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 MARCH 31, 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 3-31-99
----- -------------
$1.00 par value Common 256,153,605
(Adjusted to reflect a three-for-two stock split
payable May 17, 1999 to stockholders of
record on May 4, 1999)
<PAGE>
Part 1
Financial Information
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
(millions) AS OF AS OF
MARCH 31, 1999 DEC. 31, 1998
-------------------------------
ASSETS (UNAUDITED)
INVESTMENTS
Fixed maturities at fair value $ 2,790 $ 3,103
Equity securities at fair value 708 768
Short-term investments 2,481 2,221
Other investments 411 360
-----------------------------
TOTAL INVESTMENTS 6,390 6,452
CASH 927 723
RECEIVABLES
Insurance brokerage and consulting
services 5,927 5,423
Premiums and other 1,125 1,120
Accrued investment income 61 63
-----------------------------
TOTAL RECEIVABLES 7,113 6,606
Intangible assets 3,594 3,500
Other assets 2,460 2,407
-----------------------------
Total Assets $ 20,484 $ 19,688
=============================
AS OF AS OF
MARCH 31, 1999 DEC. 31, 1998
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
Insurance Premiums Payable $ 7,470 $ 6,948
Policy Liabilities
Future policy benefits 997 986
Policy and contract claims 765 779
Unearned and advance premiums 1,766 1,797
Other policyholder funds 1,300 1,261
-----------------------------
Total policy liabilities 4,828 4,823
General Liabilities
General expenses 1,383 1,259
Short-term borrowings 929 844
Notes payable 576 580
Other liabilities 1,561 1,367
-----------------------------
Total Liabilities 16,747 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 258 172
Paid-in additional capital 451 450
Accumulated other comprehensive loss (245) (116)
Retained earnings 2,726 2,782
Less - Treasury stock at cost (55) (58)
Deferred compensation (248) (213)
-----------------------------
Total Stockholders' Equity 2,887 3,017
-----------------------------
Total Liabilities and Stockholders' Equity $ 20,484 $ 19,688
=============================
See the accompanying notes to the condensed consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
Aon Corporation
Condensed Consolidated Statements of Income
(Unaudited)
First Quarter Ended
--------------------------------------
(millions except per share data) March 31, 1999 March 31, 1998
------------------ ------------------
<S> <C> <C>
REVENUE
Brokerage commissions and fees $ 1,112 $ 996
Premiums and other 437 417
Investment income 150 149
-------- --------
Total revenue 1,699 1,562
-------- --------
EXPENSES
General expenses 1,309 1,048
Benefits to policyholders 239 226
Interest expense 21 20
Amortization of intangible assets 34 30
-------- --------
Total expenses 1,603 1,324
-------- --------
INCOME BEFORE INCOME TAX AND MINORITY INTEREST 96 238
Provision for income tax 36 89
-------- --------
INCOME BEFORE MINORITY INTEREST 60 149
Minority interest - 8.205% trust preferred capital securities (10) (10)
-------- --------
NET INCOME $ 50 $ 139
======== ========
Preferred stock dividends (1) (1)
-------- --------
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS $ 49 $ 138
======== ========
NET INCOME PER SHARE (1):
Basic net income per share $ 0.19 $ 0.55
======== ========
Dilutive net income per share $ 0.19 $ 0.53
======== ========
Cash dividends paid on common stock (1) $ 0.19 $ 0.17
======== ========
Dilutive average common and common equivalent shares outstanding (1) 261.8 257.1
-------- --------
<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)
First Quarter Ended
--------------------------------------
March 31, March 31,
(millions) 1999 1998
----------------- ------------------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES .................................. $ 263 $ 256
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of investments
Fixed maturities
Maturities .................................................. 14 27
Calls and prepayments ....................................... 49 18
Sales ....................................................... 601 1,310
Equity securities ............................................... 176 1,101
Other investments ............................................... 22 33
Purchase of investments ..............................................
Fixed maturities ................................................ (387) (1,233)
Equity securities ............................................... (181) (1,011)
Other investments ............................................... (44) (40)
Purchase of short-term investments - net .............................. (258) (431)
Acquisition of subsidiaries ........................................... (102) (96)
Property and equipment and other ...................................... (41) (43)
-------- --------
CASH USED BY INVESTING ACTIVITIES ........................... (151) (365)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock transactions - net ................................... (1) 12
Issuance (repayment) of short-term borrowings - net ................. 125 (89)
Repayment of long-term debt ......................................... (5) (19)
Interest sensitive life, annuity and investment contracts ...........
