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, 1996
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 9-30-96
------- ---------------
$1.00 par value Common 108,270,863
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<CAPTION>
Part 1
Financial Information
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
--------------------------------------------------------
(millions) As of As of
ASSETS Sept. 30, 1996 Dec. 31, 1995
------------------ ------------------
(Unaudited)
Investments
<S> <C> <C>
Fixed maturities available for sale $ 2,707.4 $ 7,687.1
Equity securities at fair value
Common stocks 303.0 300.0
Preferred stocks 518.3 706.3
Mortgage loans on real estate 33.5 632.0
Real estate (net of accumulated depreciation) 19.4 36.5
Policy loans 58.3 226.3
Other long-term investments 108.4 112.6
Short-term investments 1,174.2 938.3
------------------ ------------------
Total investments 4,922.5 10,639.1
Cash 226.4 115.3
Receivables
Insurance brokerage and consulting
services 3,055.2 2,264.1
Premiums and other 790.3 580.2
Accrued investment income 74.7 152.4
------------------ ------------------
Total receivables 3,920.2 2,996.7
Deferred Policy Acquisition Costs 621.7 1,261.5
Intangible Assets 1,393.4 1,597.7
Property and Equipment at Cost (net of 277.5 307.8
accumulated depreciation)
Assets Held Under Special Contracts 305.9 2,307.2
Other Assets 559.4 510.5
------------------ ------------------
Total Assets $ 12,227.0 $ 19,735.8
================== ==================
LIABILITIES AND EQUITY
Policy Liabilities
Future policy benefits $ 886.4 $ 1,475.1
Policy and contract claims 867.1 970.9
Unearned and advance premiums 1,674.7 1,646.2
Other policyholder funds 367.0 5,464.2
------------------ ------------------
Total policy liabilities 3,795.2 9,556.4
General Liabilities
Insurance premiums payable 3,394.1 2,722.8
Commissions and general expenses 502.8 562.4
Accrued income taxes 118.1 332.6
Short-term borrowings 59.6 352.7
Notes payable 476.8 497.5
Debt guarantee of ESOP 46.1 56.8
Liabilities held under special contracts 305.9 2,307.2
Other liabilities 760.3 623.7
------------------ ------------------
Total Liabilities 9,458.9 17,012.1
COMMITMENTS AND CONTINGENT LIABILITIES
Redeemable Preferred Stock 50.0 50.0
Stockholders' Equity
Preferred stock - $1 par value 7.6 8.1
Common stock - $1 par value 111.5 111.4
Paid-in additional capital 454.1 431.8
Net unrealized investment gains 96.3 123.1
Net foreign exchange gains/(losses) (11.5) 1.8
Retained earnings 2,312.7 2,212.1
Less - Treasury stock at cost (119.3) (97.3)
Deferred compensation (133.3) (117.3)
------------------ ------------------
Total Stockholders' Equity 2,718.1 2,673.7
------------------ ------------------
Total Liabilities and Equity $ 12,227.0 $ 19,735.8
================== ==================
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
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<CAPTION>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
(millions except per share data)
Third Quarter Ended Nine Months Ended
---------------------------- ----------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
REVENUE
<S> <C> <C> <C> <C>
Brokerage commissions and fees ......................... $ 454.5 $ 400.9 $ 1,368.0 $ 1,225.7
Premiums earned ........................................ 382.1 358.1 1,141.4 1,058.5
Net investment income .................................. 92.4 86.6 269.7 245.0
Realized investment gains .............................. 3.1 8.8 3.1 9.3
Other income ........................................... 12.2 11.3 36.6 32.3
------------- ------------- ------------- -------------
Total revenue ...................................... 944.3 865.7 2,818.8 2,570.8
------------- ------------- ------------- -------------
BENEFITS AND EXPENSES
Commissions and general expenses ....................... 537.2 491.6 1,621.4 1,454.7
Benefits to policyholders .............................. 203.3 174.8 582.1 513.8
Interest expense ....................................... 9.1 9.7 28.4 27.6
Amortization of deferred policy
acquisition costs .................................... 48.3 53.5 156.4 153.5
Amortization of intangible assets ...................... 18.4 19.9 55.6 60.3
------------- ------------- ------------- -------------
Total benefits and expenses ........................ 816.3 749.5 2,443.9 2,209.9
------------- ------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX .................................... 128.0 116.2 374.9 360.9
Provision for income tax ............................ 44.2 39.2 129.3 121.7
------------- ------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS ......................... $ 83.8 $ 77.0 $ 245.6 $ 239.2
DISCONTINUED OPERATIONS: (1)
Income from discontinued operations, net of tax ..... - 23.0 22.4 70.7
Gain on disposal of discontinued operations,
net of tax ........................................ - - 21.0 -
------------- ------------- ------------- -------------
NET INCOME ................................................ $ 83.8 $ 100.0 $ 289.0 $ 309.9
============= ============= ============= =============
Net Income Available for Common Stockholders .............. $ 78.8 $ 94.2 $ 273.8 $ 290.5
============= ============= ============= =============
PER SHARE:
Income from continuing operations (2) ..................... $ 0.72 $ 0.66 $ 2.11 $ 2.03
Income from discontinued operations (1) ................... - 0.21 0.20 0.65
Gain on disposal of discontinued operations (1) ........... - - 0.19 -
------------- ------------- ------------- -------------
Net income (2) ............................................ $ 0.72 $ 0.87 $ 2.50 $ 2.68
============= ============= ============= =============
Cash dividends paid on common stock ....................... $ 0.36 $ 0.34 $ 1.06 $ 1.00
============= ============= ============= =============
Average common and common equivalent shares
outstanding ......................................... 109.4 108.1 109.7 108.5
------------- ------------- ------------- -------------
<FN>
(1) In April, 1996, Aon completed the sales of two of its insurance subsidiaries, Union Fidelity Life Insurance Company
and The Life Insurance Company of Virginia. Their results are classified as discontinued operations.
