SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- -
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
-
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7933
Aon Corporation
---------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-3051915
-------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
123 N. WACKER DR, CHICAGO, ILLINOIS 60606
----------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(312) 701-3000
--------------
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 3 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
---
Number of shares of common stock outstanding:
No. Outstanding
Class as of 9-30-00
----- -------------
$1.00 par value Common 256,094,695
<PAGE>
<TABLE>
<CAPTION>
Part 1
Financial Information
Aon Corporation
Condensed Consolidated Statements of Financial Position
(millions) AS OF AS OF
SEPT. 30, 2000 DEC. 31, 1999
------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
INVESTMENTS
Fixed maturities at fair value $ 2,352 $ 2,497
Equity securities at fair value 556 574
Short-term investments 2,473 2,362
Other investments 875 751
-------------- -------------
TOTAL INVESTMENTS 6,256 6,184
CASH 980 837
RECEIVABLES
Insurance brokerage and consulting
services 6,642 6,230
Premiums and other 1,367 1,116
-------------- -------------
TOTAL RECEIVABLES 8,009 7,346
EXCESS OF COST OVER NET ASSETS PURCHASED 3,255 3,359
OTHER INTANGIBLE ASSETS 482 503
OTHER ASSETS 2,849 2,903
-------------- -------------
TOTAL ASSETS $ 21,831 $ 21,132
============== =============
AS OF AS OF
SEPT. 30, 2000 DEC. 31, 1999
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
INSURANCE PREMIUMS PAYABLE $ 8,143 $ 7,643
POLICY LIABILITIES
Future policy benefits 1,007 1,005
Policy and contract claims 816 764
Unearned and advance premiums 2,042 2,012
Other policyholder funds 1,056 1,207
-------------- -------------
TOTAL POLICY LIABILITIES 4,921 4,988
GENERAL LIABILITIES
General expenses 1,455 1,731
Short-term borrowings 476 303
Notes payable 1,801 1,611
Other liabilities 1,003 955
-------------- -------------
TOTAL LIABILITIES 17,799 17,231
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 260 259
Paid-in additional capital 573 525
Accumulated other comprehensive loss (409) (309)
Retained earnings 3,107 2,905
Less - Treasury stock at cost (125) (90)
Deferred compensation (224) (239)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 3,182 3,051
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,831 $ 21,132
============== =============
</TABLE>
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)
Third Quarter Ended Nine Months Ended
------------------------ -------------------------
(millions except per share data) Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
----------- ----------- ------------ ------------
REVENUE
<S> <C> <C> <C> <C>
Brokerage commissions and fees ......................... $ 1,176 $ 1,127 $ 3,584 $ 3,382
Premiums and other ..................................... 476 475 1,435 1,353
Investment income ...................................... 133 168 395 457
----------- ----------- ------------ ------------
Total revenue ....................................... 1,785 1,770 5,414 5,192
----------- ----------- ------------ ------------
EXPENSES
General expenses ....................................... 1,208 1,222 3,741 3,698
Benefits to policyholders .............................. 257 244 766 720
Interest expense ....................................... 38 29 102 74
Amortization of intangible assets ...................... 38 36 115 105
----------- ----------- ------------ ------------
Total expenses ...................................... 1,541 1,531 4,724 4,597
----------- ----------- ------------ ------------
INCOME BEFORE INCOME TAX AND MINORITY INTEREST ............ 244 239 690 595
Provision for income tax ............................... 95 91 269 226
----------- ----------- ------------ ------------
INCOME BEFORE MINORITY INTEREST ........................... 149 148 421 369
Minority interest - 8.205% trust preferred
capital securities ................................... (10) (10) (30) (30)
----------- ----------- ------------ ------------
NET INCOME ................................................ $ 139 $ 138 $ 391 $ 339
=========== =========== ============ ============
Preferred stock dividends .............................. (1) (1) (2) (2)
----------- ----------- ------------ ------------
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS .............. $ 138 $ 137 $ 389 $ 337
=========== =========== ============ ============
NET INCOME PER SHARE:
Basic net income per share ............................. $ 0.53 $ 0.53 $ 1.50 $ 1.30
=========== =========== ============ ============
Dilutive net income per share .......................... $ 0.53 $ 0.52 $ 1.49 $ 1.28
=========== =========== ============ ============
CASH DIVIDENDS PAID ON COMMON STOCK ....................... $ 0.22 $ 0.21 $ 0.65 $ 0.61
=========== =========== ============ ============
Dilutive average common and common equivalent
shares outstanding ..................................... 262.8 264.2 261.7 263.3
----------- ----------- ------------ ------------
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
Aon Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
----------------------------
Sept. 30, Sept. 30,
(millions) 2000 1999
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ...................................................................... $ 391 $ 339
Adjustments to reconcile net income to cash provided by operating activities
Insurance operating assets / liabilities net of reinsurance .................. 32 125
Amortization of intangible assets ............................................ 115 105
Depreciation and amortization of property, equipment and software ........... 131 139
Income taxes ................................................................. 125 (2)
Special charge and purchase accounting liabilities (notes 8 and 11) ......... (90) 37
Valuation changes on investments and income on disposals ..................... (72) (122)
Other receivables and liabilities - net ...................................... (98) (143)
------------- -------------
Cash Provided by Operating Activities.. ........................................... 534 478
------------- -------------
Cash Flows from Investing Activities:
Sale of investments
Fixed maturities
Maturities ................................................................ 86 53
Calls and prepayments ..................................................... 106 146
Sales ..................................................................... 218 999
Equity securities ............................................................ 173 404
Other investments ............................................................ 253 35
Purchase of investments
Fixed maturities ............................................................. (298) (905)
Equity securities ............................................................ (130) (352)
Other investments ............................................................ (433) (256)
Purchase of short-term investments - net ..................................... (156) (249)
Acquisition of subsidiaries ..................................................... (60) (373)
Property and equipment and other - net .......................................... (104) (195)
------------- -------------
Cash Used by Investing Activities ......................................... (345) (693)
------------- -------------
Cash Flows from Financing Activities:
Treasury stock transactions - net. ............................................. (61) (22)
Issuance of short-term borrowings - net ........................................ 178 328
Issuance of long-term debt ..................................................... 250 255
Repayment of other long-term debt .............................................. (26) -
Interest sensitive, annuity and investment-type contracts
Deposits ..................................................................... 65 297
Withdrawals .................................................................. (275) (335)
Cash dividends to stockholders ................................................. (168) (156)
------------- -------------
Cash Provided (Used) by Financing Activities .............................. (37) 367
------------- -------------
Effect of Exchange Rate Changes on Cash ........................................... (9) (4)
Increase in Cash .................................................................. 143 148
Cash at Beginning of Period ....................................................... 837 723
------------- -------------
Cash at End of Period ............................................................. $ 980 $ 871
============= =============
</TABLE>
See the accompanying notes to condensed consolidated financial statements.
