<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 SEPTEMBER 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 9-30-95
----- ---------------
$1.00 par value Common 108,028,708
<PAGE>
Part 1
Financial Information
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
(millions) As of As of
Assets Sept 30, 1995 Dec. 31, 1994
------------- -------------
(Unaudited)
<S> <C> <C>
Investments
Fixed maturities
Held to maturity $ 2,881.5 $ 2,983.8
Available for sale 4,760.8 4,160.3
Equity securities at fair value
Common stocks 244.3 314.9
Preferred stocks 720.6 624.4
Mortgage loans on real estate 597.7 567.5
Real estate (net of accumulated depreciation) 36.3 35.6
Policy loans 222.6 214.9
Other long-term investments 106.9 97.9
Short-term investments 962.1 783.2
------------ ------------
Total investments 10,532.8 9,782.5
Cash 124.2 508.8
Receivables
Insurance brokerage and consulting services 2,315.7 1,882.0
Premiums and other 800.3 637.7
Accrued investment income 173.3 133.5
------------ ------------
Total receivables 3,289.3 2,653.2
Deferred Policy Acquisition Costs 1,241.7 1,181.6
Intangible Assets 1,555.1 1,548.0
Property and Equipment at Cost (net of 308.1 266.5
accumulated depreciation)
Assets Held Under Special Contracts 2,109.5 1,595.1
Other Assets 479.4 386.2
------------ ------------
Total Assets $ 19,640.1 $ 17,921.9
============ ============
</TABLE>
<TABLE>
<CAPTION>
As of As of
Liabilities and Equity Sept 30, 1995 Dec. 31, 1994
------------- -------------
(Unaudited)
<S> <C> <C>
Policy Liabilities
Future policy benefits $ 1,446.5 $ 1,434.5
Policy and contract claims 951.3 944.2
Unearned and advance premiums 1,638.0 1,428.4
Other policyholder funds 5,508.2 5,503.3
------------ ------------
Total policy liabilities 9,544.0 9,310.4
General Liabilities
Short-term borrowings 322.2 243.9
Insurance premiums payable 2,859.0 2,408.7
Commissions and general expenses 518.7 526.6
Accrued income taxes 365.0 330.2
Notes payable 496.4 495.5
Debt guarantee of ESOP 56.8 65.5
Liabilities held under special contracts 2,109.5 1,595.1
Other liabilities 746.5 638.6
------------ ------------
Total Liabilities 17,018.1 15,614.5
Commitments and Contingent Liabilities
Redeemable Preferred Stock 50.0 50.0
Stockholders' Equity
Preferred stock - $1 par value 8.1 11.1
Common stock - $1 par value 111.4 110.6
Paid-in additional capital 421.8 485.2
Net unrealized investment gains/(losses) 117.8 (142.8)
Net foreign exchange losses (4.7) (19.7)
Retained earnings 2,130.8 1,998.1
Less - Treasury stock at cost (104.0) (72.9)
Deferred compensation (109.2) (112.2)
------------ ------------
Total Stockholders' Equity 2,572.0 2,257.4
------------ ------------
Total Liabilities and Equity $ 19,640.1 $ 17,921.9
============ ============
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
-2-
<PAGE>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(millions except per share data)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
--------------------- ---------------------
Sept 30, Sept 30, Sept 30, Sept 30,
1995 1994 1995 1994
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE
Premiums and policy fees.......................$ 514.1 $ 480.9 $ 1,527.0 $ 1,430.7
Net investment income.......................... 210.9 190.6 623.5 560.8
Realized investment gains...................... 1.6 1.8 3.6 5.2
Brokerage commissions and fees................. 394.5 336.7 1,208.9 1,015.0
Other income................................... 21.2 20.5 59.9 64.8
-------- -------- --------- ---------
Total revenue earned....................... 1,142.3 1,030.5 3,422.9 3,076.5
-------- -------- --------- ---------
BENEFITS AND EXPENSES
Benefits to policyholders...................... 343.8 325.9 1,039.0 972.3
Commissions and general expenses............... 532.9 472.9 1,579.8 1,393.1
Interest expense............................... 14.2 11.3 41.2 33.4
Amortization of deferred policy
acquisition costs............................ 76.6 68.7 223.0 201.4
Amortization of intangible assets.............. 23.2 22.2 70.2 67.1
-------- -------- --------- ---------
Total benefits and expenses................ 990.7 901.0 2,953.2 2,667.3
