-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LckYPBWhCk3WAzKtXRHYXJrhqTs0N6bKWa30BcY1jdlXb86HG8Lq7LgaJbuCo+HX SB/wUYS0qmDBfqCURULnxw== 0000948572-97-000043.txt : 19970815 0000948572-97-000043.hdr.sgml : 19970815 ACCESSION NUMBER: 0000948572-97-000043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AON CORP CENTRAL INDEX KEY: 0000315293 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 363051915 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07933 FILM NUMBER: 97662673 BUSINESS ADDRESS: STREET 1: 123 N WACKER DR CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3127013000 FORMER COMPANY: FORMER CONFORMED NAME: COMBINED INTERNATIONAL CORP DATE OF NAME CHANGE: 19870504 10-Q 1 AON CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) - OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 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 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of common stock outstanding: No. Outstanding Class as of 6-30-97 ----- ------------- $1.00 par value Common 167,213,341 (Adjusted to reflect a three-for-two stock split payable May 14, 1997 to stock holders of record on May 1, 1997)
Part 1 Financial Information Aon CORPORATION Condensed Consolidated Statements of Financial Position (millions) As of As of Assets June 30, 1997 Dec. 31, 1996 ------------------- ------------------- (Unaudited) Investments Fixed maturities - available for sale $ 2,903.2 $ 2,826.1 Equity securities at fair value Common stocks 435.1 393.8 Preferred stocks 378.8 485.3 Mortgage loans on real estate 24.1 29.0 Real estate (net of accumulated depreciation) 12.0 17.8 Policy loans 58.2 58.2 Other long-term investments 150.7 136.2 Short-term investments 1,189.0 1,266.3 ------------------- ------------------- Total investments 5,151.1 5,212.8 Cash 1,331.6 410.1 Receivables Insurance brokerage and consulting services 4,564.3 3,565.9 Premiums and other 1,214.2 989.3 Accrued investment income 67.2 69.2 ------------------- ------------------- Total receivables 5,845.7 4,624.4 Deferred Policy Acquisition Costs 570.0 598.8 Cost of Insurance and Renewal Rights Purchased 531.9 537.5 Excess of Cost over Net Assets Purchased 2,195.9 1,060.2 Property and Equipment at Cost (net of 441.0 323.2 accumulated depreciation) Assets Held Under Special Contracts 85.7 87.3 Other Assets 1,254.0 868.4 ------------------- ------------------- Total Assets $ 17,406.9 $ 13,722.7 =================== =================== As of As of Liabilities and Equity June 30, 1997 Dec. 31, 1996 ------------------- ------------------- (Unaudited) Policy Liabilities Future policy benefits $ 1,080.3 $ 1,079.4 Policy and contract claims 835.4 840.9 Unearned and advance premiums 2,017.2 1,925.2 Other policyholder funds 678.9 514.1 ------------------- ------------------- Total policy liabilities 4,611.8 4,359.6 General Liabilities Insurance premiums payable 5,775.2 4,143.7 Commissions and general expenses 976.5 776.8 Short-term borrowings 479.3 213.4 Notes payable 621.6 475.1 Debt guarantee of ESOP 46.1 46.1 Liabilities held under special contracts 85.7 87.3 Other liabilities 1,143.2 737.8 ------------------- ------------------- Total Liabilities 13,739.4 10,839.8 Commitments and Contingent Liabilities Redeemable Preferred Stock 50.0 50.0 Company-obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust holding solely the Company's Junior Subordinated Debentures 800.0 - Stockholders' Equity Preferred stock - $1 par value 5.5 5.5 Common stock - $1 par value 171.1 114.1 Paid-in additional capital 450.3 475.4 Net unrealized investment gains 159.2 153.1 Net foreign exchange gains/(losses) (46.1) 1.0 Retained earnings 2,354.0 2,356.8 Less - Treasury stock at cost (100.9) (121.5) Deferred compensation (175.6) (151.5) ------------------- ------------------- Total Stockholders' Equity 2,817.5 2,832.9 ------------------- ------------------- Total Liabilities and Equity $ 17,406.9 $ 13,722.7 =================== =================== See the accompanying notes to the condensed consolidated financial statements.
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Aon CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (millions except per share data) Second Quarter Ended Six Months Ended --------------------------- --------------------------- June 30, June 30, June 30, June 30, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Revenue Brokerage commissions and fees .............................. $ 885.0 $ 445.5 $ 1,726.7 $ 913.5 Premiums earned ............................................. 408.9 381.3 793.3 759.3 Net investment income ....................................... 117.6 92.6 233.4 177.3 Realized investment gains ................................... - - 2.4 - Other income ................................................ 13.0 13.0 23.0 24.4 ------------ ------------ ------------ ------------ Total revenue earned .................................... 1,424.5 932.4 2,778.8 1,874.5 ------------ ------------ ------------ ------------ Benefits and Expenses Commissions and general expenses ............................ 922.3 524.6 1,811.7 1,054.0 Benefits to policyholders ................................... 215.6 192.8 420.8 378.8 Interest expense ............................................ 15.9 10.1 30.6 19.3 Amortization of deferred policy acquisition costs ........... 58.4 55.0 111.9 108.1 Amortization of intangible assets ........................... 33.4 18.4 64.7 37.2 Special charges ............................................. 27.0 30.2 172.0 30.2 ------------ ------------ ------------ ------------ Total benefits and expenses ............................. 1,272.6 831.1 2,611.7 1,627.6 ------------ ------------ ------------ ------------ Income from Continuing Operations Before Income Tax and Minority Interest ............................ 151.9 101.3 167.1 246.9 Provision for income tax ................................. 