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<PAGE>
Aon CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Statement of Accounting Principles
----------------------------------
The financial results included in this report are stated in conformity
with accounting principles generally accepted in the United States 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, 1999 for additional
details of Aon's financial position, as well as a description of the
accounting policies which have been continued without material change. The
details included in the notes have not changed except as a result of
normal transactions in the interim and the events mentioned in the
footnotes below.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. Statements of Financial Accounting Standards (SFAS)
---------------------------------------------------
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
requires Aon to recognize all derivatives on the statement of financial
position at fair value.
In June 1999, the FASB issued Statement No. 137 that amended the
required adoption date of Statement No. 133 to all fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued Statement
No. 138, a significant amendment to Statement No. 133, which is
effective simultaneously with Statement No. 133. Effective October 1,
2000, Aon adopted Statement No. 133 in its fourth quarter consolidated
financial statements. Implementation of Statement No. 133 will not have
a material impact on the consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 (Interpretation),
"Accounting for Certain Transactions Involving Stock Compensation."
This Interpretation clarifies the application of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." This
Interpretation was effective July 1, 2000 and its adoption did not have
a material impact on Aon's consolidated financial statements.
In June 2000, the staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 101B that amended the required
adoption date of SAB 101 to fourth quarter 2000. SAB 101 provides guidance
for applying generally accepted accounting principles relating to the
timing of revenue recognition in financial statements filed with the SEC.
Any change required by the SAB must be made by the end of fourth quarter
2000 with a cumulative effect accounting change effective January 1, 2000.
Based on new interpretative guidance issued by the SEC staff in October
- 5 -
<PAGE>
2000, Aon has not yet determined the full effect this SAB will have on the
consolidated financial statements.
In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." Statement No. 140 replaces Statement No. 125 and revises
the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures.
Statement No. 140 is effective for all transfers of financial assets
occurring after March 31, 2001. Aon has not yet determined the effect, if
any, this statement will have on the consolidated financial statements.
3. Comprehensive Income
--------------------
The components of comprehensive income, net of related tax, for the third
quarter and nine months ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
(millions) Third Quarter Ended Nine Months Ended
------------------- -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
---------- ---------- ---------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 139 $ 138 $ 391 $ 339
Net unrealized investment gains (losses) 16 (55) 11 (155)
Net foreign exchange losses (31) (12) (111) (57)
Net additional minimum pension
liability reduction - - - 65
---------- ---------- ---------- ---------
Comprehensive income $ 124 $ 71 $ 291 $ 192
========== ========== ========== =========
</TABLE>
The components of accumulated other comprehensive loss, net of related
tax, at September 30, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(millions) 2000 1999
---- ----
<S> <C> <C>
Net unrealized investment losses $ (110) $ (121)
Net foreign exchange losses (263) (152)
Net additional minimum pension liability
adjustment (36) (36)
---------- ----------
Accumulated other comprehensive loss $ (409) $ (309)
========== ==========
</TABLE>
4. Business Segments
-----------------
Aon classifies its business into three major segments based on the type of
service or product, and a fourth nonoperating segment. The Insurance
Brokerage and Other Services segment is comprised of retail and
reinsurance brokerage and related operations, which include specialty and
wholesale activity. The Consulting segment is Aon's employee benefit and
human resource consulting organization. The Insurance Underwriting segment
is comprised of life, accident and health, and extended warranty and
casualty insurance products. The Corporate and Other nonoperating segment
revenues consist primarily of investment income on policyholder surplus
from insurance underwriting companies which is not otherwise allocated to
the operating segments. Corporate and
- 6 -
<PAGE>
Other expenses consist primarily of amortization of goodwill (excess of
costs over net assets purchased), interest, certain information technology
expenses and other general and administrative expenses.
Amounts reported in the tables for these four segments, when aggregated,
total to the amounts in the accompanying condensed consolidated financial
statements. Revenues are attributed to geographic areas based on the
location of the resources producing the revenues. There are no material
inter-segment amounts to be eliminated.
Selected information about Aon's operating and geographic areas of
operation follows.