-------- -------- --------- ---------
INCOME BEFORE INCOME TAX 151.6 129.5 469.7 409.2
Provision for income tax.................... 51.6 42.8 159.8 135.2
-------- -------- --------- ---------
NET INCOME .......................................$ 100.0 $ 86.7 $ 309.9 $ 274.0
======== ======== ========= =========
Income Attributable to Common Stockholders........$ 94.2 $ 78.4 $ 290.5 $ 249.1
======== ======== ========= =========
Net income per share (1)..........................$ 0.87 $ 0.76 $ 2.68 $ 2.40
======== ======== ========= =========
Cash dividends paid on common stock ..............$ 0.34 $ 0.32 $ 1.00 $ 0.94
======== ======== ========= =========
Average common and common equivalent shares
outstanding ................................ 108.1 105.7 108.5 105.9
-------- -------- --------- ---------
</TABLE>
(1) Includes the effect of $5.8 million and $19.4 million, and $6.8
million and $20 million of dividends incurred on the 8%, 6.25% and
Series C preferred stocks in third quarter and nine months ended
September 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)
Nine Months Ended
-----------------------
Sept 30, Sept 30,
1995 1994
--------- ---------
<S> <C> <C>
Cash Provided by Operating Activities...................................... $ 439.4 $ 518.0
--------- ---------
Cash Flows from Investing Activities:
Sale (purchase) of short term investments-net........................... (155.6) 16.6
Sale or maturity of investments
Fixed maturities - Held to maturity
Maturities........................................ 0.8 30.7
Calls and Prepayments............................. 123.1 693.9
Sales............................................. 3.0 -
Fixed maturities - Available for sale
Maturities........................................ 86.1 64.7
Calls and Prepayments............................. 158.8 264.0
Sales............................................. 2,195.3 499.8
All other investments................................................. 705.5 814.5
Purchase of investments
Fixed maturities - Held to maturity................................... - (726.4)
Fixed maturities - Available for sale................................. (2,761.6) (978.4)
All other investments................................................. (720.4) (1,047.8)
Acquisition of subsidiaries............................................. (74.5) (21.1)
Property and equipment and other........................................ (81.9) (56.3)
--------- ---------
Cash Used by Investing Activities................................. (521.4) (445.8)
--------- ---------
Cash Flows from Financing Activities:
Treasury stock transactions - net....................................... (49.4) 4.8
Issuance of short-term borrowings - net................................. 78.3 77.8
Issuance of notes payable............................................... 18.0 99.7
Repayment of notes payable.............................................. (19.1) (126.1)
Interest sensitive life, annuity and investment contract deposits....... 1,008.2 1,274.3
Interest sensitive life, annuity and investment contract withdrawals.... (1,138.4) (1,102.4)
Cash dividends to stockholders.......................................... (128.2) (120.7)
Retirement of cumulative perpetual preferred stock...................... (75.4) -
Retirement of Series B conversion preferred stock....................... - (31.2)
--------- ---------
Cash Provided (Used) by Financing Activities...................... (306.0) 76.2
--------- ---------
Effect of Exchange Rate Changes on Cash.................................... 3.4 9.4
Increase (Decrease) in Cash................................................ (384.6) 157.8
Cash at Beginning of Period................................................ 508.8 163.8
--------- ---------
Cash at End of Period...................................................... $ 124.2 $ 321.6
========= =========
</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 SFAS
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
consolidated financial statements as required. Implementation of this
Statement is not expected to have a material effect on Aon's financial
statements.