(2) Includes the effect of $5 million and $15.2 million, and $5.8 million and $19.4 million of dividends incurred on
the 8%, 6.25% and Series C preferred stock in third quarter and nine months ended September 30, 1996 and 1995, respectively.
</FN>
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
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<CAPTION>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(millions)
Nine Months Ended
------------------------------
Sept. 30, Sept. 30,
1996 1995
------------- -------------
<S> <C> <C>
Cash Provided by Operating Activities .................................... $ 375.6 $ 439.4
------------- -------------
Cash Flows from Investing Activities:
Purchase of short term investments-net ................................ (307.8) (155.6)
Sale or maturity of fixed maturities
Available for sale - Maturities ..................................... 105.4 86.1
Calls and Prepayments .......................... 145.2 158.8
Sales .......................................... 569.4 2,195.3
Held to maturity - Maturities ..................................... - 0.8
Calls and prepayments .......................... - 123.1
Sales .......................................... - 3.0
Sale or maturities of other investments ............................. 471.5 705.5
Purchase of fixed maturities - available for sale ..................... (1,276.6) (2,761.6)
Purchase of other investments ......................................... (630.2) (720.4)
Disposition (acquisition) of subsidiaries - net ....................... 1,253.2 (74.5)
Property and equipment and other ...................................... (56.9) (81.9)
------------- -------------
Cash Provided (Used) by Investing Activities.... 273.2 (521.4)
------------- -------------
Cash Flows from Financing Activities:
Treasury stock transactions - net ..................................... (35.9) (49.4)
Issuance (repayment) of short-term borrowings - net ................... (293.1) 78.3
Issuance of long-term debt ............................................ - 18.0
Repayment of long-term debt ........................................... (4.1) (19.1)
Interest sensitive life, annuity and investment contract deposits ..... 371.0 1,008.2
Interest sensitive life, annuity and investment contract withdrawals .. (432.1) (1,138.4)
Retirement of preferred stock ......................................... (14.2) (75.4)
Cash dividends to stockholders ........................................ (129.5) (128.2)
------------- -------------
Cash Used by Financing Activities .............. (537.9) (306.0)
------------- -------------
Effect of Exchange Rate Changes on Cash .................................. 0.2 3.4
Increase (Decrease) in Cash .............................................. 111.1 (384.6)
Cash at Beginning of Period .............................................. 115.3 508.8
------------- -------------
Cash at End of Period .................................................... $ 226.4 $ 124.2
============= =============
</TABLE>
See the accompanying notes to condensed consolidated financial statements.
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<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 (Annual Report) for the year ended December 31,
1995 for additional details of Aon's financial position, as well as a
description of the accounting policies which have been continued
without material 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.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. Statement of Financial Accounting Standards (SFAS)
--------------------------------------------------
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement No. 125 (Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities). This Statement provides
accounting and reporting standards for sales, securitization, and
servicing of receivables and other financial assets and extinguishments
of liabilities. The provisions of this Statement are to be applied to
transactions occurring after December 31, 1996. Aon anticipates
adopting this Statement in its 1997 financial statements as required.
Implementation of this Statement is not expected to have a material
effect on Aon's financial statements.
3. Capital Stock
-------------
During nine months 1996, Aon purchased 1,151,000 shares of its common
stock, at a total cost of $56.7 million. Aon reissued 575,000 shares of
common stock from treasury for employee benefit plans during the nine
months 1996. In addition, Aon reissued 491,000 shares of treasury stock
in connection with business combinations. There were 3.2 million shares
of common stock held in treasury at September 30, 1996.
