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, 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 3-31-00
----- -------------
$1.00 par value Common 255,861,956
<PAGE>
Part 1
Financial Information
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
(millions) As of As of
March 31, 2000 Dec. 31, 1999
-----------------------------
ASSETS (UNAUDITED)
Investments
Fixed maturities at fair value $ 2,509 $ 2,497
Equity securities at fair value 555 574
Short-term investments 2,263 2,362
Other investments 848 751
------------- --------------
Total investments 6,175 6,184
Cash 774 837
Receivables
Insurance brokerage and consulting
services 6,299 6,230
Premiums and other 1,201 1,116
------------- --------------
Total receivables 7,500 7,346
Excess of cost over net assets purchased 3,335 3,359
Other intangible assets 498 503
Other assets 3,018 2,903
------------- --------------
Total Assets $ 21,300 $ 21,132
============= ==============
(millions) As of As of
March 31, 2000 Dec. 31, 1999
-----------------------------
Liabilities and Stockholders' Equity (Unaudited)
Insurance Premiums Payable $ 7,837 $ 7,643
Policy Liabilities
Future policy benefits 1,009 1,005
Policy and contract claims 760 764
Unearned and advance premiums 2,050 2,012
Other policyholder funds 1,142 1,207
------------ --------------
Total policy liabilities 4,961 4,988
General Liabilities
General expenses 1,573 1,731
Short-term borrowings 343 303
Notes payable 1,593 1,611
Other liabilities 1,053 955
------------ --------------
Total Liabilities 17,360 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 259 259
Paid-in additional capital 536 525
Accumulated other comprehensive loss (338) (309)
Retained earnings 2,966 2,905
Less - Treasury stock at cost (106) (90)
Deferred compensation (227) (239)
------------ --------------
Total Stockholders' Equity 3,090 3,051
------------ --------------
Total Liabilities and Stockholders' Equity $ 21,300 $ 21,132
============ ==============
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, March 31,
2000 1999
------------------- -------------------
REVENUE
<S> <C> <C>
Brokerage commissions and fees .................................. $ 1,205 $ 1,112
Premiums and other .............................................. 468 437
Investment income ............................................... 137 150
--------- ---------
TOTAL REVENUE ................................................ 1,810 1,699
--------- ---------
EXPENSES
General expenses ................................................ 1,271 1,309
Benefits to policyholders ....................................... 252 239
Interest expense ................................................ 31 21
Amortization of intangible assets ............................... 38 34
--------- ---------
TOTAL EXPENSES ............................................... 1,592 1,603
--------- ---------
INCOME BEFORE INCOME TAX AND MINORITY INTEREST 218 96
Provision for income tax ........................................ 85 36
--------- ---------
INCOME BEFORE MINORITY INTEREST .................................... 133 60
Minority interest - 8.205% trust preferred capital securities ... (10) (10)
--------- ---------
NET INCOME ......................................................... $ 123 $ 50
========= =========
Preferred stock dividends ....................................... (1) (1)
--------- ---------
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS ....................... $ 122 $ 49
========= =========
Net Income Per Share:
Basic net income per share ...................................... $ 0.47 $ 0.19
========= =========
Dilutive net income per share ................................... $ 0.47 $ 0.19
========= =========
CASH DIVIDENDS PAID ON COMMON STOCK ................................ $ 0.21 $ 0.19
========= =========
Dilutive average common and common equivalent shares outstanding ... 260.5 261.8
--------- ---------
</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)
First Quarter Ended
----------------------
March 31, March 31,
(millions) 2000 1999
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 123 $ 50
Adjustments to reconcile net income to cash provided by operating activities
Insurance assets / liabilities net of reinsurance ............................ 87 89
Amortization of intangible assets ............................................ 38 34
Depreciation of property and equipment ....................................... 44 44
Income taxes ................................................................. 17 (20)
Special charge and purchase accounting liabilities (notes 7 and 10) .......... (43) 138
Brokerage insurance premiums payable - net ................................... 125 198
Other ........................................................................ (245) (270)
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES ............................................. 146 263
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of investments
Fixed maturities
Maturities ................................................................ 28 14
Calls and prepayments ..................................................... 32 49
Sales ..................................................................... 57 601
Equity securities ............................................................ 25 176
Other investments ............................................................ 57 22
Purchase of investments
Fixed maturities ............................................................. (130) (387)
Equity securities ............................................................ (15) (181)
Other investments ............................................................ (128) (44)
Sale (purchase) of short-term investments - net ................................. 100 (258)
Acquisition of subsidiaries ..................................................... (35) (102)
Property and equipment and other ................................................ (59) (41)
------- -------
CASH USED BY INVESTING ACTIVITIES ......................................... (68) (151)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock transactions - net .............................................. (23) (1)
