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, 1998
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 6-30-98
----- -------------
$1.00 par value Common 168,856,896
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<TABLE>
<CAPTION>
PART 1
FINANCIAL INFORMATION
AON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(millions) AS OF AS OF
JUNE 30, 1998 DEC. 31, 1997
-----------------------------------
ASSETS (UNAUDITED)
INVESTMENTS
<S> <C> <C>
Fixed maturities at fair value $ 3,076.8 $ 3,143.6
Equity securities at fair value 800.4 806.3
Short-term investments 2,363.1 1,697.7
Other investments 304.4 274.5
----------------- -----------------
TOTAL INVESTMENTS 6,544.7 5,922.1
CASH 1,034.4 1,084.7
RECEIVABLES
Insurance brokerage and consulting
services 5,564.2 5,320.5
Premiums and other 1,108.7 862.6
Accrued investment income 60.8 66.8
----------------- -----------------
TOTAL RECEIVABLES 6,733.7 6,249.9
INTANGIBLE ASSETS 3,273.6 3,094.5
OTHER ASSETS 2,258.8 2,340.0
----------------- -----------------
TOTAL ASSETS $ $ 19,845.2 $ 18,691.2
================= =================
AS OF AS OF
JUNE 30, 1998 DEC. 31, 1997
-----------------------------------
LIABILITIES AND EQUITY (UNAUDITED)
POLICY LIABILITIES
Future policy benefits $ 946.7 $ 942.6
Policy and contract claims 797.5 809.4
Unearned and advance premiums 1,874.4 1,869.7
Other policyholder funds 1,032.9 828.1
----------------- -----------------
TOTAL POLICY LIABILITIES 4,651.5 4,449.8
GENERAL LIABILITIES
Insurance premiums payable 6,941.1 6,379.8
Commissions and general expenses 1,415.2 1,488.8
Short-term borrowings 931.2 764.2
Notes payable 624.5 637.1
Other liabilities 1,406.6 1,299.4
----------------- -----------------
TOTAL LIABILITIES 15,970.1 15,019.1
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 800.0 800.0
STOCKHOLDERS' EQUITY
Common stock - $1 par value 171.5 171.5
Paid-in additional capital 395.4 377.0
Net unrealized investment gains 176.6 189.0
Net foreign exchange losses (91.4) (85.6)
Retained earnings 2,654.8 2,463.4
Less - Treasury stock at cost (73.2) (93.2)
Deferred compensation (208.6) (200.0)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 3,025.1 2,822.1
----------------- -----------------
TOTAL LIABILITIES AND EQUITY $ 19,845.2 $ 18,691.2
================= =================
<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)
Second Quarter Ended
---------------------------------------
(millions except per share data) June 30, June 30, Percent
1998 1997 Change
------------ ------------ ------------
Revenue
<S> <C> <C> <C>
Brokerage commissions and fees $ 1,059.5 $ 885.0 19.7%
Premiums and other 423.4 421.9 0.4
Investment income 140.1 117.6 19.1
------------ ------------ ------------
Total revenue 1,623.0 1,424.5 13.9
------------ ------------ ------------
Expenses
General expenses 1,104.2 980.7 12.6
Benefits to policyholders 226.8 215.6 5.2
Interest expense 21.2 15.9 33.3
Amortization of intangible assets 31.2 33.4 (6.6)
Special charges -- 27.0 --
------------ ------------ ------------
Total expenses 1,383.4 1,272.6 8.7
------------ ------------ ------------
Income Before Income Tax and Minority Interest 239.6 151.9 57.7
Provision for income tax 89.8 57.0 57.5
------------ ------------ ------------
Income Before Minority Interest 149.8 94.9 57.9
Minority interest - 8.205% mandatorily redeemable
preferred capital securities (10.3) (10.7) N/A
------------ ------------ ------------
Net Income $ 139.5 $ 84.2 65.7%
============ ============ ============
Net Income Available for Common Stockholders $ 138.8 $ 80.9 71.6%
============ ============ ============
Net Income Per Share:
Basic net income per share $ 0.82 $ 0.48 70.8%
============ ============ ============
Dilutive net income per share $ 0.81 $ 0.48 68.8%
============ ============ ============
Cash dividends paid on common stock $ 0.28 $ 0.26
============ ============
Dilutive average common and common equivalent shares outstanding 172.2 169.6
------------ ------------
Six Months Ended
---------------------------------------
(millions except per share data) June 30, June 30, Percent
1998 1997 Change
------------ ------------ ------------
Revenue
Brokerage commissions and fees $ 2,055.7 $ 1,726.7 19.1%
Premiums and other 840.2 816.3 2.9
Investment income 288.6 235.8 22.4
------------ ------------ ------------
Total revenue 3,184.5 2,778.8 14.6
------------ ------------ ------------
Expenses
General expenses 2,152.4 1,923.6 11.9
Benefits to policyholders 452.7 420.8 7.6
Interest expense 41.3 30.6 35.0
Amortization of intangible assets 60.7 64.7 (6.2)
Special charges -- 172.0 --
------------ ------------ ------------
Total expenses 2,707.1 2,611.7 3.7
------------ ------------ ------------
Income Before Income Tax and Minority Interest 477.4 167.1 185.7
Provision for income tax 179.0 62.7 185.5
------------ ------------ ------------
Income Before Minority Interest 298.4 104.4 185.8
Minority interest - 8.205% mandatorily redeemable
preferred capital securities (20.6) (19.5) N/A
------------ ------------ ------------
Net Income $ 277.8 $ 84.9 227.2%