57.0 36.0 62.7 85.1 ------------ ------------ ------------ ------------ Income from Continuing Operations Before Minority Interest ........................................... $ 94.9 $ 65.3 $ 104.4 $ 161.8 Minority Interest - 8.205% mandatorily redeemable preferred capital securities .......................... (10.7) - (19.5) - ------------ ------------ ------------ ------------ Income from Continuing Operations .............................. 84.2 65.3 84.9 161.8 Discontinued Operations: Income from discontinued operations, net of tax ................ - - - 22.4 Gain on disposal of discontinued operations, net of tax ........ - 21.0 - 21.0 ============ ============ ============ ============ Net Income ..................................................... $ 84.2 $ 86.3 $ 84.9 $ 205.2 ============ ============ ============ ============ Net Income Available for Common Stockholders (1) ............... $ 80.9 $ 81.2 $ 78.2 $ 195.0 ============ ============ ============ ============ Per Share: (2) Income from continuing operations (1) .......................... $ 0.48 $ 0.36 $ 0.46 $ 0.92 Income from discontinued operations ............................ - - - 0.13 Gain on disposal of discontinued operations .................... - 0.13 - 0.13 ============ ============ ============ ============ Net income (1) ................................................. $ 0.48 $ 0.49 $ 0.46 $ 1.18 ============ ============ ============ ============ Cash dividends paid on common stock (2) ........................ $ 0.26 $ 0.24 $ 0.50 $ 0.47 ============ ============ ============ ============ Average common and common equivalent shares outstanding (2) .... 169.3 164.7 169.2 164.7 ------------ ------------ ------------ ------------ (1) Includes the effect of $3.3 million and $6.7 million of dividends incurred on the 8% and redeemable preferred stock and $5.1 million and $10.2 million of dividends incurred on 8%, 6.25% and redeemable preferred stock in second quarter and six months ended June 30, 1997 and 1996, respectively. (2) Reflects the three-for-two stock split on May 14, 1997. See the accompanying notes to the condensed consolidated financial statements.
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Aon CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended ---------------------------------- June 30, June 30, (millions) 1997 1996 -------------- -------------- Cash Provided by Operating Activities ....................................... $ 294.3 $ 297.4 -------------- -------------- Cash Flows from Investing Activities: Sale (purchase) of short term investments-net .......................... 285.5 (634.6) Sale or maturity of fixed maturities Available for sale - Maturities .................................... 61.3 78.7 Calls and prepayments ......................... 72.9 130.8 Sales ......................................... 526.6 439.4 Sale of equity investments ............................................ 639.1 301.3 Sale or maturities of other investments ................................ 32.9 41.0 Purchase of fixed maturities - available for sale ...................... (757.9) (984.6) Purchase of equity investments ......................................... (655.8) (293.0) Purchase of other investments .......................................... (38.1) (154.4) Disposition (acquisition) of subsidiaries .............................. (1,288.8) 1,273.9 Acquired fiduciary funds from Alexander & Alexander Services, Inc....... 734.0 - Property and equipment and other ....................................... (28.7) (35.1) -------------- -------------- Cash Provided (Used) by Investing Activities .. (417.0) 163.4 -------------- -------------- Cash Flows from Financing Activities: Treasury stock transactions - net ...................................... 21.9 (27.9) Issuance (repayment) of short-term borrowings - net .................... 258.0 (262.9) Sale of mandatorily redeemable preferred capital securities ............ 800.0 - Repayment of long-term debt ............................................ (71.8) (2.4) Interest sensitive life, annuity and investment contract deposits ...... 154.1 348.2 Interest sensitive life, annuity and investment contract withdrawals ... (6.8) (427.1) Retirement of preferred stock .......................................... - (14.2) Cash dividends to stockholders ......................................... (88.9) (86.3) -------------- -------------- Cash Provided (Used) by Financing Activities .. 1,066.5 (472.6) -------------- -------------- Effect of Exchange Rate Changes on Cash ..................................... (22.3) - Increase (Decrease) in Cash ................................................. 921.5 (11.8) Cash at Beginning of Period ................................................. 410.1 115.3 -------------- -------------- Cash at End of Period ....................................................... 1,331.6 103.5 ============== ============== See the accompanying notes to condensed consolidated financial statements