Issuance of short-term borrowings - net ........................................ 41 125
Repayment of long-term debt .................................................... (16) (5)
Interest sensitive, annuity and investment-type contracts
Deposits ..................................................................... 34 103
Withdrawals .................................................................. (123) (81)
Cash dividends to stockholders ................................................. (54) (48)
------- -------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES .............................. (141) 93
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ........................................... - (1)
INCREASE (DECREASE) IN CASH ....................................................... (63) 204
CASH AT BEGINNING OF PERIOD ....................................................... 837 723
------- -------
CASH AT END OF PERIOD ............................................................. $ 774 $ 927
======= =======
</TABLE>
See the accompanying notes to condensed consolidated financial statements.
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<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 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 will
require Aon to recognize all derivatives on the statement of financial
position at fair value. Aon has not yet determined the effect, if any,
this statement will have on the consolidated financial statements.
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. Early adoption is permitted as of the
beginning of any quarter subsequent to the issuance of Statement No.
137. Aon has not yet decided when it will adopt Statement No. 133.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101 which 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 second quarter 2000
with a cumulative effect accounting change effective January 1, 2000. Aon
has not yet determined the effect, if any, this SAB will have on the
consolidated financial statements.
3. Comprehensive Income
--------------------
The components of comprehensive income (loss), net of related tax, for the
first quarter ended March 31, 2000 and 1999 are as follows:
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<PAGE>
(millions) 2000 1999
---- ----
Net income $ 123 $ 50
Net unrealized investment gains (losses) 3 (63)
Net foreign exchange losses (32) (66)
-------- --------
Comprehensive income (loss) $ 94 $ (79)
======== ========
The components of accumulated other comprehensive loss, net of related
tax, at March 31, 2000 and December 31, 1999, are as follows:
(millions) 2000 1999
---- ----
Net unrealized investment losses $ (118) $ (121)
Net foreign exchange losses (184) (152)
Net minimum pension liability adjustment (36) (36)
-------- ---------
Accumulated other comprehensive loss $ (338) $ (309)
======== =========
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 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 segment revenues consist
primarily of investment income on capital and expenses consist primarily
of amortization of goodwill, interest, certain information technology
expenses and other general and administrative expenses.
Amounts reported in the tables for the 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:
- 6 -
<PAGE>
==========================================================================
INSURANCE BROKERAGE AND OTHER SERVICES
(millions) First quarter ended March 31 2000 1999
==========================================================================
Revenue:
United States $ 524 $ 483
United Kingdom 204 189
Europe 226 225
Rest of World 120 100
--------------------------------------------------------------------------
Total revenue $ 1,074 $ 997
--------------------------------------------------------------------------
Income before income tax
excluding special charges $ 180 $ 184
Special charges - 119
--------------------------------------------------------------------------
Income before income tax $ 180 $ 65
--------------------------------------------------------------------------
==========================================================================
CONSULTING
(millions) First quarter ended March 31 2000 1999
==========================================================================
Revenue:
United States $ 99 $ 91
United Kingdom 39 34
Europe 22 16
Rest of World 16 15
--------------------------------------------------------------------------
Total revenue $ 176 $ 156
--------------------------------------------------------------------------
Income before income tax
excluding special charges $ 19 $ 17
Special charges - 44
--------------------------------------------------------------------------
Income (loss) before income tax $ 19 $ (27)
--------------------------------------------------------------------------
==========================================================================
INSURANCE UNDERWRITING
(millions) First quarter ended March 31 2000 1999
==========================================================================
Revenue:
United States $ 376 $ 342
United Kingdom 78 82
Europe 26 30
Rest of World 50 43
--------------------------------------------------------------------------
Total revenue $ 530 $ 497
--------------------------------------------------------------------------
Income before income tax $ 67 $ 64
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Corporate and Other
(millions) First quarter ended March 31 2000 1999
==========================================================================
Total revenue $ 30 $ 49
--------------------------------------------------------------------------
Loss before income tax $ (48) $ (6)
--------------------------------------------------------------------------
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<PAGE>
5. Capital Stock
-------------
During first quarter 2000, Aon reissued 373,700 shares of common stock
from treasury for employee benefit plans and 323,300 shares in connection
with the employee stock purchase plan. Aon purchased 1.5 million shares of
its common stock at a total cost of $38 million during first quarter 2000.