During nine months 1996, Aon purchased and retired 553,000 shares of
its 8% Cumulative Perpetual Preferred Stock at a total cost of $14.2
million.
On September 20, 1996, Aon exercised its option to call for redemption
on November 1, 1996, all of the then outstanding 6.25% Cumulative
Convertible Exchangeable Preferred Stock ("6.25% preferred stock").
Shareholders had the option of either having shares redeemed for
$51.8750 per share, plus accrued dividends, or converting shares into
1.220 shares of common stock at any time prior to the close of business
on October 31, 1996. Substantially all of the 6.25% preferred stock
shareholders elected to convert their shares into common stock.
- 5 -
<PAGE>
4. Discontinued Operations
-----------------------
On April 1, 1996, Aon completed the sales of Union Fidelity Life
Insurance Company (UFLIC) and The Life Insurance Company of Virginia
(LOV) and received after-tax sales proceeds of approximately $1.2
billion. The gain on disposal of discontinued operations was $21
million after taxes of approximately $175 million.
5. Subsequent Event
----------------
On October 18, 1996, Aon acquired all of the outstanding shares of Bain
Hogg Group plc ("Bain Hogg"), a wholly-owned subsidiary of Inchcape plc
for approximately $250 million. The acquisition was financed primarily
by internal funds. Bain Hogg is an international insurance brokerage
and consulting organization with twelve months 1995 revenues of
approximately $350 million.
- 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 1996
GENERAL
- -------
In fourth quarter 1995, Aon and its wholly owned subsidiary Combined Insurance
Company of America (CICA) reached definitive agreements to sell two of its
domestic insurance subsidiaries, UFLIC and LOV. The sales of UFLIC and LOV were
completed in April, 1996, and resulted in a $21 million after-tax gain on
disposal. The results of UFLIC and LOV are classified in the consolidated
statements of income as discontinued operations. For purposes of the following
discussions, comparisons against prior years' results are based on continuing
operations.
The after-tax proceeds from the sales of UFLIC and LOV were $1.2 billion. The
majority of the proceeds were initially used for both short-term debt reductions
and investments. The potential long-term uses of the proceeds are the further
repayment of debt, the repurchase of capital stock, and other general corporate
purposes, including acquisitions.
CONSOLIDATED RESULTS
- --------------------
Brokerage commissions and fees increased $53.6 million or 13.4% and $142.3
million or 11.6% in third quarter and nine months 1996, respectively, primarily
reflecting business combination activity.
Premiums earned increased $24 million or 6.7% and $82.9 million or 7.8% in third
quarter and nine months 1996, respectively, compared with the same periods last
year. Extended warranty premiums earned increased $23 million or 31.7% in the
quarter, primarily reflecting a continuing higher volume of new business in the
appliance and electronic equipment line. Direct sales earned premium grew 1.1%
from third quarter 1995 of which the strongest growth was in the international
segment.
Net investment income increased $5.8 million or 6.7% in third quarter 1996 when
compared to prior year. Growth in the quarter was primarily attributable to
investment income associated with the proceeds from the sales of UFLIC and LOV,
and was impacted by lower income from certain private equity investments. For
the nine months 1996, investment income increased $24.7 million or 10.1%
primarily reflecting investment income on the sales proceeds.
Total revenue increased $78.6 million or 9.1% and $248 million or 9.6% in the
third quarter and nine months 1996, respectively. Total benefits and expenses
increased $66.8 million or 8.9% and $234 million or 10.6% in the same periods.
The increase in the nine months expenses reflects the inclusion of special
charges of $30.2 million related to the completion of a voluntary early
retirement program introduced domestically in the second quarter as well as
similar programs internationally. Total benefits and expenses, excluding the
1996 special charges, increased 9.2% for the nine months 1996. Income before
income tax increased $11.8 million or 10.2% and $14 million or 3.9% in third
quarter and nine months 1996, respectively. Excluding these special charges,
income before income tax increased 12.2% when compared to nine months 1995,
primarily due to the inclusion
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<PAGE>
of investment income associated with the proceeds from the sale of discontinued
operations and to growth in the insurance brokerage and consulting services
segment related primarily to business combination activity.
MAJOR LINES OF BUSINESS
- -----------------------
GENERAL
- -------
Beginning with the 1995 Annual Report, Aon reclassified its operating segments
to reflect the focus of its continuing operations. Insurance underwriting
operations were presented as one segment based on the related nature,
distribution channels and markets of the continuing products. Insurance
underwriting primarily includes life, accident and health insurance and extended
warranty products. In this report, 1995 segments have been reclassified to
conform to the 1996 presentation.
