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Aon plc - Quarter Report: 2014 March (Form 10-Q)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED March 31, 2014
 
OR
 
o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 1-7933

Aon plc
(Exact Name of Registrant as Specified in Its Charter)
 
ENGLAND AND WALES
 
98-1030901
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
8 DEVONSHIRE SQUARE, LONDON, ENGLAND
 
EC2M 4PL
(Address of Principal Executive Offices)
 
(Zip Code)
+44 20 7623 5500
(Registrant’s Telephone Number,
Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  ý  NO  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  ý  NO  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o NO ý
 
Number of Class A Ordinary Shares of Aon plc, $0.01 nominal value, outstanding as of March 31, 2014296,483,350
 





PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
Aon plc
Condensed Consolidated Statements of Income
(Unaudited)
 
 
 
Three Months Ended
(millions, except per share data)
 
March 31, 2014
 
March 31, 2013
Revenue
 
 

 
 

Commissions, fees and other
 
$
2,941

 
$
2,908

Fiduciary investment income
 
6

 
7

Total revenue
 
2,947

 
2,915

Expenses
 
 

 
 

Compensation and benefits
 
1,751

 
1,725

Other general expenses
 
727

 
780

Total operating expenses
 
2,478

 
2,505

Operating income
 
469

 
410

Interest income
 
2

 
1

Interest expense
 
(58
)
 
(52
)
Other income
 
1

 
9

Income before income taxes
 
414

 
368

Income taxes
 
78

 
96

Net income
 
336

 
272

Less: Net income attributable to noncontrolling interests
 
11

 
11

Net income attributable to Aon shareholders
 
$
325

 
$
261

 
 
 
 
 
Basic net income per share attributable to Aon shareholders
 
$
1.07

 
$
0.82

Diluted net income per share attributable to Aon shareholders
 
$
1.06

 
$
0.82

Cash dividends per share paid on ordinary shares
 
$
0.18

 
$
0.16

Weighted average ordinary shares outstanding - basic
 
303.5

 
316.4

Weighted average ordinary shares outstanding - diluted
 
307.2

 
320.0

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

2




Aon plc
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
 
Three Months Ended
(millions)
 
March 31, 2014
 
March 31, 2013
Net income
 
$
336

 
$
272

Less: Net income attributable to noncontrolling interests
 
11

 
11

Net income attributable to Aon shareholders
 
325

 
261

Other comprehensive income (loss), net of tax:
 
 

 
 

Change in fair value of investments
 
1

 

Change in fair value of derivatives
 
9

 
(14
)
Foreign currency translation adjustments
 
16

 
(174
)
Post-retirement benefit obligation
 
26

 
23

Total other comprehensive income (loss)
 
52

 
(165
)
Less: Other comprehensive income attributable to noncontrolling interests
 
(2
)
 

Total other comprehensive income (loss) attributable to Aon shareholders
 
54

 
(165
)
Comprehensive income attributable to Aon shareholders
 
$
379

 
$
96

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

3



Aon plc
Condensed Consolidated Statements of Financial Position
 
(millions, except nominal value)
 
Mar 31, 2014
 
Dec 31, 2013
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

CURRENT ASSETS
 
 

 
 

Cash and cash equivalents
 
$
338

 
$
477

Short-term investments
 
340

 
523

Receivables, net
 
2,880

 
2,896

Fiduciary assets
 
12,038

 
11,871

Other current assets
 
577

 
563

Total Current Assets
 
16,173

 
16,330

Goodwill
 
9,030

 
8,997

Intangible assets, net
 
2,500

 
2,578

Fixed assets, net
 
785

 
791

Investments
 
143

 
132

Other non-current assets
 
1,446

 
1,423

TOTAL ASSETS
 
$
30,077

 
$
30,251

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

CURRENT LIABILITIES
 
 

 
 

Fiduciary liabilities
 
$
12,038

 
$
11,871

Short-term debt and current portion of long-term debt
 
1,077

 
703

Accounts payable and accrued liabilities
 
1,499

 
1,931

Other current liabilities
 
967

 
906

Total Current Liabilities
 
15,581

 
15,411

Long-term debt
 
3,669

 
3,686

Pension, other post-retirement and other post-employment liabilities
 
1,573

 
1,607

Other non-current liabilities
 
1,248

 
1,352

TOTAL LIABILITIES
 
22,071

 
22,056

 
 
 
 
 
EQUITY
 
 

 
 

Ordinary shares - $0.01 nominal value
Authorized: 750 shares (issued: 2014 - 296.5; 2013 - 300.7)
 
3

 
3

Additional paid-in capital
 
4,860

 
4,785

Retained earnings
 
5,403

 
5,731

Accumulated other comprehensive loss
 
(2,320
)
 
(2,374
)
TOTAL AON SHAREHOLDERS’ EQUITY
 
7,946

 
8,145

Noncontrolling interests
 
60

 
50

TOTAL EQUITY
 
8,006

 
8,195

TOTAL LIABILITIES AND EQUITY
 
$
30,077

 
$
30,251

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

4



Aon plc
Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited)
 
(millions)
 
Shares
 
Ordinary
Shares and
Additional
Paid-in Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Loss, Net of Tax
 
Non-
controlling
Interests
 
Total
Balance at December 31, 2013
 
300.7

 
$
4,788

 
$
5,731

 
$
(2,374
)
 
$
50

 
$
8,195

Net income
 

 

 
325

 

 
11

 
336

Shares issued - employee benefit plans
 
0.3

 
14

 

 

 

 
14

Shares issued - employee compensation
 
2.7

 
(85
)
 

 

 

 
(85
)
Shares purchased
 
(7.2
)
 

 
(600
)
 

 

 
(600
)
Tax benefit - employee benefit plans
 

 
44

 

 

 

 
44

Share-based compensation expense
 

 
102

 

 

 

 
102

Dividends to shareholders
 

 

 
(53
)
 

 

 
(53
)
Net change in fair value of investments
 

 

 

 
1

 

 
1

Net change in fair value of derivatives
 

 

 

 
9

 

 
9

Net foreign currency translation adjustments
 

 

 

 
18

 
(2
)
 
16

Net post-retirement benefit obligation
 

 

 

 
26

 

 
26

Purchase of subsidiary shares from non-controlling interests
 

 

 

 

 
1

 
1

Dividends paid to non-controlling interests on subsidiary common stock
 

 

 

 

 

 

Balance at March 31, 2014
 
296.5

 
$
4,863

 
$
5,403

 
$
(2,320
)
 
$
60

 
$
8,006

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

5



Aon plc
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Three Months Ended
(millions)
 
March 31, 2014
 
March 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net income
 
$
336

 
$
272

Adjustments to reconcile net income to cash provided by operating activities:
 
 

 
 

Gain from sales of businesses and investments, net
 
(5
)
 

Depreciation of fixed assets
 
60

 
59

Amortization of intangible assets
 
86

 
99

Share-based compensation expense
 
102

 
69

Deferred income taxes
 
10

 
13

Change in assets and liabilities:
 
 

 
 

Fiduciary receivables
 
165

 
(42
)
Short term investments - funds held on behalf of clients
 
(271
)
 
(322
)
Fiduciary liabilities
 
106

 
364

Receivables, net
 
13

 
174

Accounts payable and accrued liabilities
 
(468
)
 
(417
)
Restructuring reserves
 
(40
)
 
(16
)
Current income taxes
 
2

 
(65
)
Pension, other post-retirement and other post-employment liabilities
 
(128
)
 
(196
)
Other assets and liabilities
 
21

 
62

CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES
 
(11
)
 
54

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from sale of long-term investments
 
42

 
18

Purchases of long-term investments
 
(10
)
 
(3
)
Net sales (purchases) of short-term investments - non-fiduciary
 
183

 
(16
)
Acquisition of businesses, net of cash acquired
 
(5
)
 
(2
)
Proceeds from sale of businesses
 
1

 
1

Capital expenditures
 
(55
)
 
(60
)
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES
 
156

 
(62
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Share repurchase
 
(600
)
 
(300
)
Issuance of shares for employee benefit plans
 
26

 
36

Issuance of debt
 
1,195

 
1,150

Repayment of debt
 
(829
)
 
(715
)
Cash dividends to shareholders
 
(53
)
 
(50
)
Purchase of shares from noncontrolling interests
 
1

 
(1
)
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
 
(260
)
 
120

 
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(24
)
 
5

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
(139
)
 
117

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
477

 
291

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
338

 
$
408

 
 
 
 
 
Supplemental disclosures:
 
 

 
 

Interest paid
 
$
64

 
$
32

Income taxes paid, net of refunds
 
$
66

 
$
148

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

6



Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
1.  Basis of Presentation
 
The accompanying unaudited Condensed Consolidated Financial Statements and Notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).  The Condensed Consolidated Financial Statements include the accounts of Aon plc and all controlled subsidiaries (“Aon” or the “Company”).  All intercompany accounts and transactions have been eliminated.  The Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows for all periods presented.
 
Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  The results for the three months ended March 31, 2014 are not necessarily indicative of operating results that may be expected for the full year ending December 31, 2014.
 
Use of Estimates
 
The preparation of the accompanying unaudited Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of reserves and expenses. These estimates and assumptions are based on management’s best estimates and judgments.  Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances.  Aon adjusts such estimates and assumptions when facts and circumstances dictate.  Illiquid credit markets, volatile equity markets, and foreign currency movements increase the uncertainty inherent in such estimates and assumptions.  As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.  Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

2.  Accounting Principles and Practices
 
Changes in Accounting Principles

Discontinued Operations

In April 2014, the Financial Accounting Standards Board ("FASB") issued new accounting guidance that increased the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance is effective for Aon in the first quarter of 2015. The adoption of this guidance is not expected to have a material impact on the Company's Condensed Consolidated Financial Statements.

Presentation of Unrecognized Tax Benefits

In July 2013, the FASB issued guidance on the presentation of certain unrecognized tax benefits on the financial statements. The guidance requires, unless certain conditions exist, an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance is effective for Aon in the first quarter of 2014. The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements.

Foreign Currency

In March 2013, the FASB issued new accounting guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The guidance is effective for Aon in the first quarter of 2014. The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements.


7



3.  Cash and Cash Equivalents and Short-term Investments
 
Cash and cash equivalents include cash balances and all highly liquid investments with initial maturities of three months or less.  Short-term investments include certificates of deposit, money market funds and highly liquid debt instruments purchased with initial maturities in excess of three months but less than one year and are carried at amortized cost, which approximates fair value.
 
The Company is required to hold £77 million of operating funds in the U.K. by the Financial Conduct Authority, a U.K. based regulator, which were included in Short-term investments.  These operating funds, when translated to U.S. dollars, were equal to $128 million and $126 million at March 31, 2014 and December 31, 2013, respectively.  Cash and cash equivalents included restricted balances of $125 million and $88 million at March 31, 2014 and December 31, 2013, respectively. The restricted balances primarily relate to cash required to be held as collateral.

4.  Other Financial Data
 
Condensed Consolidated Statements of Income Information

Other Income

Other income consists of the following (in millions):
 
Three months ended March 31,
 
2014
 
2013
Equity earnings
$
5

 
$
2

(Loss) gain on investments
(1
)
 
1

Foreign currency remeasurement gain
19

 
24

Derivative loss
(23
)
 
(18
)
Other
1

 

 
$
1

 
$
9


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 March 31,
 
2014
 
2013
Balance at beginning of period
$
90

 
$
118

Provision charged to operations
4

 
10

Accounts written off, net of recoveries
(5
)
 
(9
)
Effect of exchange rate changes and other

 
3

Balance at end of period
$
89

 
$
122


Other Current Assets

The components of Other current assets are as follows (in millions):
 
Mar 31, 2014
 
Dec 31, 2013
Prepaid expenses
$
219

 
$
229

Taxes receivable
130

 
111

Deferred project costs
102

 
98

Deferred tax assets
81

 
93

Other
45

 
32

 
$
577

 
$
563


8




Other Non-Current Assets

The components of Other non-current assets are as follows (in millions):
 
Mar 31, 2014
 
Dec 31, 2013
Prepaid pension (1)
$
659

 
$
567

Deferred project costs
259

 
273

Deferred tax assets
180

 
193

Taxes receivable
100

 
108

Other
248

 
282

 
$
1,446

 
$
1,423

  ______________________________________________
(1)
Increase in prepaid pensions is primarily due to cash funding of the U.K. pension plans.

Other Current Liabilities

The components of Other current liabilities are as follows (in millions):
 
Mar 31, 2014
 
Dec 31, 2013
Deferred revenue
$
513

 
$
475

Taxes payable
140

 
136

Deferred tax liabilities
53

 
48

Other
261

 
247

 
$
967

 
$
906


Other Non-Current Liabilities

The components of Other non-current liabilities are as follows (in millions):
 
Mar 31, 2014
 
Dec 31, 2013
Deferred tax liabilities
$
365

 
$
420

Leases
201

 
204

Taxes payable
194

 
184

Deferred revenue
128

 
134

Compensation and benefits
59

 
105

Other
301

 
305

 
$
1,248

 
$
1,352


5.  Acquisitions and Dispositions
 
Acquisitions
 
During the three months ended March 31, 2014, the Company completed the acquisition of one business in the Risk Solutions segment and one business in the HR Solutions segment.  During the three months ended March 31, 2013, the Company completed the acquisition of one business in the HR Solutions segment.
 

9



The following table includes the aggregate consideration transferred and the preliminary value of intangible assets recorded as a result of the Company’s acquisitions (in millions):
 
 
Three months ended March 31,
 
 
2014
 
2013
Consideration
 
$
5

 
$
2

Intangible assets:
 
 

 
 

Goodwill
 
$
4

 
$
2

Other intangible assets
 
4

 
1

     Total
 
$
8

 
$
3

 
The results of operations of these acquisitions are included in the Condensed Consolidated Financial Statements as of the acquisition date.  The results of operations of the Company would not have been materially different if these acquisitions had been reported from the beginning of the period in which they were acquired.
 
Dispositions
 
During the three months ended March 31, 2014, the Company completed the disposition of one business in the Risk Solutions segment. Total pretax gain of $1 million was recognized on this sale, which is included in Other income in the Condensed Consolidated Statements of Income. During the three months ended March 31, 2013, the Company completed the disposition of three businesses in the Risk Solutions segment.  No gain or loss was recognized on these dispositions.

6.  Goodwill and Other Intangible Assets
 
The changes in the net carrying amount of goodwill by reportable segment for the three months ended March 31, 2014 is as follows (in millions):
 
Risk
Solutions
 
HR
Solutions
 
Total
Balance as of December 31, 2013
$
6,020

 
$
2,977

 
$
8,997

Goodwill related to current year acquisitions
2

 
2

 
4

Goodwill related to prior year acquisitions
(1
)
 

 
(1
)
Foreign currency translation
31

 
(1
)
 
30

Balance as of March 31, 2014
$
6,052

 
$
2,978

 
$
9,030


Other intangible assets by asset class are as follows (in millions):
 
March 31, 2014
 
December 31, 2013
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Intangible assets with indefinite lives:
 

 
 

 
 

 
 

 
 

 
 

Tradenames
$
1,019

 
$

 
$
1,019

 
$
1,019

 
$

 
$
1,019

 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets with finite lives:
 

 
 

 
 

 
 

 
 

 
 

Customer related and contract based
2,729

 
1,386

 
1,343

 
2,720

 
1,310

 
1,410

Marketing, technology and other
587

 
449

 
138

 
584

 
435

 
149

 
$
4,335

 
$
1,835

 
$
2,500

 
$
4,323

 
$
1,745

 
$
2,578


Amortization expense from finite lived intangible assets was $86 million and $99 million for the three months ended March 31, 2014 and 2013, respectively.
 