Deposits ........................................................ 103 187
Withdrawals ..................................................... (81) (18)
Cash dividends to stockholders ...................................... (48) (44)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES ....................... 93 29
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................ (1) 5
INCREASE (DECREASE) IN CASH ............................................ 204 (75)
CASH AT BEGINNING OF PERIOD ............................................ 723 1,085
======== ========
CASH AT END OF PERIOD .................................................. $ 927 $ 1,010
======== ========
</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, payable in the form of a stock dividend of one share payable
for every two shares held, of Aon's $1.00 par value common stock, with
approximately 86 million shares payable on May 17, 1999 to stockholders of
record on May 4, 1999. The stock split has been retroactively reflected in
the March 31, 1999 condensed consolidated statement of financial position,
(but not the December 31, 1998), by increasing common stock and decreasing
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. Comprehensive Income
--------------------
Comprehensive income is computed in accordance with Financial Accounting
Standards Board (FASB) Statement No. 130 (Reporting Comprehensive Income)
and is calculated as follows:
The components of comprehensive income (loss), net of related tax, for the
first quarter ended March 31, 1999 and 1998 are as follows:
(millions) 1999 1998
------ ------
Net income $ 50 $ 139
Net unrealized investment losses (63) (7)
Net foreign exchange gains (losses) (66) 2
------- -------
Comprehensive income (loss) $ (79) $ 134
======= =======
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<PAGE>
The components of accumulated other comprehensive loss, net of related
tax, at March 31, 1999 and December 31, 1998, are as follows:
(millions) 1999 1998
------ ------
Net unrealized investment gains $ 15 $ 78
Net foreign exchange losses (164) (98)
Net minimum pension liability
adjustment (96) (96)
------- -------
Accumulated other comprehensive loss $ (245) $ (116)
======= =======
4. Business Segments
-----------------
In fourth quarter 1998, Aon adopted Financial Accounting Standards Board
(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.
All 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 11 through
13 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.
5. Capital Stock
-------------
During first quarter 1999, Aon reissued 798,500 shares of common stock
from treasury for employee benefit plans and 333,500 shares in connection
with the employee stock purchase plan. Aon purchased 665,500 shares of its
common stock at a total cost of $27.2 million during first quarter 1999.
There were 1.8 million shares of common stock held in treasury at March
31, 1999.
6. 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.
- 6 -
<PAGE>
7. 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 March 31, 1999, approximately $20 million has been paid related to
650 employees terminated. The remaining payments on these terminations
and the remaining terminations plan to be paid within one year.
In the consulting segment, special charges of approximately $43 million
were recorded to reflect Aon's ability to clarify and quantify, in the
first quarter 1999, 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 over the next two
years. 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.
The remaining charges of $21 million primarily reflect the lease
abandonments relating to the consolidation of worldwide brokerage
operations, and other exit activities.
8. Income Per Share
----------------
Income per share is computed in accordance with FASB Statement No. 128
(Earnings Per Share) and is calculated as follows:
First Quarter Ended
--------------------------------
(millions except per share data) March 31, 1999 March 31, 1998
---------------------------------------------------------------------
Net income $ 50 $ 139
Redeemable preferred stock dividends 1 1
----------------------------
Net income for dilutive and basic $ 49 $ 138
============================
Basic shares outstanding 258 253
Common stock equivalents 4 4
----------------------------
Dilutive potential common shares 262 257
---------------------------------------------------------------------
Basic net income per share $ 0.19 $ 0.55
Dilutive net income per share $ 0.19 $ 0.53
=====================================================================
- 7 -
<PAGE>
9. 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 March 31, 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 and amounted to $148 million. Such
liabilities are net of reinsurance recoverables and other assets of $184
million.
10. 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.
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 as
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. Aon further believes that the settlement of
these issues will not have a material impact on its financial position.
Although the ultimate outcome of these suits cannot be ascertained and
liabilities in indeterminate amounts may be imposed on Aon or its
subsidiaries, on the basis of present information, availability of
insurance coverages and advice received from counsel, it is the opinion of
management that the disposition or ultimate determination of such claims
will not have a material adverse effect on the consolidated financial
position of Aon.
- 8 -
<PAGE>
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR FIRST QUARTER 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 7 to the condensed consolidated
financial statements is incorporated herein by reference.
