SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
-
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 3 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
---
Number of shares of common stock outstanding:
No. Outstanding
Class as of 9-30-99
----- -------------
$1.00 par value Common 256,634,418
(Adjusted to reflect a three-for-two stock split
paid on May 17, 1999 to stockholders of
record on May 4, 1999)
<PAGE>
Part 1
Financial Information
<TABLE>
<CAPTION>
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
(millions) As of As of
Sept. 30, 1999 Dec. 31, 1998
------------------------------
<S> <C> <C>
Assets (Unaudited)
Investments
Fixed maturities at fair value $ 2,682 $ 3,103
Equity securities at fair value 613 768
Short-term investments 2,509 2,221
Other investments 679 360
---------- ----------
Total investments 6,483 6,452
Cash 871 723
Receivables
Insurance brokerage and consulting
services 5,797 5,423
Premiums and other 1,195 1,120
Accrued investment income 62 63
---------- ----------
Total receivables 7,054 6,606
Intangible assets 3,842 3,500
Other assets 2,863 2,407
---------- ----------
Total Assets $ 21,113 $ 19,688
========== ==========
As of As of
Sept. 30, 1999 Dec. 31, 1998
------------------------------
Liabilities and Stockholders' Equity (Unaudited)
Insurance Premiums Payable $ 7,435 $ 6,948
Policy Liabilities
Future policy benefits 1,009 986
Policy and contract claims 797 779
Unearned and advance premiums 1,931 1,797
Other policyholder funds 1,282 1,261
---------- ----------
Total policy liabilities 5,019 4,823
General Liabilities
General expenses 1,033 1,259
Short-term borrowings 1,129 844
Notes payable 817 580
Other liabilities 1,674 1,367
---------- ----------
Total Liabilities 17,107 15,821
Commitments and Contingent Liabilities
Redeemable Preferred Stock 50 50
Company-Obligated Mandatorily Redeemable
Preferred Capital Securities of Subsidiary
Trust holding solely the Company's Junior
Subordinated Debentures 800 800
Stockholders' Equity
Common stock - $1 par value 259 172
Paid-in additional capital 515 450
Accumulated other comprehensive loss (263) (116)
Retained earnings 2,948 2,782
Less - Treasury stock at cost (66) (58)
Deferred compensation (237) (213)
---------- ----------
Total Stockholders' Equity 3,156 3,017
---------- ----------
Total Liabilities and Stockholders' Equity $ 21,113 $ 19,688
========== ==========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
Aon Corporation
Condensed Consolidated Statements of Income
(Unaudited)
Third Quarter Ended Nine Months Ended
----------------------------- -----------------------------
(millions except per share data) Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUE
Brokerage commissions and fees ............................ $ 1,127 $ 1,023 $ 3,382 $ 3,079
Premiums and other ........................................ 475 431 1,353 1,271
Investment income ......................................... 168 153 457 441
---------- ----------- ---------- ----------
TOTAL REVENUE .......................................... 1,770 1,607 5,192 4,791
---------- ----------- ---------- ----------
EXPENSES
General expenses .......................................... 1,222 1,119 3,698 3,271
Benefits to policyholders ................................. 244 220 720 673
Interest expense .......................................... 29 23 74 64
Amortization of intangible assets ......................... 36 30 105 91
---------- ----------- ---------- ----------
TOTAL EXPENSES ......................................... 1,531 1,392 4,597 4,099
---------- ----------- ---------- ----------
INCOME BEFORE INCOME TAX AND MINORITY INTEREST ............... 239 215 595 692
Provision for income tax .................................. 91 80 226 259
---------- ----------- ---------- ----------
INCOME BEFORE MINORITY INTEREST .............................. 148 135 369 433
Minority interest - 8.205% trust preferred capital securities (10) (11) (30) (31)
---------- ----------- ---------- ----------
NET INCOME ................................................... $ 138 $ 124 $ 339 $ 402
========== =========== ========== ==========
Preferred stock dividends ................................. (1) (1) (2) (2)
---------- ----------- ---------- ----------
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS ................. $ 137 $ 123 $ 337 $ 400
========== =========== ========== ==========
NET INCOME PER SHARE (1):
Basic net income per share ................................ $ 0.53 $ 0.48 $ 1.30 $ 1.57
========== =========== ========== ==========
Dilutive net income per share ............................. $ 0.52 $ 0.47 $ 1.28 $ 1.54
========== =========== ========== ==========
CASH DIVIDENDS PAID ON COMMON STOCK (1) ...................... $ 0.21 $ 0.19 $ 0.61 $ 0.55
========== =========== ========== ==========
Dilutive average common and common equivalent shares outstanding (1) 264.2 260.9 263.3 258.9
---------- ----------- ---------- ----------
<FN>
(1) Reflects the three-for-two stock split effective May 4, 1999.
</FN>
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
--------------------------------
Sept. 30 Sept. 30
(millions) 1999 1998
--------------- ---------------
<S> <C> <C>
Cash Provided by Operating Activities ........................................ $ 478 $ 707
Cash Flows from Investing Activities:
Sale of investments
Fixed maturities
Maturities ........................................................ 53 82
Calls and prepayments ............................................. 146 72
Sales ............................................................. 999 1,848
Equity securities ..................................................... 404 1,755
Other investments ..................................................... 35 59
Purchase of investments
Fixed maturities ...................................................... (905) (2,041)
Equity securities ..................................................... (352) (1,769)
Other investments ..................................................... (256) (104)
Purchase of short-term investments - net ................................... (249) (484)
Acquisition of subsidiaries ................................................ (373) (323)
Property and equipment and other ........................................... (195) (170)
----------- -----------
Cash Used by Investing Activities ................................. (693) (1,075)
----------- -----------
Cash Flows from Financing Activities:
Treasury stock transactions - net ......................................... (22) 10
Issuance of short-term borrowings - net ................................... 328 289
Issuance of long-term debt ................................................ 255 -
Repayment of long-term debt ............................................... - (27)
Interest sensitive life, annuity and investment contracts
Deposits .............................................................. 297 400
Withdrawals ........................................................... (335) (80)
Cash dividends to stockholders ............................................ (156) (146)
----------- -----------
Cash Provided by Financing Activities ............................. 367 446
----------- -----------
Effect of Exchange Rate Changes on Cash ...................................... (4) 8
Increase in Cash ............................................................. 148 86
Cash at Beginning of Period .................................................. 723 1,085
----------- -----------
Cash at End of Period ........................................................ $ 871 $ 1,171
=========== ===========
</TABLE>
See the accompanying notes to condensed consolidated financial statements.
