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AON PLC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY OF 2021 FINANCIAL RESULTS
Aon plc is a leading global professional services firm providing a broad range of risk, health, and wealth solutions. Through our experience, global reach, and comprehensive analytics, we are better able to help clients meet rapidly changing, increasingly complex, and interconnected challenges. We are committed to accelerating innovation to address unmet and evolving client needs, so that our clients are better informed, better advised, and able to make better decisions to protect and grow their business. Management is focused on strengthening Aon and uniting the firm with one portfolio of capability enabled by data and analytics and one operating model to deliver additional insight, connectivity, and efficiency.
Financial Results
The following is a summary of our 2021 financial results:
•Revenue increased$1.1 billion , or 10%, to$12.2 billion in 2021 compared to 2020, reflecting 9% organic revenue growth and a 2% favorable impact from foreign currency translation, partially offset by a 1% unfavorable impact from divestitures, net of acquisitions. •Operating expenses increased$1.8 billion , or 22%, to$10.1 billion in 2021 compared to 2020 due primarily to a$1.3 billion increase in charges related to terminating the combination with WTW and related costs, increased expenses associated with 9% organic revenue growth, and a$195 million unfavorable impact from translating prior year period results at current period foreign exchange rates ("foreign currency translation"), partially offset by a$72 million decrease in amortization related to certain tradenames that were fully amortized in the second quarter of 2020 and a$58 million decrease in expenses related to divestitures, net of acquisitions.
•Operating margin decreased to 17.1% in 2021 from 25.1% in 2020. The decrease
was driven by an increase in operating expenses as listed above, partially
offset by organic revenue growth of 9%.
•Due to the factors set forth above, Net income was
decrease of
•Diluted earnings per share decreased 34% to
months of 2021 compared to
•Cash flows provided by operating activities was
decrease of
the
terminating the combination with WTW, partially offset by strong revenue growth.
We focus on four key metrics not presented in accordance withU.S. GAAP that we communicate to shareholders: organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, and free cash flow. These non-GAAP metrics should be viewed in addition to, not instead of, our Consolidated Financial Statements. The following is our measure of performance against these four metrics for 2021: •Organic revenue growth, a non-GAAP measure defined under the caption "Review of Consolidated Results - Organic Revenue Growth," was 9% in 2021, compared to 1% organic growth in the prior year. •Adjusted operating margin, a non-GAAP measure defined under the caption "Review of Consolidated Results - Adjusted Operating Margin," was 30.1% in 2021, compared to 28.5% in the prior year. The increase in adjusted operating margin primarily reflects 9% organic revenue growth and a favorable impact from foreign currency translation of$63 million . •Adjusted diluted earnings per share, a non-GAAP measure defined under the caption "Review of Consolidated Results - Adjusted Diluted Earnings per Share," was$12.00 per share in 2021, an increase of$2.19 per share, or 22%, from$9.81 per share in 2020. The increase in adjusted diluted earnings per share primarily reflects strong operational performance and effective capital management, highlighted by$3.5 billion of share repurchase during 2021, and a favorable impact from foreign currency translation. •Free cash flow, a non-GAAP measure defined under the caption "Review of Consolidated Results - Free Cash Flow," was$2.0 billion in 2021, a decrease of$597 million , or 23%, from$2.6 billion in 2020, reflecting a decrease in cash flows from operations, partially offset by a$4 million decrease in capital expenditures. 30 --------------------------------------------------------------------------------
BUSINESS OVERVIEW
In the third quarter of 2021, we announced a realignment of our principal
service lines to the following:
Solutions,
solution lines results in the following changes in the presentation of our
principal service line reporting:
•Data & Analytic Services' revenue and organic revenue results, which were previously reported as a separate principal service line and include Affinity, Aon Inpoint,CoverWallet , and ReView, are included withinCommercial Risk Solutions .
•Human Capital, which was previously reported within Retirement Solutions, is
included within
•Wealth Solutions includes revenue and organic revenue results for all
businesses previously reported within Retirement Solutions, excluding Human
Capital.
The changes in the solution line structure affects only the manner in which our revenue and organic revenue results for our principal service lines were previously reported and have no impact our previously reported Consolidated Financial Statements, results of operations, or total organic revenue growth. We continue to operate as one segment that includes all of our operations. See the "Principal Products and Services" section in Part I, Item 1 of this report for information on each of the four principal service lines.
TERMINATION OF BUSINESS COMBINATION AGREEMENT
On
respect to a combination of the parties (the "Combination"). The parties'
respective shareholders approved the Combination on
OnJune 16, 2021 , the DOJ filed a civil antitrust lawsuit against the Company and WTW in theUnited States District Court for the District of Columbia seeking to enjoin the Combination. OnJuly 26, 2021 , the Company and WTW mutually agreed to terminate the Business Combination Agreement (the "Termination Agreement"). Pursuant to the Termination Agreement, the Business Combination Agreement was terminated and a termination fee of$1 billion (the "Termination Fee") was paid to WTW. Following the termination, the lawsuit by the DOJ was dismissed.Aon Corporation , a subsidiary ofAon plc , paid the Termination Fee to WTW onJuly 27, 2021 , reflecting thatU.S. business services provided byAon Corporation and its subsidiaries were the primary focus of the DOJ's challenge to our proposed combination. The Termination Fee was paid to defend the existingU.S. business ofAon Corporation and to avoid additional remedy divestitures of criticalAon Corporation business segments in theU.S. and the continuing delay and uncertainty in completing the combination.
COVID-19 PANDEMIC
The outbreak of the coronavirus, which causes COVID-19, was declared by theWorld Health Organization to be a pandemic and has impacted almost all countries, in varying degrees, creating significant public health concerns, and significant volatility, uncertainty, and economic disruption in every region in which we operate. The COVID-19 pandemic has resulted, and may continue to result, in significant economic disruption and volatility, although in recent months progress has been made in the development and distribution of vaccines, contributing to overall improved economic conditions globally, despite recent developments as a result of the Delta and Omicron variants. We continue to closely monitor the situation and its impacts on our business, liquidity, and capital planning initiatives. We continue to be fully operational and to reoccupy certain offices in phases, where deemed appropriate and in compliance with governmental restrictions considering the impact on health and safety of our colleagues, their families, and our clients, and we have restricted or minimized access to offices where appropriate to support the health and safety of our colleagues. We continue to deploy business continuity protocols to facilitate remote working capabilities to ensure the health and safety of our colleagues and to comply with public health and travel guidelines and restrictions. As the situation continues to evolve, the scale and duration of disruption cannot be predicted, and it is not possible to quantify or estimate the full impact that COVID-19 will have on our business. While we continue to focus on managing our cash flow to meet liquidity needs, our results of operations, particularly with respect to our more discretionary revenues, may be adversely affected. However, for the year endedDecember 31, 2021 , the impacts of COVID-19 on our business results have lessened and we have seen overall strength across the firm. We continue to monitor the situation closely.
The impacts of the pandemic on our business operations and results of operations
for the year ended
entitled "Review of Consolidated Results" and "Liquidity and Financial
Condition" contained in Part II, Item 7 of this report.
31 --------------------------------------------------------------------------------
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
For many companies, the management of ESG risks and opportunities has become increasingly important. Aon offers a wide range of consulting and advisory solutions designed to address and manage ESG issues for clients. We view ESG risks as presenting an important opportunity to help clients and improve our impact on ESG matters.