Brokerage commissions and fees increased $116 million or 12% in first quarter
1999, primarily reflecting post-first quarter 1998 business combination activity
and internal growth.
Premiums and other is primarily related to insurance underwriting operations.
Premiums and other increased $20 million or 5% in first quarter 1999, compared
with the same period last year. Extended warranty premiums earned increased $11
million or 8% in the quarter, primarily reflecting new business development in
the international appliance and electronics warranty lines. Direct sales
premiums earned increased 3% 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, which includes related expenses and income on disposals,
increased a modest 1% in the first quarter 1999 when compared to prior year.
Growth derived from the sales of tax-exempt bonds of approximately $30
million was partially offset by lower levels of income from private equity and
other investment holdings in the quarter. Investment income from insurance
brokerage and other services, and consulting operations, primarily relating to
fiduciary funds, decreased $3 million and $1 million, respectively, in first
quarter 1999 compared to first quarter 1998.
- 9 -
<PAGE>
Total revenue increased $137 million or 9% in first quarter 1999, primarily
attributable to post first quarter 1998 brokerage acquisition activity and
internal growth in the operating segments.
Benefits to policyholders increased $13 million or 6% in first quarter 1999.
Contributing to this increase was a higher volume of capital accumulation and
new extended warranty business. This increase was partially offset by the
run-off of auto credit business as planned.
Total expenses increased $279 million or 21% in first quarter 1999 when compared
to prior year. The first quarter 1999 increase reflects the inclusion of 1999
pretax special charges. Total expenses, excluding the 1999 special charges,
increased 9% for the quarter when compared to 1998. First quarter 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.
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 decreased $142 million or 60% in first quarter 1999
when compared to prior year, primarily due to the inclusion of 1999 special
charges. Excluding special charges, income before income tax increased $21
million or 9% in first quarter 1999 when compared to prior year, largely due to
growth in the insurance brokerage and other services and consulting segments
related to business combination activity in 1999 and 1998 and to internal
growth. Total annualized cost savings are projected to be approximately $50
million from the special charges taken in first quarter 1999.
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.
INSURANCE BROKERAGE AND OTHER SERVICES
- - - - - - - - - - - - - - - - - --------------------------------------
The Insurance Brokerage and Other Services segment consists principally of Aon's
retail, reinsurance, specialty and wholesale brokerage operations.
First quarter 1999 Insurance Brokerage and Other Services revenue was $997
million, up 12%. Post-first quarter 1998 acquisitions as well as internal growth
accounted for the majority of this revenue growth. Excluding the impact of
acquisitions, revenue related to brokerage core businesses grew approximately 5%
in a very competitive environment.
- 10 -
<PAGE>
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
Insurance Brokerage and Other Services
(millions) First quarter ended March 31 1999 1998
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
Revenue:
United States $ 483 $ 412
United Kingdom 189 185
Europe 225 177
Rest of World 100 116
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
Total revenue $ 997 $ 890
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
Income before income tax
excluding special charges $ 184 $ 168
Special charges 119 -
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
Income before income tax $ 65 $ 168
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
U.S. revenue of $483 million in 1999 was up 17% from 1998, while United Kingdom
and European revenue of $414 million increased 14% from 1998, primarily due to
acquisition activity. Rest of world revenue declined in 1999 primarily due to
the impact of foreign exchange rates.
Insurance Brokerage and Other Services segment results were impacted positively
by acquisitions, in particular the Le Blanc and AIS acquisitions in second and
third quarter 1998, respectively. Retail brokerage results continued to reflect
competitive property and casualty pricing. Pretax income, excluding 1999 special
charges, grew 10% over 1998, due to both internal growth and to acquisitions.
Investments in new initiatives, with little or no immediate revenue growth, also
impacted revenue and pretax income results. Pretax margins in this segment
declined slightly in 1999, reflecting market-pricing pressures.
CONSULTING
- - - - - - - - - - - - - - - - - ----------
The consulting segment provides a full range of employee benefits, human
resources, compensation, and change management services.
In the Consulting segment, first quarter 1999 revenue increased 4% to $156
million. Revenue growth was influenced by acquisition activity and divestitures
subsequent to first quarter 1998.