- 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 amounts 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, 1998 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. Stock Split
-----------
On March 19, 1999, Aon's board of directors authorized a three-for-two
stock split of Aon's $1.00 par value common stock, with approximately 86
million shares payable on May 17, 1999. The stock split has not been
retroactively reflected in the December 31, 1998 condensed consolidated
statement of financial position. The effect of the stock split was to
increase common stock and decrease additional paid-in-capital by $86
million. All references in the accompanying financial statements to the
number of common shares and per share amounts have been retroactively
restated to reflect the stock split.
3 Statements of Financial Accounting Standards (SFAS)
----------------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133 (Accounting for Derivative Instruments and Hedging
Activities). 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.
In June 1999, the FASB issued Statement No. 137 that amends the required
adoption date of Statement No. 133 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. Early adoption is permitted as of
the beginning of any quarter subsequent to the issuance of Statement No.
137. Aon has not yet decided when it will adopt Statement No. 133.
- 5 -
<PAGE>
4. Comprehensive Income
--------------------
The components of comprehensive income, net of related tax, for the third
quarter and nine months ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(millions) Third Quarter Ended Nine Months Ended
------------------- -----------------
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 138 $ 124 $ 339 $ 402
Net unrealized investment losses (55) (70) (155) (82)
Net foreign exchange gains (losses) (12) 9 (57) 3
Net additional minimum pension
liability reduction - - 65 -
--------- ---------- ---------- ---------
Comprehensive income $ 71 $ 63 $ 192 $ 323
========= ========== ========== =========
</TABLE>
The components of accumulated other comprehensive loss, net of related
tax, at September 30, 1999 and December 31, 1998, are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(millions) 1999 1998
------------- --------------
<S> <C> <C>
Net unrealized investment gains (losses) $ (77) $ 78
Net foreign exchange losses (155) (98)
Net additional minimum pension liability (31) (96)
------------- ------------
Accumulated other comprehensive loss $ (263) $ (116)
============= ============
</TABLE>
5. Business Segments
-----------------
In fourth quarter 1998, Aon adopted FASB Statement No. 131 (Disclosure
about Segments of an Enterprise and Related Information). Beginning in
1999, all prior period segment information is restated to conform to the
current period presentation. Aon classifies its businesses into three
major operating segments: Insurance Brokerage and Other Services,
Consulting and Insurance Underwriting; and into one non-operating segment,
Corporate and Other.
Intercompany revenues and expenses are eliminated in computing
consolidated revenues and income before income tax.
In accordance with the interim period reporting requirements of Statement
No. 131, the segment information located in the tables on pages 13 through
16 is incorporated herein by reference.
Amounts reported in the tables for the four segments, when aggregated,
total to the amounts in the accompanying condensed consolidated financial
statements.
- 6 -
<PAGE>
6. Notes Payable
-------------
In second quarter 1999, Aon filed a universal shelf registration on Form
S-3 with the Securities and Exchange Commission for the issuance of $500
million of debt and equity securities. In a public offering based on the
shelf registration, Aon issued $250 million of 6.9% debt securities due
June, 2004. The net proceeds from the sale of the 6.9% notes were used to
reduce outstanding short-term commercial paper borrowings.
7. Capital Stock
-------------
During nine months 1999, Aon reissued 1.4 million shares of common stock
from treasury for employee benefit plans and 720,000 shares in connection
with the employee stock purchase plan. Aon purchased 1.8 million shares of
its common stock at a total cost of $72 million during nine months 1999.
There were 1.9 million shares of common stock held in treasury at
September 30, 1999. In addition, during nine months 1999, Aon issued 1.2
million new shares of common stock for employee benefit plans and for
acquisitions.
8. 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.
9. Special Charges
---------------
In first quarter 1999, Aon recorded special charges of $163 million ($102
million after tax or $0.39 per share), including provisions for
restructuring and pension misselling. These charges are included in
general expenses in the condensed consolidated statements of income.
Total severance and related pension expenses, involving 900 positions,
were $99 million. Of the $99 million, approximately $32 million represents
benefits related to pension plans and is included in Aon's total pension
liability. Workforce reductions are related to a voluntary early
retirement plan for employees of Aon's U.S. and Canadian operating
subsidiaries, as well as the consolidation of Aon's European insurance
brokerage and other services operations, primarily in the United Kingdom.
As of September 30, 1999, approximately $65 million has been paid related
to the termination of approximately 870 employees. The remaining payments
on these terminations and the remaining terminations plan to be paid by
the first quarter 2000.
In the consulting segment, special charges of approximately $43 million
were recorded in first quarter 1999 to reflect amounts required to make
redress payments to customers who purchased private pension plans in the
United Kingdom several years ago. As of September 30, 1999, approximately
$8 million has been paid related to redress payments. The remaining
amounts are anticipated to be paid primarily by early 2001. Aon's ultimate
exposure from the private pension plan review, as presently calculated, is
subject to a number of variable factors including, among others, equity
markets, the rate of response to the pension review mailings, the interest
rate established quarterly by
- 7 -
<PAGE>
the U.K. Pension Investment Authority for calculating compensation, and
the precise scope, duration, and methodology of the review.
The remaining charges of $21 million primarily reflect the lease
abandonments relating to the consolidation of worldwide brokerage
operations, and other exit activities.
10. Income Per Share
----------------
Income per share is computed as follows:
<TABLE>
<CAPTION>
(millions except per Third Quarter Ended Nine Months Ended
share data) ------------------- ------------------
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $138 $124 $339 $402
Redeemable preferred stock
dividends 1 1 2 2
---- ---- ---- ----
Net income for dilutive and
basic $137 $123 $337 $400
==== ==== ==== =====
Basic shares outstanding 260 256 259 254
Common stock equivalents 4 5 4 5
---- ---- ---- ----
Dilutive potential common
shares 264 261 263 259
-------------------------------------------------------------------------------------
Basic net income per share $ 0.53 $ 0.48 $ 1.30 $ 1.57
Dilutive net income per share $ 0.52 $ 0.47 $ 1.28 $ 1.54
-------------------------------------------------------------------------------------
</TABLE>
11. 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, with 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 September 30,
1999, 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. Such liabilities are net of
reinsurance recoverables and other assets.
12. Contingencies
-------------
Aon and its subsidiaries are subject to numerous claims, tax assessments
and lawsuits that arise in the ordinary course of business. The damages
that may be claimed are substantial, including in many instances claims
for punitive or extraordinary damages. Accruals for these items have been
provided to the extent that losses are deemed probable and are estimable.
