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 JUNE 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
-------- ----------
(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 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 6-30-97
----- -------------
$1.00 par value Common 167,213,341
(Adjusted to reflect a three-for-two stock
split payable May 14, 1997 to stock
holders of record on May 1, 1997)
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<TABLE>
<CAPTION>
Part 1
Financial Information
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
(millions) As of As of
Assets June 30, 1997 Dec. 31, 1996
------------------- -------------------
(Unaudited)
<S> <C> <C>
Investments
Fixed maturities - available for sale $ 2,903.2 $ 2,826.1
Equity securities at fair value
Common stocks 435.1 393.8
Preferred stocks 378.8 485.3
Mortgage loans on real estate 24.1 29.0
Real estate (net of accumulated depreciation) 12.0 17.8
Policy loans 58.2 58.2
Other long-term investments 150.7 136.2
Short-term investments 1,189.0 1,266.3
------------------- -------------------
Total investments 5,151.1 5,212.8
Cash 1,331.6 410.1
Receivables
Insurance brokerage and consulting
services 4,564.3 3,565.9
Premiums and other 1,214.2 989.3
Accrued investment income 67.2 69.2
------------------- -------------------
Total receivables 5,845.7 4,624.4
Deferred Policy Acquisition Costs 570.0 598.8
Cost of Insurance and Renewal Rights Purchased 531.9 537.5
Excess of Cost over Net Assets Purchased 2,195.9 1,060.2
Property and Equipment at Cost (net of 441.0 323.2
accumulated depreciation)
Assets Held Under Special Contracts 85.7 87.3
Other Assets 1,254.0 868.4
------------------- -------------------
Total Assets $ 17,406.9 $ 13,722.7
=================== ===================
As of As of
Liabilities and Equity June 30, 1997 Dec. 31, 1996
------------------- -------------------
(Unaudited)
Policy Liabilities
Future policy benefits $ 1,080.3 $ 1,079.4
Policy and contract claims 835.4 840.9
Unearned and advance premiums 2,017.2 1,925.2
Other policyholder funds 678.9 514.1
------------------- -------------------
Total policy liabilities 4,611.8 4,359.6
General Liabilities
Insurance premiums payable 5,775.2 4,143.7
Commissions and general expenses 976.5 776.8
Short-term borrowings 479.3 213.4
Notes payable 621.6 475.1
Debt guarantee of ESOP 46.1 46.1
Liabilities held under special contracts 85.7 87.3
Other liabilities 1,143.2 737.8
------------------- -------------------
Total Liabilities 13,739.4 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 171.1 114.1
Paid-in additional capital 450.3 475.4
Net unrealized investment gains 159.2 153.1
Net foreign exchange gains/(losses) (46.1) 1.0
Retained earnings 2,354.0 2,356.8
Less - Treasury stock at cost (100.9) (121.5)
Deferred compensation (175.6) (151.5)
------------------- -------------------
Total Stockholders' Equity 2,817.5 2,832.9
------------------- -------------------
Total Liabilities and Equity $ 17,406.9 $ 13,722.7
=================== ===================
<FN>
See the accompanying notes to the condensed consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(millions except per share data)
Second Quarter Ended Six Months Ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Brokerage commissions and fees .............................. $ 885.0 $ 445.5 $ 1,726.7 $ 913.5
Premiums earned ............................................. 408.9 381.3 793.3 759.3
Net investment income ....................................... 117.6 92.6 233.4 177.3
Realized investment gains ................................... - - 2.4 -
Other income ................................................ 13.0 13.0 23.0 24.4
------------ ------------ ------------ ------------
Total revenue earned .................................... 1,424.5 932.4 2,778.8 1,874.5
------------ ------------ ------------ ------------
Benefits and Expenses
Commissions and general expenses ............................ 922.3 524.6 1,811.7 1,054.0
Benefits to policyholders ................................... 215.6 192.8 420.8 378.8
Interest expense ............................................ 15.9 10.1 30.6 19.3
Amortization of deferred policy acquisition costs ........... 58.4 55.0 111.9 108.1
Amortization of intangible assets ........................... 33.4 18.4 64.7 37.2
Special charges ............................................. 27.0 30.2 172.0 30.2
------------ ------------ ------------ ------------
Total benefits and expenses ............................. 1,272.6 831.1 2,611.7 1,627.6
------------ ------------ ------------ ------------
Income from Continuing Operations Before
Income Tax and Minority Interest ............................ 151.9 101.3 167.1 246.9
Provision for income tax ................................. 57.0 36.0 62.7 85.1
------------ ------------ ------------ ------------
Income from Continuing Operations Before
Minority Interest ........................................... $ 94.9 $ 65.3 $ 104.4 $ 161.8
Minority Interest - 8.205% mandatorily redeemable
preferred capital securities .......................... (10.7) - (19.5) -
------------ ------------ ------------ ------------
Income from Continuing Operations .............................. 84.2 65.3 84.9 161.8
Discontinued Operations:
Income from discontinued operations, net of tax ................ - - - 22.4
Gain on disposal of discontinued operations, net of tax ........ - 21.0 - 21.0
============ ============ ============ ============
Net Income ..................................................... $ 84.2 $ 86.3 $ 84.9 $ 205.2
============ ============ ============ ============
Net Income Available for Common Stockholders (1) ............... $ 80.9 $ 81.2 $ 78.2 $ 195.0
============ ============ ============ ============
Per Share: (2)
Income from continuing operations (1) .......................... $ 0.48 $ 0.36 $ 0.46 $ 0.92
Income from discontinued operations ............................ - - - 0.13
Gain on disposal of discontinued operations .................... - 0.13 - 0.13
============ ============ ============ ============
Net income (1) ................................................. $ 0.48 $ 0.49 $ 0.46 $ 1.18
============ ============ ============ ============
Cash dividends paid on common stock (2) ........................ $ 0.26 $ 0.24 $ 0.50 $ 0.47
============ ============ ============ ============
Average common and common equivalent shares outstanding (2) .... 169.3 164.7 169.2 164.7
------------ ------------ ------------ ------------
<FN>
(1) Includes the effect of $3.3 million and $6.7 million of dividends incurred
on the 8% and redeemable preferred stock and $5.1 million and $10.2 million
of dividends incurred on 8%, 6.25% and redeemable preferred stock in second
quarter and six months ended June 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)
Six Months Ended
----------------------------------
June 30, June 30,
(millions) 1997 1996
-------------- --------------
<S> <C> <C>
Cash Provided by Operating Activities ....................................... $ 294.3 $ 297.4
-------------- --------------
Cash Flows from Investing Activities:
Sale (purchase) of short term investments-net .......................... 285.5 (634.6)
Sale or maturity of fixed maturities
Available for sale - Maturities .................................... 61.3 78.7
Calls and prepayments ......................... 72.9 130.8
Sales ......................................... 526.6 439.4
Sale of equity investments ............................................ 639.1 301.3
Sale or maturities of other investments ................................ 32.9 41.0
Purchase of fixed maturities - available for sale ...................... (757.9) (984.6)
Purchase of equity investments ......................................... (655.8) (293.0)
Purchase of other investments .......................................... (38.1) (154.4)
Disposition (acquisition) of subsidiaries .............................. (1,288.8) 1,273.9
Acquired fiduciary funds from Alexander & Alexander Services, Inc....... 734.0 -
Property and equipment and other ....................................... (28.7) (35.1)
-------------- --------------