REVIEW OF CONSOLIDATED RESULTS
Summary of Results
Our consolidated results are as follow (in millions, except per share data):
Years Ended December 31
2021 2020 2019
Revenue
Total revenue $ 12,193 $ 11,066 $ 11,013
Expenses
Compensation and benefits 6,738 5,905 6,054
Information technology 477 444 494
Premises 327 291 339
Depreciation of fixed assets 179 167 172
Amortization and impairment of intangible assets 147 246 392
Other general expense 2,235 1,232 1,393
Total operating expenses 10,103 8,285 8,844
Operating income 2,090 2,781 2,169
Interest income 11 6 8
Interest expense (322) (334) (307)
Other income 152 13 -
Income before income taxes 1,931 2,466 1,870
Income tax expense 623 448 297
Net income 1,308 2,018 1,573
Less: Net income attributable to noncontrolling
interests 53 49 41
Net income attributable to Aon shareholders $ 1,255
Diluted net income per share attributable to Aon shareholders$ 5.55 $ 8.45 $ 6.37 Weighted average ordinary shares outstanding - diluted 226.1 233.1 240.6
Consolidated Results for 2021 Compared to 2020
Revenue
Total revenue increased$1.1 billion , or 10%, to$12.2 billion in 2021, compared to$11.1 billion in 2020. The increase was driven by 9% organic revenue growth and a 2% favorable impact from foreign currency translation, partially offset by a 1% unfavorable impact from divestitures, net of acquisitions.Commercial Risk Solutions revenue increased$774 million , or 13%, to$6.6 billion in 2021, compared to$5.9 billion in 2020. Organic revenue growth was 11% in 2021, reflecting growth across every major geography, driven by strong new business generation, retention, and management of the renewal book portfolio. Strength in retail brokerage was highlighted by double-digit growth in theU.S. ,Latin America , andAsia . Results also reflect growth in the more discretionary portions of the business, including double-digit growth in transaction solutions and project-related work. On average globally, exposures and pricing were both modestly positive, which resulted in a modestly positive market impact overall. Reinsurance Solutions revenue increased$183 million , or 10%, to$2.0 billion in 2021, compared to$1.8 billion in 2020. Organic revenue growth was 8% in 2021 driven by strong net new business generation in treaty, as well as solid growth in facultative placements and double-digit growth in capital markets transactions. In addition, market impact was modestly positive on results. 32 --------------------------------------------------------------------------------Health Solutions revenue increased$87 million , or 4%, to$2.2 billion in 2021, compared to$2.1 billion in 2020. Organic revenue growth was 10% in 2021 driven by double-digit growth in human capital due to growth in both rewards and assessments solutions. In health and benefits brokerage, solid growth globally in the core was driven by strong retention and management of the renewal book portfolio, as well as growth in the more discretionary portions of the business, including double-digit growth in voluntary benefits and enrollment solutions and project-related work. Wealth Solutions revenue increased$85 million , or 6%, to$1.4 billion in 2021, compared to$1.3 billion in 2020. Organic revenue growth was 2% in 2021 driven by growth in investments, including solid growth in delegated investment management, as well as growth in retirement, primarily from higher utilization rates and project-related work.
Compensation and Benefits
Compensation and benefits increased$833 million , or 14%, in 2021 compared to 2020. The increase was primarily driven by an increase in expense associated with 9% organic revenue growth, a$245 million increase in charges related to terminating the combination with WTW and related costs, and a$151 million unfavorable impact from foreign currency translation, partially offset by a$17 million decrease in expenses related to divestitures, net of acquisitions.
Information Technology
Information technology, which represents costs associated with supporting and maintaining our infrastructure, increased$33 million , or 7%, in 2021 compared to 2020. The increase was primarily driven by a$17 million increase in charges related to terminating the combination with WTW and related costs, an increase in expense associated with 9% organic revenue growth, investments in long-term growth, and a$5 million unfavorable impact from foreign currency translation.
Premises
Premises, which represents the cost of occupying offices in various locations throughout the world, increased$36 million , or 12%, in 2021 compared to 2020. The increase was primarily driven by a$22 million increase in charges related to terminating the combination with WTW and related costs and a$10 million unfavorable impact from foreign currency translation.
Depreciation of Fixed Assets
Depreciation of fixed assets primarily relates to software, leasehold improvements, furniture, fixtures and equipment, computer equipment, buildings, and automobiles. Depreciation of fixed assets increased$12 million , or 7%, in 2021 compared to 2020. The increase was primarily driven by a$16 million increase in charges related to terminating the combination with WTW and related costs.
Amortization and Impairment of Intangible Assets
Amortization and impairment of intangibles primarily relates to finite-lived tradenames and customer-related, contract-based, and technology assets. Amortization and impairment of intangibles decreased$99 million , or 40%, in 2021 compared to 2020. The decrease was primarily driven by a$72 million decrease from certain tradenames that were fully amortized in the second quarter of 2020. Other General Expenses Other general expenses increased$1.0 billion , or 81%, in 2021 compared to 2020. The increase was primarily driven by a$1.0 billion increase in charges related to terminating the combination with WTW and related costs, a$21 million unfavorable impact from foreign currency translation, and an increase in expense associated with 9% organic revenue growth, partially offset by a$37 million decrease in expenses related to divestitures, net of acquisitions.
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. Interest income was$11 million in 2021, an increase of$5 million , or 83%, from 2020. Interest Expense Interest expense, which represents the cost of our debt obligations, was$322 million in 2021, a decrease of$12 million , or 4%, from 2020. The decrease was primarily driven by lower average outstanding term debt. 33 --------------------------------------------------------------------------------
Other Income
Other income was$152 million in 2021, compared to$13 million in 2020. Other income in 2021 primarily includes$142 million of gains from the disposal of business, compared to$25 million in 2020.
Income before Income Taxes
Due to factors described above, income before income taxes was
2021, a 22% decrease from
driven by a
combination with WTW and related costs, as previously described.
Income Taxes
The effective tax rate on net income was 32.3% in 2021 and 18.2% in 2020. The primary drivers of the 2021 tax rate were the impact of the Termination Fee, theU.K. statutory tax rate increase, and the tax benefit of share-based payments. TheU.K. enacted legislation in the second quarter of 2021 which increases the corporate income tax rate from 19% to 25% with effect fromApril 1, 2023 and the Company remeasured itsU.K. deferred tax assets and liabilities accordingly.
The 2020 tax rate was primarily driven by the geographical distribution of
income, as well as certain discrete items, primarily the favorable impacts of
share-based payments and the release of a valuation allowance.
Net Income Attributable to Aon Shareholders
Net income attributable to Aon shareholders decreased to
per diluted share, in 2021, compared to
share, in 2020.