- 8 -
<PAGE>
In the fourth quarter of 1998, Aon received an Internal Revenue Service
(IRS) revenue agent's report (RAR) proposing adjustments to the tax of
certain Aon subsidiaries for the period 1990 through 1993. In the RAR, the
IRS has contended that retro-rated extended warranty contracts do not
constitute insurance for tax purposes. Accordingly, the IRS has proposed a
deferral of deductions for obligations under those contracts. The effect
of such deferral would be to increase the current tax obligations of
certain Aon subsidiaries by approximately $74 million, $3 million, $5
million and $12 million (plus interest) in years 1990, 1991, 1992 and
1993, respectively. Aon believes that the IRS's position in the RAR is
without merit and inconsistent with numerous previous IRS private letter
rulings. Aon has commenced an administrative appeal and intends to contest
vigorously such treatment. Aon believes that if the contracts are deemed
not to be insurance for tax purposes, they would be recharacterized in
such a way that the increased taxes for the years in question would be far
less than the proposed assessments. In the same RAR, a number of
additional items were identified which would also increase the tax of
other Aon subsidiaries for 1990 through 1993. Aon believes that these
additional items should be resolved through factual substantiation of
certain accounting matters.
In the second quarter of 1999, Allianz Life Insurance Company of North
America, Inc. ("Allianz") filed an amended complaint in Minnesota adding a
brokerage subsidiary of Aon as a defendant in an action which Allianz had
originally brought against three insurance carriers which Allianz
reinsures. These three carriers, together referred to as the "APS
Insurers," are American Phoenix Life and Reassurance Company, Phoenix Home
Life Mutual Insurance Company and Sun Life Assurance Company of Canada.
APS Insurers provided certain reinsurance to a pool of insurers and to
certain facilities managed by Unicover Managers, Inc. ("Unicover"), a New
Jersey corporation not affiliated with Aon. The Unicover pool and
facilities provided reinsurance relating to certain types of workers'
compensation coverage.Allianz alleges that Centaur Underwriting Management
Ltd. ("Centaur"), a Bermuda-based entity not affiliated with Aon, is a
managing general underwriter that held underwriting authority for, and was
an authorized agent of, the APS Insurers, but has not named Centaur as
a defendant. Allianz further alleges that the Aon subsidiary acted as an
agent of the APS Insurers when placing reinsurance coverage on their
behalf. Allianz claims that the reinsurance it issued should be rescinded
or that it should be awarded damages, based on alleged fraudulent,
negligent and innocent misrepresentations by APS Insurers, through their
alleged authorized agents, Centaur and the Aon subsidiary defendant.
Allianz has also asserted claims against the APS Insurers for alleged
breach of contract, alleged breach of fiduciary duty, alleged negligence
and alleged violations of the Minnesota Consumer Fraud Act and the
Minnesota Deceptive Trade Practices Act; some of these claims are based in
part on allegations about the supposed actions of Centaur and/or the Aon
subsidiary. Aon believes that the Aon subsidiary has meritorious defenses
and the Aon subsidiary intends to vigorously defend this claim. While
the Allianz lawsuit is among several lawsuits and arbitrations that have
been inititated by various persons that relate directly or indirectly to
one or more entities managed by Unicover, except for an action filed to
compel Aon to produce documents, to which Aon is in the process of
responding, the Allianz lawsuit is the only lawsuit or arbitration
relating to Unicover in which any Aon related entity is involved as a
party.
Although the ultimate outcome of all matters referred to above 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 matters
will not have a material adverse effect on the consolidated financial
position of Aon.
- 9 -
<PAGE>
13. Business Combinations
---------------------
In July 1999, Aon acquired Nikols Sedgwick, a leading Italian insurance
and reinsurance broker. This acquisition was financed by internal funds
and has been accounted for by the purchase method. The effect of the
Nikols Sedgwick acquisition was not material to Aon's consolidated
financial statements.
- 10 -
<PAGE>
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR THIRD QUARTER AND NINE MONTHS 1999
CONSOLIDATED RESULTS
- --------------------
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
- -------------------------------------------------
This quarterly report contains forward-looking statements relating to such
matters as future financial performance, the business of Aon and Year 2000. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical results or those anticipated, depending on a variety
of factors such as changes in worldwide and national economic conditions,
fluctuations in foreign currencies, changes in securities and fixed income
markets, unpredictability and timing and amounts of returns on private equity
holdings, downward commercial property and casualty premium pressures, and the
competitive environment. In addition, Aon notes that a variety of factors could
cause Aon's actual results and experience relating to compliance with Year 2000
to differ materially from the anticipated results or other expectations
expressed in Aon's forward-looking statements concerning Year 2000 issues. These
factors include (i) the unanticipated material impact of a system fault of Aon
relating to Year 2000, (ii) the failure to successfully remediate, in spite of
testing, material systems of Aon, (iii) the time it may take to successfully
remediate a failure once it occurs, as well as the resulting costs and loss of
revenues, and (iv) the failure of third parties to properly remediate material
Year 2000 problems.
GENERAL
- -------
Special charges information located in note 9 to the condensed consolidated
financial statements is incorporated herein by reference.
Brokerage commissions and fees increased $104 million or 10% in third quarter
1999 and $303 million or 10% in nine months 1999, reflecting post-third quarter
1998 business combination activity and internal growth.
Premiums and other is primarily related to insurance underwriting operations.
Premiums and other increased $44 million or 10% in third quarter 1999 and $82
million or 6% in nine months 1999, compared with the same periods last year.
Extended warranty premiums earned increased $38 million or 27% in the quarter,
primarily reflecting continued growth in the appliance and electronics warranty
lines. Direct sales premiums earned increased $9 million or 4% reflecting the
recent introduction of several new products, growth in worksite marketing, and
geographic expansion. The runoff of North American auto credit business
partially offset this growth in premiums earned.
Investment income includes income on disposals and related expenses. For the
quarter, consolidated investment income increased $15 million or 10% compared to
prior year, primarily due to income on disposals of private equity investments
and higher levels of income from private equity and other investment holdings.
For nine months 1999, investment income is up $16 million or 4% compared to
1998. The primary factors causing this change are approximately $30 million
income on disposal of tax-exempt bonds
- 11 -
<PAGE>
in first quarter 1999, the settlement of a dispute relating to investments with
a third party in second quarter 1999, and the combination of income on disposals
and higher levels of income from private equity investments. Declining yields
on fixed maturity investments and a reduction in short-term interest rates
partially offset the increase in investment income in the nine months 1999.
