SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- -
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
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(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
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(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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Number of shares of common stock outstanding:
No. Outstanding
Class as of 9-30-97
----- -------------
$1.00 par value Common 167,708,594
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<CAPTION>
Part 1
Financial Information
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
(millions) As of As of
Assets Sept. 30, 1997 Dec. 31, 1996
-------------- --------------
(Unaudited)
<S> <C> <C>
Investments
Fixed maturities - available for sale $ 3,027.4 $ 2,826.1
Equity securities at fair value
Common stocks 489.1 393.8
Preferred stocks 368.9 485.3
Mortgage loans on real estate 22.2 29.0
Real estate (net of accumulated depreciation) 11.8 17.8
Policy loans 57.9 58.2
Other long-term investments 150.3 136.2
Short-term investments 1,399.0 1,266.3
-------------- --------------
Total investments 5,526.6 5,212.8
Cash 1,404.4 410.1
Receivables
Insurance brokerage and consulting
services 4,511.6 3,565.9
Premiums and other 1,124.6 989.3
Accrued investment income 70.7 69.2
-------------- --------------
Total receivables 5,706.9 4,624.4
Deferred Policy Acquisition Costs 560.2 598.8
Intangible Assets 2,802.7 1,597.7
Property and Equipment at Cost (net of 443.9 323.2
accumulated depreciation)
Assets Held Under Special Contracts 85.3 87.3
Other Assets 1,302.1 868.4
-------------- --------------
Total Assets $ 17,832.1 $ 13,722.7
============== ==============
Liabilities and Equity
Policy Liabilities
Future policy benefits $ 1,083.3 $ 1,079.4
Policy and contract claims 834.4 840.9
Unearned and advance premiums 2,015.1 1,925.2
Other policyholder funds 694.8 514.1
-------------- --------------
Total policy liabilities 4,627.6 4,359.6
General Liabilities
Insurance premiums payable 5,772.6 4,143.7
Commissions and general expenses 1,141.0 776.8
Short-term borrowings 592.6 213.4
Notes payable 646.0 475.1
Debt guarantee of ESOP 33.1 46.1
Liabilities held under special contracts 85.3 87.3
Other liabilities 1,163.4 737.8
-------------- --------------
Total Liabilities 14,061.6 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 Junior
Subordinated Debentures 800.0 --
Stockholders' Equity
Preferred stock - $1 par value 5.5 5.5
Common stock - $1 par value 171.5 114.1
Paid-in additional capital 490.8 475.4
Net unrealized investment gains 223.8 153.1
Net foreign exchange gains/(losses) (57.8) 1.0
Retained earnings 2,364.6 2,356.8
Less - Treasury stock at cost (97.8) (121.5)
Deferred compensation (180.1) (151.5)
-------------- --------------
Total Stockholders' Equity 2,920.5 2,832.9
-------------- --------------
Total Liabilities and Equity $ 17,832.1 $ 13,722.7
============== ==============
<FN>
See the accompanying notes to the conconsolidated financial statements.
</FN>
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<TABLE>
<CAPTION>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(millions except per share data)
Third Quarter Ended Nine Months Ended
------------------------ ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
Brokerage commissions and fees ................................ $ 923.3 $ 454.5 $ 2,650.0 $ 1,368.0
Premiums earned ............................................... 398.2 382.1 1,191.5 1,141.4
Net investment income ......................................... 119.6 92.4 353.0 269.7
Realized investment gains ..................................... 2.7 3.1 5.1 3.1
Other income .................................................. 7.2 12.2 30.2 36.6
---------- ---------- ---------- ----------
Total revenue earned ........................................ 1,451.0 944.3 4,229.8 2,818.8
---------- ---------- ---------- ----------
Benefits and Expenses
Commissions and general expenses .............................. 966.5 537.2 2,778.2 1,591.2
Benefits to policyholders ..................................... 212.7 203.3 633.5 582.1
Interest expense .............................................. 18.7 9.1 49.3 28.4
Amortization of deferred policy acquisition costs ............. 47.0 48.3 158.9 156.4
Amortization of intangible assets ............................. 28.3 18.4 93.0 55.6
Special charges ............................................... -- -- 172.0 30.2
---------- ---------- ---------- ----------
Total benefits and expenses ................................. 1,273.2 816.3 3,884.9 2,443.9
---------- ---------- ---------- ----------
Income from Continuing Operations Before
Income Tax and Minority Interest .............................. 177.8 128.0 344.9 374.9
Provision for income tax .................................... 66.6 44.2 129.3 129.3
---------- ---------- ---------- ----------
Income from Continuing Operations Before
Minority Interest ............................................. $ 111.2 $ 83.8 $ 215.6 $ 245.6
Minority Interest - 8.205% mandatorily redeemable
preferred capital securities .............................. (10.2) -- (29.7) --
---------- ---------- ---------- ----------
Income from Continuing Operations ............................... 101.0 83.8 185.9 245.6
Discontinued Operations:
Income from discontinued operations, net of tax ................. -- -- -- 22.4
Gain on disposal of discontinued operations, net of tax ......... -- -- -- 21.0
---------- ---------- ---------- ----------
Net Income ...................................................... $ 101.0 $ 83.8 $ 185.9 $ 289.0
========== ========== ========== ==========
Net Income Available for Common Stockholders (1) ................ $ 97.6 $ 78.8 $ 175.8 $ 273.8
========== ========== ========== ==========
Per Share: (2)
Income from continuing operations (1) ........................... $ 0.57 $ 0.48 $ 1.03 $ 1.40
Income from discontinued operations ............................. -- -- -- 0.13
Gain on disposal of discontinued operations ..................... -- -- -- 0.13
========== ========== ========== ==========
Net income (1) .................................................. $ 0.57 $ 0.48 $ 1.03 $ 1.66
========== ========== ========== ==========
Cash dividends paid on common stock (2) ......................... $ 0.26 $ 0.24 $ 0.76 $ 0.71
========== ========== ========== ==========
Average common and common equivalent shares outstanding (2) ..... 170.8 164.1 170.0 164.6
========== ========== ========== ==========
<FN>
(1) Includes the effect of $3.4 million and $10.1 million of dividends incurred
on the 8% and redeemable preferred stock and $5.0 million and $15.2 million
of dividends incurred on the 8%, 6.25% and redeemable preferred stock in
third quarter and nine months ended September 30, 1997 and 1996,
respectively.