Consolidated Results for 2020 Compared to 2019
We have elected not to include a discussion of our consolidated results for 2020 compared to 2019 in this report in reliance upon Instruction 1 to Item 303(b) of Regulation S-K. This discussion can be found in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSEC onFebruary 19, 2021 . Non-GAAP Metrics In our discussion of consolidated results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth (decline), adjusted operating margin, adjusted diluted earnings per share, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. Management believes that these measures are important to make meaningful period-to-period comparisons and that this supplemental information is helpful to investors. Management also uses these measures to assess operating performance and performance for compensation. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Consolidated Financial Statements. 34 --------------------------------------------------------------------------------
Organic Revenue Growth (Decline)
We use supplemental information related to organic revenue growth (decline) to help us and our investors evaluate business growth from existing operations. Organic revenue growth (decline) is a non-GAAP measure that includes the impact of intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. This supplemental information related to organic revenue growth (decline) represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. A reconciliation of this non-GAAP measure to the reported Total revenue is as follows (in millions, except percentages): Years Ended Less: Fiduciary Organic Less: Currency Investment Income Less: Acquisitions, Revenue Growth Dec 31, 2021 Dec 31, 2020 % Change Impact (1) (2) Divestitures & Other (3) Commercial Risk Solutions$ 6,635 $ 5,861 13 % 2 % - % - % 11 % Reinsurance Solutions 1,997 1,814 10 2 - - 8 Health Solutions 2,154 2,067 4 2 - (8) 10 Wealth Solutions 1,426 1,341 6 3 - 1 2 Elimination (19) (17) N/A N/A N/A N/A N/A Total revenue$ 12,193 $ 11,066 10 % 2 % - % (1) % 9 % Years Ended Less: Fiduciary Organic Revenue Less: Currency Investment Income Less: Acquisitions, Growth (Decline) Dec 31, 2020 Dec 31, 2019 % Change Impact (1) (2) Divestitures & Other (3) Commercial Risk Solutions$ 5,861 $ 5,857 - % - % - % (1) % 1 % Reinsurance Solutions 1,814 1,686 8 - (1) (1) 10 Health Solutions 2,067 2,104 (2) (1) - 1 (2) Wealth Solutions 1,341 1,380 (3) - - (2) (1) Elimination (17) (14) NA NA NA NA NA Total revenue$ 11,066 $ 11,013 - % - % - % (1) % 1 % (1)Currency impact is determined by translating last year's revenue at this year's foreign exchange rates. (2)Fiduciary investment income for the years endedDecember 31, 2021 and 2020 was$8 million and$27 million , respectively. (3)Organic revenue growth (decline) includes the impact of intercompany activity, changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. 35 --------------------------------------------------------------------------------
Adjusted Operating Margin
We use adjusted operating margin as a non-GAAP measure of core operating performance of the Company. Adjusted operating margin excludes the impact of certain items, as listed below, because management does not believe these expenses reflect our core operating performance. This supplemental information related to adjusted operating margin represents a measure not in accordance withU.S. GAAP, and should be viewed in addition to, not instead of, our Consolidated Financial Statements.
A reconciliation of this non-GAAP measure to reported operating margins is as
follows (in millions, except percentages):
Years Ended
2021 2020 Revenue$ 12,193 $ 11,066 Operating income - as reported$ 2,090 $ 2,781 Amortization and impairment of intangible assets 147 246
Transaction costs and other charges related to the combination
and resulting termination (1)
1,436 123 Operating income - as adjusted$ 3,673 $ 3,150 Operating margin - as reported 17.1 % 25.1 % Operating margin - as adjusted 30.1 % 28.5 % (1)As part of the terminated combination with WTW, certain transaction costs have been incurred by us in 2021. These costs may include advisory, legal, accounting, valuation, and other professional or consulting fees related to the combination, including planned divestitures that have been terminated, as well as certain compensation expenses and expenses related to further steps on our Aon United operating model as a result of the termination. Additionally, this includes the$1 billion Termination Fee paid in connection with the termination of the combination.
Adjusted Diluted Earnings per Share
We use adjusted diluted earnings per share as a non-GAAP measure of our core operating performance. Adjusted diluted earnings per share excludes the items identified above, along with pension settlements and related income taxes, because management does not believe these expenses are representative of our core earnings. This supplemental information related to adjusted diluted earnings per share represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements. A reconciliation of this non-GAAP measure to reported diluted earnings per share is as follows (in millions, except per share data and percentages):
Year Ended
U.S. GAAP Adjustments Non-GAAP Adjusted Operating income$ 2,090 $ 1,583 $ 3,673 Interest income 11 - 11 Interest expense (322) - (322) Other income (1) 152 (124) 28 Income before income taxes 1,931 1,459 3,390 Income tax expense (2) 623 - 623 Net income 1,308 1,459 2,767 Less: Net income attributable to noncontrolling interests 53 - 53 Net income attributable to Aon shareholders$ 1,255 $ 1,459 $ 2,714 Diluted net income per share attributable to Aon shareholders$ 5.55 $ 6.45 $ 12.00 Weighted average ordinary shares outstanding - diluted 226.1 - 226.1 Effective tax rates (2) 32.3 % 18.4 % 36
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Year Ended
U.S. GAAP Adjustments Non-GAAP Adjusted Operating income$ 2,781 $ 369 $ 3,150 Interest income 6 - 6 Interest expense (334) - (334) Other income (3) 13 - 13 Income before income taxes 2,466 369 2,835 Income tax expense (2) 448 51 499 Net income 2,018 318 2,336 Less: Net income attributable to noncontrolling interests 49 - 49 Net income attributable to Aon shareholders$ 1,969 $ 318 $ 2,287 Diluted net income per share attributable to Aon shareholders$ 8.45 $ 1.36 $ 9.81 Weighted average ordinary shares outstanding - diluted 233.1 - 233.1 Effective tax rates (2) 18.2 % 17.6 % (1)Adjusted Other income excludes gains from dispositions of$124 million , for the year endedDecember 31, 2021 . (2)Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with accelerated tradename amortization, impairment charges, certain gains from dispositions, and certain transaction costs and other charges related to the combination and resulting termination, which are adjusted at the related jurisdictional rate. In addition, income tax expense for the year endedDecember 30, 2021 excludes the impact of remeasuring the net deferred tax liabilities in theU.K. as a result of the corporate income tax rate increase enacted in the second quarter of 2021. (3)There was$1 million of income for the year endedDecember 31, 2020 , including the related tax effect, from discontinued operations recognized in Net Income from discontinued operations in the Consolidated Statement of Income.
Free Cash Flow
We use free cash flow, defined as cash flow provided by operations minus capital expenditures, as a non-GAAP measure of our core operating performance and cash generating capabilities of our business operations. This supplemental information related to free cash flow represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, the Consolidated Financial Statements. The use of this non-GAAP measure does not imply or represent the residual cash flow for discretionary expenditures. A reconciliation of this non-GAAP measure to cash flow provided by operations is as follows (in millions): Years Ended December 31 2021 2020 Cash provided by operating activities$ 2,182 $ 2,783 Capital expenditures (137) (141) Free cash flow$ 2,045 $ 2,642
Impact of Foreign Currency Exchange Rate Fluctuations
Because we conduct business in more than 120 countries, foreign currency exchange rate fluctuations have a significant impact on our business. Foreign currency 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 rate fluctuations on our financial results. The methodology used to calculate this impact isolates the impact of the change in currencies between periods by translating the prior year's revenue, expenses, and net income using the current year's foreign currency exchange rates. Currency fluctuations had a favorable impact of$0.17 on earnings per diluted share during the year endedDecember 31, 2021 if prior year period results were translated at current period foreign exchange rates. Currency fluctuations had an unfavorable impact of$0.03 on earnings per diluted share during the year endedDecember 31, 2020 , if 2019 results were translated at 2020 rates. Currency fluctuations had a favorable impact of$0.23 on adjusted earnings per diluted share during the year endedDecember 31, 2021 if prior year period results were translated at current period foreign exchange rates. Currency fluctuations had an unfavorable impact of$0.04 on adjusted earnings per diluted share during the year endedDecember 31, 2020 , if 2019 37 --------------------------------------------------------------------------------
results were translated at 2020 rates. These translations are performed for
comparative and illustrative purposes only and do not impact the accounting
policies or practices for amounts included in our Financial Statements.