Cash Provided (Used) by Investing Activities .. (417.0) 163.4
-------------- --------------
Cash Flows from Financing Activities:
Treasury stock transactions - net ...................................... 21.9 (27.9)
Issuance (repayment) of short-term borrowings - net .................... 258.0 (262.9)
Sale of mandatorily redeemable preferred capital securities ............ 800.0 -
Repayment of long-term debt ............................................ (71.8) (2.4)
Interest sensitive life, annuity and investment contract deposits ...... 154.1 348.2
Interest sensitive life, annuity and investment contract withdrawals ... (6.8) (427.1)
Retirement of preferred stock .......................................... - (14.2)
Cash dividends to stockholders ......................................... (88.9) (86.3)
-------------- --------------
Cash Provided (Used) by Financing Activities .. 1,066.5 (472.6)
-------------- --------------
Effect of Exchange Rate Changes on Cash ..................................... (22.3) -
Increase (Decrease) in Cash ................................................. 921.5 (11.8)
Cash at Beginning of Period ................................................. 410.1 115.3
-------------- --------------
Cash at End of Period ....................................................... 1,331.6 103.5
============== ==============
<FN>
See the accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
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<PAGE>
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. 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 established standards for
providing disclosures related to products and services, geographic
areas, and major customers. Aon anticipates adopting 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 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 half 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.
- 5 -
<PAGE>
4. Capital Stock
-------------
During first half 1997, Aon reissued 661,100 shares of common stock
from treasury for employee benefit plans. Aon purchased 56,600 shares
of its common stock at a total cost of $2.4 million during first half
1997. In addition, Aon reissued 243,100 shares of common stock held in
connection with business combinations. There were 3.9 million shares of
common stock held in treasury at June 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
---------------------
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 June 30, 1997,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
first half 1996 unaudited proforma consolidated results of operations
would have resulted in total revenues of approximately $2.5 billion,
income from continuing operations of $172 million ($0.86 per share) and
net income of $215 million ($1.12 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
the operations of Aon. In addition, the effect of one-time
restructuring and investment losses recognition charges related to the
A&A acquisition are not reflected in the proforma 1996 results above.
These restructuring and investment losses charges have been reflected
in first half 1997 (see note 7).
- 6 -
<PAGE>
7. Special Charges
---------------
In second quarter 1997, Aon recorded pretax special charges of $27
million ($16.9 million after-tax or $0.10 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, as it
had been constructed before Aon's acquisition, contained certain highly
volatile securities with previously unrecognized losses. Aon
immediately sold those particular securities and undertook a full
financial review into the size and causes of all losses. The review was
completed early in third quarter 1997 and revealed that A&A's portfolio
had included certain highly volatile securities (such as inverse
floater tranches of collateralized mortgage obligations), which had
been incorrectly classified as high quality money market instruments.
At Aon's acquisition date, the carrying value of certain securities in
A&A's portfolio was overstated by the previously unrecognized
investment 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 $110 million reported in other liabilities at June 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,
involving over 600 positions, were approximately $40 million.
Terminations resulting from workforce reductions are planned to take
place within one year.
Approximately 2,000 additional terminations resulting from workforce
reductions are planned to take place within one year. Severance and
related costs related to these workforce reductions are included as
part of the preliminary purchase accounting liabilities recorded as of
June 30, 1997 (see note 6).
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 June 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 agreed to provide indemnites to the
purchaser for various potential liabilities, including provisions
covering future losses on certain insurance pooling arrangements
between Sphere Drake and Orion Insurance Company (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 Lloyds Syndicate 701. The Sphere Drake's sales agreement also
requires A&A to assume any losses in respect of the actions or
omissions by Swann & Everett Underwriting Agency, an underwriting
manangement company previously managed by Alexander Howden & Group
Limited, a subsidiary of A&A.
- 7 -
<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 subsidiares sold. Excluded from these liabilities is A&A
long-term debt related to two reinsurance contracts which are
associated with the financing of discontinued operations. Included in
Aon's June 30, 1997 condensed consolidated statement of financial
position and condensed consolidated statement of operations is
long-term debt of $50 million and related interest expense of $2.3
million, respectively. The net liabilities for discontinued operations
as of June 30, 1997 are composed of the following:
(millions)
- --------------------------------------------------------------------------------
Assets:
Insurance liabilities recoverable under finite risk contracts $ 147
Reinsurance recoverables 59
Cash and investments 31
Other 9
- --------------------------------------------------------------------------------
Total assets $ 246
- --------------------------------------------------------------------------------
Liabilities:
Insurance liabilities $ 275
Other 16
- --------------------------------------------------------------------------------
Total liabilities 291
- --------------------------------------------------------------------------------
Total net liabilities of discontinued operations classified
as other liabilities $ 45
- --------------------------------------------------------------------------------
The insurance liabilities represent estimates of future claims expected
to be made under occurrence- based insurance policies and reinsurance
business 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.
While the insurance liabities set forth above represent A&A's best
estimate of the probable loss amounts, there is no assurance that
further adverse developments may not occur due to 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.
- 8 -
<PAGE>
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 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.
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.
- 9 -
<PAGE>
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.
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 in the
notes to the June 30, 1997 financial statements 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 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 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 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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<PAGE>
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR SECOND QUARTER AND FIRST HALF 1997
Consolidated Results
- --------------------
Brokerage commissions and fees increased $439.5 million or 98.7% and $813.2
million or 89% in second quarter and first half 1997, respectively, reflecting
primarily business combination activity related to the acquisitions of A&A in
first quarter 1997 and Bain Hogg Group (Bain Hogg) in fourth quarter 1996.