(2) Reflects the three-for-two stock split on May 14, 1997.
See the accompanying notes to the condensed consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
---------------------------
Sept. 30, Sept. 30,
(millions) 1997 1996
------------ ------------
<S> <C> <C>
Cash Provided by Operating Activities ....................................... $ 472.0 $ 375.6
------------ ------------
Cash Flows from Investing Activities:
Sale (purchase) of short term investments-net ............................ 190.0 (307.8)
Sale or maturity of fixed maturities
Available for sale - Maturities ........................................ 88.0 105.4
Calls and prepayments ............................. 108.2 145.2
Sales ............................................. 1,277.0 569.4
Sale of equity investments .............................................. 1,257.6 430.8
Sale or maturities of other investments .................................. 21.6 40.7
Purchase of fixed maturities - available for sale ........................ (1,661.6) (1,276.6)
Purchase of equity investments ........................................... (1,139.5) (469.4)
Purchase of other investments ............................................ (57.6) (160.8)
Disposition (acquisition) of subsidiaries ................................ (1,344.7) 1,253.2
Acquired fiduciary funds from Alexander & Alexander Services, Inc ........ 734.0 -
Property and equipment and other ......................................... (40.4) (56.9)
------------ ------------
Cash Provided (Used) by Investing Activities ...... (567.4) 273.2
------------ ------------
Cash Flows from Financing Activities:
Treasury stock transactions - net ........................................ 23.7 (35.9)
Issuance (repayment) of short-term borrowings - net ...................... 370.0 (293.1)
Sale of mandatorily redeemable preferred capital securities .............. 800.0 -
Repayment of long-term debt .............................................. (72.4) (4.1)
Interest sensitive life, annuity and investment contract deposits ........ 167.7 371.0
Interest sensitive life, annuity and investment contract withdrawals ..... (18.3) (432.1)
Retirement of preferred stock ............................................ - (14.2)
Cash dividends to stockholders ........................................... (135.5) (129.5)
------------ ------------
Cash Provided (Used) by Financing Activities ...... 1,135.2 (537.9)
------------ ------------
Effect of Exchange Rate Changes on Cash ..................................... (45.5) 0.2
Increase in Cash ............................................................ 994.3 111.1
Cash at Beginning of Period ................................................. 410.1 115.3
------------ ------------
Cash at End of Period ....................................................... $ 1,404.4 $ 226.4
============ ============
<FN>
See the accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
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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 on Aon's $1.00 par value common stock, which was paid in
the form of a stock dividend, of approximately 57 million shares on May
14, 1997. The stock split has not been retroactively reflected in the
December 31, 1996 condensed statement of consolidated financial
position. The effect of the stock split was to increase common stock
and decrease 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 restated to reflect the stock split.
3. Statements of Financial Accounting Standards (SFAS)
---------------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130 (Reporting Comprehensive Income) and Statement No.
131 (Disclosures about Segments of an Enterprise and Related
Information). Statement No. 130 establishes standards for reporting and
classifying components of comprehensive income in the financial
statements and requires that the accumulated balance of other
comprehensive income be displayed separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. Statement No. 131 establishes standards for
providing disclosures related to products and services, geographic
areas, and major customers. Aon will adopt these statements in its 1998
financial statements as required. Implementation of these statements is
not expected to have a material effect on Aon's financial statements.
In February 1997, the 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 basic 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 will adopt
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 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.
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4. Capital Stock
-------------
During nine months 1997, Aon reissued 791,000 shares of common stock
from treasury for employee benefit plans. Aon purchased 60,300 shares
of its common stock at a total cost of $2.6 million during nine months
1997. In addition, Aon reissued 243,100 shares of common stock from
treasury in connection with business combinations. There were 3.8
million shares of common stock held in treasury at September 30, 1997.
5. Capital Securities
------------------
In January 1997, Aon created Aon Capital A, a statutory business trust,
for the purpose of issuing mandatorily redeemable preferred capital
securities (capital securities). The sole asset of Aon Capital A is
$824 million aggregate principal amount of Aon's 8.205% Junior
Subordinated Deferrable Interest Debentures due January 1, 2027.
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 Junior Subordinated Debentures." The
after-tax interest incurred on the capital securities is reported as
minority interest on the condensed consolidated statements of
operations.
6. Business Combinations
---------------------
Third quarter 1997 operating results were impacted by the acquisition
of The Minet Group (Minet) by certain insurance brokerage subsidiaries
of Aon. This acquisition was accounted for by the purchase method.
The effect of the acquisition was not material to Aon's consolidated
financial statements.