There were 3.5 million shares of common stock held in treasury at March
31, 2000.
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.
7. Business Combinations
---------------------
In first quarter 1999, Aon consummated a plan of restructuring its
operations as a result of recent business combination activity. A special
charge was recorded in the amount of $120 million.
In first quarter 2000, Aon made total payments of $8 million on
restructuring charges and purchase accounting liabilities relating to
business combinations.
The movements of these special charges and purchase accounting liabilities
are 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 - (4) (4)
Cash payments in 2000 (2) - (2)
--------------------------------------------------------------------------
Balance at March 31, 2000 $ 14 $ 1 $ 15
--------------------------------------------------------------------------
The following table demonstrates the activity related to the liabilities
established as a result of 1998 acquisitions:
Termination Lease
(millions) Benefits Abandonments Total
--------------------------------------------------------------------------
Initial liability $ 40 $ 30 $ 70
Cash payments in 1998 (16) (4) (20)
Cash payments in 1999 (24) (6) (30)
Cash payments in 2000 - (1) (1)
--------------------------------------------------------------------------
Balance at March 31, 2000 $ - $ 19 $ 19
--------------------------------------------------------------------------
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<PAGE>
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)
Cash payments in 2000 - (2) (2)
---------------------------------------------------------------------------
Balance at March 31, 2000 $ - $ 43 $ 43
---------------------------------------------------------------------------
</TABLE>
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
Charge to expense in 2000 - 4 4
Cash payments in 2000 - (3) (3)
---------------------------------------------------------------------------
Balance at March 31, 2000 $ - $ 61 $ 61
---------------------------------------------------------------------------
</TABLE>
All of Aon's liabilities relating to restucturing charges and purchase
accounting are reflected in the general expense liabilities in the condensed
consolidated statements of financial position.
- 9 -
<PAGE>
8. Income Per Share
----------------
Income per share is calculated as follows:
First Quarter Ended March 31,
--------------------------------
(millions except per share data) 2000 1999
---------------------------------------------------------------------
Net income $ 123 $ 50
Redeemable preferred stock dividends 1 1
-----------------------------
Net income for dilutive and basic $ 122 $ 49
=============================
Basic shares outstanding 259 258
Common stock equivalents 1 4
-----------------------------
Dilutive potential common shares 260 262
---------------------------------------------------------------------
Basic net income per share $ 0.47 $ 0.19
Dilutive net income per share $ 0.47 $ 0.19
---------------------------------------------------------------------
9. 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 reinsurance agreement, and
actions or omissions by various underwriting agencies previously managed
by an A&A subsidiary. As of March 31, 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 $146 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 $177 million of reinsurance recoverables
and other assets.
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 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
- 10 -
<PAGE>
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 March 31, 2000, Aon has $49
million remaining in general expense liabilities for these litigation
matters including Unicover. The remaining Unicover issues are complex and,
therefore, the timing of resolution cannot be determined at this time.
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 March 31, 2000, Aon has $96 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, 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.
- 11 -
<PAGE>
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.