10



The estimated future amortization for finite lived intangible assets as of March 31, 2014 is as follows (in millions):
 
Risk Solutions
 
HR Solutions
 
Total
Remainder of 2014
$
77

 
$
183

 
$
260

2015
83

 
212

 
295

2016
70

 
177

 
247

2017
59

 
141

 
200

2018
47

 
93

 
140

Thereafter
89

 
250

 
339

 
$
425

 
$
1,056

 
$
1,481

 
7.  Restructuring
 
Aon Hewitt Restructuring Plan

On October 14, 2010, the Company announced a global restructuring plan ("Aon Hewitt Plan") in connection with the acquisition of Hewitt. The Aon Hewitt Plan was intended to streamline operations across the combined Aon Hewitt organization. The Company incurred all remaining costs for the Aon Hewitt Plan and the plan was closed in the fourth quarter of 2013. For the three months ended March 31, 2014 no charges were taken under the Aon Hewitt Plan. For the three months ended March 31, 2013, $26 million of restructuring expenses were charged, of which $15 million and $11 million were in the HR Solutions segment and Risk Solutions segment, respectively.

As of December 31, 2013, the remaining liabilities for the Company's restructuring plans were $166 million. During the three months ended March 31, 2014, the Company made cash payments of $40 million, partially offset by foreign exchange translation of $1 million, resulting in restructuring liabilities of $127 million as of March 31, 2014.

8.  Investments
 
The Company earns income on cash balances and investments, as well as on premium trust balances that the Company maintains for premiums collected from insureds but not yet remitted to insurance companies, and funds held under the terms of certain outsourcing agreements to pay certain obligations on behalf of clients.  Premium trust balances and receivables, as well as a corresponding liability, are included in Fiduciary assets and Fiduciary liabilities in the accompanying Condensed Consolidated Statements of Financial Position.
 
The Company’s interest-bearing assets and other investments are included in the following categories in the Condensed Consolidated Statements of Financial Position (in millions):
 
March 31,
2014
 
December 31,
2013
Cash and cash equivalents
$
338

 
$
477

Short-term investments
340

 
523

Fiduciary assets (1)
4,088

 
3,778

Investments
143

 
132

 
$
4,909

 
$
4,910

  ______________________________________________
(1)
Fiduciary assets include funds held on behalf of clients but does not include fiduciary receivables.
 
The Company’s investments are as follows (in millions):
 
March 31,
2014
 
December 31,
2013
Equity method investments
$
127

 
$
113

Other investments
8

 
10

Fixed-maturity securities
8

 
9

 
$
143

 
$
132



11



9.  Debt
 
The Company uses proceeds from the commercial paper market from time to time in order to meet short-term working capital needs and to retire other debt obligations.  At March 31, 2014, the Company had $374 million in commercial paper outstanding compared to no commercial paper outstanding at December 31, 2013. The weighted average commercial paper outstanding for the three months ended March 31, 2014 was $204 million. The weighted average interest rate of the commercial paper outstanding for the three months ended March 31, 2014 was 0.32%.

10.  Income Taxes
 
The effective tax rate on net income was 18.9% and 26.1% for the quarters ended March 31, 2014 and 2013, respectively. The effective tax rate in the first quarter 2014 was favorably impacted by a change in the geographical distribution of income.

11.  Shareholders’ Equity
 
Ordinary Shares
 
In April 2012, the Company’s Board of Directors authorized a share repurchase program under which up to $5.0 billion of Class A Ordinary Shares may be repurchased (“2012 Share Repurchase Program”). Under this program, 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.
 
During the three months ended March 31, 2014, the Company repurchased 7.2 million shares at an average price per share of $83.45 for a total cost of $600 million under the 2012 Share Repurchase Program. During the three months ended March 31, 2013, the Company repurchased 5.0 million shares at an average price per share of $59.82 for a total cost of $300 million under the 2012 Share Repurchase Program. The remaining authorized amount for share repurchase under the 2012 Share Repurchase Program is $2.3 billion. Since the inception of the 2012 Share Repurchase Program, the Company repurchased a total of 43.5 million shares for an aggregate cost of $2.7 billion.
 
Participating Securities
 
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities, as defined, and therefore, should be included in computing basic and diluted earnings per share using the two class method.  Certain of the Company’s restricted share awards allow the holder to receive a non-forfeitable dividend equivalent.
 
Net income attributable to participating securities was $3 million in both the three months ended March 31, 2014 and 2013.

Weighted average shares outstanding are as follows (in millions):
 
Three months ended
March 31,
 
2014
 
2013
Shares for basic earnings per share (1) 
303.5

 
316.4

Common stock equivalents
3.7

 
3.6

Shares for diluted earnings per share
307.2

 
320.0

   ______________________________________________
(1) Includes 3.4 million and 4.2 million of participating securities for the three months ended March 31, 2014 and 2013, respectively.
 
Certain ordinary share equivalents were not included in the computation of diluted net income per share because their inclusion would have been antidilutive. There were no shares excluded from the calculation for the three months ended March 31, 2014. The number of shares excluded from the calculation was 0.2 million for the three months ended March 31, 2013.
 

12



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 Investments (1)
 
Change in Fair Value of Derivatives (1)
 
Foreign Currency Translation Adjustments
 
Post-Retirement Benefit Obligation (2)
 
Total
Balance at December 31, 2013
$
1

 
$
(22
)
 
$
169

 
$
(2,522
)
 
$
(2,374
)
Other comprehensive income (loss) before reclassifications, net
1

 

 
18

 

 
19

Amounts reclassified from accumulated other comprehensive loss:
 
 


 


 


 


Amounts reclassified from accumulated other comprehensive loss

 
14

 

 
36

 
50

Tax benefit

 
(5
)
 

 
(10
)
 
(15
)
Amounts reclassified from accumulated other comprehensive loss, net

 
9

 

 
26

 
35

Net current period other comprehensive (loss) income
1

 
9

 
18

 
26

 
54

Balance at March 31, 2014
$
2

 
$
(13
)
 
$
187

 
$
(2,496
)
 
$
(2,320
)
______________________________________________
(1) Reclassifications from this category included in Accumulated other comprehensive loss are recorded in Other income
(2) Reclassifications from this category included in Accumulated other comprehensive loss are recorded in Compensation and benefits

12.  Employee Benefits
 
The following table provides the components of the net periodic benefit cost for Aon’s material U.K., U.S., and other significant international pension plans, which are located in the Netherlands and Canada (in millions):
 
Three months ended March 31,
 
U.K.
 
U.S.
 
Other
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$

 
$

 
$

 
$

 
$

 
$
5

Interest cost
58

 
53

 
32

 
28

 
12

 
11

Expected return on plan assets
(82
)
 
(75
)
 
(39
)
 
(34
)
 
(15
)
 
(15
)
Amortization of net actuarial loss
13

 
12

 
10

 
13

 
2

 
6

Net periodic (benefit) cost
(11
)
 
(10
)
 
3

 
7

 
(1
)
 
7

Curtailment loss (gain) and other

 

 
1

 

 
(3
)
 

Total net periodic benefit cost
$
(11
)

$
(10
)

$
4


$
7


$
(4
)

$
7


Based on current assumptions, in 2014, Aon plans to contribute $185 million, $173 million, and $27 million to its U.K., U.S., and other significant international pension plans, respectively. During the three months ended March 31, 2014, contributions of $65 million, $40 million, and $12 million were made to the Company's U.K., U.S. and other significant international pension plans, respectively.
 

13



13.  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 March 31,
 
2014
 
2013
Restricted share units (“RSUs”)
$
60

 
$
55

Performance share awards (“PSAs”)
39

 
11

Share options

 
1

Employee share purchase plans
3

 
2

Total share-based compensation expense
$
102

 
$
69

 
Restricted Share Units
 
A summary of the status of the Company’s RSUs is as follows (shares in thousands):
 
Three months ended March 31,
 
2014
 
2013
 
Shares
 
Fair Value (1)
 
Shares
 
Fair Value (1)
Non-vested at beginning of period
9,759

 
$
51

 
10,432

 
$
44

Granted
1,146

 
83

 
1,764

 
60

Vested
(1,950
)
 
51

 
(2,080
)
 
46

Forfeited
(125
)
 
50

 
(128
)
 
44

Non-vested at end of period
8,830

 
56

 
9,988

 
47

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

Performance Share Awards

The vesting of PSAs is contingent upon meeting a level of earnings per share performance over a three-year period. The performance conditions are not considered in the determination of the grant date fair value for these awards. The fair value of PSAs is based upon the market price of an Aon ordinary share at the date of grant. Compensation expense is recognized over the performance period based on management's estimate of the number of units expected to vest. Compensation expense is adjusted to reflect the actual number of shares issued at the end of the programs. The actual issue 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. Dividend equivalents are not paid on PSAs.

Information as of March 31, 2014 regarding the Company’s target PSAs granted and shares that would be issued at current performance levels for PSAs granted during the three months ended March 31, 2014 and the years ended December 31, 2013 and 2012, respectively, is as follows (shares in thousands, dollars in millions, except fair value):
 
As of March 31, 2014
 
As of December 31, 2013
 
As of December 31, 2012
Target PSAs granted
816

 
1,135

 
1,369

Fair value (1)
$
81

 
$
58

 
$
47

Number of shares that would be issued based on current performance levels
816

 
2,243

 
2,682

Unamortized expense, based on current performance levels
$
65

 
$
82

 
$
34

 ______________________________________________
(1)
Represents per share weighted average fair value of award at date of grant.
 
Share Options
 
The Company did not grant any share options during the three months ended March 31, 2014 or 2013, respectively.
 

14



A summary of the status of the Company’s share options and related information is as follows (shares in thousands):
 
Three months ended March 31,
 
2014
 
2013
 
Shares
 
Weighted- Average
Exercise Price
 
Shares
 
Weighted- Average
Exercise Price
Beginning outstanding
3,462

 
$
32

 
5,611

 
$
32

Granted

 

 

 

Exercised
(416
)
 
33

 
(610
)
 
31

Forfeited and expired
(2
)
 
36

 
(10
)
 
33

Outstanding at end of period
3,044

 
32

 
4,991

 
32

Exercisable at end of period
2,928

 
32

 
4,579

 
32

 
The weighted average remaining contractual life, in years, of outstanding options was 2.0 years and 2.5 years at March 31, 2014 and 2013, respectively.
 
The aggregate intrinsic value represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing share price of $84.28 as of March 31, 2014, which would have been received by the option holders had those option holders exercised their options as of that date.  At March 31, 2014, the aggregate intrinsic value of options outstanding was $159 million, of which $154 million was exercisable.
 
Other information related to the Company’s share options is as follows (in millions):
 
Three months ended March 31,
 
2014
 
2013
Aggregate intrinsic value of stock options exercised
$
21

 
$
17

Cash received from the exercise of stock options
14

 
20

Tax benefit realized from the exercise of stock options
6

 
3

 
Unamortized deferred compensation expense, which includes both options and awards, amounted to $365 million as of March 31, 2014, with a remaining weighted-average amortization period of approximately 2.0 years.

14.  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 receives revenues, pays expenses, or enters into intercompany loans denominated in a currency that differs from its functional currency, or other transactions that are denominated in a currency other than 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; however, in limited instances, the Company has hedged certain exposures up to five years in the future.
 
The Company also uses foreign exchange derivatives, typically forward contracts and options, to hedge its net investments in foreign operations for up to two years in the future.
 
The Company also uses foreign exchange derivatives, typically forward contracts and options, to manage 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, for up to one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other income in the Condensed Consolidated Statements of Income.
 
Interest Rate Risk Management
 
The Company holds variable-rate short-term brokerage and other operating deposits. The Company uses interest rate derivatives, typically swaps, to reduce its exposure to the effects of interest rate fluctuations on the forecasted interest receipts

15



from these deposits for up to two years in the future.
 
Certain derivatives also give rise to credit risks from the possible non-performance by counterparties.  The credit risk at the balance sheet date is generally limited to the fair value of those contracts that are favorable to the Company.  The Company has reduced its credit risk by using International Swaps and Derivatives Association (“ISDA”) master agreements, collateral and credit support arrangements, entering into non-exchange-traded derivatives with highly-rated major financial institutions and by using exchange-traded instruments.  The Company monitors the creditworthiness of, and exposure to, its counterparties.  As of March 31, 2014, all net derivative positions were free of credit risk contingent features.  The Company has not received or pledged any collateral related to derivative arrangements as of March 31, 2014.
 