In early 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 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,
primarily relating to severance and related costs, and the
consolidation of real estate space. Preliminary intangible assets of
approximately $1.2 billion were created by the acquisition.
If the A&A acquisition had been consummated on January 1, 1996, the
nine months 1996 unaudited proforma consolidated results of operations
would have resulted in total revenues of approximately $3.8 billion,
income from continuing operations of $258 million ($1.29 per share) and
net income of $301 million ($1.55 per share).
- 6 -
<PAGE>
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
the operations of Aon. In addition, the effect of special charges
related to the A&A acquisition are not reflected in the proforma 1996
results above (see note 7).
7. Special Charges
---------------
In second quarter 1997, Aon recorded pretax special charges of $27
million ($16.9 million after-tax or $.10 per share) to recognize
investment losses incurred at A&A before Aon acquired A&A. Aon
discovered in the second quarter that A&A's investment portfolio
contained certain highly volatile securities with previously
unrecognized losses. These charges were reflected as a separate
component of total benefits and expenses in the condensed consolidated
statements of operations.
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. These
charges were reflected as a separate component of total benefits and
expenses in the condensed consolidated statements of operations. In
connection with the first quarter 1997 special charges, Aon had
approximately $90 million reported in the commissions and general
expenses liability at September 30, 1997, representing amounts related
to the special charges that have not yet been paid.Pretax restructuring
charges include approximately $105 million associated with real
estate activities including the closure, abandonment and downsizing
of various offices around the world, and other consolidation costs. The
restructuring charges related to consolidating real estate space are
expected to be paid out over several years. Special charges for
severance and related costs were approximately $40 million.Terminations
resulting from workforce reductions are planned to take place within
one year from the date of acquisition.
Additional terminations resulting from workforce reductions are planned
to take place within one year from the date of acquisition. Severance
and related costs associated with these workforce reductions were
included as part of the preliminary purchase accounting liabilities.
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 $40 million reported in
the commissions and general expenses liability at September 30, 1997
representing amounts related to the special charges that have not yet
been paid.
8. A&A Discontinued Operations
---------------------------
A&A discontinued its insurance underwriting operations in 1985 and sold
Sphere Drake Insurance Group (Sphere Drake) in 1987. In connection with
the sale of Sphere Drake, A&A provided indemnities to the purchaser
for various potential liabilities, including provisions covering
future losses on certain insurance pooling arrangements between
Sphere Drake and The Orion Insurance Company plc (Orion), a UK based
insurance company placed in provisional liquidation in 1994, and future
losses pursuant to a stop-loss reinsurance contract between Sphere
Drake and Lloyd's Syndicate 701. The Sphere Drake sales agreement also
states that A&A assumes any losses in respect of the actions or
omissions by various underwriting agencies including Swann & Everett
Underwriting Agency, previously managed by a subsidiary of A&A.
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<PAGE>
The net liabilities of discontinued operations shown in the
accompanying condensed consolidated statements of financial position
include insurance liabilities associated with the above indemnities,
liabilities of its insurance underwriting subsidiaries that are
currently in run-off and its indemnification of certain liabilities
relating to subsidiaries sold. Excluded from these liabilities is A&A
long-term debt related to two finite risk reinsurance contracts which
are associated with the financing of discontinued operations. Included
in Aon's September 30, 1997 condensed consolidated statement of
financial position and condensed consolidated statement of operations
is long-term debt of $40 million and related interest expense of $3.3
million, respectively. The net liabilities for discontinued operations
as of September 30, 1997 are composed of the following:
- --------------------------------------------------------------------------------
(millions)
- --------------------------------------------------------------------------------
Assets:
Insurance liabilities recoverable under finite risk contracts $ 147
Reinsurance recoverables 59
Cash and investments 32
Other 7
-------
Total assets $ 245
-------
Liabilities:
Insurance liabilities $ 273
Other 16
-------
Total liabilities 289
-------
Total net liabilities of discontinued operations classified as
other liabilities $ 44
- --------------------------------------------------------------------------------
The insurance liabilities represent estimates of future claims expected
to be made under occurrence-based insurance policies and reinsurance
business covering primarily asbestos, 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, and scientific standards for measuring the adequacy
of site clean-up are 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 and reinsurance liabilities, consisting
principally of incurred but not reported losses. As noted above, 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.
While the insurance liabilities set forth above represent A&A's best
estimate of the probable liabilities within a range of independent
actuarial estimates of reasonably probable loss amounts, there is no
assurance that further adverse developments may not occur due to
the nature of the information available to A&A, variables inherent in
the estimation processes, and other matters described above. Based
on independent actuarial estimates of a range of reasonably possible
loss amounts, liabilities could exceed recorded amounts, subject to
offset in the event of such adverse development by way of amounts
recoverable under the finite risk contracts referenced above. 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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9. Contingencies
-------------
A&A Contingencies
-----------------
A certain pending claim asserted against 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 sought compensatory
and punitive damages, as well as treble damages under RICO totaling $36
million. The defendants counterclaimed against certain of the
plaintiffs for contribution. As part of the Lloyd's of London
Reconstruction and Renewal Plan ("R&R Plan"), most of A&A's exposure
with respect to this claim has been extinguished or assigned to the
reinsurance entity (Equitas) created to effectuate the R&R Plan. The
remainder of the exposure relates to one insurance company which may
shortly become a participant in the R&R Plan. Notwithstanding the R&R
Plan, the management of Aon believes that A&A has valid defenses to all
of the claims that have been made with respect to these activities and
should the pending action continue because the one insurance company
does not participate in the R&R Plan, A&A will continue to vigorously
defend the 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
and a decision is pending from the appellate court.