In second quarter 1996, Aon reported a gain on disposal of discontinued
operations, net of tax, of $21 million related to the sales of UFLIC and LOV. In
addition, investment income associated with the sales proceeds was included in
the Corporate and Other segment in the quarter. Aon also reported second quarter
pretax special charges of $30.2 million related to early retirement programs.
For the purposes of the following line of business discussions, comparisons
against last year's results exclude the gain on sale of discontinued operations
and the special charges.
INSURANCE BROKERAGE AND CONSULTING SERVICES
- -------------------------------------------
Beginning in first quarter 1996, Aon combined the retail brokerage and
reinsurance and wholesale subsegments of insurance brokerage and consulting
services into one subsegment called "Insurance and other services". Also
included in this subsegment is revenue from financing services operations which
includes service fees received from the placement of insurance premiums and
retail auto financing receivables with unaffiliated parties. This operation was
previously reported in the corporate segment. All prior period data has been
reclassified to conform to the 1996 presentation. Insurance and other services
revenue increased $48.1 million or 13.4% for the third quarter 1996 when
compared with the same period last year. This growth was primarily attributable
to various acquisition programs, both internationally as well as domestically.
Insurance and other services revenue continued to reflect highly competitive
property and casualty pricing in the domestic market.
"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 $3.1 million or
5% for the third quarter when compared to prior year, primarily due to the
expanding integrated human resources consulting practice. Partially limiting
this growth was an unanticipated decline in revenues in the automotive
consulting operations.
Overall, revenue for the insurance brokerage and consulting services segment
increased $51.2 million or 12.2% in the third quarter and $137.8 million or
10.8% for nine months 1996. The brokerage segment continues to be impacted by a
soft property and casualty market. Income before income tax increased $9.9
million or 21.6% and $25.2 million or 14.6% when compared to third quarter and
nine months 1996, respectively, primarily reflecting acquisition activity.
Excluding the impact of acquisitions, revenue and income before income tax
results demonstrated modest growth while operating in a competitive environment.
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<PAGE>
Domestic/International Results
- ------------------------------
Third quarter domestic insurance brokerage and consulting services revenue and
income before income tax represent 70% and 96%, respectively, of the total
segment. International brokerage revenue of $141.2 million increased 21.6% for
the third quarter, primarily reflecting acquisition activity. International
brokerage income before income tax declined for the quarter primarily reflecting
the brokerage revenue pattern in the insurance and other services subsegment
with revenues being highest in the first quarter of the year, while expenses
are incurred on a more even basis throughout the year.
INSURANCE UNDERWRITING
- ----------------------
The insurance underwriting line of business provides direct sales life and
accident and health products, and extended warranty products to individuals. On
June 30, 1996, Aon completed the sale of North American auto credit underwriting
and distribution operations, including the distribution of extended warranties
throughout North America. However, the extended warranty products will continue
to be underwritten by Aon's subsidiary, Virginia Surety Company. The North
American auto credit underwriting business written prior to the sale will
continue to run off as planned. Total North American auto credit insurance
underwriting revenues included in Aon's consolidated statements of income for
the third quarter and nine months ended September 30, 1996 were approximately
$30 million and $95 million, respectively.
Revenue increased 7.3% or $30 million and 8.9% or $108.3 million for the third
quarter and nine months 1996, respectively, when compared to prior year
primarily due to the continued expansion, both domestically and internationally,
of the extended warranty appliance and electronic line. Certain specialty
programs and auto credit business continue to be profitably run off. CICA's
revenues for the quarter were up 1.5% to $255.6 million. CICA's direct sales
business continues to produce modest revenue growth, stable earnings and strong
cash flow.
Pretax income from insurance underwriting increased $5.2 million or 8% and $11.4
million or 6.2% in third quarter and nine months 1996, respectively, compared
with last year. In general, expense margins in the third quarter 1996 decreased
while benefit levels increased slightly, particularly in the extended warranty
line. Overall, benefit and expense margins in third quarter 1996 did not suggest
any significant shift in operating trends.
Domestic/International Results
- ------------------------------
Third quarter domestic insurance underwriting revenue and income before income
tax represent 72% and 69%, respectively, of the total segment. International
insurance underwriting revenue of $125.9 million increased 10.5%, principally
due to improved premiums earned in the extended warranty lines. International
pretax income improved 10.8% primarily due to expansion in the appliance and
electronic extended warranty line.
CORPORATE AND OTHER
- -------------------
Revenue in this category consists primarily of investment income on capital and
realized investment gains and losses. Allocation of investment income to the
insurance underwriting segment is based on the invested assets which underlie
policyholder liabilities. Excess invested assets and related investment income,
which do not underlie underwriting liabilities, are reported in this segment.
