<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
___ OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission file number 1-7933
Aon Corporation
---------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-3051915
-------- ------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
123 N. WACKER DR., CHICAGO, ILLINOIS 60606
------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(312) 701-3000
--------------
(Registrant's Telephone Number)
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 X NO
--- ---
Number of shares of common stock outstanding:
No. Outstanding
Class as of 6-30-95
----- ---------------
$1.00 par value Common 107,080,080
<PAGE>
<TABLE>
<CAPTION>
Part 1
Financial Information
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
(millions) As of As of
Assets June 30, 1995 Dec. 31, 1994
------------- -------------
(Unaudited)
<S> <C> <C>
Investments
Fixed maturities
Held to maturity $ 2,923.6 $ 2,983.8
Available for sale 4,633.1 4,160.3
Equity securities at fair value
Common stocks 258.6 314.9
Preferred stocks 746.0 624.4
Mortgage loans on real estate 573.7 567.5
Real estate (net of accumulated
depreciation) 35.6 35.6
Policy loans 220.0 214.9
Other long-term investments 113.0 97.9
Short-term investments 843.5 783.2
------------- ------------
Total investments 10,347.1 9,782.5
Cash 268.4 508.8
Receivables
Insurance brokerage and consulting
services 2,098.7 1,882.0
Premiums and other 740.2 637.7
Accrued investment income 148.5 133.5
------------- ------------
Total receivables 2,987.4 2,653.2
Deferred Policy Acquisition Costs 1,212.0 1,181.6
Intangible Assets 1,579.1 1,548.0
Property and Equipment at Cost (net of
accumulated depreciation) 303.3 266.5
Assets Held Under Special Contracts 1,862.7 1,595.1
Other Assets 460.6 386.2
------------- ------------
Total Assets $ 19,020.6 $ 17,921.9
============= ============
As of As of
Liabilities and Equity June 30, 1995 Dec. 31, 1994
------------- -------------
(Unaudited)
Policy Liabilities
Future policy benefits $ 1,434.1 $ 1,434.5
Policy and contract claims 968.8 944.2
Unearned and advance premiums 1,562.1 1,428.4
Other policyholder funds 5,511.3 5,503.3
------------- ------------
Total policy liabilities 9,476.3 9,310.4
General Liabilities
Short-term borrowings 227.0 243.9
Insurance premiums payable 2,703.7 2,408.7
Commissions and general expenses 499.8 526.6
Accrued income taxes 370.2 330.2
Notes payable 496.2 495.5
Debt guarantee of ESOP 65.5 65.5
Liabilities held under special
contracts 1,862.7 1,595.1
Other liabilities 666.4 638.6
------------- ------------
Total Liabilities 16,367.8 15,614.5
Commitments and Contingent Liabilities
Redeemable Preferred Stock 50.0 50.0
Stockholders' Equity
Preferred stock - $1 par value 11.1 11.1
Common stock - $1 par value 110.6 110.6
Paid-in additional capital 493.8 485.2
Net unrealized investment gains/(losses) 96.0 (142.8)
Net foreign exchange gains/(losses) 4.7 (19.7)
Retained earnings 2,111.9 1,998.1
Less - Treasury stock at cost (107.2) (72.9)
Deferred compensation (118.1) (112.2)
------------- ------------
Total Stockholders' Equity 2,602.8 2,257.4
------------- ------------
Total Liabilities and Equity $ 19,020.6 $ 17,921.9
============= ============
</TABLE>
See the acompanying notes to the condensed consolidated financial statements.
-2-
<PAGE>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(millions except per share data)
Second Quarter Ended Six Months Ended
---------------------- ---------------------
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Premiums and policy fees............. $ 522.2 $ 482.9 $1,012.9 $ 949.8
Net investment income................ 203.8 184.7 412.6 370.2
Realized investment gains............ 1.4 1.7 2.0 3.4
Brokerage commissions and fees....... 394.7 336.1 814.4 678.3
Other income......................... 19.1 21.0 38.7 44.3
-------- -------- -------- --------
TOTAL REVENUE EARNED............. 1,141.2 1,026.4 2,280.6 2,046.0
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits to policyholders............ 348.5 320.3 695.2 646.4
Commissions and general expenses..... 533.5 473.0 1,046.9 920.2
Interest expense..................... 14.0 11.0 27.0 22.1
Amortization of deferred policy
acquisition costs.................. 72.4 68.0 146.4 132.7
Amortization of intangible assets.... 23.2 22.4 47.0 44.9
-------- -------- -------- --------
TOTAL BENEFITS AND EXPENSES...... 991.6 894.7 1,962.5 1,766.3
-------- -------- -------- --------
INCOME BEFORE INCOME TAX 149.6 131.7 318.1 279.7
Provision for income tax............. 50.9 43.5 108.2 92.4
-------- -------- -------- --------
NET INCOME ............................. $ 98.7 $ 88.2 $ 209.9 $ 187.3
======== ======== ======== ========
INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS.......................... $ 91.9 $ 79.9 $ 196.3 $ 170.7
======== ======== ======== ========
NET INCOME PER SHARE (1)................ $ 0.85 $ 0.77 $ 1.81 $ 1.65
======== ======== ======== ========
CASH DIVIDENDS PAID ON COMMON STOCK..... $ 0.34 $ 0.32 $ 0.66 $ 0.62
======== ======== ======== ========
Average common and common equivalent
shares outstanding.................... 108.4 105.3 108.6 105.8
-------- -------- -------- --------
</TABLE>
(1) Includes the effect of $6.8 million and $13.6 million, and $6.8 million and
$13.2 million of dividends incurred on the 8%, 6.25% and Series C preferred
stocks in second quarter and six months ended June 30, 1995 and 1994,
respectively.