Total revenue increased $163 million or 10% in third quarter 1999 and $401
million or 8% in nine months 1999, attributable to post-third quarter 1998
brokerage acquisition activity and internal growth in the operating segments as
well as investment income.
Benefits to policyholders increased $24 million or 11% in third quarter 1999 and
$47 million or 7% in nine months 1999. The increase in the quarter and nine
months was consistent with growth in related premiums earned and reflected no
unusual claims activity. The run-off of certain specialty liability programs is
now substantially complete. Partially offsetting the increase in policyholder
benefits is the runoff of auto credit business as planned.
Total expenses increased $139 million or 10% in third quarter and $498 million
or 12% in nine months 1999 when compared to prior year. The nine months 1999
increase reflects the inclusion of first quarter 1999 pretax special charges of
$163 million. Total expenses, excluding the 1999 special charges, increased 8%
for the nine months when compared to 1998. Third quarter and nine months 1999
expenses increased over prior year primarily due to investments in new business
initiatives, technology, product development and the branding campaign. Due to
the early retirement program in first quarter 1999 and significant changes in
interest rates, Aon revalued its domestic and U.K. pension plans in both the
second and third quarters of 1999. The revaluation resulted in a reduction of
pension expense.
Restructuring liabilities for recent acquisitions and 1999 special charges have
been reduced by payments as planned. Total annualized cost savings are projected
to be approximately $50 million related to first quarter 1999 restructuring
activity.
References to income before income tax are before minority interest related to
the issuance of 8.205% mandatorily redeemable preferred capital securities
(capital securities).
Income before income tax increased $24 million or 11% in third quarter 1999.
Nine months 1999 income before income tax decreased $97 million or 14% when
compared to prior year, primarily due to the inclusion of special charges.
Excluding special charges, income before income tax increased $66 million or 10%
in nine months 1999 when compared to prior year, reflecting internal growth in
each of the operating business segments in addition to the impact of business
combination activity in 1999 and 1998 in the insurance and other services and
consulting segments.
BUSINESS SEGMENTS
- -----------------
GENERAL
- -------
For purposes of the following business segments discussions, comparisons against
1998 results exclude discontinued operations and special charges. In addition,
references to income before income tax exclude minority interest related to the
capital securities.
A review of financial performance for each of the four business segments
follows.
- 12 -
<PAGE>
INSURANCE BROKERAGE AND OTHER SERVICES
- --------------------------------------
The Insurance Brokerage and Other Services segment consists principally of Aon's
retail, reinsurance, specialty and wholesale brokerage operations.
Third quarter 1999 Insurance Brokerage and Other Services revenue increased $89
million or 10% and nine months 1999 revenue increased $262 million or 9%.
Post-third quarter 1998 acquisitions as well as internal growth accounted for
the majority of revenue growth.Excluding the impact of acquisitions, commissions
and fee revenue for brokerage core businesses grew approximately 7% in the
quarter and 6% in nine months in a very competitive environment. Investment
income in this segment decreased $4 million in third quarter 1999 compared to
prior year reflecting a reduction in short-term interest rates.
Revenue earned related to reinsurance obtained by Unicover pool members and
facilities (see footnote 12 - Contingencies) was $7 million and $16 million for
third quarter and nine months 1999, respectively. Fourth quarter 1999 Unicover
revenue is expected to be significantly less than it was in third quarter 1999.
Unicover revenue earned for full year 1998 was $15 million.
<TABLE>
<CAPTION>
========================================================================================
Insurance Brokerage and Other Services
(millions)
Third quarter ended Sept. 30, Nine months ended Sept. 30,
1999 1998 1999 1998
========================================================================================
<S> <C> <C> <C> <C>
Revenue:
United States $ 543 $ 493 $ 1,563 $1,360
United Kingdom 209 190 616 596
Europe 137 130 505 461
Rest of World 123 110 345 350
- ----------------------------------------------------------------------------------------
Total revenue $ 1,012 $ 923 $ 3,029 $2,767
- ----------------------------------------------------------------------------------------
Income before income tax
excluding special charges $ 163 $ 144 $ 535 $ 494
Special charges - - (119) -
- ----------------------------------------------------------------------------------------
Income before income tax $ 163 $ 144 $ 416 $ 494
- ----------------------------------------------------------------------------------------
</TABLE>
U.S. revenue of $543 million in third quarter 1999 was up 10% from 1998. Total
international revenues in the quarter increased $39 million or 9% when compared
to prior year. International reinsurance business continues to be strong, both
in new business and retention of existing business, particularly in Ireland,
Spain and The Netherlands.
U.S. revenue of $1.6 billion in nine months 1999 was up 15% from 1998. European
revenue of $505 million increased 10% from 1998, primarily due to acquisition
activity and new and renewal business mentioned above. Rest of world revenue
declined in 1999 primarily due to the impact of foreign exchange and short-term
interest rates.
Insurance Brokerage and Other Services third quarter and nine months 1999
segment income results were impacted positively by acquisitions, in particular
the Nikols Sedgwick acquisition in third quarter 1999. Retail brokerage results
continued to reflect competitive property and casualty pricing in the quarter
and nine months results although some tightening of prices was evident.
- 13 -
<PAGE>
Pretax income grew 13% in the quarter over 1998 and nine months 1999 pretax
income, excluding first quarter 1999 special charges, grew 8% over 1998,
primarily due to both internal growth and to acquisitions. Pretax margins in
this segment improved in the quarter when compared to prior year, reflecting
cost savings and some reduction in market-pricing pressures. Nine months 1999
pretax margin also reflected cost savings related to first quarter 1999
restructuring activity and improved expense controls.
CONSULTING
- ----------
The Consulting segment provides a full range of employee benefits, human
resources, compensation, and change management services.
In the Consulting segment, third quarter 1999 revenue increased 5% to $158
million while nine months 1999 revenue increased 4% to $475 million. Acquisition
activity subsequent to third quarter 1998 and internal growth influenced revenue
growth. Excluding the impact of acquisitions, foreign exchange, and the
reclassification of certain operating unit results from the consulting segment
to the brokerage segment, revenue for consulting core businesses grew
approximately 8% in the quarter and 7% in nine months 1999. Investment income in
this segment declined $1 million in the quarter compared to prior year
reflecting a reduction in short-term interest rates.