<TABLE>
<CAPTION>
=============================================================================================
Insurance Brokerage and Other Services
(millions) Third quarter ended Sept. 30, Nine months ended Sept. 30,
2000 1999 2000 1999
=============================================================================================
Revenue:
<S> <C> <C> <C> <C>
United States $ 549 $ 543 $ 1,618 $ 1,563
United Kingdom 231 209 673 616
Continental Europe 134 137 503 505
Rest of World 128 123 387 345
---------------------------------------------------------------------------------------------
Total revenue $ 1,042 $ 1,012 $ 3,181 $ 3,029
---------------------------------------------------------------------------------------------
Income before income tax
excluding special charges $ 183 $ 163 $ 545 $ 535
Special charges - - - (119)
---------------------------------------------------------------------------------------------
Income before income tax $ 183 $ 163 $ 545 $ 416
---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
Consulting Third quarter ended Sept. 30, Nine months ended Sept. 30,
(millions) 2000 1999 2000 1999
=============================================================================================
Revenue:
<S> <C> <C> <C> <C>
United States $ 118 $ 102 $ 326 $ 291
United Kingdom 35 36 114 108
Continental Europe 13 7 49 32
Rest of World 16 13 49 44
---------------------------------------------------------------------------------------------
Total revenue $ 182 $ 158 $ 538 $ 475
---------------------------------------------------------------------------------------------
Income before income tax
excluding special charges $ 26 $ 15 $ 68 $ 51
Special charges - - - (44)
---------------------------------------------------------------------------------------------
Income before income tax $ 26 $ 15 $ 68 $ 7
---------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Insurance Underwriting Third quarter ended Sept. 30, Nine months ended Sept. 30,
(millions) 2000 1999 2000 1999
=============================================================================================
<S> <C> <C> <C> <C>
Revenue:
United States $ 384 $ 370 $ 1,154 $ 1,061
United Kingdom 74 97 233 258
Continental Europe 25 27 79 85
Rest of World 53 46 152 135
---------------------------------------------------------------------------------------------
Total revenue $ 536 $ 540 $ 1,618 $ 1,539
---------------------------------------------------------------------------------------------
Income before income tax $ 81 $ 75 $ 227 $ 214
---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
Corporate and Other Third quarter ended Sept. 30, Nine months ended Sept. 30,
(millions) 2000 1999 2000 1999
=============================================================================================
<S> <C> <C> <C> <C>
Total revenue $ 25 $ 60 $ 77 $ 149
---------------------------------------------------------------------------------------------
Loss before income tax $ (46) $ (14) $ (150) $ (42)
---------------------------------------------------------------------------------------------
</TABLE>
5. Notes Payable
-------------
In May 2000, Aon filed a prospectus supplement to use the remaining $250
million of its universal shelf registration filed in May 1999, and issued
$250 million of 8.65% debt securities due May 2005. The net proceeds from
the sale of the 8.65% notes are being used for general corporate purposes,
including securities repurchase programs, capital expenditures, working
capital, repayment or reduction of long-term and short-term debt and the
financing of acquisitions.
6. Capital Stock
-------------
During the first nine months of 2000, Aon purchased 3.3 million shares of
its common stock at a total cost of $95 million and reissued 1.2 million
shares of common stock from treasury for employee benefit plans and
739,700 shares in connection with the employee stock purchase plan. There
were 4 million shares of common stock held in treasury at September 30,
2000.
In April 2000, Aon's stockholders approved an amendment to Aon's Second
Amended and Restated Certificate of Incorporation to increase the number
of shares of common stock Aon is authorized to issue from 300 million to
750 million.
7. 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.
- 8 -
<PAGE>
8. Business Combinations
----------------------
In first quarter 1999, Aon consummated a plan of restructuring its
operations as a result of recent business combination activity. A pretax
special charge was recorded in the amount of $120 million.
In the first, second and third quarters of 2000, Aon made total payments
of $8 million, $13 million and $9 million, respectively, on restructuring
charges and purchase accounting liabilities relating to business
combinations.
The activity of these special charges and purchase accounting liabilities
is presented below.
The following table demonstrates the activity related to the liability for
termination benefits and abandoned leases recorded as expenses in 1999:
Termination Lease
(millions) Benefits Abandonments Total
--------------------------------------------------------------------------
Expense charged in 1999 $ 67 $ 11 $ 78
Cash payments in 1999 (51) (6) (57)
Credit to expense in 2000 - (5) (5)
Cash payments in 2000 (9) - (9)
--------------------------------------------------------------------------
Balance at September 30, 2000 $ 7 $ - $ 7
--------------------------------------------------------------------------
The following table demonstrates the activity related to the liabilities
established as a result of 1998 acquisitions:
<TABLE>
<CAPTION>
Termination Lease
(millions) Benefits Abandonments Total
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Initial liability $ 40 $ 30 $ 70
Cash payments in 1998 (16) (4) (20)
Cash payments in 1999 (24) (6) (30)
Credit to expense in 2000 - (3) (3)
Cash payments in 2000 - (4) (4)
-----------------------------------------------------------------------------
Balance at September 30, 2000 $ - $ 13 $ 13
-----------------------------------------------------------------------------
</TABLE>
The following table demonstrates the activity related to the "Aon Plan"
liabilities recorded as expenses in 1996 and 1997:
<TABLE>
<CAPTION>
Lease
Abandonments
Termination and Other
(millions) Benefits Exit Costs Total
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 12 $ 48 $ 60
Expense charged in 1997 40 68 108
Cash payments in 1997 (48) (10) (58)
Cash payments in 1998 (4) (26) (30)
Cash payments in 1999 - (24) (24)
Credit to expense in 1999 - (11) (11)
Credit to expense in 2000 - (3) (3)
Cash payments in 2000 - (7) (7)
-----------------------------------------------------------------------------
Balance at September 30, 2000 $ - $ 35 $ 35
-----------------------------------------------------------------------------
</TABLE>
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<PAGE>
The following table demonstrates the activity related to the A&A and Bain
Hogg plan liabilities established as a result of 1996 and 1997
acquisitions:
<TABLE>
<CAPTION>
Lease
Abandonments
Termination and Other
(millions) Benefits Exit Costs Total
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Initial liability $ 100 $ 164 $ 264
Cash payments in 1997 (65) (44) (109)
Cash payments in 1998 (35) (45) (80)
Cash payments in 1999 - (28) (28)
Charge to expense in 1999 - 13 13
Cash payments in 2000 - (10) (10)
-----------------------------------------------------------------------------
Balance at September 30, 2000 $ - $ 50 $ 50
-----------------------------------------------------------------------------
</TABLE>
All of Aon's liabilities relating to restructuring charges and purchase
accounting are reflected in the general expense liabilities in the
condensed consolidated statements of financial position.