See the accompanying notes to the condensed consolidated financial statements.
-3-
<PAGE>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(millions)
Six Months Ended
-----------------------
June 30, June 30,
1995 1994
--------- ---------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES............... $ 372.9 $ 407.1
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short term investments-net.... (59.9) 67.7
Sale or maturity of investments
Fixed maturities - Held to maturity
Maturities................. 0.7 27.1
Calls and Prepayments...... 79.8 621.4
Sales...................... 3.0 -
Fixed maturities - Available for sale
Maturities................. 52.2 51.0
Calls and Prepayments...... 100.2 236.9
Sales...................... 1,273.2 407.8
All other investments.......................... 501.3 662.1
Purchase of investments
Fixed maturities - Held to maturity............ - (644.4)
Fixed maturities - Available for sale.......... (1,637.2) (594.9)
All other investments.......................... (537.2) (916.9)
Acquisition of subsidiaries...................... (66.7) (21.1)
Property and equipment and other................. (55.4) (42.3)
--------- ---------
CASH USED BY INVESTING ACTIVITIES.......... (346.0) (145.6)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock transactions - net................ (48.0) 1.4
Repayments of short-term borrowings - net........ (16.9) (1.4)
Issuance of long-term debt securities............ 18.6 99.7
Repayment of notes payable....................... (19.2) (125.0)
Interest sensitive life, annuity and investment
contract deposits.............................. 690.9 932.2
Interest sensitive life, annuity and investment
contract withdrawals........................... (813.9) (885.3)
Cash dividends to stockholders................... (84.3) (79.1)
Retirement of Series B conversion preferred stock - (31.0)
--------- ---------
CASH USED BY FINANCING ACTIVITIES.......... (272.8) (88.5)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............. 5.5 4.5
INCREASE (DECREASE) IN CASH......................... (240.4) 177.5
CASH AT BEGINNING OF PERIOD......................... 508.8 163.8
--------- ---------
CASH AT END OF PERIOD............................... $ 268.4 $ 341.3
========= =========
</TABLE>
See the accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
Aon CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Statement of Accounting Principles
The financial results included in this report are stated in conformity with
generally accepted accounting principles and are unaudited but include all
normal recurring adjustments which the Registrant ("Aon") considers
necessary for a fair presentation of the results for such periods. These
interim figures are not necessarily indicative of results for a full year
as further discussed below.
Refer to the consolidated financial statements and notes in the Annual
Report to Stockholders for the year ended December 31, 1994 for additional
details of Aon's financial position, as well as a description of the
accounting policies which have been continued without change. The details
included in the notes have not changed except as a result of normal
transactions in the interim and the events mentioned in the footnotes
below.
2. Statements of Financial Accounting Standards (SFAS)
As required, in first quarter 1995, Aon adopted SFAS Statement Nos. 114 and
118 which relate to accounting by creditors for impairment of a loan.
These standards require that impaired loans are to be valued at the present
value of expected future cash flows, at the loan's observable market price,
or at the fair value of the collateral if the loan is collateral dependent.
Implementation of these standards did not have a material effect on Aon's
financial statements.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121 (Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of). This Statement requires that
long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Aon anticipates adopting this Statement in its 1996 financial
statements as required. Implementation of this Statement is not expected
to have a material effect on Aon's financial statements.
3. Business Combinations
In first quarter 1995, Aon merged with a retail insurance broker
specializing in construction business coverages. This business
combination has been accounted for by the pooling of interests method.
Prior period financial statements have not been restated because the effect
of the merger was not material to Aon's consolidated financial statements.
-5-
<PAGE>
In addition, certain insurance brokerage subsidiaries of Aon acquired
several insurance brokerage operations. These acquisitions were financed
by internal funds and were accounted for by the purchase method. They were
not material to Aon's consolidated financial statements.
4. Treasury Stock
During the first half 1995, Aon purchased 1,815,000 shares of its common
stock, at a total cost of $65.6 million. Aon reissued 816,000 shares of
common stock from treasury for employee benefit plans during the first half
1995. The net aggregate cost of those shares exceeded the net aggregate
proceeds resulting in a charge to retained earnings.