- 4 - NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Statement of Accounting Principles ---------------------------------- The financial results included in this report are stated in conformity with generally accepted accounting principles and are unaudited but include all normal recurring adjustments which the Registrant ("Aon") considers necessary for a fair presentation of the results for such periods. These interim figures are not necessarily indicative of results for a full year as further discussed below. Refer to the consolidated financial statements and notes in the Annual Report to Stockholders for the year ended December 31, 1996 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. 2. Stock Split ----------- On March 21, 1997, Aon's board of directors authorized a three-for-two stock split, payable in the form of a stock dividend, of Aon's $1.00 par value common stock, with approximately 57 million shares payable on May 14, 1997. The stock split has not been retroactively reflected in the December 31, 1996 condensed statement of consolidated financial position. The effect of the stock split was to increase common stock and decrease additional paid-in-capital by $57 million. All references in the accompanying financial statements to the number of common shares and per share amounts have been restated to reflect the stock split. 3. Statements of Financial Accounting Standards (SFAS) --------------------------------------------------- In June 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 130 (Reporting Comprehensive Income) and Statement No. 131 (Disclosures about Segments of an Enterprise and Related Information). Statement No. 130 establishes standards for reporting and classifying components of comprehensive income in the financial statements and requires that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Statement No. 131 established standards for providing disclosures related to products and services, geographic areas, and major customers. Aon anticipates adopting these statements in its 1998 financial statements as required. Implementation of these Statements is not expected to have a material effect on Aon's financial statements. In February 1997, the FASB issued Statement No. 128 (Earnings per Share). This Statement changes the standards for computing earnings per share (EPS). Under the new requirements for calculating primary EPS, the dilutive effect of stock options will be excluded. The provisions of this Statement are to be applied after December 15, 1997, and require retroactive restatement of all prior periods presented. Aon anticipates adopting this statement in its December 31, 1997 financial statements as required. Implementation of this Statement is not expected to have a material effect on Aon's financial statements. In first half 1997, Aon adopted Statement No. 125 (Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities) in its financial statements as required. Implementation of this Statement did not have a material effect on Aon's financial statements. - 5 - 4. Capital Stock ------------- During first half 1997, Aon reissued 661,100 shares of common stock from treasury for employee benefit plans. Aon purchased 56,600 shares of its common stock at a total cost of $2.4 million during first half 1997. In addition, Aon reissued 243,100 shares of common stock held in connection with business combinations. There were 3.9 million shares of common stock held in treasury at June 30, 1997. 5. Capital Securities ------------------ In January 1997, Aon created Aon Capital A, a statutory business trust, for the purpose of issuing 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. Aon Capital A issued $800 million of 8.205% capital securities in January 1997. The proceeds from the issuance of the capital securities were used to finance a portion of Aon's acquisition of Alexander and Alexander Services Inc. (A&A). The capital securities are subject to mandatory redemption on January 1, 2027 or are redeemable in whole, but not in part, at the option of Aon upon the occurrence of certain events. The capital securities are categorized on the condensed consolidated statement of financial position as "Company-obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust holding solely the Company's Junior Subordinated Debentures." The after-tax interest incurred on the capital securities is reported as minority interest on the condensed consolidated statements of operations. 6. Business Combinations --------------------- In first quarter 1997, Aon completed its acquisition of A&A for a purchase price of approximately $1.2 billion. The acquisition of A&A was accounted for by the purchase method and was financed by the issuance of the capital securities, commercial paper, and by internal funds. Results have been included in Aon's consolidated financial statements since January 1, 1997. While A&A was acquired in early 1997, the purchase valuation has not yet been completed. Preliminary purchase accounting liabilities of approximately $200 million were recorded as of June 30, 1997,primarily relating to severance and related costs, and the consolidation of real estate space. Preliminary intangible assets of approximately $1.2 billion were created by the acquisition. If the A&A acquisition had been consummated on January 1, 1996, the first half 1996 unaudited proforma consolidated results of operations would have resulted in total revenues of approximately $2.5 billion, income from continuing operations of $172 million ($0.86 per share) and net income of $215 million ($1.12 per share). Pro forma financial information presented is not necessarily indicative either of results of operations that would have occurred had the acquisition been effective on January 1, 1996, or of future results of the operations of Aon. In addition, the effect of one-time restructuring and investment losses recognition charges related to the A&A acquisition are not reflected in the proforma 1996 results above. These restructuring and investment losses charges have been reflected in first half 1997 (see note 7). - 6 - 7. Special Charges --------------- In second quarter 1997, Aon recorded pretax special charges of $27 million ($16.9 million after-tax or $0.10 per share) to recognize investment losses incurred at A&A before Aon acquired A&A. Aon discovered in the second quarter that A&A's investment portfolio, as it had been constructed before Aon's acquisition, contained certain highly volatile securities with previously unrecognized losses. Aon immediately sold those particular securities and undertook a full financial review into the size and causes of all losses. The