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, 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 6-30-99
----- -------------
$1.00 par value Common 256,165,977
(Adjusted to reflect a three-for-two stock split
paid on May 17, 1999 to stockholders of
record on May 4, 1999)
<PAGE>
<TABLE>
<CAPTION>
PART 1
FINANCIAL INFORMATION
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(millions) AS OF JUNE AS OF DEC. AS OF JUNE AS OF DEC.
30, 1999 31, 1998 30, 1999 31, 1998
------------------------ -----------------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY
INVESTMENTS INSURANCE PREMIUMS PAYABLE $ 7,640 $ 6,948
Fixed maturities at fair value $ 2,954 $ 3,103 POLICY LIABILITIES
Future policy benefits 1,002 986
Equity securities at fair value 684 768 Policy and contract claims 780 779
Unearned and advance premiums 1,925 1,797
Short-term investments 2,201 2,221 Other policyholder funds 1,378 1,261
---------- ----------
Other investments 519 360 TOTAL POLICY LIABILITIES 5,085 4,823
--------- ---------- GENERAL LIABILITIES
TOTAL INVESTMENTS 6,358 6,452 General expenses 1,086 1,259
Short-term borrowings 926 844
Notes payable 814 580
CASH 1,038 723 Other liabilities 1,485 1,367
---------- ----------
TOTAL LIABILITIES 17,036 15,821
RECEIVABLES
Insurance brokerage and COMMITMENTS AND CONTINGENT LIABILITIES
consulting services 6,119 5,423
REDEEMABLE PREFERRED STOCK 50 50
Premiums and other 1,133 1,120 COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED CAPITAL SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY THE COMPANY'S JUNIOR
Accrued investment income 67 63 SUBORDINATED DEBENTURES 800 800
--------- ----------
TOTAL RECEIVABLES 7,319 6,606 STOCKHOLDERS' EQUITY
Common stock - $1 par value 258 172
Paid-in additional capital 484 450
INTANGIBLE ASSETS 3,642 3,500 Accumulated other comprehensive loss (196) (116)
Retained earnings 2,871 2,782
Less - Treasury stock at cost (61) (58)
OTHER ASSETS 2,647 2,407 Deferred compensation (238) (213)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 3,118 3,017
---------- ---------- ---------- ----------
TOTAL ASSETS $ 21,004 $ 19,688 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,004 $ 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)
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------------- -------------------------
(millions except per share data) JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Brokerage commissions and fees $ 1,143 $ 1,060 $ 2,255 $ 2,056
Premiums and other 441 423 878 840
Investment income 139 140 289 288
------------ ------------ ------------ ------------
TOTAL REVENUE 1,723 1,623 3,422 3,184
------------ ------------ ------------ ------------
EXPENSES
General expenses 1,167 1,104 2,476 2,152
Benefits to policyholders 237 227 476 453
Interest expense 24 21 45 41
Amortization of intangible assets 35 31 69 61
------------ ------------ ------------ ------------
TOTAL EXPENSES 1,463 1,383 3,066 2,707
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX AND MINORITY INTEREST 260 240 356 477
Provision for income tax 99 90 135 179
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 161 150 221 298
Minority interest - 8.205% trust preferred capital securities (10) (10) (20) (20)
------------ ------------ ------------ ------------
NET INCOME $ 151 $ 140 $ 201 $ 278
============ ============ ============ ============
Preferred stock dividends (1) (1) (1) (1)
------------ ------------ ------------ ------------
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS $ 150 $ 139 $ 200 $ 277
============ ============ ============ ============
NET INCOME PER SHARE (1):
Basic net income per share $ 0.58 $ 0.55 $ 0.77 $ 1.09
============ ============ ============ ============
Dilutive net income per share $ 0.57 $ 0.54 $ 0.76 $ 1.07
============ ============ ============ ============
CASH DIVIDENDS PAID ON COMMON STOCK (1) $ 0.21 $ 0.19 $ 0.40 $ 0.36
============ ============ ============ ============
Dilutive average common and common equivalent
shares outstanding (1) 263.7 258.3 262.9 257.6
------------ ------------ ------------ ------------
<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.