In October 1995, FASB issued SFAS Statement No. 123 (Accounting for Stock-
Based Compensation). This standard establishes financial accounting and
reporting standards for stock-based employee compensation plans. This
standard also requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of whether the fair value or the intrinsic value based methods
of accounting are used to account for them. Aon anticipates adopting this
statement in its 1996 consolidated financial statements as required.
Implementation of this statement is not expected to have a material effect
on Aon's financial statements.
-5-
<PAGE>
3. Business Combinations
---------------------
In first quarter 1995, Aon merged with a retail insurance broker
specializing in construction business coverages. In connection with this
merger, Aon reissued 383,000 shares of common stock from treasury. In third
quarter 1995, Aon merged with an insurance broker specializing in various
products and services to the travel industry. In connection with this
merger, Aon issued 816,000 shares of common stock. In addition, Aon merged
with certain other insurance brokerage operations in third quarter 1995.
These business combinations have been accounted for by the pooling of
interests method. Prior period financial statements have not been restated
because the effect of the mergers was not material to Aon's consolidated
financial statements.
During 1995, 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. Capital Stock
-------------
During the nine months 1995, Aon purchased 1,966,000 shares of its common
stock, at a total cost of $71.2 million. Aon reissued 959,000 shares of
common stock from treasury for employee benefit plans during the nine
months 1995. The net aggregate cost of those shares exceeded the net
aggregate proceeds resulting in a charge to retained earnings.
In addition, Aon reissued 523,000 shares of treasury stock in connection
with business combinations. There were 3.4 million shares of common stock
held in treasury at September 30, 1995.
In third quarter 1995, Aon purchased and retired 3 million shares of its 8%
Cumulative Perpetual Preferred Stock at a total cost of $75.4 million.
5. Subsequent Event
----------------
On November 13, 1995, Aon announced it had reached a definitive agreement
on the sale of its domestic life and health operation, Union Fidelity Life
Insurance Company (UFLIC), which is headquartered in Trevose, Pennsylvania,
to General Electric Capital Corporation (GE Capital) of Stamford,
Connecticut. UFLIC is being sold for a price in excess of $400 million. The
sale will close as soon as the required regulatory consents have been
received, which is expected to be in the early part of 1996.
-6-
<PAGE>
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR THIRD QUARTER AND NINE MONTHS 1995
CONSOLIDATED RESULTS
- --------------------
Premiums and policy fees increased $33.2 million or 6.9% and $96.3 million or
6.7% in third quarter and nine months 1995, respectively, compared with the same
period last year. Life premium and policy fees earned increased 3.7% in the
quarter, primarily reflecting earned premiums from direct response business.
Accident and health premiums earned increased $4.9 million or 1.6% in the
quarter, primarily due to the continued growth of Combined Insurance Company of
America ("Combined") direct sales international business. Specialty property
and casualty premiums earned increased $24.1 million or 41.4% in the quarter
reflecting a higher volume of new business in the extended warranty operations,
particularly the appliance and electronic equipment line. The continued phase-
out of certain specialty liability programs partially offset this increase.
Net investment income increased $20.3 million or 10.7% in the third quarter and
$62.7 million or 11.2% in the nine months when compared to prior year.
Investment income growth in the third quarter and nine months 1995, was
primarily attributed to higher levels of invested assets as well as income
received from private placement equity holdings and capital venture investments.
Brokerage commissions and fees increased $57.8 million or 17.2% and $193.9
million or 19.1% in third quarter and nine months 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 $111.8 million or 10.8% in the third quarter and $346.4
million or 11.3% in nine months 1995 over last year, reflecting investment
income growth, internal growth, and the business combinations mentioned above.
Total benefits and expenses increased 10% and 10.7% in the same periods. Income
before income tax increased $22.1 million or 17.1% and $60.5 million or 14.8% in
the third quarter and nine months, 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 $36.1 million or 19.1% for the third quarter 1995 when
compared with the same period last year. Improvements in revenue and income
were primarily fueled by acquisition activity, namely EII and other post-third
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 period
last year, revenue from this brokerage element increased $26.6 million or 26.7%.