Premiums earned increased $27.6 million or 7.2% and $34 million or 4.5% in
second quarter and first half 1997, respectively, compared with the same periods
last year. Extended warranty premiums earned increased $30.7 million or 32% 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 increase.
Net investment income increased $25 million or 27% and $56.1 million or 31.6% in
the second quarter and first half 1997, respectively, when compared to prior
year. Investment income growth in first half was primarily related to brokerage
acquisitions, 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 $38
million in second quarter 1997 from $17 million in 1996, and to $77 million in
first half 1997 from $34 million in 1996, primarily due to brokerage acquisition
activity.
Total revenue increased $492.1 million or 52.8% and $904.3 million or 48.2% in
the second quarter and first half 1997, respectively, largely attributable to
acquisition-related growth in brokerage commissions and fees. Net realized
investment gains were $2.4 million in first half 1997. There were no realized
investment gains in first half 1996. First half 1997 revenue, excluding realized
investment gains, increased 48.1% when compared to prior year.
Benefits to policyholders increased 11.8% or $22.8 million and 11.1% or $42
million in second quarter and first half 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 had 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 Alexander
and Alexander Services, Inc. (A&A) before Aon acquired A&A. Aon discovered in
the second quarter that A&A's investment portfolio, as it had been constructed
before Aon's acquisition, contained certain highly volatile securities with
previously unrecognized losses. Aon immediately sold those particular securities
and undertook a full financial review into the size and causes of all losses.
The review was completed early in third quarter 1997 and revealed that A&A's
portfolio had included certain highly volatile securities (such as inverse
floater tranches of collateralized mortgage obligations), which had been
incorrectly classified as high quality money market instruments. At Aon's
acquisition date, the carrying value of certain securities in A&A's portfolio
was overstated by the previously unrecognized investment losses.
- 11 -
<PAGE>
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 paid out over several years. Special charges for
severance and related costs, involving over 600 positions, were approximately
$40 million. Terminations resulting from workforce reductions are planned to
take place within one year.
Approximately 2,000 additional terminations resulting from workforce reductions
are planned to take place within one year. Severance and related costs related
to these workforce reductions are included as part of the preliminary purchase
accounting liabilities recorded as of June 30, 1997 (see note 6).
In second quarter 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 total
benefits and expenses in the condensed consolidated statements of operations.
Total benefits and expenses increased $441.5 million or 53.1% and $984.1 million
or 60.5% in the same periods. The increases in the second quarter and first half
expenses reflect the inclusion of pretax special charges of $27 million and $172
million in second quarter and first half 1997, respectively, related to
investment losses incurred at A&A prior to Aon's acquisition and restructuring
costs associated with the merger with A&A, and $30.2 million in second quarter
and first half 1996 related to the completion of voluntary early retirement
programs. Total benefits and expenses, excluding the 1997 and 1996 special
charges, increased 55.5% and 52.7% for the second quarter and first half 1997,
respectively, primarily reflecting brokerage acquisition activity. Income before
income tax increased $50.6 million or 50% in second quarter 1997 and decreased
$79.8 million or 32.3% in the first half 1997, respectively, when compared to
prior year. The decrease in first half 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 and Bain Hogg acquisitions. Excluding
special charges, income before income tax increased 36% and 22.4% when compared
to second quarter and first half 1996, respectively.
Major Lines of Business
- -----------------------
General
- -------
In the insurance brokerage and consulting services segment, Aon reported first
half 1997 pretax special charges of $145 million related to the acquisition of
A&A. In second quarter 1997, Aon reported $27 million of pretax special charges
related to investment losses at A&A in the corporate and other segment. Aon also
reported second quarter 1996 special charges of $30.2 million related to early
retirement programs. The 1996 special charges were allocated to each of the
major lines of business. For purposes of the following line of business
discussions, comparisons against last year's results exclude special charges.
Cost savings associated with the integration of similar businesses among 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.
- 12 -
<PAGE>
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 second quarter and first half 1997 and 1996
are not comparable.
Insurance and other services (retail, reinsurance and wholesale brokerage)
revenue increased $387.7 million or 99.1% in the second quarter 1997 and $725.6
million or 90.2% for the first half 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.
"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 $73 million or
102.5% and $130.8 million or 91.8% for the second quarter and first half 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 $460.7 million or 99.7% and $856.4 million or 90.4% in the second
quarter and first half 1997, respectively. Income before income tax increased
$70.2 million or 122.7% and $93.6 million or 65.7% when compared to second
quarter and first half 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 approximately 90-95% of the above
revenue growth in the quarter. 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
- --------------------------
Second quarter U.S. insurance brokerage and consulting services revenue
represents 55% of the worldwide total and U.S. income before income tax
represents 49% of the worldwide total. International brokerage revenue of $412
million increased 200.3% for the second quarter, primarily reflecting the A&A
and Bain Hogg acquisitions. International brokerage income before income tax
increased 385% for the second 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 provides direct sales life and
accident and health products, and extended warranty products to individuals.
Revenue increased $29.7 million or 6.7% and $39 million or 4.4% for the second
quarter and first half 1997, respectively, when compared to prior year primarily
due to growth in the worldwide extended warranty lines. Direct sales business
grew modestly as life business in Europe and the Pacific continues to runoff as
planned.
Pretax income from insurance underwriting increased $3.8 million or 5.7% and
$10.1 million or 8.1% in the second quarter and first half 1997, respectively,
when compared with last year. Overall, benefit and expense margins in second
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
- 13 -
<PAGE>
health product sales. Certain specialty liability programs and auto credit
business continued to be profitably run off.
U.S./International Results
- --------------------------
Second quarter U.S. insurance underwriting revenue represents 71% of the
worldwide total and U.S. income before income tax represents 72% of the
worldwide total. U.S. insurance underwriting income before income tax increased
11.7% 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 $135.3 million
increased 12.6% in the quarter principally due to growth in premiums earned in
both the direct sales and extended warranty lines. International pretax income
decreased 7% in the quarter, primarily due to the impact of certain events in
the extended warranty lines that are not expected to recur in future periods.
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 6.5% or $1.7 million and 18.9% or $8.9 million for the second
quarter and first half 1997, respectively, primarily due to higher levels of
investment income received on certain private equity investment holdings.
Revenue growth was partially limited by alternative uses of corporate capital.
Pretax realized investment gains for the first half 1997 were $2.4 million.