11. Subsequent Events
-----------------
In April 2000, Aon's stockholders approved an amendment to Aon's Second
Certificate of Incorporation to increase the number of shares of common
stock Aon is authorized to issue from 300 million to 750 million.
In May 2000, Aon filed a prospectus to use the remaining $250 million
of its universal shelf registration filed in May 1999. The net proceeds
from the sale will be used to reduce outstanding short-term commercial
paper borrowings.
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<PAGE>
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR FIRST QUARTER 2000
CONSOLIDATED RESULTS
- --------------------
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,
downward commercial property and casualty premium pressures, the competitive
environment and the actual cost of resolution of contingent liabilities.
GENERAL
- -------
Brokerage commissions and fees increased $93 million or 8% in first quarter
2000, primarily reflecting growth from business combination activity, internal
growth, increased new business and the impact of slower premium rate declines on
revenue.
Premiums and other is primarily related to insurance underwriting operations.
Premiums and other increased $31 million or 7% in first quarter 2000, compared
with the same period last year. Total premiums earned in the insurance
underwriting segment were $463 million, an increase of $36 million or 8% over
prior year. The increase in premiums earned primarily reflects new business
development in the domestic mechanical warranty and casualty lines, continued
internal growth and the impact of acquisitions.
Investment income, which includes related expenses and income on disposals,
decreased 9% in the first quarter 2000 when compared to prior year. First
quarter 1999 investment income included a gain on the sales of tax-exempt bonds
of approximately $30 million with no comparable amount in 2000. Excluding the
gain on the bonds, first quarter 2000 investment income increased 14% or $17
million primarily reflecting increased valuations from equity investments in
limited partnerships in the quarter. Revenues from private equity investments
fluctuate due to the inherent volatility of equity investments. Investment
income from insurance brokerage and other services, and consulting operations,
primarily relating to fiduciary funds, increased $4 million in first quarter
2000 compared to first quarter 1999.
Total revenue increased $111 million or 7% in first quarter 2000, primarily
attributable to growth in brokerage commissions and fees resulting from business
combination activity, the impact of slower premium rate declines, growth
resulting from new business and internal growth in the operating segments.
Revenue growth was slowed by the impact of foreign exchange rate reductions and
the absence of Unicover revenues in first quarter 2000.
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<PAGE>
In first quarter 1999, Aon recorded in general expenses, special charges of $163
million ($102 million after-tax or $0.39 per share) including provisions for
pension selling, early retirement plan in the U.S. and Canada and the consoli-
dation of Aon's European insurance brokerage and other services operations.
General expenses, excluding 1999 special charges, increased $125 million or 11%
in the quarter primarily reflecting investments in new business initiatives and
technology. A $13 million or 5% increase in benefits to policyholders when
compared to prior year was fairly consistent with growth in related premiums
earned and reflected no unusual claims activity. Total expenses decreased $11
million or 1% in first quarter 2000 when compared to prior year. Total expenses,
excluding the 1999 special charges, increased 11% for the quarter when compared
to 1999. Interest expense increased $10 million or 48% compared to prior year
attributed primarily to acquisition financing in 1999. Restructuring liabilities
for recent acquisitions and 1999 special charges have been reduced by payments
as planned.
References to income before income tax in the following paragraph are before
minority interest related to the issuance of 8.205% mandatorily redeemable
preferred capital securities (capital securities).
Income before income tax increased $122 million or 127% in first quarter 2000
when compared to prior year, primarily due to the inclusion of 1999 special
charges. Excluding special charges, income before income tax decreased $41
million or 16% in first quarter 2000 when compared to prior year, primarily
reflecting costs to integrate Aon's global network, increased technology
expenses related to brokerage computer systems, additional interest expense and
the inclusion of the $30 million gain on sale of tax exempt securities in 1999.
BUSINESS SEGMENTS
- -----------------
GENERAL
- -------
For purposes of the following business segments discussions, comparisons against
1999 results exclude discontinued operations and 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 the four business segments follow.
INSURANCE BROKERAGE AND OTHER SERVICES
- --------------------------------------
The Insurance Brokerage and Other Services segment consists principally of Aon's
retail and reinsurance brokerage operations, which include specialty and
wholesale activity.