<PAGE> - 3 -
<TABLE>
<CAPTION>
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
------------------------------
June 30, June 30,
(millions) 1999 1998
-------------- --------------
<S> <C> <C>
Cash Provided by Operating Activities $ 357 $ 784
Cash Flows from Investing Activities:
Sale of investments
Fixed maturities
Maturities 30 59
Calls and prepayments 104 36
Sales 788 1,749
Equity securities 356 1,481
Other investments 38 27
Purchase of investments
Fixed maturities (848) (1,776)
Equity securities (384) (1,486)
Other investments (87) (109)
Purchase of short-term investments - net (49) (703)
Acquisition of subsidiaries (177) (263)
Property and equipment and other (134) (105)
------------ ------------
Cash Used by Investing Activities (363) (1,090)
------------ ------------
Cash Flows from Financing Activities:
Treasury stock transactions - net (13) 15
Issuance of short-term borrowings - net 126 167
Issuance (repayment) of long-term debt 252 (13)
Interest sensitive life, annuity and investment contracts
Deposits 153 221
Withdrawals (91) (48)
Cash dividends to stockholders (101) (92)
------------ ------------
Cash Provided by Financing Activities 326 250
------------ ------------
Effect of Exchange Rate Changes on Cash (5) 5
Increase (Decrease) in Cash 315 (51)
Cash at Beginning of Period 723 1,085
------------ ------------
Cash at End of Period $ 1,038 $ 1,034
============ ============
</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 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, 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)
----------------------------------------------------
Derivatives Disclosure
----------------------
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 second
quarter and six months ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(millions) Second Quarter Ended Six Months Ended
-------------------- ----------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 151 $ 140 $ 201 $ 278
Net unrealized investment losses (37) (6) (100) (12)
Net foreign exchange gains (losses) 21 (8) (45) (6)
Net additional minimum pension
liability reduction 65 - 65 -
----------- ----------- ----------- -----------
Comprehensive income $ 200 $ 126 $ 121 $ 260
=========== =========== =========== ===========
</TABLE>
The components of accumulated other comprehensive loss, net of related
tax, at June 30, 1999 and December 31, 1998, are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(millions) 1999 1998
--------------- --------------
<S> <C> <C>
Net unrealized investment gains (losses) $ (22) $ 78
Net foreign exchange losses (143) (98)
Net additional minimum pension liability (31) (96)
--------------- --------------
Accumulated other comprehensive loss $ (196) $ (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 12 through
15 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 six months 1999, Aon reissued 1.3 million shares of common stock
from treasury for employee benefit plans and 333,600 shares in connection
with the employee stock purchase plan. Aon purchased 1.2 million shares of
its common stock at a total cost of $49.1 million during six months 1999.
There were 1.8 million shares of common stock held in treasury at June 30,
1999.
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 June 30, 1999, approximately $40 million has been paid related to
the termination of approximately 800 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. These 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
the U.K. Pension Investment Authority for calculating compensation, and
the precise scope, duration, and methodology of the review.
- 7 -
<PAGE>
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 Second Quarter Ended Six Months Ended
share data) -------------------- ----------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 151 $ 140 $ 201 $ 278
Redeemable preferred stock
dividends 1 1 1 1
----- ----- ----- -----
Net income for dilutive
and basic $ 150 $ 139 $ 200 $ 277
===== ===== ===== =====
Basic shares outstanding 260 254 259 254
Common stock equivalents 4 4 4 4
----- ----- ----- -----
Dilutive potential common
shares 264 258 263 258
==========================================================================================
Basic net income per share $0.58 $0.55 $0.77 $1.09
Dilutive net income per share $0.57 $0.54 $0.76 $1.07
==========================================================================================
</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 June 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' 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 to all of which
Allianz had issued reinsurance cover. 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. Unicover
Managers, Inc. ("Unicover"), a New Jersey corporation unrelated to Aon,
managed the pool and facilities, which issued reinsurance related to
certain workers' compensation insurance coverages. In turn, APS Insurers
obtained reinsurance from carriers, including Allianz. Allianz alleges
that Centaur Underwriting Management Ltd. ("Centaur"), a Bermuda-based
entity unrelated to Aon, is a managing general underwriter that at all
material times held underwriting authority for, and was an authorized
agent of, the APS Insurers, but has not named Centaur as a defendant.