============ ============ ============
Net Income Available for Common Stockholders $ 276.5 $ 78.2 253.6%
============ ============ ============
Net Income Per Share:
Basic net income per share $ 1.64 $ 0.47 248.9%
============ ============ ============
Dilutive net income per share $ 1.61 $ 0.46 250.0%
============ ============ ============
Cash dividends paid on common stock $ 0.54 $ 0.50
============ ============
Dilutive average common and common equivalent shares outstanding 171.7 169.5
------------ ------------
<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 CASH FLOWS
(Unaudited)
Six Months Ended
--------------------------------------
June 30, June 30,
(millions) 1998 1997
------------------ -----------------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES ........................................ $ 784.2 $ 294.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of investments
Fixed maturities
Maturities ......................................................... 59.2 61.3
Calls and prepayments .............................................. 36.1 72.9
Sales .............................................................. 1,748.7 526.6
Equity securities ...................................................... 1,481.2 639.1
Other investments ...................................................... 26.8 32.9
Purchase of investments
Fixed maturities ....................................................... (1,776.1) (757.9)
Equity securities ...................................................... (1,485.5) (655.8)
Other investments ...................................................... (109.3) (38.1)
Sale (purchase) of short-term investments - net.............................. (703.0) 285.5
Acquisition of subsidiaries ................................................. (263.0) (1,288.8)
Acquired fiduciary funds from acquisitions .................................. - 734.0
Property and equipment and other ............................................ (105.0) (28.7)
------------------ -----------------
CASH USED BY INVESTING ACTIVITIES .................................. (1,089.9) (417.0)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock transactions - net ......................................... 14.9 21.9
Issuance of short-term borrowings - net ................................... 167.0 258.0
Issuance of mandatorily redeemable preferred capital securities ........... - 800.0
Repayment of long-term debt ............................................... (12.7) (71.8)
Interest sensitive life, annuity and investment contracts
Deposits ............................................................... 221.0 154.1
Withdrawals ............................................................ (48.3) (6.8)
Cash dividends to stockholders ............................................ (91.5) (88.9)
------------------ -----------------
CASH PROVIDED BY FINANCING ACTIVITIES .............................. 250.4 1,066.5
------------------ -----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ...................................... 5.0 (22.3)
INCREASE (DECREASE) IN CASH .................................................. (50.3) 921.5
CASH AT BEGINNING OF PERIOD .................................................. 1,084.7 410.1
------------------ -----------------
CASH AT END OF PERIOD ........................................................ $ 1,034.4 $ 1,331.6
------------------ -----------------
<FN>
See the accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
- 4 -
<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, 1997 for additional
details of Aon's financial position, as well as a description of the
accounting policies which have been continued without material change. The
details included in the notes have not changed except as a result of
normal transactions in the interim and the events mentioned in the
footnotes below.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. Statements of Financial Accounting Standards (SFAS)
---------------------------------------------------
Comprehensive Income
--------------------
As of January 1, 1998, Aon adopted the interim reporting requirements of
Financial Accounting Standards Board (FASB) Statement No. 130 (Reporting
Comprehensive Income) as presented below. Statement No. 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on Aon's
net income or stockholders' equity. Statement No. 130 requires net
unrealized investment gains or losses on Aon's available-for-sale
securities and net foreign exchange gains or losses, which currently are
reported in stockholders' equity, to be included in accumulated other
comprehensive income and the disclosure of comprehensive income. When Aon
adopts the fiscal year end reporting requirements of Statement No. 130 in
its December 31, 1998 financial statements, the totals of accumulated
other comprehensive income items and comprehensive income (which includes
net income), will be displayed separately and prior year financial
statements will be reclassified to conform to the requirements of
Statement No. 130.
