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 MARCH 31, 1997
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 3-31-97
----- ---------------
$1.00 par value Common 166,900,547
(Adjusted to reflect a three-for-two
stock split payable May 14, 1997 to
stockholders of record on May 1, 1997)
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<CAPTION>
PART 1
Financial Information
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
-------------------------------------------------------
(millions) As of As of
Assets March 31, 1997 Dec. 31, 1996
-------------- --------------
(UNAUDITED)
Investments
<S> <C> <C>
Fixed maturities - available for sale $ 2,733.9 $ 2,826.1
Equity securities at fair value
Common stocks 346.6 393.8
Preferred stocks 364.3 485.3
Mortgage loans on real estate 24.6 29.0
Real estate (net of accumulated depreciation) 14.2 17.8
Policy loans 58.2 58.2
Other long-term investments 137.1 136.2
Short-term investments 1,381.9 1,266.3
-------------- --------------
Total investments 5,060.8 5,212.8
Cash 1,269.6 410.1
Receivables
Insurance brokerage and consulting
services 4,763.8 3,565.9
Premiums and other 1,009.4 989.3
Accrued investment income 74.2 69.2
-------------- --------------
Total receivables 5,847.4 4,624.4
Deferred Policy Acquisition Costs 575.3 598.8
Cost of Insurance and Renewal Rights Purchased 533.0 537.5
Excess of Cost over Net Assets Purchased 2,255.1 1,060.2
Property and Equipment at Cost (net of 439.1 323.2
accumulated depreciation)
Assets Held Under Special Contracts 85.9 87.3
Other Assets 1,250.5 868.4
-------------- --------------
Total Assets $ 17,316.7 $ 13,722.7
============== ==============
(millions) As of As of
Liabilities and Equity March 31, 1997 Dec. 31, 1996
-------------- --------------
(UNAUDITED)
Policy Liabilities
Future policy benefits $ 1,080.5 $ 1,079.4
Policy and contract claims 840.5 840.9
Unearned and advance premiums 1,979.9 1,925.2
Other policyholder funds 558.1 514.1
-------------- --------------
Total Policy Liabilities 4,459.0 4,359.6
General Liabilities
Insurance premiums payable 5,967.9 4,143.7
Commissions and general expenses 1,068.4 776.8
Short-term borrowings 345.4 213.4
Notes payable 572.6 475.1
Debt guarantee of ESOP 46.1 46.1
Liabilities held under special contracts 85.9 87.3
Other liabilities 1,225.4 737.8
-------------- --------------
Total Liabilities 13,770.7 10,839.8
Commitments and Contingent Liabilities
Redeemable Preferred Stock 50.0 50.0
Company-obligated Mandatorily Redeemable
Preferred Capital Securities of Subsidiary
Trust holding solely the Company's Securities 800.0 --
Stockholders' Equity
Preferred stock - $1 par value 5.5 5.5
Common stock - $1 par value 171.1 114.1
Paid-in additional capital 445.8 475.4
Net unrealized investment gains 119.0 153.1
Net foreign exchange gains(losses) (34.6) 1.0
Retained earnings 2,272.4 2,356.8
Less - Treasury stock at cost (108.3) (121.5)
Deferred compensation (174.9) (151.5)
-------------- --------------
Total Stockholders' Equity 2,696.0 2,832.9
-------------- --------------
-------------- --------------
Total Liabilities and Equity $ 17,316.7 $ 13,722.7
============== ==============
<FN>
See the accompanying notes to the condensed consolidated financial statements.
</FN>
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<CAPTION>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
First Quarter Ended
---------------------------
(millions except per share data) March 31, March 31,
1997 1996
------------ ------------
Revenue
<S> <C> <C>
Brokerage commissions and fees ............................... $ 841.7 $ 468.0
Premiums earned .............................................. 384.4 378.0
Net investment income ........................................ 115.8 84.7
Realized investment gains .................................... 2.4 -
Other income ................................................. 10.0 11.4
------------ ------------
Total revenue earned ....................................... 1,354.3 942.1
------------ ------------
Benefits and Expenses
Commissions and general expenses ............................. 889.5 529.4
Benefits to policyholders .................................... 205.2 186.0
Interest expense ............................................. 14.6 9.2
Amortization of deferred policy
acquisition costs ........................................... 53.5 53.1
Amortization of intangible assets ............................ 31.3 18.8
Special charges............................................... 145.0 --
------------ ------------
Total Benefits and Expenses ................................ 1,339.1 796.5
------------ ------------
Income From Continuing Operations Before
Income Tax and Minority Interest ............................. 15.2 145.6
Provision for income tax .................................... 5.7 49.1
------------ ------------
Income From Continuing Operations Before Minority Interest ..... 9.5 96.5
Minority Interest - 8.205% mandatorily redeemable
preferred capital securities................................ (8.8) -
------------ ------------
Income From Continuing Operations............................... 0.7 96.5
Income From Discontinued Operations - Net of Tax ............... - 22.4
------------ ------------
Net Income ..................................................... $ 0.7 $ 118.9
============ ============
Net Income (Loss) Available for Common Stockholders (1)......... $ (2.7) $ 113.8
============ ============
Per Share: (2)
- --------------
Income (loss) from continuing operations (1).................... $ (0.02) 0.56
Income from discontinued operations............................. - $ 0.13
------------ ------------
Net income (loss) (1)........................................... $ (0.02) $ 0.69
============ ============
Cash dividends paid on common stock (2)......................... $ 0.24 $ 0.23
============ ============
Average common and common equivalent shares
outstanding (2) 169.2 164.6
------------ ------------
<FN>
(1) Includes the effect of $3.4 million of dividends incurred on the 8% and
redeemable preferred stock and $5.1 million of dividends incurred on
the 8%, 6.25% and redeemable preferred stock in first quarter ended
March 31, 1997 and 1996, respectively.
(2) Reflects the three-for-two stock split effective May 1, 1997.
See the accompanying notes to the condensed consolidated financial statements.
</FN>
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<CAPTION>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(MILLIONS)
FIRST QUARTER ENDED
----------------------------
MARCH 31, MARCH 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES ............................................... $ 307.8 $ 242.7
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short term investments - net (1)................................ 826.2 (236.4)
Sale or maturity of fixed maturities
Available for sale - Maturities ................................................. 20.6 46.9
Calls and Prepayments ...................................... 17.1 92.4
Sales ...................................................... 395.7 325.2
Sale of equity investments ........................................................ 348.1 246.0
Sale or maturity of other invesments .............................................. 1.6 69.9
Purchase of fixed maturities - available for sale ................................. (400.9) (305.0)
Purchase of equity investments .................................................... (185.0) (191.6)
Purchase of other investments ..................................................... (13.7) (151.5)
Acquisition of subsidiaries ....................................................... (1,289.8) (7.2)
Property and equipment and other .................................................. (28.6) (15.9)
------------ ------------
CASH USED BY INVESTING ACTIVITIES ........................ (308.7) (127.2)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock transactions - net ................................................. 10.9 12.1
Issuance of short-term borrowings - net ........................................... 124.0 1.5
Sale of mandatorily redeemable preferred capital securities ....................... 800.0 --
Repayment of long-term debt ....................................................... (51.1) (2.1)
Interest sensitive life, annuity and investment contract deposits ................. 37.0 266.5
Interest sensitive life, annuity and investment contract withdrawals .............. -- (426.4)
Retirement of preferred stock ..................................................... -- (14.1)
Cash dividends to stockholders .................................................... (42.4) (42.2)
------------ ------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES ............. 878.4 (204.7)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................................. (18.0) (0.6)
INCREASE (DECREASE) IN CASH ......................................................... 859.5 (89.8)
CASH AT BEGINNING OF PERIOD ......................................................... 410.1 115.3
------------ ------------
CASH AT END OF PERIOD ............................................................... $ 1,269.6 $ 25.5
============ ============
<FN>
(1) First quarter 1997 includes $ 734.0 million of cash acquired from the acquisition
of Alexander & Alexander Services Inc.
See the accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
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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, 1996 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.
2. Stock Split
-----------
On March 21, 1997, Aon's board of directors authorized a three-for-two
stock split, payable in the form of a stock dividend, of Aon's $1.00
par value common stock, with approximately 57 million shares payable on
May 14, 1997 to stockholders of record on May 1, 1997. The stock split
has been retroactively reflected in the March 31, 1997 condensed
statement of consolidated financial position, (but not the December 31,
1996), by increasing common stock and decreasing additional
paid-in-capital by $57 million. All references in the accompanying
financial statements to the number of common shares and per share
amounts have been retroactively restated to reflect the stock split.
3. Statements of Financial Accounting Standards (SFAS)
---------------------------------------------------
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128 (Earnings per Share). This Statement changes
the standards for computing earnings per share (EPS). Under the new
requirements for calculating primary EPS, the dilutive effect of stock
options will be excluded. The provisions of this Statement are to be
applied after December 15, 1997, and require retroactive restatement of
all prior periods presented. Aon anticipates adopting this statement in
its December 31, 1997 financial statements as required. Implementation
of this Statement is not expected to have a material effect on Aon's
financial statements.
In first quarter 1997, Aon adopted Statement No. 125 (Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities) in its financial statements as required. Implementation of
this Statement did not have a material effect on Aon's financial
statements.