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
Consulting
(millions) First quarter ended March 31 1999 1998
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
Revenue:
United States $ 91 $ 87
United Kingdom 34 31
Europe 16 13
Rest of World 15 19
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
Total revenue $ 156 $ 150
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
Income before income tax
excluding special charges $ 17 $ 15
Special charges 44 -
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
Income before income tax $ (27) $ 15
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------
- 11 -
<PAGE>
U.S. revenue of $91 million in 1999 was up 5% from 1998. United Kingdom and
European revenue of $50 million increased 14% from 1998. The impact of foreign
exchange rates contributed to a $4 million decline in rest of world revenues
when compared to prior year.
Pretax income, excluding special charges, increased to $17 million from $15
million in first quarter 1998, a 13% increase.
INSURANCE UNDERWRITING
- - - - - - - - - - - - - - - - - ----------------------
The Insurance Underwriting segment is comprised of direct sales life and
accident and health, warranty, specialty and other insurance products.
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------
Insurance Underwriting
(millions) First quarter ended March 31 1999 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------
Revenue:
Direct sales $ 265 $ 258
Extended warranty 173 159
Specialty and other 59 58
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------
Total revenue $ 497 $ 475
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------
Income before income tax $ 64 $ 65
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------
Revenue was $497 million in first quarter 1999, up 5% from 1998, primarily due
to growth in the international electronic and appliance lines. Direct sales
continued to expand its product distribution through work-site marketing
programs and the introduction of new product initiatives. Auto credit business
continues to runoff.
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------
Insurance Underwriting
(millions) First quarter ended March 31 1999 1998
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------
Revenue:
United States $ 342 $ 337
United Kingdom 82 68
Europe 30 26
Rest of World 43 44
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------
Total revenue $ 497 $ 475
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------
U.S. revenue of $342 million was up 1% in first quarter 1999 principally due
to growth in revenues for capital accumulation products. United Kingdom and
European revenue of $112 million rose 19%, primarily reflecting a higher volume
of new business in the appliance and electronic extended warranty lines. Rest
of world revenue was $43 million, down slightly from prior year.
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<PAGE>
Pretax income was $64 million in first quarter 1999, down slightly from $65
million last year, primarily due to the run-off of auto credit business. Higher
expense ratios associated with start-up costs related to new direct sales
product initiatives and investments in new product development in the extended
warranty lines partially contributed to the modest decline in pretax income
results in first quarter 1999. Overall, benefit and expense margins in first
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.
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------
Corporate and Other
(millions) First quarter ended March 31 1999 1998
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------
Total revenue $ 49 $ 47
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------
Loss before income tax $ (6) $ (10)
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------
Corporate and Other revenue for the first quarter 1999 was $49 million, up $2
million from the first quarter 1998. Lower revenue from private equity
investments was more than offset by aprroximately $30 million of gain from
disposal of $500 million in tax-exempt bonds.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. 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-free to taxable bonds will increase
Aon's effective tax rate by about a point. The increased yield should allow Aon
to maintain after-tax investment results despite higher taxes.
The bonds were sold by Aon's insurance underwriting subsidiaries. However, the
gain on the bonds was recorded in Corporate and Other revenue, in keeping with
past practice, in order to provide better period to period comparability for the
insurance underwriting segment. Dividend and interest income from the securities
purchased with those proceeds will be recorded in the insurance underwriting
segment.
Corporate and Other expenses for the quarter were $55 million, down $2 million
from the same period last year. They are composed of interest expense, goodwill
amortization and general expenses. Interest expense and goodwill amortization
were up a total of $5 million over the first quarter 1998, reflecting the
financing of acquisitions made during the last twelve months. General expenses
were down somewhat, in line with expectations.
The Corporate and Other pretax loss was $6 million in the quarter, a $4 million
improvement over last year.
- 13 -
<PAGE>
NET INCOME FOR FIRST QUARTER 1999
References to share data reflect the three-for-two stock split announced on
March 19, 1999, payable on May 17, 1999 to stockholders of record as of May 4,
1999. First quarter 1999 net income was $50 million ($0.19 dilutive per share)
compared to $139 million ($0.53 dilutive per share) in 1998. First quarter 1999
net income was primarily influenced by after-tax 1999 special charges of $102
million ($0.39 per share) with no comparable amount in first quarter 1998. Basic
net income per share, including 1999 special charges, was $0.19 and $0.55 in
first quarter 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 37.5% for both first quarter 1999 and 1998. Dilutive
average shares outstanding for first quarter 1999 increased 2% when compared to
1998 primarily due to the reissuance of common shares from treasury for employee
benefits.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF FIRST QUARTER 1999
Cash flows provided by operating activities in first quarter 1999 were $263
million, an increase of $7 million from first quarter 1998. The increase
primarily represents growth in the insurance brokerage businesses and is offset
in part by the timing of the settlement of brokerage receivables and payables.