The components of comprehensive income, net of related tax, for the
second quarter ended June 30, 1998 and 1997 are as follows:
(millions) 1998 1997
---- ----
Net income $ 139.5 $ 84.2
Net unrealized investment gains(losses) (5.8) 40.2
Net foreign exchange losses (8.1) (11.5)
------------ -----------
Comprehensive income $ 125.6 $ 112.9
============ ===========
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<PAGE>
The components of comprehensive income, net of related tax, for the
six months ended June 30, 1998 and 1997 are as follows:
(millions) 1998 1997
---- ----
Net income $ 277.8 $ 84.9
Net unrealized investment gains(losses) (12.4) 6.1
Net foreign exchange losses (5.8) (47.1)
------------ -----------
Comprehensive income $ 259.6 $ 43.9
============ ===========
The components of accumulated other comprehensive income, net of related
tax, at June 30, 1998 and December 31, 1997, are as follows:
(millions) 1998 1997
---- ----
Net unrealized investment gains $ 176.6 $ 189.0
Net foreign exchange losses (91.4) (85.6)
------------ -----------
Accumulated other comprehensive income $ 85.2 $ 103.4
============ ===========
Segments Disclosure
-------------------
In 1997, the FASB issued Statement No. 131 (Disclosures about Segments of
an Enterprise and Related Information). Statement No. 131 establishes
standards for providing disclosures related to products and services,
geographic areas, and major customers. Aon will adopt this statement in
its fourth quarter 1998 financial statements as required. Implementation
of this statement is not expected to have a material effect on Aon's
financial statements.
Derivatives Disclosure
----------------------
In June 1998, the FASB issued Statement No. 133 (Accounting for Derivative
Instruments and Hedging Activities). This Statement is required to be
adopted in fiscal years beginning after June 15, 1999 with early adoption
permitted as of the beginning of any quarter subsequent to its issuance.
Aon has not yet decided when it will adopt the new statement. Statement
No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities and will require Aon to recognize
all derivatives on the statement of financial position at fair value. Aon
has not yet determined the effect this statement will have on Aon's
earnings and financial position.
3. Capital Stock
-------------
In first half 1998, Aon reissued 538,500 shares of common stock from
treasury for employee benefit plans. Aon purchased 85,600 shares of its
common stock at a total cost of $4.3 million during first half 1998. In
addition, Aon reissued 381,900 shares of common stock from treasury in
connection with business combinations. There were 2.7 million shares of
common stock held in treasury at June 30, 1998.
- 6 -
<PAGE>
4. Capital Securities
------------------
In 1997, Aon Capital A, a subsidiary trust of Aon, issued $800 million of
8.205% 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.
5. Business Combinations
---------------------
In first half 1998, operating results were impacted by the insurance
brokerage acquisitions of Le Blanc de Nicolay (the largest reinsurance
broker in France) and Gil y Carvajal (the largest retail and reinsurance
broker in Spain). These acquisitions were accounted for by the purchase
method and their effect was not material to Aon's consolidated financial
statements.
In third quarter 1998, Aon anticipates the completion of certain insurance
brokerage acquisitions. These acquisitions will be accounted for by the
purchase method and their effect is not anticipated to be material to
Aon's consolidated financial statements.
6. Earnings Per Share
------------------
Earnings per share is computed in accordance with FASB Statement No. 128
(Earnings Per Share) and is calculated as follows:
Second Quarter Ended
----------------------------------
(millions except per share data) June 30, 1998 June 30, 1997
--------------------------------------------------------------------
Net income $ 139.5 $ 84.2
8% preferred stock dividends - 2.7
Redeemable preferred stock dividends 0.7 0.6
--------------------------------
Net income for dilutive and basic $ 138.8 $ 80.9
================================
Basic shares outstanding 169.3 167.6
Common stock equivalents 2.9 2.0
--------------------------------
Dilutive potential common shares 172.2 169.6
--------------------------------------------------------------------
Basic earnings per share $0.82 $0.48
Dilutive earnings per share $0.81 $0.48
--------------------------------------------------------------------
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<PAGE>
Six Months Ended
--------------------------------
(millions except per share data) June 30, 1998 June 30, 1997
--------------------------------------------------------------------
Net income $ 277.8 $ 84.9
8% preferred stock dividends - 5.4
Redeemable preferred stock dividends 1.3 1.3
--------------------------------
Net income for dilutive and basic $ 276.5 $ 78.2
================================
Basic shares outstanding 168.9 167.3
Common stock equivalents 2.8 2.2
--------------------------------
Dilutive potential common shares 171.7 169.5
--------------------------------------------------------------------
Basic earnings per share $1.64 $0.47
Dilutive earnings per share $1.61 $0.46
--------------------------------------------------------------------
7. Alexander & Alexander Services Inc. (A&A) Discontinued Operations
-----------------------------------------------------------------
A&A discontinued its insurance underwriting operations in 1985, some of
which were then placed into run-off, the remainder sold in 1987. In
connection with those sales, A&A provided indemnities to the purchaser for
various estimated and potential liabilities, including provisions to cover
future losses attributable to insurance pooling arrangements, a stop-loss
reinsurance agreement, and actions or omissions by various underwriting
agencies previously managed by an A&A subsidiary. As of June 30, 1998, the
liabilities associated with the foregoing indemnities and liabilities of
insurance underwriting subsidiaries that are currently in run-off were
included in other liabilities in the accompanying condensed consolidated
statement of financial position and amounted to $152 million. Such
liabilities are net of reinsurance recoverables and other assets of $184
million.
