth reflects growth in the core, driven by net new business generation and ongoing strong retention, as well as double-digit growth overall in the more discretionary portions of the business. Organic revenue growth was 9% for the first nine months of 2021, reflecting growth in the core, driven by ongoing strong retention and net new business generation, as well as growth overall in the more discretionary portions of the business.
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Adjusted operating margin, a non-GAAP measure defined under the caption “Review of Consolidated Results — Adjusted Operating Margin,” was 22.1% for the third quarter of 2021 compared to 22.4% in the prior year period. The decrease in adjusted operating margin primarily reflects a $65 million negative impact from the repatterning of discretionary expenses within the year, as previously described, partially offset by strong organic revenue growth that significantly outpaced investment. For the first nine months of 2021, adjusted operating margin was 29.2% compared to 29.0% for the prior year period. The increase in adjusted operating margin primarily reflects strong organic revenue growth, partially offset by a $200 million negative impact from the repatterning of discretionary expenses within the year, as previously described.
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Adjusted diluted earnings per share, a non-GAAP measure defined under the caption “Review of Consolidated Results — Adjusted Diluted Earnings per Share,” was $1.74 per share for the third quarter of 2021 and $8.31 for the first nine months of 2021, compared to $1.53 and $7.19 per share for the respective prior year periods.
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Free cash flow, a non-GAAP measure defined under the caption “Review of Consolidated Results — Free Cash Flow,” decreased in the first nine months of 2021 by $755 million from the prior year period, to $1.1 billion, reflecting a decrease in cash flows from operations, partially offset by a $17 million decrease in capital expenditures.
BUSINESS OVERVIEW
In the third quarter of 2021, we announced a realignment of our principal service lines to the following: Commercial Risk Solutions, Reinsurance Solutions, Health Solutions, and Wealth Solutions. Realignment to these four solution lines results in the following changes in the presentation of our principal service line reporting:
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Data & Analytic Services’ revenue and organic revenue results, which were previously reported as a separate principal service line and include Affinity, Aon Inpoint, CoverWallet, and ReView, are included within Commercial Risk Solutions.
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Human Capital, which was previously reported within Retirement Solutions, is included within Health Solutions’ revenue and organic revenue results.
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Wealth Solutions includes revenue and organic revenue results for all businesses previously reported within Retirement Solutions, excluding Human Capital.
The changes in the solution line structure affect only the manner in which our revenue and organic revenue results for our principal service lines were previously reported and have no impact our previously reported Consolidated Financial Statements, results of operations, or total organic revenue growth. We continue to operate as one segment that includes all of our operations.
Commercial Risk Solutions includes retail brokerage, specialty solutions, global risk consulting and captives management, and Affinity programs. In retail brokerage, our dedicated teams of risk professionals utilize comprehensive analytics capabilities and insights providing clients with risk advice for their organizations. We utilize Aon’s differentiated capabilities in industry sector- and segment-specific approaches to risk transfer options and deliver them through a variety of channels including bespoke solutions for complex needs, structured solutions for mid-market and small and medium-sized enterprises, and digital distribution including CoverWallet. Our specialty-focused organizational structure includes financial and professional lines, cyber, surety and trade credit, crisis management, transaction liability, and intellectual property. We develop market leading insights on the most efficient risk transfer vehicles for clients in today’s complex and integrated risk environment to enable clients to make better decisions. Global risk consulting and captive management is a global leader in supporting better management of companies’ risk profiles by identifying and quantifying the risks they face, mapping out optimal risk mitigation, retention and transfer solutions and thus enabling them to be more informed to make better decisions for their businesses. Affinity programs include development, marketing, and administration of customized and targeted insurance programs, facilities, and other structured solutions, including Aon Client Treaty. We collaborate with sponsors and other privileged distribution channels through which Aon can deliver differentiated, highly targeted, and highly valuable solutions for unique risk solutions.
Reinsurance Solutions includes treaty reinsurance, facultative reinsurance, and capital markets. Treaty reinsurance addresses underwriting and capital objectives on a portfolio level, allowing our clients to more effectively manage the combination of premium growth, return on capital, and rating agency interests on an integrated basis. This includes the development of more competitive, innovative, and efficient risk transfer options. Facultative reinsurance empowers clients to better understand, manage, and transfer risk through innovative facultative solutions and provides the most efficient access to the global facultative reinsurance markets. Capital markets is a global investment bank with expertise in insurance-linked securities, capital raising, strategic advice, restructuring, and mergers and acquisitions. We partner with insurers, reinsurers, investment firms, and corporations in executing innovative risk management products, capital market solutions and corporate finance advisory services.
Health Solutions includes consulting and brokerage, Human Capital, and voluntary benefits and enrollment solutions. Consulting and brokerage develops and implements innovative, customized health and benefits strategies for clients of all sizes across industries and geographies to manage risk, drive engagement, and increase accountability. We partner with insurers and other strategic partners to develop and implement new and innovative solutions, and leverage world-class analytics and technology to help clients make informed decisions and manage healthcare outcomes. Consulting and brokerage also advises multinational companies on Global Benefits including program design and management, financing optimization, and enhanced employee experience, and assists in navigating global regulatory and compliance requirements in countries in which they operate. Our Human Capital team delivers human capital data, analytics and advice to business leaders so they can make better workforce decisions and align their business and people strategies. We support clients across the full employee lifecycle, including talent assessment and selection, compensation benchmarking and plan design, people analytics, performance benchmarking, total rewards strategy, human capital integration in transaction situations, Corporate Governance, ESG consulting and strategic employee communication. Voluntary benefits and enrollment solutions designs and delivers innovative voluntary consumer benefits that improve an employer’s total rewards strategy and positively impacts their employees’ financial well-being. Multi-channel and targeted communications solutions increase consumer benefit knowledge and enhance engagement. We leverage our proprietary digital platform to provide efficient enrollment strategies through an effective combination of data, analytics, and tailored products.
Wealth Solutions includes retirement consulting and pension administration, as well as investments. Retirement consulting and pension administration leverages pension expertise to deliver high-quality integrated retirement services. Our customized services include outsourcing, co-sourcing and in-sourcing options. We also help organizations execute pension de-risking projects to maximize shareholder value. We manage defined benefit plans with people in mind. We believe in the power of connecting participants to experts to make better informed and smarter decisions about their Wealth. Our partnership-driven model is powered by deep pension experience and enabled with smart technology. Retirement Consulting specializes in providing clients across the globe with strategic design consulting on their retirement programs, actuarial services, and risk management, including pension de-risking, governance, integrated pension administration and legal and compliance consulting. Our investments team provides public and private companies and other institutions with advice on developing and maintaining investment programs across a broad range of plan types, including defined benefit plans, defined contribution plans, endowments and foundations. Our delegated investment solutions offer ongoing management of investment programs and fiduciary responsibilities either in a partial or full discretionary model for multiple asset owners. We partner with clients to deliver our scale and experience to help them effectively manage their investments, risk, and governance and potentially lower costs.