The major contributing factors to this increased revenue were internal growth,
and to a lesser extent, the inclusion of the JFS (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 $2 million or
3.4% for the third quarter when compared to prior year. The major contributing
factors to this increased revenue were the inclusion of the fourth quarter 1994
HRS (human resources strategy development) business combination and the third
quarter 1995 merger with Hutchison & Associates (employee benefits consulting).
Although the consulting line produced higher revenues when compared to 1994,
this line experienced slow growth in benefit plan product sales.
Overall, revenue for the insurance brokerage and consulting services segment
increased $64.7 million or 18.6% and $212.5 million or 20.2% in the third
quarter and nine months, respectively. Limiting this revenue increase, the
brokerage segment continues to be impacted by a soft property and casualty
market. Income before income tax increased $15.2 million or 53.9% and $39.2
million or 30.6% when compared to third quarter and nine months 1994,
respectively, reflecting recent acquisitions as well as internal growth and
improved expenses.
Domestic/International Results
- ------------------------------
Third quarter domestic insurance brokerage and consulting services revenue and
income before income tax represent 72% and 88%, respectively, of the total.
International brokerage revenue of $116 million increased 38.1% for the third
quarter. Partially offsetting this increase was the slow growth in benefit plan
product sales in the consulting line of business. International brokerage
income before income tax increased $4.9 million for the quarter. In the
international retail brokerage subsegment, revenues are generally highest in the
first quarter of the year, while expenses are incurred on a more even basis
throughout the year.
-8-
<PAGE>
LIFE INSURANCE
- --------------
The life insurance line of business is composed primarily of capital
accumulation products, credit insurance and ordinary life products. Revenue
increased 2.9% and 4.6% for the third quarter and nine months 1995,
respectively, when compared to prior year primarily due to increased investment
income generated on guaranteed investment contracts and variable products, and
growth in premiums and fees on direct response business. In addition, life
revenue also reflected a moderation in fixed annuity sales. Traditional life
business in Europe and the Pacific is continuing to runoff as planned.
Income before income tax for life insurance increased 13.6% and 8% for the third
quarter and nine months 1995, respectively, compared with last year primarily
due to favorable mortality experience and growth in capital accumulation
variable annuities. Pretax income growth was positively influenced by newer
direct sales domestic products with better underwriting margins. Overall,
benefit and expense margins in third quarter 1995 did not suggest any
significant shift in operating trends.
Domestic/International Results
- ------------------------------
Third quarter domestic life revenue represents 94% of the total. Domestic life
income before income tax increased 19.6% when compared to its 1994 level.
International life revenue of $14.9 million increased 4.9%, principally due to
improved premiums earned in the credit insurance line.
ACCIDENT AND HEALTH INSURANCE
- -----------------------------
The accident and health line of business is composed principally of individual
accident and health products sold by employees and agents and through direct
response techniques, and credit disability products. Revenue increased $6.5
million or 2% and $37 million or 3.9% in the third quarter and nine months,
respectively. Combined direct sales accident and health revenue grew 3.5% in
the third quarter. Financial credit disability revenue decreased 8.2% in the
quarter primarily due to the discontinuation of lower margin business.
Income before income tax increased 2% and 4% in the third quarter and nine
months, respectively. Income before income tax on Combined's direct sales
business was up 6.1% from third 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
decreased slightly from third quarter 1994 reflecting lower earned premium and
lower auto sales which were offset in part by good expense controls. Pretax
income on direct response products decreased from 1994. Strong growth in third
party business was offset by the continued runoff of the medicare supplement
line. Profit margins for the accident and health segment, however, continued to
remain stable when compared to prior year.
-9-
<PAGE>
Domestic/International Results
- ------------------------------
Third 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 the business that is marketed internationally.
International accident and health revenue of $80.1 million increased 10.8% in
the quarter influenced, in part, by an increase in both auto credit earned
premiums and prior year auto sales and by strong sales of Combined's health
products in Europe and the Pacific. Third quarter international income before
income tax increased 18.4% compared to the previous year primarily due to
improved auto credit 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 specialty liability insurance, primarily professional
liability and workers' compensation. Revenue increased $27.1 million or 36.7%
when compared to third 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 decline of
specialty property and casualty revenues.