There were no realized investment gains in the second quarter and first half
1996. Income before income tax, excluding realized investment gains, decreased
$26.6 million in the quarter and $44.1 million in the first half over the same
periods last year. Contributing to this decrease 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 first half 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 sales of LOV and UFLIC
resulted in a $21 million after-tax gain on disposal which was recorded in
second quarter 1996.
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.
- 14 -
<PAGE>
<TABLE>
<CAPTION>
Aon CORPORATION
MAJOR LINES OF BUSINESS
Second Quarter Ended Six Months Ended
--------------------------- ---------------------------
June 30, Percent June 30, Percent
(millions) 1997 Change 1997 Change
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Insurance brokerage and consulting services .................... $ 923.0 99.7% $ 1,803.7 90.4%
Insurance underwriting ......................................... 473.7 6.7 919.1 4.4
Corporate and other ............................................ 27.8 6.5 56.0 18.9
------------ ------------ ------------ ------------
Total revenue $ 1,424.5 52.8% $ 2,778.8 48.2%
============ ============ ============ ============
Income Before Income Tax
Insurance brokerage and consulting services .................... $ 127.4 122.7% $ 236.0 65.7%
Special charges .......................................... - - (145.0) N/A
------------ ------------ ------------ ------------
Including special charges ................................ 127.4 266.1 91.0 (24.2)
Insurance underwriting ......................................... 70.5 5.7 135.3 8.1
Corporate and other ............................................ (19.0) N/A (32.2) N/A
Special charges .......................................... (27.0) N/A (27.0) N/A
------------ ------------ ------------ ------------
Including special charges ................................ (46.0) N/A (59.2) N/A
------------ ------------ ------------ ------------
Total income before income tax .......................... $ 151.9 50.0% $ 167.1 (32.3%)
============ ============ ============ ============
</TABLE>
- 15 -
<PAGE>
<TABLE>
Aon CORPORATION
REVENUE BY MAJOR PRODUCT LINE
Second Quarter Ended Six Months Ended
--------------------------- ---------------------------
June 30, Percent June 30, Percent
(millions) 1997 Change 1997 Change
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Insurance brokerage and consulting services
Insurance and other services .................................... $ 778.8 99.1% $ 1,530.4 90.2%
Consulting ...................................................... 144.2 102.5 273.3 91.8
------------ ------------ ------------ ------------
Total revenue............................................... $ 923.0 99.7% $ 1,803.7 90.4%
============ ============ ============ ============
Insurance underwriting
Direct sales - life, accident and health ........................ $ 259.7 1.0% $ 514.4 0.7%
Extended warranty ............................................... 147.8 28.2 277.2 23.6
Other ........................................................... 66.2 (7.4) 127.5 (12.1)
------------ ------------ ------------ ------------
Total revenue............................................... $ 473.7 6.7% $ 919.1 4.4%
============ ============ ============ ============
Corporate and other
Investment income on capital and other .......................... $ 27.8 6.5% $ 53.6 13.8%
Realized investment gains ....................................... -- -- 2.4 --
------------ ------------ ------------ ------------
Total revenue............................................... $ 27.8 6.5% $ 56.0 18.9%
============ ============ ============ ============
</TABLE>
- 16 -
<PAGE>
NET INCOME FOR SECOND QUARTER AND FIRST HALF 1997
References to share data reflect the three-for-two stock split announced on
March 21, 1997, payable on May 14, 1997. Second quarter net income was $84.2
million ($0.48 per share) compared to $86.3 million ($0.49 per share) in 1996.
Net income for first half was $84.9 million ($0.46 per share) compared to $205.2
million ($1.18 per share). Included in first half 1997 net income is after-tax
realized investment gains of $0.01 per share with no comparable gains or losses
in 1996. The decrease in first half 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 $101.1 million ($0.58 per share) and $190.9 million ($1.09
per share) in the second quarter and first half 1997, respectively, compared to
$84.8 million ($0.48 per share) and $181.5 million ($1.04 per share) in the
second quarter and first half 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 first
half 1997 and 1996, respectively, due to changes in business mix. Realized gains
were taxed at 37.5% and 36% for first half 1997 and 1996, respectively. Average
shares outstanding for second quarter 1997 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 HALF 1997
General
- -------
Consistent with financial statement presentation, the following cash flow
discussion reflects 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 half 1997
are not comparable to the same period in 1996.
Cash flows from operating activities in first half 1997 were $294.3 million, a
decrease of $3.1 million from first half 1996. This decrease primarily reflects
the timing of settlement of insurance segment receivables and payables, as well
as the payments on special charges and valuation adjustments relating to the
acquisitions of A&A and Bain Hogg.
Investing activities used cash of $417 million which was made available from
financing and operating activities. Cash used for acquisition activity during
the first half 1997 was $1.3 billion, primarily reflecting the A&A acquisition.
- 17 -
<PAGE>
Cash totaling $1,066.5 million was provided during first half 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 $82.2
million on common stock, $5.4 million on 8% cumulative perpetual preferred
stock, and $1.3 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 $2.9 billion, Aon's total fixed maturity
portfolio is invested primarily in investment grade holdings (96%) and has a
fair value which is 103.9% of amortized cost.
Total assets increased $3.7 billion to $17.4 billion since year-end 1996,
primarily due to the acquisition of A&A. Invested assets at June 30, 1997
decreased $61.7 million from year-end levels, primarily due to lower levels of
short-term investments. The amortized cost and fair value of less than
investment grade fixed maturity investments, at June 30, 1997, were $96.5
million and $104.1 million, respectively. The carrying value of non-income
producing investments in Aon's portfolio at June 30, 1997 was $63.8 million, or
1.2% 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 June 30,
1997, Aon had open contracts which had unrealized gains of approximately $18.7
million.
Insurance brokerage and consulting services receivables and insurance premiums
payable increased $1 billion and $1.6 billion, respectively, in first half 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 $1.1 billion due to the A&A acquisition (see note 6).
In first quarter 1997, Aon completed the aquisition 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 second quarter 1997
by $265.9 million when compared to year-end 1996, primarily due to the issuance
of commercial paper for acquisition financing. Notes payable increased at the
end of second quarter 1997 by $146.5 million when compared to year-end 1996,
primarily due to acquisition financing. Included in notes payable at June 30,
1997 is approximately $25 million which represents the principal amount of notes
due within one year.
- 18 -
<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 June 30, 1997, 5,446,000 shares of 8% preferred stock
were outstanding.