TERMINATION OF BUSINESS COMBINATION AGREEMENT
On March 9, 2020, we and WTW, entered into a Business Combination Agreement with respect to a combination of the parties. The parties’ respective shareholders approved the Combination on August 26, 2020. On October 30, 2020, we and WTW amended the Business Combination Agreement to provide that, at the effective date of the transaction, there would be 12 members of our Board of Directors, including one director mutually agreed by the parties.
During the second quarter of 2020, the United States Department of Justice (“DOJ”) delivered a “Second Request” pursuant to the Hart-Scott-Rodino Antitrust Improvement Act. On June 16, 2021, the DOJ filed a civil antitrust lawsuit against the Company and WTW in the United States District Court for the District of Columbia seeking to enjoin the Combination. On July 26, 2021, the Company and WTW entered into an agreement to terminate the Business Combination Agreement (the “Termination Agreement”). Pursuant to the Termination Agreement, the Business Combination Agreement was terminated and the Company paid to WTW a termination fee of $1 billion (the “Termination Fee”).
During the second quarter of 2021, we and WTW entered into agreements to divest certain businesses intended to address competition concerns in certain jurisdictions. We and WTW entered into a definitive agreement to sell Willis Re and a set of WTW corporate risk and broking and health and benefits services to Arthur J. Gallagher & Co. (the “Gallagher Agreement”). Pursuant to its terms, the Gallagher Agreement terminated automatically upon the termination of the Business Combination
Agreement. In addition, we entered into a definitive agreement to sell Aon’s U.S. retirement business to Aquiline (the “Aquiline Agreement”). On July 26, 2021, Aon delivered a termination notice pursuant to the terms of the Aquiline Agreement, at which time the Aquiline Agreement was terminated in accordance with its terms. Aon also entered into a definitive agreement to sell the Aon Retiree Health Exchange™ business to Alight (the “Alight Agreement”). On July 29, 2021, Aon and Alight executed an amendment and restatement of the Alight Agreement to remove the closing of the Combination as a condition to closing the transaction. The transaction closed in the fourth quarter of 2021 and has been accounted for as held for sale as of the third quarter of 2021. Additionally, we entered into a definitive agreement to sell Aon’s retirement and investment business in Germany to Lane Clark & Peacock LLP (the “LCP Agreement”). Aon and Lane Clark & Peacock LLP entered into a termination agreement in the fourth quarter of 2021, pursuant to which the LCP Agreement was terminated.
Aon Corporation, a subsidiary of Aon plc, paid the Termination Fee to WTW on July 27, 2021, reflecting that U.S. business services provided by Aon Corporation and its subsidiaries were the primary focus of the DOJ’s challenge to our proposed combination. The Termination Fee was paid to defend the existing U.S. business of Aon Corporation and to avoid additional remedy divestitures of critical Aon Corporation business segments in the U.S. and the continuing delay and uncertainty in completing the combination.
COVID-19 PANDEMIC
The outbreak of the coronavirus, COVID-19, was declared by the World Health Organization to be a pandemic and has impacted almost all countries, in varying degrees, creating significant public health concerns, and significant volatility, uncertainty, and economic disruption in every region in which we operate. The COVID-19 pandemic has resulted, and may continue to result, in significant economic disruption, although in recent months progress has been made in the development and distribution of vaccines, contributing to overall improved economic conditions globally, despite recent developments as a result of the Delta variant. We continue to closely monitor the situation and its impacts on our business, liquidity, and capital planning initiatives. We continue to be fully operational and to reoccupy certain offices in phases, where deemed appropriate and in compliance with governmental restrictions considering the impact on health and safety of our colleagues, their families, and our clients. We continue to deploy business continuity protocols to facilitate remote working capabilities to ensure the health and safety of our colleagues and to comply with public health and travel guidelines and restrictions.
As the situation continues to evolve, the scale and duration of disruption cannot be predicted, and it is not possible to quantify or estimate the full impact that COVID-19 will have on our business. While we continue to focus on managing our cash flow to meet liquidity needs, our results of operations, particularly with respect to our more discretionary revenues, may be adversely affected. However, in the first nine months ended September 30, 2021, the impacts of COVID-19 on our business results have lessened and we have seen overall strength across the firm. We continue to monitor the situation closely.
The impacts of the pandemic on our business operations and results of operations for the three and nine months ended September 30, 2021 are further described in the sections entitled “Review of Consolidated Results” and “Liquidity and Financial Condition” contained in Part I, Item 2 of this report.
REVIEW OF CONSOLIDATED RESULTS
Summary of Results
Our consolidated results are as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||
| Total revenue | $ | 2,702 | $ | 2,385 | $ | 9,113 | $ | 8,101 | ||||||||||||||||||
| Expenses | 0 | |||||||||||||||||||||||||
| Compensation and benefits | 1,835 | 1,387 | 5,182 | 4,270 | ||||||||||||||||||||||
| Information technology | 130 | 107 | 359 | 325 | ||||||||||||||||||||||
| Premises | 98 | 70 | 251 | 217 | ||||||||||||||||||||||
| Depreciation of fixed assets | 56 | 42 | 138 | 124 | ||||||||||||||||||||||
| Amortization and impairment of intangible assets | 36 | 50 | 112 | 205 | ||||||||||||||||||||||
| Other general expense | 1,348 | 288 | 1,955 | 892 | ||||||||||||||||||||||
| Total operating expenses | 3,503 | 1,944 | 7,997 | 6,033 | ||||||||||||||||||||||
| Operating income (loss) | (801) | 441 | 1,116 | 2,068 | ||||||||||||||||||||||
| Interest income | 3 | 3 | 9 | 5 | ||||||||||||||||||||||
| Interest expense | (80) | (80) | (237) | (252) | ||||||||||||||||||||||
| Other income (expense) | 10 | — | 7 | 19 | ||||||||||||||||||||||
| Income (loss) before income taxes | (868) | 364 | 895 | 1,840 | ||||||||||||||||||||||
| Income tax expense | 23 | 82 | 460 | 356 | ||||||||||||||||||||||
| Net income (loss) | (891) | 282 | 435 | 1,484 | ||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 9 | 7 | 43 | 39 | ||||||||||||||||||||||
| Net income (loss) attributable to Aon shareholders | $ | (900) | $ | 275 | $ | 392 | $ | 1,445 | ||||||||||||||||||
| Diluted net income (loss) per share attributable to Aon shareholders | $ | (3.99) | $ | 1.18 | $ | 1.72 | $ | 6.18 | ||||||||||||||||||
| Weighted average ordinary shares outstanding - diluted | 225.4 | 233.5 | 227.7 | 233.9 |
Revenue
Total revenue increased $317 million, or 13%, in the third quarter of 2021 compared to the third quarter of 2020. This increase reflects organic revenue growth of 12% and a 2% favorable impact from foreign currency translation, partially offset by a 1% unfavorable impact from acquisitions, divestitures, and other. For the first nine months of 2021, revenue increased by $1.0 billion, or 12% compared to the prior year period. This increase reflects organic revenue growth of 9% and a 3% favorable impact from foreign currency translation.