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. 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 started by various
persons that relate directly or indirectly to one or more entities managed
by Unicover, 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.
13. Subsequent Event
----------------
In July 1999, Aon acquired Nikols Sedgwick, a leading Italian insurance
and reinsurance broker. This acquisition was financed by internal funds
and will be accounted for by the purchase method. The effect of the Nikols
Sedgwick acquisition is not anticipated to be material to Aon's
consolidated financial statements.
- 9 -
<PAGE>
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR SECOND QUARTER AND SIX 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 $83 million or 8% in second quarter
1999 and $199 million or 10% in six months 1999, reflecting post-second quarter
1998 business combination activity and internal growth.
Premiums and other is primarily related to insurance underwriting operations.
Premiums and other increased $18 million or 4% in second quarter 1999 and $38
million or 5% in six months 1999, compared with the same periods last year.
Extended warranty premiums earned increased $8 million or 6% in the quarter,
primarily reflecting continued growth in the appliance and electronics warranty
lines. Direct sales premiums earned increased $14 million or 6% reflecting the
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, investment income is down $1 million or 1% compared to prior year,
primarily due to short-term interest rates. Included in second quarter 1999
investment income is an $8.5 million settlement of a dispute with an unrelated
third party. For six months 1999, investment income is up $1 million compared to
1998. The primary factors causing this
- 10 -
<PAGE>
change are short-term interest rate decline, the dispute settlement, and
approximately $30 million gain on disposal of tax-exempt bonds in first
quarter 1999. Investment income from insurance brokerage and other services,
primarily relating to fiduciary funds, decreased $11 million in second quarter
1999 compared to prior year. Consulting operations investment income declined
$1 million in the quarter compared to prior year. A reduction in short-term
interest rates contributed to the overall investment income decline in the
brokerage segments.
Total revenue increased $100 million or 6% in second quarter 1999 and $238
million or 7% in six months 1999, attributable to post-second quarter 1998
brokerage acquisition activity and internal growth in the operating segments.
Benefits to policyholders increased $10 million or 4% in second quarter 1999 and
$23 million or 5% in six months 1999. The increase in the quarter and six months
was consistent with growth in related premiums earned and reflected no unusual
claims activity. The run-off of auto credit business as planned partially offset
the increase in policyholder benefits.
Total expenses increased $80 million or 6% in second quarter and $359 million or
13% in six months 1999 when compared to prior year. The six months 1999 increase
reflects the inclusion of first quarter 1999 pretax special charges of $163
million. Total expenses, excluding the 1999 special charges, increased 7% for
the six months when compared to 1998. Second quarter and six months 1999
expenses increased over prior year primarily due to investments in new business
initiatives, technology and product development. Restructuring liabilities for
recent acquisitions and 1999 special charges have been reduced by payments as
planned. 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 as of April 1, 1999. The revaluation resulted in a reduction of
pension expense, the effect of which was reflected in second quarter and six
months 1999 general expenses.
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 $20 million or 8% in second quarter 1999. Six
months 1999 income before income tax decreased $121 million or 25% when compared
to prior year, primarily due to the inclusion of special charges. Excluding
special charges, income before income tax increased $42 million or 9% in six
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. Total annualized cost savings are projected to be
approximately $50 million related to first quarter 1999 restructuring activity.
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 follow.
- 11 -
<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.
Second quarter 1999 Insurance Brokerage and Other Services revenue increased $66
million or 7% and six months 1999 revenue increased $173 million or 9%.
Post-second 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 4%
in the quarter and 5% in six months in a very competitive environment. Revenue
earned related to reinsurance obtained by Unicover pool members (see Footnote 12
- - - - - - - - - - - - - - - - - - Contingencies) was $9 million for six months 1999. Revenue earned for full
year 1998 was $15 million and is anticipated to be approximately $28 million for
full year 1999.