Expenses include interest and other financing expenses, goodwill amortization
(primarily associated with insurance brokerage and consulting acquisitions), and
corporate administrative costs.
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<PAGE>
Revenue decreased 8% for the third quarter compared to last year, primarily due
to a lower level of realized investment gains. Pretax realized investment gains
for the third quarter were $3.1 million and $8.8 million in 1996 and 1995,
respectively. Excluding realized investment gains, revenue increased 13.1% when
compared to prior year. Third quarter revenue in this segment benefited from
investment income associated with the proceeds from the sales of UFLIC and LOV
and was offset, in part, by lower income from certain private equity
investments. Unlike public securities, income flows on these private investments
are based on events that are not scheduled. Nine months 1996 revenue increased
2.5%, largely due to investment income generated by the sales proceeds.
Excluding realized investment gains, revenue increased 12.3%. Income before
income tax decreased $3.3 million to $1.9 million in third quarter 1996,
primarily due to the decrease in realized investment gains and offset in part by
an increase in investment income. Income before income tax, excluding realized
investment gains, increased $2.4 million over the same quarter last year. Nine
months 1996 income before income tax increased 200% over 1995, largely due to
investment income from the sales proceeds and to an improved level of general
expenses.
DISCONTINUED OPERATIONS
- -----------------------
Discontinued operations are composed principally of capital accumulation
products and direct response products. Substantially all of the revenue and
income before income tax generated from discontinued operations is domestic.
These amounts have been segregated as "Income From Discontinued Operations" in
the consolidated statements of income.
With the completion of the sales of UFLIC and LOV on April 1, 1996, there are no
operating results from these discontinued operations going forward. The
effective operating income tax rate on discontinued operations was 35% in 1996
and 1995. In addition, in second quarter 1996, a $21 million gain on disposal of
discontinued operations, net of taxes of approximately $175 million, was
recorded.
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<TABLE>
<CAPTION>
Aon CORPORATION
MAJOR LINES OF BUSINESS
-----------------------
(millions)
Third Quarter Ended Nine Months Ended
----------------------------- -----------------------------
Sept. 30, Percent Sept. 30, Percent
1996 Change (1) 1996 Change (1)
-------------- -------------- -------------- --------------
Revenue
- -------
<S> <C> <C> <C> <C>
Insurance brokerage and consulting services ..... $ 471.4 12.2 % $ 1,418.7 10.8 %
Insurance underwriting .......................... 443.0 7.3 1,323.1 8.9
Corporate and other ............................. 29.9 (8.0) 77.0 2.5
-------------- -------------- -------------- --------------
Total revenue ............................ $ 944.3 9.1 % $ 2,818.8 9.6 %
============== ============== ============== ==============
Income Before Income Tax
- ------------------------
Insurance brokerage and consulting services ..... $ 55.7 21.6 % $ 198.1 14.6 %
Special charges ........................... - - (22.4) -
-------------- -------------- -------------- --------------
Including special charges ................. 55.7 21.6 175.7 1.6
Insurance underwriting .......................... 70.4 8.0 195.6 6.2
Special charges ........................... - - (6.4) -
-------------- -------------- -------------- --------------
Including special charges ................. 70.4 8.0 189.2 2.7
Corporate and other ............................. 1.9 (63.5) 11.4 200.0
Special charges ........................... - - (1.4) -
-------------- -------------- -------------- --------------
Including special charges ................. 1.9 (63.5) 10.0 163.2
-------------- -------------- -------------- --------------
Total income before income tax ........... $ 128.0 10.2 % $ 374.9 3.9 %
============== ============== ============== ==============
<FN>
(1) Prior period amounts have been reclassified to conform to the 1996 presentation.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
Aon CORPORATION
REVENUE BY MAJOR PRODUCT LINE
-----------------------------
(millions)
Third Quarter Ended Nine Months Ended
----------------------------- -----------------------------
Sept. 30, Percent Sept. 30, Percent
1996 Change (1) 1996 Change (1)
-------------- -------------- -------------- --------------
Insurance brokerage and consulting services
<S> <C> <C> <C> <C>
Insurance and other services .................... $ 406.5 13.4 % $ 1,211.3 10.7 %
Consulting ...................................... 64.9 5.0 207.4 11.0
-------------- -------------- -------------- --------------
Total revenue ........................... $ 471.4 12.2 % $ 1,418.7 10.8 %
============== ============== ============== ==============
Insurance underwriting
Direct sales - life, accident and health ........ $ 255.6 1.5 % $ 766.4 1.7 %
Warranty and other .............................. 187.4 16.2 556.7 20.7
-------------- -------------- -------------- --------------
Total revenue ........................... $ 443.0 7.3 % $ 1,323.1 8.9 %
============== ============== ============== ==============
Corporate and other
Investment income on capital and other .......... $ 26.8 13.1 % $ 73.9 12.3 %
Realized investment gains ....................... 3.1 (64.8) 3.1 (66.7)
-------------- -------------- -------------- --------------
Total revenue ............................ $ 29.9 (8.0)% $ 77.0 2.5 %
============== ============== ============== ==============
<FN>
(1) Prior period amounts have been reclassified to conform to the 1996 presentation.