Income before income tax was $13.8 million in the third quarter and $40.9
million for nine months reflecting an increase of 3.8% and 0.7%, respectively,
when compared to prior year. Extended warranty income before income tax
increased 48.2% for the quarter reflecting strong revenue and earnings growth
mentioned above.
Domestic/International Results
- ------------------------------
Third quarter domestic revenue and income before income tax represent 81% and
87%, respectively, of the total. Domestic income before income tax decreased
2.4% for the third quarter reflecting the continued phase-out of certain
underwriting programs. Strong growth, particularly in the appliance and
electronic equipment line, offset this decline. Third quarter international
revenue was 30.3% above prior year. International income before income tax
increased 80% during the quarter principally due to the impact of lower loss
ratios and to a higher volume of new business, particularly in the appliance and
electronic equipment line.
-10-
<PAGE>
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 based on 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.
Revenue increased 14.8% and 12.7% for the third quarter and nine months 1995,
respectively, due in part to higher levels of invested assets, higher investment
yields, and returns received from private placement equity securities and
capital venture holdings, and growth in financing fees. Pretax realized
investment gains for the third quarter were $1.6 million and $1.8 million in
1995 and 1994, respectively. Income before income tax increased $1.3 million or
14.8% over the same quarter last year. Higher short-term interest expense due
to an increased volume of short-term-borrowings, which were primarily used to
finance the repurchase of the 8% preferred stock in third quarter 1995,
partially offset increases in revenue for the quarter.
-11-
<PAGE>
Aon CORPORATION
MAJOR LINES OF BUSINESS
<TABLE>
<CAPTION>
(millions)
Third Quarter Ended Nine Months Ended
-------------------- -------------------
Sept 30, Percent Sept 30, Percent
1995 Change 1995 Change
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Revenue
Insurance brokerage and consulting services........$ 413.2 18.6 % $ 1,262.1 20.2 %
Life............................................... 246.1 2.9 737.3 4.6
Accident and health................................ 330.8 2.0 996.2 3.9
Specialty property and casualty.................... 101.0 36.7 281.0 20.7
Corporate and other................................ 51.2 14.8 146.3 12.7
--------- ---- --------- ----
Total revenue earned........................$ 1,142.3 10.8 % $ 3,422.9 11.3 %
========= ==== ========= ====
Income Before Income Tax
Insurance brokerage and consulting services........$ 43.4 53.9 % $ 167.2 30.6 %
Life............................................... 34.3 13.6 90.2 8.0
Accident and health................................ 50.0 2.0 136.7 4.0
Specialty property and casualty.................... 13.8 3.8 40.9 0.7
Corporate and other................................ 10.1 14.8 34.7 35.0
--------- ---- --------- ----
Total income before income tax..............$ 151.6 17.1 % $ 469.7 14.8 %
========= ==== ========= ====
</TABLE>
-12-
<PAGE>
Aon CORPORATION
REVENUE BY MAJOR PRODUCT LINE
<TABLE>
<CAPTION>
(millions)
Third Quarter Ended Nine Months Ended
-------------------- -------------------
Sept. 30, Percent Sept. 30, Percent
1995 Change 1995 Change
---------- ------- --------- -------
<S> <C> <C> <C> <C>
Insurance brokerage and consulting services
Retail brokerage (1).................................$ 225.3 19.1 % $ 723.2 18.5 %
Reinsurance and wholesale............................ 126.2 26.7 352.1 28.6
Consulting (1)....................................... 61.7 3.4 186.8 12.8
-------- ---- --------- ----
Total revenue earned.........................$ 413.2 18.6 % $ 1,262.1 20.2 %
======== ==== ========= ====
Life
Capital accumulation products........................$ 142.1 0.8 % $ 430.0 4.2 %
Ordinary, Credit and other........................... 104.0 5.9 307.3 5.1
-------- ---- --------- ----
Total revenue earned.........................$ 246.1 2.9 % $ 737.3 4.6 %
======== ==== ========= ====
Accident and health
Combined direct sales................................$ 218.2 3.5 % $ 655.2 5.2 %
Direct response and Group............................ 77.7 - 236.3 1.1
Credit and other..................................... 34.9 (2.5) 104.7 2.2
-------- ---- --------- ----