LIQUIDITY AND FINANCIAL CONDITION
Liquidity
Executive Summary
We believe that our balance sheet and strong cash flow provide us with adequate liquidity. Our primary sources of liquidity in the near-term include cash flows provided by operations and available cash reserves; primary sources of liquidity in the long-term include cash flows provided by operations, debt capacity available under our credit facilities and capital markets. Our primary uses of liquidity are operating expenses and investments, capital expenditures, acquisitions, share repurchases, pension obligations, and shareholder dividends. We believe that cash flows from operations, available credit facilities, available cash reserves, and the capital markets will be sufficient to meet our liquidity needs, including principal and interest payments on debt obligations, capital expenditures, pension contributions, and anticipated working capital requirements in the next twelve months and over the long-term. Although there continues to be uncertainties around future economic conditions due to COVID-19, we have largely returned to normal levels of liquidity and will continue to monitor our needs as economic conditions change. In the third quarter of 2021, the Combination with WTW was terminated and onJuly 27, 2021 , we paid the Termination Fee of$1 billion . Refer to "Termination of Business Combination Agreement" within Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for further information. The Termination Fee, along with other payments made in the third and fourth quarters related to terminating the combination with WTW, are reflected as an outflow to operating activities. Cash on our balance sheet includes funds available for general corporate purposes, as well as amounts restricted as to their use. Funds held on behalf of clients in a fiduciary capacity are segregated and shown together with uncollected insurance premiums and claims in Fiduciary assets in the Consolidated Statements of Financial Position, with a corresponding amount in Fiduciary liabilities. In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance underwriters. We also collect claims or refunds from underwriters on behalf of insureds, which are then returned to the insureds. Unremitted insurance premiums and claims are held by us in a fiduciary capacity. The levels of funds held on behalf of clients and liabilities can fluctuate significantly depending on when we collect the premiums, claims, and refunds, make payments to underwriters and insureds, and collect funds from clients and make payments on their behalf, and upon the impact of foreign currency movements. Funds held on behalf of clients, because of their nature, are generally invested in very liquid securities with highly rated, credit-worthy financial institutions. Fiduciary assets include funds held on behalf of clients comprised of cash and cash equivalents of$6.1 billion and$5.7 billion atDecember 31, 2021 and 2020, and fiduciary receivables of$8.3 billion and$8.1 billion atDecember 31, 2021 and 2020, respectively. While we earn investment income on the funds held in cash and money market funds, the funds cannot be used for general corporate purposes. We maintain multi-currency cash pools with third-party banks in which various Aon entities participate. Individual Aon entities are permitted to overdraw on their individual accounts provided the overall global balance does not fall below zero. AtDecember 31, 2021 , non-U.S. cash balances of one or more entities may have been negative; however, the overall balance was positive.
The following table summarizes our Cash and cash equivalents, Short-term
investments, and Fiduciary assets as of
Statement of
Financial Position Classification
Cash and cash Short-term Fiduciary
Asset Type equivalents investments assets Total
Certificates of deposit, bank deposits, or time
deposits $ 544
$ -
Money market funds
- 292 2,626 2,918 Cash, Short-term investments, and Funds held on behalf of clients 544 292 6,101 6,937 Fiduciary receivables - - 8,285 8,285 Total $ 544$ 292 $ 14,386 $ 15,222 38
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Cash and cash equivalents and Funds held on behalf of clients increased
million
used for operating, investing, and financing activities is as follows (in
millions):
Years Ended December 31
2021 2020 (1)
(As Revised)
Cash provided by operating activities $ 2,182 $ 2,783
Cash provided by (used for) investing activities $ 49 $ (679)
Cash used for financing activities $
(1,924)
Effect of exchange rates on cash and cash equivalents and funds
held on behalf of clients
$
(235) $ 297
(1) Certain amounts on the Consolidated Statements of Cash Flows as presented in our financial statements previously filed in the Company's Annual Reports on Form 10-K have been restated. Refer to Note 1 "Basis of Presentation" of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report. Operating Activities Net cash provided by operating activities during the year endedDecember 31, 2021 decreased$601 million , or 22%, from the prior year to$2,182 million . This amount represents net income reported, as adjusted for gains or losses on sales of businesses, share-based compensation expense, depreciation expense, amortization and impairments, and other non-cash income and expenses, as well as changes in working capital that relate primarily to the timing of payments of accounts payable and accrued liabilities and the collection of receivables.
Pension Contributions
Pension contributions were$87 million for the year endedDecember 31, 2021 , as compared to$120 million for the year endedDecember 31, 2020 . In 2022, we expect to contribute approximately$74 million in cash to our pension plans, including contributions to non-U.S. pension plans, which are subject to changes in foreign exchange rates. Investing Activities Cash flows provided by investing activities during the year endedDecember 31, 2021 were$49 million , an increase of$728 million compared to prior year. Generally, the primary drivers of cash flows provided by investing activities are sales of businesses, sales of short-term investments, and proceeds from investments. Generally, the primary drivers of cash flows used for investing activities are acquisition of businesses, purchases of short-term investments, capital expenditures, and payments for investments. The gains and losses corresponding to cash flows provided by proceeds from investments and used for payments for investments are primarily recognized in Other income in the Consolidated Statements of Income.
Short-term Investments
Short-term investments decreased$16 million atDecember 31, 2021 as compared toDecember 31, 2020 . As disclosed in Note 14 "Fair Value Measurements and Financial Instruments" of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report, the majority of our investments carried at fair value are money market funds. These money market funds are held throughout the world with various financial institutions. We are not aware of any market liquidity issues that would materially impact the fair value of these investments.
Acquisitions and Dispositions of Businesses
During 2021, the Company completed the acquisition of two businesses for consideration of$14 million , net of cash and funds held on behalf of clients, and the disposition of six businesses for a$218 million cash inflow, net of cash and funds held on behalf of clients. During 2020, the Company completed the acquisition of six businesses for consideration of$368 million , net of cash and funds held on behalf of clients, and the disposition of one business for a$30 million cash inflow, net of cash and funds held on behalf of clients.
Capital Expenditures
The Company's additions to fixed assets, including capitalized software, which amounted to$137 million in 2021 and$141 million in 2020, primarily related to the refurbishing and modernizing of office facilities, software development costs, and computer equipment purchases. 39 --------------------------------------------------------------------------------
Financing Activities
Cash flows used for financing activities during the year endedDecember 31, 2021 was$1,924 million , an increase of$152 million compared to prior year. Generally, the primary drivers of cash flows used for financing activities are issuances of debt, net of repayments, share repurchases, change in net fiduciary liabilities, dividends paid to shareholders, issuances of shares for employee benefit plans, transactions with noncontrolling interests, and other financing activities, such as collection of or payments for deferred consideration in connection with prior-year business acquisitions and divestitures.
Share Repurchase Program
We have a share repurchase program authorized by our Board of Directors. The Repurchase Program was established inApril 2012 with$5.0 billion in authorized repurchases, and was increased by$5.0 billion in authorized repurchases in each ofNovember 2014 ,June 2017 , andNovember 2020 , and by$7.5 billion in authorized repurchases inFebruary 2022 for a total of$27.5 billion in repurchase authorizations.
The following table summarizes the Company's Share Repurchase activity (in
millions, except per share data):
Years Ended December 31
2021 2020
Shares repurchased 12.4 8.5
Average price per share $ 286.82 $ 206.28
Costs recorded to retained earnings
Total repurchase cost $ 3,543 $
1,761
Additional associated costs -
2
Total costs recorded to retained earnings$ 3,543 $
1,763
AtDecember 31, 2021 , the remaining authorized amount for share repurchase under the Repurchase Program was approximately$1.7 billion . Under the Repurchase Program, we have repurchased a total of 149.6 million shares for an aggregate cost of approximately$18.3 billion .