</FN>
</TABLE>
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<PAGE>
NET INCOME FOR THIRD QUARTER AND NINE MONTHS 1996
Third quarter net income was $83.8 million ($0.72 per share) compared to
$100 million ($0.87 per share) in 1995. Net income for the nine months was $289
million ($2.50 per share) compared to $309.9 million ($2.68 per share) in 1995.
The decrease in third quarter 1996 net income is not comparable to 1995 due to
the completion of the sales of UFLIC and LOV early in the second quarter 1996.
In third quarter 1995, UFLIC and LOV contributed $0.21 per share to net income.
The principal factor that partially offset this third quarter 1996 decrease is
the inclusion of investment income associated with the sales proceeds. Third
quarter and nine months operating income from continuing operations, which
excludes after-tax realized investment gains and losses, and before special
charges, was $81.8 million ($0.70 per share) and $263.1 million ($2.27 per
share) in 1996, respectively, compared to $71.4 million ($0.61 per share) and
$233.2 million ($1.97 per share) in 1995, respectively. Included in third
quarter 1996 and 1995 net income are after-tax realized investment gains of
$0.02 and $0.05 per share, respectively. The effective tax rate on operating
income from continuing operations, was 34.5% and 33.7% for nine months 1996 and
1995, respectively. The effective tax rate for realized gains and losses was 36%
for 1996 and 1995. Average shares outstanding for third quarter increased 1.2%
when compared to 1995.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF NINE MONTHS 1996
GENERAL
- -------
Consistent with financial statement presentation, the following cash flow and
financial position discussion reflects the completion of the sales of UFLIC and
LOV in April, 1996. As a result of the sales, the condensed consolidated
statement of financial position at September 30, 1996 has been significantly
impacted when compared to year end 1995. Amounts contained in the condensed
consolidated statement of cash flows for the nine months ended September 30,
1996 compared to the same period in 1995 also reflect the impact of the sales of
UFLIC and LOV.
Cash flows from operating activities (including discontinued operations) in nine
months 1996 were $375.6 million, a decrease of $63.8 million from nine months
1995. This decrease reflects federal income tax payments relating to the sales
of UFLIC and LOV.
Investing activities provided cash of $273.2 million which was made available
from the completed sales of UFLIC and LOV, and offset in part, by net purchases
of investments. Cash used for acquisition activity during the nine months 1996
was $70.5 million.
Cash totaling $537.9 million was used during nine months 1996 for financing
activities. Net cash used from capital accumulation product deposits and
withdrawals was $61.1 million in nine months 1996, primarily related to
discontinued operations. Cash was used to pay dividends of $114.3 million on
common stock, $8.3 million on 8% cumulative perpetual preferred stock, $5
million on 6.25% cumulative convertible exchangeable preferred stock and $1.9
million on Series C preferred stock.
Included in notes payable at September 30, 1996 is approximately $3 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, the ability of the parent company to access
adequate short-term lines of credit, and sufficient cash flow in the long-term.
- 13 -
<PAGE>
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 $2.7 billion,
Aon's total fixed maturity portfolio is invested primarily in investment grade
holdings (95.2%) and has a market value which is 103.3% of amortized cost.
Mortgage-backed securities, primarily collateralized mortgage obligations
(CMO's), included in the fixed maturities portfolio, totaled $45.2 million, down
approximately $2 billion from year end 1995 with the difference attributed to
discontinued operations.
Total assets decreased $7.5 billion to $12.2 billion, while invested assets at
September 30, 1996 decreased $5.7 billion from year-end levels, primarily due to
the sales of UFLIC and LOV. The amortized cost and fair value of less than
investment grade fixed maturity investments at September 30, 1996 were $116.9
million and $120.7 million, respectively. The carrying value of non-income
producing investments in Aon's portfolio at September 30, 1996 was $41 million,
or 0.8% of total invested assets.
Mortgage loans totaled $33.5 million or 0.7% of total invested assets. Aon
maintains investment reserves related to mortgage loan losses on real estate
holdings (including real estate ventures and limited partnerships) totaling $5.8
million at the end of third quarter 1996, down $25 million from the year end
1995 level of $30.8 million. Substantially all of the decrease in reserves
relates to discontinued operations.