The notional and fair values of derivative instruments are as follows (in millions):
 
Notional Amount
 
Derivative Assets (1)
 
Derivative Liabilities (2)
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
Derivatives accounted for as hedges:
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$
172

 
$
171

 
$
9

 
$
9

 
$

 
$

Foreign exchange contracts
1,223

 
1,191

 
73

 
71

 
94

 
93

Total
1,395

 
1,362

 
82

 
80

 
94

 
93

Derivatives not accounted for as hedges:
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange contracts
177

 
215

 

 

 

 

   Total
$
1,572

 
$
1,577

 
$
82

 
$
80

 
$
94

 
$
93

______________________________________________
(1)
Included within Other current assets ($49 million and $46 million at March 31, 2014 and December 31, 2013, respectively) or Other non-current assets ($33 million and $34 million at March 31, 2014 and December 31, 2013, respectively)
(2)
Included within Other current liabilities ($18 million and $51 million at March 31, 2014 and December 31, 2013, respectively) or Other non-current liabilities ($76 million and $42 million at March 31, 2014 and December 31, 2013, respectively)

Offsetting of financial assets and derivatives assets are as follows (in millions):
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets Presented in the Statement of Financial Position (1)
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
Derivatives accounted for as hedges:
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$
9

 
$
9

 
$

 
$

 
$
9

 
$
9

Foreign exchange contracts
73

 
71

 
(24
)
 
(30
)
 
49

 
41

Total
82

 
80

 
(24
)
 
(30
)
 
58

 
50

Derivatives not accounted for as hedges:
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange contracts

 

 

 

 

 

   Total
$
82

 
$
80

 
$
(24
)
 
$
(30
)
 
$
58

 
$
50

______________________________________________
(1) Included within Other current assets ($21 million and $18 million at March 31, 2014 and December 31, 2013, respectively) or Other non-current assets ($37 million and $32 million at March 31, 2014 and December 31, 2013, respectively)


16



Offsetting of financial liabilities and derivative liabilities are as follows (in millions):
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Liabilities Presented in the Statement of Financial Position (2)
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
Derivatives accounted for as hedges:
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$

 
$

 
$

 
$

 
$

 
$

Foreign exchange contracts
94

 
93

 
(24
)
 
(30
)
 
70

 
63

Total
94

 
93

 
(24
)
 
(30
)
 
70

 
63

Derivatives not accounted for as hedges:
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange contracts

 

 

 

 

 

   Total
$
94

 
$
93

 
$
(24
)
 
$
(30
)
 
$
70

 
$
63

______________________________________________
(2) Included within Other current liabilities ($18 million and $23 million at March 31, 2014 and December 31, 2013, respectively) or Other non-current liabilities ($52 million and $40 million at March 31, 2014 and December 31, 2013, respectively)

The amounts of derivative gains (losses) recognized in the Condensed Consolidated Financial Statements for the three months ended March 31, 2014 and 2013 are as follows (in millions):
 
Three months ended March 31,
Gain (Loss) recognized in Accumulated Other Comprehensive Loss:
2014
 
2013
Cash flow hedges:
 

 
 

Interest rate contracts (1)
$

 
$

Foreign exchange contracts (2)
(8
)
 
(29
)
Total
$
(8
)
 
$
(29
)
Foreign net investment hedges:
 

 
 

Foreign exchange contracts
$

 
$

 ______________________________________________
(1) Location of future reclassification from Accumulated Other Comprehensive Loss will be included within Interest Expense
(2) Location of future reclassification from Accumulated Other Comprehensive Loss will be included within Compensation and benefits ($11 million and $4 million gain for the three months ended March 31, 2014 and 2013, respectively), and Other income ($19 million and $33 million loss for the three months ended March 31, 2014 and 2013, respectively)
Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion):
Three months ended March 31,
2014
 
2013
Cash flow hedges:
 

 
 

Interest rate contracts (1)
$

 
$

Foreign exchange contracts (2)
(21
)
 
(11
)
Total
(21
)
 
(11
)
Foreign net investment hedges:
 

 
 

Foreign exchange contracts
$

 
$

 ______________________________________________
(1) Included within Interest Expense
(2) Included within Compensation and benefits ($3 million and $1 million loss for the three months ended March 31, 2014 and 2013, respectively), Other general expenses ($1 million loss for the three months ended March 31, 2013), and Other income ($18 million and $9 million loss for the three months ended March 31, 2014 and 2013, respectively)

17




The amount of gain (loss) recognized in the Condensed Consolidated Financial Statements is as follows (in millions):
 
Three months ended March 31,
 
Amount of Gain (Loss) Recognized in Income on Derivative (2)
 
Amount of Gain (Loss) Recognized in Income on Related Hedged Item
 
2014
 
2013
 
2014
 
2013
Fair value hedges:
 

 
 

 
 

 
 

Foreign exchange contracts (1)
$

 
$
(1
)
 
$

 
$
1

  ______________________________________________
(1) Relates to fixed rate debt
(2) Included in Interest expense
 
The Company estimates that approximately $15 million of pretax losses currently included within Accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.
 
The amount of gain (loss) recognized in income on the ineffective portion of derivatives for the three months ended March 31, 2014 and 2013 was not material.
 
During the three months ended March 31, 2014 and 2013, the Company recorded a loss of $5 million and $9 million, respectively, in Other income for foreign exchange derivatives not designated or qualifying as hedges.
 
15.  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 and highly liquid debt securities are carried at cost and amortized cost, respectively, as an approximation of fair value. Based on market convention, the Company considers cost a practical and expedient measure of fair value.
 
Cash, cash equivalents, and highly liquid debt instruments consist of cash and institutional short-term investment funds. The Company independently reviews the short-term investment funds to obtain reasonable assurance the fund net asset value is $1 per share.
 
Equity investments consist of domestic and international equity securities and exchange traded 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 equity security and volatility. The Company independently reviews the listing of Level 1 equity securities in the portfolio and agrees the closing stock prices to a national securities exchange, and on a sample basis, 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 a detailed understanding of the models, inputs, and assumptions used in developing prices provided by its vendors. This understanding includes discussions with valuation resources at the vendor. During these discussions, the Company uses a fair value measurement questionnaire, which is part of the Company’s internal controls over financial reporting, to obtain the information necessary to assert the model, inputs and assumptions used comply

18



with U.S. GAAP, including disclosure requirements. The Company also obtains observable inputs from the pricing vendor and 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 the Company’s guidelines, it is then reviewed by a member of management and the fair value estimate provided by the vendor is adjusted, if deemed appropriate. These adjustments do not occur frequently and have not historically been material to the fair value estimates used in the Condensed Consolidated Financial Statements.
 
Pooled funds consist of various equity, fixed income, commodity, and real estate mutual fund type investment vehicles. Pooled investment funds fair value is estimated based on the proportionate share ownership in the underlying net assets of the investment, which is based on the fair value of the underlying securities that trade on a national securities exchange. Where possible, the Company independently reviews the listing securities in the portfolio and agrees the closing stock prices to a national securities exchange. The Company gains an understanding of the investment guidelines and valuation policies of the fund and discusses fund performance with pooled fund managers. The Company obtains audited fund manager financial statements, when available. If the pooled fund is designed to replicate a publicly traded index, the Company compares the performance of the fund to the index to assess the reasonableness of the fair value measurement.
 
Alternative investments consist of limited partnerships, private equity and hedge funds. Alternative investment fair value is generally estimated based on the proportionate share ownership in the underlying net assets of the investment as determined by the general partner or investment manager. The valuations are based on various factors depending on investment strategy, proprietary models, and specific financial data or projections. The Company obtains audited fund manager financial statements, when available. The Company obtains a detailed understanding of the models, inputs and assumptions used in developing prices provided by the investment managers (or appropriate party) through regular discussions. During these discussions with the investment managers, the Company uses a fair value measurement questionnaire, which is part of the Company’s internal controls over financial reporting, to obtain the information necessary to assert the model, inputs and assumptions used comply with U.S. GAAP, including disclosure requirements. The Company also obtains observable inputs from the investment manager and 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 the Company’s guidelines, it is then reviewed by a member of management and the fair value estimate provided by the vendor is adjusted, if deemed appropriate. These adjustments do not occur frequently and have not historically been material to the fair value estimates in the Condensed Consolidated Financial Statements.
 
Derivatives are carried at fair value, based upon industry standard valuation techniques that use, where possible, current market-based or independently sourced pricing inputs, such as interest rates, currency exchange rates, or implied volatilities.
 
Annuity contracts consist of insurance group annuity contracts purchased to match the pension benefit payment stream owed to certain selected plan participant demographics within a few major United Kingdom defined benefit plans. Annuity contracts are valued using a discounted cash flow model utilizing assumptions such as discount rate, mortality, and inflation. The Company independently verifies the observable inputs.
 
Real estate and REITs consist of publicly traded real estate investment trusts ("REITs") and direct real estate investments. Level 1 REITs are valued using the closing stock price on a national securities exchange. The Level 3 values are based on the proportionate share of ownership in the underlying net asset value as determined by the investment manager. The Company independently reviews the listing of Level 1 REIT securities in the portfolio and agrees the closing stock prices to a national securities exchange. The Company gains an understanding of the investment guidelines and valuation policies of the Level 3 real estate funds and discusses performance with the fund managers. The Company obtains audited fund manager financial statements, when available. See the description of “Alternative investments” for further detail on valuation procedures surrounding Level 3 REITs.
 
Guarantees are carried at fair value, which is based on discounted estimated cash flows using published historical cumulative default rates and discount rates commensurate with the underlying exposure.
 
Debt is carried at outstanding principal balance, less any unamortized 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.
 

19



The following tables present the categorization of the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2014 and December 31, 2013 (in millions):
 
 
 
Fair Value Measurements Using
 
Balance at March 31, 2014
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets:
 

 
 

 
 

 
 

Money market funds and highly liquid debt securities (1)
$
2,086

 
$
2,061

 
$
25

 
$

Other investments:
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

Corporate bonds
1

 

 

 
1

Government bonds
7

 

 
7

 

Equity securities
15

 
6

 
9

 

Derivatives:
 

 
 

 
 

 
 

Interest rate contracts
9

 

 
9

 

Foreign exchange contracts
73

 

 
73

 

Liabilities:
 

 
 

 
 

 
 

Derivatives:
 

 
 

 
 

 
 

Foreign exchange contracts
94

 

 
94

 

  ______________________________________________
(1) Includes $2,061 million of money market funds and $25 million of highly liquid debt securities that are classified as Fiduciary assets, Short-term investments or Cash and cash equivalents in the Condensed Consolidated Statements of Financial Position, depending on their nature and initial maturity.  See Note 8 “Investments” for additional information regarding the Company’s investments.
 
 
 
Fair Value Measurements Using
 
Balance at December 31, 2013
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets:
 

 
 

 
 

 
 

Money market funds and highly liquid debt securities (1)
$
2,079

 
$
2,054

 
$
25

 
$

Other investments:
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

Corporate bonds
2

 

 

 
2

Government bonds
7

 

 
7

 

Equity securities
13

 
6

 
7

 

Derivatives:
 

 
 

 
 

 
 

Interest rate contracts
9

 

 
9

 

Foreign exchange contracts
71

 

 
71

 

Liabilities:
 

 
 

 
 

 
 

Derivatives:
 

 
 

 
 

 
 

Foreign exchange contracts
93

 

 
93

 

  ______________________________________________
(1)  Includes $2,054 million of money market funds and $25 million of highly liquid debt securities that are classified as Fiduciary assets, Short-term investments or Cash and cash equivalents in the Condensed Consolidated Statements of Financial Position, depending on their nature and initial maturity.  See Note 8 “Investments” for additional information regarding the Company’s investments.
 
There were no transfers of assets or liabilities between fair value hierarchy levels in the three months ended March 31, 2014 and 2013, respectively. There were no realized or unrealized gains or losses recognized in the Condensed Consolidated Statements of Income during either the three months ended March 31, 2014 or 2013, related to assets and liabilities measured at fair value using unobservable inputs.
 

20



The fair value of Long-term debt is classified as Level 2 of the fair value hierarchy. The following table discloses the Company’s financial instruments where the carrying amounts and fair values differ (in millions):
 
March 31, 2014
 
December 31, 2013
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Long-term debt
$
3,669

 
$
3,966

 
$
3,686

 
$
3,894


16.  Commitments and Contingencies
 
Legal
 
Aon and its subsidiaries are subject to numerous claims, tax assessments, lawsuits and proceedings that arise in the ordinary course of business, which frequently include errors and omissions (“E&O”) claims. The damages claimed in these matters are or may be substantial, including, in many instances, claims for punitive, treble or extraordinary damages. Aon has historically purchased E&O insurance and other insurance to provide protection against certain losses that arise in such matters. Aon has exhausted or materially depleted its coverage under some of the policies that protect the Company and, consequently, is self-insured or materially self-insured for some historical claims. Accruals for these exposures and legal fees, and related insurance receivables, when applicable, have been provided to the extent that losses are deemed probable and are reasonably estimable. These amounts are adjusted from time to time as developments warrant. Amounts related to settlement provisions are recorded in Other general expenses in the Condensed Consolidated Statements of Income.
 
A retail insurance brokerage subsidiary of Aon provides insurance brokerage services to Northrop Grumman Corporation (“Northrop”). This Aon subsidiary placed Northrop’s excess property insurance program for the period covering 2005. Northrop suffered a substantial loss in August 2005 when Hurricane Katrina damaged Northrop’s facilities in the Gulf states. Northrop’s excess insurance carrier, Factory Mutual Insurance Company (“Factory Mutual”), denied coverage for the claim pursuant to a flood exclusion. Northrop sued Factory Mutual in the United States District Court for the Central District of California and later sought to add this Aon subsidiary as a defendant, asserting that if Northrop’s policy with Factory Mutual does not cover the losses suffered by Northrop stemming from Hurricane Katrina, then this Aon subsidiary will be responsible for Northrop’s losses. On August 26, 2010, the court granted in large part Factory Mutual’s motion for partial summary judgment regarding the applicability of the flood exclusion and denied Northrop’s motion to add this Aon subsidiary as a defendant in the federal lawsuit. On January 27, 2011, Northrop filed suit against this Aon subsidiary in state court in Los Angeles, California, pleading claims for negligence, breach of contract and negligent misrepresentation. Northrop has since settled with Factory Mutual. Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims. The outcome of this lawsuit, and the amount of any losses or other payments that may result, cannot be estimated at this time.

Another retail insurance brokerage subsidiary of Aon has been sued in Tennessee state court by a client, Opry Mills Mall Limited Partnership (“Opry Mills”) that sustained flood damage to its property in May 2010. The lawsuit seeks $200 million from numerous insurers with whom this Aon subsidiary placed the client’s property insurance coverage. The insurers contend that only $50 million in coverage is available for the loss because the flood event occurred on property in a high hazard flood zone. Opry Mills is seeking full coverage from the insurers for the loss and has sued this Aon subsidiary in the alternative for the same $150 million difference on various theories of professional liability if the court determines there is not full coverage. In addition, Opry Mills seeks prejudgment interest, attorneys' fees and enhanced damages which could substantially increase Aon's exposure. Aon believes it has meritorious defenses and intends to vigorously defend itself against these claims. The outcome of this lawsuit, and the amount of any losses or other payments that may result, cannot be estimated at this time.
 
A pensions consulting and administration subsidiary of Hewitt before its acquisition by Aon provided advisory services to the Trustees of the Philips UK pension fund and the relevant employer of fund beneficiaries (together, “Philips”). In January 2014, the Aon subsidiary was served with a High Court lawsuit alleging negligence and breach of duty. The proceedings assert Philips' right to claim damages related to Philips' use of a credit default swap hedging strategy pursuant to the supply of the advisory services, which is said to have resulted in substantial damages to Philips. Aon believes that it has meritorious defenses and intends to vigorously defend itself against these allegations. The outcome of this lawsuit, and the amount of any losses or other payments that may result, cannot be estimated at this time.

Mazeikiu Nafta ("MN"), which operates an oil refinery in Lithuania, has sued an insurance brokerage subsidiary of Aon in London. Aon placed property damage and business interruption coverage for MN. There was a fire at the refinery in 2006. MN settled with insurers in November 2011 and claimed against Aon in December 2012. The claim is for $125 million, which is the shortfall alleged by MN to have been caused by Aon's failure to obtain appropriate business interruption coverage. Aon

21



believes that it has meritorious defenses and intends to vigorously defend itself against these allegations. The outcome of this lawsuit, and the amount of any losses or other payments that may result, cannot be estimated at this time.

The International Road Transport Union ("IRU") sued Aon in a court in Switzerland. IRU alleges, among other things, that, between 1995 and 2004, a predecessor of Aon and, later, an Aon subsidiary (1) accepted commissions for certain insurance placements that violated a fee agreement entered between the parties and (2) negligently failed to ask certain insurance carriers to contribute to the IRU's risk management costs.  Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims.  The outcome of these proceedings, and the amount of any losses or other payments that may result, cannot be estimated at this time.