Total revenue earned.........................$ 330.8 2.0 % $ 996.2 3.9 %
======== ==== ========= ====
Specialty property and casualty......................$ 101.0 36.7 % $ 281.0 20.7 %
======== ==== ========= ====
Corporate and other
Investment income on capital and other...............$ 42.6 14.2 % $ 123.8 13.3 %
Premium financing fees............................... 7.0 27.3 18.9 23.5
Realized investment gains............................ 1.6 (11.1) 3.6 (30.8)
-------- ---- --------- ----
Total revenue earned..........................$ 51.2 14.8 % $ 146.3 12.7 %
======== ==== ========= ====
</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 THIRD QUARTER AND NINE MONTHS 1995
The effective tax rate for third quarter and nine months 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 third quarter increased 2.3% primarily due to
the issuance of common shares related to business combinations and offset, in
part, by treasury stock repurchases. Third quarter net income was $100 million
($0.87 per share) compared to $86.7 million ($0.76 per share) in 1994. Net
income per share for the nine months was $309.9 million ($2.68 per share)
compared to $274 million ($2.40 per share). Included in third 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 NINE MONTHS 1995
Cash flows from operating activities in nine months 1995 were $439.4 million, a
decrease of $78.6 million from nine months 1994. This decrease primarily
reflects the timing of estimated federal income tax settlements and the receipt
of interest payments on Aon's investment portfolio.
Investing activities used cash of $521.4 million which was made available
primarily from operations. Cash used for acquisition activity during the nine
months 1995 was $74.5 million.
Cash totalling $306 million was used during nine months 1995 for financing
activities. Aon repurchased $49.4 million of treasury stock, net of reissued
shares. Net cash flows from capital accumulation product deposits and
withdrawals declined $302.1 million in nine months 1995 when compared to prior
year. This decline was primarily attributable to lower interest rates. Cash
was used to pay dividends of $107.8 million on common stock, $13.5 million on 8%
perpetual preferred stock, $5 million on 6.25% convertible preferred stock and
$1.9 million on Series C preferred stock.
In addition, included in notes payable at September 30, 1995 is approximately
$14 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 anticipate sufficient cash flow
in the long-term.
-14-
<PAGE>
Recently Aon announced its intention to explore the sale of its domestic life
insurance company - Life of Virginia (LOV). The sale proceeds would be used in
such a way that Aon's current capitalization relationships would be maintained.
LOV's principal business activity is to underwrite substantially all of the
capital accumulation and traditional life products sold by Aon subsidiaries. For
Aon's 1994 fiscal year, LOV contributed in excess of $600 million of the $947
million of life insurance revenues generated. On the consolidated statement of
financial position, LOV's total policy liabilities at December 31, 1994
accounted for approximately $6 billion of Aon's $9.3 billion policy liabilities
in the aggregate.
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. With a carrying value of $7.6 billion,
Aon's total fixed maturity portfolio is invested primarily in investment grade
holdings (95.4%) and has a market value which is 101.9% of amortized cost.
Mortgage-backed securities, primarily collateralized mortgage obligations
(CMO's), included in the fixed maturities portfolio, totalled $2.1 billion, down
$1 billion 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 $1.7 billion to $19.6 billion since year-end 1994,
primarily due to growth in the investment portfolio. Invested assets at
September 30, 1995 increased $750.3 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
September 30, 1995, were $340.9 million and $353.1 million, respectively. The
carrying value of non-income producing investments in Aon's portfolio at
September 30, 1995 was $59.3 million, or 0.6% of total invested assets.
Mortgage loans held totalled $597.7 million or 5.7% 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 $33.3 million at the end of nine months 1995,
down $3.1 million from the year end 1994 level of $36.4 million. These reserves
are a product of Aon's continuing review of the characteristics and risks of its
investment portfolio and current environmental and economic conditions.