In addition, Aon reissued 383,000 shares of treasury stock in connection
with a business combination. There were 3.5 million shares of common stock
held in treasury at June 30, 1995.
5. Purchase of 8% Cumulative Perpetual Preferred Stock
In July 1995, Aon purchased 3 million shares of its 8% Cumulative Perpetual
Preferred Stock at a total cost of $75.4 million.
-6-
<PAGE>
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR SECOND QUARTER AND FIRST HALF 1995
CONSOLIDATED RESULTS
--------------------
Premiums and policy fees increased $39.3 million or 8.1% and $63.1 million or
6.6% in second quarter and first half 1995, respectively, compared with the same
period last year. Life premium and policy fees earned increased 6.3% in the
quarter, primarily reflecting policy fees from capital accumulation products.
Accident and health premiums earned increased $11.2 million or 3.7% primarily
due to the continued growth of Combined Insurance Company of America
("Combined") direct sales international business. Specialty property and
casualty premiums earned increased $21.2 million or 32.8% in the quarter
reflecting a higher volume of new business in the extended warranty operations,
particularly the appliance and electronic equipment line. The anticipated
phase-out of certain specialty liability programs partially offset this
increase.
Net investment income increased $19.1 million or 10.3% in the second quarter and
$42.4 million or 11.5% in the first half when compared to prior year.
Investment income growth in the second quarter and first half 1995, was
primarily attributed to higher levels of invested assets, and returns received
from private placement equity securities and capital venture investments.
Brokerage commissions and fees increased $58.6 million or 17.4% and $136.1
million or 20.1% in second quarter and first half 1995, respectively, reflecting
internal growth and business combination activity, primarily the late-1994
mergers with Jenner Fenton Slade Group Limited (JFS), Energy Insurance
International (EII) and HRStrategies Inc. (HRS).
Total revenue increased $114.8 million or 11.2% in the second quarter and $234.6
million or 11.5% in first half 1995 over last year, reflecting investment income
growth, a favorable foreign exchange impact, internal business growth, and the
business combinations mentioned above. Total benefits and expenses increased
10.8% and 11.1% in the same periods. Income before income tax increased $17.9
million or 13.6% and $38.4 million or 13.7% in the second quarter and first half
1995, respectively, due largely to growth in the brokerage and consulting
segment.
-7-
<PAGE>
-
MAJOR LINES OF BUSINESS
-----------------------
INSURANCE BROKERAGE AND CONSULTING SERVICES
-------------------------------------------
"Retail brokerage" provides for the placement and management of insurance risks
for commercial clients as well as associations and financial institutions.
Revenue increased $28.8 million or 13.9% for the second quarter 1995 when
compared with the same period last year. Improvements in revenue and income
were primarily fueled by internal growth and acquisition activity, namely EII
and other post-second quarter 1994 acquisitions. Retail brokerage continued to
reflect highly competitive property and casualty pricing in the domestic market.
(Consulting related fees previously included in Retail brokerage in 1994 have
been reclassified to "Consulting" to conform to the 1995 presentation).
"Reinsurance and wholesale" provides reinsurance, third-party administration,
underwriting management and captive services. When compared to the same
quarter last year, revenue from this brokerage element increased $22.9 million
or 25.9%. The major contributing factors to this increased revenue were
internal growth, and to a lesser extent, the inclusion of the JFS (a London-
based insurance and reinsurance brokerage firm) business combination in fourth
quarter 1994.
"Consulting" provides a full range of employee benefits and compensation
consulting, specialized employee assessment and training programs, and
administrative services. This business showed revenue growth of $12.1 million
or 23% for the second quarter when compared to prior year. The major
contributing factors to this increase were the inclusion of the post-second
quarter 1994 Pecos River Learning Centers Inc. (employee training) and HRS
(human resources strategy development) business combinations. Although the
consulting line produced higher revenues when compared to 1994, this line
experienced slow growth in benefit plan products and a lower than anticipated
inflow of new business.
Overall, revenue for the insurance brokerage and consulting services segment
increased $63.8 million or 18.3% and $147.8 million or 21.1% in the second
quarter and first half 1995, respectively, primarily due to internal growth and
acquisitions. Limiting this revenue increase, the brokerage segment continues
to be impacted by a soft domestic property and casualty market. Income before
income tax increased $11.7 million or 31.5% and $24 million or 24% when compared
to second quarter and first half 1994, respectively, reflecting recent
acquisitions as well as internal growth.
Domestic/International Results
------------------------------
Second quarter domestic insurance brokerage and consulting services revenue and
income before income tax represent 70% and 76%, respectively, of the total.
International brokerage revenue of $122 million increased 35.3% for the second
quarter. International brokerage income before income tax increased $5.3
million for the quarter. Partially offsetting this increase was the lower than
anticipated inflow of financial planning revenues in the consulting line of
business. In the international retail brokerage subsegment, revenues are
generally highest in the first
-8-
<PAGE>
quarter of the year, while expenses are incurred on a more even basis throughout
the year.