Investing activities used cash of $151 million, which was made available from
financing and operating activities. Cash of $258 million was used during first
quarter 1999 for the purchase of short-term investments. Cash used for
acquisition activity during first quarter 1999 was $102 million, primarily
reflecting brokerage acquisitions.
Cash totaling $93 million was provided during first quarter 1999 from financing
activities. The increase of $64 million from first quarter 1998 is primarily
due to the issuance of short-term borrowings for acquisitions. Cash was used to
pay dividends of $47 million on common stock and $1 million on redeemable
preferred stock during first quarter 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.
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 $2.8 billion, Aon's total fixed maturity
portfolio is invested primarily in investment grade holdings (94%) and has a
fair value which is 102% of amortized cost.
- 14 -
<PAGE>
Total assets increased $796 million to $20.5 billion since year-end 1998.
Invested assets at March 31, 1999 decreased $62 million from year-end levels,
primarily reflecting the disposal of $500 million tax-exempt bonds. Partially
offsetting this decrease was higher levels of short-term investments relating to
brokerage fiduciary funds. The amortized cost and fair value of less than
investment grade fixed maturity investments, at March 31, 1999, were $162
million and $156 million, respectively. The carrying value of non-income
producing investments in Aon's portfolio at March 31, 1999 was $54 million, or
1% 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 March 31, 1999, Aon had open
contracts, related to the above, which had unrealized losses of approximately $6
million.
Insurance brokerage and consulting services receivables increased $504 million
when compared to year-end 1998. Insurance premiums payable increased $522
million in first quarter 1999, reflecting acquisitions and the receipt of client
fiduciary funds.
Short-term borrowings increased at the end of first quarter 1999 by $85 million
when compared to year-end 1998. The increase is primarily due to the financing
of acquisitions. Notes payable decreased at the end of first quarter 1999 by $4
million when compared to year-end 1998. Included in notes payable at March 31,
1999 is approximately $120 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 decreased $130 million in first quarter 1999 to $11.27 per
share, a decrease of $0.56 per share since year-end 1998. The principal factors
influencing this decrease were the $102 million of after-tax special charges
which reduced net income, net unrealized investment losses of $63 million, net
foreign exchange losses of $66 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. These short-term non-cash fluctuations are not economical to hedge.
Included in the reduction for dividends is an accrual for the second quarter
1999 common stock dividend.
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
mid-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.
- 15 -
<PAGE>
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 mid-1999. Testing on some of these systems is
continuing into the first half of 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 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 is being prepared for management for any business unit with a
mission critical application on the watch list. 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.
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 December 31, 1998, Aon is not aware of any significant third party with a
Year 2000 issue that would materially impact Aon's
- 16 -
<PAGE>
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.
Aon is compiling information on and assessing the compliance status of insurance
carriers with whom it places business on behalf of its clients. Compliance
questionnaires have been 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, has produced a response rate of
close to 100%. Progress updates on these carriers are in progress. A similar
update effort for significant non-U.S. carriers being executed in London is
targeted for completion by June 30, 1999.
Costs to Address Aon's Year 2000 Issues
As of December 31, 1998, Aon's Year 2000 remediation costs for all business
units were projected to be approximately $70 million through December 31, 1999.
These costs are being funded through business unit operating cash flows.
As of March 31, 1999, Aon has incurred approximately $53 million related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $17 million will be incurred and expensed in second and third
quarter 1999.
Risks of Aon's Year 2000 Issues
Aon's management believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, Aon has not yet completed
all necessary Year 2000 program activities for all mission critical applications
for all 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, where Aon's
planned completion dates for IT system replacement or remediation could extend
into the third quarter 1999, contingency plans are required. These contingency
issues are being developed on a business unit basis. 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 remediation in 1999. Second, 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.
- 17 -
<PAGE>
REVIEW BY INDEPENDENT AUDITORS
- - - - - - - - - - - - - - - - - ------------------------------
The condensed consolidated financial statements at March 31, 1999, and for the
first quarter then ended have been reviewed, prior to filing, by Ernst & Young
LLP, Aon's independent auditors, and their report is included herein.