AXA Versicherung Aktiengesellschaft ("AXA") started arbitral proceedings against an insurance and reinsurance brokerage subsidiary of Aon in Germany.  Predecessors of AXA granted predecessors of the Aon subsidiary a mandate to underwrite non-proportional reinsurance business from 1975 through 1999. AXA alleges, among other things, that the Aon-related entities intentionally exceeded their mandate and that, if AXA had known of this intention, it would not have granted a mandate.  Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims.  The outcome of these proceedings, and the amount of any losses or other payments that may result, cannot be estimated at this time.

From time to time, Aon’s clients may bring claims and take legal action pertaining to the performance of fiduciary responsibilities. Whether client claims and legal action related to the Company’s performance of fiduciary responsibilities are founded or unfounded, if such claims and legal actions are resolved in a manner unfavorable to the Company, they may adversely affect Aon’s financial results and materially impair the market perception of the Company and that of its products and services.
 
Although the ultimate outcome of all matters referred to above cannot be ascertained, and liabilities in indeterminate amounts may be imposed on Aon or its subsidiaries, on the basis of present information, amounts already provided, availability of insurance coverages and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the consolidated financial position of Aon. However, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by an unfavorable resolution of these matters.
 
Guarantees and Indemnifications
 
In connection with the redomicile of Aon's headquarters ("the Redomestication"), the Company on April 2, 2012 entered 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 as of April 2, 2012, among Aon Corporation, Aon plc, and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) (amending and restating the Indenture, dated as of September 10, 2010, between Aon Corporation and the Trustee), (2) Amended and Restated Indenture, dated as of April 2, 2012, among Aon Corporation, Aon plc and the Trustee (amending and restating the Indenture, dated as of December 16, 2002, between Aon Corporation and the Trustee), (3) Amended and Restated Indenture, dated as of April 2, 2012, among Aon Corporation, Aon plc and the Trustee (amending and restating the Indenture, dated as of January 13, 1997, as supplemented by the First Supplemental Indenture, dated as of January 13, 1997) (4) First Supplemental Indenture, dated as of April 2, 2012, among Aon Finance N.S. 1, ULC, as issuer, Aon Corporation, as guarantor, Aon plc, as guarantor, and Computershare Trust Company of Canada, as trustee, and (5) Amended and Restated Trust Deed, among Aon Corporation, Aon plc, Aon Services Luxembourg & Co S.C.A. (formerly known as Aon Financial Services Luxembourg S.A.) (“Aon Luxembourg”) and BNY Mellon Corporate Trustee Services Limited, as trustee (the “Luxembourg Trustee”) (amending and restating the Trust Deed, dated as of July 1, 2009, as amended and restated on January 12, 2011, among Aon Delaware, Aon Luxembourg and the Luxembourg Trustee).
 
Effective as of the same date, the Company also entered into agreements pursuant to which it agreed to guarantee the obligations of its subsidiaries arising under the (1) $450,000,000 Term Credit Agreement dated June 15, 2011, among Aon Corporation, as borrower, Bank of America, N.A., as administrative agent and the other agents and lenders party thereto, (2) $400,000,000 Five-Year Agreement dated March 20, 2012, among Aon Corporation, as borrower, Citibank, N.A., as administrative agent and the other agents and lenders party thereto and (3) €650,000,000 Facility Agreement, dated October 15, 2010, among Aon Corporation, the subsidiaries of Aon Corporation party thereto as borrowers, Citibank International plc, as agent, and the other agents and lenders party thereto, as amended on July 18, 2011.
 
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

22



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 Company’s Condensed Consolidated 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.

Letters of Credit
 
The Company had total letters of credit (“LOCs”) outstanding for approximately $66 million at March 31, 2014, compared to $71 million at December 31, 2013. These letters of credit 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 issued LOCs to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at its international subsidiaries. Amounts are accrued in the Condensed Consolidated Financial Statements, and are recorded at fair value.
 
Commitments

The Company has provided commitments to fund certain limited partnerships in which it has an interest in the event that the general partners request funding. Some of these commitments have specific expiration dates and the maximum potential funding under these commitments was $24 million at March 31, 2014 compared to $34 million at December 31, 2013. During the three months ended March 31, 2014, the Company funded $10 million of these commitments.
 
Premium Payments

The Company has certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. Costs associated with these guarantees, to the extent estimable and probable, are provided in Aon’s allowance for doubtful accounts. The maximum exposure with respect to such contractual contingent guarantees was approximately $64 million at March 31, 2014 compared to $98 million at December 31, 2013.
 
17. Segment Information
 
The Company has two reportable segments:  Risk Solutions and HR Solutions.  Unallocated income and expenses, when combined with the operating segments and after the elimination of intersegment revenues and expenses, equal the amounts in the Condensed Consolidated Financial Statements.
 
Reportable operating segments have been determined using a management approach, which is consistent with the basis and manner in which Aon’s chief operating decision-maker (“CODM”) uses financial information for the purposes of allocating resources and evaluating performance.  The CODM assesses performance based on operating income and generally accounts for inter-segment revenue as if the revenue were from third parties and at what management believes are current market prices.  The Company does not present net assets by segment as this information is not reviewed by the CODM.
 
Risk Solutions acts as an advisor and insurance and reinsurance broker, helping clients manage their risks, via consultation, as well as negotiation and placement of insurance risk with insurance carriers through Aon’s global distribution network.
 
HR Solutions partners with organizations to solve their most complex benefits, talent and related financial challenges, and improve business performance by designing, implementing, communicating and administering a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies.
  
Aon’s total revenue is as follows (in millions):
 
Three months ended March 31,
 
2014

2013
Risk Solutions
$
1,994


$
1,971

HR Solutions
965


954

Intersegment eliminations
(12
)

(10
)
Total revenue
$
2,947


$
2,915



23



Commissions, fees and other revenues by product are as follows (in millions):
 
Three months ended March 31,
 
2014
 
2013
Retail brokerage
$
1,579

 
$
1,562

Reinsurance brokerage
409

 
402

Total Risk Solutions Segment
1,988

 
1,964

Consulting services
384

 
382

Outsourcing
589

 
581

Intrasegment
(8
)
 
(9
)
Total HR Solutions Segment
965

 
954

Intersegment
(12
)
 
(10
)
Total commissions, fees and other revenue
$
2,941

 
$
2,908

 
Fiduciary investment income by segment is as follows (in millions):
 
Three months ended March 31,
 
2014
 
2013
Risk Solutions
$
6

 
$
7

HR Solutions

 

Total fiduciary investment income
$
6

 
$
7

 
A reconciliation of segment operating income before tax to income before income taxes is as follows (in millions):
 
Three months ended March 31,
 
2014
 
2013
Risk Solutions
$
445

 
$
403

HR Solutions
67

 
51

Segment income before income taxes
512

 
454

Unallocated expenses
(43
)
 
(44
)
Interest income
2

 
1

Interest expense
(58
)
 
(52
)
Other income
1

 
9

Income before income taxes
$
414

 
$
368

 
Unallocated expenses include administrative or other costs not attributable to the operating segments, such as corporate governance costs. Interest income represents income earned primarily on operating cash balances and certain income producing securities. Interest expense represents the cost of debt obligations.
 
Other income consists of equity earnings, realized gains or losses on the sale of investments, gains or losses on the disposal of businesses, gains or losses on derivatives, and gains or losses on foreign currency transactions.
 
18.  Guarantee of Registered Securities
 
As described in Note 16, in connection with the Redomestication, Aon plc entered into various agreements pursuant to which it agreed to guarantee the obligations of Aon Corporation arising under issued and outstanding debt securities. Aon Corporation is a 100% directly owned subsidiary of Aon plc. The debt securities that are subject to Rule 3-10 of Regulation S-X are the 3.50% senior notes due September 2015, the 3.125% senior notes due May 2016, the 5.00% senior notes due September 2020, the 8.205% junior subordinated deferrable interest debentures due January 2027 and the 6.25% senior notes due September 2040. All guarantees of Aon plc are full and unconditional. There are no other subsidiaries of Aon plc that are guarantors of the debt.

Aon Corporation entered into an agreement pursuant to which it agreed to guarantee the obligations of Aon plc arising under the 4.250% Notes Due 2042 exchanged for Aon Corporation's outstanding 8.205% junior subordinated deferrable interest debentures due January 2027 in both Original Notes and Exchange Notes form. Those notes are subject to Rule 3-10 of Regulation S-X. Aon Corporation also agreed to guarantee the obligations of Aon plc arising under the 4.45% Notes Due 2043 issued on May 21, 2013 and the 4.00% Notes Due November 2023 issued on November 21, 2013. In each case, the guarantee

24



of Aon Corporation is full and unconditional. There are no subsidiaries of Aon plc, other than Aon Corporation, that are guarantors of the 4.250% Notes Due 2042, the 4.45% Notes Due 2043 or the 4.00% Notes Due 2023.
 
The following tables set forth condensed consolidating statements of income for the three months ended March 31, 2014 and 2013, condensed consolidating statements of comprehensive income for the three months ended March 31, 2014 and 2013, condensed consolidating statements of financial position as of March 31, 2014 and December 31, 2013, and condensed consolidating statements of cash flows for the three months ended March 31, 2014 and 2013 in accordance with Rule 3-10 of Regulation S-X. The condensed consolidating financial information includes the accounts of Aon plc, the accounts of Aon Corporation, and the combined accounts of the non-guarantor subsidiaries. The condensed consolidating financial statements are presented in all periods as a merger under common control, with Aon plc presented as the parent company in all periods prior and subsequent to the Redomestication. The principal consolidating adjustments are to eliminate the investment in subsidiaries and intercompany balances and transactions.

In July 2013, Aon Holdings LLC, an intermediate holding company and the then-direct parent of Aon Corporation, transferred its ownership of Aon Corporation to Aon plc via distribution. The financial results of Aon Holdings LLC were included in the Other Non-Guarantor Subsidiaries column of the Condensed Consolidating Financial Statements. The Company has reflected the transfer of Aon Corporation from Aon Holdings LLC to Aon plc below for all periods presented.

Condensed Consolidating Statement of Income
 
 
Three months ended March 31, 2014
 
 
 
 
 
 
Other
 
 
 
 
 
 
Aon
 
Aon
 
Non-Guarantor
 
Consolidating
 
 
(millions)
 
plc
 
Corporation
 
Subsidiaries
 
Adjustments
 
Consolidated
Revenue
 
 
 
 
 
 
 
 
 
 
Commissions, fees and other
 
$
1

 
$

 
$
2,940

 
$

 
$
2,941

Fiduciary investment income
 

 

 
6

 

 
6

Total revenue
 
1

 

 
2,946

 

 
2,947

Expenses
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
12

 
8

 
1,731

 

 
1,751

Other general expenses
 
7

 
17

 
703

 

 
727

Total operating expenses
 
19

 
25

 
2,434

 

 
2,478

Operating (loss) income
 
(18
)
 
(25
)
 
512

 

 
469

Interest income
 
(2
)
 

 
4

 

 
2

Interest expense
 
(9
)
 
(31
)
 
(18
)
 

 
(58
)
Intercompany interest income (expense)
 
111

 
(74
)
 
(37
)
 

 

Other income
 

 

 
1

 

 
1

Income (loss) before taxes
 
82

 
(130
)
 
462

 

 
414

Income tax (benefit) expense
 
20

 
(50
)
 
108

 

 
78

Income (loss) before equity in earnings of subsidiaries
 
62

 
(80
)
 
354

 

 
336

Equity in earnings of subsidiaries, net of tax
 
263

 
280

 

 
(543
)
 

Net income
 
325

 
200

 
354

 
(543
)
 
336

Less: Net income attributable to noncontrolling interests
 

 

 
11

 

 
11

Net income attributable to Aon shareholders
 
$
325

 
$
200

 
$
343

 
$
(543
)
 
$
325




25



Condensed Consolidating Statement of Income 
 
 
Three months ended March 31, 2013
 
 
 
 
 
 
Other
 
 
 
 
 
 
Aon
 
Aon
 
Non-Guarantor
 
Consolidating
 
 
(millions)
 
plc
 
Corporation
 
Subsidiaries
 
Adjustments
 
Consolidated
Revenue
 
 
 
 
 
 
 
 
 
 
Commissions, fees and other
 
$
1

 
$

 
$
2,907

 
$

 
$
2,908

Fiduciary investment income
 

 

 
7

 

 
7

Total revenue
 
1

 

 
2,914

 

 
2,915

Expenses
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
11

 
15

 
1,699

 

 
1,725

Other general expenses
 
7

 
6

 
767

 

 
780

Total operating expenses
 
18

 
21

 
2,466

 

 
2,505

Operating (loss) income
 
(17
)
 
(21
)
 
448

 

 
410

Interest income
 

 
1

 

 

 
1

Interest expense
 
(2
)
 
(34
)
 
(16
)
 

 
(52
)
Intercompany interest (expense) income
 
(7
)
 
43

 
(36
)
 

 

Other (expense) income
 

 
(1
)
 
10

 

 
9

(Loss) income before taxes
 
(26
)
 
(12
)
 
406

 

 
368

Income tax (benefit) expense
 
(5
)
 
(5
)
 
106

 

 
96

(Loss) income before equity in earnings of subsidiaries
 
(21
)
 
(7
)
 
300

 

 
272

Equity in earnings of subsidiaries, net of tax
 
282

 
254

 

 
(536
)
 

Net income
 
261

 
247

 
300

 
(536
)
 
272

Less: Net income attributable to noncontrolling interests
 

 

 
11

 

 
11

Net income attributable to Aon shareholders
 
$
261

 
$
247

 
$
289

 
$
(536
)
 
$
261










26



Condensed Consolidating Statement of Comprehensive Income
 
 
Three months ended March 31, 2014
 
 
 
 
 
 
Other
 
 
 
 
 
 
Aon
 
Aon
 
Non-Guarantor
 
Consolidating
 
 
(millions)
 
plc
 
Corporation
 
Subsidiaries
 
Adjustments
 
Consolidated
Net income
 
$
325

 
$
200

 
$
354

 
$
(543
)
 
$
336

Less: Net income attributable to noncontrolling interests
 

 

 
11

 

 
11

Net income attributable to Aon shareholders
 
$
325

 
$
200

 
$
343

 
$
(543
)
 
$
325

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
 
 
Change in fair value of investments
 

 

 
1

 

 
1

Change in fair value of derivatives
 

 
1

 
8

 

 
9

Foreign currency translation adjustments
 

 
(17
)
 
33

 

 
16

Post-retirement benefit obligation
 

 
6

 
20

 

 
26

Total other comprehensive income
 

 
(10
)
 
62

 

 
52

Equity in other comprehensive loss of subsidiaries, net of tax
 
54

 
69

 

 
(123
)
 

Less: Other comprehensive income attributable to noncontrolling interests
 

 

 
(2
)
 

 
(2
)
Total other comprehensive income attributable to Aon shareholders
 
54

 
59

 
64

 
(123
)
 
54

Comprehensive income attributable to Aon shareholders
 
$
379

 
$
259

 
$
407

 
$
(666
)
 
$
379

 

Condensed Consolidating Statement of Comprehensive Income
 
 
Three months ended March 31, 2013
 
 
 
 
 
 
Other
 
 
 
 
 