9. Net Income Per Share
--------------------
Net income per share is calculated as follows:
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
(millions except per ------------------- -----------------
share data) Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 139 $ 138 $ 391 $ 339
Redeemable preferred
stock dividends (1) (1) (2) (2)
--------- ---------- ---------- ----------
Net income for
dilutive and basic $ 138 $ 137 $ 389 $ 337
========= ========== ========== ==========
Basic shares outstanding 260 260 259 259
Common stock equivalents 3 4 3 4
--------- ---------- ---------- ----------
Dilutive potential
common shares 263 264 262 263
-------------------------------------------------------------------------------------
Basic net income per share $0.53 $0.53 $1.50 $1.30
Dilutive net income per
share $0.53 $0.52 $1.49 $1.28
-------------------------------------------------------------------------------------
</TABLE>
10. Alexander & Alexander Services Inc. (A&A) Discontinued Operations
-----------------------------------------------------------------
A&A discontinued its property and casualty 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 purchasers for various estimated and potential
liabilities, including provisions to cover future losses attributable to
insurance pooling arrangements, a stop-loss
- 10 -
<PAGE>
reinsurance agreement, and actions or omissions by various underwriting
agencies previously managed by an A&A subsidiary. As of September 30,
2000, 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 amounted to
$143 million and would be substantially reduced if a February, 2000 ruling
from the Court of Appeal in England favorable to the Company, in respect
of which right to appeal has been granted, were upheld in a decision
expected in or around 2002. The stated liabilities are net of $174 million
of reinsurance recoverables and other assets.
11. 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 1998, the Internal Revenue Service (IRS) proposed adjustments to the
tax of certain Aon subsidiaries for the period of 1990 through 1993. Most
of these adjustments should be resolved through factual substantiation of
certain accounting matters. However, 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 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 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
brought against three insurance carriers reinsured by Allianz. These three
carriers provided certain types of workers' compensation reinsurance to a
pool of insurers and to certain facilities managed by Unicover Managers,
Inc. ("Unicover"), a New Jersey corporation not affiliated with Aon.
Allianz alleges that the Aon subsidiary acted as an agent of the three
carriers when placing reinsurance coverage on their behalf. Allianz claims
that the reinsurance it issued should be rescinded or that it should be
awarded damages, based on alleged fraudulent, negligent and innocent
misrepresentations by the carriers, through their agents, including the
Aon subsidiary defendant. Aon believes that the Aon subsidiary has
meritorious defenses and the Aon subsidiary intends to vigorously defend
this claim.
Except for an action filed in Illinois seeking to compel Aon to produce
documents and for an action filed in England disputing entitlement to
commissions and fees to both of which Aon is responding, the Allianz
lawsuit is the only lawsuit or arbitration relating to Unicover in which
any Aon related entity is a party. However, in fourth quarter 1999 Aon
recognized a pretax charge for $72 million in general expenses in its
insurance brokerage and other services segment relating to various
litigation matters including Unicover. As of September 30, 2000, Aon has
$49 million
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<PAGE>
remaining in general expense liabilities for these various litigation
matters, which are complex and, therefore, the timing of resolution cannot
yet be determined.
Certain U.K. subsidiaries of Aon have been required by their regulatory
body, the Personal Investment Authority (PIA), to review advice given by
those subsidiaries to individuals who bought pension plans during the
period from April 1988 to June 1994. These reviews have resulted in a
requirement to pay compensation to clients based on guidelines issued by
the PIA. In 1999, Aon charged general expenses for $121 million in the
consulting segment, of which $43 million was in first quarter 1999, to
provide for these payments. As of September 30, 2000, Aon has $66 million
remaining in general expense liabilities for these payments which are
expected to be disbursed over the next several 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, general
level of pricing in the equity markets, the rate of response to the
pension review mailings, the interest rate established quarterly by the
PIA for calculating compensation, and the precise scope, duration and
methodology of the review, including whether recent regulatory guidance
will have to be applied to previously settled claims.
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 legal advice received, 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 beyond amounts provided. However, it is possible that
future results of operations or cash flows for any particular quarterly or
annual period could be materially affected by an unfavorable resolution of
these matters.
12. Subsequent Event
----------------
In October 2000, Aon acquired ASA Acquisition Corp. (ASA), an employee
benefits and compensation consulting firm. The acquisition was financed by
the issuance of 3.9 million shares of common stock and will be accounted
for as a purchase.
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<PAGE>
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR THIRD QUARTER AND NINE MONTHS 2000
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
-------------------------------------------------
This quarterly report contains certain statements relating to future results,
which are forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. 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 general economic conditions in different countries
around the world, fluctuations in global equity and fixed income markets,
changes in commercial property and casualty premium rates, the competitive
environment, the actual cost of resolution of contingent liabilities, the final
form of the business transformation plan, the ultimate cost and timing of the
implementation thereof and the actual cost savings and other benefits resulting
therefrom. (See "Business Transformation Plan / Future Restructuring Charges"
section below).
GENERAL
-------
BUSINESS TRANSFORMATION PLAN / FUTURE RESTRUCTURING CHARGES
In November 2000, Aon's board of directors approved, in principle, a
comprehensive business transformation plan (the "Plan") designed to
significantly improve the way Aon conducts its business, to improve client
service and to enhance profitability. The Plan combines existing, proven
technology with process redesign and organizational change. The business
transformation costs, estimated to be between $250 million and $325 million on a
pretax basis, will include a restructuring charge and transition costs, the
majority of which will be incurred over the next three quarters when the Plan is
being implemented. The majority of the total costs will be recorded as a
restructuring charge beginning in fourth quarter 2000.