LIFE INSURANCE
--------------
The life insurance line of business is composed primarily of capital
accumulation products, credit insurance and ordinary life products. Revenue
increased 5.8% and 5.5% for the second quarter and first half 1995,
respectively, when compared to prior year primarily due to increased investment
income generated on guaranteed investment contracts and variable products.
Although premiums and fees on capital accumulation products continued to grow,
investment spreads improved only slightly. In addition, traditional life
business in Europe and the Pacific is continuing to runoff.
Income before income tax for life insurance increased 5.9% and 4.9% for the
second quarter and first half 1995, respectively, compared with last year,
primarily due to favorable mortality experience and growth in capital
accumulation variable annuities. Overall, benefit and expense margins in second
quarter 1995 did not suggest any significant shift in operating trends.
Domestic/International Results
------------------------------
Second quarter domestic life revenue represents 94% of the total. Domestic life
income before income tax increased 15.7% when compared to its 1994 level.
International life revenue of $15.7 million increased 4.7%. International life
business experienced a modest loss in the second quarter primarily due to the
runoff of Combined's unit-linked business.
ACCIDENT AND HEALTH INSURANCE
-----------------------------
The accident and health line of business is composed primarily of individual
accident and health products sold by employees and agents and through direct
response techniques, and credit disability products. Revenue increased $13
million or 4% and $30.5 million or 4.8% in the second quarter and first half
1995, respectively. Combined's direct sales accident and health revenue grew
5.1% in the second quarter. Financial credit disability revenue decreased 13.7%
in the quarter due to the discontinuation of lower margin business.
Income before income tax increased 5.9% and 5.2% in the second quarter and first
half 1995, respectively. Income before income tax on Combined's direct sales
was up 3.1% from second quarter 1994, in part due to good general expense
controls and to strong international health product sales, offset in part by
slightly higher claims costs. Auto credit income before income tax increased
from second quarter 1994 reflecting an increase in premiums earned. Pretax
income on direct response business increased from 1994 primarily due to
favorable benefit experience in the broad market line.
-9-
<PAGE>
Domestic/International Results
------------------------------
Second quarter domestic accident and health revenue and income before income tax
represent 76% and 65%, respectively, of the total. Combined direct and credit
disability products represent all of the business that is marketed
internationally. International accident and health revenue of $79.6 million
increased 15.7% in the quarter influenced, in part, by an increase in auto
credit earned premiums and by strong sales of Combined's health products in
Europe and the Pacific. Second quarter international income before income tax
increased 22.1% compared to the previous year primarily due to Combined's
improved expense ratios.
SPECIALTY PROPERTY AND CASUALTY INSURANCE
-----------------------------------------
This line of business is composed primarily of extended warranties for
mechanical repair, principally for automobiles as well as appliances and
electronic equipment, and of specialty liability insurance, primarily
professional liability and workers' compensation. Revenue increased $21.1
million or 26.2% when compared to second quarter 1994. Certain specialty
property and casualty underwriting programs (generally characterized as higher
margin businesses) continued to be favorably phased-out. Increased warranty
revenue, particularly in the appliance and electronic equipment line, largely
offset the loss of specialty property and casualty revenues.
Income before income tax was $14.2 million in the second quarter and $27.1
million in the first half reflecting an increase of 3.6% and a decrease of 0.7%,
respectively, when compared to prior year. Extended warranty income before
income tax of $9.7 million increased 49.2% for the quarter reflecting strong
revenue and earnings growth.
Domestic/International Results
------------------------------
Second quarter domestic revenue and income before income tax represent 83% and
92%, respectively, of the total. Domestic income before income tax increased
2.4% for the second quarter reflecting strong growth in both the mechanical
repair and the appliance and electronic equipment lines. Offsetting this
growth, in part, was the continued phase-out of certain underwriting programs.
Second quarter international revenue was 26.8% above prior year. International
income before income tax increased 20% during the quarter due to the impact of
lower loss ratios, particularly in the appliance and electronic extended
warranty business.
CORPORATE AND OTHER
-------------------
Revenue in this category consists primarily of investment income on capital,
financing fees, and realized investment gains before tax. Allocation of
investment income to the insurance segments is determined by the invested assets
which underlie policyholder liabilities for each of the major insurance product
lines. Excess invested assets and related investment income, which do not
underlie these liabilities, are reported in this segment. Expenses include
corporate administrative costs, interest and financing expenses, and goodwill
amortization associated with acquisitions.
-10-
<PAGE>
Revenue increased 8.3% and 11.6% for the second quarter and first half 1995,
respectively, due in part to higher levels of invested assets and returns
received from private placement equity securities and capital venture
investments, and growth in financing fees. Pretax realized investment gains for
the second quarter were $1.4 million and $1.7 million in 1995 and 1994,
respectively. Income before income tax increased $1.3 million or 22% over the
same quarter last year.