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.
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
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<PAGE>
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 and exposures 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.
Other 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.
10. Derivatives and Market Risk Disclosure
--------------------------------------
In first quarter 1997, the Securities and Exchange Commission (SEC)
issued new rules related to disclosure concerning derivative accounting
policy and market risk outside the financial statements. Aon has
adopted the additional accounting policy disclosures as required, based
on a review of current derivatives and related accounting policies as
set forth in note 11 in the Annual Report for the year ended December
31, 1996. The following additional disclosure references all material
derivative activity that Aon is currently engaged in.
In most cases, derivatives hedging the invested asset portfolio are
hedging the portfolio as a whole. The sale, maturity or extinguishment
of a hedged portfolio item would not affect the accounting method for
the derivative. The only time the accounting relating to the
termination of a hedge would differ from the company's regular
accounting practices would be if the hedge ceases to meet the criteria
for hedge accounting.
The following criteria must be met in order for a derivative to qualify
for hedge accounting. The derivative must be designated as a hedge at
inception and be consistent with Aon's policy for risk management. The
hedged portfolio item must have a reliably measurable fair value and
changes in fair value must have the potential to affect future
earnings. Changes in the fair value of the derivative must be expected
to substantially offset changes in the fair value of the designated
portfolio item attributable to the risk being hedged.
If the criteria for hedge accounting is not met, the resulting gain or
loss from the termination of the hedge would be realized through the
statement of operations in the current period.
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Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR THIRD QUARTER AND NINE MONTHS 1997
Consolidated Results
- --------------------
Brokerage commissions and fees increased $468.8 million or 103.1% and $1.3
billion or 93.7% in third quarter and nine months 1997, respectively, reflecting
primarily business combination activity related to the acquisitions of A&A in
first quarter 1997, Bain Hogg Group plc (Bain Hogg) in fourth quarter 1996 and,
to a lesser extent, Minet and certain other 1997 brokerage acquisitions.
Premiums earned increased $16.1 million or 4.2% and $50.1 million or 4.4% in
third quarter and nine months 1997, respectively, compared with the same periods
last year. Extended warranty premiums earned increased $28.3 million or 29.6% in
the quarter reflecting continued growth in both the mechanical and the appliance
and electronic lines. There was also continued modest growth in direct sales
business. The planned runoff of North American auto credit business partially
offset this growth in premiums earned.
Net investment income increased $27.2 million or 29.4% and $83.3 million or
30.9% in the third quarter and nine months 1997, respectively, when compared to
prior year. Investment income growth in nine months was primarily related to
brokerage acquisitions, and to income received on certain private equity
investment holdings. Net investment income from insurance brokerage and
consulting operations, primarily relating to fiduciary funds, increased to $43
million in third quarter 1997 from $17 million in 1996, and to $120 million in
nine months 1997 from $51 million in 1996, primarily due to brokerage
acquisition activity.
Total revenue increased $506.7 million or 53.7% and $1.4 billion or 50.1% in the
third quarter and nine months 1997, respectively, largely attributable to
acquisition-related growth in brokerage commissions and fees.Realized investment
gains were $5.1 million and $3.1 million in nine months 1997 and 1996,
respectively. Nine months 1997 revenue, excluding realized investment gains,
increased 50% when compared to prior year.
Benefits to policyholders increased 4.6% or $9.4 million and 8.8% or $51.4
million in third quarter and nine months 1997, respectively, reflecting a higher
volume of new extended warranty business. This increase was partially offset by
lower claims paid on auto credit business that has been in runoff since second
quarter 1996. It is anticipated that this business will continue to runoff as
planned.
In second quarter 1997, Aon recorded pretax special charges of $27 million
($16.9 million after-tax) to recognize investment losses incurred at A&A before
Aon acquired A&A. At Aon's acquisition date, the carrying value of certain
securities in A&A's portfolio was overstated by the previously unrecognized
investment losses.
In first quarter 1997, Aon recorded pretax special charges of $145 million
($90.6 million after-tax) which were 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. Restructuring charges included approximately
$105 million associated with real estate activities including the closure,
abandonment and downsizing of various offices around the world, and other
consolidation costs. The restructuring charges related to consolidating real
estate space are expected to be
- 11 -
<PAGE>
paid out over several years. Special charges for severance and related costs
were approximately $40 million. Terminations resulting from workforce reductions
are planned to take place within one year from the date of acquisition.
Additional terminations resulting from workforce reductions are planned to take
place within one year from the date of acquisition. Severance and related
costs associated with these workforce reductions were included as part of the
preliminary purchase accounting liabilities (see note 6).
In nine months 1996, Aon reported pretax special charges of $30.2 million ($19.5
million after-tax) related to early retirement programs. Both the 1997 and 1996
special charges were reflected as a separate component of commissions and
general expenses in the condensed consolidated statements of operations.
Total benefits and expenses increased $456.9 million or 56% and $1.4 billion or
59% in third quarter and nine months 1997, respectively, when compared to prior
year. The increase in the nine months expenses reflects the inclusion of 1997
and 1996 pretax special charges. Total benefits and expenses, excluding the 1997
and 1996 special charges, increased 53.8% for the nine months 1997, primarily
reflecting brokerage acquisition activity. Income before income tax increased
$49.8 million or 38.9% in third quarter 1997 and decreased $30 million or 8% in
the nine months 1997, respectively, when compared to prior year. The decrease in
nine months pretax earnings reflects the inclusion of special charges and is
offset, in part, by growth in the insurance brokerage and consulting segment
following the A&A, Bain Hogg, Minet and certain other brokerage acquisitions.