Commercial Risk Solutions revenue increased $185 million, or 14%, to $1.5 billion in the third quarter of 2021, compared to $1.3 billion in the third quarter of 2020. Organic revenue growth was 13% in the third quarter of 2021, driven by growth across every major geography, reflecting strong new business generation, retention and management of the renewal book portfolio. Strength in retail brokerage was highlighted by double-digit growth in the U.S., Latin America, Asia and the Pacific, driven by continued strength in core P&C, as well as double-digit growth in transaction liability and project-related work. Results also reflect solid growth globally in the Affinity business across both consumer and business solutions. On average globally, exposures and pricing were modestly positive, resulting in a modestly positive market impact. For the first nine months of 2021, revenue increased $591 million, or 14%, to $4.8 billion, compared to $4.2 billion in the first nine months of 2020. Organic revenue growth was 11% in the first nine months of 2021, driven by growth across every major geography, including double-digit growth in the U.S., Canada, Latin America, and Asia, driven by strong retention and management of the renewal book portfolio. Results also reflect growth in the more discretionary portions of our business, including double-digit growth in transaction liability and project-related work. On average globally, exposures and pricing were both modestly positive, resulting in a modestly positive market impact overall.
Reinsurance Solutions revenue increased $32 million, or 10%, to $353 million in the third quarter of 2021, compared to $321 million in the third quarter of 2020. Organic revenue growth was 8% in the third quarter of 2021, driven by strong growth in treaty, reflecting continued net new business generation globally, as well as double-digit growth in facultative placements,
partially offset by a modest decline in capital markets transactions. For the first nine months of 2021, revenue increased $158 million, or 10%, to $1.8 billion, compared to $1.6 billion in the first nine months of 2020. Organic revenue growth was 7% in the first nine months of 2021, driven by continued net new business generation in treaty, as well as double-digit growth in capital markets transactions and solid growth in facultative placements. Market impact was modestly positive on results for the three and nine months ended September 30, 2021. The majority of revenue in our treaty portfolio is recurring in nature and is recorded in connection with the major renewal periods that take place throughout the first half of the year, while the second half of the year is largely driven by facultative placements and capital markets that are more transactional in nature.
Health Solutions revenue increased $74 million, or 17%, to $497 million in the third quarter of 2021, compared to $423 million in the third quarter of 2020. Organic revenue growth was 16% in the third quarter of 2021, driven by double-digit growth in Human Capital, reflecting growth in both rewards and assessments solutions. In health and benefits brokerage, solid growth globally in the core was driven by strong retention and management of the renewal book portfolio, as well as growth in the more discretionary areas, primarily voluntary benefits and project-related work. Results include a positive impact from the timing of certain revenue. For the first nine months of 2021, revenue increased $187 million, or 14%, to $1.5 billion, compared to $1.3 billion in the first nine months of 2020. Organic revenue growth was 11% in the first nine months of 2021, reflecting double-digit growth in Human Capital due to growth in both rewards and assessments solutions. In health and benefits brokerage, solid growth globally in the core was driven by strong retention and management of the renewal book portfolio, as well as growth in the more discretionary areas, primarily voluntary benefits and project-related work.
Wealth Solutions revenue increased $24 million, or 7%, to $351 million in the third quarter of 2021, compared to $327 million in the third quarter of 2020. Organic revenue growth was 4% in the third quarter of 2021, reflecting strong growth in delegated investment management. Results also reflect modest growth in Retirement Consulting, driven by higher utilization rates and project-related work. For the first nine months of 2021, revenue increased $78 million, or 8%, to $1.1 billion, compared to $984 million in the first nine months of 2020. Organic revenue growth was 3% in the first nine months of 2021, reflecting growth in delegated investment management, as well as growth in Retirement Consulting, primarily from higher utilization rates and project-related work.
Compensation and Benefits
Compensation and benefits expenses increased $448 million, or 32%, in the third quarter of 2021 compared to the third quarter of 2020. This increase was primarily driven by a $245 million increase in charges related to terminating the combination with WTW and related costs, increased expenses associated with 12% organic revenue growth, a $65 million negative impact from the repatterning of discretionary expenses within the year, as previously described, and a $28 million unfavorable impact from foreign currency translation. For the first nine months of 2021, Compensation and benefits increased $912 million, or 21%, compared to the first nine months of 2020. The increase was primarily driven by increased expenses associated with 9% organic revenue growth, a $245 million increase in charges related to terminating the combination with WTW and related costs, a $200 million negative impact from the repatterning of discretionary expenses within the year, as previously described, and a $160 million unfavorable impact from foreign currency translation.
Information Technology
Information technology expenses, which represent costs associated with supporting and maintaining our infrastructure, increased $23 million, or 21%, in the third quarter of 2021 compared to the third quarter of 2020. This increase was primarily driven by a $17 million increase in charges related to terminating the combination with WTW and related costs and increased expenses associated with 12% organic revenue growth. For the first nine months of 2021, Information technology expenses increased $34 million, or 10%, compared to the first nine months of 2020. The increase was primarily driven by a $17 million increase in charges related to terminating the combination with WTW and related costs, increased expenses associated with 9% organic revenue growth and a $6 million unfavorable impact from foreign currency translation.
Premises
Premises expenses, which represent the cost of occupying offices in various locations throughout the world, increased $28 million, or 40%, in the third quarter of 2021 compared to the third quarter of 2020. This increase was primarily driven by a $22 million increase in charges related to terminating the combination with WTW and related costs and a $2 million unfavorable impact from foreign currency translation. For the first nine months of 2021, Premises expenses increased $34 million, or 16%, compared to the first nine months of 2020. The increase was primarily driven by a $22 million increase in charges related to terminating the combination with WTW and related costs and a $10 million unfavorable impact from foreign currency translation.
Depreciation of Fixed Assets
Depreciation of fixed assets primarily relates to software, leasehold improvements, furniture, fixtures, and equipment, computer equipment, buildings, and automobiles. Depreciation of fixed assets increased $14 million, or 33%, in the third quarter of 2021 compared to the third quarter of 2020 due primarily to a $16 million increase in charges related to terminating the combination with WTW and related costs. For the first nine months of 2021, Depreciation of fixed assets increased $14 million, or 11%, compared to the first nine months of 2020 due primarily to a $16 million increase in charges related to terminating the combination with WTW and related costs.