Borrowings
Total debt atDecember 31, 2021 was$9.4 billion , an increase of$1.7 billion compared toDecember 31, 2020 . Commercial paper activity during the years endedDecember 31, 2021 and 2020 is as follows (in millions): Years Ended December 31 2021 2020 Total issuances (1)$ 4,478 $ 3,162 Total repayments (3,807) (3,275) Net issuances (repayments)$ 671 $ (113)
(1) The proceeds of the commercial paper issuances were used primarily for
short-term working capital needs.
Commercial paper may be issued in aggregate principal amounts of up to$1 billion under theU.S. Program and €625 million under the European Program, not to exceed the amount of our committed credit facilities, which was$1.75 billion atDecember 31, 2021 . The aggregate capacity of theU.S. Program was increased in the fourth quarter of 2021 from$900 million to$1 billion . The aggregate capacity of the Commercial Paper Program remains fully backed by our committed credit facilities.
Proceeds from commercial paper issued by
where the aggregate principal was raised on
approximately
OnDecember 2, 2021 ,Aon Corporation , aDelaware corporation, andAon Global Holdings plc , a public limited company incorporated under the laws ofEngland andWales , co-issued$500 million aggregate principal amount of 2.60% Senior Notes set to mature onDecember 2, 2031 . We intend to use the net proceeds of the offering for general corporate purposes. InNovember 2021 , the Company's$500 million 2.20% Senior Notes dueNovember 2022 were classified as Short-term debt and current portion of long-term debt in the Consolidated Statements of Financial Position as the date of maturity is in less than one year as ofDecember 31, 2021 . 40 -------------------------------------------------------------------------------- OnAugust 23, 2021 ,Aon Corporation , aDelaware corporation, andAon Global Holdings plc , a public limited company formed under the laws ofEngland andWales , both wholly owned subsidiaries of the Company, co-issued$400 million of 2.05% Senior Notes dueAugust 2031 and$600 million of 2.90% Senior Notes dueAugust 2051 . We intend to use the net proceeds from the offering for general corporate purposes. OnJanuary 13, 2021 ,Aon Global Limited , a limited company organized under the laws ofEngland andWales and a wholly owned subsidiary ofAon plc , issued an irrevocable notice of redemption to holders of its 2.80% Senior Notes for the redemption of all$400 million outstanding aggregate principal amount of the notes, which were set to mature inMarch 2021 and classified as Short-term debt and current portion of long-term debt as ofDecember 31, 2020 . The redemption date was onFebruary 16, 2021 and resulted in an insignificant loss due to extinguishment. OnMay 29, 2020 ,Aon Corporation , aDelaware corporation and a wholly owned subsidiary of the Company, issued an irrevocable notice of redemption to holders of its 5.00% Senior Notes, which were set to mature onSeptember 30, 2020 , for the redemption of all$600 million outstanding aggregate principal amount of the notes. The redemption date was onJune 30, 2020 and resulted in a loss of$7 million due to extinguishment. OnMay 12, 2020 ,Aon Corporation issued$1 billion 2.80% Senior Notes dueMay 2030 .Aon Corporation used a portion of the net proceeds onJune 30, 2020 to repay its outstanding 5.00% Senior Notes, which were set to mature onSeptember 30, 2020 . We used the remainder to repay other borrowings and for general corporate purposes. Other Liquidity Matters Distributable Profits We are required under Irish law to have available "distributable profits" to make share repurchases or pay dividends to shareholders. Distributable profits are created through the earnings of the Irish parent company and, among other methods, through intercompany dividends or a reduction in share capital approved by theHigh Court of Ireland . Distributable profits are not linked to aU.S. GAAP reported amount (e.g. retained earnings). OnJuly 16, 2021 , we received approval from theHigh Court of Ireland to complete a reduction in share premium to create distributable profits of$34.0 billion to support the payment of possible future dividends or future share repurchases, if and to the extent declared by the directors in compliance with their duties under Irish law. As ofDecember 31, 2021 andDecember 31, 2020 , we had distributable profits in excess of$32.7 billion and$0.2 billion , respectively. We believe that we will have sufficient distributable profits for the foreseeable future.
Credit Facilities
We expect cash generated by operations for 2021 to be sufficient to service our debt and contractual obligations, finance capital expenditures, and continue to pay dividends to our shareholders. Although cash from operations is expected to be sufficient to service these activities, we have the ability to access the commercial paper markets or borrow under our credit facilities to accommodate any timing differences in cash flows. Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed. As ofDecember 31, 2021 , we had two primary committed credit facilities outstanding: our$1.0 billion multi-currencyU.S. credit facility expiring inSeptember 2026 and our$750 million multi-currencyU.S. credit facility expiring inOctober 2023 . In aggregate, these two facilities provide$1.75 billion in available credit. The$1.0 billion credit facility was entered into onSeptember 28, 2021 and replaced the$900 million credit facility, which was scheduled to mature onFebruary 2, 2022 . Each of these primary committed credit facilities includes customary representations, warranties, and covenants, including financial covenants that require us to maintain specified ratios of adjusted consolidated EBITDA to consolidated interest expense and consolidated debt to consolidated adjusted EBITDA, tested quarterly. AtDecember 31, 2021 , we did not have borrowings under either facility, and we were in compliance with the financial covenants and all other covenants contained therein during the rolling year endedDecember 31, 2021 . Shelf Registration Statement OnMay 12, 2020 , we filed a shelf registration statement with theSEC , registering the offer and sale from time to time of an indeterminate amount of, among other securities, debt securities, preference shares, Class A Ordinary Shares and convertible securities. Our ability to access the market as a source of liquidity is dependent on investor demand, market conditions, and other factors. 41 --------------------------------------------------------------------------------
Rating Agency Ratings
The major rating agencies' ratings of our debt atFebruary 18, 2022 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
Guarantees in Connection with the Sale of the Divested Business
In connection with the sale of the Divested Business, we guaranteed future operating lease commitments related to certain facilities assumed by the Buyer. We are obligated to perform under the guarantees if the Divested Business defaults on the leases at any time during the remainder of the lease agreements, which expire on various dates through 2025. As ofDecember 31, 2021 , the undiscounted maximum potential future payments under the lease guarantee were$40 million , with an estimated fair value of$5 million . No cash payments were made in connection to the lease commitments during the year endedDecember 31, 2021 . Additionally, we are subject to performance guarantee requirements under certain client arrangements that were assumed by the Buyer. Should the Divested Business fail to perform as required by the terms of the arrangements, we would be required to fulfill the remaining contract terms, which expire on various dates through 2023. As ofDecember 31, 2021 , the undiscounted maximum potential future payments under the performance guarantees were$52 million , with an estimated fair value of less than$1 million . No cash payments were made in connection to the performance guarantees during the year endedDecember 31, 2021 .
Letters of Credit and Other Guarantees
We have entered into a number of arrangements whereby our performance on certain obligations is guaranteed by a third party through the issuance of an LOC. We had total LOCs outstanding of approximately$75 million atDecember 31, 2021 , compared to$79 million atDecember 31, 2020 . These LOCs cover the beneficiaries related to certain of ourU.S. and Canadian non-qualified pension plan schemes and secure deductible retentions for our own workers' compensation program. We also have obtained LOCs to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at our international subsidiaries. We have certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. The maximum exposure with respect to such contractual contingent guarantees was approximately$153 million atDecember 31, 2021 , compared to$113 million atDecember 31, 2020 .