Stockholders' equity decreased $15.4 million in first half 1997 to $16.04 per
share, a decrease of $0.17 per share since year-end 1996. The principal factors
influencing this decrease were $107.5 million of after-tax special charges which
reduced net income, net foreign exchange losses of $47.1 million, and dividends
to stockholders of $88.9 million. Partially offsetting this decrease were net
unrealized investment gains of $6.1 million.
Review by Independent Auditors
- ------------------------------
The condensed consolidated financial statements at June 30, 1997, and for the
second quarter and first half then ended have been reviewed, prior to filing, by
Ernst & Young LLP, Aon's independent auditors, and their report is included
herein.
- 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 June 30, 1997, and the related condensed
consolidated statements of income for the three-month and six-month periods
ended June 30, 1997 and 1996, and the condensed consolidated statements of cash
flows for the six-month periods ended June 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
August 5, 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 June 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)
August 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.
- ---------------------- ---
(10) Aon Severance Plan
(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>
Aon
SEVERANCE
PLAN
<PAGE>
Aon Severance Plan
Preamble
The name of this plan is the Aon Severance Plan (the "Plan"). Its purpose
is to compensate staff employees of Aon Corporation and its subsidiaries
for unavoidable and permanent loss of employment under the circumstances
specified below. Benefits are in consideration of the waiver of any
employment-related litigation and claims against Aon Corporation or its
subsidiaries. The Plan shall be effective as of May 1, 1997, and apply to
employees notified of termination of employment by Aon Corporation or by
a subsidiary on or after that date. All prior existing severance pay
plans, programs or practices for employees, whether formal or informal,
are hereby revoked and terminated.
SECTION 1
---------
DEFINITIONS
-----------
1.01 "Board" shall mean the board of directors of Aon Corporation.
1.02 "Cause" shall mean:
(a) excessive absenteeism or tardiness which violates the Company's
attendance standards;
(b) unsatisfactory job performance;
(c) violation of Company policies;
(d) breach of fiduciary duty; theft; fraud; dishonesty; embezzlement;
violation of securities laws; violation of non-competition,
nonsolicitation or confidentiality agreements;
(e) falsification of employment application or other business records;
(f) insubordination (e.g., failure to follow direct supervisory
instructions);
(g) unethical or criminal conduct.
1.03 "Committee" shall mean the Benefits Committee appointed by the Board. The
Committee is designated as the plan administrator and named fiduciary.
1.04 "Company" shall mean Aon Corporation and its majority owned subsidiaries.
1.05 "Compensation" shall mean solely salary and fixed base compensation.
Compensation shall be determined before excluding any pretax deferrals
for retirement, health, welfare, death, insurance, or similar plans of
the Company. The following are examples of items that are not included in
Compensation: (a) net and deferred commission payments; (b) bonuses; (c)
stock awards; (d) expense reimbursements; (e) income from exercise of
stock options; (f) overtime pay; (g) overrides; and (h) car allowances.
- 2 -
<PAGE>
1.06 "Employee" shall mean any regular United States staff employee of the
Company working 20 or more hours a week. The term, "Employee" shall not
include independent contractors, any individual treated as an independent
contractor by the Company but considered an employee by the Internal
Revenue Service or other third party, leased employees, and temporary
employees.
1.07 "Involuntary Termination of Employment" shall mean any Termination of
Employment with the Company due to the following:
(a) Elimination of the Employee's job, provided that (i) the
Employee has made a good faith effort to secure another
position within the Company; and (ii) there is no
possibility that another position may be secured within the
Company. A temporary or seasonal lay-off shall not be
considered an Involuntary Termination of Employment.
(b) Divestiture or other disposition of a subsidiary or unit of
the Company, where an Employee of such subsidiary or unit
is not employed by the acquiring company or offered
employment by the acquiring company.
An Involuntary Termination of Employment shall not include, among other
events: Resignation; Termination of Employment for Cause; and Termination
of Employment on account of disability.
1.08 "Participant" shall mean an Employee eligible for benefits under Section
2.01.
1.09 "Plan" shall mean the Aon Severance Plan.
1.10 "Release" shall mean a release of Employee claims in the form set forth
in Appendix A.
1.11 "Resignation" shall mean a Termination of Employment effected by the
Employee, or effected by mutual agreement between the Employee and the
Company.
1.12 "Termination of Employment" shall mean the cessation of the
classification of an Employee as an active employee on the payroll
records of the Company.
- 3 -
<PAGE>
SECTION 2
---------
ELIGIBILITY
-----------
2.01 Eligibility. Any Employee of the Company who: (a) incurs an Involuntary
-----------
Termination of Employment; (b) signs a Release in accordance with Section
2.03, which Release shall have become effective under its terms; and (c)
returns all Company property in the possession of the Employee, shall
receive benefits in accordance with Section 3 of this Plan.
2.02 Involuntary Termination. Involuntary Termination of Employment shall be a
-----------------------
condition to receipt of benefits under this Plan. The determination of
whether an Employee has incurred an Involuntary Termination of Employment
shall be made based on the good faith belief of the Corporate Human
Resources Department.
2.03 Release. As a condition to receipt of benefits under this Plan, the
-------
Employee must sign a Release which shall have become effective in
accordance with its terms. The failure or refusal of an Employee to sign
a Release, or the revocation of a Release (to the extent permitted by its
terms) shall disqualify the employee from receiving benefits under this
Plan. If an Employee files a legal action asserting any claim or demand
within the scope of the Release, the Company shall retain all rights and
benefits of the Release and may (a) cancel all future obligations under
the Release; and (b) recoup the value of all payments and benefits paid
under this Plan, together with the Company's costs and attorneys fees.
2.04 Disabled Employees. An Employee receiving benefits under the Company's
-------------------
short-term disability plan who: (a) following commencement of such
benefits, is scheduled to incur an Involuntary Termination of Employment;
and (b) meets all the requirements of Section 2.01, shall be entitled to
benefits under this Plan; provided, however, that the number of weeks
during which benefits are paid (or deemed to be paid) under Section 3 of
this Plan shall be reduced by the number of weeks in which the Employee
receives short-term disability benefits after the scheduled date of
Termination of Employment.
2.05 Alexander & Alexander Employees. Any Employee who was employed by
-----------------------------------
Alexander & Alexander Services, Inc., or any of its subsidiaries on
January 15, 1997, shall not be eligible for benefits under this Plan
until the Board or its designee shall amend this Plan to permit such
eligibility.