Amortization and Impairment of Intangibles Assets
Amortization and impairment of intangible assets primarily relates to finite-lived tradenames and customer-related, contract-based, and technology assets. Amortization and impairment of intangibles decreased $14 million, or 28%, in the third quarter of 2021 compared to the third quarter of 2020 which included $10 million of asset impairments. For the first nine months of 2021, Amortization and impairment of intangibles decreased $93 million, or 45%, compared to the first nine months of 2020 due primarily to a $72 million decrease from accelerated amortization related to certain tradenames that were fully amortized in the second quarter of 2020.
Other General Expense
Other general expense in the third quarter of 2021 increased $1.1 billion, or 368%, compared to the third quarter of 2020 due primarily to a $1.0 billion increase in charges related to terminating the combination with WTW and related costs and increased expenses associated with 12% organic revenue growth. For the first nine months of 2021, Other general expense increased $1.1 billion, or 119%, compared to the prior year period. This increase was primarily driven by a $1.1 billion increase in charges related to terminating the combination with WTW and related costs and a $23 million unfavorable impact from foreign currency translation.
Interest Income
Interest income represents income earned on operating cash balances and other income-producing investments. It does not include interest earned on funds held on behalf of clients. During the third quarter of 2021, Interest income was $3 million, and was flat compared to the third quarter of 2020. For the first nine months of 2021, Interest income was $9 million, compared to $5 million in the first nine months of 2020.
Interest Expense
Interest expense, which represents the cost of our debt obligations, was $80 million for the third quarter of 2021, and was flat compared to the third quarter of 2020. For the first nine months of 2021, Interest expense was $237 million, a decrease of $15 million, or 6%, from the prior year period. The decrease was driven primarily by less weighted average commercial paper outstanding for the first nine months of 2021.
Other Income (Expense)
Total Other income was $10 million for the third quarter of 2021, compared to other income of zero for the third quarter of 2020. Other income (expense) for the third quarter of 2021 includes $20 million of income due to the favorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies, compared to $19 million of expense in the prior year period. Other income was $7 million for the first nine months of 2021, compared to $19 million for the first nine months of 2020. Other income includes $2 million of gains from the disposal of business, compared to $25 million in the prior year period.
Income (Loss) before Income Taxes
Due to the factors discussed above, Income (loss) before income taxes for the third quarter of 2021 was $(868) million, a 338% decrease from $364 million in the third quarter of 2020, and Income (loss) before income taxes was $895 million for the first nine months of 2021, a 51% decrease from $1.8 billion for the first nine months of 2020.
Income Taxes
The effective tax rates on Net income (loss) were (2.6)% and 22.5% for the third quarter of 2021 and 2020, respectively. The effective tax rates on Net income (loss) were 51.4% and 19.3% for the first nine months ended September 30, 2021 and 2020, respectively.
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 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. In the 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).
Net Income (Loss) Attributable to Aon Shareholders
Net income (loss) attributable to Aon shareholders for the third quarter of 2021 decreased to $(900) million, or $(3.99) per diluted share, from $275 million, or $1.18 per diluted share, in the prior year period. Net income (loss) attributable to Aon shareholders for the first nine months of 2021 decreased to $392 million, or $1.72 per diluted share, from $1,445 million, or $6.18 per diluted share, in the prior year period.
Non-GAAP Metrics
In our discussion of consolidated results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Financial Statements.
Organic Revenue Growth
We use supplemental information related to organic revenue growth to help us and our investors evaluate business growth from existing operations. Organic revenue growth is a non-GAAP measure that includes the impact of intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. This supplemental information related to organic revenue growth represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Financial Statements. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. A reconciliation of this non-GAAP measure to the reported Total revenue is as follows (in millions, except percentages):
| Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | Less: Currency Impact (1) | Less: Fiduciary Investment Income (2) | Less: Acquisitions, Divestitures & Other | Organic Revenue Growth (3) | ||||||||||||||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial Risk Solutions | $ | 1,505 | $ | 1,320 | 14 | % | 2 | % | — | % | (1) | % | 13 | % | ||||||||||||||||||||||||||||||
| Reinsurance Solutions | 353 | 321 | 10 | 1 | — | 1 | 8 | |||||||||||||||||||||||||||||||||||||
| Health Solutions | 497 | 423 | 17 | 2 | — | (1) | 16 | |||||||||||||||||||||||||||||||||||||
| Wealth Solutions | 351 | 327 | 7 | 3 | — | — | 4 | |||||||||||||||||||||||||||||||||||||
| Eliminations | (4) | (6) | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 2,702 | $ | 2,385 | 13 | % | 2 | % | — | % | (1) | % | 12 | % |
| Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | Less: Currency Impact (1) | Less: Fiduciary Investment Income (2) | Less: Acquisitions, Divestitures & Other | Organic Revenue Growth (3) | ||||||||||||||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial Risk Solutions | $ | 4,788 | $ | 4,197 | 14 | % | 4 | % | — | % | (1) | % | 11 | % | ||||||||||||||||||||||||||||||
| Reinsurance Solutions | 1,775 | 1,617 | 10 | 2 | — | 1 | 7 | |||||||||||||||||||||||||||||||||||||
| Health Solutions | 1,503 | 1,316 | 14 | 3 | — | — | 11 | |||||||||||||||||||||||||||||||||||||
| Wealth Solutions | 1,062 | 984 | 8 | 4 | — | 1 | 3 | |||||||||||||||||||||||||||||||||||||
| Elimination | (15) | (13) | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 9,113 | $ | 8,101 | 12 | % | 3 | % | — | % | — | % | 9 | % |
(1)Currency impact represents the effect on prior year period results if they were translated at current period foreign exchange rates.
(2)Fiduciary investment income for the three months ended September 30, 2021 and 2020, respectively, was $2 million and $3 million. Fiduciary investment income for the nine months ended September 30, 2021 and 2020, respectively, was $6 million and $23 million.
(3)Organic revenue growth includes the impact of intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges.
Adjusted Operating Margin
We use adjusted operating margin as a non-GAAP measure of our core operating performance. Adjusted operating margin excludes the impact of certain items, as listed below, because management does not believe these expenses are the best indicators of our core operating performance. This supplemental information related to adjusted operating margin represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Financial Statements.