-11-
<PAGE>
Aon CORPORATION
MAJOR LINES OF BUSINESS
<TABLE>
<CAPTION>
(millions)
Second Quarter Ended Six Months Ended
-------------------- ---------------------
June 30, Percent June 30, Percent
1995 Change 1995 Change
--------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUE
Insurance brokerage and consulting
services.........................$ 412.6 18.3 % $ 848.9 21.1 %
Life............................... 246.9 5.8 491.2 5.5
Accident and health................ 335.8 4.0 665.4 4.8
Specialty property and casualty.... 101.6 26.2 180.0 13.2
Corporate and other................ 44.3 8.3 95.1 11.6
--------- ------ --------- ------
TOTAL REVENUE EARNED..........$ 1,141.2 11.2 % $ 2,280.6 11.5 %
========= ====== ========= ======
INCOME BEFORE INCOME TAX
Insurance brokerage and consulting
services.........................$ 48.8 31.5 % $ 123.8 24.0 %
Life............................... 30.7 5.9 55.9 4.9
Accident and health................ 48.7 5.9 86.7 5.2
Specialty property and casualty.... 14.2 3.6 27.1 (0.7)
Corporate and other................ 7.2 22.0 24.6 45.6
--------- ------ --------- ------
TOTAL INCOME BEFORE INCOME TAX.$ 149.6 13.6 % $ 318.1 13.7 %
========= ====== ========= ======
</TABLE>
-12-
<PAGE>
Aon CORPORATION
REVENUE BY MAJOR PRODUCT LINE
<TABLE>
<CAPTION>
(millions)
Second Quarter Ended Six Months Ended
-------------------- --------------------
June 30, Percent June 30, Percent
1995 Change 1995 Change
-------- ------- -------- -------
<S> <C> <C> <C> <C>
INSURANCE BROKERAGE AND CONSULTING
SERVICES
Retail brokerage (1)..................$ 236.4 13.9 % $ 497.9 18.3 %
Reinsurance and wholesale............. 111.4 25.9 225.9 29.7
Consulting (1)........................ 64.8 23.0 125.1 18.1
-------- ------ -------- ------
TOTAL REVENUE EARNED..........$ 412.6 18.3 % $ 848.9 21.1 %
======== ====== ======== ======
LIFE
Capital accumulation products.........$ 145.3 6.4 % $ 287.9 6.0 %
Ordinary, Credit and other............ 101.6 5.0 203.3 4.7
-------- ------ -------- ------
TOTAL REVENUE EARNED..........$ 246.9 5.8 % $ 491.2 5.5 %
======== ====== ======== ======
ACCIDENT AND HEALTH
Combined direct sales.................$ 220.9 5.1 % $ 437.0 6.0 %
Direct response and Group............. 78.7 0.9 158.6 1.7
Credit and other...................... 36.2 4.6 69.8 4.8
-------- ------ -------- ------
TOTAL REVENUE EARNED..........$ 335.8 4.0 % $ 665.4 4.8 %
======== ====== ======== ======
SPECIALTY PROPERTY AND CASUALTY.......$ 101.6 26.2 % $ 180.0 13.2 %
======== ====== ======== ======
CORPORATE AND OTHER
Investment income on capital and
other...............................$ 36.6 6.7 % $ 81.2 12.8 %
Premium financing fees................ 6.3 28.6 11.9 21.4
Realized investment gains............. 1.4 (17.6) 2.0 (41.2)
-------- ------ -------- ------
TOTAL REVENUE EARNED...........$ 44.3 8.3 % $ 95.1 11.6 %
======== ====== ======== ======
</TABLE>
(1) Consulting related fees previously included in Retail brokerage in
1994 have been reclassified to Consulting to conform to the 1995
presentation.
-13-
<PAGE>
NET INCOME FOR SECOND QUARTER AND FIRST HALF 1995
The effective tax rate for second quarter and first half 1995 operating income,
which excludes after-tax realized investment gains was 34%, compared to 33% for
the full year 1994. Realized gains were taxed at 36% in 1995 and 1994.
Average shares outstanding for the second quarter increased 2.9% primarily due
to the issuance of common shares related to business combinations and offset, in
part, by treasury stock repurchases. Second quarter net income was $98.7
million ($0.85 per share) compared to $88.2 million ($0.77 per share) in 1994.
Net income for the first half was $209.9 million ($1.81 per share) compared to
$187.3 million ($1.65 per share) in 1994. Included in second quarter 1995 and
1994 net income are after-tax realized investment gains of $0.01 per share.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF FIRST HALF 1995
Cash flows from operating activities in first half 1995 were $372.9 million, a
decrease of $34.2 million from first half 1994. This decrease primarily
reflects an increase in estimated federal income tax payments.
Investing activities used cash of $346 million which was made available
primarily from operations. Cash used for acquisition activity during the first
half 1995 was $66.7 million.