review was completed early in third quarter 1997 and revealed that A&A's portfolio had included certain highly volatile securities (such as inverse floater tranches of collateralized mortgage obligations), which had been incorrectly classified as high quality money market instruments. At Aon's acquisition date, the carrying value of certain securities in A&A's portfolio was overstated by the previously unrecognized investment losses. These charges were reflected as a separate component of total benefits and expenses in the condensed consolidated statements of operations. In first quarter 1997, Aon recorded pretax special charges of $145 million ($90.6 million after-tax or $0.54 per share), primarily related to management's commitment to a formal plan of restructuring Aon's brokerage operations as a result of the acquisition of A&A. These charges were reflected as a separate component of total benefits and expenses in the condensed consolidated statements of operations. In connection with the first quarter 1997 special charges, Aon had approximately $110 million reported in other liabilities at June 30, 1997, representing amounts related to the special charges that have not yet been paid. Pretax restructuring charges include approximately $105 million associated with real estate activities including the closure, abandonment and downsizing of various offices around the world, and other consolidation costs. The restructuring charges related to consolidating real estate space are expected to be paid out over several years. Special charges for severance and related costs, involving over 600 positions, were approximately $40 million. Terminations resulting from workforce reductions are planned to take place within one year. Approximately 2,000 additional terminations resulting from workforce reductions are planned to take place within one year. Severance and related costs related to these workforce reductions are included as part of the preliminary purchase accounting liabilities recorded as of June 30, 1997 (see note 6). In 1996, Aon recorded pretax special charges of $90.5 million ($59.3 million after-tax or $0.36 per share). In connection with the 1996 special charges, Aon had approximately $60 million reported in other liabilities at June 30, 1997 representing amounts related to the special charges that have not yet been paid. 8. A&A Discontinued Operations --------------------------- A&A discontinued its insurance underwriting operations in 1985 and sold Sphere Drake Insurance Group (Sphere Drake) in 1987. In connection with the sale of Sphere Drake, A&A agreed to provide indemnites to the purchaser for various potential liabilities, including provisions covering future losses on certain insurance pooling arrangements between Sphere Drake and Orion Insurance Company (Orion), a UK based insurance company placed in provisional liquidation in 1994, and future losses pursuant to a stop-loss reinsurance contract between Sphere Drake and Lloyds Syndicate 701. The Sphere Drake's sales agreement also requires A&A to assume any losses in respect of the actions or omissions by Swann & Everett Underwriting Agency, an underwriting manangement company previously managed by Alexander Howden & Group Limited, a subsidiary of A&A. - 7 - The net liabilities of discontinued operations shown in the accompanying condensed consolidated statements of financial position include insurance liabilities associated with the above indemnities, liabilities of its insurance underwriting subsidiaries that are currently in run-off and its indemnification of certain liabilities relating to subsidiares sold. Excluded from these liabilities is A&A long-term debt related to two reinsurance contracts which are associated with the financing of discontinued operations. Included in Aon's June 30, 1997 condensed consolidated statement of financial position and condensed consolidated statement of operations is long-term debt of $50 million and related interest expense of $2.3 million, respectively. The net liabilities for discontinued operations as of June 30, 1997 are composed of the following: (millions) - -------------------------------------------------------------------------------- Assets: Insurance liabilities recoverable under finite risk contracts $ 147 Reinsurance recoverables 59 Cash and investments 31 Other 9 - -------------------------------------------------------------------------------- Total assets $ 246 - -------------------------------------------------------------------------------- Liabilities: Insurance liabilities $ 275 Other 16 - -------------------------------------------------------------------------------- Total liabilities 291 - -------------------------------------------------------------------------------- Total net liabilities of discontinued operations classified as other liabilities $ 45 - -------------------------------------------------------------------------------- The insurance liabilities represent estimates of future claims expected to be made under occurrence- based insurance policies and reinsurance business covering primarily asbestosis, environmental pollution, and latent disease risks in the United States which are coupled with substantial litigation expenses. These claims are expected to develop and be settled over the next twenty to thirty years. Liabilities stemming from these claims cannot be estimated using conventional actuarial reserving techniques because of the inadequacy of available historical experience to support such techniques, and because case law, as well as scientific standards for measuring the adequacy of site clean-up is still evolving. Therefore, A&A's independent actuaries have combined available exposure information with other relevant industry data and have used various projection techniques to estimate the insurance liabilities, consisting principally