2.06 Service until Termination of Employment. An Employee otherwise entitled
---------------------------------------
to receive benefits under Section 2.01 of this Plan shall not receive
benefits unless such Employee: (a) works satisfactorily through the date
determined by the Company to be the date of Termination of Employment;
and (b) prior to such date, neither voluntarily terminates employment nor
is terminated for Cause.
- 4 -
<PAGE>
SECTION 3
---------
BENEFITS
--------
3.01 Company-Provided Benefits. An Employee eligible for benefits under
--------------------------
Section 2.01 shall receive an amount equal to one week's Compensation
multiplied by the lesser of: (a) the total of such Employee's Years of
Service plus four; or (b) 30. All Company-provided benefits under this
Section 3.01, in the case of a part-time Employee, will be pro rated
based upon the average number of hours worked by the part-time Employee
and the number of hours worked by full-time Employees in the part-time
Employee's location.
For purposes of this Section 3.01, "Years of Service" means the number of
years of continuous employment with the Company. Partial years of service
will be rounded to the closest Year of Service. With respect to
employment with an employer whose business was acquired by or merged into
the Company ("the Acquired Employer"), Years of Service shall include
employment with the Acquired Employer beginning with such Employee's most
recent date of hire with the Acquired Employer through the date of such
merger or acquisition. The foregoing applies only to individuals employed
by the Acquired Employer at the time of the acquisition or merger.
3.02 90-Day Subsidy for Health Benefits. Participants who elect continuation
----------------------------------
of health care coverage under the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA), shall be entitled to continue medical
(including HMO) and dental coverage under COBRA for the 90-day period
following termination of employment at a cost no greater than that paid
by similarly situated active Employees.
3.03 Form of Payment. Benefits under this Plan will be paid in a lump sum,
----------------
unless the Company decides otherwise.
3.04 Other Benefit Plans. No amount paid to a Participant under this Plan
---------------------
shall be deemed to be compensation with respect to the Employee's
entitlement to benefits under any employee benefit plan established by
the Company for its employees unless otherwise specifically provided in
such plan.
3.05 Rehired Employees. A Participant who receives benefits under this Plan
------------------
and who is rehired as an Employee at any time before the end of a number
of weeks described in Section 3.01(a), will be required to reimburse the
Company for benefits paid during, or attributable to, the period of
rehire.
- 5 -
<PAGE>
3.06 Laws Requiring Payments. To the extent that any federal, state or local
-----------------------
law, including "plant closing" laws, requires the Company to make a
payment of any kind to an Employee because of such Employee's involuntary
termination due to a layoff, reduction in force, plant or facility
closing, sale of business, change of control, or other similar event, the
benefits provided under this Plan shall be reduced dollar for dollar or
eliminated.
3.07 Other Company-Provided Payments. The amount of benefits due an Employee
---------------------------------
in accordance with Section 3.01 shall be reduced, dollar for dollar, by
Company-provided payments due the Employee upon Termination of Employment
under such other individual employment arrangements as may cover the
Employee.
- 6 -
<PAGE>
SECTION 4
---------
ADMINISTRATION
--------------
4.01 Participant Rights. If the claim of any Employee for benefits under the
-------------------
Plan is denied, the Company shall provide adequate notice in writing to
such claimant, setting forth the specific reasons for such denial. The
notice shall be written in a manner calculated to be understood by the
claimant. The Company shall afford such Employee 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 Employee appeals the decision in writing within 60 days, the
Committee shall review the written comments and any submissions of the
Employee and render its decision regarding the appeal all within 60 days
of such appeal.
4.02 Committee Actions. The Committee may, from time to time, adopt rules and
-----------------
regulations for carrying out the Plan. The Committee shall have the
exclusive right and discretionary authority to construe the provisions of
the Plan, including without limitation, the power to interpret disputed,
ambiguous or uncertain terms, and such other powers as may be necessary
to carry out the provisions of the Plan. The Committee shall also have
the discretionary authority to determine on appeal all questions relating
to the eligibility of Employees to receive benefits under the Plan and
the amount of such benefits, and resolve all questions pertaining to the
administration, interpretation and application of the Plan provisions.
Actions taken in good faith by the Company, the Committee, or any
employee of the Company shall be conclusive and binding on all interested
parties and shall be given the maximum possible deference allowed by the
law. The Committee has the authority to delegate its administrative
responsibilities.
4.03 Amendment and Termination. The Plan may, at any time be amended,
---------------------------
modified, or terminated by action of the Board.
- 7 -
<PAGE>
SECTION 5
---------
GENERAL PROVISIONS
------------------
5.01 Notices. Unless otherwise indicated, all notices to the Company shall be
-------
delivered to the attention of the Secretary of the Company. Any notice or
filing required or permitted to be given to the Company under this Plan
shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail, to the Company at the principal office of
the Company.
5.02 Controlling Law. Except to the extent superseded by federal law, the laws
---------------
of Illinois shall be controlling in all matters relating to the Plan.
5.03 Captions. The captions of Sections and paragraphs of this Plan are for
--------
convenience only and shall not control or affect the meaning or
construction of any of its provisions.
5.04 Action by the Company. Any action required or permitted by a Company
----------------------
under the Plan shall be by resolution of its Board or any person or
persons authorized by resolution of its Board.
5.05 Facility of Payment. Any amounts payable under this Plan to any person
-------------------
under legal disability or who, in the judgment of the Company, 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 Company may select.
5.06 Severability. Whenever possible, each provision of the Plan shall be
------------
interpreted in such manner as to be effective and valid under applicable
law. If, however, any provision of the Plan shall be held to be
prohibited by or invalid under applicable law, then (a) such provision
shall be deemed amended to, and to have contained from the outset such
language as shall be necessary to, accomplish the objectives of the
provision as originally written to the fullest extent permitted by law;
and (b) all other provisions of the Plan shall remain in full force and
effect.
5.07 Liability. No member of the Board, no employee of the Company, and no
---------
member of the Committee (nor the Committee itself) shall be liable for
any act or action under this Plan 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 Company will fully
indemnify and hold the members of the Committee harmless from any
liability under this Plan, except in circumstances involving a Committee
member's bad faith, gross negligence, or fraud. The Company or the
Committee may consult with legal counsel, who may be counsel for the
Company or other counsel, with respect to its obligation or duties
- 8 -
<PAGE>
under this Plan, 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.
5.08 Successors. The provisions of the Plan shall bind and inure to the
----------
benefit of the Company and its successors and assigns. The term
"successors" as used herein shall include any corporation or other
business entity which shall by merger, consolidation, purchase, or
otherwise, acquire all or substantially all of the business and assets of
the Company and successors of any such corporation or other business
entity.