Excluding special charges, income before income tax increased 28% when compared
to nine months 1996.
Major Lines of Business
- -----------------------
General
- -------
For purposes of the following line of business discussions, comparisons against
last year's results exclude special charges. Cost savings at similar business
segments at Aon, A&A and Bain Hogg began to be realized starting in second
quarter 1997. Management anticipates that the full benefit of cost savings on
operations will be achieved starting in 1998. In addition, references to income
before income tax exclude minority interest related to the capital securities.
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. In addition, Minet and certain
other brokerage acquisitions were completed in third quarter 1997. As a result,
revenue and income before income tax results between third quarter and nine
months 1997 and 1996 are not comparable.
"Insurance and other services" (retail, reinsurance and wholesale brokerage)
revenue increased $428 million or 105.3% in the third quarter 1997 and $1,153.7
million or 95.3% for nine months 1997 when compared with the same periods last
year, largely due to acquisition activity. Insurance and other services
continued to reflect highly competitive property and casualty pricing in the
domestic market.
- 12 -
<PAGE>
"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 $67.3 million or
103.7% and $198.1 million or 95.5% for the third quarter and nine months 1997,
respectively, 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 $495.3 million or 105.1% and $1,351.7 million or 95.3% in the third
quarter and nine months 1997, respectively. Income before income tax increased
$67.2 million or 120.6% and $160.8 million or 81.2% when compared to third
quarter and nine months 1996, respectively. The brokerage segment continues to
be impacted by a soft property and casualty market, particularly in the
reinsurance brokerage business. Acquisitions accounted for the vast majority of
the above mentioned revenue growth in the nine months. However, organic revenue
growth represented approximately 3-4%. Excluding the impact of acquisitions,
revenue and pretax income results related to brokerage core businesses
demonstrated modest growth in a very competitive environment.
U.S./International Results
- --------------------------
Third quarter U.S. insurance brokerage and consulting services revenue
represents 55% of the worldwide total and U.S. income before income tax
represents 58% of the worldwide total. International brokerage revenue of $435.3
million increased 207.2% for the third quarter, primarily reflecting the A&A and
Bain Hogg acquisitions. International brokerage income before income tax
increased for the third quarter reflecting the above mentioned acquisition
activity. International brokerage 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 primarily provides direct sales life
and accident and health products, and extended warranty products to individuals.
Revenue increased $15.9 million or 3.6% and $54.9 million or 4.2% for the third
quarter and nine months 1997, respectively, when compared to prior year
primarily due to growth in the worldwide extended warranty lines. Direct sales
business also continued to grow modestly.
Pretax income from insurance underwriting increased $1.9 million or 2.7% and $12
million or 6.1% in the third quarter and nine months 1997, respectively, when
compared with last year. Overall, benefit and expense margins in third 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. Extended
warranty profits suffered slightly due to an increase in loss experience on a
closed block of mechanical warranty business. Certain specialty liability
programs and auto credit business continued to be profitably run off.
U.S./International Results
- --------------------------
Third quarter U.S. insurance underwriting revenue represents 70% of the
worldwide total and U.S. income before income tax represents 69% of the
worldwide total. U.S. insurance underwriting income before income tax increased
2.3% in the quarter 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 $137.1 million
increased 8.9% in the quarter principally due to growth in premiums earned in
both the direct sales and extended
- 13 -
<PAGE>
warranty lines. International pretax income increased 2.8% in the quarter,
primarily due to improved health product sales.
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.
Alternative uses of corporate capital contributed to a decrease in revenue of
15.1% or $4.5 million in the third quarter. Higher levels of investment
income received on certain private equity investment holdings contributed to an
increase of $4.4 million or 5.7% for nine months 1997. Pretax realized
investment gains for the third quarter and nine months 1997 and 1996 were $2.7
million and $3.1 million and $5.1 million and $3.1 million, respectively. Income
before income tax, excluding realized investment gains, decreased $18.9 million
in the quarter and decreased $63 million in nine months over the same periods
last year. Contributing to the decrease in the quarter were financing costs and
goodwill amortization related to acquisitions, in particular A&A and Bain Hogg,
and additional interest expenses on short-term debt related to acquisition
financing.
Discontinued Operations
- -----------------------
Discontinued operations in nine months 1996 were composed principally of U.S.
based capital accumulation products and direct response products. 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 sales of LOV and UFLIC resulted in a
$21 million after-tax gain on disposal which was recorded in second quarter
1996.
Following its acquisition of A&A in first quarter 1997, net liabilities of
certain A&A group companies related to acquired insurance underwriting
subsidiaries that are currently in runoff, and indemnification of certain
liabilities relating to subsidiaries sold by A&A, represent discontinued
operations (see note 8 to the condensed consolidated financial statements). Aon
believes that these discontinued operations are adequately reserved for. The
net liability is included as a component of other liabilities on the
statement of financial position.