4. Capital Stock
-------------
In first quarter 1997, Aon reissued 393,700 shares of common stock from
treasury for employee benefit plans. Aon purchased 26,000 shares of its
common stock at a total cost of $1.1 million during first quarter 1997.
In addition, Aon reissued 165,100 shares of common stock held in
connection with business combinations. There were 4.3 million shares of
common stock held in treasury at March 31, 1997.
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5. Capital Securities
------------------
In January 1997, Aon created Aon Capital A, a statutory business trust
created for the purpose of issuing mandatorily redeemable preferred
capital securities (capital securities). Aon Capital A issued $800
million of 8.205% capital securities in January 1997. The proceeds from
the issuance of the capital securities were used to finance a portion
of Aon's acquisition of Alexander and Alexander Services Inc. (A&A).
The capital securities are subject to mandatory redemption on January
1, 2027 or, are redeemable in whole, but not in part, at the option of
Aon upon the occurrence of certain events. The capital securities are
categorized on the condensed consolidated statement of financial
position as "Company-obligated Mandatorily Redeemable Preferred Capital
Securities of Subsidiary Trust holding solely the Company's
Securities." The after-tax interest incurred on the capital securities
is reported as minority interest on the condensed consolidated
statements of operations.
6. Business Combinations
---------------------
In first quarter 1997, Aon completed its acquisition of A&A for a
purchase price of approximately $1.2 billion. The acquisition of A&A
was accounted for by the purchase method and was financed by the
issuance of the capital securities, commercial paper, and by internal
funds. Results have been included in Aon's consolidated financial
statements since January 1, 1997. While A&A was acquired in early 1997,
the purchase valuation has not yet been completed. Preliminary
purchase accounting liabilities of approximately $200 million were
recorded as of March 31, 1997 primarily related to severance and
related costs, and the consolidation of real estate space. Preliminary
intangible assets of approximately $1.2 billion, created by the
acquisition, have been evaluated indicating an estimated useful life
of twenty-five years.
If the A&A acquisition had been consummated on January 1, 1996, the
first quarter 1996 unaudited proforma consolidated results of
operations would have resulted in total revenues of approximately $1.3
billion, income from continuing operations of $99 million ($0.51 per
share) and net income of $121 million ($0.64 per share).
Pro forma financial information presented is not necessarily indicative
either of results of operations that would have occurred had the
acquisition been effective on January 1, 1996, or of future results of
operations of Aon. In addition, the effect of one-time restructuring
charges related to the A&A acquisition are not reflected in the
proforma 1996 results above. These restructuring charges have been
reflected, however, in first quarter 1997.
7. Special Charges
---------------
In first quarter 1997, Aon recorded pretax special charges of $145
million ($90.6 million after-tax or $0.54 per share), primarily related
to management's commitment to a formal plan of restructuring Aon's
brokerage operations as a result of the acquisition of A&A. Special
charges for severance and related costs, involving over 2,600
positions, were approximately $40 million. Terminations resulting from
workforce reductions are planned to take place within one year. Pretax
restructuring charges include approximately $105 million associated
with real estate activities including the closure, abandonment and
downsizing of office space globally following the acquisition of A&A,
and other consolidation costs. The restructuring charges related
to consolidating real estate space are expected to be paid out over
several years. These charges were reflected as a separate component of
total benefits and expenses in the condensed consolidated statements of
operations.
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In 1996, Aon recorded pretax special charges of $90.5 million ($59.3
million after-tax or $0.36 per share). In connection with the 1996
special charges, Aon had approximately $60 million reported in other
liabilities at March 31, 1997 representing amounts related to the
special charges that have not yet been paid.
8. Discontinued Operations
-----------------------
When Aon acquired A&A in first quarter 1997, A&A had net liabilities
of approximately $45 million related to its insurance underwriting
subsidiaries that are currently in run-off and indemnification of
certain liabilities relating to subsidiaries sold. The net liabilities
for discontinued operations are composed of the following:
<TABLE>
<CAPTION>
millions As of March 31, 1997
- -------------------------------------------------------------------------------------------- -----------
Assets:
<S> <C>
Insurance liabilities recoverable under finite risk contracts $ 147
Reinsurance recoverables 60
Cash and investments 33
Other 5
- -------------------------------------------------------------------------------------------- -----------
Total assets 245
- -------------------------------------------------------------------------------------------- -----------
Liabilities:
Insurance liabilities $ 277
Other 13
- -------------------------------------------------------------------------------------------- -----------
Total liabilities 290
- -------------------------------------------------------------------------------------------- -----------
Total net liabilities of discontinued operations classified as other liabilities $ 45
- -------------------------------------------------------------------------------------------- -----------
</TABLE>
The insurance liabilities represent estimates of future claims
expected to be made under occurrence-based insurance policies and
reinsurance business written through Lloyd's and the London market
covering primarily asbestosis, environmental pollution, and latent
disease risks in the United States which are coupled with
substantial litigation expenses. These claims are expected to
develop and be settled over the next twenty to thirty years.
Liabilities stemming from these claims cannot be estimated using
conventional actuarial reserving techniques because of the
inadequacy of available historical experience to support such
techniques, and because case law, as well as scientific standards
for measuring the adequacy of site clean-up is still evolving.
Therefore, A&A's independent actuaries have combined available
exposure information with other relevant industry data and have
used various projection techniques to estimate the insurance
liabilities, consisting principally of incurred but not reported
losses. A&A has certain protection against adverse developments of
the insurance liabilities through several finite risk contracts.
The recoverable amounts under the finite risk contracts represent
the excess of such liabilities over the retention levels.
Aon believes that, based on current estimates, the established
total net liabilities of discontinued operations are sufficient to
cover A&A's exposure.
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<PAGE>
9. Contingencies
-------------
Aon and its subsidiaries are subject to numerous claims and lawsuits
that arise in the ordinary course of business. Some of these cases are
being litigated in jurisdictions which have judicial precedents and
evidentiary rules which are generally believed to favor individual
plaintiffs against corporate defendants. The damages that may be
claimed in these and other jurisdictions are substantial, including in
many instances claims for punitive or extraordinary damages. Accruals
for these lawsuits have been provided to the extent that losses are
deemed probable and are estimable.
A certain pending claim asserted against Alexander & Alexander Services
Inc. (A&A) and certain of its subsidiaries allege that certain
Alexander Howden subsidiaries accepted, on behalf of certain insurance
companies, insurance or reinsurance at premium levels not commensurate
with the level of underwriting risks assumed and retroceded or
reinsured those risks with financially unsound reinsurance companies.
In an action brought in 1988 against A&A and certain subsidiaries,
plaintiffs seek compensatory and punitive damages, as well as treble
damages under RICO totaling $36 million. The defendants have
counterclaimed against certain of the plaintiffs for contribution.
Management of Aon believes that A&A has valid defenses to all the
claims that have been made with respect to these activities and A&A is
vigorously defending the pending action. This action is covered under
A&A's professional indemnity program, except for possible damages under
RICO. Aon currently believes the reasonably possible loss that might
result from this action, if any, would not be material to Aon's
financial position or results of operations.
In 1987, A&A sold Shand Morahan & Company (Shand), its domestic
underwriting management subsidiary. Prior to the sale, Shand and its
subsidiaries had provided underwriting management services for and
placed insurance and reinsurance with and on behalf of Mutual Fire
Marine & Inland Insurance Company (Mutual Fire). Mutual Fire was placed
in rehabilitation in December 1986. In February 1991, the rehabilitator
commenced an action. The complaint, which sought compensatory and
punitive damages, alleged that Shand, and in certain respects A&A,
breached duties to and agreements with Mutual Fire. On March 27, 1995,
A&A, Shand and the rehabilitator entered into a settlement agreement
which was approved by the courts and which terminated the
rehabilitator's litigation and released A&A and Shand from any further
claims by the rehabilitator. Under the terms of the settlement, A&A
paid $43.1 million. Although A&A's professional liability
underwriters have denied coverage for the Mutual Fire lawsuit, A&A has
instituted a declaratory judgment action attempting to validate
coverage. On October 16, 1996, the Court issued a decision holding that
A&A is not entitled to coverage for the rehabilitator's claims. A&A has
appealed the ruling.
Under the 1987 agreement with the purchaser of Shand, A&A agreed to
indemnify the purchaser against certain contingencies, including, among
others, (i) losses arising out of presale transactions between Shand
or Shand's subsidiaries, on the one hand, and Mutual Fire, on the
other, and (ii) losses arising out of presale errors or omissions by
Shand or Shand's subsidiaries. A&A's obligations under the
indemnification provisions in the 1987 sales agreement were not limited
as to amount or duration.
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<PAGE>
Starting in late 1992, the purchaser of Shand has asserted a number of
claims under both the Mutual Fire indemnification provision and the
errors and omissions indemnification provision of the sales agreement.
During 1995, most of those claims were resolved by a series of
settlement agreements. Notwithstanding these settlements, which had
the effect of limiting certain contractual obligations and the
restructuring of the parties' relationship, some of A&A's
indemnification provisions under the 1987 agreement are still in
effect. As a result, there remains the possibility of substantial
exposure to A&A under the indemnification provisions of the 1987
agreement, although Aon, based on current facts and circumstances,
believes that the possibility of a material loss resulting from these
exposures is remote.