Contractual Obligations
Our contractual obligations and commitments as of
comprised of principal payments on debt, interest payments on debt, operating
leases, pension and other postretirement benefit plans, and purchase
obligations.
Operating leases are primarily comprised of leased office space throughout the world. As leases expire, we do not anticipate difficulty in negotiating renewals or finding other satisfactory space if the premise becomes unavailable. In certain circumstances, we may have unused space and may seek to sublet such space to third parties, depending upon the demands for office space in the locations involved. Refer to Note 8 "Lease Commitments" of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report for further information. Pension and other postretirement benefit plan obligations include estimates of our minimum funding requirements pursuant to the ERISA and other regulations, as well as minimum funding requirements agreed with the trustees of ourU.K. pension plans. Additional amounts may be agreed to with, or required by, theU.K. pension plan trustees. Nonqualified pension and other postretirement benefit obligations are based on estimated future benefit payments. We may make additional discretionary contributions. Refer to Note 11 "Employee Benefits" of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report for further information. Purchase obligations are defined as agreements to purchase goods and services that are enforceable and legally binding on us, and that specifies all significant terms, including the goods to be purchased or services to be rendered, the price at which the goods or services are to be rendered, and the timing of the transactions. Most of our purchase obligations are related to purchases of information technology services or other service contracts. 42 -------------------------------------------------------------------------------- We had no other cash requirements from known contractual obligations and commitments that have, or are reasonably likely to have, a current or future material effect on the Company's financial condition, results of operations, or liquidity.
Guarantee of
In connection with the Reorganization, onApril 1, 2020 Aon plc andAon Global Holdings plc , a company incorporated under the laws ofEngland andWales , entered into various agreements pursuant to which they agreed to guarantee the obligations ofAon Corporation arising under issued and outstanding debt securities, which were previously guaranteed solely byAon Global Limited and the obligations ofAon Global Limited arising under issued and outstanding debt securities, which were previously guaranteed solely byAon Corporation . Those agreements include: (1) Second Amended and Restated Indenture, datedApril 1, 2020 , amongAon Corporation ,Aon Global Limited ,Aon plc , andAon Global Holdings plc andThe Bank of New York Mellon Trust Company, N.A. , as trustee (the "Trustee") (amending and restating the Amended and Restated Indenture, datedApril 2, 2012 , amongAon Corporation ,Aon Global Limited and the Trustee); (2) Amended and Restated Indenture, datedApril 1, 2020 , amongAon Corporation ,Aon Global Limited ,Aon plc ,Aon Global Holdings plc and the Trustee (amending and restating the Indenture, datedDecember 12, 2012 , amongAon Corporation ,Aon Global Limited plc and the Trustee); (3) Second Amended and Restated Indenture, datedApril 1, 2020 , amongAon Corporation ,Aon Global Limited ,Aon plc ,Aon Global Holdings plc and the Trustee (amending and restating the Amended and Restated Indenture, datedMay 20, 2015 , amongAon Corporation ,Aon Global Limited and the Trustee); (4) Amended and Restated Indenture, datedApril 1, 2020 , amongAon Corporation ,Aon Global Limited ,Aon plc ,Aon Global Holdings plc and the Trustee (amending and restating the Indenture, datedNovember 13, 2015 , amongAon Corporation ,Aon Global Limited and the Trustee); and (5) Amended and Restated Indenture, datedApril 1, 2020 , amongAon Corporation ,Aon Global Limited ,Aon plc ,Aon Global Holdings plc and the Trustee (amending and restating the Indenture, datedDecember 3, 2018 , amongAon Corporation ,Aon Global Limited and the Trustee).
After the Reorganization, newly issued and outstanding debt securities by
Corporation
Holdings plc
Notes"):
Aon Corporation Notes 2.20% Senior Notes dueNovember 2022 8.205% Junior Subordinated Notes dueJanuary 2027 4.50% Senior Notes dueDecember 2028 3.75% Senior Notes dueMay 2029 2.80% Senior Notes due 2030 6.25% Senior Notes dueSeptember 2040 All guarantees ofAon plc ,Aon Global Limited , andAon Global Holdings plc of the Aon Corporation Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the company. There are no subsidiaries other than those listed above that guarantee theAon Corporation Notes. After the Reorganization, newly issued and outstanding debt securities byAon Global Limited are guaranteed byAon plc ,Aon Global Holdings plc , andAon Corporation , and include the following (collectively, the "Aon Global Limited Notes"): Aon Global Limited Notes 4.00% Senior Notes dueNovember 2023 3.50% Senior Notes dueJune 2024 3.875% Senior Notes dueDecember 2025 2.875% Senior Notes dueMay 2026 4.25% Senior Notes dueDecember 2042 4.45% Senior Notes dueMay 2043 4.60% Senior Notes dueJune 2044 4.75% Senior Notes dueMay 2045 All guarantees ofAon plc ,Aon Global Holdings plc , andAon Corporation of the Aon Global Limited Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future 43 -------------------------------------------------------------------------------- unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the company. There are no subsidiaries other than those listed above that guarantee the Aon Global Limited Notes.
Newly co-issued and outstanding debt securities by
Global Holdings plc
Notes"):
Co-Issued Notes -Aon Corporation andAon Global Holdings plc 2.05% Senior Notes dueAugust 2031 2.60% Senior Notes dueDecember 2031 2.90% Senior Notes dueAugust 2051 All guarantees ofAon plc andAon Global Limited of the Co-Issued Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the Co-Issuers. There are no subsidiaries other than those listed above that guarantee the Co-Issued Notes.Aon Corporation ,Aon Global Limited , andAon Global Holdings plc are indirect wholly owned subsidiaries ofAon plc .Aon plc ,Aon Global Limited ,Aon Global Holdings plc , andAon Corporation together comprise the "Obligor group". The following tables set forth summarized financial information for the Obligor group. Adjustments are made to the tables to eliminate intercompany balances and transactions between the Obligor group. Intercompany balances and transactions between the Obligor group and non-guarantor subsidiaries are presented as separate line items within the summarized financial information. These balances are presented on a net presentation basis, rather than a gross basis, as this better reflects the nature of the intercompany positions and presents the funding or funded position that is to be received or owed. No balances or transactions of non-guarantor subsidiaries are presented in the summarized financial information, including investments of the Obligor group in non-guarantor subsidiaries. Summarized Statement of Income information for the Obligor group is as follows (in millions): Obligor Group Summarized Statement of Income Information Year Ended December 31, 2021 Revenue $ - Operating loss $ (1,156) Expense from non-guarantor subsidiaries before income taxes $ (778) Net loss $ (2,120) Net loss attributable to Aon shareholders $ (2,120) 44 -------------------------------------------------------------------------------- Summarized Statement of Financial Position information for the Obligor group is as follows (in millions): Obligor Group Summarized Statement of Financial Position Information As of December 31, 2021 Receivables due from non-guarantor subsidiaries $ 1,646 Other current assets 57 Total current assets $ 1,703 Non-current receivables due from non-guarantor subsidiaries $ 498 Other non-current assets 882 Total non-current assets $ 1,380 Payables to non-guarantor subsidiaries $ 13,509 Other current liabilities 2,013 Total current liabilities $ 15,522 Non-current payables to non-guarantor subsidiaries $ 7,139 Other non-current liabilities 9,512 Total non-current liabilities $ 16,651
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Consolidated Financial Statements have been prepared in accordance withU.S. GAAP. To prepare these financial statements, we make estimates, assumptions, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the periods presented. In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, pensions, goodwill and other intangible assets, contingencies, share-based payments, and income taxes, and base our estimates, assumptions, and judgments on our historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these Consolidated Financial Statements.