of incurred but not reported losses. A&A has certain protection against adverse developments of the insurance liabilities through several finite risk contracts. The recoverable amounts under the finite risk contracts represent the excess of such liabilities over the retention levels. While the insurance liabities set forth above represent A&A's best estimate of the probable loss amounts, there is no assurance that further adverse developments may not occur due to variables inherent in the estimation processes and other matters described above. Based on independent actuarial estimates of a range of reasonably possible loss amounts, liabilities could exceed recorded amounts, subject to offset in the event of such adverse development by way of amounts recoverable under the finite risk contracts referenced above. Aon believes that, based on current estimates, the established total net liabilities of discontinued operations are sufficient to cover A&A's exposure. - 8 - 9. Contingencies ------------- A&A Contingencies ----------------- A certain pending claim asserted against A&A and certain of its subsidiaries allege that certain Alexander Howden subsidiaries accepted, on behalf of certain insurance companies, insurance or reinsurance at premium levels not commensurate with the level of underwriting risks assumed and retroceded or reinsured those risks with financially unsound reinsurance companies. In an action brought in 1988 against A&A and certain subsidiaries, plaintiffs seek compensatory and punitive damages, as well as treble damages under RICO totaling $36 million. The defendants have counterclaimed against certain of the plaintiffs for contribution. Management of Aon believes that A&A has valid defenses to all the claims that have been made with respect to these activities and A&A is vigorously defending the pending action. This action is covered under A&A's professional indemnity program, except for possible damages under RICO. Aon currently believes the reasonably possible loss that might result from this action, if any, would not be material to Aon's financial position or results of operations. In 1987, A&A sold Shand Morahan & Company (Shand), its domestic underwriting management subsidiary. Prior to the sale, Shand and its subsidiaries had provided underwriting management services for and placed insurance and reinsurance with and on behalf of Mutual Fire Marine & Inland Insurance Company (Mutual Fire). Mutual Fire was placed in rehabilitation in December 1986. In February 1991, the rehabilitator commenced an action. The complaint, which sought compensatory and punitive damages, alleged that Shand, and in certain respects A&A, breached duties to and agreements with Mutual Fire. On March 27, 1995, A&A, Shand and the rehabilitator entered into a settlement agreement which was approved by the courts and which terminated the rehabilitator's litigation and released A&A and Shand from any further claims by the rehabilitator. Under the terms of the settlement, A&A paid $43.1 million. Although A&A's professional liability underwriters have denied coverage for the Mutual Fire lawsuit, A&A has instituted a declaratory judgment action attempting to validate coverage. On October 16, 1996, the Court issued a decision holding that A&A is not entitled to coverage for the rehabilitator's claims. A&A has appealed the ruling. Under the 1987 agreement with the purchaser of Shand, A&A agreed to indemnify the purchaser against certain contingencies, including, among others, (i) losses arising out of presale transactions between Shand or Shand's subsidiaries, on the one hand, and Mutual Fire, on the other, and (ii) losses arising out of presale errors or omissions by Shand or Shand's subsidiaries. A&A's obligations under the indemnification provisions in the 1987 sales agreement were not limited as to amount or duration. Starting in late 1992, the purchaser of Shand has asserted a number of claims under both the Mutual Fire indemnification provision and the errors and omissions indemnification provision of the sales agreement. During 1995, most of those claims were resolved by a series of settlement agreements. Notwithstanding these settlements, which had the effect of limiting certain contractual obligations and the restructuring of the parties' relationship, some of A&A's indemnification provisions under the 1987 agreement are still in effect. As a result, there remains the possibility of substantial exposure to A&A under the indemnification provisions of the 1987 agreement, although Aon, based on current facts and circumstances, believes that the possibility of a material loss resulting from these exposures is remote. - 9 - Although the ultimate outcome of these suits cannot be ascertained and liabilities in indeterminate amounts may be imposed on A&A or its subsidiaries, on the basis of present information, availability of insurance coverages and advice received from counsel, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of Aon. Other Contingencies ------------------- Aon and its subsidiaries are subject to numerous claims and lawsuits that arise in the ordinary course of business. Some of these cases are being litigated in jurisdictions which have judicial precedents and evidentiary rules which are generally believed to favor individual plaintiffs against corporate defendants. The damages that may be claimed in these and other jurisdictions are substantial, including in many instances claims for punitive or extraordinary damages. Accruals for these lawsuits have been provided to the extent that losses are deemed probable and are estimable. 