Although the ultimate outcome of these suits cannot be ascertained and
liabilities in indeterminate amounts may be imposed on A&A or its
subsidiaries, on the basis of present information, availability of
insurance coverages and advice received from counsel, it is the opinion
of management that the disposition or ultimate determination of such
claims and lawsuits will not have a material adverse effect on the
consolidated financial position of Aon.
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Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR FIRST QUARTER 1997
CONSOLIDATED RESULTS
- --------------------
GENERAL
- -------
In first quarter 1997, Aon recorded pretax special charges of $145 million
($90.6 million after-tax) primarily related to management's commitment to a
formal plan of restructuring Aon's brokerage operations as a result of the
acquisition of A&A. Special charges for severance and related costs,
involving over 2,600 positions, were approximately $40 million. Terminations
resulting from workforce reductions are planned to take place within one year.
Restructuring charges include approximately $105 million associated with real
estate activities including the closure, abandonment and downsizing of office
space globally following the acquisition of A&A, and other consolidation costs.
The restructuring charges related to consolidating real estate space are
expected to be paid out over several years. These charges were reflected as a
separate component of total benefits and expenses in the condensed consolidated
statements of operations.
Brokerage commissions and fees increased $373.7 million or 79.9% in first
quarter 1997, reflecting primarily business combination activity related to the
acquisitions of Alexander & Alexander Services Inc. (A&A) in first quarter 1997
and Bain Hogg Group (Bain Hogg) in fourth quarter 1996.
Premiums earned increased $6.4 million or 1.7% in first quarter 1997, compared
with the same period last year. Extended warranty premiums earned increased
$17.8 million or 19.4% in the quarter reflecting a higher volume of new business
in both the mechanical and the appliance and electronic lines. The continued
phase-out of certain specialty liability programs and the planned runoff of
North American auto credit business partially offset this increase . There was
also continued modest growth in direct sales business.
Net investment income of $115.8 million increased $31.1 million or 36.7% in the
first quarter 1997 when compared to prior year. Investment income growth in
first quarter was primarily related to the A&A acquisition, and to income
received on certain private equity investment holdings. In addition, net
investment income from insurance brokerage and consulting operations, primarily
relating to fiduciary funds, increased to $39 million in first quarter 1997 from
$17 million in 1996, primarily due to brokerage acquisition activity.
Total revenue increased $412.2 million or 43.8% in first quarter 1997, largely
attributable to acquisition-related growth in brokerage commissions and fees.
Net realized investment gains were $2.4 million in 1997. There were no realized
investment gains in first quarter 1996. Revenue excluding realized investment
gains increased 43.5% when compared to prior year.
Benefits to policyholders increased 10.3% or $19.2 million in the quarter
reflecting a higher volume of new extended warranty business. This increase
was partially offset by lower claims paid on auto credit business that had
been in runoff since since second quarter 1996. It is anticipated that this
business will continue to runoff as planned. Total benefits and expenses
increased 68.1% in the same period. The increase in first quarter expenses
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<PAGE>
reflects the inclusion of pretax special charges of $145 million related
to restructuring costs associated with the merger with A&A. Total benefits
and expenses, excluding the 1997 special charges, increased 49.9% for the
first quarter 1997. Income before income tax decreased $130.4 million or
89.6% in the first quarter, due largely to the inclusion of special charges
and offset, in part, by growth in the insurance brokerage and consulting
segment following the A&A and Bain Hogg acquisitions. Excluding special charges,
income before income tax increased 10% when compared to first quarter 1996.
MAJOR LINES OF BUSINESS
- -----------------------
GENERAL
- -------
In the insurance brokerage and consulting services segment, Aon reported first
quarter pretax special charges of $145 million related to the acquisition of
A&A. For purposes of the following line of business discussions, comparisons
against last year's results exclude special charges. Management anticipates that
cost savings associated with the integration of similar businesses among Aon,
A&A and Bain Hogg will be realized beginning in the second half of 1997 with the
full benefit of cost savings on operations to be achieved starting in 1998. In
addition, references to income before income tax exclude minority interest.
INSURANCE BROKERAGE AND CONSULTING SERVICES
- -------------------------------------------
In first quarter 1997, Aon acquired A&A for approximately $1.2 billion. In
fourth quarter 1996, Aon acquired Bain Hogg. As a result, revenue and income
before income tax results between first quarter 1997 and 1996 are not
comparable.
Insurance and other services (retail, reinsurance and wholesale brokerage)
revenue increased $337.9 million or 81.7% for the first quarter 1997 when
compared with the same period last year largely due to acquisition activity.
Insurance and other services 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 $57.8 million or
81.1% for the first quarter when compared to prior year, primarily due to
acquisition activity and to a lesser extent, expanding integrated human
resources consulting programs.
Overall, revenue for the insurance brokerage and consulting services segment
increased $395.7 million or 81.6% in the first quarter. Income before income tax
increased $23.4 million or 27.5% when compared to first quarter 1996. The
brokerage segment continues to be impacted by a soft property and casualty
market, particularly in the reinsurance brokerage business. Acquisitions
accounted for substantially all of the above revenue and pretax income growth.
Excluding the impact of acquisitions, revenue and pretax income results
demonstrated modest growth in a very competitive environment.
U.S./International Results
- --------------------------
First quarter U.S. insurance brokerage and consulting services revenue represent
51% of the worldwide total and U.S. income before income tax represent 30% of
the worldwide total. International brokerage revenue of $434.6 million increased
151.8% for the first quarter primarily reflecting the A&A and Bain Hogg
acquisitions.
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<PAGE>
International brokerage income before income tax increased 65.2% for the quarter
reflecting the above mentioned acquisition activity. In the international
insurance and other services subsegment, revenues for risk management
and insurance brokerage services generally are strongest during the first
quarter of the year, particularly for Continental Europe, 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.
Revenue increased 2.1% for the first quarter 1997 when compared to prior year
primarily due to growth in the worldwide extended warranty lines. Direct sales
business grew modestly, as the company continued to expand its product
distribution through payroll deduction, worksite marketing programs.
Pretax income from insurance underwriting increased $6.3 million or 10.8% in
first quarter 1997, compared with last year. Overall, benefit and expense
margins in first quarter 1997 did not suggest any significant shift in operating
trends. Direct sales accident & health business improved its pretax margin in
part due to good general expense controls and good international health product
sales. Certain specialty liability programs and auto credit business continued
to be profitably runoff.
U.S./International Results
- --------------------------
First quarter U.S. insurance underwriting revenue represents 71% of the
worldwide total and U.S. income before income tax represents 73% of the
worldwide total. U.S. insurance underwriting income before income tax increased
6.8% when compared to its 1996 level. Results reflect the completed sale of the
North American auto credit underwriting and distribution operations in second
quarter 1996 and reflect the planned continued runoff of those operations.
International insurance underwriting revenue of $130.5 million increased 10.7%,
principally due to improved premiums earned in both the direct sales and
extended warranty lines. International pretax income increased 22.9%, primarily
due to strong operating performance in the appliance and electronic lines and
was offset in part by the continuing runoff of traditional life business in
Europe and the Pacific.
CORPORATE AND OTHER
- -------------------
Revenue in this category consists primarily of investment income on insurance
underwriting operations' capital and realized investment gains. Insurance
company investment income is allocated to the underwriting segment based on the
invested assets which underlie policyholder liabilities.Excess invested assets
and related investment income, which do not underlie these liabilities, are
reported in this segment. Expenses include interest and other financing
expenses, goodwill amortization associated with insurance brokerage and
consulting acquisitions, and corporate administrative costs.
Revenue increased 34.3% for the first quarter 1997, due primarily to higher
levels of investment income received on certain private equity investment
holdings. Pretax realized investment gains for the first quarter 1997 were $2.4
million and there were no realized investment gains in first quarter 1996.
Income before income tax, excluding realized investment gains, decreased $17.5
million over the same quarter last year. Financing costs and goodwill
amortization related to acquisitions, in particular A&A and Bain Hogg,
contributed largely to this decrease.
- 12 -
<PAGE>
DISCONTINUED OPERATIONS
- -----------------------
Discontinued operations in first quarter 1996 were composed principally of
capital accumulation products and direct response products. Substantially all of
the revenue and income before income tax generated from discontinued operations
was U.S. These amounts have been segregated as "Income From Discontinued
Operations" in the condensed consolidated statements of operations. With the
completion of the sales of The Life Insurance Company of Virginia (LOV) and
Union Fidelity Life Insurance Company (UFLIC) on April 1, 1996, there were no
operating results from these discontinued operations going forward.
The discontinued operations assumed by Aon upon its acquisition of A&A in first
quarter 1997 represent net liabilities related to acquired insurance
underwriting subsidiaries that are currently in runoff and indemnification of
certain liabilities relating to subsidiaries sold (see note 8 to the condensed
consolidated financial statements). Aon believes that these discontinued
operations are adequately reserved for and the net liability is included as a
component of other liabilities on the statement of financial position.