8. 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.
At the time of Aon's acquisition of A&A in January 1997, A&A was facing
various legal claims, several of which remain ongoing. While the
possibility of substantial exposure remains, based on current facts and
circumstances, Aon believes the possibility of material loss resulting
from these exposures is remote.
- 8 -
<PAGE>
Although the ultimate outcome of these suits cannot be ascertained and
liabilities in indeterminate amounts may be imposed on Aon 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.
- 9 -
<PAGE>
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR SECOND QUARTER AND FIRST HALF 1998
CONSOLIDATED RESULTS
- - - - - - - - - - - - - - - - - --------------------
GENERAL
- - - - - - - - - - - - - - - - - -------
Certain amounts in the prior years' condensed consolidated financial statements
have been reclassified to conform to the 1998 presentation.
Brokerage commissions and fees increased $174.5 million or 19.7% and $329
million or 19.1% in second quarter and first half 1998, respectively, primarily
reflecting business combination activity related to the acquisitions of Le Blanc
de Nicolay (Le Blanc) in second quarter 1998, Gil y Carvajal in first quarter
1998, Jauch & Hubener in fourth quarter 1997 and, to a lesser extent, Minet and
certain other 1997 brokerage acquisitions.
Premiums and other is primarily related to insurance underwriting operations.
Premiums and other increased $1.5 million or 0.4% and $23.9 million or 2.9% in
second quarter and first half 1998, respectively, compared with the same period
last year. Extended warranty premiums earned increased $7.9 million or 6.2% in
the quarter reflecting continued growth, primarily in the appliance and
electronic lines. Direct sales premiums earned increased 0.6% as a result of
changes in the consumer insurance market. The runoff of North American auto
credit business partially offset this growth in premiums earned.
Investment income, which includes related expenses and realized investment
gains, increased $22.5 million or 19.1% and $52.8 million or 22.4% in the second
quarter and first half 1998, respectively, when compared to prior year.
Investment income growth was primarily related to insurance brokerage and
consulting acquisitions in 1998 and in second half 1997. Higher levels of
income received on private equity and other investment holdings in second
quarter 1998 and first half 1998 contributed to overall investment income growth
when compared to prior year. Investment income from insurance brokerage and
consulting operations, primarily relating to fiduciary funds, increased to $50
million in second quarter 1998 from $38 million in 1997, and to $94 million in
first half 1998 from $77 million in 1997, due to brokerage acquisition activity
and internal growth.
Total revenue increased $198.5 million or 13.9% and $405.7 million or 14.6% in
the second quarter and first half 1998, respectively, primarily attributable to
brokerage acquisition activity .
Benefits to policyholders increased $11.2 million or 5.2% and $31.9 million or
7.6% million in second quarter and first half 1998, respectively, reflecting a
higher volume of new extended warranty business. This growth was partially
offset by the run-off of auto credit business as planned.
In second quarter 1997, Aon reported special charges of $27 million ($16.9
million after-tax) to recognize investment losses incurred at Alexander &
Alexander Services Inc. (A&A ) before Aon acquired A&A. At Aon's acquisition
date, the carrying value of certain securities in A&A's portfolio was overstated
by the previously unrecognized investment losses.
- 10 -
<PAGE>
In first quarter 1997, Aon reported special charges of $145 million ($90.6
million after-tax) related to the restructuring of Aon's brokerage operations as
a result of the acquisition of A&A. The special charges included costs related
to severance and other costs and the consolidation of real estate space. The
1997 special charges were reflected as a separate component of total expenses in
the condensed consolidated statements of operations.
Total expenses increased $110.8 million or 8.7% and $95.4 million or 3.7% in
second quarter and first half 1998, respectively, when compared to prior year.
The increase reflects the inclusion of 1997 pretax special charges. In first
half 1998, restructuring liabilities related to 1997 special charges have been
reduced as planned, and reflect payments on those special charges and valuation
adjustments related to recent acquisitions. Total expenses, excluding the 1997
special charges, increased 11.1% and 11% for the second quarter and first half
1998, respectively. Income before income tax increased $87.7 million or 57.7% in
second quarter 1998 and $310.3 million or 185.7% in first half 1998 when
compared to prior year, primarily due to the inclusion of special charges in
first half 1997. Excluding special charges, income before income tax increased
33.9% and 40.8% when compared to second quarter and first half 1997, largely due
to growth in the insurance brokerage and consulting services segment and
to the achievement of cost savings resulting from the consolidation of brokerage
operations.
MAJOR LINES OF BUSINESS
- - - - - - - - - - - - - - - - - -----------------------
GENERAL
- - - - - - - - - - - - - - - - - -------
For purposes of the following line of business discussions, comparisons against
last year's results exclude special charges. Management anticipates that the
full benefit of cost savings on brokerage operations will continue to be
achieved throughout the remainder of 1998. In addition, references to income
before income tax exclude minority interest related to the capital securities.