First quarter 2000 Insurance Brokerage and Other Services revenue was $1.1
billion, up 8%. Post-first quarter 1999 acquisitions as well as internal growth
accounted for the majority of this revenue growth. Excluding the impact of
acquisitions and foreign exchange, revenue related to brokerage core businesses
grew approximately 5% in a very competitive environment.
U.S. revenue of $524 million in 2000 was up 8% from 1999 due to increased new
business, acquisitions, the impact of diminishing premium rate declines and
growth in U.S. specialty operations. U.K. and European revenue of $430 million
increased 4% from 1999, primarily due to internal growth and acquisitions. The
impact of foreign exchange rates partially offset this revenue growth. Rest of
world revenue increased in
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<PAGE>
2000 primarily due to new initiatives. In the international retail brokerage
operations, price comparisons continue to be negative but have improved slightly
from fourth quarter 1999.
Retail brokerage results continued to reflect competitive property and casualty
pricing. Pretax income, excluding 1999 special charges, declined 2% over 1999
reflecting lower revenue sharing income with insurers that was principally due
to higher underwriting losses. While this negatively affected short-term
results, poor underwriting performance contributed to continued price firming.
Investments in new initiatives, with little or no immediate revenue growth, also
impacted revenue and pretax income results. Pretax margins in this segment were
16.8% in the quarter compared to 18.4% in 1999. The decline in revenue sharing
income from insurers mentioned above accounted for approximately 100 basis
points of the margin decline. In addition, higher technology costs related to
the rollout of Aon's retail brokerage computer system platform and the impact of
certain acquisitions that have seasonally higher expenses relative to revenues
contributed to the pretax income and related margin decline in first quarter
2000.
CONSULTING
- ----------
The consulting segment provides a range of consulting services including
employee benefits, human resources, compensation and change management.
In the consulting segment, first quarter 2000 revenue increased 13% to $176
million. Internal growth, transfers of business units to consulting from the
insurance brokerage and other services segment and acquisition activity
subsequent to the first quarter 1999 influenced revenue growth. Absent these
factors, revenue grew approximately 10% in first quarter 2000.
U.S. revenue of $99 million in 2000 was up 9% from 1999 reflecting growth
primarily in employee benefit consulting. U.K. and European revenue of $61
million increased 22% from 1999. U.K. revenue grew 15% from the prior period
reflecting strong growth in employee benefit services. European revenue
increased 38% reflecting revenue growth of existing businesses and transfers
of certain operating activities to the consulting segment, partially offset by
unfavorable foreign exchange rates.
Pretax income, excluding 1999 special charges, increased 12% to $19 million from
$17 million in first quarter 1999 primarily reflecting U.K. operations and
domestic employee benefits, human resources and change management consulting.
Pretax margins in this segment were relatively flat in the quarter compared to
1999.
INSURANCE UNDERWRITING
- ----------------------
The Insurance Underwriting segment is comprised of accident, health and life
insurance and extended warranty and casualty insurance products.
Revenue was $530 million in first quarter 2000, up 7% from 1999, primarily due
to growth in the U.S. mechanical extended warranty and casualty products.
Accident and health continued to expand product distribution through worksite
marketing programs, the development of new product initiatives introduced in
1999 on a global basis, and acquisitions. However, the above revenue growth is
predominantly from core operations and acquisitions as these new initiatives
continue to build momentum.
- 15 -
<PAGE>
U.S. revenue of $376 million was up 10% in first quarter 2000 due to growth in
revenues for accident and health and mechanical extended warranty products.
United Kingdom and European revenue of $104 million declined 7% reflecting the
transfer of certain business to the brokerage and other services segment in
first quarter 2000. Rest of world revenue was $50 million, up 16% from prior
year reflecting continued geographic expansion.
Pretax income was $67 million in first quarter 2000, up 5% from $64 million last
year reflecting revenue growth mentioned above and overall expense management.