Major elements of the Plan include severance payments for workforce reductions
relating to the elimination of approximately 3,000 positions or 6% of Aon's
50,000 total worldwide workforce. Transition costs are related primarily to the
running of parallel functions and will mostly offset savings through the first
half of 2001. A majority of the total charges are expected to be taken over the
fourth quarter 2000 and first quarter 2001 with the remaining amount expected to
be recognized in second quarter 2001.
Annualized pretax savings from the Plan are estimated to be approximately $150
million to $200 million. The majority of the annualized savings is expected to
be realized beginning in fourth quarter 2001. Temporary revenue shortfalls may
occur during the early implementation stage of the Plan.
The majority of the charges and savings relate to the Insurance Brokerage and
Other Services segment and the majority of the related savings will occur in the
U.S. and the U.K. where most of Aon's offices and employees are located.
Positions to be eliminated will occur at all levels including senior and middle
management, corporate staff functions, administrative and clerical.
- 13 -
<PAGE>
CONSOLIDATED RESULTS
--------------------
REVENUE AND INCOME BEFORE INCOME TAX
------------------------------------
REVENUE:
Total revenue increased $15 million or 1% in the third quarter and $222 million
or 4% in nine months 2000. Foreign exchange rate reductions and the absence of
revenue from the Unicover workers compensation pool slowed revenue growth in
third quarter and nine months 2000. The impact of lower total returns on private
equity investments and lower levels of income on disposals contributed to the
slight increase in third quarter revenues compared to prior year.On a comparable
currency basis, total revenues improved 4% in the quarter compared to 1999.
Brokerage commissions and fees increased $49 million or 4% in third quarter 2000
and $202 million or 6% in nine months 2000, primarily reflecting internal growth
from increased new business and growth from business combination activity.
Partially offsetting the growth in brokerage commission and fees was the impact
of foreign exchange rates in the quarter and nine months.
Premiums and other, primarily related to insurance underwriting operations,
increased $1 million in third quarter 2000 and $82 million or 6% in nine months
2000 compared with the same period last year. The absence of growth in third
quarter 2000 premiums and other revenue over prior year primarily reflects a
significant decline in extended warranty revenue following a change in the mix
of warranty services delivered to clients. The intentional discontinuation of
one major warranty renewal that did not meet profitability hurdles and the loss
of revenue from the exit of one retailer from the appliances and electronics
line also impacted revenue growth in the quarter. Total premiums earned in the
insurance underwriting segment were $472 million, an increase of $3 million or
1% over third quarter 1999. The increase primarily reflects continued strong
growth in accident and health core business which was largely offset by the
reduction in extended warranty revenues mentioned above.
Investment income, which includes related expenses and income on disposals,
decreased 21% or $35 million and 14% or $62 million in the third quarter and
nine months 2000, respectively, when compared to prior year. Revenues from
private equity investments fluctuate due to the inherent volatility of these
investments. The decline in third quarter 2000 investment income primarily
reflected a decrease in income on disposals and lower total returns on private
equity investments when compared to 1999. Nine months 2000 investment income
declined from prior year largely due to lower levels of income on disposals.
Partially offsetting this decline were higher total returns on private equity
investments in the first six months of 2000. For nine months 1999, investment
income included a gain of $30 million of income on the disposal of tax-exempt
bonds, the settlement of a dispute relating to investments with a third party in
second quarter 1999 and other significant income on disposals, with no
comparable amounts in 2000. Investment income from insurance brokerage and other
services, and consulting operations, primarily relating to fiduciary funds,
increased $4 million in third quarter 2000 compared to third quarter 1999.
Higher short-term interest rates coupled with improved cash flows contributed to
the overall investment income increase in the brokerage segments.
EXPENSES:
General expenses decreased 1% in the quarter reflecting the impact of foreign
exchange fluctuations and lower policy acquisition costs and commissions paid in
the insurance underwriting segment. On a comparable currency basis, general
expenses increased 4% in the quarter. In the nine months 2000,
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<PAGE>
general expenses, excluding 1999 special charges (see below), increased $206
million or 6%, primarily reflecting investments in new business initiatives,
acquisitions and technology. Such costs included the rollout of Aon's U.S.
retail brokerage computer system platform and related conversions, running of
parallel systems and training expenses.
Benefits to policyholders increased $13 million or 5% in the quarter and $46
million or 6% in nine months 2000 when compared to prior year. The increases
were consistent with growth in related premium earned and reflected no unusual
claims activity in the nine months comparisons.
Interest expense increased 31% in the quarter compared to prior year and 38% in
nine months 2000, attributed primarily to acquisition financing from 1999 and
2000 acquisitions, higher short-term interest rates and the issuances of $250
million of 6.9% notes at the end of second quarter 1999 and $250 million of
8.65% notes in second quarter 2000 (see note 5).
Based on the above, total expenses increased $10 million or 1% in the third
quarter 2000 and $127 million or 3% for the first nine months when compared with
the prior year. For the nine months 2000, the increase would have been $290
million or 7% after adjusting for the 1999 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 U.K. pension
selling, an early retirement plan in the U.S. and Canada and the consolidation
of Aon's European insurance brokerage and other services operations.
Restructuring liabilities for recent acquisitions and 1999 special charges have
been reduced by payments as planned.
INCOME BEFORE INCOME TAX:
As a result of the above revenue and expenses discussions for the third quarter
2000, income before income tax and minority interest increased $5 million or 2%
in third quarter 2000 when compared to prior year, primarily due to revenue
growth in the brokerage and consulting segments and a decline in general
expenses which were offset in part by lower total returns on equity investments
and higher interest and goodwill amortization expenses. Nine months 2000 income
before income tax increased $95 million or 16% over 1999 reflecting the
inclusion of 1999 special charges. Excluding special charges, nine months 2000
income before income tax decreased $68 million or 9% when compared to prior
year, primarily reflecting lower total returns on equity investments, costs to
integrate Aon's global network, increased technology expenses related to
brokerage computer systems, additional interest expense, absence of Unicover
revenues and the inclusion of the $30 million income on disposal of tax-exempt
securities in 1999.