- 13 -
<PAGE>
<TABLE>
<CAPTION>
Aon CORPORATION
MAJOR LINES OF BUSINESS
-----------------------
First Quarter Ended
---------------------------
(millions) March 31, Percent
1997 Change
------------ ------------
REVENUE
<S> <C> <C>
Insurance brokerage and consulting services ................... $ 880.7 81.6%
Insurance underwriting ........................................ 445.4 2.1
Corporate and other ........................................... 28.2 34.3
------------ ------------
TOTAL REVENUE ............................................. $ 1,354.3 43.8%
============ ============
INCOME BEFORE INCOME TAX
Insurance brokerage and consulting services ................... $ 108.6 27.5%
Special charges ............................................. (145.0) -
------------ ------------
Including special charges ................................... (36.4) N/A
Insurance underwriting ........................................ 64.8 10.8
Corporate and other ........................................... (13.2) N/A
------------ ------------
TOTAL INCOME BEFORE INCOME TAX ............................ $ 15.2 (89.6%)
============ ============
</TABLE>
- 14 -
<PAGE>
<TABLE>
<CAPTION>
Aon CORPORATION
REVENUE BY MAJOR PRODUCT LINE
-----------------------------
First Quarter Ended
---------------------------
(millions) March 31, Percent
1997 Change
------------ ------------
INSURANCE BROKERAGE AND CONSULTING SERVICES
<S> <C> <C>
Insurance and other services................................... $ 751.6 81.7%
Consulting..................................................... 129.1 81.1
------------ ------------
TOTAL REVENUE.............................................. $ 880.7 81.6%
============ ============
INSURANCE UNDERWRITING
Direct sales - life, accident and health ..................... $ 254.7 0.4%
Extended warranty ............................................. 129.4 18.7
Other....................... .................................. 61.3 (16.6)
------------ ------------
TOTAL REVENUE.............................................. $ 445.4 2.1%
============ ============
CORPORATE AND OTHER
Investment income on capital and other......................... $ 25.8 22.9%
Realized investment gains...................................... 2.4 -
------------ ------------
TOTAL REVENUE.............................................. $ 28.2 34.3%
============ ============
</TABLE>
- 15 -
<PAGE>
NET INCOME FOR FIRST QUARTER 1997
References to share data reflect the three-for-two stock split announced on
March 21, 1997, payable on May 14, 1997 to stockholders of record as of May 1,
1997. First quarter net income was $0.7 million ($0.02 loss per share) compared
to $118.9 million ($0.69 income per share) in 1996. The decrease in first
quarter 1997 net income and the related per share amount is not comparable to
1996 due to: (1) after-tax 1997 special charges of $90.6 million ($0.54 per
share); (2) the 1997 deduction for after-tax distributions on the capital
securities (reflected as "minority interest" on the condensed consolidated
statements of operations); and (3) operating results from 1996 discontinued
operations are due to the completion of the sales of UFLIC and LOV in second
quarter 1996 ($0.13 per share).
Operating income from continuing operations before special charges, and realized
investment gains was $89.8 million ($0.51 per share) in 1997 compared to $96.5
million ($0.56 per share) in 1996. Included in first quarter 1997 net income is
after-tax realized investment gains of $0.01 per share with no comparable gains
or losses in 1996.
The effective tax rate on continuing operations for operating income, which
excludes after-tax realized investment gains, was 37.5%, up from 33.7% for first
quarter 1996 due to changes in business mix. Realized gains were taxed at 37.5%
and 36% for first quarter 1997 and 1996, respectively. Average shares
outstanding for first quarter increased 2.8% when compared to 1996 primarily due
to the conversion of preferred stock to common stock in fourth quarter 1996.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF FIRST QUARTER 1997
GENERAL
- -------
Consistent with financial statement presentation, the following cash flow
discussion reflects the completion of the sales of UFLIC and LOV in April, 1996,
and the acquisition of A&A in first quarter 1997 and Bain Hogg in fourth quarter
1996. As a result of these transactions, the amounts contained in the condensed
consolidated statement of cash flows for the first quarter ended March 31, 1997
are not comparable to the same period in 1996.
Cash flows from operating activities in first quarter 1997 were $307.8 million,
an increase of $65.1 million from first quarter 1996 (including discontinued
operations). This increase primarily reflects the timing of settlement of
insurance segment receivables and payables.
Investing activities used cash of $308.7 million which was made available from
financing and operating activities. Cash used for acquisition activity during
the first quarter 1997 was $1.3 billion, primarily reflecting the A&A
acquisition.
- 16 -
<PAGE>
Cash totaling $878.4 million was provided during first quarter 1997 from
financing activities. The increase is primarily a result of funds provided on
the issuance of the capital securities. Cash was used to pay dividends of $39.1
million on common stock, $2.7 million on 8% cumulative perpetual preferred
stock, and $0.6 million on redeemable preferred stock.
Aon's operating subsidiaries anticipate that there will be adequate liquidity to
meet their needs in the foreseeable future. Aon's liquidity needs are primarily
for servicing its debt and for the payment of dividends on stock issues and
capital securities. The businesses of Aon's operating subsidiaries continue to
provide substantial positive cash flow. Brokerage cash flow has been used
primarily for acquisition financing. 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.
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 (96%) and has a
fair value which is 102.7% of amortized cost.
Total assets increased $3.6 billion to $17.3 billion since year-end 1996,
primarily due to the acquisition of A&A. Invested assets at March 31, 1997
decreased $152 million from year-end levels, primarily due to unrealized losses
on preferred stock. The amortized cost and fair value of less than investment
grade fixed maturity investments, at March 31, 1997, were $90.4 million and
$96.4 million, respectively. The carrying value of non-income producing
investments in Aon's portfolio at March 31, 1997 was $70.8 million, or 1.4% of
total invested assets.
Aon uses derivative financial instruments (primarily financial futures, swaps,
options and foreign exchange forwards) 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 foreign currency transaction risk and other business risks. As of March
31, 1997, Aon had open contracts which had unrealized gains of approximately
$23.9 million.
Insurance brokerage and consulting services receivables and insurance premiums
payable increased $1.2 billion and $1.8 billion, respectively, in first quarter
1997 when compared to year-end 1996, primarily reflecting the A&A acquisition.
When compared to 1996, excess of cost over net assets purchased (goodwill)
increased approximately $1.2 billion due to the A&A acquisition (see note 6).
In first quarter 1997, Aon completed the merger with A&A. The purchase price of
approximately $1.2 billion was funded by the issuance of commercial paper,
internal funds, and the issuance of $800 million of 8.205% mandatorily
redeemable preferred capital securities (capital securities). The capital
securities are designated on the condensed consolidated statement of financial
position as "Company-obligated Mandatorily Redeemable Preferred Capital
Securities of Subsidiary Trust holding solely the Company's Securities."
Short-term borrowings increased at the end of first quarter 1997 by $132 million
when compared to year-end 1996 primarily due to the issuance of commercial paper
to fund a portion of the A&A acquisition. Included in notes payable at March 31,
1997 is approximately $40 million which represents the principal amount of notes
due within one year.
- 17 -
<PAGE>
Commencing on or after November 1, 1997, Aon has the option to redeem all or any
part of its 8% Cumulative Perpetual Preferred Stock (8% preferred stock) at a
redemption price of $25.00 per share plus accrued dividends. It is anticipated
that Aon will most likely exercise its option to redeem all of the remaining
outstanding shares. At March 31, 1997, 5,446,000 shares of 8% preferred stock
were outstanding.
Stockholders' equity decreased $136.9 million in first quarter 1997 to $15.34
per share, a decrease of $0.87 per share since year-end 1996. The principal
factors influencing this decrease were $90.6 million of after-tax special
charges which reduced net income, net unrealized investment losses of $34.1
million, net foreign exchange losses of $35.6 million and dividends to
stockholders of $85.8 million. Included in dividends is an accrual for the
common stock dividend that will be paid in second quarter 1997.
Review by Independent Auditors
- ------------------------------
The condensed consolidated financial statements at March 31, 1997, and for the
first quarter then ended have been reviewed, prior to filing, by Ernst & Young
LLP, Aon's independent auditors, and their report is included herein.
- 18 -
<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 March 31, 1997, and the related condensed
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 1997 and 1996. 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, 1996, 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 11, 1997, 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, 1996, 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
May 1, 1997
- 19 -
<PAGE>
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
The Registrant hereby incorporates by reference to Part I Note 8
(Discontinued Operations) and Note 9 (Contingencies) of the Notes
to the Condensed Consolidated Financial Statements herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
(a) The Annual Meeting of Stockholders of the Registrant
was held on April 18, 1997 (the "1997 Annual Meeting").
(b) Not applicable.