5.09 Unfunded Status of the Plan. Payments made to the Participant pursuant to
---------------------------
the Plan shall be made only from the general assets of the Company.
Nothing contained in this Plan shall be deemed to create a trust of any
kind.
- 9 -
<PAGE>
IN WITNESS WHEREOF, Aon Corporation hereby adopts the Aon Severance Plan,
effective as set forth above, as of this 5th day of May , 1997.
------- ---------------- --
AON CORPORATION
By:
/s/ Daniel T. Cox
-----------------------
Daniel T. Cox
Executive Vice President
- 10 -
<PAGE>
APPENDIX A
AON SEVERANCE PLAN
------------------
WAIVER AND RELEASE OF CLAIMS
----------------------------
In exchange for benefits to be provided to me under the Aon Severance Plan (the
"Plan") , which I acknowledge I am not otherwise entitled to receive, I freely
and voluntarily agree to this WAIVER AND RELEASE OF CLAIMS.
1. In signing this WAIVER AND RELEASE OF CLAIMS, I hereby waive and
release any and all claims that I may ever have had or that I now have
against the following persons and organizations:
a. Aon Corporation, its affiliates, successors and subsidiaries;
and,
b. Any and all officers, directors, employees, shareholders and
agents of Aon Corporation, its affiliates, successors and
subsidiaries.
2. I understand and agree that, in signing this document, I am waiving and
releasing any and all claims of whatever nature that I may ever have
had or now have against the persons and organizations listed in
paragraph 1. I understand and agree that among the claims that I am
waiving and releasing are the following:
a. Claims of age discrimination in employment under the federal
Age Discrimination in Employment Act of 1967;
b. Claims of race, color, sex, national origin and religious
discrimination or harassment in employment under Title VII of
the Civil Rights Act of 1964, as amended, and the Civil Rights
Act of 1866, 42 U.S.C. ss. 1981, as amended;
c. Claims of disability discrimination under the Americans With
Disabilities Act;
d. Claims of discrimination in employment under any other
federal, state or local statute, ordinance, regulation or
constitution;
e. Claims under any employment agreement or any claims of breach
of contract; and,
f. Any common law or statutory claims of wrongful discharge and
any other common law tort or statutory claims.
I understand and agree that I am waiving and releasing any and all
claims that I may ever have had or that I now have, regardless of their
nature or origin, and that the fact that such claim is not listed in
subparagraphs (a) through (f) above, does not mean that such claim is
not included in this WAIVER AND RELEASE OF CLAIMS.
3. I agree that I will never sue any of the persons or organizations
listed in paragraph 1 and I further agree that I will never seek or
receive damages for any claim or charge of employment discrimination,
for any claim released by this WAIVER AND RELEASE OF CLAIMS. I also
agree to withdraw any pending lawsuit I may have against any of the
- 11 -
<PAGE>
persons or organizations listed in paragraph 1 arising out of my
employment, including the termination of my employment.
4. In signing this agreement, I agree and understand that this WAIVER AND
RELEASE OF CLAIMS will be binding not only on me but also on my heirs,
administrators and assigns with respect to the claims covered by this
agreement. As of the date of my signing of this agreement, I have made
no assignment of any claims against any of the persons or organizations
described in paragraph 1.
5. I hereby acknowledge that, at the time I was given this WAIVER AND
RELEASE OF CLAIMS, I was informed in writing that I had at least 45
days from the date I received all the information described in
paragraph below in which to consider whether I would sign this WAIVER
AND RELEASE OF CLAIMS. I also acknowledge that, at the time I was given
this WAIVER AND RELEASE OF CLAIMS, I was informed in writing that I
should consult with an attorney before signing this agreement. I have
had an opportunity to consult with an attorney and have either had such
consultations or have decided of my own free will that I will sign this
agreement without consulting with legal counsel.
6. I acknowledge that, at the time I was given this WAIVER AND RELEASE OF
CLAIMS, I was given a complete description of the Plan, including a
description of the group of persons who are covered by this program,
the rules of eligibility and any time limits applicable to such
program. Finally, I acknowledge that I have received a list of ages and
job titles of all individuals in my organizational unit who are
eligible or were selected to receive benefits under the Plan as well as
the ages and job titles of individuals in my organizational unit who
are not eligible or were not selected to receive benefits under the
Plan.
7. I acknowledge that I have been informed that I may revoke my acceptance
of this WAIVER AND RELEASE OF CLAIMS by delivering a letter to the
Corporate Human Resources Department (see address below), within seven
days of the date I have signed this agreement. I understand that this
WAIVER AND RELEASE OF CLAIMS will not become effective until the eighth
day following my signing of this agreement. I understand and intend
that, in the event I do not revoke my acceptance of this agreement
within the seven-day period described in this paragraph, this WAIVER
AND RELEASE OF CLAIMS will be legally binding and enforceable on me, my
heirs, administrators and assigns.
8. I agree to continue to respect the trade secrets and other confidential
information to which I have had access while employed. Insofar as I
have already signed any written agreement or agreements not to deal
with customers or clients or not to hire employees of my employing
company or its affiliates for any period of time after cessation of
employment, I confirm that I shall fulfill the terms of such agreement
or agreements.
- 12 -
<PAGE>
9. This WAIVER AND RELEASE OF CLAIMS will be interpreted and enforced
according to the laws of the state of Illinois. If any part of this
WAIVER AND RELEASE OF CLAIMS is judged by a court of competent
jurisdiction to be illegal, invalid or inoperable, then that part only
will be stricken. A suitable and equitable provision will be
substituted in order to carry out, so far as may be enforceable and
valid, the intent and purpose of the stricken part, and the rest of
this WAIVER AND RELEASE OF CLAIMS will continue in full force and
effect.
I acknowledge that the number of years of service used to calculate my benefit
under the Aon Severance Plan is ____, based on my hire date of , 19__.