Although foreign exchange rates negatively affected revenues in the third
quarter, pretax income was generally protected against foreign currency
fluctuations through the use of derivative instruments. In the third quarter,
the net foreign exchange impact to pretax income, after the benefit of
derivative activity, was minimal. For the nine months 2000, the unfavorable
foreign exchange impact to pretax income was $9 million.
- 15 -
<PAGE>
BUSINESS SEGMENTS
-----------------
GENERAL
-------
For purposes of the following business segments discussions, comparisons against
1999 results exclude special charges. In addition, references to income before
income tax exclude minority interest related to the capital securities.
Aon classifies its businesses into three major operating segments: Insurance
Brokerage and Other Services, Consulting and Insurance Underwriting; and into
one nonoperating segment, Corporate and Other. A description of operations and a
review of financial performance for each of these four segments follows.
INSURANCE BROKERAGE AND OTHER SERVICES
--------------------------------------
The Insurance Brokerage and Other Services segment consists principally of Aon's
retail and reinsurance brokerage and related operations, which include specialty
and wholesale activity.
Third quarter 2000 revenue was $1.04 billion, up 3%, and nine months 2000
revenue was $3.2 billion, up 5% from 1999. Internal growth as well as post-third
quarter 1999 acquisitions accounted for the majority of this revenue growth.
Excluding the impact of acquisitions, foreign exchange and Unicover, revenue
related to Insurance Brokerage and Other Services core businesses grew
approximately 7% in the quarter in a very competitive environment. Revenue
growth in the quarter, on a comparable currency basis, was also 7% compared to
prior year. Revenue growth was slowed in the quarter primarily due to a decrease
in one-time transaction revenues in the U.S. retail brokerage sector and the
absence of revenue from the Unicover workers compensation pool. Revenue related
to reinsurance obtained by Unicover was $11 million and $25 million for third
quarter and nine months 1999, respectively.
In third quarter 2000, U.S. revenue of $549 million was up slightly from 1999.
Pricing trends in the marketplace were basically flat in the quarter when
compared to second quarter 2000. U.K. and Continental Europe revenue of $365
million increased 5% from 1999, primarily due to strong internal growth,
particularly in the retail, specialty and reinsurance sectors. The impact of
foreign exchange rates partially offset this revenue growth. Rest of world
revenue increased 4% in 2000 primarily due to new initiatives and internal
growth.
In the nine months, U.S. revenue of $1.6 billion in 2000 was up 4% from 1999
reflecting increased new business, acquisitions, and the impact of minimal
premium rate declines and growth in U.S. specialty operations. U. K. and
Continental Europe revenue of $1.2 billion increased 5% from 1999, primarily
due to internal growth as mentioned above and to a lesser extent,
acquisitions. The impact of foreign exchange rates partially offset this
revenue growth. Rest of world revenue increased $42 million or 12% in 2000
primarily reflecting new initiatives and internal growth.
Excluding 1999 special charges, pretax income grew 12% in third quarter and 2%
in nine months 2000 over prior year, primarily reflecting strong internal
growth, particularly in the retail, specialty and reinsurance sectors. Partially
offsetting the pretax income growth in the nine months was lower revenue sharing
income with insurers who are experiencing higher industry-wide underwriting
losses. While this negatively affected short-term results, poor underwriting
performance contributed to continued price firming.
- 16 -
<PAGE>
Third quarter pretax margins in this segment were 17.5% in 2000 compared to
16.1% in the prior year. International retail, specialty and reinsurance
businesses had strong results in the quarter. In the nine months, pretax margins
were 17.1% compared to 17.7% in 1999. Third quarter 1999 results benefited from
high margin Unicover revenue which was absent in 2000. In addition, higher
technology costs related to the rollout of Aon's U.S. retail brokerage computer
system platform and investments in new initiatives, with little or no immediate
revenue growth, contributed to margin declines in the nine months.
CONSULTING
----------
The Consulting segment provides a range of consulting services including
employee benefits, human resources, compensation and change management.
In the Consulting segment, third quarter 2000 revenue increased 15% to $182
million while nine months 2000 revenue of $538 million grew 13%. Internal growth
and acquisition activity principally influenced third quarter 2000 revenue
growth. Excluding the impact of acquisitions and foreign exchange, revenue
related to Consulting core businesses grew approximately 14% in the quarter. On
a comparable currency basis, Consulting revenue grew 18% in the quarter compared
to 1999.
U.S. revenue of $118 million in third quarter 2000 was up 16% from 1999
reflecting growth primarily in employee benefit consulting and change
management. U.K. and Continental Europe revenue of $48 million increased 12%
from 1999. U.K. revenue declined 3% from the prior period reflecting the
absence of revenues from the sale of the financial planning business in the
quarter. Continental Europe revenue increased 86% or $6 million reflecting
revenue growth of existing businesses and transfers of certain operating
activities to the consulting segment, partially offset by the unfavorable
impact of foreign exchange rates.
U.S. revenue of $326 million in nine months 2000 was up 12% from 1999 reflecting
growth primarily in employee benefit consulting and change management. U.K. and
Continental Europe revenue of $163 million increased 16% from 1999. Strong
growth in employee benefit services partially offset by the sale of the
financial planning consulting business led to the U.K.'s 6% increase in revenue
growth from the prior period. Continental Europe revenue increased 53% or $17
million reflecting growth of existing businesses and transfers of certain
operating activities to the consulting segment, partially offset by unfavorable
foreign exchange rates.
Third quarter and nine months pretax income, excluding 1999 special charges,
increased 73% to $26 million and 33% to $68 million, respectively, compared to
1999 primarily reflecting U.K. operations and domestic employee benefits, human
resources and change management consulting. Pretax margins in this segment
improved to 14.3% in the quarter from 9.5% in the prior period primarily
reflecting core business growth. Nine months 2000 pretax margins were 12.7%
compared to 10.8% in 1999 representing strong fundamental improvement in this
segment. Nine months 2000 margin is more indicative of future operating trends
in the consulting segment.