 
Aon
 
Aon
 
Non-Guarantor
 
Consolidating
 
 
(millions)
 
plc
 
Corporation
 
Subsidiaries
 
Adjustments
 
Consolidated
Net income
 
$
261

 
$
247

 
$
300

 
$
(536
)
 
$
272

Less: Net income attributable to noncontrolling interests
 

 

 
11

 

 
11

Net income attributable to Aon shareholders
 
$
261

 
$
247

 
$
289

 
$
(536
)
 
$
261

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Change in fair value of investments
 

 

 

 

 

Change in fair value of derivatives
 

 
1

 
(15
)
 

 
(14
)
Foreign currency translation adjustments
 

 
(8
)
 
(166
)
 

 
(174
)
Post-retirement benefit obligation
 

 
7

 
16

 

 
23

Total other comprehensive income
 

 

 
(165
)
 

 
(165
)
Equity in other comprehensive income of subsidiaries, net of tax
 
(165
)
 
(164
)
 

 
329

 

Less: Other comprehensive income attributable to noncontrolling interests
 

 

 

 

 

Total other comprehensive income attributable to Aon shareholders
 
(165
)
 
(164
)
 
(165
)
 
329

 
(165
)
Comprehensive income attributable to Aon Shareholders
 
$
96

 
$
83

 
$
124

 
$
(207
)
 
$
96





27



Condensed Consolidating Statement of Financial Position 
 
 
As of March 31, 2014
 
 
 
 
 
 
Other
 
 
 
 
 
 
Aon
 
Aon
 
Non-Guarantor
 
Consolidating
 
 
(millions)
 
plc
 
Corporation
 
Subsidiaries
 
Adjustments
 
Consolidated
ASSETS
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
154

 
$
1,372

 
$
(1,188
)
 
$
338

Short-term investments
 

 
101

 
239

 

 
340

Receivables, net
 

 
1

 
2,879

 

 
2,880

Fiduciary assets
 

 

 
12,038

 

 
12,038

Intercompany receivables
 
116

 
3,982

 
5,878

 
(9,976
)
 

Other current assets
 

 
109

 
538

 
(70
)
 
577

Total Current Assets
 
116

 
4,347

 
22,944

 
(11,234
)
 
16,173

Goodwill
 

 

 
9,030

 

 
9,030

Intangible assets, net
 

 

 
2,500

 

 
2,500

Fixed assets, net
 

 

 
785

 

 
785

Investments
 

 
69

 
74

 

 
143

Intercompany receivables
 
7,166

 
2,163

 
2,201

 
(11,530
)
 

Other non-current assets
 
146

 
509

 
1,477

 
(686
)
 
1,446

Investment in subsidiary
 
4,979

 
12,165

 

 
(17,144
)
 

TOTAL ASSETS
 
$
12,407

 
$
19,253

 
$
39,011

 
$
(40,594
)
 
$
30,077

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Fiduciary liabilities
 
$

 
$

 
$
12,038

 
$

 
$
12,038

Short-term debt and current portion of long-term debt
 
227

 
140

 
710

 

 
1,077

Accounts payable and accrued liabilities
 
1,218

 
41

 
1,428

 
(1,188
)
 
1,499

Intercompany payables
 
87

 
5,834

 
4,055

 
(9,976
)
 

Other current liabilities
 
33

 
47

 
957

 
(70
)
 
967

Total Current Liabilities
 
1,565

 
6,062

 
19,188

 
(11,234
)
 
15,581

Long-term debt
 
792

 
2,516

 
361

 

 
3,669

Pension, other post-retirement and other post-employment liabilities
 

 
930

 
643

 

 
1,573

Intercompany payables
 
2,100

 
7,267

 
2,163

 
(11,530
)
 

Other non-current liabilities
 
4

 
112

 
1,818

 
(686
)
 
1,248

TOTAL LIABILITIES
 
4,461

 
16,887

 
24,173

 
(23,450
)
 
22,071

 
 
 
 
 
 
 
 
 
 
 
TOTAL AON SHAREHOLDERS’ EQUITY
 
7,946

 
2,366

 
14,778

 
(17,144
)
 
7,946

Noncontrolling interests
 

 

 
60

 

 
60

TOTAL EQUITY
 
7,946

 
2,366

 
14,838

 
(17,144
)
 
8,006

 
 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
$
12,407

 
$
19,253

 
$
39,011

 
$
(40,594
)
 
$
30,077



28



Condensed Consolidating Statement of Financial Position
 
 
As of December 31, 2013
 
 
 
 
 
 
Other
 
 
 
 
 
 
Aon
 
Aon
 
Non-Guarantor
 
Consolidating
 
 
(millions)
 
plc
 
Corporation
 
Subsidiaries
 
Adjustments
 
Consolidated
ASSETS
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
247

 
$
1,246

 
$
(1,016
)
 
$
477

Short-term investments
 

 
163

 
360

 

 
523

Receivables, net
 

 
4

 
2,892

 

 
2,896

Fiduciary assets
 

 

 
11,871

 

 
11,871

Intercompany receivables
 
186

 
3,503

 
5,452

 
(9,141
)
 

Other current assets
 

 
69

 
513

 
(19
)
 
563

Total Current Assets
 
186

 
3,986

 
22,334

 
(10,176
)
 
16,330

Goodwill
 

 

 
8,997

 

 
8,997

Intangible assets, net
 

 

 
2,578

 

 
2,578

Fixed assets, net
 

 

 
791

 

 
791

Investments
 

 
57

 
75

 

 
132

Intercompany receivables
 
7,166

 
2,178

 
2,201

 
(11,545
)
 

Other non-current assets
 
146

 
560

 
1,421

 
(704
)
 
1,423

Investment in subsidiary
 
4,607

 
11,694

 

 
(16,301
)
 

TOTAL ASSETS
 
$
12,105

 
$
18,475

 
$
38,397

 
$
(38,726
)
 
$
30,251

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Fiduciary liabilities
 
$

 
$

 
$
11,871

 
$

 
$
11,871

Short-term debt and current portion of long-term debt
 

 

 
707

 
(4
)
 
703

Accounts payable and accrued liabilities
 
1,036

 
62

 
1,849

 
(1,016
)
 
1,931

Intercompany payables
 
15

 
5,449

 
3,677

 
(9,141
)
 

Other current liabilities
 
12

 
47

 
866

 
(19
)
 
906

Total Current Liabilities
 
1,063

 
5,558

 
18,970

 
(10,180
)
 
15,411

Long-term debt
 
792

 
2,512

 
378

 
4

 
3,686

Pension, other post-retirement and other post-employment liabilities
 

 
925

 
682

 

 
1,607

Intercompany payables
 
2,100

 
7,267

 
2,178

 
(11,545
)
 

Other non-current liabilities
 
5

 
159

 
1,892

 
(704
)
 
1,352

TOTAL LIABILITIES
 
3,960

 
16,421

 
24,100

 
(22,425
)
 
22,056

 
 
 
 
 
 
 
 
 
 
 
TOTAL AON SHAREHOLDERS’ EQUITY
 
8,145

 
2,054

 
14,247

 
(16,301
)
 
8,145

Noncontrolling interests
 

 

 
50

 

 
50

TOTAL EQUITY
 
8,145

 
2,054

 
14,297

 
(16,301
)
 
8,195

 
 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
$
12,105

 
$
18,475

 
$
38,397

 
$
(38,726
)
 
$
30,251



29



Condensed Consolidating Statement of Cash Flows
 
 
Three months ended March 31, 2014
 
 
Aon
 
Aon
 
Other
Non-Guarantor
 
Consolidating
 
 
(millions)
 
plc
 
Corporation
 
Subsidiaries
 
Adjustments
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
 
$
89

 
$
(123
)
 
$
23

 
$

 
$
(11
)
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
 
Sales of long-term investments
 

 
37

 
5

 

 
42

Purchase of long-term investments
 

 
(10
)
 

 

 
(10
)
Net sales of short-term investments - non-fiduciary
 

 
62

 
121

 

 
183

Acquisition of businesses, net of cash acquired
 

 

 
(5
)
 

 
(5
)
Proceeds from sale of businesses
 

 

 
1

 

 
1

Capital expenditures
 

 

 
(55
)
 

 
(55
)
CASH PROVIDED BY INVESTING ACTIVITIES
 

 
89

 
67

 

 
156

 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
 
Share repurchase
 
(600
)
 

 

 

 
(600
)
Advances from (to) affiliates
 
313

 
(206
)
 
65

 
(172
)
 

Issuance of shares for employee benefit plans
 
26

 

 

 

 
26

Issuance of debt
 
293

 
902

 

 

 
1,195

Repayment of debt
 
(68
)
 
(755
)
 
(6
)
 

 
(829
)
Cash dividends to shareholders
 
(53
)
 

 

 

 
(53
)
Purchase of shares from noncontrolling interests
 

 

 
1

 

 
1

Dividends paid to noncontrolling interests
 

 

 

 

 

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
 
(89
)
 
(59
)
 
60

 
(172
)
 
(260
)
 
 
 
 
 
 
 
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 

 

 
(24
)
 

 
(24
)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 

 
(93
)
 
126

 
(172
)
 
(139
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
 

 
247

 
1,246

 
(1,016
)
 
477

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$

 
$
154

 
$
1,372

 
$
(1,188
)
 
$
338



30



Condensed Consolidating Statement of Cash Flows
 
 
Three months ended March 31, 2013
 
 
 
 
 
 
Other
 
 
 
 
 
 
Aon
 
Aon
 
Non-Guarantor
 
Consolidating
 
 
(millions) 
 
plc
 
Corporation
 
Subsidiaries
 
Adjustments
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
 
$
5

 
$
(23
)
 
$
72

 
$

 
$
54

 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
 
Sales of long-term investments
 

 
1

 
17

 

 
18

Purchase of long-term investments
 

 
(3
)
 

 

 
(3
)
Net (purchases) sales of short-term investments - non-fiduciary
 

 
(39
)
 
23

 

 
(16
)
Acquisition of businesses, net of cash acquired
 

 

 
(2
)
 

 
(2
)
Proceeds from sale of businesses
 

 

 
1

 

 
1

Capital expenditures
 

 

 
(60
)
 

 
(60
)
CASH USED FOR INVESTING ACTIVITIES
 

 
(41
)
 
(21
)
 

 
(62
)
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
 
Share repurchase
 
(300
)
 

 

 

 
(300
)
Advances from (to) affiliates
 
96

 
(206
)
 
71

 
39

 

Issuance of shares for employee benefit plans
 
36

 

 

 

 
36

Issuance of debt
 
87

 
833

 
230

 

 
1,150

Repayment of debt
 

 
(511
)
 
(204
)
 

 
(715
)
Cash dividends to shareholders
 
(50
)
 

 

 

 
(50
)
Purchase of shares from noncontrolling interests
 

 

 
(1
)
 

 
(1
)
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
 
(131
)
 
116

 
96

 
39

 
120

 
 
 
 
 
 
 
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 

 

 
5

 

 
5

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
(126
)
 
52

 
152

 
39

 
117

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
 
131

 
199

 

 
(39
)
 
291

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
5

 
$
251

 
$
152

 
$

 
$
408


 



31



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
EXECUTIVE SUMMARY OF FIRST QUARTER 2014 FINANCIAL RESULTS
 
During the first three months of 2014, we continued to face certain headwinds impacting our business. In our Risk Solutions segment, these headwinds included economic weakness in continental Europe and a negative market impact in our Reinsurance business. In our HR Solutions segment, these headwinds included price compression in our benefits administration business and macro-economic pressures across continental Europe.
 
The following is a summary of our first quarter 2014 financial results:

For the quarter, revenue increased $32 million, or 1%, to $2.9 billion compared to the prior year quarter due primarily to organic revenue growth of 2%, partially offset by a 1% unfavorable impact from foreign currency exchange rates and a $1 million, or 14%, decline in investment income due to lower average interest rates globally. In Risk Solutions, revenue was driven by solid growth in Retail brokerage across both the Americas and International businesses, as well as solid growth in our Reinsurance business. The HR Solutions segment had growth in investment and compensation consulting and modest growth in benefits administration and human resources business process outsourcing, partially offset by the unfavorable impact from the timing of revenue in the quarter.
 
Operating expenses for the quarter were $2.5 billion, a decrease of $27 million, or 1%, compared to the prior year quarter of $2.5 billion due primarily to a $31 million increase in savings related to restructuring programs, a $26 million decrease in formal restructuring costs, an $18 million favorable impact from foreign currency exchange rates, a $17 million decrease in expenses related to acquisitions, net of divestitures, and a $13 million decrease in intangible asset amortization, partially offset by an increase in expense to support future growth in our health care exchange business and an increase in expense associated with organic revenue growth of 2%.
 
Operating margin increased to 15.9% in the first quarter 2014 from 14.1% in the first quarter 2013. The increase in operating margin from the prior year quarter is primarily related to organic revenue growth of 2%, decreased intangible asset amortization, savings related to the restructuring programs, and expense discipline. Operating margin for Risk Solutions increased 190 basis points from 20.4% in the first quarter 2013 to 22.3% in the first quarter 2014, due primarily to solid revenue growth, expense discipline, and savings related to the restructuring programs. Operating margin for HR Solutions increased 160 basis points from 5.3% in the first quarter 2013 to 6.9% in the first quarter 2014, due primarily to modest revenue growth, a reduction in intangible asset amortization, and savings from the restructuring plans, partially offset by an increase in expense to support future growth in our healthcare exchange business and the unfavorable impact from timing of certain consulting revenue.
 
Net income attributable to Aon shareholders increased $64 million, or 25%, to $325 million for the first quarter 2014 compared to the first quarter 2013.

Cash flow used for operating activities was $11 million for the first quarter 2014, a decrease of $65 million, or 120%, from cash flow provided by operating activities of $54 million in the first quarter 2013 driven by expenses associated with organic growth and the unfavorable timing of certain incentive compensation and interest expense payments, partially offset by a solid underlying working capital performance and a decrease in both pension contributions and cash taxes in the quarter.

We focus on four key non-GAAP metrics each quarter that we communicate to shareholders: grow organically, expand adjusted margins, increase adjusted diluted earnings per share, and increase free cash flow.  The following is our measure of performance against these four metrics for the first quarter of 2014:
 
Organic revenue growth, a non-GAAP measure as defined under the caption “Review of Consolidated Results — Organic Revenue,” was 2% in the first quarter 2014 unchanged from the prior year first quarter organic revenue growth of 2%. In Risk Solutions, revenue was driven by solid growth in Retail brokerage across both the Americas and International businesses, as well as solid growth in our Reinsurance business. The HR Solutions segment had growth in investment and compensation consulting and modest growth in benefits administration and human resources business process outsourcing, partially offset by the unfavorable impact from the timing of revenue in the quarter.
 
Adjusted operating margin, a non-GAAP measure as defined under the caption “Review of Consolidated Results — Adjusted Operating Margin,” for the first quarter 2014 was 18.8% for Aon overall, 23.6% for the Risk Solutions segment, and 13.3% for the HR Solutions segment.  Adjusted operating margin was 18.5% for Aon overall, 22.5% for

32



the Risk Solutions segment, and 14.3% for the HR Solutions segment for the first quarter 2013.  The quarter-to-date increase in adjusted operating margin for the Risk Solutions segment reflects organic revenue growth, expense discipline, and savings related to the restructuring programs. The quarter-to-date decrease in adjusted operating margin for the HR Solutions segment reflects an increase in expense to support future growth in our health care exchange business and the unfavorable impact from timing of certain consulting revenue, partially offset by modest organic revenue growth and savings related to the Aon Hewitt restructuring program.
 