INSURANCE BROKERAGE AND CONSULTING SERVICES
- - - - - - - - - - - - - - - - - -------------------------------------------
First half 1998 revenue and income before income tax have been impacted by the
acquisitions of Le Blanc and Gil y Carvajal in second and first quarter 1998,
respectively, and the acquisitions of Jauch & Hubener, Minet and certain other
brokerage acquisitions in third and fourth quarter 1997.
Insurance and other services (retail, reinsurance and wholesale brokerage)
revenue increased $175 million or 22.5% and $313.5 million or 20.5% in the
second quarter and first half 1998, respectively, when compared with the same
period last year, largely due to acquisition activity. Insurance and other
services continued to reflect highly competitive property and casualty pricing.
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 $11 million or
7.6% and $32 million or 11.7% for the second quarter and first half 1998,
respectively, when compared to prior year, primarily due to second half 1997
acquisitions. A decline in human resources consulting revenue partially offset
growth in the quarter.
- 11 -
<PAGE>
Overall, revenue for the insurance brokerage and consulting services segment
increased $186 million or 20.2% and $345.5 million or 19.2% in the second
quarter and first half 1998, respectively. Acquisitions made in 1998 and second
half 1997 accounted for a majority of the above mentioned revenue growth in the
quarter. Excluding the impact of acquisitions, revenue related to brokerage core
businesses grew approximately 3% in the quarter and 4% in the first half in a
very competitive environment. Income before income tax increased $69.5 million
or 54.6% and $144.2 million or 61.1% when compared to second quarter and first
half 1997, respectively. The brokerage segment continues to be impacted by a
soft property and casualty market, particularly in the reinsurance brokerage
business. Pretax margins in this segment improved for the quarter reflecting
cost savings resulting from the consolidation of businesses acquired in 1997.
U.S./INTERNATIONAL RESULTS
- - - - - - - - - - - - - - - - - --------------------------
Second quarter 1998 international insurance brokerage and consulting services
revenue represents 50% of the worldwide total and international income before
income tax represents 53% of the worldwide total. International brokerage
revenue of $554.3 million increased 34.5% for the second quarter, primarily
reflecting 1998 and second half 1997 acquisitions. International brokerage
income before income tax increased 62.2% for the second quarter reflecting
the above mentioned acquisition activity. International brokerage revenues for
retail brokerage services generally are strongest during the first quarter of
the year, particularly for continental Europe, while expenses are incurred on
a more even basis throughout the year.
INSURANCE UNDERWRITING
- - - - - - - - - - - - - - - - - ----------------------
The insurance underwriting line of business primarily provides direct sales life
and accident and health products, and extended warranty products to individuals.
Revenue increased $8.8 million or 1.9% and $38.4 million or 4.2% for the second
quarter and first half 1998, respectively, when compared to prior year,
primarily due to growth in the U.S. electronic and appliance lines and in the
international mechanical extended warranty line. Direct sales business also
continued to grow modestly.
Pretax income from insurance underwriting decreased $1.4 million or 2% and $1.7
million or 1.3% in the second quarter and first half 1998, respectively, when
compared with last year reflecting planned start-up costs in the worksite
marketing initiative, and the run-off of auto credit business and specialty
liability programs. Overall, benefit and expense margins in second quarter 1998
did not suggest any significant shift in operating trends. Extended warranty
profits improved in the quarter, primarily due to the mechanical extended
warranty line of business.
U.S./INTERNATIONAL RESULTS
- - - - - - - - - - - - - - - - - ---------------------------
Second quarter 1998 U.S. insurance underwriting revenue represents 69% of the
worldwide total and U.S. income before income tax represents 71% of the
worldwide total. Second quarter U.S. insurance underwriting revenue and income
before income tax decreased 1.2% and 3%, respectively, when compared to the 1997
level. Results reflect the runoff of the auto credit business and specialty
liability programs. International insurance underwriting revenue of $148.3
million increased 9.6% in the quarter principally due to growth in premiums
earned, primarily in the mechanical extended warranty line. International pretax
income increased modestly in the quarter.
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<PAGE>
CORPORATE AND OTHER
- - - - - - - - - - - - - - - - - -------------------
Revenue in this category consists primarily of investment income (including
realized investment gains) on capital. 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 and information technology costs.
Revenue increased 13.3% or $3.7 million and 38.9% or $21.8 million in the second
quarter and first half 1998, respectively, primarily due to higher levels of
investment income received on private equity and other investment holdings. The
loss before income tax increased $7.4 million in the quarter over the same
period last year. Contributing to the higher loss in the quarter were financing
costs and goodwill amortization related to acquisitions, additional interest
expense on short-term and long-term debt related to acquisition financing, and
costs related to investments in information technology.