-15-
<PAGE>
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 September 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: (a) manage its overall asset/liability duration match; (b)
hedge asset price risk associated with financial instruments whose change in
value is reported under SFAS 115; and (c) hedge other business risks. As of
September 30, 1995, Aon had open contracts which had unrealized losses of
approximately $21 million.
Stockholders' equity increased $314.6 million in nine months 1995 to $21.89 per
share, an increase of $3.59 per share since year-end. In addition to net
income, the principal factors influencing this increase were the change in net
unrealized investment gains of $260.6 million, of which $197.6 million is
related to fixed maturities available for sale, and foreign exchange gains of
$15 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 $71.2 million for the repurchase of
approximately 2 million shares of common stock from treasury, the purchase of 3
million shares of the 8% Cumulative Perpetual Preferred Stock for $75.4 million,
and dividends to stockholders of $162.8 million. Included in the reduction for
dividends is an accrual for the fourth quarter 1995 common stock dividend.
Review by Independent Auditors
- ------------------------------
The condensed consolidated financial statements at September 30, 1995, and for
the third quarter and nine months 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 September 30, 1995, and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1995 and 1994, and the condensed consolidated statements of
cash flows for the nine-month periods ended September 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
November 2, 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 September 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)
November 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
-------------
Exhibit Number
In Regulation S-K, Page
Item 601 Exhibit Table No.
- ---------------------- ----
(11) Statement regarding Computation of Per Share Earnings. 20
(12) Statements regarding Computation of Ratios.
(a) Statement regarding Computation of Ratio of Earnings to 21
Fixed Charges.
(b) Statement regarding Computation of Ratio of Earnings to 22
Combined Fixed Charges and Preferred Stock Dividends.
(15) Letter re: Unaudited Interim Financial Information. 23
(27) Financial Data Schedule
-19-
<PAGE>
EXHIBIT 11
Aon Corporation and Subsidiaries
CONSOLIDATED NET INCOME PER SHARE COMPUTATION
<TABLE>
<CAPTION>
(millions except per share data)
Third Quarter Ended Nine Months Ended
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE
Net income..............................................$ 100.0 $ 86.7 $ 309.9 $ 274.0
Preferred stock dividends............................... 5.8 6.8 19.4 20.0
------- ------- ------- -------
Net income less preferred stock dividends..........$ 94.2 $ 79.9 $ 290.5 $ 254.0
======= ======= ======= =======
Average common shares issued............................ 110.8 106.4 110.6 106.4
Net effect of treasury stock activity................... (3.4) (4.5) (2.8) (4.5)
Weighted average effect of Series B preferred stock..... - 3.0 - 3.3
Net effect of dilutive stock compensation plans based
on the treasury stock method...................... 0.7 0.8 0.7 0.7
------- ------- ------- -------
Average common and common equivalent shares
outstanding.................................. 108.1 105.7 108.5 105.9
======= ======= ======= =======
Net income per share (1).....................................$ 0.87 $ 0.76 $ 2.68 $ 2.40
======= ======= ======= =======
</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>
Nine Months
Ended Sept. 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 $ 469.7 $ 409.2 $ 537.6 $ 479.1 $ 290.5 $ 331.5 $ 325.2
Add back fixed charges:
Interest on indebtedness 41.2 33.4 46.4 42.3 41.9 40.7 44.4