A reconciliation of this non-GAAP measure to the reported operating margin is as follows (in millions, except percentages):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Revenue | $ | 2,702 | $ | 2,385 | $ | 9,113 | $ | 8,101 | ||||||||||||||||||
| Operating income (loss) - as reported | $ | (801) | $ | 441 | $ | 1,116 | $ | 2,068 | ||||||||||||||||||
| Amortization and impairment of intangible assets | 36 | 50 | 112 | 205 | ||||||||||||||||||||||
| Transaction costs and other charges related to the combination and resulting termination (1) | 1,363 | 43 | 1,436 | 79 | ||||||||||||||||||||||
| Operating income - as adjusted | $ | 598 | $ | 534 | $ | 2,664 | $ | 2,352 | ||||||||||||||||||
| Operating margin - as reported | (29.6) | % | 18.5 | % | 12.2 | % | 25.5 | % | ||||||||||||||||||
| Operating margin - as adjusted | 22.1 | % | 22.4 | % | 29.2 | % | 29.0 | % |
(1)As part of the terminated combination with WTW, certain transaction costs have been incurred by the Company through the third quarter of 2021. These costs may include advisory, legal, accounting, valuation, and other professional or consulting fees related to the combination, including planned divestitures that have been terminated, as well as certain compensation expenses and expenses related to further steps on our Aon United operating model as a result of the termination. Additionally, this includes the $1 billion Termination Fee paid in connection with the termination of the combination.
Adjusted Diluted Earnings per Share
We use adjusted diluted earnings per share as a non-GAAP measure of our core operating performance. Adjusted diluted earnings per share excludes the items identified above, because management does not believe these expenses are representative of our core earnings. This supplemental information related to adjusted diluted earnings per share represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Financial Statements.
A reconciliation of this non-GAAP measure to the reported Diluted net income (loss) per share attributable to Aon shareholders is as follows (in millions, except per share data and percentages):
| Three Months Ended September 30, 2021 | ||||||||||||||||||||
| Non-GAAP | ||||||||||||||||||||
| U.S. GAAP | Adjustments | Adjusted | ||||||||||||||||||
| Operating income (loss) | $ | (801) | $ | 1,399 | $ | 598 | ||||||||||||||
| Interest income | 3 | — | 3 | |||||||||||||||||
| Interest expense | (80) | — | (80) | |||||||||||||||||
| Other income (expense) | 10 | — | 10 | |||||||||||||||||
| Income (loss) before income taxes | (868) | 1,399 | 531 | |||||||||||||||||
| Income tax expense (1) | 23 | 104 | 127 | |||||||||||||||||
| Net income (loss) | (891) | 1,295 | 404 | |||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 9 | — | 9 | |||||||||||||||||
| Net income (loss) attributable to Aon shareholders | $ | (900) | $ | 1,295 | $ | 395 | ||||||||||||||
| Diluted net income (loss) per share attributable to Aon shareholders | $ | (3.99) | $ | 5.73 | $ | 1.74 | ||||||||||||||
| Weighted average ordinary shares outstanding - diluted (2) | 225.4 | 1.5 | 226.9 | |||||||||||||||||
| Effective tax rates (1) | (2.6) | % | 23.9 | % | ||||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Non-GAAP | ||||||||||||||||||||||||||||||||
| U.S. GAAP | Adjustments | Adjusted | ||||||||||||||||||||||||||||||
| Operating income | $ | 441 | $ | 93 | $ | 534 | ||||||||||||||||||||||||||
| Interest income | 3 | — | 3 | |||||||||||||||||||||||||||||
| Interest expense | (80) | — | (80) | |||||||||||||||||||||||||||||
| Other income (expense) (3) | — | — | — | |||||||||||||||||||||||||||||
| Income before income taxes | 364 | 93 | 457 | |||||||||||||||||||||||||||||
| Income tax expense (1) | 82 | 10 | 92 | |||||||||||||||||||||||||||||
| Net income | 282 | 83 | 365 | |||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 7 | — | 7 | |||||||||||||||||||||||||||||
| Net income attributable to Aon shareholders | $ | 275 | $ | 83 | $ | 358 | ||||||||||||||||||||||||||
| Diluted net income per share attributable to Aon shareholders | $ | 1.18 | $ | 0.35 | $ | 1.53 | ||||||||||||||||||||||||||
| Weighted average ordinary shares outstanding - diluted | 233.5 | — | 233.5 | |||||||||||||||||||||||||||||
| Effective tax rates (1) | 22.5 | % | 20.1 | % | ||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Non-GAAP | ||||||||||||||||||||||||||||||||
| U.S. GAAP | Adjustments | Adjusted | ||||||||||||||||||||||||||||||
| Operating income | $ | 1,116 | $ | 1,548 | $ | 2,664 | ||||||||||||||||||||||||||
| Interest income | 9 | — | 9 | |||||||||||||||||||||||||||||
| Interest expense | (237) | — | (237) | |||||||||||||||||||||||||||||
| Other income (expense) | 7 | — | 7 | |||||||||||||||||||||||||||||
| Income before income taxes | 895 | 1,548 | 2,443 | |||||||||||||||||||||||||||||
| Income tax expense (1) | 460 | 47 | 507 | |||||||||||||||||||||||||||||
| Net income | 435 | 1,501 | 1,936 | |||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 43 | — | 43 | |||||||||||||||||||||||||||||
| Net income attributable to Aon shareholders | $ | 392 | $ | 1,501 | $ | 1,893 | ||||||||||||||||||||||||||
| Diluted net income per share attributable to Aon shareholders | $ | 1.72 | $ | 6.59 | $ | 8.31 | ||||||||||||||||||||||||||
| Weighted average ordinary shares outstanding - diluted | 227.7 | — | 227.7 | |||||||||||||||||||||||||||||
| Effective tax rates (1) | 51.4 | % | 20.8 | % | ||||||||||||||||||||||||||||
.
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Non-GAAP | ||||||||||||||||||||||||||||||||
| U.S. GAAP | Adjustments | Adjusted | ||||||||||||||||||||||||||||||
| Operating income | $ | 2,068 | $ | 284 | $ | 2,352 | ||||||||||||||||||||||||||
| Interest income | 5 | — | 5 | |||||||||||||||||||||||||||||
| Interest expense | (252) | — | (252) | |||||||||||||||||||||||||||||
| Other income (expense) (3) | 19 | — | 19 | |||||||||||||||||||||||||||||
| Income before income taxes | 1,840 | 284 | 2,124 | |||||||||||||||||||||||||||||
| Income tax expense (1) | 356 | 48 | 404 | |||||||||||||||||||||||||||||
| Net income | 1,484 | 236 | 1,720 | |||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 39 | — | 39 | |||||||||||||||||||||||||||||
| Net income attributable to Aon shareholders | $ | 1,445 | $ | 236 | $ | 1,681 | ||||||||||||||||||||||||||
| Diluted net income per share attributable to Aon shareholders | $ | 6.18 | $ | 1.01 | $ | 7.19 | ||||||||||||||||||||||||||
| Weighted average ordinary shares outstanding - diluted | 233.9 | — | 233.9 | |||||||||||||||||||||||||||||
| Effective tax rates (1) | 19.3 | % | 19.0 | % | ||||||||||||||||||||||||||||
(1)Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with accelerated tradename amortization, impairment charges and certain transaction costs and other charges related to the combination and resulting termination, which are adjusted at the related jurisdictional rate. In addition, income tax expense for the nine months ended September 30, 2021 was adjusted to exclude the impact of remeasuring the net deferred tax liabilities in the U.K. as a result of the corporate income tax rate increase enacted in the second quarter of 2021.