INSURANCE UNDERWRITING
----------------------
The Insurance Underwriting segment is comprised of accident, health and life
insurance and extended warranty and casualty insurance products.
Revenue was $536 million in third quarter 2000, down 1% from 1999, caused by a
change in the mix of warranty services delivered to clients. Also contributing
to the revenue decline in the quarter was the
- 17 -
<PAGE>
intentional discontinuation of one major warranty renewal that did not meet
profitability hurdles and the loss of revenue from the exit of one retailer from
the appliances and electronics line. These reductions in revenue did not affect
the overall profitability of this segment. Accident and health continued to
expand product distribution through worksite marketing programs, and the
development of new product initiatives introduced in 1999 on a global basis.
However, the above revenue growth is predominantly from core operations and
acquisitions as these new initiatives continue to build momentum. Excluding the
impact of acquisitions and foreign exchange, written premiums related to
insurance underwriting core businesses grew approximately 2% in the quarter.
Excluding the impact of foreign exchange adjustments, revenue growth in the
quarter was 1% on a comparable currency basis.
U.S. revenue of $384 million was up 4% in third quarter 2000 principally due
to growth in revenues for accident and health core businesses. U.K. and
Continental Europe revenue of $99 million declined 20% principally reflecting
a change in the mix of warranty services delivered. Rest of world revenue was
$53 million, up 15% from prior year reflecting continued geographic expansion.
U.S. revenue of $1.15 billion was up 9% in nine months 2000 driven by life,
accident and health products and extended warranty products. U.K. and
Continental Europe revenue of $312 million declined 9% reflecting the transfer
of certain business to the Insurance Brokerage and Other Services segment in
first quarter 2000. Rest of world revenue was $152 million, up 13% from prior
year reflecting continued geographic expansion.
Pretax income was $81 million in third quarter 2000, up 8% from last year. Nine
months 2000 pretax income was $227 million, an increase of 6% over prior year.
Partially impacting third quarter 2000 comparisons was the positive runoff of
specialty liability policies. This is the final year that underwriting earnings
are expected to be impacted by the runoff of those policies. Revenue growth and
expense management was partially offset by start-up costs related to new
accident and health product initiatives and investments in new product
development in the extended warranty product lines. Pretax margins in this
segment grew to 15.1% in third quarter 2000 compared to 13.9% in 1999,
principally reflecting improved results in the accident and health core
businesses and the positive runoff of special liability policies, and offset in
part, by the effect of the start-up costs mentioned above.
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 goodwill amortization, interest expense and
general expenses such as administrative and certain information technology
costs.
Corporate and Other revenue for the third quarter 2000 was down $35 million or
58% from third quarter 1999 primarily reflecting a decrease in income on
disposals and lower total returns from private equity investments. These
investments generate a more variable income stream due to the inherent
fluctuations of equity security valuations. Nine months 2000 Corporate and Other
revenue declined $72 million or 48% from prior year primarily due to lower
levels of income on disposals. Partially offsetting this decline were higher
total returns on private equity investments in the first six months of 2000.
Nine months 1999 investment income included a gain of $30 million of income on
the disposal of tax-exempt bonds and other significant income on disposals, with
no comparable amounts in 2000.
Corporate and Other expenses for the quarter declined $3 million and for nine
months were up $36 million from the same periods last year. Third quarter 1999
expenses included costs related to the branding
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<PAGE>
campaign without a comparable amount in the current quarter. Interest expense
and goodwill amortization were up a total of $11 million over the third quarter
1999 reflecting the impact and financing of acquisitions made during the
previous twelve months, higher short-term interest rates, and the issuance of
approximately $500 million of debt securities since June 1999.
Lower revenues from equity investments and income on disposals, and increased
interest and amortization expenses were the primary factors that contributed to
the overall corporate and other pretax loss of $46 million in the quarter and
$150 million for nine months 2000, a decline of $32 million and $108 million,
respectively.
- 19 -
<PAGE>
NET INCOME FOR THIRD QUARTER AND NINE MONTHS 2000
Third quarter 2000 net income was $139 million ($0.53 dilutive per share)
compared to $138 million ($0.52 dilutive per share) in 1999. Nine months 2000
net income was $391 million ($1.49 dilutive per share) compared to $339 million
($1.28 dilutive per share) in 1999. Nine months 1999 net income was primarily
influenced by after-tax 1999 special charges of $102 million ($0.39 per share)
with no comparable amount in nine months 2000. In the third quarter and first
nine months of 2000, there was no net income reflected in Aon's consolidated
financial statements from the impact of Unicover revenues. The impact of
Unicover revenues in 1999 was approximately $0.03 per share in the third quarter
and $0.06 per share for the first nine months.
Basic net income per share, including 1999 special charges, was $0.53 in both
third quarter 2000 and 1999 and $1.50 and $1.30 in nine months 2000 and 1999,
respectively. Dividends on the redeemable preferred stock have been deducted
from net income to compute income per share. The effective tax rate was 39% and
38.25% for third quarter 2000 and 1999, respectively. The increase in the
effective rate was primarily attributable to a shift in business mix and to less
tax-exempt investment income.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF NINE MONTHS 2000
Cash flows from operating activities reflect the net income earned by Aon in the
reported periods adjusted for non-cash charges and changes in assets and
liabilities. Cash flows provided by operating activities in nine months 2000
were $534 million, an increase of $56 million from the $478 million reported at
nine months 1999. The increase is primarily due to overpayments in 1999 on
income taxes applied to the 2000 expense. Other cash flows consist primarily of
timing of receivables and liabilities. Partially offsetting this increase were
payments on special charges related to restructuring and purchase accounting
liabilities from business combinations. Aon has reformatted the "Cash Provided
by Operating Activities" section of the Condensed Consolidated Statements of
Cash Flows from earlier 2000 filings. The following table demonstrates, for
comparability purposes, Aon's cash flows from operating activities in the new
reporting format for the six months ended June 30, 2000 and 1999 and for the
three months ended March 31, 2000 and 1999, respectively.