- 13 -
<PAGE>
<TABLE>
<CAPTION>
Aon Corporation
MAJOR LINES OF BUSINESS
Second Quarter Ended Six Months Ended
------------------------------ -------------------------------
(millions except per share data) June 30, June 30, Percent June 30, June 30, Percent
1998 1997 Change 1998 1997 Change
---------- ---------- -------- ---------- ---------- --------
REVENUE
- - - - - - - - - - - - - - - - - -------
Insurance brokerage and consulting services:
<S> <C> <C> <C> <C> <C> <C>
Insurance and other services .............. $ 953.8 $ 778.8 22.5% $ 1,843.9 $ 1,530.4 20.5%
Consulting ................................ 155.2 144.2 7.6 305.3 273.3 11.7
---------- ---------- -------- ---------- ---------- --------
TOTAL REVENUE ........................... 1,109.0 923.0 20.2 2,149.2 1,803.7 19.2
---------- ---------- -------- ---------- ---------- --------
Insurance underwriting:
Direct sales - life, accident and health . 261.2 259.7 0.6 518.9 514.4 0.9
Extended warranty ........................ 157.0 147.8 6.2 316.4 277.2 14.1
Other .................................... 64.3 66.2 (2.9) 122.2 127.5 (4.2)
---------- ---------- -------- ---------- ---------- --------
TOTAL REVENUE ........................... 482.5 473.7 1.9 957.5 919.1 4.2
---------- ---------- -------- ---------- ---------- --------
Corporate and other ........................... 31.5 27.8 13.3 77.8 56.0 38.9
---------- ---------- -------- ---------- ---------- --------
TOTAL REVENUE ........................... $ 1,623.0 $ 1,424.5 13.9% $ 3,184.5 $ 2,778.8 14.6%
========== ========== ======== ========== ========== ========
INCOME BEFORE INCOME TAX
- - - - - - - - - - - - - - - - - ------------------------
Insurance brokerage and consulting services ... $ 196.9 $ 127.4 54.6% $ 380.2 $ 236.0 61.1%
Special charges ......................... -- -- -- -- (145.0) --
---------- ---------- --------- ---------- ---------- --------
Including special charges ............... 196.9 127.4 54.6 380.2 91.0 317.8
Insurance underwriting ........................ 69.1 70.5 (2.0) 133.6 135.3 (1.3)
Corporate and other ........................... (26.4) (19.0) N/A (36.4) (32.2) N/A
Special charges ......................... -- (27.0) -- -- (27.0) --
---------- ---------- -------- ---------- ---------- --------
Including special charges ............... (26.4) (46.0) N/A (36.4) (59.2) N/A
---------- ---------- -------- ---------- ---------- --------
TOTAL INCOME BEFORE INCOME TAX .......... $ 239.6 $ 151.9 57.7% $ 477.4 $ 167.1 185.7%
========== ========== ======== ========== ========== ========
</TABLE>
- 14 -
<PAGE>
NET INCOME FOR SECOND QUARTER AND FIRST HALF 1998
Second quarter 1998 net income was $139.5 million ($0.81 dilutive per share)
compared to $84.2 million ($0.48 dilutive per share) in 1997. First half 1998
net income was $277.8 million ($1.61 dilutive per share) compared to $84.9
million ($0.46 dilutive per share) in 1997. First half 1997 net income was
primarily influenced by after-tax 1997 special charges of $107.5 million ($0.64
per share) with no comparable amount in first half 1998. Basic net income per
share was $0.82 and $0.48 in second quarter and $1.64 and $0.47 in first half
1998 and 1997, respectively.
The effective tax rate was 37.5% for both 1998 and 1997. Dilutive average shares
outstanding for second quarter 1998 increased 1.5% when compared to 1997
primarily due to the reissuance of common shares from treasury for employee
benefits.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF FIRST HALF 1998
Cash flows provided by operating activities in first half 1998 were $784.2
million, an increase of $489.9 million from first half 1997. The increase
represents growth in the insurance brokerage businesses and the timing of the
settlement of brokerage receivables and payables.
Investing activities used cash of $1.1 billion which was made available from
financing and operating activities. Cash of $703 million was used during first
half 1998 for the purchase of short-term investments. Cash used for acquisition
activity during first half 1998 was $263 million, primarily reflecting the Gil y
Carvajal and Le Blanc de Nicolay acquisitions.
Cash totaling $250.4 million was provided during first half 1998 from financing
activities. The decrease of $816.1 million from first half 1997 is primarily a
result of the 1997 issuance of capital securities. Cash was used to pay
dividends of $90.2 million on common 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 $3.1 billion, Aon's total fixed maturity
portfolio is invested primarily in investment grade holdings (95.9%) and has a
fair value which is 104.2% of amortized cost.
- 15 -
<PAGE>
Total assets increased $1.2 billion to $19.8 billion since year-end 1997.
Invested assets at June 30, 1998 increased $622.6 million from year-end levels,
primarily due to higher levels of short-term investments relating to brokerage
fiduciary funds . The amortized cost and fair value of less than investment
grade fixed maturity investments, at June 30, 1998, were $114.4 million and
$116.2 million, respectively. The carrying value of non-income producing
investments in Aon's portfolio at June 30, 1998 was $69.6 million, or 1.1% of
total invested assets.