Aon uses derivative financial instruments (primarily financial futures, swaps
and options) to: (a) manage certain asset/liability duration matches; (b) hedge
asset price risk associated with financial instruments which are reported at
their fair values; and (c) hedge other business risks. As of September 30, 1996,
Aon had open contracts which had unrealized losses of approximately $0.2
million.
Short-term borrowings decreased at the end of third quarter 1996 by $293.1
million when compared to year end 1995 primarily due to the use of sales
proceeds to pay down debt.
Stockholders' equity increased $44.4 million in third quarter 1996 to $23.29 per
share, an increase of $0.52 per share since year-end 1995. The principal factors
influencing this increase were net income which includes the after tax gain on
disposal of discontinued operations of $21 million. Partially offsetting this
increase was a decrease in net unrealized investment gains of $26.8 million, a
change in net foreign exchange gains and losses of $13.3 million, the repurchase
of common stock for treasury for a cost of $40 million, and dividends to
stockholders of $168.3 million. Included in the reduction for dividends is an
accrual for the fourth quarter 1996 common stock dividend.
Review by Independent Auditors
- ------------------------------
The condensed consolidated financial statements at September 30, 1996, 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.
- 14 -
<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, 1996, and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1996 and 1995, and the condensed consolidated statements of
cash flows for the nine-month periods ended September 30, 1996 and 1995. 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, 1995, 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 8, 1996, 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, 1995, is fairly stated, in all material
respects, in relation to the consolidated statement of financial position from
which it has been derived.
ERNST & YOUNG LLP
Chicago, Illinois
November 5, 1996
- 15 -
<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, 1996.
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, 1996 /s/ Harvey N. Medvin
-----------------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER
(Principal Financial and Accounting Officer)
- 16 -
<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. 18
(12) Statements regarding Computation of Ratios.
(a) Statement regarding Computation of Ratio of
Earnings to Fixed Charges. 19
(b) Statement regarding Computation of Ratio of
Earnings to Combined Fixed Charges and Preferred
Stock Dividends. 20
(15) Letter re: Unaudited Interim Financial Information. 21
(27) Financial Data Schedule
- 17 -
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
Aon Corporation and Subsidiaries
CONSOLIDATED NET INCOME PER SHARE COMPUTATION
(millions except per share data)
Third Quarter Ended Nine Months Ended
-------------------------- --------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
EARNINGS PER SHARE
<S> <C> <C> <C> <C>
Net income ............................................. $ 83.8 $ 100.0 $ 289.0 $ 309.9
Preferred stock dividends .............................. 5.0 5.8 15.2 19.4
------------ ------------ ------------ ------------
Net income available for common stockholders....... $ 78.8 $ 94.2 $ 273.8 $ 290.5
============ ============ ============ ============
Average common shares issued ........................... 111.5 110.8 111.5 110.6
Net effect of treasury stock activity .................. (3.1) (3.4) (3.0) (2.8)
Net effect of dilutive stock compensation plans based
on the treasury stock method ..................... 1.0 0.7 1.2 0.7
------------ ------------ ------------ ------------
Average common and common equivalent shares
outstanding ............................... 109.4 108.1 109.7 108.5
============ ============ ============ ============
Net income per share ........................................ $ 0.72 $ 0.87 $ 2.50 $ 2.68
============ ============ ============ ============
</TABLE>
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12(a)
Aon Corporation and Consolidated Subsidiaries
Combined With Unconsolidated Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
Nine Months
Ended Sept 30, Years Ended December 31,
------------------------ ---------------------------------------------------------------
(millions except ratios) 1996 1995 1995 1994 1993 1992 (1) 1991
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
<S> <C> <C> <C> <C> <C> <C> <C>
before provision for income taxes $ 374.9 $ 360.9 $ 458.0 $ 397.0 $ 331.6 $ 179.1 $ 242.4
Add back fixed charges:
Interest on indebtedness 32.9 41.2 55.5 46.4 42.3 41.9 40.7
Interest on ESOP 3.5 4.1 5.3 5.9 6.5 6.9 7.2
Portion of rents representative of
interest factor 20.0 18.0 21.4 28.7 26.1 19.2 15.4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income as adjusted $ 431.3 $ 424.2 $ 540.2 $ 478.0 $ 406.5 $ 247.1 $ 305.7
=========== =========== =========== =========== =========== =========== ===========
Fixed charges:
Interest on indebtedness $ 32.9 $ 41.2 $ 55.5 $ 46.4 $ 42.3 $ 41.9 $ 40.7
Interest on ESOP 3.5 4.1 5.3 5.9 6.5 6.9 7.2
Portion of rents representative of
interest factor 20.0 18.0 21.4 28.7 26.1 19.2 15.4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total fixed charges $ 56.4 $ 63.3 $ 82.2 $ 81.0 $ 74.9 $ 68.0 $ 63.3
=========== =========== =========== =========== =========== =========== ===========
Ratio of earnings to fixed charges 7.6 6.7 6.6 5.9 5.4 3.6 4.8
=========== =========== =========== =========== =========== =========== ===========
Ratio of earnings to fixed charges (2) 8.3 8.4 8.4 7.6 7.4 5.3 6.2
=========== =========== =========== =========== =========== =========== ===========
<FN>
(1) Income from continuing operations before provision for income taxes
excludes the cumulative effect of changes in accounting principles.