- 20 -
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------- ------------------
June 30, June 30, March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net Income $ 252 $ 201 $ 123 $ 50
Adjustments to reconcile net income to cash provided
by operating activities
Insurance operating assets/liabilities net of
reinsurance 18 122 87 89
Amortization of intangible assets 77 69 38 34
Depreciation and amortization of property,
equipment and software 88 89 44 44
Income taxes 62 (23) 17 (20)
Special charge and purchase accounting liabilities
(notes 8 and 11) (73) 73 (43) 138
Valuation changes on investments and income on
disposals (49) (69) (25) (36)
Other receivables and liabilities - net (113) (105) (95) (36)
------ ------ ------ ------
CASH PROVIDED BY OPERATING ACTIVITIES $ 262 $ 357 $ 146 $ 263
====== ====== ====== ======
</TABLE>
Investing activities used cash of $345 million, which was made available from
financing and operating activities. Cash used for acquisition activity during
nine months 2000 was $60 million, primarily reflecting brokerage acquisitions.
Property and equipment and other capital expenditures for the first nine months
of 2000 were $104 million, net of proceeds of $42 million from the sale of
certain assets.
Financing activities during nine months 2000 used cash of $37 million. Net
withdrawals of $210 million related to capital accumulation products and a
reduction of new short-term borrowings of $150 million were the primary
contributors towards the $404 million decline in cash flows from financing
activities. Cash was used to pay dividends of $166 million on common stock and
$2 million on redeemable preferred stock during nine months 2000. Because of
regulatory requirements relating to Aon's underwriting and overseas operations,
availability of operating cash flows for general corporate purposes is delayed.
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 business reinvestment (i.e. rollout of the new U.S. retail
brokerage system, acquisition financing and payments of special charge and
purchase accounting liabilities).
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. Given these factors, Aon anticipates a sufficient
level of future operating cash flows to offset the impact of cash payments
related to both restructuring charges and transition costs associated with the
implementation of the Business Transformation Plan that will commence in fourth
quarter 2000 and continue through the end of 2001. Given
- 21 -
<PAGE>
this expected future use of available cash flows, Aon anticipates deferring any
material reduction of debt levels until after the Business Transformation Plan
is materially implemented.
Aon's fixed maturity investments are invested primarily in investment grade
holdings (95%) and have a fair value of $2.4 billion at September 30, 2000,
which is approximately 96% of amortized cost.
Total assets increased $699 million to $21.8 billion since year-end 1999.
Invested assets at September 30, 2000 increased $72 million from year-end levels
primarily from higher levels of short-term investments and other investments and
were offset in part by a reduction in fixed maturities to fund special charge
payments and to settle policyholder fund liabilities. The amortized cost and
fair value of less than investment grade fixed maturity investments were $103
million and $89 million, respectively, at September 30, 2000. The carrying value
of non-income producing investments in Aon's portfolio at September 30, 2000 was
$61 million, or 1% of total invested assets.
In general, Aon uses derivative financial instruments (primarily financial
futures, swaps, options interest rate floors and caps and forward foreign
currency contracts) to manage: (a) foreign currency translation and transaction
risks, interest rate risk and other business risks (e.g. credit risk); (b) asset
price risk associated with financial instruments whose change in value is
reported under SFAS 115; and (c) overall asset/liability duration matches. As of
September 30, 2000, there were no net unrealized gains or losses included in
accumulated other comprehensive loss related to these instruments.
Short-term borrowings increased at the end of nine months 2000 by $173 million
when compared to year-end 1999 to primarily fund the financing of acquisitions,
in particular the completion of minority interest buyouts associated with
previous acquisitions. Notes payable increased at the end of nine months 2000 by
$190 million when compared to year-end 1999. The principal factor influencing
this increase is the issuance of $250 million of 8.65% debt securities due May
2005 (see note 5). Debt repayments partially offset the increase in notes
payable. Included in notes payable at September 30, 2000 is approximately $12
million, which represents the principal amount of notes to be paid within one
year.
Stockholders' equity increased $131 million in nine months 2000 to $12.42 per
share, an increase of $0.51 per share since year-end 1999. The principal factor
influencing this increase was net income. Partially offsetting this increase
were net foreign exchange losses of $111 million and dividends to stockholders
of $168 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
completely.
REVIEW BY INDEPENDENT AUDITORS
------------------------------
The condensed consolidated financial statements at September 30, 2000 and for
the third quarter and nine months then ended have been reviewed, prior to
filing, by Ernst & Young LLP, Aon's independent auditors, and their report is
included herein.
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<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Aon Corporation
We have reviewed the accompanying condensed consolidated statement of financial
position of Aon Corporation as of September 30, 2000, and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 2000 and 1999, and the condensed consolidated statements of
cash flows for the nine-month periods ended September 30, 2000 and 1999. 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 auditing standards generally accepted in the United States,
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 accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated statement of financial position
of Aon Corporation as of December 31, 1999, 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 8, 2000, 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, 1999, 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
Chicago, Illinois
November 8, 2000
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<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 -
-------------------
(i) No Current Reports on Form 8-K were filed for the quarter
ended September 30, 2000.
(ii) The Registrant filed one Current Report on Form 8-K dated
November 3, 2000. The following exhibit was included in
the report: Exhibit 99 - Press Release issued on November
2, 2000.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aon Corporation
---------------
(Registrant)
November 13, 2000 /s/ Harvey N. Medvin
------------------------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting
Officer)
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<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
- 25 -
<PAGE>