<TABLE>
<CAPTION>
=========================================================================================
Consulting Third quarter ended Sept. 30, Nine Months ended Sept. 30,
(millions) 1999 1998 1999 1998
=========================================================================================
<S> <C> <C> <C> <C>
Revenue:
United States $ 102 $ 99 $ 291 $ 286
United Kingdom 36 33 108 99
Europe 7 6 32 26
Rest of World 13 12 44 44
- ----------------------------------------------------------------------------------------
Total revenue $ 158 $ 150 $ 475 $ 455
- ----------------------------------------------------------------------------------------
Income before income tax
excluding special charges $ 15 $ 13 $ 51 $ 43
Special charges - - (44) -
- ----------------------------------------------------------------------------------------
Income before income tax $ 15 $ 13 $ 7 $ 43
- ----------------------------------------------------------------------------------------
</TABLE>
U.S. revenue of $102 million in third quarter 1999 was up $3 million from 1998.
United Kingdom and European revenue of $43 million increased 10% from 1998,
primarily reflecting favorable performance at a majority of foreign business
units, in particular growth emanating principally from the United Kingdom, The
Netherlands and France. Rest of world revenues increased $1 million in the
quarter when compared to prior year.
U.S. revenue of $291 million in nine months 1999 was up 2% from 1998. United
Kingdom and European revenue of $140 million increased 12% from 1998. Rest of
world revenues were flat when compared to prior year.
- 14 -
<PAGE>
Pretax income increased to $15 million from $13 million in third quarter 1998, a
15% increase. The increase reflects international revenue growth mentioned above
and strong organic growth in the U.S. employee benefits operations, United
Kingdom and Canada. Pretax margins in this segment increased in 1999 when
compared to prior year reflecting good expense controls.
Pretax income in nine months 1999 increased $8 million or 19% reflecting strong
organic revenue growth and reductions in overall expenses.
INSURANCE UNDERWRITING
- ----------------------
The Insurance Underwriting segment is comprised of direct sales life and
accident and health, warranty, specialty and other insurance products.
<TABLE>
<CAPTION>
=====================================================================================
Insurance Underwriting Third quarter ended Sept. 30, Nine months ended Sept. 30,
(millions) 1999 1998 1999 1998
=====================================================================================
<S> <C> <C> <C> <C>
Revenue:
Direct sales $ 275 $ 266 $ 815 $ 785
Extended warranty 202 164 538 480
Specialty and other 63 63 186 185
- -------------------------------------------------------------------------------------
Total revenue $ 540 $ 493 $ 1,539 $ 1,450
- -------------------------------------------------------------------------------------
Income before income tax $ 75 $ 75 $ 214 $ 208
- -------------------------------------------------------------------------------------
Revenue:
United States $ 370 $ 345 $ 1,061 $ 1,016
United Kingdom 97 75 258 218
Europe 27 30 85 86
Rest of World 46 43 135 130
- -------------------------------------------------------------------------------------
Total revenue $ 540 $ 493 $ 1,539 $ 1,450
- -------------------------------------------------------------------------------------
</TABLE>
Revenue was $540 million in third quarter 1999, up 10% from 1998. Revenue was
$1.5 billion in nine months 1999, up 6% from 1998. There was a higher volume of
new business in the appliance and electronics extended warranty lines, both in
the U.S. and internationally, as well as in the U.S. mechanical extended
warranty line. Direct sales continued to expand its product distribution through
worksite marketing programs and the recent introduction of new product
initiatives on a global basis. Auto credit business continues to runoff.
Investment income allocated to Insurance Underwriting increased $2 million in
the quarter when compared to prior year.
U.S. revenue of $370 million was up 7% in third quarter 1999, principally due to
growth in revenues for mechanical warranty and, to a lesser extent, direct sales
lines of business. United Kingdom and European revenue of $124 million rose 18%.
Rest of world revenue was $46 million, up $3 million or 7% from prior year.
U.S. revenue of $1.1 billion was up 4% in nine months 1999, principally due to
growth in revenues for direct sales and the mechanical extended warranty line of
business. United Kingdom and European revenue of $343 million rose 13%,
primarily reflecting a higher volume of new business in the appliance and
electronic extended warranty lines. Rest of world revenue was $135 million, up
$5 million or 4% from prior year.
- 15 -
<PAGE>
Pretax income in the quarter was flat when compared to prior year, primarily
reflecting the completion of the profitable runoff of special liability policies
prior to 1999. Nine months 1999 pretax income increased $6 million or 3% in
nine months 1999 when compared to prior year. Growth in the quarter reflects
revenue earned from the recent introduction of several new direct sales products
and worksite marketing in addition to expense ratio improvements in the
mechanical extended warranty line. Start-up costs related to new direct sales
product initiatives partially offset the direct sales and extended warranty
improvements. Overall, benefit and expense margins in third quarter 1999 did
not suggest any significant shift in operating trends.
CORPORATE AND OTHER
- -------------------
Revenue in this category consists primarily of investment income, including
income on disposals, which is not otherwise allocated to the operating segments.
Corporate operating expenses include administrative and certain information
technology costs.
<TABLE>
<CAPTION>
======================================================================================
Corporate and Other Third quarter ended Sept. 30, Nine months ended Sept. 30,
(millions) 1999 1998 1999 1998
======================================================================================
<S> <C> <C> <C> <C>
Total revenue $ 60 $ 41 $ 149 $ 119
- --------------------------------------------------------------------------------------
Loss before income tax $ (14) $ (17) $ (42) $ (53)
- --------------------------------------------------------------------------------------
</TABLE>
Corporate and Other revenue for the third quarter 1999 was $60 million, up $19
million from the third quarter 1998. In the quarter, revenue growth resulted
from higher income levels on private equity investments including significant
income on private equity disposals, the proceeds of which were reinvested
in similar types of equity securities in accordance with Aon's investment
strategy for the corporate segment. Nine months 1999 revenue was $149 million,
up $30 million from prior year. Included in nine months 1999 was approximately
$30 million of gains from disposal of $500 million in tax-exempt bonds in first
quarter 1999. The sale of these bonds (and the reinvestment of proceeds in
foreign source income securities) was part of a program designed to enable
Aon to fully utilize foreign tax credits. The switch from tax-exempt to taxable
bonds increased Aon's effective tax rate from 37.5% in first quarter 1999 to
38.25% in subsequent quarters. Higher revenue from private equity investments
was partially offset by lower yields on other corporate assets in the nine
months 1999. The timing of revenues from private equity investments varies
significantly between periods. The investment strategy for the corporate segment
is to seek long-term total returns from publicly-traded equities and less liquid
private equities which exceed long-term security market rates.