- 18 -
<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 March 31, 1999, and the related condensed
consolidated statements of income and cash flows for the three-month periods
ended March 31, 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
May 4, 1999
- 19 -
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Registrant was held on
April 16, 1999 (the "1999 Annual Meeting").
(b) Not applicable.
(c)(i)The tabulation of votes below does not reflect the three-for-two
stock split payable May 17, 1999 to stockholders of record on May 4,
1999. Set forth below is the tabulation of the votes on each nominee
for election as a director:
Name For Against
---- --- -------
Daniel T. Carroll 150,875,122 609,908
Franklin A. Cole 150,997,751 487,279
Edgar D. Jannotta 150,918,268 566,762
Lester B. Knight 151,003,882 481,148
Perry J. Lewis 151,047,926 437,104
Andrew J. McKenna 150,920,208 564,822
Newton N. Minow 149,346,671 2,138,359
Richard C. Notebaert 150,989,501 495,529
Michael D. O'Halleran 151,004,794 480,236
Donald S. Perkins 150,892,466 592,564
John W. Rogers,Jr. 151,043,790 441,240
Patrick G. Ryan 151,009,126 475,904
George A. Schaefer 151,037,982 477,048
Raymond I. Skilling 151,036,222 448,808
Fred L. Turner 151,047,018 438,012
Arnold R. Weber 150,914,718 570,312
Carolyn Y. Woo 151,036,634 448,396
(ii) Set forth below is the tabulation of the vote on the selection
of Ernst & Young LLP as auditors for the Registrant for the
1999 fiscal year.
For Against Abstain
--- ------- -------
151,006,021 131,891 347,118
(d) Not applicable.
- 20 -
<PAGE>
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 March 31, 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)
May 14, 1999 /s/ Harvey N. Medvin
----------------------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting
Officer)
- 21 -
<PAGE>
Aon CORPORATION
- - - - - - - - - - - - - - - - - ---------------
EXHIBIT INDEX
- - - - - - - - - - - - - - - - - --------------
Exhibit Number
In Regulation S-K
ITEM 601 EXHIBIT TABLE
- - - - - - - - - - - - - - - - - ----------------------
(10) Material Contracts
(a) First Amendment to the Aon Stock Option Plan as Amended and
Restated Through 1997.
(b) First Amendment to the Aon Stock Award Plan as Amended and
Restated Through 1997.
(12) Statements regarding Computation of Ratios
(a) Statement regarding Computation of Ratio of Earnings to Fixed
Charges.
(b) Statement regarding Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule
- 22 -
<PAGE>
Exhibit 10(a)
FIRST AMENDMENT
TO THE AON STOCK OPTION PLAN
AS AMENDED AND RESTATED THROUGH 1997
THIS FIRST AMENDMENT ("First Amendment") TO THE AON STOCK OPTION PLAN AS
AMENDED AND RESTATED THROUGH 1997 (the "Plan") is hereby made effective as of
the 19th day of March, 1999.
R E C I T A L S
WHEREAS, the Company deems it in the best interests of the Company to
amend certain provisions of the Plan to clarify existing policies, practices and
procedures; and
WHEREAS, the Company desires to make available to participants in the Plan
certain deferral features.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. All references in the Plan to "paragraph" when used in conjunction with a
specific paragraph number, e.g., "paragraph" 7, shall be changed to
"Section."
2. Section 2 of the Plan is hereby amended by deleting the second and third
sentences and inserting the following:
"Since the adoption of the Plan in 1982, after giving effect to
subsequent additions approved by shareholders and stock splits, the
aggregate number of shares of Common Stock which may be issued
pursuant to options granted under the Plan shall be 23,250,000. The
administration of the Plan, agreements relating to Grants, including
but not limited to agreements governing unfair competition, forms,
practices, procedures, all questions involving the eligibility for
Grants, interpretations of the provisions of the Plan, or the
operation of the Plan shall be decided by the Committee."
3. Section 4 of the Plan is hereby amended by adding the following as a final
sentence:
"The Committee in its sole discretion may satisfy its liability
under this Section 4 by making a cash payment equal to the Fair
Market Value of the shares of Common Stock to be delivered."
<PAGE>
4. Section 6 is hereby amended by adding the following as a final sentence:
"Any Participant who terminates employment, other than by death or
disability, will be permitted to exercise any vested shares for a
period of 30 days immediately following the Participant's
termination of employment, after which any vested shares will be
forfeited."