- 14 -
<PAGE>
<TABLE>
<CAPTION>
Aon CORPORATION
MAJOR LINES OF BUSINESS
Third Quarter Ended Nine Months Ended
------------------------- --------------------------
Sept. 30, Percent Sept. 30, Percent
(millions) 1997 Change 1997 Change
------------ ----------- ------------ ------------
Revenue
<S> <C> <C> <C> <C>
Insurance brokerage and consulting services . $ 966.7 105.1% $ 2,770.4 95.3%
Insurance underwriting ...................... 458.9 3.6 1,378.0 4.2
Corporate and other ......................... 25.4 (15.1) 81.4 5.7
------------ ----------- ------------ ------------
Total revenue ............................ $ 1,451.0 53.7% $ 4,229.8 50.1%
============ =========== ============ ============
Income Before Income Tax
Insurance brokerage and consulting services . $ 122.9 120.6% $ 358.9 81.2%
Special charges .......................... -- -- (145.0) N/A
------------ ----------- ------------ ------------
Including special charges ................ 122.9 120.6 213.9 21.7
Insurance underwriting ...................... 72.3 2.7 207.6 6.1
Special charges .......................... -- -- -- --
------------ ----------- ------------ ------------
Including special charges ................ 72.3 2.7 207.6 9.7
Corporate and other ......................... (17.4) N/A (49.6) N/A
Special charges .......................... -- -- (27.0) N/A
------------ ----------- ------------ ------------
Including special charges ................ (17.4) N/A (76.6) N/A
------------ ----------- ------------ ------------
Total income before income tax............ $ 177.8 38.9% $ 344.9 (8.0%)
============ =========== ============ ============
</TABLE>
- 15 -
<PAGE>
<TABLE>
<CAPTION>
Aon CORPORATION
REVENUE BY MAJOR PRODUCT LINE
Third Quarter Ended Nine Months Ended
---------------------------- ----------------------------
Sept. 30, Percent Sept. 30, Percent
(millions) 1997 Change 1997 Change
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Insurance brokerage and consulting services
Insurance and other services ................ $ 834.5 105.3% $ 2,364.9 95.2%
Consulting .................................. 132.2 103.7 405.5 95.5
------------ ------------ ------------ ------------
Total revenue ............................ $ 966.7 105.1% $ 2,770.4 95.3%
============ ============ ============ ============
Insurance underwriting
Direct sales - life, accident and health .... $ 258.5 1.1% $ 772.9 0.8%
Extended warranty ........................... 142.0 23.2 419.2 23.4
Other ....................................... 58.4 (19.0) 185.9 (14.4)
------------ ------------ ------------ ------------
Total revenue ............................ $ 458.9 3.6% $ 1,378.0 4.2%
============ ============ ============ ============
Corporate and other
Investment income on capital and other ...... $ 22.7 (15.3)% $ 76.3 3.2%
Realized investment gains ................... 2.7 (12.9) 5.1 64.5
------------ ------------ ------------ ------------
Total revenue ............................ $ 25.4 (15.1)% $ 81.4 5.7%
============ ============ ============ ============
</TABLE>
- 16 -
<PAGE>
NET INCOME FOR THIRD QUARTER AND NINE MONTHS 1997
References to share data reflect the three-for-two stock split on May 14, 1997.
Third quarter net income was $101 million ($0.57 per share) compared to $83.8
million ($0.48 per share) in 1996. Net income for nine months was $185.9 million
($1.03 per share) compared to $289 million ($1.66 per share). Included in nine
months 1997 and 1996 net income per share are after-tax realized investment
gains of $0.02 per share and $0.01 per share, respectively. The decrease in nine
months 1997 net income and the related per share amount is primarily influenced
by: (1) after-tax 1997 special charges of $107.5 million ($0.64 per share)
compared to after-tax 1996 special charges of $19.5 million ($0.12 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); (3) operating results from 1996 discontinued operations due to the
completion of the sales of UFLIC and LOV in second quarter 1996 ($0.13 per
share); and (4) after-tax gain on disposal of discontinued operations in 1996
($0.13 per share).
Operating income from continuing operations before special charges, and realized
investment gains was $99.2 million ($0.56 per share) and $290.2 million ($1.65
per share) in the third quarter and nine months 1997, respectively, compared to
$81.8 million ($0.47 per share) and $263.3 million ($1.51 per share) in the
third quarter and nine months 1996, respectively.
The effective tax rate on continuing operations for operating income, which
excludes after-tax realized investment gains, was 37.5%, up from 34.5% for nine
months 1997 and 1996, respectively, due to changes in business mix. Realized
gains were taxed at 37.5% and 36% for nine months 1997 and 1996, respectively.
Average shares outstanding for third quarter 1997 increased 4.1% 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 NINE MONTHS 1997
General
- -------
Consistent with financial statement presentation, the following cash flow
discussion reflects the acquisition of Minet in third quarter 1997, 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 nine months 1997 are not comparable to the same period in 1996.
Cash flows from operating activities in nine months 1997 were $472.0 million, an
increase of $96.4 million from nine months 1996. This increase primarily
reflects the acquisitions noted above, the timing of the settlement of insurance
segment receivables and payables, and the payments on special charges and
valuation adjustments relating to the acquisitions of A&A and Bain Hogg.
Investing activities used cash of $567.4 million which was made available from
financing and operating activities. Cash used for acquisition activity during
nine months 1997 was $1.3 billion, primarily reflecting the A&A acquisition.
- 17 -
<PAGE>
Cash totaling $1,135.2 million was provided during nine months 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 $125.4
million on common stock, $8.2 million on 8% cumulative perpetual preferred
stock, and $1.9 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 $3 billion, Aon's total fixed maturity
portfolio is invested primarily in investment grade holdings (96%) and has a
fair value which is 105.1% of amortized cost.