Partially offsetting income growth were start-up costs related to new accident
and health product initiatives and investments in new product development in the
extended warranty lines. Overall, benefit and expense margins in first quarter
2000 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 revenue for the first quarter 2000 was $30 million, down $19
million from first quarter 1999. In 1999, corporate revenue included $30 million
of gains from the disposal of $500 million in tax-exempt bonds. Excluding the
gain, corporate and other revenue increased $11 million or 58% over prior year
due to increased valuation from equity investments in limited partnerships.
These investments generate a more variable income stream due to the inherent
volatility of equity security valuations.
Corporate and Other expenses for the quarter were $78 million, up $23 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 $13 million over the first quarter 1999, reflecting the
financing of acquisitions made during the last twelve months.
The revenue and expense discussed above contributed to the overall corporate and
other pretax loss of $48 million in the quarter, a $42 million decline over
last year.
- 16 -
<PAGE>
NET INCOME FOR FIRST QUARTER 2000
First quarter 2000 net income was $123 million ($0.47 dilutive per share)
compared to $50 million ($0.19 dilutive per share) in 1999. 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 2000. Basic
net income per share, including 1999 special charges, was $0.47 and $0.19 in
first quarter 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 37.5% for first 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 income.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF FIRST QUARTER 2000
Cash flows provided by operating activities in first quarter 2000 were $146
million, a decrease of $117 million from first quarter 1999. The decrease
primarily represents lower net income before special charges. In addition,
income taxes improved operating cashflow reflecting a refund due on prior year
taxes. Special charge and purchase accounting liabilities show the most
significant change between years. The first quarter 1999 income statement
reflected after-tax special charges of $102 million. First quarter 2000 reflects
only actual payments on special charge and purchase accounting liabilities
previously established.
Investing activities used cash of $68 million, which was made available from
financing and operating activities. Cash of $100 million was provided during
first quarter 2000 from the sale of short-term investments. Cash used for
acquisition activity during first quarter 2000 was $35 million, primarily
reflecting brokerage acquisitions.
Cash totaling $141 million was used during first quarter 2000 from financing
activities. The decrease of $234 million from first quarter 1999 is primarily
due to net withdrawals of capital accumulation products and a reduction of new
short-term borrowings. Cash was used to pay dividends of $53 million on common
stock and $1 million on redeemable preferred stock during first quarter 2000.
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 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.
Due to the contractual nature of its insurance policyholder liabilities, which
are primarily intermediate to long-term in nature, Aon has invested primarily in
fixed maturities. With a carrying value of $2.5 billion, Aon's total fixed
maturity portfolio is invested primarily in investment grade holdings (97%) and
has a fair value which is 96.5% of amortized cost at March 31, 2000.
- 17 -
<PAGE>
Total assets increased $168 million to $21.3 billion since year-end 1999.
Invested assets at March 31, 2000 decreased $9 million from year-end levels
primarily from the use of short-term investments 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 at March 31,
2000 were $123 million and $116 million, respectively. The carrying value of
non-income producing investments in Aon's portfolio at March 31, 2000 was $43
million, or 0.7% of total invested assets.
In general, Aon uses derivative financial instruments (primarily financial
futures, swaps, options and foreign exchange forwards) to: (a) hedge income
statement 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, 2000, Aon had open contracts, related to certain of the above, which had
net unrealized gains of approximately $3 million.
Short-term borrowings increased at the end of first quarter 2000 by $40 million
when compared to year-end 1999. The increase is primarily due to the financing
of acquisitions which were mainly the completion of minority interest buyouts
associated with previous acquisitions. Notes payable decreased at the end of
first quarter 2000 by $18 million when compared to year-end 1999, reflecting
debt repayments. Included in notes payable at March 31, 2000 is approximately
$7 million, which represents the principal amount of notes to be paid within
one year.
Stockholders' equity increased $39 million in first quarter 2000 to $12.08 per
share, an increase of $0.17 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 $32 million and dividends to stockholders of
$54 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 March 31, 2000, 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, 2000, and the related condensed
consolidated statements of income and cash flows for the three-month periods
ended March 31, 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.
ERNST & YOUNG LLP
Chicago, Illinois
May 10, 2000
- 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 18, 2000 (the "1999 Annual Meeting").