Corporate and Other expenses for the quarter were $74 million, up $16 million
from the same period last year. Nine months 1999 expenses were $191 million, up
$19 million from prior year. Expenses in this segment are composed of interest
expense, goodwill amortization and general expenses. Corporate and other
expenses also included costs related to the branding campaign launched in second
quarter 1999. For the quarter and nine months, interest expense and goodwill
amortization increased over prior year, reflecting the financing of acquisitions
made during the last twelve months.
- 16 -
<PAGE>
NET INCOME FOR THIRD QUARTER AND NINE MONTHS 1999
References to share data reflect the three-for-two stock split announced on
March 19, 1999 and paid on May 17, 1999. Third quarter 1999 net income was $138
million ($0.52 dilutive per share) compared to $124 million ($0.47 dilutive per
share) in 1998. Nine months 1999 net income was $339 million ($1.28 dilutive per
share) compared to $402 million ($1.54 dilutive per share) in 1998. Nine months
1999 net income was primarily influenced by after-tax 1999 special charges of
$102 million ($0.39 per share) with no comparable amount in nine months 1998.
Basic net income per share, including 1999 special charges, was $0.53 and $0.48
in third quarter 1999 and 1998, respectively, and $1.30 and $1.57 in nine months
1999 and 1998, respectively. Dividends on the redeemable preferred stock have
been deducted from net income to compute income per share.
The effective tax rate was increased to 38.25% for the second and subsequent
quarters of 1999 from 37.5% in first quarter 1999 and 1998 as part of a program
designed to enable Aon to fully utilize foreign tax credits by switching from
tax-exempt to taxable bonds. Dilutive average shares outstanding for third
quarter 1999 increased 1% when compared to 1998, primarily due to the reissuance
of common shares from treasury for employee stock compensation benefits,
increase in common stock equivalents and, to a lesser extent, for acquisition
financing.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF NINE MONTHS 1999
Cash flows provided by operating activities in nine months 1999 were $478
million, a decrease of $229 million from nine months 1998.The decrease primarily
represents first quarter 1999 special charges, payments on acquisition-related
valuation adjustments, the branding campaign and the timing of the settlement of
brokerage receivables and payables. Excluding these noncomparable items, cash
flow provided by operating activities in nine months 1999 was higher than nine
months 1998.
Investing activities used cash of $693 million, which was made available from
financing and operating activities. Cash of $249 million was used during nine
months 1999 for the purchase of short-term investments. Cash used for
acquisition activity during nine months 1999 was $373 million, primarily
reflecting brokerage acquisitions.
Cash totaling $367 million was provided during nine months 1999 from financing
activities. This was primarily due to the issuance of $250 million of 6.9% debt
securities in second quarter 1999. Net short-term borrowing issuances of $328
million in nine months 1999 principally reflect funds provided for the financing
of acquisitions and other general corporate purposes. Cash was used to pay
dividends of $154 million on common stock and $2 million on redeemable preferred
stock during nine months 1999.
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.
- 17 -
<PAGE>
Due to the contractual nature of its insurance policyholder liabilities, which
are intermediate to long-term in nature, Aon has invested primarily in fixed
maturities. With a carrying value of $2.7 billion, Aon's total fixed maturity
portfolio is invested primarily in investment grade holdings (95%) and has a
fair value which is 98% of amortized cost.
Total assets increased $1.4 billion to $21.1 billion since year-end 1998.
Invested assets at September 30, 1999 increased $31 million from year-end
levels. At September 30, 1999, less than investment grade fixed maturity
investments had an amortized cost of $137 million and a fair value of $130
million. The carrying value of non-income producing investments in Aon's
portfolio at September 30, 1999 was $37 million, or 0.6% of total invested
assets.
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 September 30, 1999, Aon had open
contracts, related to the above, which had unrealized losses of approximately $2
million.
Insurance brokerage and consulting services receivables increased $374 million
when compared to year-end 1998. Insurance premiums payable increased $487
million in nine months 1999, reflecting acquisitions and the receipt of client
fiduciary funds.
Short-term borrowings increased at the end of nine months 1999 by $285 million
when compared to year-end 1998. The net increase in short-term borrowings,
compared to year-end 1998, is principally due to the financing of acquisitions,
common stock purchases, and other general corporate purposes. Notes payable
increased at the end of nine months 1999 by $237 million when compared to
year-end 1998. The principal factor influencing this increase is the issuance of
$250 million of 6.9% debt securities due June 2004 (see note 6). Included in
notes payable at September 30, 1999 is approximately $106 million, which
represents the principal amount of notes due within one year. Of this amount,
approximately $100 million represents Aon's 6.875% debt securities, due October
1, 1999, which were redeemed at 100% of the principal amount plus accrued
interest.
Stockholders' equity increased $139 million in nine months 1999 to $12.30 per
share, an increase of $0.47 per share since year-end 1998. The principal factors
influencing this increase were net income (which includes $102 million of
after-tax special charges) and a $65 million reduction of the additional minimum
pension liability due to the revaluation of the U.K. pension plans. Partially
offsetting this increase during the nine months 1999 were net unrealized
investment losses of $155 million, net foreign exchange losses of $57 million
and dividends to stockholders of $156 million. Fluctuations in unrealized
investment gains and losses and foreign exchange gains and losses from period to
period are largely based on market conditions; however, they have decreased
equity by $232 million on an accumulated basis (see note 4).
- 18 -
<PAGE>
YEAR 2000 READINESS DISCLOSURE
Aon's State of Readiness
- ------------------------
Aon is affected by both its own computer information systems and by third
parties with which it has business relationships, in the processing of data
relating to the Year 2000 and beyond. Aon began work on the computer Year 2000
issue in 1995 and its efforts were substantially completed by the end of
third quarter 1999. In 1997, Aon designated a full-time Year 2000 project
coordinator who established Aon's Year 2000 project office to monitor the
progress of and act as a central contact for its major business units worldwide.
Year 2000 efforts under the direction of the Aon Executive Vice President of
Business Systems Solutions are focused primarily on two areas: internal systems
readiness and readiness of carriers with whom Aon places insurance business on
behalf of its clients.