5. Section 7 is hereby amended by deleting the following sentence:
"Shares subject to a Grant shall not be delivered to the
Participant until such time as such payment has been made."
6. Section 15 is hereby amended by adding the following as new second and
third paragraphs, and moving the current second paragraph to be the fourth
paragraph:
"To the extent any shares of Common Stock covered by a Grant are not
delivered to a Participant or beneficiary because the Grant was
forfeited or canceled, or the shares of Common Stock are not
delivered because the Grant or exercise of the option is settled in
cash or used to satisfy the applicable tax withholding obligation,
such shares shall not be deemed to have been delivered for purposes
of determining the maximum number of shares of Common Stock
available for delivery under the Plan.
If the exercise price of any Grant under this Plan is satisfied by
tendering shares of Common Stock to the Corporation (by either
actual delivery of by attestation), only the number of shares of
Common Stock issued net of shares of Common Stock tendered shall be
deemed delivered for purposes of determining the maximum number of
shares of Common Stock available for delivery under the Plan."
7. There is added a new Section 16 as follows:
"The Committee may, in its discretion and subject to such rules as
it may adopt, permit a Participant to defer all or a portion of such
shares otherwise deliverable pursuant to an exercise of a Grant."
<PAGE>
Exhibit 10(b)
FIRST AMENDMENT
TO THE AON STOCK AWARD PLAN
AS AMENDED AND RESTATED THROUGH 1997
THIS FIRST AMENDMENT ("First Amendment") TO THE AON STOCK AWARD PLAN AS
AMENDED AND RESTATED THROUGH 1997 (the "Plan") is hereby made effective as of
the 19th day of March, 1999.
R E C I T A L S
WHEREAS, the Company deems it in the best interests of the Company to
amend certain provisions of the Plan to clarify existing policies, practices and
procedures.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. All references in the Plan to "paragraph" when used in conjunction with a
specific paragraph number, e.g., "paragraph" 7, shall be changed to
"Section."
2. Section 2 of the Plan is hereby amended by deleting the second, third and
fourth sentences and inserting the following:
"Since the adoption of the Plan in 1987, after giving effect to
subsequent additions approved by shareholders and stock splits, the
aggregate number of shares of Common Stock which may be issued
pursuant to Awards under the Plan shall be 12,900,000. The
administration of the Plan, agreements relating to Awards, including
but not limited to agreements governing unfair competition, forms,
practices, procedures, all questions involving the eligibility for
Awards, interpretations of the provisions of the Plan, or the
operation of the Plan shall be decided by the Committee."
3. Section 4 of the Plan is hereby amended by deleting the fourth sentence of
the second paragraph and substituting the following:
"The Participant does not have the right to vote any shares subject
to an Award or receive dividends on such shares prior to the time
they are vested."
4. Section 6 is hereby amended by deleting the second paragraph and inserting
the following:
"The Committee may, in its discretion and subject to such rules as
it may adopt,
<PAGE>
permit or, in the absence of the receipt of payment therefore within
prescribed time periods, require Participant to pay all or a portion
of such taxes arising in connection with vesting of an Award by
electing to have the Corporation withhold shares of Common Stock
otherwise issuable having a Fair Market Value equal to all or any
portion of such tax to be satisfied in this manner."
5. Section 13 is hereby amended by adding the following:
"To the extent any shares of Common Stock covered by an Award are
not delivered to a Participant or beneficiary because the Award was
forfeited or canceled, or the shares of Common Stock are not
delivered because the Award or exercise of the option is settled in
cash or used to satisfy the applicable tax withholding obligation,
such shares shall not be deemed to have been delivered for purposes
of determining the maximum number of shares of Common Stock
available for delivery under the Plan."
6. The text of Section 15 is hereby deleted and the following inserted:
"The Committee may, in its discretion and subject to such rules as
it may adopt, permit a Participant to defer all or a portion of such
shares otherwise deliverable pursuant to an exercise of a Award."