(b) Not applicable.
(c)(i)Set forth below is the tabulation of the votes on each nominee for
election as a director:
Name For Against
---- --- -------
Daniel T. Carroll 226,625,652 2,159,607
Franklin A. Cole 226,722,222 2,063,037
Edgar D. Jannotta 226,719,710 2,065,549
Lester B. Knight 226,794,226 1,991,033
Perry J. Lewis 226,771,652 2,013,607
Andrew J. McKenna 226,767,875 2,017,384
Newton N. Minow 225,133,590 3,651,669
Richard C. Notebaert 226,790,179 1,995,080
Michael D. O'Halleran 225,534,731 3,250,528
Donald S. Perkins 226,715,102 2,070,157
John W. Rogers, Jr. 226,808,718 1,976,541
Patrick G. Ryan 226,767,511 2,017,748
George A. Schaefer 226,757,677 2,027,582
Raymond I. Skilling 226,768,433 2,016,826
Fred L. Turner 226,781,180 2,004,079
Arnold R. Weber 226,698,838 2,086,421
Carolyn Y. Woo 226,765,677 2,019,582
(ii) Set forth below is the tabulation of the vote on the
resolution to amend the Registrant's Certificate of
Incorporation to increase the number of shares of common
stock the Registrant is authorized to issue from
300,000,000 to 750,000,000.
For Against Abstain
--- ------- -------
193,111,589 34,720,311 953,359
(iii) Set forth below is the tabulation of the vote on the
adoption of the amendment and restatement of the Aon Stock
Award Plan and to re-approve such plan in its entirety with
a limit on the number of shares to be granted annually to
any one person in order to qualify such plan for treatment
under Section 162(m) of the Internal Revenue Code.
- 20 -
<PAGE>
For Against Abstain
--- ------- -------
220,057,553 7,400,838 1,326,863
(iv) Set forth below is the tabulation of the vote on the
selection of Ernst & Young LLP as auditors for the
Registrant for the 2000 fiscal year.
For Against Abstain
--- ------- -------
227,504,330 470,338 810,591
(d) Not applicable.
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, 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)
May 12, 2000 /s/ Harvey N. Medvin
--------------------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting
Officer)
- 21 -
<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 incorporated by reference to Exhibit 12(a) to the
Registrant's current report on Form 8-K dated May 9, 2000.
(b) Statement regarding Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends incorporated by
reference to Exhibit 12(b) to the Registrant's current report on
Form 8-K dated May 9, 2000.
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule
- 22 -
<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
10, 2000 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, 2000:
Registration Statement
----------------------
Form Number Purpose
---- ------ -------
S-8 33-27984 Pertaining to Aon's savings plan
S-8 33-42575 Pertaining to Aon's stock award plan and stock
option plan
S-8 33-59037 Pertaining to Aon's stock award plan and stock
option plan
S-4 333-21237 Offer to exchange Capital Securities of Aon Capital A
S-3 333-50607 Pertaining to the registration of 369,000 shares of
common stock
S-8 333-55773 Pertaining to Aon's stock award plan, stock option
plan and employee stock purchase plan
S-3 333-78723 Pertaining to the registration of debt securities,
preferred stock and common stock
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Chicago, Illinois
May 10, 2000
<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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1.0
<CASH> 3,037 <F1>
<SECURITIES> 3,064 <F2>
<RECEIVABLES> 7,591
<ALLOWANCES> 91
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F3>
<PP&E> 1,547
<DEPRECIATION> 822
<TOTAL-ASSETS> 21,300
<CURRENT-LIABILITIES> 0 <F3>
<BONDS> 1,593 <F4>
850 <F5>
0
<COMMON> 259
<OTHER-SE> 2,831
<TOTAL-LIABILITY-AND-EQUITY> 21,300
<SALES> 0
<TOTAL-REVENUES> 1,810
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,592 <F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 218
<INCOME-TAX> 85
<INCOME-CONTINUING> 133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.47
<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> Represents total expenses.
</FN>
</TABLE>