Total assets increased $4.1 billion to $17.8 billion since year-end 1996,
primarily due to the acquisition of A&A. Invested assets at September 30, 1997
increased $313.8 million from year-end levels, primarily due to higher levels of
short-term investments. The amortized cost and fair value of less than
investment grade fixed maturity investments, at September 30, 1997, were $107.5
million and $115.8 million, respectively. The carrying value of non-income
producing investments in Aon's portfolio at September 30, 1997 was $69.3
million, or 1.2% of total invested assets.
Aon uses derivative financial instruments (primarily financial futures, swaps,
options and foreign exchange forwards) to: (a) hedge foreign currency
transaction risk and other business risks; (b) hedge asset price risk associated
with financial instruments whose change in value is reported under SFAS 115; and
(c) manage its overall asset/liability duration match. As of September 30, 1997,
Aon had open contracts which had unrealized gains of approximately $1.6
million.
Insurance brokerage and consulting services receivables increased $946 million
and insurance premiums payable increased $1.6 billion in nine months 1997 when
compared to year-end 1996, primarily reflecting the A&A acquisition. When
compared to 1996, intangible assets increased approximately $1.2 billion due
to the A&A acquisition (see note 6).
In first quarter 1997, Aon completed the acquisition of 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 Junior Subordinated
Debentures." Short-term borrowings increased at the end of third quarter 1997 by
$379.2 million when compared to year-end 1996, primarily due to the issuance of
commercial paper for acquisition activity. Notes payable increased at the end
of third quarter 1997 by $170.9 million when compared to year-end 1996,
primarily due to acquisition financing. Included in notes payable at September
30, 1997 is approximately $25 million which represents the principal amount of
notes due within one year.
- 18 -
<PAGE>
At September 30, 1997, 5,446,000 shares of 8% Cumulative Perpetual Preferred
Stock (8% preferred stock) were outstanding. On November 3, 1997, Aon exercised
its option to redeem all of the remaining outstanding shares of its 8% preferred
stock at a redemption price of $25.00 per share plus accrued dividends. The cost
of repurchasing these shares was approximately $136 million, financed primarily
by short-term borrowings.
Stockholders' equity increased $87.6 million in nine months 1997 to $16.60 per
share, an increase of $0.39 per share since year-end 1996. In addition to net
income, which is net of $107.5 million of after-tax special charges, the
principal factor influencing this increase was net unrealized investment gains
of $70.7 million. Partially offsetting this increase were net foreign exchange
losses of $58.8 million and dividends to stockholders of $168.9 million.
Included in the reduction for dividends is an accrual for the fourth quarter
1997 common stock dividend.
Review by Independent Auditors
The condensed consolidated financial statements at September 30, 1997, and for
the third quarter and nine months then ended have been reviewed, prior to
filing, by Ernst & Young LLP, Aon's independent auditors, and their report is
included herein.
- 19 -
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Aon Corporation
We have reviewed the accompanying condensed consolidated statement of financial
position of Aon Corporation as of September 30, 1997, and the related condensed
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 1997 and 1996, and the condensed consolidated statements of
cash flows for the nine-month periods ended September 30, 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.
ERNST & YOUNG LLP
Chicago, Illinois
November 4, 1997
- 20 -
<PAGE>
PART II
OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits filed with this report are listed on the
--------
attached Exhibit Index.
(b) Reports on Form 8-K - No Current Reports on Form 8-K were filed for
--------------------
the quarter ended September 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aon Corporation
(Registrant)
November 14, 1997 /s/ Harvey N. Medvin
--------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER
(Principal Financial and Accounting Officer)
- 21 -
<PAGE>
Aon CORPORATION
---------------
EXHIBIT INDEX
-------------
Exhibit Number
In Regulation S-K
Page
Item 601 Exhibit Table No.
- ---------------------- ---
(11) Statement regarding Computation of Per Share Earnings.