(2)The dilutive effect of potentially issuable shares was excluded from the calculation of the U.S. GAAP Weighted average ordinary shares outstanding for the three months ended September 30, 2021 due to the net loss recognized in the period.
(3)There was $1 million of income for the three and nine months ended September 30, 2020, 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.
Free Cash Flow
We use free cash flow, defined as cash flow provided by operations less capital expenditures, as a non-GAAP measure of our core operating performance and cash-generating capabilities of our business operations. This supplemental information related to free cash flow represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Financial Statements. The use of this non-GAAP measure does not imply or represent the residual cash flow for discretionary expenditures. A reconciliation of this non-GAAP measure to the reported cash provided by operating activities is as follows (in millions):
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Cash provided by operating activities | $ | 1,251 | $ | 2,023 | ||||||||||||||||
| Capital expenditures used for operations | (102) | (119) | ||||||||||||||||||
| Free cash flow provided by operations | $ | 1,149 | $ | 1,904 |
Impact of Foreign Exchange Rate Fluctuations
Because we conduct business in over 120 countries and sovereignties, foreign exchange rate fluctuations may have a significant impact on our business. Foreign exchange rate movements may be significant and may distort true period-to-period comparisons of changes in revenue or pretax income. Therefore, to give financial statement users meaningful information about our operations, we have provided an illustration of the impact of foreign currency exchange rates on our financial results. The methodology used to calculate this impact isolates the impact of the change in currencies between periods by translating the prior year quarter’s revenue, expenses, and net income using the current quarter’s foreign exchange rates.
Currency fluctuations had a favorable impact of $0.02 and a favorable impact of $0.13 on net income per diluted share during the three and nine months ended September 30, 2021 if prior year period results were translated at current period foreign exchange rates. Currency fluctuations had an unfavorable impact of $0.01 and $0.04 on net income per diluted share during the three and nine months ended September 30, 2020, respectively, if 2019 results were translated at 2020 rates.
Currency fluctuations had a favorable impact of $0.02 and a favorable impact of $0.24 on adjusted net income per diluted share during the three and nine months ended September 30, 2021 if prior year period results were translated at current period foreign exchange rates. Currency fluctuations had an unfavorable impact of $0.01 and $0.06 on adjusted net income per diluted share during the three and nine months ended September 30, 2020, respectively, if 2019 results were translated at 2020 rates. These translations are performed for comparative and illustrative purposes only and do not impact the accounting policies or practices for amounts included in our Financial Statements.
LIQUIDITY AND FINANCIAL CONDITION
Liquidity
Executive Summary
We believe that our balance sheet and strong cash flow provide us with adequate liquidity. Our primary sources of liquidity in the near-term include cash flows provided by operations and available cash reserves; primary sources of liquidity in the long-term include cash flows provided by operations, debt capacity available under our credit facilities and capital markets. Our primary uses of liquidity are operating expenses and investments, capital expenditures, acquisitions, share repurchases, pension obligations, and shareholder dividends. We believe that cash flows from operations, available credit facilities, available cash reserves, and the capital markets will be sufficient to meet our liquidity needs, including principal and interest payments on debt obligations, capital expenditures, pension contributions, and anticipated working capital requirements in the next twelve months and over the long-term. Although there continues to be uncertainties around future economic conditions due to COVID-19, we have largely returned to normal levels of liquidity and will continue to monitor our needs as economic conditions change.
In the third quarter of 2021, the Combination with WTW was terminated and on July 27, 2021, we paid the Termination Fee of $1 billion. Refer to Note 6 “Acquisitions and Dispositions of Businesses” for more information. The Termination Fee, along with other payments made in the third quarter related to terminating the combination with WTW, are reflected as an outflow to operating activities.
Cash on our balance sheet includes funds available for general corporate purposes, as well as amounts restricted as to their use. Funds held on behalf of clients in a fiduciary capacity are segregated and shown together with uncollected insurance premiums in Fiduciary assets in our Condensed Consolidated Statements of Financial Position, with a corresponding amount in Fiduciary liabilities.
In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance underwriters. We also collect claims or refunds from underwriters on behalf of insureds, which are then returned to the insureds. Unremitted insurance premiums and claims are held by us in a fiduciary capacity. In addition, some of our outsourcing agreements require us to hold funds on behalf of clients to pay obligations on their behalf. The levels of fiduciary assets and liabilities can fluctuate significantly, depending on when we collect premiums, claims, and refunds, make payments to underwriters and insureds, and collect funds from clients and make payments on their behalf, and upon the impact of foreign currency movements. Fiduciary assets, because of their nature, are generally invested in very liquid securities with highly rated, credit-worthy financial institutions. In our Condensed Consolidated Statements of Financial Position, the amounts we report for Fiduciary assets and Fiduciary liabilities are equal and offsetting. Our Fiduciary assets included cash and short-term investments of $6.4 billion and $5.7 billion at September 30, 2021 and December 31, 2020, respectively, and fiduciary receivables of $7.6 billion and $8.1 billion at September 30, 2021 and December 31, 2020, respectively. While we earn investment income on the fiduciary assets held in cash and investments, the cash and investments cannot be used for general corporate purposes.
We maintain multicurrency cash pools with third-party banks in which various Aon entities participate. Individual Aon entities are permitted to overdraw on their individual accounts provided the overall global balance does not fall below zero. At September 30, 2021, non-U.S. cash balances of one or more entities may have been negative; however, the overall balance was positive.
The following table summarizes our Cash and cash equivalents, Short-term investments, and Fiduciary assets as of September 30, 2021 (in millions):
| Statement of Financial Position Classification | |||||||||||||||||||||||
| Asset Type | Cash and Cash Equivalents | Short-term Investments | Fiduciary Assets | Total | |||||||||||||||||||
| Certificates of deposit, bank deposits, or time deposits | $ | 609 | $ | — | $ | 3,715 | $ | 4,324 | |||||||||||||||
| Money market funds | — | 310 | 2,697 | 3,007 | |||||||||||||||||||
| Cash and short-term investments | 609 | 310 | 6,412 | 7,331 | |||||||||||||||||||
| Fiduciary receivables | — | — | 7,605 | 7,605 | |||||||||||||||||||
| Total | $ | 609 | $ | 310 | $ | 14,017 | $ | 14,936 |
Cash and cash equivalents decreased $275 million in 2021. A summary of our cash flows provided by and used for operations from operating, investing, and financing activities is as follows (in millions):
| Nine Months Ended September 30, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Cash provided by operating activities | $ | 1,251 | $ | 2,023 | ||||||||||
| Cash used for investing activities | $ | (116) | $ | (815) | ||||||||||
| Cash used for financing activities | $ | (1,380) | $ | (1,146) | ||||||||||
| Effect of exchange rates changes on cash and cash equivalents | $ | (30) | $ | (31) |
Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 2021 decreased $772 million, or 38%, from the prior year period to $1.3 billion. This amount represents Net income (loss) reported, generally adjusted for the following primary drivers including gains or losses on sales of businesses, share-based compensation expense, depreciation expense, amortization and impairments, and other non-cash income and expenses, as well as changes in working capital that relate primarily to the timing of payments of accounts payable and accrued liabilities and collection of receivables.