10. Derivatives and Market Risk Disclosure -------------------------------------- In first quarter 1997, the Securities and Exchange Commission (SEC) issued new rules related to disclosure concerning derivative accounting policy and market risk outside the financial statements. Aon has adopted the additional accounting policy disclosures as required in the notes to the June 30, 1997 financial statements based on a review of current derivatives and related accounting policies as set forth in note 11 in the Annual Report for the year ended December 31, 1996. The following additional disclosure references all material derivative activity that Aon is currently engaged in. In most cases, derivatives hedging the invested asset portfolio are hedging the portfolio as a whole. The sale, maturity or extinguishment of a hedged item would not affect the accounting method for the derivative. The only time the accounting relating to the termination of a hedge would differ from the company's regular accounting practices would be if the hedge ceases to meet the criteria for hedge accounting. The following criteria must be met in order for a derivative to qualify for hedge accounting. The derivative must be designated as a hedge at inception and be consistent with Aon's policy for risk management. The hedged item must have a reliably measurable fair value and changes in fair value must have the potential to affect future earnings. Changes in the fair value of the derivative must be expected to substantially offset changes in the fair value of the designated item attributable to the risk being hedged. If the criteria for hedge accounting is not met, the resulting gain or loss from the termination of the hedge would be realized through the statement of operations in the current period. - 10 - Aon CORPORATION MANAGEMENT'S ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION REVENUE AND INCOME BEFORE INCOME TAX FOR SECOND QUARTER AND FIRST HALF 1997 Consolidated Results - -------------------- Brokerage commissions and fees increased $439.5 million or 98.7% and $813.2 million or 89% in second quarter and first half 1997, respectively, reflecting primarily business combination activity related to the acquisitions of A&A in first quarter 1997 and Bain Hogg Group (Bain Hogg) in fourth quarter 1996. Premiums earned increased $27.6 million or 7.2% and $34 million or 4.5% in second quarter and first half 1997, respectively, compared with the same periods last year. Extended warranty premiums earned increased $30.7 million or 32% in the quarter reflecting continued growth in both the mechanical and the appliance and electronic lines. There was also continued modest growth in direct sales business. The planned runoff of North American auto credit business partially offset this increase. Net investment income increased $25 million or 27% and $56.1 million or 31.6% in the second quarter and first half 1997, respectively, when compared to prior year. Investment income growth in first half was primarily related to brokerage acquisitions, and to income received on certain private equity investment holdings. In addition, net investment income from insurance brokerage and consulting operations, primarily relating to fiduciary funds, increased to $38 million in second quarter 1997 from $17 million in 1996, and to $77 million in first half 1997 from $34 million in 1996, primarily due to brokerage acquisition activity. Total revenue increased $492.1 million or 52.8% and $904.3 million or 48.2% in the second quarter and first half 1997, respectively, largely attributable to acquisition-related growth in brokerage commissions and fees. Net realized investment gains were $2.4 million in first half 1997. There were no realized investment gains in first half 1996. First half 1997 revenue, excluding realized investment gains, increased 48.1% when compared to prior year. Benefits to policyholders increased 11.8% or $22.8 million and 11.1% or $42 million in second quarter and first half 1997, respectively, reflecting a higher volume of new extended warranty business. This increase was partially offset by lower claims paid on auto credit business that had been in runoff since second quarter 1996. It is anticipated that this business will continue to runoff as planned. In second quarter 1997, Aon recorded pretax special charges of $27 million ($16.9 million after-tax) to recognize investment losses incurred at Alexander and Alexander Services, Inc. (A&A) before Aon acquired A&A. Aon discovered in the second quarter that A&A's investment portfolio, as it had been constructed before Aon's acquisition, contained certain highly volatile securities with previously unrecognized losses. Aon immediately sold those particular securities and undertook a full financial review into the size and causes of all losses. The review was completed early in third quarter 1997 and revealed that A&A's portfolio had included certain highly volatile securities (such as inverse floater tranches of collateralized mortgage obligations), which had been incorrectly classified as high quality money market instruments. At Aon's acquisition date, the carrying value of certain securities in A&A's portfolio was overstated by the previously unrecognized investment losses. - 11 - In first quarter 1997, Aon recorded pretax special charges of $145 million ($90.6 million after-tax) which were primarily related to management's commitment to a formal plan of restructuring Aon's brokerage operations as a result of the acquisition of A&A. Restructuring charges included approximately $105 million associated with real estate activities including the closure, abandonment and downsizing of various offices around the world, and other consolidation costs. The restructuring charges related to consolidating real estate space are expected to be paid out over several years. Special charges for severance and related costs, involving over 600 positions, were approximately $40 million. Terminations resulting from workforce reductions are planned to take place within one year. Approximately 2,000 additional