Cash totalling $272.8 million was used during first half 1995 by financing
activities. Aon repurchased $48 million of treasury stock, net of reissued
shares. Net cash flows from capital accumulation product deposits and
withdrawals declined $169.9 million in first half 1995 when compared to prior
year. This decline was primarily attributable to lower interest rates. Cash
was used to pay dividends of $71.4 million on common stock, $9 million on 8%
perpetual preferred stock, $3.3 million on 6.25% convertible preferred stock and
$1.3 million on Series C preferred stock.
In addition, included in notes payable at June 30, 1995 is approximately
$11 million which represents the principal amount of notes due within one year.
Aon's operating subsidiaries anticipate that there will be adequate liquidity to
meet their needs in the foreseeable future. Aon anticipates continuation of the
company's positive cash flow and the ability of the parent company to access
adequate short-term lines of credit. Aon does not anticipate insufficient cash
flow in the long-term.
The businesses of Aon's operating subsidiaries continue to provide substantial
positive cash flow. Brokerage cash flow has been used primarily for servicing
acquisition-related debt. Due to the contractual nature of its insurance
policyholder liabilities which are intermediate to long-term in nature, Aon has
invested primarily in fixed maturities.
-14-
<PAGE>
With a carrying value of $7.6 billion, Aon's total fixed maturity portfolio is
invested primarily in investment grade holdings (96.1%) and has a market value
which is 101.8% of amortized cost.
Mortgage-backed securities, primarily collateralized mortgage obligations
(CMOs), included in the fixed maturities portfolio, totaled $2.3 billion, down
$0.8 million from year-end 1994. There are no CMO residuals, interest only,
inverse floating or principal only type securities in Aon's CMO portfolio. CMOs
have been acquired as alternatives to mortgage-backed pass-through securities.
Aon's insurance subsidiaries have generally acquired CMOs classified in the form
of sequential payment, targeted amortization classes (TACs) or support TACs.
Market values for CMOs are established each quarter based primarily on
information received from broker-dealer market makers. Certain mortgage-backed
securities are subject to duration extension risk in periods of rising interest
rates and to prepayment risk, especially, in periods of declining interest
rates. To limit its credit risk, Aon's CMO investments are concentrated in AAA
and AA rated tranches.
Total assets increased $1.1 billion to $19 billion since year-end 1994,
primarily due to growth in the investment securities portfolio. Invested assets
at June 30, 1995 increased $564.6 million from year-end levels, primarily due to
unrealized investment gains and cash flows from operations. The amortized cost
and fair value of less than investment grade fixed maturity investments, at June
30, 1995, were $284.3 million and $300.6 million, respectively. The carrying
value of non-income producing investments in Aon's portfolio at June 30, 1995
was $63 million, or 0.6% of total invested assets.
Mortgage loans held totalled $573.7 million or 5.5% of total invested assets.
Aon maintained separate investment reserves related to mortgage loan losses on
real estate and illiquid holdings, which include real estate ventures and
limited partnerships, totalling $33.5 million at the end of first half 1995,
down $2.9 million from the year end 1994 level of $36.4 million. These reserves
are a product of Aon's continued review of the characteristics and risks of its
investment portfolio and current environmental and economic conditions.
Aon measures capital accumulation product asset and liability durations to
determine its net exposure to changes in interest rates. The duration match
associated with interest-sensitive products is closely monitored. Non interest-
sensitive insurance products do not require as close monitoring of duration
matching.
Aon adjusts its duration mismatch subject to market conditions and its outlook
on interest rate trends. As of June 30, 1995, assets and interest-sensitive
liabilities were closely matched with the aggregate estimated duration variance
of less than one year.
Aon uses derivative financial instruments (primarily financial futures, swaps
and options) to: manage its overall asset/liability duration match; hedge asset
price risk associated with financial instruments whose change in value is
reported under SFAS 115; and hedge other business risks. As of June 30, 1995,
Aon had open interest rate swap contracts which had unrealized losses of
approximately $22.6 million.
-15-
<PAGE>
Stockholders' equity increased $345.4 million in first half 1995 to $21.63 per
share, an increase of $3.33 per share since year-end. In addition to net
income, the principal factors influencing this increase were net unrealized
investment gains of $238.8 million, of which $187.1 million is related to fixed
maturities available for sale, and foreign exchange gains of $24.4 million. At
year end 1994, a $30 million valuation allowance was established as a direct
adjustment to stockholders' equity for a tax credit on unrealized losses on
Aon's investment portfolios. This valuation allowance was reversed in the first
quarter due to an improvement in market performance. In addition, equity was
reduced by dividends to stockholders of $84.3 million and by $65.6 million for
the repurchase of 1.8 million shares of common stock for treasury.
Review by Independent Auditors
------------------------------
The condensed consolidated financial statements at June 30, 1995, and for the
second quarter and first half then ended have been reviewed, prior to filing, by
Ernst & Young LLP, Aon's independent auditors, and their report is included
herein.