Adjusted diluted earnings per share from net income attributable to Aon’s shareholders, a non-GAAP measure as defined under the caption “Review of Consolidated Results — Adjusted Diluted Earnings per Share,” was $1.28 per share in the first quarter of 2014 compared to $1.11 per share in the first quarter of 2013.

Free cash flow, a non-GAAP measure as defined under the "Review of Consolidated Results Free Cash Flow," decreased $60 million from the prior year period to a use of cash of $66 million in the first quarter of 2014 driven by a decrease in cash flow from operations, partially offset by a decrease of $5 million in capital expenditures from the prior year period.

REVIEW OF CONSOLIDATED RESULTS
 
General
 
In our discussion of operating 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.
 
Organic Revenue
 
We use supplemental information related to organic revenue to help us and our investors evaluate business growth from existing operations.  Organic revenue is a non-GAAP measure and excludes the impact of foreign exchange rate changes, acquisitions, divestitures, transfers between business units, fiduciary investment income, reimbursable expenses, and certain unusual items.  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 Condensed Consolidated Financial Statements and Notes thereto.  Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments.  Reconciliations of this non-GAAP measure, organic revenue growth percentages, to the reported Commissions, fees and other revenue growth percentages, have been provided under the “Review by Segment” caption, below.
 
Adjusted Operating Margin
 
We use adjusted operating margin as a non-GAAP measure of core operating performance of our Risk Solutions and HR Solutions segments.  Adjusted operating margin excludes the impact of certain items, including restructuring charges, intangible asset amortization and headquarters relocation costs. 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 Condensed Consolidated Financial Statements and Notes thereto.

 A reconciliation of this non-GAAP measure to the reported operating margin is as follows (in millions):
 
Three months ended March 31, 2014
 
Total Aon (1)
 
Risk Solutions
 
HR Solutions
Revenue — U.S. GAAP
$
2,947

 
$
1,994

 
$
965

Operating income — U.S. GAAP
$
469

 
$
445

 
$
67

Intangible asset amortization
86

 
25

 
61

Operating income — as adjusted
$
555

 
$
470

 
$
128

Operating margins — U.S. GAAP
15.9
%
 
22.3
%
 
6.9
%
Operating margins — as adjusted
18.8
%
 
23.6
%
 
13.3
%


33



 
Three months ended March 31, 2013
 
Total Aon (1)
 
Risk Solutions
 
HR Solutions
Revenue — U.S. GAAP
$
2,915

 
$
1,971

 
$
954

Operating income — U.S. GAAP
$
410

 
$
403

 
$
51

Restructuring charges
26

 
11

 
15

Intangible asset amortization
99

 
29

 
70

Headquarters relocation costs
3

 

 

Operating income — as adjusted
$
538

 
$
443

 
$
136

Operating margins — U.S. GAAP
14.1
%
 
20.4
%
 
5.3
%
Operating margins — as adjusted
18.5
%
 
22.5
%
 
14.3
%
  ______________________________________________
(1) Includes unallocated expenses and the elimination of inter-segment revenue.

Adjusted Diluted Earnings per Share
 
We also use adjusted diluted earnings per share as a non-GAAP measure of our core operating performance. Adjusted diluted earnings per share excludes the impact of restructuring charges, intangible asset amortization and headquarters relocation costs, along with related income taxes. 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 Condensed Consolidated Financial Statements and Notes thereto. Reconciliations of this non-GAAP measure to the reported diluted earnings per share are as follows (in millions except per share data): 
 
Three months ended March 31, 2014
 
U.S. GAAP
 
Adjustments
 
As Adjusted
Operating income
$
469

 
$
86

 
$
555

Interest income
2

 

 
2

Interest expense
(58
)
 

 
(58
)
Other income
1

 

 
1

Income before income taxes
414

 
86

 
500

Income taxes
78

 
17

 
95

Net income
336

 
69

 
405

Less: Net income attributable to noncontrolling interests
11

 

 
11

Net income attributable to Aon shareholders
$
325

 
$
69

 
$
394

Diluted earnings per share
$
1.06

 
$
0.22

 
$
1.28

Weighted average common shares outstanding — diluted
307.2

 
307.2

 
307.2


 
Three months ended March 31, 2013
 
U.S. GAAP
 
Adjustments
 
As Adjusted
Operating income
$
410

 
$
128

 
$
538

Interest income
1

 

 
1

Interest expense
(52
)
 

 
(52
)
Other income
9

 

 
9

Income before income taxes
368

 
128

 
496

Income taxes
96

 
33

 
129

Net income
272

 
95

 
367

Less: Net income attributable to noncontrolling interests
11

 

 
11

Net income attributable to Aon shareholders
$
261

 
$
95

 
$
356

Diluted earnings per share
$
0.82

 
$
0.29

 
$
1.11

Weighted average common shares outstanding — diluted
320.0

 
320.0

 
320.0



34



Free Cash Flow

We use free cash flow, defined as cash flow provided by operations minus capital expenditures, as a non-GAAP measure of our core operating performance. 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 Condensed Consolidated Financial Statements and Notes thereto. 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 Cash flow provided by operations is as follows (in millions):
 
Three months ended March 31,
 
2014
 
2013
Cash flow provided by operations - U.S. GAAP
$
(11
)
 
$
54

Less: Capital expenditures
(55
)
 
(60
)
Free cash flow
$
(66
)
 
$
(6
)

Impact of Foreign Exchange Rate Fluctuations
 
Because we conduct business in more than 120 countries, foreign exchange rate fluctuations have a significant impact on our business.  In comparison to the U.S. dollar, 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 last year’s revenue, expenses and net income, using current year's foreign exchange rates.  Using this illustrative methodology, currency fluctuations had no impact and a favorable impact of $0.02 during the three months ended March 31, 2014 and 2013, respectively, on adjusted net income per diluted share, when we translate prior year quarter results at current quarter foreign exchange rates. These translations are performed for comparative and illustrative purposes only and do not impact the accounting policy or practices for amounts included in the Condensed Consolidated Financial Statements.
 
Summary of Results
 
Our consolidated results of operations follow (in millions):
 
Three months ended March 31,
 
2014
 
2013
Revenue:
 

 
 

Commissions, fees and other
$
2,941

 
$
2,908

Fiduciary investment income
6

 
7

Total revenue
2,947

 
2,915

Expenses:
 

 
 

Compensation and benefits
1,751

 
1,725

Other general expenses
727

 
780

Total operating expenses
2,478

 
2,505

Operating income
469

 
410

Interest income
2

 
1

Interest expense
(58
)
 
(52
)
Other income
1

 
9

Income before income taxes
414

 
368

Income taxes
78

 
96

Net income
336

 
272

Less: Net income attributable to noncontrolling interests
11

 
11

Net income attributable to Aon shareholders
$
325

 
$
261

 

35



Revenue
 
Revenue increased by $32 million, or 1%, in the first quarter 2014 compared to the first quarter 2013.  The first quarter increase consists of a $23 million, or 1%, increase in the Risk Solutions segment and an $11 million, or 1%, increase in the HR Solutions segment. The results of the Risk Solutions segment reflect 3% organic revenue growth, partially offset by a decrease in Fiduciary investment income. The increase in Risk Solutions revenue compared to the prior year quarter was primarily driven by solid growth in Retail brokerage across both the Americas and International businesses, as well as solid growth in our reinsurance business. Organic revenue growth in the HR Solutions segment for the quarter was 1%, primarily driven by growth in investment and compensation consulting and modest growth in benefits administration and human resources business process outsourcing, partially offset by the unfavorable impact from the timing of revenue in the quarter.

Compensation and Benefits
 
Compensation and benefits increased $26 million, or 2%, from first quarter 2013. For the quarter ended March 31, 2014, the increase in Compensation and benefits was primarily driven by an increase in expense to support future growth in our health care exchange business and an increase in expense associated with 2% organic revenue growth, partially offset by restructuring savings, a $24 million decrease in formal restructuring costs, a $13 million favorable impact from foreign currency exchange rates, and a $12 million decrease in expenses related to acquisitions, net of divestitures.
 
Other General Expenses
 
Other general expenses decreased $53 million, or 7%, in the first quarter 2014 compared to the prior year quarter. The decrease was due to expense discipline, intangible amortization expense decrease of $13 million, a $5 million favorable impact from foreign currency exchange rates, and restructuring savings.

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 first quarter 2014, Interest income increased $1 million compared to the first quarter 2013 to $2 million in the first quarter 2014 .
 
Interest Expense
 
Interest expense, for the first quarter of 2014, which represents the cost of our worldwide debt obligations, increased $6 million from the first quarter of 2013. The increase in interest expense reflects an increase in the total debt outstanding and an increase in costs related to certain derivative programs.
 
Other Income
 
Other income was $1 million for the first quarter of 2014, compared to $9 million for the first quarter of 2013.  The first quarter 2014 includes a $19 million gain on foreign currency remeasurement and equity earnings of $5 million, partially offset by $23 million loss from derivatives. The first quarter 2013 includes a $24 million gain on foreign currency remeasurement and additional income from equity method investments of $2 million, partially offset by an $18 million loss from derivatives.
 
Income before Income Taxes
 
Income before income taxes for the first quarter was $414 million, a 13% increase from $368 million in 2013.  The increase in income was driven by the 2% increase in organic growth, expense discipline, and increased benefits from restructuring initiatives.
 
Income Taxes
 
The effective tax rate on net income was 18.9% and 26.1% for the quarters ended March 31, 2014 and 2013, respectively. The effective tax rate in the first quarter of 2014 was favorably impacted by changes in the geographic distribution of income. Potential unfavorable discrete tax adjustments in future quarters of 2014 could cause the effective tax rate for the full year 2014 to be higher than the effective tax rate reported in the first quarter of 2014.
  

36



Net Income Attributable to Aon Shareholders
 
Net income attributable to Aon shareholders for the first quarter increased to $325 million, or $1.06 diluted net income per share, from $261 million, or $0.82 diluted net income per share, in 2013.
 
LIQUIDITY AND FINANCIAL CONDITION

Liquidity

Executive Summary

We believe that our balance sheet and strong cash flow provide us with financial flexibility to create long-term value for our shareholders.  Our primary sources of liquidity are cash flow from operations, available cash reserves and debt capacity available under various credit facilities.  Our primary uses of liquidity are operating expenses, capital expenditures, acquisitions, share repurchases, restructuring initiatives, funding pension obligations and shareholder dividends.

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 the Condensed Consolidated Statement of Financial Position, with a corresponding amount in Fiduciary liabilities. Fiduciary funds cannot be used for general corporate purposes, and are not a source of liquidity for us.

Operating Activities
 
Net cash used for operating activities during the three months ended March 31, 2014 was $11 million compared to net cash provided by operating activities during the three months ended March 31, 2013 of $54 million, a decrease of $65 million. The decrease from the prior year period was primarily driven by a smaller decrease in accounts receivable of $161 million due to revenue growth and strong working capital management during 2013, a larger decrease in accounts payable and accrued liabilities of $51 million due primarily to the timing of certain incentive payments, and a $24 million increase in payments for restructuring reserves, partially offset by higher net income, adjusted for non-cash items, of $77 million and a reduction in pension contributions of $68 million from the prior year period.

The primary uses of cash from operating activities during the three months ended March 31, 2014 were a decrease in accounts payable and accrued liabilities of $468 million, pension contributions of $128 million and a decrease in restructuring reserves of $40 million, partially offset by net income, adjusted for non-cash items, of $589 million and a decrease in accounts receivable of $13 million. Pension contributions were $128 million and $196 million for the three months ended March 31, 2014 and 2013, respectively. For the remainder of 2014, we expect to contribute approximately $257 million to our pension plans, with the majority attributable to non-U.S. pension plans, which are subject to changes in foreign exchange rates.
 
We expect cash generated by operations for 2014 to be sufficient to service our debt and contractual obligations, fund the cash requirements of our restructuring programs, finance capital expenditures, continue purchases of shares under our share repurchase program, 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 borrow under our credit facilities to accommodate any timing differences in cash flows.  We have committed credit facilities of approximately $1.3 billion, of which all was available at March 31, 2014.  We can access these facilities on a same day or next day basis.  Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed.
 
Investing Activities
 
Cash flow provided by investing activities was $156 million during the three months ended March 31, 2014. The primary drivers of the cash flow provided by investing activities were net sales of short-term investments of $183 million and $32 million for net sales of long term investments, partially offset by $55 million for capital expenditures. The cash flows provided by the net sales of long term investments represent the cash proceeds generated from net sales of long term investments where the corresponding gains and losses are recognized in Other income in the Condensed Consolidated Statements of Income.
 
Cash flow used for investing activities was $62 million during the three months ended March 31, 2013. The primary drivers of the cash flow used for investing activities were $60 million for capital expenditures, $16 million for net purchases of short-term investments, and $3 million for purchases of long-term investments, partially offset by $18 million for sales of long-term investments.
 

37



Financing Activities
 
Cash flow used for financing activities during the three months ended March 31, 2014 was $260 million. The primary drivers of the cash flow used for financing activities were share repurchases of $600 million and dividends paid to shareholders of $53 million, partially offset by issuances of debt, net of repayments, of $366 million and proceeds from the exercise of share options and issuance of shares purchased through the employee stock purchase plan of $26 million.
 
Cash flow provided by financing activities during the three months ended March 31, 2013 was $120 million. The primary drivers of cash flow provided by financing activities were issuances of debt, net of repayments, of $435 million and proceeds from the exercise of share options and issuance of shares purchased through the employee stock purchase plan of $36 million, partially offset by share repurchases of $300 million and dividends paid to shareholders of $50 million.
 
As a U.K. incorporated company, we must have “distributable reserves” to make share repurchases or pay dividends to shareholders. Distributable reserves may be created through the earnings of the U.K. parent company and, amongst other methods, through a reduction in share capital approved by the English Companies Court. Distributable reserves are not linked to a U.S. GAAP reported amount (e.g., retained earnings). As of March 31, 2014 and 2013, we had distributable reserves in excess of $5.1 billion and $6.6 billion, respectively. We believe that we will have sufficient distributable reserves to fund shareholder dividends for the foreseeable future.
 
Cash and Investments
 
At March 31, 2014, our cash and cash equivalents and short-term investments were $678 million, a decrease of $322 million from December 31, 2013, primarily related to share repurchases of $600 million and dividends of $53 million, partially offset by the net issuance of commercial paper of $374 million  Of the total balance as of March 31, 2014, $253 million was restricted as to its use, which was comprised of $128 million of operating funds in the U.K. as required by the Financial Conduct Authority and $125 million held as collateral for various business purposes.  At March 31, 2014, $969 million of cash and cash equivalents and short-term investments were held in the U.S. and overdrawn cash and cash equivalents and short-term investments of $291 million were held in other countries. We maintain a multicurrency cash pool with a third party bank in which various Aon entities participate. Individual Aon entities are permitted to overdraw on their individual accounts provided the overall balance does not fall below zero. At March 31, 2014, non-U.S. cash balances of one or more entities were negative; however, the overall balance was positive.