Revenue Recognition
The Company recognizes revenue when control of the promised services is transferred to the customer in the amount that best reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements where control is transferred over time, an input or output method is applied that represents a faithful depiction of the progress towards completion of the performance obligation. For arrangements that include variable consideration, the Company assesses whether any amounts should be constrained. For arrangements that include multiple performance obligations, the Company allocates consideration based on their relative fair values. Costs incurred by the Company in obtaining a contract are capitalized and amortized on a systematic basis that is consistent with the transfer of control of the services to which the asset relates, considering anticipated renewals when applicable. Certain contract related costs, including pre-placement brokerage costs, are capitalized as a cost to fulfill and are amortized on a systematic basis consistent with the transfer of control of the services to which the asset relates, which is generally less than one year.Commercial Risk Solutions includes retail brokerage, specialty solutions, global risk consulting and captives management, and Affinity programs. Revenue primarily includes insurance commissions and fees for services rendered. Revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement using output measures to depict the transfer of control of the services 45 -------------------------------------------------------------------------------- to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements recognized over time, various output measures, including units transferred and time elapsed, are utilized to provide a faithful depiction of the progress towards completion of the performance obligation. Revenue is recorded net of allowances for estimated policy cancellations, which are determined based on an evaluation of historical and current cancellation data. Commissions and fees for brokerage services may be invoiced near the effective date of the underlying policy or over the term of the arrangement in installments during the policy period. Reinsurance Solutions includes treaty reinsurance, facultative reinsurance, and capital markets. Revenue primarily includes reinsurance commissions and fees for services rendered. Revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement using output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements recognized over time, various output measures, including units delivered and time elapsed, are utilized to provide a faithful depiction of the progress towards completion of the performance obligation. Commissions and fees for brokerage services may be invoiced at the inception of the reinsurance period for certain reinsurance brokerage, or more commonly, over the term of the arrangement in installments based on deposit or minimum premiums for most treaty reinsurance arrangements.Health Solutions includes consulting and brokerage, Human Capital, and voluntary benefits and enrollment solutions. Revenue primarily includes insurance commissions and fees for services rendered. For brokerage commissions, revenue is predominantly recognized at the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services using input or output measures, including units delivered or time elapsed, to provide a faithful depiction of the progress towards completion of the performance obligation. For Human Capital, revenue is recognized over time or at a point in time upon completion of the services. For arrangements recognized over time, revenue is based on a measure of progress that depicts the transfer of control of the services to the customer utilizing an appropriate input or output measure to provide a faithful depiction of the progress towards completion of the performance obligation, including units delivered or time elapsed. Input and output measures utilized vary based on the arrangement but typically include reports provided or days elapsed. Revenue from voluntary benefits and enrollment solutions arrangements are typically recognized upon successful enrollment of participants. Commissions and fees for brokerage services may be invoiced at the effective date of the underlying policy or over the term of the arrangement in installments during the policy period. Payment terms for other services vary but are typically over the contract term in installments. Wealth Solutions includes retirement consulting, pension administration and investments. Revenue recognized for these arrangements is predominantly recognized over the term of the arrangement using input or output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For consulting arrangements recognized over time, revenue will be recognized based on a measure of progress that depicts the transfer of control of the services to the customer, utilizing an appropriate input or output measure to provide a reasonable assessment of the progress towards completion of the performance obligation including units delivered or time elapsed. Fees paid by customers for consulting services are typically charged on an hourly, project or fixed-fee basis, and revenue for these arrangements is typically recognized based on time incurred, days elapsed, or reports delivered. Revenue from time-and-materials or cost-plus arrangements are recognized as services are performed using input or output measures to provide a reasonable assessment of the progress towards completion of the performance obligation including hours worked, and revenue for these arrangements is typically recognized based on time and materials incurred. Reimbursements received for out-of-pocket expenses are generally recorded as a component of revenue. Payment terms vary but are typically over the contract term in installments.
Pensions
We sponsor defined benefit pension plans throughout the world. Our most
significant plans are located in the
benefits relating to salary and services for our
The service cost component of net periodic benefit cost is reported in
Compensation and benefits and all other components are reported in Other income.
We used a full-yield curve approach in the estimation of the service and
interest cost components of net periodic pension and postretirement benefit cost
for our major pension and other postretirement benefit plans; this was obtained
by applying the specific spot rates along the yield curve used in the
determination of the benefit obligation to the relevant projected cash flows.
46
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Recognition of Gains and Losses and Prior Service
Certain changes in the value of the obligation and in the value of plan assets, which may occur due to various factors such as changes in the discount rate and actuarial assumptions, actual demographic experience, and/or plan asset performance are not immediately recognized in net income. Such changes are recognized in Other comprehensive income and are amortized into net income as part of the net periodic benefit cost. Unrecognized gains and losses that have been deferred in Other comprehensive income, as previously described, are amortized into expense as a component of periodic pension expense based on the average life expectancy of theU.S. ,U.K. ,Netherlands , andCanada plan members. We amortize any prior service expense or credits that arise as a result of plan changes over a period consistent with the amortization of gains and losses. As ofDecember 31, 2021 , our pension plans have deferred losses that have not yet been recognized through income in the Consolidated Financial Statements. We amortize unrecognized actuarial losses outside of a corridor, which is defined as 10% of the greater of market-related value of plan assets or PBO. To the extent not offset by future gains, incremental amortization as calculated above will continue to affect future pension expense similarly until fully amortized.
The following table discloses our accumulated other comprehensive loss, the
number of years over which we are amortizing the loss, and the estimated 2022
amortization of loss by country (in millions, except amortization period):
U.K. U.S. Other
Accumulated other comprehensive loss
Amortization period
7 - 26 6 - 23 11 - 35
Estimated 2022 amortization of loss
The
The unrecognized prior service cost (credit) at
million
For theU.S. pension plans, we use a market-related valuation of assets approach to determine the expected return on assets, which is a component of net periodic benefit cost recognized in the Consolidated Statements of Income. This approach recognizes 20% of any gains or losses in the current year's value of market-related assets, with the remaining 80% spread over the next four years. As this approach recognizes gains or losses over a five-year period, the future value of assets and therefore, our net periodic benefit cost will be impacted as previously deferred gains or losses are recorded. As ofDecember 31, 2021 , the market-related value of assets was$2.2 billion . We do not use the market-related valuation approach to determine the funded status of theU.S. plans recorded in the Consolidated Statements of Financial Position. Instead, we record and present the funded status in the Consolidated Statements of Financial Position based on the fair value of the plan assets. As ofDecember 31, 2021 , the fair value of plan assets was$2.4 billion . Our non-U.S. plans use fair value to determine expected return on assets.
Rate of Return on Plan Assets and Asset Allocation
The following table summarizes the expected long-term rate of return on plan
assets for future pension expense as of
U.K. U.S. Other
Expected return on plan assets, net of administration
expenses
2.34% 2.03 - 5.28% 1.80 - 3.15% In determining the expected rate of return for the plan assets, we analyze investment community forecasts and current market conditions to develop expected returns for each of the asset classes used by the plans. In particular, we surveyed multiple third-party financial institutions and consultants to obtain long-term expected returns on each asset class, considered historical performance data by asset class over long periods, and weighted the expected returns for each asset class by target asset allocations of the plans.