-16-
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Aon Corporation
We have reviewed the accompanying condensed consolidated statement of financial
position of Aon Corporation as of June 30, 1995, and the related condensed
consolidated statements of income for the three-month and six-month periods
ended June 30, 1995 and 1994, and the condensed consolidated statements of cash
flows for the six-month periods ended June 30, 1995 and 1994. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of Aon Corporation
as of December 31, 1994, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended, not presented
herein, and in our report dated February 9, 1995, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated statement of
financial position as of December 31, 1994, is fairly stated, in all material
respects, in relation to the consolidated statement of financial position from
which it has been derived.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
August 1, 1995
-17-
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits filed with this report are listed on the
attached Exhibit Index.
(b) Reports on Form 8-K -. No Current Reports on Form 8-K were filed for
the quarter ended June 30, 1995.
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 Corporation
(Registrant)
August 14, 1995 /s/ Harvey N. Medvin
-----------------------------------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER
(Principal Financial and Accounting Officer)
-18-
<PAGE>
Aon CORPORATION
---------------
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number
In Regulation S-K, Page
Item 601 Exhibit Table No.
---------------------- ----
<S> <C>
(11) Statement regarding Computation of Per Share Earnings. 20
(12) Statements regarding Computation of Ratios.
(a) Statement regarding Computation of Ratio of Earnings
to Fixed Charges. 21
(b) Statement regarding Computation of Ratio of Earnings
to Combined Fixed Charges and Preferred Stock
Dividends. 22
(15) Letter re: Unaudited Interim Financial Information. 23
(27) Financial Data Schedule
</TABLE>
-19-
<PAGE>
Exhibit 11
Aon CORPORATION AND SUBSIDIARIES
CONSOLIDATED NET INCOME PER SHARE COMPUTATION
<TABLE>
<CAPTION>
(millions except per share data)
Second Quarter Ended Six Months Ended
-------------------- ---------------------
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE
Net income....................... $ 98.7 $ 88.2 $ 209.9 $ 187.3
Preferred stock dividends........ 6.8 6.8 13.6 13.2
------- ------- ------- -------
NET INCOME LESS PREFERRED
STOCK DIVIDENDS........... $ 91.9 $ 81.4 $ 196.3 $ 174.1
======= ======= ======= =======
Average common shares issued..... 110.6 106.2 110.6 106.2
Net effect of treasury stock
activity....................... (2.8) (4.6) (2.6) (4.5)
Weighted average effect of
Series B preferred stock....... - 3.0 - 3.4
Net effect of dilutive stock
compensation plans based on the
treasury stock method.......... 0.6 0.7 0.6 0.7
------- ------- ------- -------
Average common and common
equivalent shares
outstanding.............. 108.4 105.3 108.6 105.8
======= ======= ======= =======
NET INCOME PER SHARE (1)........... $ 0.85 $ 0.77 $ 1.81 $ 1.65
======= ======= ======= =======
</TABLE>
(1) Primary and fully diluted net income per share are materially the same.
-20-
<PAGE>
EXHIBIT 12(a)
Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
--------------- -----------------------------------------
(millions except ratios) 1995 1994 1994 1993 1992 (1) 1991 1990
------- ------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes $ 318.1 $ 279.7 $ 537.6 $ 479.1 $ 290.5 $ 331.5 $ 325.2
Add back fixed charges:
Interest on indebtedness 27.0 22.1 46.4 42.3 41.9 40.7 44.4
Interest on ESOP 2.7 3.0 5.9 6.5 6.9 7.2 7.4
Portion of rents representative of
interest factor 12.0 15.8 28.7 26.1 19.2 15.4 13.2
------- ------- ------- ------- --------- ------- -------
INCOME AS ADJUSTED $ 359.8 $ 320.6 $ 618.6 $ 554.0 $ 358.5 $ 394.8 $ 390.2
======= ======= ======= ======= ========= ======= =======
FIXED CHARGES:
Interest on indebtedness:
Aon Corporation and
consolidated subsidiaries $ 27.0 $ 22.1 $ 46.4 $ 42.3 $ 41.9 $ 40.7 $ 43.9
Unconsolidated subsidiaries - - - - - - 0.5
------- ------- ------- ------- ---------- ------- -------
INTEREST 27.0 22.1 46.4 42.3 41.9 40.7 44.4
Interest on ESOP 2.7 3.0 5.9 6.5 6.9 7.2 7.4
Portion of rents representative of
interest factor 12.0 15.8 28.7 26.1 19.2 15.4 13.2
------- ------- ------- ------- ---------- ------- -------
TOTAL FIXED CHARGES $ 41.7 $ 40.9 $ 81.0 $ 74.9 $ 68.0 $ 63.3 $ 65.0
======= ======= ======= ======= ========== ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 8.6 7.8 7.6 7.4 5.3 6.2 6.0
======= ======= ======= ======= ========== ======= =======
</TABLE>
(1) Income from continuing operations before provision for income taxes excludes
the cumulative effect of changes in accounting principles.