<TABLE>
<CAPTION>
========================================================================================
Insurance Brokerage and Other Services
(millions) Second quarter ended June 30, Six months ended June 30,
1999 1998 1999 1998
========================================================================================
<S> <C> <C> <C> <C>
Revenue:
United States $ 537 $ 455 $ 1,020 $ 867
United Kingdom 218 221 407 406
Europe 143 154 368 331
Rest of World 122 124 222 240
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Total Revenue $ 1,020 $ 954 $ 2,017 $ 1,844
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Income before income tax
excluding special charges $ 188 $ 182 $ 372 $ 350
Special charges - - (119) -
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Income before income tax $ 188 $ 182 $ 253 $ 350
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
</TABLE>
U.S. revenue of $537 million in second quarter 1999 was up 18% from 1998. Total
international revenues in the quarter declined $16 million or 3% when compared
to prior year, primarily reflecting the impact of foreign exchange rates, and to
a lesser extent, a reduction in short-term interest rates.
U.S. revenue of $1 billion in six months 1999 was up 18% from 1998. European
revenue of $368 million increased 11% from 1998, primarily due to acquisition
activity. 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 quarter and six months segment results
were impacted positively by acquisitions, in particular the second quarter 1998
acquisition of Le Blanc de Nicolay and the Auto Insurance Specialists
acquisition in third quarter 1998. Retail brokerage results continued to reflect
competitive property and casualty pricing in the quarter and six months results.
Pretax income grew 3% in the quarter over 1998 and six months 1999 pretax
income, excluding first quarter 1999 special charges, grew 6% over 1998,
primarily due to both internal growth and to acquisitions. Pretax margins in
this segment declined slightly in 1999, reflecting investment in claims
management operations, market-pricing pressures and investment in new
initiatives.
- 12 -
<PAGE>
CONSULTING
- - - - - - - - - - - - - - - - - ----------
The Consulting segment provides a full range of employee benefits, human
resources, compensation, and change management services.
In the Consulting segment, second quarter 1999 revenue increased 4% to $161
million while six months 1999 revenue increased 4% to $317 million. Acquisition
activity subsequent to second quarter 1998 and internal growth influenced
revenue growth. Excluding the impact of acquisitions and foreign exchange,
revenue for consulting core businesses grew approximately 7% in the quarter and
6% in six months 1999.
<TABLE>
<CAPTION>
========================================================================================
Consulting
(millions) Second quarter ended June 30, Six months ended June 30,
1999 1998 1999 1998
========================================================================================
<S> <C> <C> <C> <C>
Revenue:
United States $ 98 $ 100 $ 189 $ 187
United Kingdom 38 34 72 66
Europe 9 7 25 20
Rest of World 16 14 31 32
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Total Revenue $ 161 $ 155 $ 317 $ 305
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Income before income tax
excluding special charges $ 19 $ 15 $ 36 $ 30
Special Charges - - (44) -
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Income (loss) before income tax $ 19 $ 15 $ (8) $ 30
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
</TABLE>
U.S. revenue of $98 million in second quarter 1999 was down 2% from 1998,
reflecting lower than anticipated revenues for human resources consulting and
change management operations. United Kingdom and European revenue of $47 million
increased 15% from 1998, primarily reflecting favorable performance at a
majority of foreign business units. Rest of world revenues increased $2 million
in the quarter when compared to prior year.
U.S. revenue of $189 million in six months 1999 was up 1% from 1998. United
Kingdom and European revenue of $97 million increased 13% from 1998. The impact
of foreign exchange rates contributed to a $1 million decline in rest of world
revenues when compared to prior year.
Pretax income increased to $19 million from $15 million in second quarter 1998,
a 27% 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.
Pretax income in six months 1999 increased $6 million or 20% reflecting strong
organic revenue growth and reductions in overall expenses.
- 13 -
<PAGE>
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
(millions) Second quarter ended June 30, Six months ended June 30,
1999 1998 1999 1998
========================================================================================
<S> <C> <C> <C> <C>
Revenue:
Direct sales $ 275 $ 261 $ 540 $ 519
Extended warranty 163 157 336 316
Specialty and other 64 65 123 122
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Total revenue $ 502 $ 483 $ 999 $ 957
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Income before income tax $ 75 $ 69 $ 139 $ 133
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Revenue:
United States $ 349 $ 334 $ 691 $ 671
United Kingdom 79 75 161 143
Europe 28 30 58 56
Rest of World 46 44 89 87
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Total revenue $ 502 $ 483 $ 999 $ 957
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
</TABLE>
Revenue was $502 million in second quarter 1999, up 4% from 1998. Revenue was
$999 million in six months 1999, up 4% from 1998. Direct sales continued to
expand its product distribution through worksite marketing programs and the
introduction of new product initiatives on a global basis. Auto credit business
continues to runoff.