Of the total balance as of December 31, 2013, $214 million was restricted as to its use, which was comprised of $126 million of operating funds in the U.K. as required by the Financial Conduct Authority and $88 million held as collateral for various business purposes. At December 31, 2013, $516 million of cash and cash equivalents and short-term investments were held in the U.S. and $484 million was held in other countries.
 
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 underwriter.  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 the premiums, claims and refunds, make payments to underwriters and insureds, collect funds from clients and make payments on their behalf, and foreign currency movements.  Fiduciary assets, because of their nature, are required to be invested in very liquid securities with highly-rated, credit-worthy financial institutions.  In our Condensed Consolidated Statements of Financial Position, the amount we report for Fiduciary assets and Fiduciary liabilities are equal.  Our Fiduciary assets included cash and investments of $4.1 billion and $3.8 billion and fiduciary receivables of $8.0 billion and $8.1 billion at March 31, 2014 and December 31, 2013, respectively.  While we earn investment income on the fiduciary assets held in cash and investments, the cash and investments are not owned by us, and cannot be used for general corporate purposes.
 
As disclosed in Note 15 “Fair Value Measurements and Financial Instruments” of the Notes to the Condensed Consolidated Financial Statements, the majority of our investments carried at fair value are money market funds.  Money market funds are carried at cost as an approximation of fair value.  Consistent with market convention, we consider cost a practical and expedient measure of fair value.  These money market funds are held throughout the world with various financial institutions.  We do not believe that there are any market liquidity issues that would materially impact the fair value of these investments.
 
As of March 31, 2014, our investments in money market funds and highly liquid debt instruments had a fair value of $2.1 billion and are reported as Short-term investments or Fiduciary assets in the Condensed Consolidated Statements of Financial Position depending on their nature and initial maturity.

38




The following table summarizes our Fiduciary assets and non-fiduciary Cash and cash equivalents, and Short-term investments as of March 31, 2014 (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
 
$
338

 
$

 
$
2,342

 
$
2,680

Money market funds
 

 
340

 
1,721

 
2,061

Highly liquid debt instruments
 

 

 
25

 
25

Other investments due within one year
 

 

 

 

Cash and investments
 
338

 
340

 
4,088

 
4,766

Fiduciary receivables
 

 

 
7,950

 
7,950

Total
 
$
338

 
$
340

 
$
12,038

 
$
12,716

 
Share Repurchase Program
 
In April 2012, our Board of Directors authorized a share repurchase program under which up to $5 billion of Class A Ordinary Shares may be repurchased ("2012 Share Repurchase Program"). Under this program, 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.

In the first quarter of 2014, the Company repurchased 7.2 million shares at an average price per share of $83.45 for a total cost of $600 million under the 2012 Share Repurchase Program. In the first quarter of 2013, the Company repurchased 5.0 million shares at an average price per share of $59.82 for a total cost of $300 million under the 2012 Share Repurchase Program. Since the inception of the 2012 Share Repurchase Program, we repurchased a total of 43.5 million shares for an aggregate cost of $2.7 billion. The remaining authorized amount for share repurchase under the 2012 Share Repurchase Program is approximately $2.3 billion.
 
For information regarding share repurchases made during the first quarter of 2014, see Part II, Item 2 — “Unregistered Sales of Equity Securities and Use of Proceeds” below.

Borrowings
 
Total debt at March 31, 2014 was $4.7 billion, which represents an increase of $357 million compared to December 31, 2013. This increase is primarily due to an increase in commercial paper outstanding of $374 million compared to December 31, 2013. Commercial paper activity during the three months ended March 31, 2014 included total issuances of $1.2 billion, compared to $883 million for the three months ended March 31, 2013. The proceeds of the commercial paper issuances were used primarily for short-term working capital needs.

Our total debt as a percentage of total capital attributable to Aon shareholders was 37.4% and 35.0% at March 31, 2014 and December 31, 2013, respectively.
 
Credit Facilities
 
At March 31, 2014, we have a five-year $400 million unsecured revolving credit facility in the U.S. (“U.S. Facility”) that expires in 2017. The U.S. facility is for general corporate purposes, including commercial paper support.  Additionally, we have a five-year €650 million ($896 million at March 31, 2014 exchange rate) credit facility ("Euro Facility") available, which expires in October 2015.  At March 31, 2014, we had no borrowings under either of these credit facilities.

For both our U.S. Facility and Euro Facility, the two most significant covenants require us to maintain a certain ratio of consolidated EBITDA (earnings before interest, taxes, depreciation and amortization), adjusted for Hewitt related transaction costs and up to $50 million in non-recurring cash charges (“Adjusted EBITDA”), to consolidated interest expense and a ratio of consolidated debt to Adjusted EBITDA. For both facilities, the ratio of Adjusted EBITDA to consolidated interest expense must be at least 4 to 1.  For the Euro Facility, the ratio of consolidated debt to Adjusted EBITDA must not exceed 3 to 1.  For the U.S. Facility, the ratio of consolidated debt to Adjusted EBITDA must not exceed the lower of (a) 3.25 to 1.00 or (b) the greater of (i) 3.00 to 1.00 or (ii) the lowest ratio of consolidated debt to Adjusted EBITDA then set forth in the Euro Facility or Aon’s

39



$450 million Term Loan Facility. We were in compliance with these and all other covenants during the three months ended March 31, 2014

Shelf Registration Statement

On August 31, 2012, 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. The availability of any potential liquidity for these types of securities is dependent on investor demand, market conditions and other factors.

Rating Agency Ratings
 
The major rating agencies’ ratings of our debt at April 25, 2014 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
 
In April 2014, Moody's Investor Services changed their outlook from positive to stable.

A downgrade in the credit ratings of our senior debt and commercial paper would increase our borrowing costs, reduce or eliminate our access to capital, reduce our financial flexibility, increase our commercial paper interest rates or possibly restrict our access to the commercial paper market altogether, or may impact future pension contribution requirements.
 
Letters of Credit and Other Guarantees
 
We had total letters of credit ("LOCs") outstanding for approximately $66 million at March 31, 2014, compared to $71 million at December 31, 2013. These letters of credit 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 issued 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.  Costs associated with these guarantees, to the extent estimable and probable, are provided in our allowance for doubtful accounts.  The maximum exposure with respect to such contractual contingent guarantees was approximately $64 million at March 31, 2014 compared to $98 million at December 31, 2013.
 
We have provided commitments to fund certain limited partnerships in which we have an interest in the event that the general partners request funding.  Some of these commitments have specific expiration dates and the maximum potential funding under these commitments was $24 million and $34 million at March 31, 2014 and December 31, 2013, respectively.  During the three months ended March 31, 2014, we funded $10 million of these commitments.

Adequacy of Liquidity Sources

We believe that cash flows from operations and available credit facilities will be sufficient to meet our liquidity needs, including principal and interest payments on debt obligations, capital expenditures, pension contributions, cash restructuring costs, and anticipated working capital requirements, for the foreseeable future. We do not have exposure related to off balance sheet arrangements. Our cash flows from operations, borrowing availability and overall liquidity are subject to risks and uncertainties. See “Information Concerning Forward-Looking Statements” below.
 

40



Financial Condition
 
At March 31, 2014, our net assets of $8.0 billion, representing total assets minus total liabilities, decreased from $8.2 billion at December 31, 2013. The decrease was due primarily to share repurchases of $600 million, dividends of $53 million, and a decrease in Accumulated other comprehensive loss of $54 million related primarily to foreign currency translation adjustment and post-retirement benefit obligation, partially offset by Net income of $336 million for the three months ended March 31, 2014.  Working capital decreased by $327 million to $592 million from December 31, 2013.
 
Equity
 
Equity at March 31, 2014 was $8.0 billion, a decrease of $189 million from December 31, 2013.  The decrease resulted primarily from share repurchases of $600 million, $53 million of dividends to shareholders, and a decrease in Accumulated other comprehensive loss of $54 million, partially offset by Net income of $336 million.
  
The $54 million decrease in Accumulated other comprehensive loss from December 31, 2013 primarily reflects the following:
 
positive net foreign currency translation adjustments of $18 million, which are attributable to the weakening of the U.S. dollar against certain foreign currencies,
a decrease of $26 million in net post-retirement benefit obligations,
net derivative gains of $9 million, and
net investment gains of $1 million.

REVIEW BY SEGMENT
 
General
 
We serve clients through the following segments:
 
Risk Solutions acts as an advisor and insurance and reinsurance broker, helping clients manage their risks, via consultation, as well as negotiation and placement of insurance risk with insurance carriers through our global distribution network.
 
HR Solutions partners with organizations to solve their most complex benefits, talent and related financial challenges, and improve business performance by designing, implementing, communicating and administering a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies.
 
Risk Solutions
 
Three months ended March 31,
(millions, except percentage data)
2014
 
2013
Revenue
$
1,994

 
$
1,971

Operating income
445

 
403

Operating margin
22.3
%
 
20.4
%
 
The demand for property and casualty insurance generally rises as the overall level of economic activity increases and generally falls as such activity decreases, affecting both the commissions and fees generated by our brokerage business. The economic activity that impacts property and casualty insurance is described as exposure units, and is most closely correlated with employment levels, corporate revenue and asset values.  During the first three months of 2014, pricing was flat on average globally, and we would still consider this to be a “soft market.”  In a soft market, premium rates flatten or decrease, along with commission revenues, due to increased competition for market share among insurance carriers or increased underwriting capacity.  Changes in premiums have a direct and potentially material impact on the insurance brokerage industry, as commission revenues are generally based on a percentage of the premiums paid by insureds.
 
Additionally, continuing into the first quarter of 2014, we faced difficult conditions as a result of unprecedented disruptions in the global economy, the repricing of credit risk and the deterioration of the financial markets.  Weak economic conditions in many markets around the globe have reduced our customers’ demand for our retail brokerage and reinsurance brokerage products, which have had a negative impact on our operational results.

41



 
Risk Solutions generated approximately 67% of our consolidated total revenues in the first quarter of 2014.  Revenues are generated primarily through fees paid by clients, commissions and fees paid by insurance and reinsurance companies, and investment income on funds held on behalf of clients.  Our revenues vary from quarter to quarter throughout the year as a result of the timing of our clients’ policy renewals, the net effect of new and lost business, the timing of services provided to our clients, and the income we earn on investments, which is heavily influenced by short-term interest rates.
 
We operate in a highly competitive industry and compete with many retail insurance brokerage and agency firms, as well as with individual brokers, agents, and direct writers of insurance coverage.  Specifically, we address the highly specialized product development and risk management needs of commercial enterprises, professional groups, insurance companies, governments, health care providers, and non-profit groups, among others; provide affinity products for professional liability, life, disability income, and personal lines for individuals, associations, and businesses; provide products and services via GRIP Solutions; provide reinsurance services to insurance and reinsurance companies and other risk assumption entities by acting as brokers or intermediaries on all classes of reinsurance; provide capital management transaction and advisory products and services, including mergers and acquisitions and other financial advisory services, capital raising, contingent capital financing, insurance-linked securitizations and derivative applications; provide managing underwriting to independent agents and brokers as well as corporate clients; provide risk consulting, actuarial, loss prevention, and administrative services to businesses and consumers; and manage captive insurance companies.

Revenue
 
Commissions, fees and other revenue for Risk Solutions were as follows (in millions):
 
Three months ended March 31,
 
2014
 
2013
Retail brokerage:
 

 
 

Americas
$
698

 
$
686

International (1)
881

 
876

Total retail brokerage
1,579

 
1,562

Reinsurance brokerage
409

 
402

Total
$
1,988

 
$
1,964

  ______________________________________________
(1) Includes the U.K., Europe, Middle East, Africa and Asia Pacific.
 
During the first quarter 2014, commissions, fees and other revenue increased $24 million, or 1%, compared to the first quarter 2013, due to 3% organic revenue growth, partially offset by 1% unfavorable impact from foreign exchange rates, 1% decrease related to acquisitions, net of dispositions, and a decline in investment income.
 
Reconciliation of organic revenue growth to reported commissions, fees and other revenue growth for 2014 versus 2013 is as follows:
Three months ended March 31, 2014
 
Percent Change
 
Less: Currency Impact
 
Less: Acquisitions, Divestitures & Other
 
Organic Revenue
Retail brokerage:
 
 

 
 

 
 

 
 

Americas
 
2
%
 
(3
)%
 
1
 %
 
4
%
International (1)
 
1

 

 
(2
)
 
3

Total retail brokerage
 
1

 
(1
)
 
(1
)
 
3

Reinsurance brokerage
 
2

 
(1
)
 

 
3

Total
 
1
%
 
(1
)%
 
(1
)%
 
3
%
  ______________________________________________
(1) Includes the U.K., Europe, Middle East, Africa and Asia Pacific.
 
Retail brokerage Commissions, fees and other revenue increased 1% in the first quarter driven by 4% and 3% organic revenue growth in the Americas and International operations, respectively, partially offset by a decline in investment income, a 1% decrease related to acquisitions, net of dispositions, and a 1% unfavorable impact from foreign exchange rates.
 

42



Americas Commissions, fees and other revenue increased 2% in the first quarter reflecting 4% growth in organic revenue due to new business generation in U.S. Retail and strong management of the renewal book portfolio across Latin America and Canada, and a 1% increase related to acquisitions, net of dispositions, partially offset by a 3% unfavorable impact from foreign exchange rates.
 
International Commissions, fees and other revenue increased 1% in the first quarter driven by a 3% increase in organic revenue growth, partially offset by a 2% unfavorable impact from acquisitions, net of divestitures. Organic growth of 3% was driven by strong growth across emerging markets and Asia and solid management of the renewal book portfolio across continental Europe.
 
Reinsurance brokerage Commissions, fees and other revenue increased 2% in the first quarter driven by a 3% increase in organic revenue growth, partially offset by a 1% unfavorable impact from foreign exchange rates. The increase in organic revenue growth is due primarily to growth in facultative placements and capital markets transactions and advisory business, as well as net new business growth in treaty placements, offset by an unfavorable market impact in the quarter.
 
Operating Income
 
Operating income for the first quarter 2014 increased $42 million, or 10%, from 2013 to $445 million in 2014, and operating income margins increased to 22.3% from 20.4% in 2013.  Operating margin improvement was driven by organic revenue growth, expense discipline, and savings related to restructuring programs.
 