-21-
<PAGE>
EXHIBIT 12(b)
Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
--------------- ---------------------------------------
(millions except ratios) 1995 1994 1994 1993 1992(1) 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes $ 318.1 $ 279.7 $ 537.6 $ 479.1 $ 290.5 $ 331.5 $ 325.2
Add back fixed charges:
Interest on indebtedness 27.0 22.1 46.4 42.3 41.9 40.7 44.4
Interest on ESOP 2.7 3.0 5.9 6.5 6.9 7.2 7.4
Portion of rents representative of
interest factor 12.0 15.8 28.7 26.1 19.2 15.4 13.2
------- ------- ------- ------- ------- ------- -------
INCOME AS ADJUSTED $ 359.8 $ 320.6 $ 618.6 $ 554.0 $ 358.5 $ 394.8 $ 390.2
======= ======= ======= ======= ======= ======= =======
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS:
Interest on indebtedness:
Aon Corporation and
consolidated subsidiaries $ 27.0 $ 22.1 $ 46.4 $ 42.3 $ 41.9 $ 40.7 $ 43.9
Unconsolidated subsidiaries - - - - - - 0.5
Preferred stock dividends 20.6 24.7 48.4 47.5 20.3 3.5 2.0
------- ------- ------- ------- ------- ------- -------
INTEREST AND DIVIDENDS 47.6 46.8 94.8 89.8 62.2 44.2 46.4
Interest on ESOP 2.7 3.0 5.9 6.5 6.9 7.2 7.4
Portion of rents representative of
interest factor 12.0 15.8 28.7 26.1 19.2 15.4 13.2
------- ------- ------- ------- ------- ------- -------
TOTAL FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS $ 62.3 $ 65.6 $ 129.4 $ 122.4 $ 88.3 $ 66.8 $ 67.0
======= ======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS 5.8 4.9 4.8 4.5 4.1 5.9 5.8
======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) Income from continuing operations before provision for income taxes
excludes the cumulative effect of changes in accounting principles.
-22-
<PAGE>
EXHIBIT 15
Board of Directors and Stockholders
Aon Corporation
We are aware of the incorporation by reference in the Registration Statements of
Aon Corporation ("Aon") described in the following table of our report dated
August 1, 1995 relating to the unaudited condensed consolidated interim
financial statements of Aon Corporation which are included in its Form 10-Q for
the quarter ended June 30, 1995:
Registration Statement
----------------------
Form Number Purpose
---- ------ -------
S-8 2-79114 Pertaining to Aon's stock option plan
S-8 2-82791 Pertaining to Aon's stock option plan
S-8 33-27984 Pertaining to Aon's savings plan
S-8 33-42575 Pertaining to Aon's stock award plan and stock option
plan
S-8 33-59037 Pertaining to Aon's stock award plan and stock option
plan
S-3 33-57562 Registration of Aon's 8% cumulative perpetual
preferred stock and 6 1/4% cumulative convertible
exchangeable preferred stock
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
[Ernst & Young LLP]
ERNST & YOUNG LLP
Chicago, Illinois
August 1, 1995
-23-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Condensed
Consolidated Statements of Financial Position and Condensed Consolidated
Statements of Operations and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 4,633
<DEBT-CARRYING-VALUE> 2,924
<DEBT-MARKET-VALUE> 2,937
<EQUITIES> 1,005
<MORTGAGE> 574
<REAL-ESTATE> 36
<TOTAL-INVEST> 10,347
<CASH> 268
<RECOVER-REINSURE> 0<F1>
<DEFERRED-ACQUISITION> 1,212
<TOTAL-ASSETS> 19,021
<POLICY-LOSSES> 1,434
<UNEARNED-PREMIUMS> 1,562
<POLICY-OTHER> 969
<POLICY-HOLDER-FUNDS> 5,511
<NOTES-PAYABLE> 789<F2>
<COMMON> 111<F4>
50
11<F3>
<OTHER-SE> 2,481
<TOTAL-LIABILITY-AND-EQUITY> 19,021
1,013
<INVESTMENT-INCOME> 413
<INVESTMENT-GAINS> 2
<OTHER-INCOME> 853<F5>
<BENEFITS> 695
<UNDERWRITING-AMORTIZATION> 146
<UNDERWRITING-OTHER> 1,121
<INCOME-PRETAX> 318
<INCOME-TAX> 108
<INCOME-CONTINUING> 210
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 210
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 0.00
<RESERVE-OPEN> 681
<PROVISION-CURRENT> 0<F1>
<PROVISION-PRIOR> 0<F1>
<PAYMENTS-CURRENT> 0<F1>
<PAYMENTS-PRIOR> 0<F1>
<RESERVE-CLOSE> 0<F1>
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1> Available on an annual basis only.
<F2> Includes short-term borrowings and debt guarantee of ESOP.
<F3> Preferred stock at par value.
<F4> Common stock at par value.
<F5> Includes brokerage commissions and fees and other income.
</FN>
</TABLE>