U.S. revenue of $349 million was up 4% in second quarter 1999, principally due
to growth in revenues for direct sales and appliance and electronic warranty
lines of business. United Kingdom and European revenue of $107 million rose 2%.
Rest of world revenue was $46 million, up $2 million from prior year.
U.S. revenue of $691 million was up 3% in six 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 $219 million rose 10%,
primarily reflecting a higher volume of new business in the appliance and
electronic extended warranty lines. Rest of world revenue was $89 million, up $2
million from prior year.
Pretax income increased $6 million or 9% in second quarter 1999 and $6 million
or 5% in six months 1999 when compared to prior year. Growth in the quarter
reflects revenue earned from the introduction of several new direct sales
products and worksite marketing in addition to expense ratio improvements in the
extended warranty lines. Start-up costs related to new direct sales product
initiatives and investments in new products partially offset the direct sales
revenue growth and extended warranty improvements. Overall, benefit and expense
margins in second quarter 1999 did not suggest any significant shift in
operating trends.
- 14 -
<PAGE>
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
(millions) Second quarter ended June 30, Six months ended June 30,
1999 1998 1999 1998
=======================================================================================
<S> <C> <C> <C> <C>
Total revenue $ 40 $ 31 $ 89 $ 78
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------
Loss before income tax $ (22) $ (26) $ (28) $ (36)
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------
</TABLE>
Corporate and Other revenue for the second quarter 1999 was $40 million, up $9
million from the second quarter 1998. In the quarter, there was a settlement of
a dispute with an unrelated third party for $8.5 million. Six months 1999
revenue was $89 million, up $11 million from prior year. Included in six 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 second quarter 1999. Less revenue from
private equity investments and lower yields on corporate assets affected six
months 1999 revenue growth. The timing of revenues from private equity
investments varies significantly between periods. The goal is long-term yields
from private equities which exceed long-term security market rates.
Corporate and Other expenses for the quarter were $62 million, up $5 million
from the same period last year. Six months 1999 expenses were $117 million, up
$3 million from prior year. Expenses in this segment are composed of interest
expense, goodwill amortization and general expenses. For the second quarter
1999, Corporate and Other expenses also included costs related to the launch of
the Aon branding campaign. For the quarter and six months, interest expense and
goodwill amortization increased over prior year, reflecting the financing of
acquisitions made during the last twelve months. General expenses, excluding
branding, were down somewhat, in line with expectations.
- 15 -
<PAGE>
NET INCOME FOR SECOND QUARTER AND SIX MONTHS 1999
References to share data reflect the three-for-two stock split announced on
March 19, 1999 and paid on May 17, 1999. Second quarter 1999 net income was $151
million ($0.57 dilutive per share) compared to $140 million ($0.54 dilutive per
share) in 1998. Six months 1999 net income was $201 million ($0.76 dilutive per
share) compared to $278 million ($1.07 dilutive per share) in 1998. Six 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 six months 1998.
Basic net income per share, including 1999 special charges, was $0.58 and $0.55
in second quarter 1999 and 1998, respectively, and $0.77 and $1.09 in six 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 second quarter 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 second quarter 1999 increased 2%
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 SIX MONTHS 1999
Cash flows provided by operating activities in six months 1999 were $357
million, a decrease of $427 million from six months 1998. The decrease primarily
represents the timing of the settlement of brokerage receivables and payables
and special charges in first quarter 1999.
Investing activities used cash of $363 million, which was made available from
financing and operating activities. Cash of $49 million was used during six
months 1999 for the purchase of short-term investments. Cash used for
acquisition activity during six months 1999 was $177 million, primarily
reflecting brokerage acquisitions.