HR Solutions
 
Three months ended March 31,
(millions, except percentage data)
2014
 
2013
Revenue
$
965

 
$
954

Operating income
67

 
51

Operating margin
6.9
%
 
5.3
%
 
Our HR Solutions segment generated approximately 33% of our consolidated total revenues the first quarter of 2014 and provides a broad range of human capital services, as follows:
 
·
Retirement specializes in global actuarial services, defined contribution consulting, tax and ERISA consulting, and pension administration.
·
Compensation focuses on compensatory advisory/counsel including: compensation planning design, executive reward strategies, salary survey and benchmarking, market share studies and sales force effectiveness, with special expertise in the financial services and technology industries.
·
Strategic Human Capital delivers advice to complex global organizations on talent, change and organizational effectiveness issues, including talent strategy and acquisition, executive on-boarding, performance management, leadership assessment and development, communication strategy, workforce training and change management.
·
Investment consulting advises public and private companies, other institutions and trustees on developing and maintaining investment programs across a broad range of plan types, including defined benefit plans, defined contribution plans, endowments and foundations.
·
Benefits Administration applies our HR expertise primarily through defined benefit (pension), defined contribution (401(k)), and health and welfare administrative services. Our model replaces the resource-intensive processes once required to administer benefit plans with more efficient, effective, and less costly solutions.
·
Exchanges is building and operating healthcare exchanges that provide employers with a cost effective alternative to traditional employee and retiree healthcare, while helping individuals select the insurance that best meets their needs.
·
Human Resource Business Processing Outsourcing (“HR BPO”) provides market-leading solutions to manage employee data; administer benefits, payroll and other human resources processes; and record and manage talent, workforce and other core HR process transactions as well as other complementary services such as flexible spending, dependent audit and participant advocacy.
 
Disruption in the global credit markets and the deterioration of the financial markets created significant uncertainty in the marketplace.  Weak economic conditions in many markets around the globe continued into the first quarter of 2014 and have adversely impacted our clients’ financial condition and therefore the levels of business activities in the industries and geographies where we operate.  While we believe that the majority of our practices are well positioned to manage through this

43



time, these challenges are reducing demand for some of our services and putting continued pressure on the pricing of those services, which is having an adverse effect on our new business and results of operations.
 
Revenue
 
Commissions, fees and other revenue for HR Solutions increased $11 million, or 1%, in the first quarter 2014 compared to the first quarter 2013. The increase in revenue was driven by 1% organic growth in commissions and fees.
 
Commissions, fees and other revenue were as follows (in millions):
 
Three months ended March 31,
 
2014
 
2013
Consulting services
$
384

 
$
382

Outsourcing
589

 
581

Intersegment
(8
)
 
(9
)
Total
$
965

 
$
954

 
Reconciliation of organic revenue growth to reported commissions, fees and other revenue growth for 2014 versus 2013 is as follows:
Three months ended March 31, 2014
 
Percent Change
 
Less: Currency Impact
 
Less: Acquisitions, Divestitures & Other
 
Organic Revenue
Consulting services
 
1
%
 
1
%
 
(1
)%
 
1
%
Outsourcing
 
1

 

 

 
1

Intersegment
 
N/A

 
N/A

 
N/A

 
N/A

Total
 
1
%
 
%
 
 %
 
1
%
 
Consulting services revenue increased $2 million, or 1%, for the first quarter due primarily to 1% organic revenue growth driven by growth in investment and compensation consulting, partially offset by an unfavorable impact from timing of certain revenues in the quarter.
 
Outsourcing revenue increased $8 million, or 1%, for the first quarter due primarily to 1% organic revenue growth driven by modest growth in benefits administration and human resources business process outsourcing.

Operating Income
 
Operating income was $67 million, an increase of $16 million, or 31%, from the first quarter of 2013. The increase was primarily due to modest organic revenue growth and savings related to the Aon Hewitt restructuring program, partially offset by an increase in expense to support future growth in our health care exchange business and an unfavorable impact from timing of certain consulting revenue. Operating margin for this segment was 6.9% in the first quarter, which is an increase from 5.3% in 2013.
 

44



Unallocated Income and Expense
 
A reconciliation of our operating income to income before income taxes is as follows (in millions):
 
Three months ended March 31,
 
2014
 
2013
Operating income (loss):
 

 
 

Risk Solutions
$
445

 
$
403

HR Solutions
67

 
51

Unallocated
(43
)
 
(44
)
Operating income
469

 
410

Interest income
2

 
1

Interest expense
(58
)
 
(52
)
Other income
1

 
9

Income before income taxes
$
414

 
$
368

 
Unallocated operating expense
 
Unallocated operating expense includes corporate governance costs not allocated to the operating segments.  Net unallocated expenses decreased $1 million to $43 million in the first quarter 2014. The decrease in unallocated expenses during the three months ended March 31, 2014 is due primarily to decrease in expenses related to the Company's redomicile to the U.K. compared to such expenses in 2013.
 
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 first quarter 2014, Interest income increased $1 million to $2 million in the first quarter 2014 compared to the first quarter 2013.
 
Interest expense
 
Interest expense, which represents the cost of our worldwide debt obligations, increased $6 million compared to the first quarter of 2013. The increase in interest expense reflects an increase in the total debt outstanding and an increase in costs related to certain derivative programs.
  
Other income

Other income was $1 million for the first quarter of 2014, compared to $9 million for the first quarter of 2013.  The first quarter 2014 includes a $19 million gain on foreign currency remeasurement and equity earnings of $5 million, partially offset by $23 million loss from derivatives. The first quarter 2013 includes a $24 million gain on foreign currency remeasurement and additional income from equity method investments of $2 million, partially offset by an $18 million loss from derivatives.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
There have been no changes in our critical accounting policies, which include revenue recognition, restructuring, pensions, goodwill and other intangible assets, contingencies, share-based payments, and income taxes, as discussed in our 2013 Annual Report on Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS
 
Note 2 “Accounting Principles and Practices” of the Notes to the Condensed Consolidated Financial Statements contains a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable.
 

45



INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
 
This report contains certain statements related to future results, or states our intentions, beliefs and expectations or predictions for the future which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements relate to expectations or forecasts of future events.  They use words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “project,” “intend,” “plan,” “potential,” and other similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would.”  You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts.  For example, we may use forward-looking statements when addressing topics such as:  market and industry conditions, including competitive and pricing trends; changes in our business strategies and methods of generating revenue; the development and performance of our services and products; changes in the composition or level of our revenues; our cost structure and the outcome of cost-saving or restructuring initiatives; the outcome of contingencies; dividend policy; the expected impact of acquisitions and dispositions; pension obligations; cash flow and liquidity; expected effective tax rate; future actions by regulators; and the impact of changes in accounting rules.  These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results depending on a variety of factors. Potential factors that could impact results include:
 
·
general economic conditions in different countries in which Aon does business around the world, including conditions in emerging markets and in the European Union relating to sovereign debt and the continued viability of the Euro;
·
changes in the competitive environment;
·
changes in global equity and fixed income markets that could influence the return on invested assets;
·
changes in the funding status of our various defined benefit pension plans and the impact of any increased pension funding resulting from those changes;
·
rating agency actions that could affect our ability to borrow funds;
·
fluctuations in exchange and interest rates that could impact revenue and expense;
·
the impact of class actions, individual lawsuits, and other contingent liabilities and loss contingencies arising from errors and omissions and other claims against us including client class actions, securities class actions, derivative actions and ERISA class actions;
·
the impact of any investigations brought by regulatory authorities in the U.S., U.K. and other countries;
·
failure to retain and attract qualified personnel;
·
the impact of, and potential challenges in complying with, legislation and regulation in the jurisdictions in which we operate, particularly given the global scope of our business and the possibility of conflicting regulatory requirements across jurisdictions in which we do business;
·
the effect of the Redomestication on our operations and financial results, including the reaction of our clients, employees and other constituents, the effect of compliance with applicable U.K. regulatory regimes or the failure to realize some or all of the anticipated benefits;
·
the extent to which we retain existing clients and attract new businesses and our ability to incentivize and retain key employees;
·
the extent to which we manage certain risks created in connection with the various services, including fiduciary and advisory services, among others, that we currently provide, or will provide in the future, to clients;
·
our ability to implement restructuring initiatives and other initiatives intended to yield cost savings, and the ability to achieve those cost savings;
·
the potential of a system or network breach or disruption resulting in operational interruption or improper disclosure of client information or personal data;
·
changes in commercial property and casualty markets and commercial premium rates that could impact revenues;
·
any inquiries relating to compliance with the U.S. Foreign Corrupt Practices Act and non-U.S. anti-corruption laws and with U.S. and non-U.S. trade sanctions regimes;
·
failure to protect intellectual property rights or allegations that we infringe on the intellectual property rights of others;
·
the damage to our reputation among clients, markets or other third parties;
·
the actions taken by third parties that perform aspects of our business operations and client services;
·
changes in costs or assumptions associated with our HR Solutions segment's outsourcing and consulting arrangements that affect the profitability of these arrangements; and
·
our ability to grow and develop companies that we acquire or new lines of business.

Any or all of our forward-looking statements may turn out to be inaccurate, and there are no guarantees about our performance.  The factors identified above are not exhaustive.  Aon and its subsidiaries operate in a dynamic business environment in which new risks may emerge frequently.  Accordingly, readers should not place undue reliance on forward-looking statements, which

46



speak only as of the dates on which they are made.  We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement that we may make from time to time, whether as a result of new information, future events or otherwise.  Further information about factors that could materially affect Aon, including our results of operations and financial condition, is contained in the “Risk Factors” sections in each of Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 and Part II, Item 1A of this report below.
 
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to potential fluctuations in earnings, cash flows and the fair value of certain of our assets and liabilities due to changes in interest rates and foreign exchange rates.  To manage the risk from these exposures, we enter into a variety of derivative instruments.  We do not enter into derivatives or financial instruments for trading or speculative purposes.
 
The following discussion describes our specific exposures and the strategies we use to manage these risks. There have been no changes in our critical accounting policies for financial instruments and derivatives as discussed in our 2013 Annual Report on Form 10-K.

Foreign Exchange Risk

We are subject to foreign exchange rate risk. Our primary exposures include exchange rates between the U.S. dollar and the Euro, British Pound, the Canadian Dollar, the Australian Dollar, and the Indian Rupee.  We use over-the-counter options and forward contracts to reduce the impact of foreign currency risk to our financial statements.
 
Additionally, some of our non-U.S. brokerage subsidiaries receive revenues in currencies that differ from their functional currencies.  Our U.K. subsidiary earns a portion of its revenue in U.S. dollars and Euros, but most of its expenses are incurred in Pounds Sterling.  At March 31, 2014, we have hedged approximately 45% and 81% of our U.K. subsidiaries’ expected U.S. Dollar transaction exposure for the years ending December 31, 2014 and 2015, respectively. In addition, we have hedged 81% of our U.K. subsidiaries' expected Euro transaction exposures for the same time periods. We generally do not hedge exposures beyond three years.

We also use forward contracts to economically hedge foreign exchange risk associated with monetary balance sheet exposures, such as inter-company notes and short-term assets and liabilities that are denominated in a non-functional currency and are subject to remeasurement.
 
The translated value of revenue and expense from our international brokerage operations are subject to fluctuations in foreign exchange rates. If the Company were to translate prior year results at current quarter exchange rates, diluted earnings per share would not be impacted during the three months ended March 31, 2014.  Further, adjusted diluted earnings per share, a non-GAAP measure as defined and reconciled under the caption “Review of Consolidated Results Adjusted Diluted Earnings Per Share" would not be impacted during the three months ended March 31, 2014, if the Company were to translate prior year results at current quarter exchange rates.
 
Interest Rate Risk

Our fiduciary investment income is affected by changes in international and domestic short-term interest rates.  We monitor our net exposure to short-term interest rates and, as appropriate, hedge our exposure with various derivative financial instruments.  This activity primarily relates to brokerage funds held on behalf of clients in the U.S. and on the continent of Europe. A decrease in global short-term interest rates adversely affects our fiduciary investment income.
 
ITEM 4.   CONTROLS AND PROCEDURES
 
Evaluation of disclosure controls and procedures.  We have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this quarterly report of March 31, 2014.  Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective such that the information relating to Aon, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to Aon’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
 

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Changes in internal control over financial reporting.  No changes in Aon's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2014 that have materially affected, or that are reasonably likely to materially affect, Aon's internal control over financial reporting.


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PART II
 
OTHER INFORMATION
 
ITEM 1.                             LEGAL PROCEEDINGS
 
See Note 16 "Commitments and Contingencies" to the Condensed Consolidated Financial Statements contained in Part I, Item 1, which is incorporated by reference herein.
 
ITEM 1A.                    RISK FACTORS.
 
The risk factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 reflect certain risks associated with existing and potential lines of business and contain “forward-looking statements” as discussed in Part I, Item 2 of this report.  Readers should consider them in addition to the other information contained in this report as our business, financial condition or results of operations could be adversely affected if any of these risks actually occur.

ITEM 2.                             UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(a)  None.
(b)  None.
(c)  Issuer Purchases of Equity Securities.
 
The following information relates to the purchase of equity securities by Aon or any affiliated purchaser during each month within the first quarter of 2014:
 
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share (1)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)  (2)
1/1/14 — 1/31/14
 

 
$

 

 
$
2,873,588,140

2/1/14 — 2/28/14
 
6,375,310

 
83.12

 
6,375,310

 
2,343,661,176

3/1/14 — 3/31/14
 
813,378

 
86.04

 
813,378

 
2,273,679,205

Total
 
7,188,688

 
$
83.45

 
7,188,688

 
$
2,273,679,205

  ______________________________________________
 

(1)         Does not include commissions paid to repurchase shares.
 
(2)   In April 2012, our Board of Directors authorized a share repurchase program under which up to $5 billion of Class A Ordinary Shares were authorized to be repurchased from time to time depending on market conditions or other factors through open market or privately negotiated transactions, and will be funded from available capital. During the first quarter of 2014, we repurchased 7.2 million shares at an average price per share of $83.45 for a total cost of $600 million. The remaining authorized amount for share repurchase under the 2012 Share Repurchase Program is $2.3 billion.
 
ITEM 6.                             EXHIBITS
 
Exhibits — The exhibits filed with this report are listed on the attached Exhibit Index.

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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Aon plc
 
(Registrant)
 
 
April 25, 2014
By:
/s/ Laurel Meissner
 
LAUREL MEISSNER
 
SENIOR VICE PRESIDENT AND
 
GLOBAL CONTROLLER
 
(Principal Accounting Officer and duly authorized officer of Registrant)


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Exhibit Index
 
Exhibit Number
 
Description of Exhibit
10.1
 
Aon plc Leadership Performance Program for 2014-2016
10.2
 
Executive Committee Incentive Compensation Plan
12.1
 
Statement regarding Computation of Ratio of Earnings to Fixed Charges.
31.1
 
Certification of CEO.
31.2
 
Certification of CFO.
32.1
 
Certification of CEO Pursuant to section 1350 of Title 18 of the United States Code.
32.2
 
Certification of CFO Pursuant to section 1350 of Title 18 of the United States Code.
101
 
Interactive Data Files. The following materials are filed electronically with this Quarterly Report on Form 10-Q:
 
 
101.INS XBRL Report Instance Document
 
 
101.SCH XBRL Taxonomy Extension Schema Document
 
 
101.CAL XBRL Taxonomy Calculation Linkbase Document
 
 
101.DEF XBRL Taxonomy Definition Linkbase Document
 
 
101.PRE XBRL Taxonomy Presentation Linkbase Document
 
 
101.LAB XBRL Taxonomy Calculation Linkbase Document





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