___________________________ _____________________________
NAME (Please Print) SIGNATURE
___________________________ _____________________________
DATE SOCIAL SECURITY NUMBER
Return the original signed copy of this form on or before the 45th day after you
have received all the information described in paragraph 6 (above) to:
Corporate Human Resources
____________________________
____________________________
123 North Wacker Drive
Chicago, IL 60606
- 13 -
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
Aon Corporation and Subsidiaries
CONSOLIDATED NET INCOME PER SHARE COMPUTATION
(millions except per share data)
Second Quarter Ended Six Months Ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE (1)
Net income ................................................. $ 84.2 $ 86.3 $ 84.9 $ 205.2
Preferred stock dividends .................................. 3.3 5.1 6.7 10.2
------------ ------------ ------------ ------------
Net income available for common stockholders .......... $ 80.9 $ 81.2 $ 78.2 $ 195.0
============ ============ ============ ============
Average common shares issued ............................... 171.2 167.3 171.2 167.3
Net effect of treasury stock activity and dilutive stock
compensation plans based on the treasury stock method . (1.9) (2.6) (2.0) (2.6)
------------ ------------ ------------ ------------
Average common and common equivalent shares
outstanding ...................................... 169.3 164.7 169.2 164.7
============ ============ ============ ============
Net income per share ............................................ $ 0.48 $ 0.49 $ 0.46 $ 1.18
============ ============ ============ ============
<FN>
(1) Adjusted to reflect the three-for-two stock split on May 14, 1997
</FN>
</TABLE>
<TABLE>
<CAPTION>
Aon Corporation and Consolidated Subsidiaries Exhibit 12(a)
Combined With Unconsolidated Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
Six Months
Ended June 30, Years Ended December 31,
--------------- ---------------------------------------------
(millions except ratios) 1997 1996 1996 1995 1994 1993 1992 (1)
------ ------ ------ ------ ------ ------ ---------
<C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes (2) ......................... $167.1 $246.9 $445.6 $458.0 $397.0 $331.6 $179.1
Add back fixed charges:
Interest on indebtedness ........................................ 30.6 23.9 44.7 55.5 46.4 42.3 41.9
Interest on ESOP ................................................ 1.9 2.4 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor ............................................... 29.4 13.4 28.6 21.4 28.7 26.1 19.2
------ ------ ------ ------- ------ ------ -------
Income as adjusted ......................................... $229.0 $286.6 $523.2 $540.2 $478.0 $406.5 $247.1
====== ====== ====== ======= ====== ====== =======
Fixed charges:
Interest on indebtedness ........................................ $ 30.6 $ 23.9 $ 44.7 $ 55.5 $ 46.4 $ 42.3 $ 41.9
Interest on ESOP ................................................ 1.9 2.4 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor ............................................... 29.4 13.4 28.6 21.4 28.7 26.1 19.2
------- ------ ------ ------- ------ ------ -------
Total fixed charges ........................................ $ 61.9 $ 39.7 $ 77.6 $ 82.2 $ 81.0 $ 74.9 $ 68.0
======= ====== ====== ======= ====== ====== =======
Ratio of earnings to fixed charges .............................. 3.7 7.2 6.7 6.6 5.9 5.4 3.6
======= ======= ====== ======= ======= ====== =======
Ratio of earnings to fixed charges (3) .......................... 6.5 8.0 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 six months ended June 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 six months ended June
30, 1997 and 1996, respectively, and the years ended December 31, 1996 and
1992, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Aon Corporation and Consolidated Subsidiaries Exhibit 12(b)
Combined With Unconsolidated Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends
Six Months
Ended June 30, Years Ended December 31,
--------------- ---------------------------------------------
(millions except ratios) 1997 1996 1996 1995 1994 1993 1992 (1)
------ ------ ------ ------ ------ ------ ---------
<C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes (2) ......................... $167.1 $246.9 $445.6 $458.0 $397.0 $331.6 $179.1
Add back fixed charges:
Interest on indebtedness ........................................ 30.6 23.9 44.7 55.5 46.4 42.3 41.9
Interest on ESOP ................................................ 1.9 2.4 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor ............................................... 29.4 13.4 28.6 21.4 28.7 26.1 19.2
------ ------ ------ ------- ------ ------ -------
Income as adjusted ......................................... $229.0 $286.6 $523.2 $540.2 $478.0 $406.5 $247.1
====== ====== ====== ======= ====== ====== =======
Fixed charges:
Interest on indebtedness ........................................ $ 30.6 $ 23.9 $ 44.7 $ 55.5 $ 46.4 $ 42.3 $ 41.9
Preferred stock dividends........................................ 42.0 15.7 28.7 37.5 48.4 47.5 20.3
----- ------ ------ ------ ------ ------ ------
Interest and dividends........................................ 72.6 39.6 73.4 93.0 94.8 89.8 62.2
Interest on ESOP ................................................ 1.9 2.4 4.3 5.3 5.9 6.5 6.9
Portion of rents representative of
interest factor ............................................... 29.4 13.4 28.6 21.4 28.7 26.1 19.2
------- ------ ------ ------- ------ ------ -------
Total fixed charges and preferred
stock dividends.. ........................................ $103.9 $ 55.4 $106.3 $119.7 $129.4 $122.4 $ 88.3
======= ====== ====== ======= ====== ====== =======
Ratio of earnings to combined fixed
charges and preferred stock dividends (3)...................... 2.2 5.2 4.9 4.5 3.7 3.3 2.8
======= ======= ====== ======= ====== ====== =======
Ratio of earnings to combined fixed
charges and preferred stock dividends (4)...................... 3.9 5.7 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 six months ended June 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 six
months ended June 30, 1997 are $31.2 million of pretax distributions on the
8.205% trust preferred capital securities which are classified as "minority
interest" on the condensed cosolidated 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 six months ended June
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
August 5, 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 June 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
August 5, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 2,903
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 814
<MORTGAGE> 24
<REAL-ESTATE> 12
<TOTAL-INVEST> 5,151
<CASH> 1,332
<RECOVER-REINSURE> 0 <F1>
<DEFERRED-ACQUISITION> 570
<TOTAL-ASSETS> 17,407
<POLICY-LOSSES> 1,080
<UNEARNED-PREMIUMS> 2,017
<POLICY-OTHER> 835
<POLICY-HOLDER-FUNDS> 679
<NOTES-PAYABLE> 1,147 <F2>
50
6 <F4> <F5>
<COMMON> 171 <F3>
<OTHER-SE> 2,641
<TOTAL-LIABILITY-AND-EQUITY> 17,407
793
<INVESTMENT-INCOME> 233
<INVESTMENT-GAINS> 2
<OTHER-INCOME> 1,750 <F6>
<BENEFITS> 421
<UNDERWRITING-AMORTIZATION> 112
<UNDERWRITING-OTHER> 1,907
<INCOME-PRETAX> 167
<INCOME-TAX> 63
<INCOME-CONTINUING> 104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85
<EPS-PRIMARY> 0.46
<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>