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12(a)
Aon Corporation and Consolidated Subsidiaries
Combined With Unconsolidated Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
First Quarter Ended
March 31, 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) $ 96 $ 238 $ 931 $ 542 $ 446 $ 458 $ 397
ADD BACK FIXED CHARGES:
Interest on indebtedness 21 20 87 70 45 56 46
Interest on ESOP - 1 2 3 4 5 6
Portion of rents representative of
interest factor 13 11 51 44 29 21 29
------- ------- ------- ------- ------- ------- -------
INCOME AS ADJUSTED $ 130 $ 270 $ 1,071 $ 659 $ 524 $ 540 $ 478
======= ======= ======= ======= ======= ======= =======
FIXED CHARGES:
Interest on indebtedness $ 21 $ 20 $ 87 $ 70 $ 45 $ 56 $ 46
Interest on ESOP - 1 2 3 4 5 6
Portion of rents representative of
interest factor 13 11 51 44 29 21 29
------- ------- ------- ------- ------- ------- -------
TOTAL FIXED CHARGES $ 34 $ 32 $ 140 $ 117 $ 78 $ 82 $ 81
======= ======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.8 8.5 7.6 5.6 6.7 6.6 5.9
======= ======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES (2) 8.6 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 first
quarter ended March 31, 1999 and $172 million and $90 million for the
years ended December 31, 1997 and 1996, respectively.
(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 first quarter ended
March 31, 1999 and for the years ended December 31, 1997 and 1996,
respectively.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12(b)
Aon Corporation and Consolidated Subsidiaries
Combined With Unconsolidated Subsidiaries
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
First Quarter Ended
March 31, 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) $ 96 $ 238 $ 931 $ 542 $ 446 $ 458 $ 397
ADD BACK FIXED CHARGES:
Interest on indebtedness 21 20 87 70 45 56 46
Interest on ESOP - 1 2 3 4 5 6
Portion of rents representative of
interest factor 13 11 51 44 29 21 29
------- ------- ------- ------- ------- ------- -------
INCOME AS ADJUSTED $ 130 $ 270 $ 1,071 $ 659 $ 524 $ 540 $ 478
======= ======= ======= ======= ======= ======= =======
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS:
Interest on indebtedness $ 21 $ 20 $ 87 $ 70 $ 45 $ 56 $ 46
Preferred stock dividends 17 17 70 82 29 38 48
------- ------- ------- ------- ------- ------- -------
Interest and dividends 38 37 157 152 74 94 94
Interest on ESOP - 1 2 3 4 5 6
Portion of rents representative of
interest factor 13 11 51 44 29 21 29
TOTAL FIXED CHARGES AND PREFERRED ------- ------- ------- ------- ------- ------- -------
STOCK DIVIDENDS $ 51 $ 49 $ 210 $ 199 $ 107 $ 120 $ 129
======= ======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS (2) 2.5 5.5 5.1 3.3 4.9 4.5 3.7
======= ======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS (3) 5.7 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 first
quarter ended March 31, 1999 and $172 million and $90 million for the
years ended December 31, 1997 and 1996, respectively.
(2) Included in total fixed charges and preferred stock dividends are $16
million for the first quarters ended March 31, 1999 and 1998, and $66
million and $64 million for the years ended December 31, 1998 and 1997,
respectively, 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 first quarter ended
March 31, 1999 and for the years ended December 31, 1997 and 1996,
respectively.
</FN>
</TABLE>
<PAGE>
Exhibit 15
Board of Directors and Stockholders
Aon Corporation
We are aware of the incorporation by reference in the Registration Statements of
Aon Corporation ("Aon") described in the following table of our report dated May
4, 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 March 31, 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-8 333-55773 Pertaining to Aon's stock award plan, stock option
plan and employee stock purchase plan
S-4 333-21237 Offer to exchange Capital Securities of Aon
Capital A
S-3 333-50607 Pertaining to the registration of 369,000 shares
of common stock
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Chicago, Illinois
May 4, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.0
<CASH> 3,408 <F1>
<SECURITIES> 3,498 <F2>
<RECEIVABLES> 7,196
<ALLOWANCES> 83
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F3>
<PP&E> 1,438
<DEPRECIATION> 763
<TOTAL-ASSETS> 20,484
<CURRENT-LIABILITIES> 0 <F3>
<BONDS> 576 <F4>
850 <F5>
0
<COMMON> 258 <F6>
<OTHER-SE> 2,629
<TOTAL-LIABILITY-AND-EQUITY> 20,484
<SALES> 0
<TOTAL-REVENUES> 1,699
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,603 <F7>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 96
<INCOME-TAX> 36
<INCOME-CONTINUING> 60
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50
<EPS-PRIMARY> 0.19 <F6>
<EPS-DILUTED> 0.19 <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>