(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
- 22 -
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
Aon Corporation and Subsidiaries
CONSOLIDATED NET INCOME PER SHARE COMPUTATION
(millions except per share data)
Third Quarter Ended Nine Months Ended
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE (1)
Net income ........................................... $ 101.0 $ 83.8 $ 185.9 $ 289.0
Preferred stock dividends ............................ 3.4 5.0 10.1 15.2
--------- --------- --------- ---------
Net income available for common stockholders ........ $ 97.6 $ 78.8 $ 175.8 $ 273.8
========= ========= ========= =========
Average common shares issued ......................... 171.5 167.3 171.5 167.3
Net effect of treasury stock activity and dilutive stock
compensation plans based on the treasury stock method (0.7) (3.2) (1.5) (2.7)
--------- --------- --------- ---------
Average common and common equivalent shares
outstanding ..................................... 170.8 164.1 170.0 164.6
--------- --------- --------- ---------
Net income per share ................................... $ 0.57 $ 0.48 $ 1.03 $ 1.66
========= ========= ========= =========
<FN>
(1) Adjusted to reflect the three-for-two stock split on May 14, 1997
</FN>
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12(a)
Aon Corporation and Consolidated Subsidiaries
Combined With Unconsolidated Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
Nine Months
Ended Sept. 30, Years Ended December 31,
----------------- -----------------------------------------------
(millions except ratios) 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) $ 344.9 $ 374.9 $ 445.6 $ 458.0 $ 397.0 $ 331.6 $ 179.1
Add back fixed charges:
Interest on indebtedness 49.3 32.9 44.7 55.5 46.4 42.3 41.9
Interest on ESOP 2.8 3.5 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor 44.2 20.0 28.6 21.4 28.7 26.1 19.2
------- ------- ------- ------- ------- ------- -------
Income as adjusted $ 441.2 $ 431.3 $ 523.2 $ 540.2 $ 478.0 $ 406.5 $ 247.1
======= ======= ======= ======= ======= ======= =======
Fixed charges:
Interest on indebtedness $ 49.3 $ 32.9 $ 44.7 $ 55.5 $ 46.4 $ 42.3 $ 41.9
Interest on ESOP 2.8 3.5 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor 44.2 20.0 28.6 21.4 28.7 26.1 19.2
------- ------- ------- ------- ------- ------- -------
Total fixed charges $ 96.3 $ 56.4 $ 77.6 $ 82.2 $ 81.0 $ 74.9 $ 68.0
======= ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges 4.6 7.6 6.7 6.6 5.9 5.4 3.6
======= ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges (3) 6.4 8.2 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 $172 million and $30.2
million for nine months ended September 30, 1997 and 1996, respectively,
and $90.5 million and $86.5 million in 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 the income from continuing operations
before provision for income taxes component for the nine months ended
September 30, 1997 and 1996, respectively, and the years ended December 31,
1996 and 1992, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12(b)
Aon Corporation and Consolidated Subsidiaries
Combined With Unconsolidated Subsidiaries
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
Nine Months
Ended Sept. 30, Years Ended December 31,
----------------- -----------------------------------------------
(millions except ratios) 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) $ 344.9 $ 374.9 $ 445.6 $ 458.0 $ 397.0 $ 331.6 $ 179.1
Add back fixed charges:
Interest on indebtedness 49.3 32.9 44.7 55.5 46.4 42.3 41.9
Interest on ESOP 2.8 3.5 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor 44.2 20.0 28.6 21.4 28.7 26.1 19.2
------- ------- ------- ------- ------- ------- -------
Income as adjusted $ 441.2 $ 431.3 $ 523.2 $ 540.2 $ 478.0 $ 406.5 $ 247.1
======= ======= ======= ======= ======= ======= =======
Fixed charges and preferred stock dividends:
Interest on indebtedness $ 49.3 $ 32.9 $ 44.7 $ 55.5 $ 46.4 $ 42.3 $ 41.9
Preferred stock dividends 63.6 23.2 28.7 37.5 48.4 47.5 20.3
------- ------- ------- ------- ------- ------- -------
Interest and dividends 112.9 56.1 73.4 93.0 94.8 89.8 62.2
Interest on ESOP 2.8 3.5 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor 44.2 20.0 28.6 21.4 28.7 26.1 19.2
------- ------- ------- ------- ------- ------- -------
Total fixed charges and preferred
stock dividends $ 159.9 $ 79.6 $ 106.3 $ 119.7 $ 129.4 $ 122.4 $ 88.3
======= ======= ======= ======= ======= ======= =======
Ratio of earnings to combined fixed
charges and preferred stock dividends (3) 2.8 5.4 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 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 $172 million and $30.2
million for nine months ended September 30, 1997 and 1996, respectively,
and $90.5 million and $86.5 million in the years ended December 31, 1996
and 1992, respectively.
(3) Included in total fixed charges and preferred stock dividends for the nine
months ended September 30, 1997 are $47.6 million of pretax distributions
on the 8.205% trust preferred capital 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 nine months ended
September 30, 1997 and 1996, respectively, and the years ended December 31,
1996 and 1992, respectively.
</FN>
</TABLE>
Exhibit 15
Board of Directors and Stockholders
Aon Corporation
We are aware of the incorporation by reference in the Registration Statements of
Aon Corporation ("Aon") described in the following table of our report dated
November 4, 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 September 30, 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.
ERNST & YOUNG LLP
Chicago, Illinois
November 4, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
Condensed Consolidated Statements of Financial Position and Condensed
Consolidated Statements of Income and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 3,027
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 858
<MORTGAGE> 22
<REAL-ESTATE> 12
<TOTAL-INVEST> 5,527
<CASH> 1,404
<RECOVER-REINSURE> 0 <F1>
<DEFERRED-ACQUISITION> 560
<TOTAL-ASSETS> 17,832
<POLICY-LOSSES> 1,083
<UNEARNED-PREMIUMS> 2,015
<POLICY-OTHER> 834
<POLICY-HOLDER-FUNDS> 695
<NOTES-PAYABLE> 1,272 <F2>
50
6 <F4> <F5>
<COMMON> 171 <F3>
<OTHER-SE> 2,744
<TOTAL-LIABILITY-AND-EQUITY> 17,832
1,192
<INVESTMENT-INCOME> 353
<INVESTMENT-GAINS> 5
<OTHER-INCOME> 2,680 <F6>
<BENEFITS> 634
<UNDERWRITING-AMORTIZATION> 159
<UNDERWRITING-OTHER> 2,921
<INCOME-PRETAX> 345
<INCOME-TAX> 129
<INCOME-CONTINUING> 186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 186
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 0.00
<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 on May 14, 1997.
<F4> Preferred stock at par value.
<F5> Does not incude Company-obligated Mandatorily Redeemable Preferred
Capital Securities of Subsidiary Trust holding solely to Company's
Junior Subordinated Debentures.
<F6> Includes brokerage commissions and fees and other income.
</FN>
</TABLE>