Cash totaling $326 million was provided during six months 1999 from financing
activities. This was primarily due to the issuance of $250 million of 6.9% debt
securities in second quarter 1999. Cash was used to pay dividends of $100
million on common stock and $1 million on redeemable preferred stock during six
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.
- 16 -
<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 $3 billion, Aon's total fixed maturity
portfolio is invested primarily in investment grade holdings (95%) and has a
fair value which is 99.5% of amortized cost.
Total assets increased $1.3 billion to $21 billion since year-end 1998. Invested
assets at June 30, 1999 decreased $94 million from year-end levels, principally
reflecting declines in market value and the impact of foreign exchange rates.
At June 30, 1999, less than investment grade fixed maturity investments had an
amortized cost of $155 million and a fair value of $156 million. The carrying
value of non-income producing investments in Aon's portfolio at June 30, 1999
was $36 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 June 30, 1999, Aon had open
contracts, related to the above, which had unrealized losses of approximately $8
million.
Insurance brokerage and consulting services receivables increased $696 million
when compared to year-end 1998. Insurance premiums payable increased $692
million in six months 1999, reflecting acquisitions and the receipt of client
fiduciary funds.
Short-term borrowings increased at the end of six months 1999 by $82 million
when compared to year-end 1998. During second quarter 1999, short-term
borrowings were reduced by proceeds from the 6.9% debt securities issuance (see
below). The net increase in short-term borrowings, compared to year-end 1998, is
principally due to the financing of acquisitions and other general corporate
purposes. Notes payable increased at the end of six months 1999 by $234 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 June 30, 1999 is approximately $105 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 are anticipated to be redeemed at 100% of the principal
amount plus accrued interest.
Stockholders' equity increased $101 million in six months 1999 to $12.17 per
share, an increase of $0.34 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 were net unrealized investment losses of $100 million,
net foreign exchange losses of $45 million and dividends to stockholders of $101
million. Unrealized investment gains and losses and foreign exchange gains and
losses fluctuations from period to period are largely based on market
conditions.
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 expects to complete substantially all of its efforts by the
end of third quarter 1999. In 1997, Aon designated a full-time Year 2000 project
coordinator who established
- 17 -
<PAGE>
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.
The original readiness target date to remediate or replace most mission critical
applications was December 31, 1998, with substantially all business units
expected to be fully compliant by the end of third quarter 1999. Testing on some
of these systems is continuing into the third quarter 1999. Business units have
made good progress and are well along in the process of replacing or modifying
applications found to be non-compliant. During January 1999, a business unit
readiness review and risk assessment for each business unit was performed. Dates
were established for internal audit reviews of test documentation for selected
units. Business units were put on a watch list if any mission critical
application replacement, remediation, or testing seemed to have a material risk
of extending into third quarter 1999. Contingency plans are required for all
major business units with mission critical systems on the watch list. An
analysis of all newly acquired business units is completed immediately after
acquisition and appropriate plans are put into action.
Progress and concerns are reported to Aon's senior and business unit management.
A written report was prepared for management for any business unit with a
mission critical application on the watch list as of June 30, 1999. These
applications will be tracked by the 2000 program office and reported to
management monthly.
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.
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.
- 18 -
<PAGE>
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 June 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. An intensive
follow-up effort, focusing on U.S. carriers who receive the bulk of insurance
placements by U.S. business units, produced a response rate of close to 100%.
Aon is in the process of updating compliance status on all U.S. carriers. A
similar update effort for significant non-U.S. carriers is being executed in
London. Both efforts are expected to be completed by the end of August 1999.
Costs to Address Aon's Year 2000 Issues
Aon's Year 2000 remediation costs for all business units are projected to be
approximately $70 million through December 31, 1999. As of June 30, 1999, Aon
has incurred approximately $57 million related to all phases of the Year 2000
project. Virtually all of the total remaining project costs will be incurred and
expensed in third quarter 1999. 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.
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 are scheduled
for completion by September 30, 1999. 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
- 19 -
<PAGE>
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.
REVIEW BY INDEPENDENT AUDITORS
- - - - - - - - - - - - - - - - - ------------------------------
The condensed consolidated financial statements at June 30, 1999, and for the
second quarter and six months then ended have been reviewed, prior to filing, by
Ernst & Young LLP, Aon's independent auditors, and their report is included
herein.