terminations resulting from workforce reductions are planned to take place within one year. Severance and related costs related to these workforce reductions are included as part of the preliminary purchase accounting liabilities recorded as of June 30, 1997 (see note 6). In second quarter 1996, Aon reported pretax special charges of $30.2 million ($19.5 million after-tax) related to early retirement programs. Both the 1997 and 1996 special charges were reflected as a separate component of total benefits and expenses in the condensed consolidated statements of operations. Total benefits and expenses increased $441.5 million or 53.1% and $984.1 million or 60.5% in the same periods. The increases in the second quarter and first half expenses reflect the inclusion of pretax special charges of $27 million and $172 million in second quarter and first half 1997, respectively, related to investment losses incurred at A&A prior to Aon's acquisition and restructuring costs associated with the merger with A&A, and $30.2 million in second quarter and first half 1996 related to the completion of voluntary early retirement programs. Total benefits and expenses, excluding the 1997 and 1996 special charges, increased 55.5% and 52.7% for the second quarter and first half 1997, respectively, primarily reflecting brokerage acquisition activity. Income before income tax increased $50.6 million or 50% in second quarter 1997 and decreased $79.8 million or 32.3% in the first half 1997, respectively, when compared to prior year. The decrease in first half pretax earnings reflects the inclusion of special charges and is offset, in part, by growth in the insurance brokerage and consulting segment following the A&A and Bain Hogg acquisitions. Excluding special charges, income before income tax increased 36% and 22.4% when compared to second quarter and first half 1996, respectively. Major Lines of Business - ----------------------- General - ------- In the insurance brokerage and consulting services segment, Aon reported first half 1997 pretax special charges of $145 million related to the acquisition of A&A. In second quarter 1997, Aon reported $27 million of pretax special charges related to investment losses at A&A in the corporate and other segment. Aon also reported second quarter 1996 special charges of $30.2 million related to early retirement programs. The 1996 special charges were allocated to each of the major lines of business. For purposes of the following line of business discussions, comparisons against last year's results exclude special charges. Cost savings associated with the integration of similar businesses among Aon, A&A and Bain Hogg began to be realized starting in second quarter 1997. Management anticipates that the full benefit of cost savings on operations will be achieved starting in 1998. In addition, references to income before income tax exclude minority interest. - 12 - Insurance Brokerage and Consulting Services - ------------------------------------------- In first quarter 1997, Aon acquired A&A for approximately $1.2 billion. In fourth quarter 1996, Aon acquired Bain Hogg. As a result, revenue and income before income tax results between second quarter and first half 1997 and 1996 are not comparable. Insurance and other services (retail, reinsurance and wholesale brokerage) revenue increased $387.7 million or 99.1% in the second quarter 1997 and $725.6 million or 90.2% for the first half 1997 when compared with the same periods last year, largely due to acquisition activity. Insurance and other services continued to reflect highly competitive property and casualty pricing in the domestic market. "Consulting" provides a full range of employee benefits and compensation consulting, specialized employee assessment and training programs, and administrative services. This business showed revenue growth of $73 million or 102.5% and $130.8 million or 91.8% for the second quarter and first half 1997, respectively, when compared to prior year, primarily due to acquisition activity and to a lesser extent, expanding integrated human resources consulting programs. Overall, revenue for the insurance brokerage and consulting services segment increased $460.7 million or 99.7% and $856.4 million or 90.4% in the second quarter and first half 1997, respectively. Income before income tax increased $70.2 million or 122.7% and $93.6 million or 65.7% when compared to second quarter and first half 1996, respectively. The brokerage segment continues to be impacted by a soft property and casualty market, particularly in the reinsurance brokerage business. Acquisitions accounted for approximately 90-95% of the above revenue growth in the quarter. Excluding the impact of acquisitions, revenue and pretax income results related to brokerage core businesses demonstrated modest growth in a very competitive environment. U.S./International Results - -------------------------- Second quarter U.S. insurance brokerage and consulting services revenue represents 55% of the worldwide total and U.S. income before income tax represents 49% of the worldwide total. International brokerage revenue of $412 million increased 200.3% for the second quarter, primarily reflecting the A&A and Bain Hogg acquisitions. International brokerage income before income tax increased 385% for the second quarter reflecting the above mentioned acquisition activity. International brokerage revenues for risk management and insurance brokerage services generally are strongest during the first quarter of the year, particularly for Continental Europe, while expenses are incurred on a more even basis throughout the year. Insurance Underwriting - ---------------------- The insurance underwriting line of business provides direct sales life and accident and health products, and extended warranty products to individuals. Revenue