Pension Contributions
Pension contributions were $74 million for the nine months ended September 30, 2021, as compared to $102 million for the nine months ended September 30, 2020. For the remainder of 2021, we expect to contribute approximately $26 million in cash to our pension plans, including contributions to non-U.S. pension plans, which are subject to changes in foreign exchange rates. In the first quarter of 2021, we revised our full year expected pension contributions in the U.S. following the enactment of the American Rescue Plan Act of 2021.
Transaction Costs and Other Charges Related to the Combination and Resulting Termination
In the third quarter of 2021, we paid the Termination Fee of $1 billion and made additional payments related to terminating the combination with WTW which are reflected as an outflow to operating activities in the third quarter.
Investing Activities
Cash flow used for investing activities was $116 million during the nine months ended September 30, 2021, a decrease of $699 million compared to $815 million of cash flow used for investing activities in the prior year period. Generally, the primary drivers of cash flow used for investing activities are acquisitions of businesses, purchases of short-term investments, capital expenditures, and payments for investments. Generally, the primary drivers of cash flow provided by investing activities are sales of businesses, sales of short-term investments, and proceeds from investments. The gains and losses corresponding to cash flows provided by proceeds from investments and used for payments for investments are primarily recognized in Other income (expense) in our Condensed Consolidated Statements of Income.
Short-term Investments
Short-term investments increased $2 million as compared to December 31, 2020. As disclosed in Note 14 “Fair Value Measurements and Financial Instruments” of our Financial Statements contained in Part I, Item 1 of this report, the majority of our investments carried at fair value are money market funds. These money market funds are held throughout the world with various financial institutions. We are not aware of any market liquidity issues that would materially impact the fair value of these investments.
Acquisitions and Dispositions of Businesses
During the first nine months of 2021, we completed one acquisition for total consideration transferred of $30 million. Total cash consideration, net of cash acquired was $3 million. Three businesses were sold for a net cash inflow of $8 million. The pretax gains and losses recognized in the Condensed Consolidated Statement of Income related to dispositions were insignificant for the three and nine months ended September 30, 2021.
During the first nine months of 2020, we completed the acquisition of six businesses for total consideration of $368 million, net of cash acquired, and one business was sold for a net cash inflow of $30 million.
Assets and Liabilities Held for Sale
As of September 30, 2021, we 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.
Capital Expenditures
Our additions to fixed assets, including capitalized software, which amounted to $102 million and $119 million for the nine months ended September 30, 2021 and 2020, respectively, primarily relate to the refurbishing and modernizing of office facilities, software development costs, and computer equipment purchases.
Financing Activities
Cash flow used for financing activities during the nine months ended September 30, 2021 was $1.4 billion, an increase of $234 million compared to the prior year period. The primary drivers of cash flow used for financing activities are issuances of debt, net of repayments, dividends paid to shareholders, issuances of shares for employee benefit plans, transactions with noncontrolling interests, share repurchases, and other financing activities, such as collection of or payments for deferred consideration in connection with prior year business acquisitions and divestitures.
Share Repurchase Program
We have a share repurchase program authorized by our 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 for a total of $20.0 billion in repurchase authorizations.
The following table summarizes our share repurchase activity (in millions, except per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Shares repurchased | 4.4 | 2.4 | 5.7 | 4.6 | |||||||||||||||||||
| 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, we have repurchased a total of 142.9 million shares for an aggregate cost of approximately $16.3 billion. For further information regarding the Repurchase Program, see Part II, Item 2 of this report.
Borrowings
Total debt at September 30, 2021 was $8.4 billion, an increase of $0.7 billion compared to December 31, 2020. Further, commercial paper activity during the nine months ended September 30, 2021 and 2020 is as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Total issuances (1) | $ | 1,074 | $ | — | $ | 2,174 | $ | 3,162 | ||||||||||||||||||
| Total repayments | (924) | (309) | (2,024) | (3,250) | ||||||||||||||||||||||
| Net issuances (repayments) | $ | 150 | $ | (309) | $ | 150 | $ | (88) |
(1) The proceeds of the commercial paper issuances are generally used for short-term working capital needs.
Using proceeds of commercial paper issued by Aon Corporation under the U.S. Program, where the aggregate principal was raised on July 26, 2021, approximately $400 million of the Termination Fee was paid on July 27, 2021.
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 from 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 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 to mature on September 30, 2020, and intends to use the remainder to repay other borrowings and for general corporate purposes.
Other Liquidity Matters
Distributable Profits
We are 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 16, 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 September 30, 2021 and December 31, 2020, we had distributable profits in excess of $34.8 billion and $0.2 billion, respectively. We believe that we will have sufficient distributable profits for the foreseeable future.
Credit Facilities
We expect cash generated by operations for 2021 to be sufficient to service our debt and contractual obligations, finance capital expenditures, and continue to pay dividends to our shareholders. Although cash from operations is expected to be sufficient to service these activities, we have the ability to access the commercial paper markets or borrow under our credit facilities to accommodate any timing differences in cash flows. Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed.
As of September 30, 2021, we had two primary committed credit facilities outstanding: our $1.0 billion multi-currency U.S. credit facility expiring in September 2026 and our $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 us to maintain specified ratios of adjusted consolidated EBITDA to consolidated interest expense and consolidated debt to consolidated adjusted EBITDA, tested quarterly. At September 30, 2021, we did not have borrowings under either facility, and we were in compliance with the financial covenants and all other covenants contained therein during the rolling 12 months ended September 30, 2021.
Shelf Registration Statement
On May 12, 2020, we filed a shelf registration statement with the SEC, registering the offer and sale from time to time of an indeterminate amount of, among other securities, debt securities, preference shares, class A Ordinary Shares and convertible securities. Our ability to access the market as a source of liquidity is dependent on investor demand, market conditions, and other factors.
Rating Agency Ratings
The major rating agencies’ ratings of our debt at October 29, 2021 appear in the table below.
| Ratings | |||||||||||||||||
| Senior Long-term Debt | Commercial Paper | Outlook | |||||||||||||||
| Standard & Poor’s | A- | A-2 | Stable | ||||||||||||||
| Moody’s Investor Services | Baa2 | P-2 | Stable | ||||||||||||||
| Fitch, Inc. | BBB+ | F-2 | Stable |
On March 19, 2021, Fitch upgraded our 'BBB+' outlook to Stable, as compared to a Negative outlook at February 19, 2021 as reported in our Annual Report on Form 10-K for the year ended December 31, 2020.