Aon is continuing to update its computer systems in preparation for the Year
2000 and expects to complete its efforts by mid 1999. Aon's Year 2000
remediation cost for all lines of business is expected to be less than $50
million through 1999 and is not expected to have a material adverse impact on
Aon's financial position or results of operations. Individual business units are
continuing to make the necessary changes to become compliant according to their
plan and their progress is being monitored by Aon's Year 2000 compliance
coordinating team. If Aon's clients or vendors are unable to resolve Year 2000
compliance issues in a timely manner, a material operating and financial risk
could result.
Aon uses derivative financial instruments (primarily financial futures, swaps,
options and foreign exchange forwards) to: (a) hedge foreign currency
translation and transaction risks and other business risks (i.e. interest rate
and credit risk); (b) hedge asset price risk associated with financial
instruments whose change in value is reported under SFAS 115; and (c) manage its
overall asset/liability duration match. As of June 30, 1998, Aon had open
contracts, related to the above, which had unrealized losses of approximately $1
million.
Insurance brokerage and consulting services receivables increased $243.7 million
when compared to year-end 1997. Insurance premiums payable increased $561.3
million in first half 1998, reflecting acquisitions and the receipt of client
fiduciary funds.
Short-term borrowings increased at the end of first half 1998 by $167 million
when compared to year-end 1997. The increase is primarily due to the financing
of acquisitions. Notes payable decreased at the end of first half 1998 by $12.6
million when compared to year-end 1997. Included in notes payable at June 30,
1998 is approximately $55 million which represents the principal amount of notes
due within one year.
Stockholders' equity increased $203 million in first half 1998 to $17.91 per
share, an increase of $1.11 per share since year-end 1997. This increase
consisted of net income partially offset by net unrealized investment losses of
$12.4 million and dividends to common stockholders of $90.2 million.
REVIEW BY INDEPENDENT AUDITORS
- - - - - - - - - - - - - - - - - ------------------------------
The condensed consolidated financial statements at June 30, 1998, 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.
- 16 -
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Aon Corporation
We have reviewed the accompanying condensed consolidated statement of financial
position of Aon Corporation as of June 30, 1998, and the related condensed
consolidated statements of operations for the three-month and six-month periods
ended June 30, 1998 and 1997, and the condensed consolidated statements of cash
flows for the six-month periods ended June 30, 1998 and 1997. 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, 1997, 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 10, 1998, 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, 1997, is fairly stated, in all material
respects, in relation to the consolidated statement of financial position from
which it has been derived.
/s/ Ernst & Young LLP
----------------------
ERNST & YOUNG LLP
Chicago, Illinois
August 5, 1998
- 17 -
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits filed with this report are listed on the
--------
attached Exhibit Index.
(b) Reports on Form 8-K - No Current Reports on Form 8-K were filed for
-------------------
the quarter ended June 30, 1998.
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, 1998 /s/ Harvey N. Medvin
--------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer)
- 18 -
<PAGE>
Aon CORPORATION
---------------
EXHIBIT INDEX
-------------
Exhibit Number
In Regulation S-K
Item 601 Exhibit Table
- - - - - - - - - - - - - - - - - ----------------------
(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
- 19 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12(a)
Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Six Months
Ended June 30, Years Ended December 31,
-------- -------- -------- -------- -------- -------- --------
(millions except ratios) 1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations
<S> <C> <C> <C> <C> <C> <C> <C>
before provision for income taxes (1) $ 477.4 $ 167.1 $ 541.6 $ 445.6 $ 458.0 $ 397.0 $ 331.6
ADD BACK FIXED CHARGES:
Interest on indebtedness 41.3 30.6 69.5 44.7 55.5 46.4 42.3
Interest on ESOP 1.4 1.9 3.5 4.3 5.3 5.9 6.5
Portion of rents representative of
interest factor 22.2 29.4 44.3 28.6 21.4 28.7 26.1
-------- -------- -------- -------- -------- -------- --------
INCOME AS ADJUSTED $ 542.3 $ 229.0 $ 658.9 $ 523.2 $ 540.2 $ 478.0 $ 406.5
======== ======== ======== ======== ======== ======== ========
FIXED CHARGES:
Interest on indebtedness $ 41.3 $ 30.6 $ 69.5 $ 44.7 $ 55.5 $ 46.4 $ 42.3
Interest on ESOP 1.4 1.9 3.5 4.3 5.3 5.9 6.5
Portion of rents representative of
interest factor 22.2 29.4 44.3 28.6 21.4 28.7 26.1
-------- -------- -------- -------- -------- -------- --------
TOTAL FIXED CHARGES $ 64.9 $ 61.9 $ 117.3 $ 77.6 $ 82.2 $ 81.0 $ 74.9
======== ======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 8.4 3.7 5.6 6.7 6.6 5.9 5.4
======== ======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES (2) 6.5 7.1 7.9
======== ======== ========
<FN>
(1) Income from continuing operations before provision for income taxes and
minority interest includes special charges of $172 million for the six
months ended June 30, 1997 and the year ended December 31, 1997, and $90.5
million in the year ended December 31, 1996.