- 20 -
<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, 1999, and the related condensed
consolidated statements of income for the three-month and six-month periods
ended June 30, 1999 and 1998, and the condensed consolidated statements of cash
flows for the six-month periods ended June 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.
/s/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP
Chicago, Illinois
August 3, 1999
- 21 -
<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, 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)
August 16, 1999 /s/ Harvey N. Medvin
--------------------------------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer)
- 22 -
<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
- 23 -
<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) 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) $ 356 $ 477 $ 931 $ 542 $ 446 $ 458 $ 397
Add back fixed charges:
Interest on indebtedness 45 41 87 70 45 56 46
Interest on ESOP 1 2 2 3 4 5 6
Portion of rents representative of
interest factor 25 22 51 44 29 21 29
------ ------ ------- ------ ------ ------ ------
Income as adjusted $ 427 $ 542 $1,071 $ 659 $ 524 $ 540 $ 478
====== ====== ======= ====== ====== ====== ======
Fixed charges:
Interest on indebtedness $ 45 $ 41 $ 87 $ 70 $ 45 $ 56 $ 46
Interest on ESOP 1 2 2 3 4 5 6
Portion of rents representative of
interest factor 25 22 51 44 29 21 29
------ ------ ------- ------ ------ ------ ------
Total fixed charges $ 71 $ 65 $ 140 $ 117 $ 78 $ 82 $ 81
====== ====== ======= ====== ====== ====== ======
Ratio of earnings to fixed charges 6.0 8.4 7.6 5.6 6.7 6.6 5.9
====== ====== ======= ====== ====== ====== ======
Ratio of earnings to fixed charges (2) 8.3 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 six
months ended June 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 six months ended June
30, 1999 and for the years ended December 31, 1997 and 1996.
</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) 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) $ 356 $ 477 $ 931 $ 542 $ 446 $ 458 $ 397
Add back fixed charges:
Interest on indebtedness 45 41 87 70 45 56 46
Interest on ESOP 1 2 2 3 4 5 6
Portion of rents representative of
interest factor 25 22 51 44 29 21 29
------ ------ ------ ------ ------ ------ ------
Income as adjusted $ 427 $ 542 $1,071 $ 659 $ 524 $ 540 $ 478
====== ====== ====== ====== ====== ====== ======
Fixed charges and preferred stock dividends:
Interest on indebtedness $ 45 $ 41 $ 87 $ 70 $ 45 $ 56 $ 46
Preferred stock dividends 35 35 70 82 29 38 48
------ ------ ------ ------ ------ ------ ------
Interest and dividends 80 76 157 152 74 94 94
Interest on ESOP 1 2 2 3 4 5 6
Portion of rents representative of
interest factor 25 22 51 44 29 21 29
------ ------ ------ ------ ------ ----- ------
Total fixed charges and preferred
stock dividends $ 106 $ 100 $ 210 $ 199 $ 107 $ 120 $ 129
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to combined fixed
charges and preferred stock dividends (2) 4.0 5.4 5.1 3.3 4.9 4.5 3.7
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to combined fixed
charges and preferred stock dividends (3) 5.6 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 six
months ended June 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 $32
million for the six months ended June 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 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 the six months ended June
30, 1999 and for the years ended December 31, 1997 and 1996.
</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 3, 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 June 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.
/s/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP
Chicago, Illinois
August 3, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.0
<CASH> 3,239 <F1>
<SECURITIES> 3,638 <F2>
<RECEIVABLES> 7,410
<ALLOWANCES> 91
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F3>
<PP&E> 1,506
<DEPRECIATION> 786
<TOTAL-ASSETS> 21,004
<CURRENT-LIABILITIES> 0 <F3>
<BONDS> 814 <F4>
850 <F5>
0
<COMMON> 258 <F6>
<OTHER-SE> 2,860
<TOTAL-LIABILITY-AND-EQUITY> 21,004
<SALES> 0
<TOTAL-REVENUES> 3,422
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,066 <F7>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> 356
<INCOME-TAX> 135
<INCOME-CONTINUING> 221
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 201
<EPS-BASIC> 0.77 <F6>
<EPS-DILUTED> 0.76 <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>