Information Technology (IT)
- ---------------------------
In a corporate-wide Year 2000 readiness analysis completed in early 1998,
individual business units were required to formally develop plans, where they
had not already done so, to achieve Year 2000 compliance, and to provide their
plans to the project office. Each plan consisted of an evaluation of the
compliance status of internal IT systems and an identification of specific
hardware and software compliance issues. As a result of this effort, the project
office is currently tracking over 200 worldwide business unit plans. Each
business unit is required to report its progress against its plan on a monthly
basis to the project office. It is each business unit's responsibility to ensure
that adequate testing of systems is performed to ensure Year 2000 functionality.
During January 1999, a business unit readiness review and risk assessment for
each business unit was performed. Dates were established for internal audit
reviews to test documentation for major global business units. These audits have
been substantially completed and identified issues have been addressed. Aon's
target date to remediate or replace mission critical applications for
substantially all business units was the end of third quarter 1999. This has
been accomplished for 218 Year 2000 reporting business units as of November 15,
1999. Four small business units, two of them recent acquisitions and three of
them outside the U.S., will complete testing and replacement with compliant
systems during the fourth quarter 1999 and are on a watch list. Their status is
reviewed and updated bi-weekly.
Year 2000 Event and Contingency plans are required for all major business units.
An analysis of all newly acquired business units is undertaken immediately after
an acquisition is made and appropriate Year 2000 actions taken. Year 2000
progress and concerns are reported to Aon's senior and business unit management.
A written report was prepared for management covering the four business units
with a mission critical application on the watch list as of November 15, 1999.
These applications will be tracked by the 2000 program office and the status
will be reported to management in a timely manner.
Non-IT
- ------
With respect to non-IT issues, a project coordinator is working with Aon's
facilities management and third party leasing management company to ensure
premises issues are addressed in Aon-owned and leased properties in the United
States. Outside of the U.S., local chief financial officers have been instructed
to make similar inquiries. The results of these efforts were reviewed for U.S.
and European locations as of December 31, 1998. Some relatively minor problems
were uncovered and are in the process of being fixed. The majority of the issues
were with personal computer-based facility management systems.
- 19 -
<PAGE>
Aon has some risk on a location by location basis related to the possible
failure of government agencies, public utilities and providers of
telecommunication and transportation services. Due to Aon's dispersion of
facilities, the largest concentrated risks in this regard are in the Chicago,
New York and London locations.
Third Parties
- -------------
Third parties having a material relationship with Aon have Year 2000 issues to
address and resolve. Such third parties primarily include issuers of investment
securities, financial institutions, governmental agencies, telecommunication
companies, and insurance carriers. An aspect of the project is to identify these
third parties and contact them to seek written assurance as to the third party's
anticipation of being Year 2000 compliant. The nature of Aon's follow-up depends
upon its assessment of the response and of the materiality of the effect of
non-compliance by third parties on Aon. Significant third parties determined to
be at risk for Year 2000 failure will be reported to appropriate Aon management
for possible preemptive action to minimize adverse impact on Aon's operations.
As of September 30, 1999, Aon is not aware of any significant third party with a
Year 2000 issue that would materially impact Aon's results of operations,
liquidity, or capital resources. However, Aon has no means of ensuring that such
third parties will be Year 2000 ready. The inability of third parties to
complete their Year 2000 remediation process in a timely fashion could
materially impact Aon. The effect of non-compliance by third parties is not
determinable.
In 1998, Aon compiled information on and assessed the compliance status of
insurance carriers with whom it places business on behalf of its clients.
Questionnaires were sent to approximately 2,700 carriers worldwide. During 1999,
Aon requested updated information from carriers previously surveyed, again
focusing effort on the markets that received most of the placements. Responses
were received from 99% of the priority carriers surveyed and about 80% overall.
A similar effort to obtain compliance information for non-U.S. carriers was
executed in London and also produced a response rate of almost 80%.
Costs to Address Aon's Year 2000 Issues
As of September 30, 1999, Aon's Year 2000 remediation costs for all business
units is projected to be approximately $70 million. As of September 30, 1999,
Aon has incurred approximately $60 million related to all phases of the Year
2000 project. Approximately $5 million of the remaining project costs will be
incurred and expensed in the fourth quarter 1999 with $5 million projected to be
spent in the Year 2000. These costs are being funded through business unit
operating cash flows.
Risks of Aon's Year 2000 Issues
Aon's management believes it has an effective program in place to resolve the
Year 2000 issues in a timely manner. As noted above, Aon has not yet completed
all necessary Year 2000 program activities for all mission critical applications
for the 200 business units being tested. In addition, disruption in the economy
generally resulting from Year 2000 issues could also materially adversely affect
Aon. The amount of potential liability and lost revenue related to that
disruption cannot be reasonably estimated at this time. With regard to
non-compliance resulting from Aon's IT systems, Aon will devote its financial
and personnel resources to remediate problems as soon as detected. With regard
to non-compliance resulting from third party failure, Aon is in the process of
determining, through responses and other appropriate action, where there is any
material likelihood of non-compliance having a potentially material impact;
however, the potential impact and related costs are not known at this time.
- 20 -
<PAGE>
Aon's Contingency Plans
Contingency planning at Aon has two distinct components. First, all major
business units require both a Millennium Event Plan and a Business Continuity
Plan. These plans are being developed on a business unit basis and were
scheduled for completion by September 30, 1999. Not all were completed and work
will continue on these plans in the fourth quarter. Secondly, technical
contingency plans have been successfully invoked for a number of business units
to date. These include changing compliance strategies from replacement to
remediation (and vice versa) and partial remediation to meet critical dates
prior to January 1, 2000. The latter will require completion of full remediation
in 1999. In addition, preparations must be made for IT software and hardware
that have Year 2000 "bugs" and that are not revealed until after December 31,
1999, despite testing. Aon anticipates handling these situations with immediate
program fixes, swapped backup hardware or process work-around. Aon does not
anticipate that problems of this nature will be significant due to thorough
testing and the distributed nature of Aon's systems. Aon is establishing a Year
2000 Corporate Command Center that will monitor the progress of the 200 plus
business units as they progress through the millennium transition period.
Progress updates will be provided to senior management periodically and problem
situations will be escalated to the appropriate senior manager responsible for
the business unit on a timely basis.
REVIEW BY INDEPENDENT AUDITORS
- ------------------------------
The condensed consolidated financial statements at September 30, 1999, and for
the third quarter and nine months then ended have been reviewed, prior to
filing, by Ernst & Young LLP, Aon's independent auditors, and their report is
included herein.