(2) 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 six months ended June 30,
1997 and for the years ended December 31, 1997 and 1996, respectively.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12(b)
Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Six Months
Ended June 30, Years Ended December 31,
-------- -------- -------- -------- -------- -------- --------
(millions except ratios) 1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations
<S> <C> <C> <C> <C> <C> <C> <C>
before provision for income taxes (1) $ 477.4 $ 167.1 $ 541.6 $ 445.6 $ 458.0 $ 397.0 $ 331.6
ADD BACK FIXED CHARGES:
Interest on indebtedness 41.3 30.6 69.5 44.7 55.5 46.4 42.3
Interest on ESOP 1.4 1.9 3.5 4.3 5.3 5.9 6.5
Portion of rents representative of
interest factor 22.2 29.4 44.3 28.6 21.4 28.7 26.1
-------- -------- -------- -------- -------- -------- --------
INCOME AS ADJUSTED $ 542.3 $ 229.0 $ 658.9 $ 523.2 $ 540.2 $ 478.0 $ 406.5
======== ======== ======== ======== ======== ======== ========
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS:
Interest on indebtedness $ 41.3 $ 30.6 $ 69.5 $ 44.7 $ 55.5 $ 46.4 $ 42.3
Preferred stock dividends 35.0 42.0 82.1 28.7 37.5 48.4 47.5
-------- -------- -------- -------- -------- -------- --------
INTEREST AND DIVIDENDS 76.3 72.6 151.6 73.4 93.0 94.8 89.8
Interest on ESOP 1.4 1.9 3.5 4.3 5.3 5.9 6.5
Portion of rents representative of
interest factor 22.2 29.4 44.3 28.6 21.4 28.7 26.1
TOTAL FIXED CHARGES AND PREFERRED
-------- -------- -------- -------- -------- -------- --------
STOCK DIVIDENDS $ 99.9 $ 103.9 $ 199.4 $ 106.3 $ 119.7 $ 129.4 $ 122.4
======== ======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS (2) 5.4 2.2 3.3 4.9 4.5 3.7 3.3
======== ======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS (3) 3.9 4.2 5.8
======== ======== ========
<FN>
(1) Income from continuing operations before provision for income taxes and
minority interest includes special charges of $172 million for the six
months ended June 30, 1997 and the year ended December 31, 1997, and $90.5
million in the year ended December 31, 1996.
(2) Included in total fixed charges and preferred stock dividends for the six
months ended June 30, 1998 and 1997 are $33 million and $31.2 million,
respectively, and $64 million for the year ended December 31, 1997 of
pretax distributions on the 8.205% mandatorily redeemable preferred
capital securities which are classified as "minority interest" on the
condensed consolidated statements of operations.
(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 six months ended June 30,
1997 and for the years ended December 31, 1997 and 1996, respectively.
</FN>
</TABLE>
<PAGE>
Exhibit 15
Board of Directors and Stockholders
Aon Corporation
We are aware of the incorporation by reference in the Registration Statements of
Aon Corporation ("Aon") described in the following table of our report dated
August 5, 1998 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, 1998:
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-8 333-55773 Pertaining to Aon's stock award plan, stock
option plan and employee stock purchase plan
S-4 333-21237 Offer to exchange Capital Securities of Aon Capital A
S-3 333-50607 Pertaining to the registration of 369,000
shares of common stock
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
----------------------
ERNST & YOUNG LLP
Chicago, Illinois
August 5, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<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
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.0
<CASH> 3,398<F1>
<SECURITIES> 3,877<F2>
<RECEIVABLES> 6,818
<ALLOWANCES> 84
<INVENTORY> 0
<CURRENT-ASSETS> 0<F3>
<PP&E> 1,243
<DEPRECIATION> 705
<TOTAL-ASSETS> 19,845
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 625<F4>
850<F5>
0
<COMMON> 172
<OTHER-SE> 2,853
<TOTAL-LIABILITY-AND-EQUITY> 19,845
<SALES> 0
<TOTAL-REVENUES> 3,185
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,707<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 477
<INCOME-TAX> 179
<INCOME-CONTINUING> 298
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 278
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.61
<FN>
<F1> Includes short-term investments.
<F2> Includes fixed maturities and equity securities at fair value.
<F3> Not applicable based on current reporting format.
<F4> Includes notes payable.
<F5> Preferred stock at par value. Includes Company-obligated Mandatorily
Redeemable Preferred Capital Securities of Subsidiary Trust
holding solely to Company's Junior Subordinated Debentures.
<F6> Represents total expenses.
</FN>
</TABLE>