(c)(i) The tabulation of votes below does not reflect the
three-for-two stock split payable May 14, 1997 to
stockholders of record on May 1, 1997. Set forth below
is the tabulation of the votes on each nominee for
election as a director:
Withhold
Name For Authority
---- --- ---------
Daniel T. Carroll 96,529,268 293,759
Franklin A. Cole 96,542,230 280,797
Edgar D. Jannotta 96,573,487 249,540
Perry J. Lewis 96,567,088 255,939
Joan D. Manley 96,578,382 244,645
Andrew J. McKenna 96,575,140 247,877
Newton N. Minow 95,244,463 1,578,564
Peer Pedersen 95,244,926 1,578,101
Donald S. Perkins 96,571,598 251,429
John W. Rogers, Jr. 96,579,310 243,717
Patrick G. Ryan 96,582,783 240,244
George A. Schaefer 96,585,295 237,732
Raymond I. Skilling 96,579,662 243,365
Fred L. Turner 96,585,830 237,197
Arnold R. Weber 96,560,132 262,895
- 20 -
<PAGE>
(ii) Set forth below is the tabulation of the vote on the
adoption of amendments to the Aon Stock Option Plan in order
to increase the number of shares of Common Stock authorized
under such plan from 11,550,000 to 15,550,000 shares and to
reapprove such plan in its entirety with a limit on the
number of shares awardable annually to any one person in
order to qualify such plan for treatment under Section
162(m) of the Internal Revenue Code.
For Against Abstain Nonvote
--- ------- ------- -------
86,850,679 3,630,733 997,372 5,344,243
(iii) Set forth below is the tabulation of the vote to approve
and adopt an amendment to the Aon Stock Award Plan in order
to increase the number of shares of Common Stock authorized
under such plan from 5,025,000 to 8,600,000 shares.
For Against Abstain Nonvote
--- ------- ------- -------
86,451,199 3,928,352 1,099,534 5,343,942
(iv) Set forth below is the tabulation of the vote on the
selection of Ernst & Young LLP as auditors for the
Registrant for the 1997 fiscal year.
For Against Abstain Nonvote
--- ------- ------- -------
96,343,915 200,354 278,758 -0-
(v) Set forth below is the tabulation of the vote on a proposal
made by a stockholder relating to certain investments by the
Registrant as set forth beginning on page 24 of the
Registrant's Notice of Annual Meeting of Holders of Common
Stock and Series C Preferred Stock and Proxy Statement for
the 1997 Annual Meeting.
For Against Abstain Nonvote
--- ------- ------- -------
5,784,394 81,891,941 3,327,996 5,818,696
(d) Not applicable.
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 - The Registrant filed a Current Report
on Form 8-K and a Current Report on Form 8-K/A dated January
15, 1997 pursuant to Item 2 of Form 8-K and Item 7 of Form
8-K/A. The following financial statements were filed:
- 21 -
<PAGE>
Consolidated Statements of Operations -- For the years ended
December 31, 1995, 1994 and 1993
Consolidated Balance Sheets -- As of December 31, 1995 and
1994
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity -- For the
years ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
Unaudited Consolidated Statements of Operations -- For the
three and nine months ended September 30, 1996 and 1995
Condensed Consolidated Balance Sheets -- As of September 30,
1996 (Unaudited) and December 31, 1995
Unaudited Consolidated Statements of Cash Flows -- For the
nine months ended September 30, 1996 and 1995
Unaudited Notes to Financial Statements
No other Current Reports on Form 8-K were filed for the quarter ended
March 31, 1997.
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)
May 15, 1997 /s/ Harvey N. Medvin
--------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER
(Principal Financial and Accounting Officer)
- 22 -
<PAGE>
Aon Corporation
EXHIBIT INDEX
-------------
Exhibit Number
In Regulation S-K, Page
Item 601 Exhibit Table No.
(10)(a) Aon Stock Option Plan (as amended and restated through 1997)
(10)(b) Aon Stock Award Plan (as amended and restated through 1997)
(11) Statement regarding Computation of Per Share Earnings.
(12) Statements regarding Computation of Ratios.
(a) Statement regarding Computation of Ratio of
Earnings to Fixed Charges.
(b) Statement regarding Computation of Ratio of
Earnings to Combined Fixed Charges and Preferred
Stock Dividends.
(15) Letter re: Unaudited Interim Financial Information.
(27) Financial Data Schedule
- 23 -
<PAGE>
EXHIBIT 10(a)
AON STOCK OPTION PLAN
(as amended and restated through 1997)
1. PURPOSE
The purpose of the Aon Stock Option Plan (as amended and restated through 1997)
(the "Plan") is to encourage the highest level of performance by key employees
of operating subsidiaries and affiliates of Aon Corporation (which subsidiaries
and affiliates are herein collectively referred to as the "Corporation" ) by
making a grant to them ("Grants") of Aon Corporation's common stock, $1.00 par
value per share ("Common Stock"), which grants are subject to the conditions set
forth in the Plan.
2. ADMINISTRATION
The Plan shall be administered by the Organization and Compensation Committee
(the "Committee") of Aon Corporation's Board of Directors (the "Board"). The
aggregate number of shares of Common Stock which initially may be the subject of
Grants under this Plan shall be 15,550,000, all of which may be issued in
connection with incentive stock options. All questions involving eligibility for
Grants, interpretations of the provisions of the Plan, or the operation of the
Plan shall be decided by the Committee. No member of the Committee shall be
eligible to receive a Grant under the Plan. All determinations of the Committee
shall be conclusive. The Committee may obtain such advice or assistance as it
deems appropriate from persons not serving on the Committee.
3. ELIGIBILITY
Grants may be made under the Plan to key employees of the Corporation
("Participants") as approved by the Committee. The Grants shall be at the
discretion of the Committee and may vary by Participant.
4. TERMS AND CONDITIONS
The Committee may make Grants in the form of Incentive Stock Option Grants (as
defined by Internal Revenue Code Section 422 and referred to herein as "ISO's")
and/or Regular Stock Option Grants (not intended to be accorded favored tax
treatment, and referred to herein as "RSO's") under the Plan.
The purchase price per share of Common Stock subject to a Grant shall not be
less than 100% of the fair market value of the Common Stock on the date such
Grant is made. "Fair Market Value" as used in the Plan with regard to a date
means the arithmetic mean of the high and low prices of the Common Stock as
quoted on the New York Stock Exchange, as published in The Wall Street Journal,
or, if The Wall Street Journal is no longer published, such other periodical as
is chosen by the Committee.
A Grant shall vest after a Participant's period of continuous employment by the
Corporation from the date of a Grant ("Grant Date") in accordance with the
schedule set forth below:
- 1 -
<PAGE>
Participant's Full Years of Continuous
--------------------------------------
Employment From Grant Date Percent Vested
-------------------------- --------------
3 30
4 20
5 20
6 30
A Participant, following the vesting of any portion of a Grant as set forth
above, may elect to exercise an option by giving written notice to the
Corporation on such form as the Committee may prescribe, indicating the number
of shares to be purchased. Payment for all shares to be purchased pursuant to an
exercise of an option shall be made in any form or manner authorized by the
Committee, including, but not limited to, cash or, if the Committee so permits,
(i) by delivery or certification of ownership to the Corporation of the number
of shares of stock which have been owned by the holder for at least six (6)
months prior to the date of exercise having an aggregate Fair Market Value of
not less than the product of the purchase price of the option multiplied by the
number of shares the Participant intends to purchase upon exercise of the option
on the date of delivery; (ii) in a cashless exercise through a broker; or (iii)
by having a number of shares of stock withheld, the aggregate Fair Market Value
of which as of the date of exercise is sufficient to satisfy the purchase price
of the option. Delivery of such certificates is conditioned on the Participant's
prior compliance with this paragraph and with the terms of paragraph 7. Upon
receipt of such stock certificate, the Participant is free to hold or, subject
to paragraph 13, dispose of it at will. The Participant does not have the right
to vote any shares subject to any Grant or receive dividends on such shares
prior to the time they are delivered. The Committee at its discretion may alter
the terms of the vesting of Grants; provided, however, no Grant may be exercised
after the tenth (10th) anniversary of the date of the making of such Grant.
5. LIMITATION ON ISO'S
Notwithstanding anything in the Plan to the contrary, to the extent required
from time to time by the Internal Revenue Code and promulgations thereunder
("Code"), the following additional provisions shall apply to Grants which are
intended to qualify as ISO's:
(a) The aggregate Fair Market Value (determined as of the Grant date) of
the shares of Common Stock with respect to which ISO's are exercisable
for the first time by any Participant during any calendar year (under
all plans of the Corporation) shall not exceed $100,000 or such
other amount as may subsequently be specified by the Code; provided
that, to the extent that such limitation is exceeded, any excess
options (as determined under the Code) shall be deemed to be RSO's.
(b) Any ISO's authorized under the Plan shall contain such other provisions
as the Committee shall deem advisable, but shall in all events be
consistent with and contain or be deemed to contain all provisions
required in order to qualify the Grants as ISO's.
(c) All ISO's must be granted within ten years from the effective date of
this Plan.
- 2 -
<PAGE>
6. EMPLOYMENT TERMINATION
If a Participant's employment terminates because of death or disability all
unvested Grants will continue to vest in accordance with Paragraph 4. Unless the
Committee determines otherwise, if a Participant's employment terminates for any
reason, other than by death or disability, all unvested Grants will be
forfeited.
7. TAXES
A Participant shall have the duty to pay to the Corporation an amount equal to
all taxes required by any government to be withheld or otherwise deducted and
paid by the Corporation as a result of the distribution to the Participant of
any shares subject to a Grant. Shares subject to a Grant shall not be delivered
to the Participant until such time as such payment has been made.
The Committee may, in its discretion and subject to such rules as it may adopt,
permit Participant to pay all or a portion of such taxes arising in connection
with the exercise of a Grant by electing to have the Corporation withhold shares
of Common Stock otherwise issuable having a Fair Market Value equal to all or
any portion of such tax to be satisfied in this manner.
8. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION
In the event of a recapitalization, stock split, stock dividend, combination or
exchange of shares, merger, consolidation, rights offering, separation,
reorganization or liquidation, or any other change in the corporate structure or
shares of the Corporation, the Committee may make such equitable adjustments, to
prevent dilution or enlargement of rights, as it may deem appropriate in the
number and class of shares subject to a Grant.
9. NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in the Plan shall confer on a Participant any right to continue in the
employ of the Corporation or in any way affect the Corporation's right to
terminate the Participant's employment at any time without prior notice and for
any or no reason.
10. IMPACT ON OTHER BENEFITS
The value of any shares delivered (or money in lieu thereof) under this Plan
shall not be includable as compensation or earnings for purposes of any other
benefit plan offered by the Corporation.
11. TRANSFERABILITY
No Grants and no right under any such Grants shall be transferable by a
Participant otherwise than pursuant to a will or the laws of descent and
distribution; provided, however, that if so determined by the Committee, a
Participant may, in the manner established by the Committee;
(a) designate a beneficiary or beneficiaries to exercise the rights of the
Participant and receive any property distributable with respect to any
Grants upon the death of the Participant, or;
- 3 -
<PAGE>
(b) transfer a Grant to any member of such Participant's "immediate family"
(as such term is defined in Rule 16a-1(e) promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as
amended, or any successor rule or regulation) ("Immediate Family") or
to a trust or family partnership whose beneficiaries are members of
such Participant's Immediate Family.
Each Grant or right under any Grant shall be exercisable during the
Participant's lifetime only by the Participant, or by a member of such
Participant's immediate family or a trust or family partnership for members of
such Immediate Family pursuant to a transfer as described above, or if
permissible under applicable law, by the Participant's guardian or legal
representative. No Grant or right under any such Grant may be pledged,
alienated, attached or otherwise encumbered, any purported pledge, alienation,
attachment or encumbrance thereof shall be void and unenforceable against the
Corporation.
12. TERMINATION OR AMENDMENT OF THE PLAN
Except as otherwise stated in this Section 12, the Board shall have the right to
amend or terminate the Plan at any time, subject to any applicable rule or
regulation. A Grant, however, may not in any way be affected or limited by any
Plan amendment or termination approved after the date of the Grant without the
Participant's written consent. The Committee shall have the right, to the extent
it deems appropriate, to establish or amend such other terms, conditions,
restrictions, and/or limitations, if any, of any Grant.
The following matters shall require approval by the stockholders:
(a) the increase in the number of shares which may be issued
pursuant to the Plan (except pursuant to Section 5 herein);
(b) the grant of options under this Plan at an option price less
than Fair Market Value;
(c) the exercise of an option without full payment for the shares
at the time of purchase.
13. REGULATORY COMPLIANCE AND LISTING
The delivery of any shares under this Plan may be postponed by the Corporation
for such period as may be required to comply with any applicable requirements
under the Federal or State securities laws, any applicable listing or other
requirements of any national securities exchange and requirements under any
other law or regulation applicable to the delivery of such shares, and the
corporation shall not be obligated to deliver any shares under this Plan if such
delivery shall constitute a violation of any provision of any law or of any
regulation of any governmental authority or any national securities exchange. In
addition, the shares when delivered may be subject to conditions, including
transfer restrictions, if required to comply with applicable securities law.
14. MISCELLANEOUS
The shares of Common Stock to be delivered under the Plan may be either
authorized but unissued shares or shares which have been or may be reacquired by
the Corporation, as determined from time to time by the Committee.
- 4 -
<PAGE>
Notwithstanding any provision contained in the Plan to the contrary, the maximum
number of shares for which Grants may be made under this Plan to any one
Participant in any one calendar year is 300,000 shares of Common Stock.
15. EFFECTIVE DATE OF THE PLAN
The Plan shall become effective as amended and restated as of the date of Board
approval and stockholder approval.
- 5 -
<PAGE>
EXHIBIT 10(b)
AON STOCK AWARD PLAN
(as amended and restated through 1997)
1. PURPOSE
The purpose of the Aon Stock Award Plan (as amended and restated through 1997)
(the "Plan") is to encourage the highest level of performance by key employees
of operating subsidiaries and affiliates of Aon Corporation (which subsidiaries
and affiliates are herein referred to as "Corporation" ) by making an award to
them ("Award") of Aon Corporation's common stock ("Common Stock"), which awards
are subject to the conditions set forth in the Plan.
2. ADMINISTRATION
The Plan shall be administered by the Organization and Compensation Committee
(the "Committee") of Aon Corporation's Board of Directors (the "Board"). The
aggregate number of shares of Common Stock which may be the subject of Awards
under this Plan shall be 8,600,000. From time to time the Board may allocate
additional shares of Common Stock to be the subject of Awards under this Plan.
All questions involving eligibility for Awards, interpretations of the
provisions of the Plan, or the operation of the Plan shall be decided by the
Committee. No member of the Committee shall be eligible to receive an Award
under the Plan. All determinations of the Committee shall be conclusive. The
Committee may obtain such advice or assistance as it deems appropriate from
persons not serving on the Committee.
3. ELIGIBILITY
Awards may be made under the Plan to key employees of the Corporation
("Participants") as approved by the Committee. The Awards shall be at the
discretion of the Committee and may vary by Participant.
4. TERMS AND CONDITIONS
An Award shall vest after a Participant's period of continuous employment by the
Corporation from the date of an Award ("Award Date") in accordance with the
schedule set forth below:
Participant's Full Years of Continuous
--------------------------------------
Employment From Award Date Percent Vested
-------------------------- --------------
3 20
4 10
5 10
6 10
7 10
8 10
9 10
10 20
- 1 -
<PAGE>
Within 30 days of the vesting of any portion of an Award by virtue of the
Participant's completing the full years of continuous employment as set forth
above, the Corporation shall deliver to the Participant a stock certificate
covering the requisite number of shares. Delivery of such certificates is
conditioned on the Participant's prior compliance with the terms of paragraph 6.
Upon receipt of such stock certificate, the Participant is free to hold or,
subject to paragraph 12, dispose of it at will. The Participant does not have
the right to vote any shares subject to an Award or receive dividends on such
shares prior to the time they are delivered. The Committee at its discretion may
alter the terms of the vesting of Awards. The Committee shall have the
discretion to discharge all or a portion of its obligation under this paragraph
by paying to the Participant an amount of money equal to the fair market value
of all or a portion of the undelivered shares on the date the shares become
vested, less all taxes required to be withheld or otherwise deducted and paid by
the Corporation as a result of the distribution to the Participant. "Fair Market
Value," as used in this paragraph and hereon, with regard to a date means the
arithmetic mean of the high and low prices of the Common Stock as quoted on the
New York Stock Exchange, as published in The Wall Street Journal, or, if The
Wall Street Journal is no longer published, such other periodical as is chosen
by the Committee.
5. EMPLOYMENT TERMINATION
If a Participant's employment terminates because of death or disability all
unvested Awards will continue to vest in accordance with Paragraph 4. If a
Participant's employment terminates for any reason, other than by death or
disability, all unvested Awards will be forfeited; however, the Committee shall
have the discretion to deliver shares of Common Stock representing all or a
portion of any remaining unvested Award with respect to specific terminating
Participants if, after reviewing all of the facts and circumstances of such
termination, the Committee determines that such delivery is appropriate and
equitable as to a Participant.
6. TAXES
A Participant shall have the duty to pay to the Corporation an amount equal to
all taxes required by any government to be withheld or otherwise deducted and
paid by the Corporation as a result of the distribution to the Participant of
any shares subject to an Award. Shares subject to an Award shall not be
delivered to the Participant until such time as such payment has been made.
The Committee may, in its discretion and subject to such rules as it may adopt,
permit Participant to pay all or a portion of such taxes arising in connection
with vesting of an Award by electing to have the Corporation withhold shares of
Common Stock otherwise issuable having a Fair Market Value equal to all or any
portion of such tax to be satisfied in this manner.
7. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION
In the event of a recapitalization, stock split, stock dividend, combination or
exchange of shares, merger, consolidation, rights offering, separation,
reorganization or liquidation, or any other change in the corporate structure or
shares of the Corporation, the Committee may make such equitable adjustments, to
prevent dilution or enlargement of rights, as it may deem appropriate in the
number and class of shares subject to an Award.
- 2 -
<PAGE>
8. NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in the Plan shall confer on a Participant any right to continue in the
employ of the Corporation or in any way affect the Corporation's right to
terminate the Participant's employment at any time without prior notice and for
any or no reason.
9. IMPACT ON OTHER BENEFITS
The value of any shares delivered (or money in lieu thereof) under this Plan
shall not be includable as compensation or earnings for purposes of any other
benefit plan offered by the Corporation.
10. BENEFICIARY
Any shares deliverable after a Participant's death (or money in lieu thereof )
shall be delivered (or paid) to the beneficiary as designated in writing by the
Participant. If no beneficiary is so designated, delivery (or payment) will be
made to the Participant's estate. The Participant may change the designated
beneficiary of this Plan by filing with the Committee written notices of such
change.