Interest on ESOP 4.1 4.5 5.9 6.5 6.9 7.2 7.4
Portion of rents representative of
interest factor 18.0 23.6 28.7 26.1 19.2 15.4 13.2
------- ------- ------- ------- ------- ------- -------
Income as adjusted $ 533.0 $ 470.7 $ 618.6 $ 554.0 $ 358.5 $ 394.8 $ 390.2
======= ======= ======= ======= ======= ======= =======
Fixed charges:
Interest on indebtedness:
Aon Corporation and
consolidated subsidiaries $ 41.2 $ 33.4 $ 46.4 $ 42.3 $ 41.9 $ 40.7 $ 43.9
Unconsolidated subsidiaries - - - - - - 0.5
------- ------- ------- ------- ------- ------- -------
Interest 41.2 33.4 46.4 42.3 41.9 40.7 44.4
Interest on ESOP 4.1 4.5 5.9 6.5 6.9 7.2 7.4
Portion of rents representative of
interest factor 18.0 23.6 28.7 26.1 19.2 15.4 13.2
------- ------- ------- ------- ------- ------- -------
Total fixed charges $ 63.3 $ 61.5 $ 81.0 $ 74.9 $ 68.0 $ 63.3 $ 65.0
======= ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges 8.4 7.7 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>
Nine Months
Ended Sept. 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 $469.7 $409.2 $537.6 $479.1 $290.5 $331.5 $325.2
Add back fixed charges:
Interest on indebtedness 41.2 33.4 46.4 42.3 41.9 40.7 44.4
Interest on ESOP 4.1 4.5 5.9 6.5 6.9 7.2 7.4
Portion of rents representative of interest factor 18.0 23.6 28.7 26.1 19.2 15.4 13.2
------ ------ ------ ------ ------ ------ ------
Income as adjusted $533.0 $470.7 $618.6 $554.0 $358.5 $394.8 $390.2
====== ====== ====== ====== ====== ====== ======
Fixed charges and preferred stock dividends:
Interest on indebtedness:
Aon Corporation and consolidated subsidiaries $ 41.2 $ 33.4 $ 46.4 $ 42.3 $ 41.9 $ 40.7 $ 43.9
Unconsolidated subsidiaries _ _ _ _ _ _ 0.5
Preferred stock dividends 29.4 37.1 48.4 47.5 20.3 3.5 2.0
------ ------ ------ ------ ------ ------ ------
Interest and dividends 70.6 70.5 94.8 89.8 62.2 44.2 46.4
Interest on ESOP 4.1 4.5 5.9 6.5 6.9 7.2 7.4
Portion of rents representative of interest factor 18.0 23.6 28.7 26.1 19.2 15.4 13.2
------ ------ ------ ------ ------ ------ ------
Total fixed charges and preferred stock dividends $ 92.7 $ 98.6 $129.4 $122.4 $ 88.3 $ 66.8 $ 67.0
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to combined fixed charges and
preferred stock dividends 5.7 4.8 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
November 2, 1995 relating to the unaudited condensed consolidated interim
financial statements of Aon Corporation that are included in its Form 10-Q for
the quarter ended September 30, 1995:
<TABLE>
<CAPTION>
Registration Statement
----------------------
Form Number Purpose
---- ------ -------
<S> <C> <C>
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
</TABLE>
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.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
November 2, 1995
-23-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
Consolidated Statements of Financial Position and Consolidated Statement of
Operations and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 4,761
<DEBT-CARRYING-VALUE> 2,881
<DEBT-MARKET-VALUE> 2,891
<EQUITIES> 965
<MORTGAGE> 598
<REAL-ESTATE> 36
<TOTAL-INVEST> 10,533
<CASH> 124
<RECOVER-REINSURE> 0<F1>
<DEFERRED-ACQUISITION> 1,242
<TOTAL-ASSETS> 19,640
<POLICY-LOSSES> 1,447
<UNEARNED-PREMIUMS> 1,638
<POLICY-OTHER> 951
<POLICY-HOLDER-FUNDS> 5,508
<NOTES-PAYABLE> 875<F2>
<COMMON> 111<F4>
50
8<F3>
<OTHER-SE> 2,453
<TOTAL-LIABILITY-AND-EQUITY> 19,640
1,527
<INVESTMENT-INCOME> 624
<INVESTMENT-GAINS> 4
<OTHER-INCOME> 1,268<F5>
<BENEFITS> 1,039
<UNDERWRITING-AMORTIZATION> 223
<UNDERWRITING-OTHER> 1,691
<INCOME-PRETAX> 470
<INCOME-TAX> 160
<INCOME-CONTINUING> 310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 310
<EPS-PRIMARY> 2.68
<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 borrowing 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.
</TABLE>