(2) The calculation of this ratio of earnings to fixed charges reflects the
addition of the income from discontinued operations before the provision
for income tax component for each period presented.
</FN>
</TABLE>
- 19 -
<PAGE>
<TABLE>
<CAPTION>
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
Nine Months
Ended Sept 30, Years Ended December 31,
------------------------ ---------------------------------------------------------------
(millions except ratios) 1996 1995 1995 1994 1993 1992 (1) 1991
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
<S> <C> <C> <C> <C> <C> <C> <C>
before provision for income taxes $ 374.9 $ 360.9 $ 458.0 $ 397.0 $ 331.6 $ 179.1 $ 242.4
Add back fixed charges:
Interest on indebtedness 32.9 41.2 55.5 46.4 42.3 41.9 40.7
Interest on ESOP 3.5 4.1 5.3 5.9 6.5 6.9 7.2
Portion of rents representative of
interest factor 20.0 18.0 21.4 28.7 26.1 19.2 15.4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income as adjusted $ 431.3 $ 424.2 $ 540.2 $ 478.0 $ 406.5 $ 247.1 $ 305.7
=========== =========== =========== =========== =========== =========== ===========
Fixed charges and preferred stock dividends:
Interest on indebtedness $ 32.9 $ 41.2 $ 55.5 $ 46.4 $ 42.3 $ 41.9 $ 40.7
Preferred stock dividends 23.2 29.4 37.5 48.4 47.5 20.3 3.5
----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest and dividends 56.1 70.6 93.0 94.8 89.8 62.2 44.2
Interest on ESOP 3.5 4.1 5.3 5.9 6.5 6.9 7.2
Portion of rents representative of
interest factor 20.0 18.0 21.4 28.7 26.1 19.2 15.4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total fixed charges and preferred
stock dividends $ 79.6 $ 92.7 $ 119.7 $ 129.4 $ 122.4 $ 88.3 $ 66.8
=========== =========== =========== =========== =========== =========== ===========
Ratio of earnings to combined fixed
charges and preferred stock dividends 5.4 4.6 4.5 3.7 3.3 2.8 4.6
=========== =========== =========== =========== =========== =========== ===========
Ratio of earnings to combined fixed
charges and preferred stock dividends (2) 5.9 5.7 5.8 4.8 4.5 4.1 5.9
=========== =========== =========== =========== =========== =========== ===========
<FN>
(1) Income from continuing operations before provision for income taxes
excludes the cumulative effect of changes in accounting principles.
(2) The calculation of this ratio of earnings to fixed charges reflects the
addition of the income from discontinued operations before the provision
for income tax component for each period presented.
</FN>
</TABLE>
- 20 -
<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 5, 1996 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, 1996:
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
Chicago, Illinois
November 5, 1996
- 21 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
Condensed Consolidated Statements of Financial Position and Condensed
Consolidated Statements of Income 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 2,707
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 821
<MORTGAGE> 34
<REAL-ESTATE> 19
<TOTAL-INVEST> 4,923
<CASH> 226
<RECOVER-REINSURE> 0 <F1>
<DEFERRED-ACQUISITION> 622
<TOTAL-ASSETS> 12,227
<POLICY-LOSSES> 886
<UNEARNED-PREMIUMS> 1,675
<POLICY-OTHER> 867
<POLICY-HOLDER-FUNDS> 367
<NOTES-PAYABLE> 583 <F2>
50
8 <F3>
<COMMON> 112 <F4>
<OTHER-SE> 2,598
<TOTAL-LIABILITY-AND-EQUITY> 12,227
1,141
<INVESTMENT-INCOME> 270
<INVESTMENT-GAINS> 3
<OTHER-INCOME> 1,405 <F5>
<BENEFITS> 582
<UNDERWRITING-AMORTIZATION> 156
<UNDERWRITING-OTHER> 1,706
<INCOME-PRETAX> 375
<INCOME-TAX> 129
<INCOME-CONTINUING> 246
<DISCONTINUED> 43
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 289
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 0
<RESERVE-OPEN> 715
<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>