11. TERMINATION OR AMENDMENT OF THE PLAN
The Board shall have the right to amend or terminate the Plan at any time. An
Award, however, may not in any way be affected or limited by any Plan amendment
or termination approved after the date of the Award without the Participant's
written consent.
12. REGULATORY COMPLIANCE AND LISTING
The delivery of any shares under this Plan may be postponed by the Corporation
for such period as may be required to comply with any applicable requirements
under the Federal or State securities laws, any applicable listing or other
requirements of any national securities exchange and requirements under any
other law or regulation applicable to the delivery of such shares, and the
corporation shall not be obligated to deliver any shares under this Plan if such
delivery shall constitute a violation of any provision of any law or of any
regulation of any governmental authority or any national securities exchange. In
addition, the shares when delivered may be subject to conditions, including
transfer restrictions, if required to comply with applicable securities law.
13. MISCELLANEOUS
The shares of Common Stock to be delivered under the Plan may be either
authorized but unissued shares or shares which have been or may be reacquired by
the Corporation, as determined from time to time by the Committee.
14. TRANSFERABILITY
No Awards and no right under any such Awards shall be transferable by a
Participant otherwise than by will or by the laws of descent and distribution;
provided, however, that if so determined by the Committee, a Participant may, in
the manner established by the Committee:
- 3 -
<PAGE>
(a) designate a beneficiary or beneficiaries to exercise the rights of the
Participant and receive any property distributable with respect to any
Awards upon the death of the Participant, or;
(b) transfer an Award to any member of such Participant's "immediate
family" (as such term is defined in Rule 16a-1(e) promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended, or any successor rule or regulation) or to a trust or
family partnership whose beneficiaries are members of such
Participant's "immediate family."
No Award or right under any such Award may be pledged, alienated, attached or
otherwise encumbered, any purported pledge, alienation, attachment or
encumbrance thereof shall be void and unenforceable against the Corporation.
15. DEFERRAL OF AWARDS
Each Participant shall be entitled to defer all or a portion of an Award subject
to the terms and conditions set forth below:
(a) Election to Defer Calendar Year Vesting. On or before December 31 of
any year, each Participant shall be entitled to make an irrevocable
election to defer receipt of all or a portion of any Award that will
vest and would otherwise be distributed under the terms of this Plan
in the second calendar year following the year in which the election
is made.
(b) Election as to Period of Deferral. Each employee shall also make,
within the time specified in Subsection (a) an irrevocable election
as to the period of deferral and distribution in accordance with
Subsection (f). The elections set forth in any notice described in
this paragraph 15 shall pertain only to the period for which they are
made, and if no election is made for a period no deferral will be
made.
(c) Separate Accounts. Separate accounts for each deferral period shall
be established and maintained for each Participant. Such accounts
shall be book entries maintained by the Corporation, and the
existence of such book entries shall not create and shall not be
deemed to create a trust of any kind, or a fiduciary relationship
between the Corporation and any Participant or beneficiary. Such
accounts shall reflect the amount deferred for each deferral period
specified in each election form by the Participant. In the event two
or more accounts reflect deferred amounts which are to be paid at the
same time, all such accounts shall be aggregated into a single
account.
(d) Dividends Credited. As of each dividend payment date, each
Participant's accounts shall be credited with the dividends that
would be paid with respect to Common Stock vested and held in the
Participant's accounts on the dividend payment date as if the
Participant owned the stock credited. Dividends will be credited as
if reinvested in whole or fractional shares on the dividend date.
(e) Election of Distribution. Any amount deferred for any period plus any
dividends attributable thereto shall be payable under the method
selected by the Participant under subsection (f), unless the
Participant terminates employment before the Elected Distribution
Date or receives a hardship withdrawal in accordance with subsections
(h) or (i), respectively, before the period of deferral has expired.
- 4 -
<PAGE>
(f) Method of Distribution. At the time the Participant elects to defer
an Award pursuant to subsection (a), the Participant shall also make
an irrevocable election as to (i) the beginning date of distribution
with respect to amounts so credited to the accounts; and (ii) the
number of annual installments, not in excess of ten, over which such
distribution will be made. Payments, subject to the provisions of
subsections (h) and (i) shall commence within 30 days following the
date of distribution specified by the Participant in his or her
deferral election (the "Elected Distribution Date"); provided,
--------
however, that the Committee may in its sole discretion determine that
-------
payments shall be made over a shorter period or in more frequent
installments, or commence on an earlier date, or any or all of the
above.
(g) Installment Payments. Annual installments will be paid within 30
days of the Elected Distribution Date or on the Actual Distribution
Date, and every twelve months thereafter. The amount of the first
payment shall be a fraction of the total balances of the
Participant's accounts for such period as of the last day of the
month preceding the Elected Distribution Date or the Actual
Distribution Date (whichever is applicable), the numerator of which
is one and the denominator of which is the total number of
installments elected. The amount of each subsequent payment shall be
a fraction of the amount as of the last day of the month preceding
each subsequent payment, the numerator of which is one and the
denominator of which is the total number of installments remaining.
(h) Termination of Employment Prior to Distribution Date. If the
Participant terminates employment prior to the Elected Distribution
Date, payments shall commence within 30 days of the first business
day of the first calendar year following the year in which employment
terminated. The date that payments commence shall be the "Actual
Distribution Date," and distributions shall be made in the same
number of annual installments as had been elected by the Participant
at the time of the deferral election; provided, however, that the
Committee may, in its sole discretion, determine that distribution to
a terminated employee shall commence on any earlier or later date.
(i) Hardship Withdrawals. If a Participant or beneficiary would
otherwise suffer severe financial hardship and distribution of
amounts credited to the accounts has not yet commenced, deferral of
amounts may be suspended and payment of amounts credited to the
accounts shall commence within 30 days following the determination of
the Committee that such hardship resulted from an unforeseeable
emergency that is caused by an event beyond the control of the
Participant or beneficiary. Such suspension or withdrawal may not
exceed the amount necessary to meet the emergency. For purposes if
this subsection, "unforeseeable emergency" is defined as a severe
financial hardship to the Participant or beneficiary resulting from a
sudden and unexpected illness or accident of the Participant or
beneficiary or a dependent (as defined in Internal Revenue Code
Section 152(a)) of the Participant or beneficiary, loss of property
due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of a
Participant or beneficiary. Payment may not be made to a Participant
or beneficiary to the extent that such hardship is or may be relieved
through (i) reimbursement or compensation by insurance or otherwise;
or (ii) by the liquidation of the Participant's assets, to the extent
the liquidation of such assets would not itself cause severe
financial hardship.
- 5 -
<PAGE>
(j) Distribution Upon Death after Payments Have Commenced. If any
Participant dies before receiving all amounts credited to such
Participant's accounts, the unpaid amounts in the Participant's
accounts shall be paid to the Participant's beneficiary or
beneficiaries in accordance with the last effective beneficiary
designation form filed by the Participant. Such unpaid amounts shall
be paid in the same manner and at the same time as had been elected
by the Participant prior to such Participant's death.
(k) Form of Distribution. Distributions will be in the form of Common
stock, provided, however, that the Committee, in its sole discretion,
may modify such form of distribution. Furthermore, the Committee
shall have the discretion to discharge all or a portion of its
obligation under this paragraph by paying to the Participant an
amount of money equal to the Fair Market Value of all or a portion of
the account, less applicable withholding taxes.
(l) Participant Rights. A Participant or beneficiary shall not have
any interest in the deferred Award and dividends credited to his
accounts until such accounts are distributed in accordance with the
Plan. All amounts deferred or otherwise held for the account of a
Participant under the Plan shall remain the sole property of the
Corporation, subject to the claims of general creditors and available
for use for whatever purposes are desired. With respect to amounts
deferred or otherwise held for the account of a Participant, the
Participant is merely a general creditor, and the obligation of the
Corporation hereunder is purely contractual and shall not be funded
or secured in any way. The notice shall be written in a manner
calculated to be understood by the claimant. The Corporation shall
afford a Participant or beneficiary whose claim for benefits has been
denied 60 days from the date notice of such denial is delivered or
mailed in which to appeal the decision in writing to the Committee.
If the Participant or beneficiary appeals the decision in writing
within 60 days, the Committee shall review the written comments and
any submissions of the Participant or beneficiary and render its
decision regarding the appeal all within 60 days of such appeal.
(m) Non-alienability and Nontransferability. The rights of a Participant
to the payment of Awards deferred pursuant to this paragraph shall
not be assigned, transferred, pledged or encumbered, or be subject in
any manner to alienation or anticipation. No Participant may borrow
against his accounts. No accounts with respect to deferred
compensation shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, charge,
garnishment, execution, or levy of any kind, whether voluntary or
involuntary, including any liability which is for alimony or other
payments for the support of a spouse or former spouse, or for any
other relative of any Participant.
(n) Committee Delegation. The Committee may delegate its administrative
responsibilities as it shall, from time to time, deem advisable.
(o) Payment of Benefits to Disabled Individuals. Any amounts payable
hereunder to any person under legal disability or who, in the
judgment of the Corporation, is unable to properly manage his
financial affairs may be paid to the legal representative of such
person or may be applied for the benefit of such person in any manner
which the Corporation may select.