Guarantees in Connection with the Sale of the Divested Business
In connection with the 2017 sale of the Divested Business, we guaranteed future operating lease commitments related to certain facilities assumed by the buyer. We are obligated to perform under the guarantees if the Divested Business defaults on the 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 were $43 million, with an estimated fair value of $5 million. No cash payments were made in connection to the lease commitments during the three and nine months and ended September 30, 2021.
Additionally, we are 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, we 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 to the performance guarantees during the three and nine months ended September 30, 2021.
Letters of Credit and Other Guarantees
We have entered into a number of arrangements whereby our performance on certain obligations is guaranteed by a third party through the issuance of a letter of credit. We had total LOCs outstanding of approximately $74 million at September 30, 2021, compared to $79 million at December 31, 2020. These LOCs cover the beneficiaries related to certain of our U.S. and Canadian non-qualified pension plan schemes and secure deductible retentions for our own workers compensation program. We also have obtained LOCs to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at our international subsidiaries.
We have 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.
Off-Balance Sheet Arrangements
Apart from commitments, guarantees, and contingencies, as disclosed herein and Note 15 “Claims, Lawsuits, and Other Contingencies” to our Financial Statements contained in Part I, Item 1 of this report, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, or liquidity. Our cash flows from operations, borrowing availability, and overall liquidity are subject to risks and uncertainties. See “Information Concerning Forward-Looking Statements.”
Guarantee of Registered Securities
In connection with 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: (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).
In connection with the Ireland 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 included: (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).
After the Ireland Reorganization, newly issued and outstanding debt securities by Aon Corporation are guaranteed by Aon Global Limited, Aon plc, and Aon Global Holdings plc, and include the following (collectively, the “Aon Corporation Notes”):
| Aon Corporation Notes | ||
| 2.20% Senior Notes due November 2022 | ||
| 8.205% Junior Subordinated Notes due January 2027 | ||
| 4.50% Senior Notes due December 2028 | ||
| 3.75% Senior Notes due May 2029 | ||
| 2.80% Senior Notes due 2030 | ||
| 6.25% Senior Notes due September 2040 |
All guarantees of Aon plc, Aon Global Limited, and Aon Global Holdings plc of the Aon Corporation 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 Aon Corporation. There are no subsidiaries other than those listed above that guarantee the Aon Corporation Notes.
After the Ireland Reorganization, newly issued and outstanding debt securities by Aon Global Limited are guaranteed by Aon plc, Aon Global Holdings plc, and Aon Corporation, and include the following (collectively, the “Aon Global Limited Notes”):
| Aon Global Limited Notes | ||
| 4.00% Senior Notes due November 2023 | ||
| 3.50% Senior Notes due June 2024 | ||
| 3.875% Senior Notes due December 2025 | ||
| 2.875% Senior Notes due May 2026 | ||
| 4.25% Senior Notes due December 2042 | ||
| 4.45% Senior Notes due May 2043 | ||
| 4.60% Senior Notes due June 2044 | ||
| 4.75% Senior Notes due May 2045 |
All guarantees of Aon plc, Aon Global Holdings plc, and Aon Corporation of the Aon Global Limited 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 Aon Global Limited. There are no subsidiaries other than those listed above that guarantee the Aon Global Limited Notes.
Newly co-issued and outstanding debt securities by Aon Corporation and Aon Global Holdings plc (together, the “Co-Issuers”) are guaranteed by Aon plc and Aon Global Limited and include the following (collectively, the “Co-Issued Notes”):
| Co-Issued Notes - Aon Corporation and Aon Global Holdings plc | ||
| 2.05% Senior Notes due August 2031 | ||
| 2.90% Senior Notes due August 2051 |
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. There are no subsidiaries other than those listed above that guarantee the Co-Issued Notes.
Aon Corporation, Aon Global Limited, and Aon Global Holdings plc are indirect wholly owned subsidiaries of Aon plc. Aon plc, Aon Global Limited, Aon Global Holdings plc, and Aon Corporation together comprise the “Obligor group”. The following tables set forth summarized financial information for the Obligor group.
Adjustments are made to the tables to eliminate intercompany balances and transactions between the Obligor group. Intercompany balances and transactions between the Obligor group and non-guarantor subsidiaries are presented as separate line items within the summarized financial information. These balances are presented on a net presentation basis, rather than a
gross basis, as this better reflects the nature of the intercompany positions and presents the funding or funded position that is to be received or owed. No balances or transactions of non-guarantor subsidiaries are presented in the summarized financial information, including investments of the Obligor group in non-guarantor subsidiaries.
| Obligor Group | ||||||||
| Summarized Statement of Income Information | ||||||||
| Nine Months Ended | ||||||||
| (millions) | September 30, 2021 | |||||||
| Revenue | $ | — | ||||||
| Operating loss | $ | (1,113) | ||||||
| Expense from non-guarantor subsidiaries before income taxes | $ | (535) | ||||||
| Net loss | $ | (1,738) | ||||||
| Net loss attributable to Aon shareholders | $ | (1,738) |
| Obligor Group | |||||||||||
| Summarized Statement of Financial Position Information | |||||||||||
| As of | As of | ||||||||||
| (millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Receivables due from non-guarantor subsidiaries | $ | 4,088 | $ | 1,196 | |||||||
| Other current assets | 491 | 137 | |||||||||
| Total current assets | $ | 4,579 | $ | 1,333 | |||||||
| Non-current receivables due from non-guarantor subsidiaries | $ | 506 | $ | 516 | |||||||
| Other non-current assets | 901 | 894 | |||||||||
| Total non-current assets | $ | 1,407 | $ | 1,410 | |||||||
| Payables to non-guarantor subsidiaries | $ | 17,339 | $ | 15,167 | |||||||
| Other current liabilities | 364 | 1,695 | |||||||||
| Total current liabilities | $ | 17,703 | $ | 16,862 | |||||||
| Non-current payables to non-guarantor subsidiaries | $ | 7,142 | $ | 5,396 | |||||||
| Other non-current liabilities | 9,736 | 8,871 | |||||||||
| Total non-current liabilities | $ | 16,878 | $ | 14,267 |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in our critical accounting policies, which include revenue recognition, pensions, goodwill and other intangible assets, contingencies, share-based payments, and income taxes, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Effective in the third quarter 2021, the Company realigned its solution lines as discussed in Note 1 “Basis of Presentation”. Certain reclassifications of prior period amounts within the solution lines have been made to conform to current presentation.
NEW ACCOUNTING PRONOUNCEMENTS
As described in Note 2 “Accounting Principles and Practices” to our Financial Statements contained in Part I, Item 1, all issued, but not yet effective, guidance has been deemed not applicable or not significant to the Financial Statements.
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