- 21 -
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Aon Corporation
We have reviewed the accompanying condensed consolidated statement of financial
position of Aon Corporation as of September 30, 1999, and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1999 and 1998, and the condensed consolidated statements of
cash flows for the nine-month periods ended September 30, 1999 and 1998. 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, 1998, 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 9, 1999, 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, 1998, is fairly stated, in all material
respects, in relation to the consolidated statement of financial position from
which it has been derived.
ERNST & YOUNG LLP
Chicago, Illinois
November 2, 1999
- 22 -
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits filed with this report are listed on the
attached Exhibit Index.
(b) Reports on Form 8-K - No Current Reports on Form 8-K were filed for
the quarter ended September 30, 1999.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aon Corporation
---------------
(Registrant)
November 15, 1999 /s/ Harvey N. Medvin
--------------------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer)
- 23 -
<PAGE>
Aon CORPORATION
- ---------------
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
- 24 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12(a)
Aon Corporation and Consolidated Subsidiaries
Combined With Unconsolidated Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
Nine Months Ended
September 30, Years Ended December 31,
------------------- ---------------------------------------------------
(millions except ratios) 1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes (1) $ 595 $ 692 $ 931 $ 542 $ 446 $ 458 $ 397
Add back fixed charges:
Interest on indebtedness 74 64 87 70 45 56 46
Interest on ESOP 1 2 2 3 4 5 6
Portion of rents representative of
interest factor 38 33 51 44 29 21 29
------- ------- -------- ------- ------- ------- -------
Income as adjusted $ 708 $ 791 $1,071 $ 659 $ 524 $ 540 $ 478
======= ======= ======== ======= ======= ======= =======
Fixed charges:
Interest on indebtedness $ 74 $ 64 $ 87 $ 70 $ 45 $ 56 $ 46
Interest on ESOP 1 2 2 3 4 5 6
Portion of rents representative of
interest factor 38 33 51 44 29 21 29
------- ------- ------- ------- ------- ------- -------
Total fixed charges $ 113 $ 99 $ 140 $ 117 $ 78 $ 82 $ 81
======= ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges 6.3 8.0 7.6 5.6 6.7 6.6 5.9
======= ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges (2) 7.7 7.1 7.9
======= ======= =======
<FN>
(1) Income from continuing operations before provision for income taxes and
minority interest includes special charges of $163 million for the nine
months ended September 30, 1999, $172 million for the year ended December
31, 1997 and $90 million for 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 the nine months ended
September 30, 1999 and for the years ended December 31, 1997 and 1996.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12(b)
Aon Corporation and Consolidated Subsidiaries
Combined With Unconsolidated Subsidiaries
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
Nine Months Ended
September 30, Years Ended December 31,
-------------------- ---------------------------------------------------
(millions except ratios) 1999 1998 1998 1997 1996 1995 1994
-------- --------- --------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes (1) $ 595 $ 692 $ 931 $ 542 $ 446 $ 458 $ 397
Add back fixed charges:
Interest on indebtedness 74 64 87 70 45 56 46
Interest on ESOP 1 2 2 3 4 5 6
Portion of rents representative of
interest factor 38 33 51 44 29 21 29
------- ------- ------- ------- ------- ------- -------
Income as adjusted $ 708 $ 791 $1,071 $ 659 $ 524 $ 540 $ 478
======= ======= ======= ======= ======= ======= =======
Fixed charges and preferred stock dividends:
Interest on indebtedness $ 74 $ 64 $ 87 $ 70 $ 45 $ 56 $ 46
Preferred stock dividends 52 52 70 82 29 38 48
------- ------- ------- ------- ------- ------- -------
Interest and dividends 126 116 157 152 74 94 94
Interest on ESOP 1 2 2 3 4 5 6
Portion of rents representative of
interest factor 38 33 51 44 29 21 29
------- ------- ------- ------- ------- ------- -------
Total fixed charges and preferred
stock dividends $ 165 $ 151 $ 210 $ 199 $ 107 $ 120 $ 129
======= ======= ======= ======= ======= ======= =======
Ratio of earnings to combined fixed
charges and preferred stock dividends (2) 4.3 5.2 5.1 3.3 4.9 4.5 3.7
======= ======= ======= ======= ======= ======= =======
Ratio of earnings to combined fixed
charges and preferred stock dividends (3) 5.3 4.2 5.8
======= ======= =======
<FN>
(1) Income from continuing operations before provision for income taxes and
minority interest includes special charges of $163 million for the nine
months ended September 30, 1999, $172 million for the year ended December
31, 1997 and $90 million for the year ended December 31, 1996.
(2) Included in total fixed charges and preferred stock dividends are $49
million for the nine months ended September 30, 1999 and 1998, $66 million
for the year ended December 31, 1998 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 income.
(3) The calculation of this ratio of earnings to fixed charges reflects the
exclusion of special charges from the income from continuing operations
before provision for income taxes component for the nine months ended
September 30, 1999 and for the years ended December 31, 1997 and 1996.
</FN>
</TABLE>
Exhibit 15
Board of Directors and Stockholders
Aon Corporation
We are aware of the incorporation by reference in the Registration Statements of
Aon Corporation ("Aon") described in the following table of our report dated
November 2, 1999 relating to the unaudited condensed consolidated interim
financial statements of Aon Corporation that are included in its Form 10-Q for
the quarter ended September 30, 1999:
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-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
S-3 333-78723 Pertaining to the registration of debt securities,
preferred stock and 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.
ERNST & YOUNG LLP
Chicago, Illinois
November 2, 1999
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.0
<CASH> 3,380 <F1>
<SECURITIES> 3,295 <F2>
<RECEIVABLES> 7,118
<ALLOWANCES> 64
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F3>
<PP&E> 1,531
<DEPRECIATION> 811
<TOTAL-ASSETS> 21,113
<CURRENT-LIABILITIES> 0 <F3>
<BONDS> 817 <F4>
850 <F5>
0
<COMMON> 259 <F6>
<OTHER-SE> 2,897
<TOTAL-LIABILITY-AND-EQUITY> 21,113
<SALES> 0
<TOTAL-REVENUES> 5,192
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,597 <F7>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74
<INCOME-PRETAX> 595
<INCOME-TAX> 226
<INCOME-CONTINUING> 369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 339
<EPS-BASIC> 1.30 <F6>
<EPS-DILUTED> 1.28 <F6>
<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> Represents notes payable.
<F5> Redeemable preferred stock. Includes Company-obligated Mandatorily
Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely
the Company's Junior Subordinated Debentures.
<F6> Adjusted to reflect three-for-two stock split effective May 4, 1999.
<F7> Represents total expenses.
</FN>
</TABLE>