- 6 -
<PAGE>
(p) Liability. No member of the Board, no employee of the Corporation,
and no member of the Committee (nor the Committee itself) shall be
liable for any act or action hereunder whether of omission or
commission, by any other member or employee or by any agent to whom
duties in connection with the administration of the Plan have been
delegated or, except in circumstances involving his bad faith, gross
negligence or fraud, for anything done or omitted to be done by
himself. The Corporation will fully indemnify and hold the members of
the Committee harmless from any liability hereunder, except in
circumstances involving a Committee member's bad faith, gross
negligence, or fraud. The Corporation or the Committee may consult
with legal counsel, who may be counsel for the Corporation or other
counsel, with respect to its obligation or duties hereunder, or with
respect to any action or proceeding or any question of law, and shall
not be liable with respect to any action taken or omitted by it in
good faith pursuant to the advice of counsel.
(q) Unfunded Status of the Plan. Any and all payments made to the
Participant pursuant to the Plan shall be made only from the general
assets of the Corporation. All accounts under the Plan shall be for
bookkeeping purposes only and shall not represent a claim against
specific assets of the Corporation. Nothing contained in this Plan
shall be deemed to create a trust of any kind or create any fiduciary
relationship.
16. EFFECTIVE DATE OF THE PLAN
The Plan as amended and restated shall become effective as of the date of
approval of this Plan by the Board and the stockholders of the Company.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
Aon Corporation and Subsidiaries
CONSOLIDATED NET INCOME PER SHARE COMPUTATION
First Quarter Ended
---------------------------
(millions except per share data) March 31, March 31,
1997 1996
------------ ------------
EARNINGS PER SHARE (1)
<S> <C> <C>
Net income .................................................. $ 0.7 $ 118.9
Preferred stock dividends ................................... 3.4 5.1
============ ============
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS............... $ (2.7) $ 113.8
============ ============
Average common shares issued ................................ 171.2 167.1
Net effect of treasury stock activity and dilutive stock
compensation plans based on the treasury stock method ... (2.0) (2.5)
------------ ------------
Average common and common equivalent shares
outstanding............................................ 169.2 164.6
============ ============
NET INCOME (LOSS) PER SHARE ................................... $ (0.02) $ 0.69
============ ============
<FN>
(1) Adjusted to reflect the three-for-two stock split effective May 1, 1997.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12(a)
Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
First Quarter
Ended March 31, Years Ended December 31,
--------------------- ---------------------------------------------------------
(millions except ratios) 1997 1996 1996 1995 1994 1993 1992(1)
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes (2) $ 15.2 $ 145.6 $ 445.6 $ 458.0 $ 397.0 $ 331.6 $ 179.1
Add back fixed charges:
Interest on indebtedness 14.6 13.8 44.7 55.5 46.4 42.3 41.9
Interest on ESOP 1.0 1.2 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor 14.7 6.7 28.6 21.4 28.7 26.1 19.2
--------- --------- --------- --------- --------- --------- ---------
INCOME AS ADJUSTED $ 45.5 $ 167.3 $ 523.2 $ 540.2 $ 478.0 $ 406.5 $ 247.1
========= ========= ========= ========= ========= ========= =========
FIXED CHARGES:
Interest on indebtedness: $ 14.6 $ 13.8 $ 44.7 $ 55.5 $ 46.4 $ 42.3 $ 41.9
Interest on ESOP 1.0 1.2 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor 14.7 6.7 28.6 21.4 28.7 26.1 19.2
--------- --------- --------- --------- --------- --------- ---------
TOTAL FIXED CHARGES $ 30.3 $ 21.7 $ 77.6 $ 82.2 $ 81.0 $ 74.9 $ 68.0
========= ========= ========= ========= ========= ========= =========
RATIO OF EARNINGS TO FIXED CHARGES 1.5 7.7 6.7 6.6 5.9 5.4 3.6
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges (3) 6.3 7.9 4.9
========= ========= =========
<FN>
(1) Income from continuing operations before provision for income taxes
excludes the cumulative effect of changes in accounting principles.
(2) Income from continuing operations before provision for income taxes and
minority interest includes special charges of $145 million in first
quarter ended March 31, 1997 and $90.5 million and $86.5 million in the
the years ended December 31, 1996 and 1992, respectively.
(3) The calculation of this ratio of earnings to fixed charges reflects the
exclusion of special charges from income from continuing operation before
provision for income taxes component for the first quarter ended March 31,
1997 and the years ended December 31, 1996 and 1992, respectively.
</FN>
</TABLE>
<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
First Quarter
Ended March 31, Years Ended December 31,
--------------------- ---------------------------------------------------------
(millions except ratios) 1997 1996 1996 1995 1994 1993 1992(1)
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes (2) $ 15.2 $ 145.6 $ 445.6 $ 458.0 $ 397.0 $ 331.6 $ 179.1
Add back fixed charges:
Interest on indebtedness 14.6 13.8 44.7 55.5 46.4 42.3 41.9
Interest on ESOP 1.0 1.2 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor 14.7 6.7 28.6 21.4 28.7 26.1 19.2
--------- --------- --------- --------- --------- --------- ---------
INCOME AS ADJUSTED $ 45.5 $ 167.3 $ 523.2 $ 540.2 $ 478.0 $ 406.5 $ 247.1
========= ========= ========= ========= ========= ========= =========
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS:
Interest on indebtedness: $ 14.6 $ 13.8 $ 44.7 $ 55.5 $ 46.4 $ 42.3 $ 41.9
Preferred stock dividends 19.4 7.8 28.7 37.5 48.4 47.5 20.3
--------- --------- --------- --------- --------- --------- ---------
INTEREST AND DIVIDENDS 34.0 21.6 73.4 93.0 94.8 89.8 62.2
Interest on ESOP 1.0 1.2 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor 14.7 6.7 28.6 21.4 28.7 26.1 19.2
--------- --------- --------- --------- --------- --------- ---------
TOTAL FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS $ 49.7 $ 29.5 $ 106.3 $ 119.7 $ 129.4 $ 122.4 $ 88.3
========= ========= ========= ========= ========= ========= =========
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS (3) 0.9 5.7 4.9 4.5 3.7 3.3 2.8
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to combined fixed
charges and preferred stock dividends (4) 3.8 5.8 3.8
========= ========= =========
<FN>
(1) Income from continuing operations before provision for income taxes
excludes the cumulative effect of changes in accounting principles.
(2) Income from continuing operations before provision for income taxes and
minority interest includes special charges of $145 million in first quarter
ended March 31, 1997 and $90.5 million and $86.5 million in the years ended
December 31, 1996 and 1992, respectively.
(3) The ratio of earnings to combined fixed charges and preferred stock dividends
for first quarter ended March 31, 1997 is less than a one-to-one coverage
indicating that earnings are inadequate to cover fixed charges by $4.2 million.
Included in total fixed charges and preferred stock dividends for first
quarter ended March 31, 1997 are $14.1 million of pretax distributions on
the 8.205% trust preferred captial securities which are classified as
"minority interest" on the condensed consolidated statements of operations.
(4) The calculation of this ratio of earnings to fixed charges reflects the
exclusion of special charges from the income from continuing operations before
provision for income taxes component for the first quarter ended March 31, 1997
and the years ended December 31, 1996 and 1992, respectively.
</FN>
</TABLE>
<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 May
1, 1997 relating to the unaudited condensed consolidated interim financial
statements of Aon Corporation that are included in its Form 10-Q for the quarter
ended March 31, 1997:
Registration Statement
Form Number Purpose
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
S-4 333-21237 Offer to exchange Capital Securities of Aon Capital A
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
May 1, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This statement contains summary financial information extracted from
Condensed Consolidated Statements of Financial Position and Condensed
Consolidated Statements of Operations and is qualifed in its entirety by
reference to such financial information.
</LEGEND>
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<DEBT-HELD-FOR-SALE> 2734
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 711
<MORTGAGE> 25
<REAL-ESTATE> 14
<TOTAL-INVEST> 5061
<CASH> 1270
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 575
<TOTAL-ASSETS> 17317
<POLICY-LOSSES> 1081
<UNEARNED-PREMIUMS> 1980
<POLICY-OTHER> 841
<POLICY-HOLDER-FUNDS> 558
<NOTES-PAYABLE> 964 <F2>
50
6 <F4> <F5>
<COMMON> 171 <F3>
<OTHER-SE> 2519
<TOTAL-LIABILITY-AND-EQUITY> 17317
384
<INVESTMENT-INCOME> 116
<INVESTMENT-GAINS> 2
<OTHER-INCOME> 852 <F6>
<BENEFITS> 205
<UNDERWRITING-AMORTIZATION> 54
<UNDERWRITING-OTHER> 935
<INCOME-PRETAX> 15
<INCOME-TAX> 6
<INCOME-CONTINUING> 9
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1
<EPS-PRIMARY> (0.02)
<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> Common stock at par value; adjusted to reflect three-for-two stock split
effective May 1,1997.
<F4> Preferred stock at par value.
<F5> Does not include Company-obligated Mandatorily Redeemable Preferred Capital
Securities of Subsidiary Trust holding solely to Company's Securities.
<F6> Includes brokerage commissions and fees and other income.
</FN>
</TABLE>