The
following adopted investment guidelines. The investment policy for
other non-
Because there are several pension plans maintained in the
non-
allocation of each plan. Target allocations are subject to change.
47 --------------------------------------------------------------------------------
Impact of Changing Economic Assumptions
Changes in the discount rate and expected return on assets can have a material
impact on pension obligations and pension expense.
Holding all other assumptions constant, the following table reflects what a 25
BPS increase and decrease in our discount rate would have on our PBO at
25 BPS Change in Discount Rate
Increase (decrease) in projected benefit obligation (1) Increase Decrease
U.K. plans $ (201) $ 219
U.S. plans $ (89) $ 93
Other plans $ (64) $ 69
(1)Increases to the PBO reflect increases to our pension obligations, while
decreases in the PBO are recoveries toward fully-funded status. A change in the
discount rate has an inverse relationship to the PBO.
Holding all other assumptions constant, the following table reflects what a 25
BPS increase and decrease in our discount rate would have on our estimated 2022
pension expense (in millions):
25 BPS Change in Discount Rate
Increase (decrease) in expense Increase Decrease
U.K. plans $ (1) $ 1
U.S. plans $ 2 $ (2)
Other plans $ 1 $ (1)
Holding all other assumptions constant, the following table reflects what a 25
BPS increase and decrease in our long-term rate of return on plan assets would
have on our estimated 2022 pension expense (in millions):
25
BPS Change in Long-Term Rate of
Return on Plan Assets
Increase (decrease) in expense Increase Decrease
U.K. plans $ (15) $ 15
U.S. plans $ (5) $ 5
Other plans $ (4) $ 4
The net unfunded pension balance has continued to improve in 2021, reflecting
continued progress in reducing the funded status at risk. As a result, the
potential impact of a hypothetical adverse change in discount rates and return
seeking asset exposures would have a less significant impact as compared to
prior years. A hypothetical discount rates decrease of 1% and return seeking
assets decline of 10% would have resulted in expected balance sheet
deterioration at 2021 of approximately $235 million , as compared to
approximately $410 million in 2019, an improvement of approximately $175
million . This is largely due to greater amounts of liability matching assets and
de-risking actions.
Estimated Future Contributions
We estimate cash contributions of approximately
in 2022 as compared with cash contributions of
assets acquired. We classify our intangible assets acquired as either
tradenames, customer-related and contract-based, or technology and other.
Goodwill is not amortized, but rather tested for impairment at least annually in the fourth quarter. We test more frequently if there are indicators of impairment or whenever business circumstances suggest that the carrying value of goodwill may not be recoverable. These indicators may include a sustained significant decline in our share price and market capitalization, a decline in our expected future cash flows, or a significant adverse change in legal factors or in the business climate, among others. We perform impairment reviews at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a "component"). A component of an operating segment is a reporting unit if the component 48 -------------------------------------------------------------------------------- constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components are a reporting unit, or if the segment comprises only a single component. When evaluating these assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, then the goodwill impairment test becomes a quantitative analysis. If the fair value of a reporting unit is determined to be greater than the carrying value of the reporting unit, goodwill is deemed not to be impaired and no further testing is necessary. If the fair value of a reporting unit is less than the carrying value, a goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value limited to the total amount of the goodwill allocated to the reporting unit. In determining the fair value of our reporting units, we use a DCF model based on our most current forecasts. We discount the related cash flow forecasts using the weighted average cost of capital method at the date of evaluation. Preparation of forecasts and selection of the discount rate for use in the DCF model involve significant judgments, and changes in these estimates could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We also use market multiples which are obtained from quoted prices of comparable companies to corroborate our DCF model results. The combined estimated fair value of our reporting units from our DCF model often results in a premium over our market capitalization, commonly referred to as a control premium. We believe the implied control premium determined by our impairment analysis is reasonable based upon historic data of premiums paid on actual transactions within our industry. We review intangible assets that are being amortized for impairment whenever events or changes in circumstance indicate that their carrying amount may not be recoverable. If we are required to record impairment charges in the future, they could materially impact our results of operations.
Contingencies
We define a contingency as an existing condition that involves a degree of uncertainty as to a possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur. UnderU.S. GAAP, we are required to establish reserves for loss contingencies when the loss is probable and we can reasonably estimate its financial impact. We are required to assess the likelihood of material adverse judgments or outcomes, as well as potential ranges or probability of losses. We determine the amount of reserves required, if any, for contingencies after carefully analyzing each individual item. The required reserves may change due to new developments in each issue. We do not recognize gain contingencies until the contingency is resolved and amounts due are probable of collection. Share-Based Payments Share-based compensation expense is measured based on the grant date fair value and recognized over the requisite service period for awards that we ultimately expect to vest. For purposes of measuring share-based compensation expense, we consider whether an adjustment to the observable market price is necessary to reflect material nonpublic information that is known to us at the time the award is granted. No adjustments were necessary for the years endedDecember 31, 2021 , 2020, or 2019. We also estimate forfeitures at the time of grant based on our actual experience to date and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Restricted Share Units
RSUs are service-based awards for which we recognize the associated compensation cost on a straight-line basis over the requisite service period. We estimate the fair value of the awards based on the market price of the underlying share on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period where applicable.
Performance Share Awards
PSAs are performance-based awards for which vesting is dependent on the
achievement of certain objectives. Such objectives may be made on a personal,
group or company level. We estimate the fair value of the awards based on the
market price of the underlying share on the date of grant, reduced by the
present value of estimated dividends foregone during the vesting period.
Compensation expense is recognized over the performance period. The number of
shares issued on the vesting date will vary depending on the actual performance
objectives achieved, which are based on a fixed number of potential outcomes. We
make assessments of future performance using subjective estimates, such as
long-term plans. As a result, changes in the underlying assumptions could have a
material impact on the compensation expense recognized.
49
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The largest plan is the LPP, which has a three-year performance period. As the
percent of expected performance increases or decreases, the potential change in
expense can go from 0% to 200% of the targeted total expense. The 2019 to 2021
performance period ended on December 31, 2021 , the 2018 to 2020 performance
period ended on December 31, 2020 , and the 2017 to 2019 performance period ended
on December 31, 2019 . The LPP currently has two open performance periods: 2020
to 2022 and 2021 to 2023. A 10% upward adjustment in our estimated performance
achievement percentage for both open performance periods would not have
increased our 2021 expense, while a 10% downward adjustment would have decreased
our expense by approximately $7.6 million .
Income Taxes
We earn income in numerous countries and this income is subject to the laws of
taxing jurisdictions within those countries.
The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies and are based on management's assumptions and estimates about future operating results and levels of taxable income, and judgments regarding the interpretation of the provisions of current accounting principles. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Considerations with respect to the realizability of deferred tax assets include the period of expiration of the deferred tax asset, historical earnings and projected future taxable income by jurisdiction as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Significant management judgment is required in determining the assumptions and estimates related to the amount and timing of future taxable income. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in various factors.
We assess carryforwards and tax credits for realization as a reduction of future
taxable income by using a "more likely than not" determination.
We base the carrying values of liabilities and assets for income taxes currently payable and receivable on management's interpretation of applicable tax laws and incorporate management's assumptions and judgments about using tax planning strategies in various taxing jurisdictions. Using different estimates, assumptions, and judgments in accounting for income taxes, especially those that deploy tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and changes in our results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
Note 2 "Summary of Significant Accounting Principles and Practices" of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report contains a summary of our significant accounting policies, including a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable.
TENET HEALTHCARE CORP – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HARTFORD FINANCIAL SERVICES GROUP, INC. – 10-K –
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