increased $29.7 million or 6.7% and $39 million or 4.4% for the second quarter and first half 1997, respectively, when compared to prior year primarily due to growth in the worldwide extended warranty lines. Direct sales business grew modestly as life business in Europe and the Pacific continues to runoff as planned. Pretax income from insurance underwriting increased $3.8 million or 5.7% and $10.1 million or 8.1% in the second quarter and first half 1997, respectively, when compared with last year. Overall, benefit and expense margins in second quarter 1997 did not suggest any significant shift in operating trends. Direct sales accident & health business improved its pretax margin in part due to good general expense controls and good international - 13 - health product sales. Certain specialty liability programs and auto credit business continued to be profitably run off. U.S./International Results - -------------------------- Second quarter U.S. insurance underwriting revenue represents 71% of the worldwide total and U.S. income before income tax represents 72% of the worldwide total. U.S. insurance underwriting income before income tax increased 11.7% in the quarter when compared to its 1996 level. Results reflect the completed sale of the North American auto credit underwriting and distribution operations in second quarter 1996 and reflect the planned continued runoff of those operations. International insurance underwriting revenue of $135.3 million increased 12.6% in the quarter principally due to growth in premiums earned in both the direct sales and extended warranty lines. International pretax income decreased 7% in the quarter, primarily due to the impact of certain events in the extended warranty lines that are not expected to recur in future periods. Corporate and Other - ------------------- Revenue in this category consists primarily of investment income on insurance underwriting operations' capital and realized investment gains. Insurance company investment income is allocated to the underwriting segment based on the invested assets which underlie policyholder liabilities. Excess invested assets and related investment income, which do not underlie these liabilities, are reported in this segment. Expenses include interest and other financing expenses, goodwill amortization associated with insurance brokerage and consulting acquisitions, and corporate administrative costs. Revenue increased 6.5% or $1.7 million and 18.9% or $8.9 million for the second quarter and first half 1997, respectively, primarily due to higher levels of investment income received on certain private equity investment holdings. Revenue growth was partially limited by alternative uses of corporate capital. Pretax realized investment gains for the first half 1997 were $2.4 million. There were no realized investment gains in the second quarter and first half 1996. Income before income tax, excluding realized investment gains, decreased $26.6 million in the quarter and $44.1 million in the first half over the same periods last year. Contributing to this decrease were financing costs and goodwill amortization related to acquisitions, in particular A&A and Bain Hogg, and additional interest expenses on short-term debt related to acquisition financing. Discontinued Operations - ----------------------- Discontinued operations in first half 1996 were composed principally of capital accumulation products and direct response products. Substantially all of the revenue and income before income tax generated from discontinued operations was U.S. These amounts have been segregated as "Income From Discontinued Operations" in the condensed consolidated statements of operations. With the completion of the sales of The Life Insurance Company of Virginia (LOV) and Union Fidelity Life Insurance Company (UFLIC) on April 1, 1996, there were no operating results from these discontinued operations going forward. The sales of LOV and UFLIC resulted in a $21 million after-tax gain on disposal which was recorded in second quarter 1996. The discontinued operations assumed by Aon upon its acquisition of A&A in first quarter 1997 represent net liabilities related to acquired insurance underwriting subsidiaries that are currently in runoff, and indemnification of certain liabilities relating to subsidiaries sold (see note 8 to the condensed consolidated financial statements). Aon believes that these discontinued operations are adequately reserved for and the net liability is included as a component of other liabilities on the statement of financial position. - 14 -
Aon CORPORATION MAJOR LINES OF BUSINESS Second Quarter Ended Six Months Ended --------------------------- --------------------------- June 30, Percent June 30, Percent (millions) 1997 Change 1997 Change ------------ ------------ ------------ ------------ Revenue Insurance brokerage and consulting services .................... $ 923.0 99.7% $ 1,803.7 90.4% Insurance underwriting ......................................... 473.7 6.7 919.1 4.4 Corporate and other ............................................ 27.8 6.5 56.0 18.9 ------------ ------------ ------------ ------------ Total revenue $ 1,424.5 52.8% $ 2,778.8 48.2% ============ ============ ============ ============ Income Before Income Tax Insurance brokerage and consulting services .................... $ 127.4 122.7% $ 236.0 65.7% Special charges .......................................... - - (145.0) N/A ------------ ------------ ------------ ------------ Including special charges ................................ 127.4 266.1 91.0 (24.2) Insurance underwriting ......................................... 70.5 5.7 135.3 8.1 Corporate and other ............................................ (19.0) N/A (32.2) N/A Special charges .......................................... (27.0) N/A (27.0) N/A ------------ ------------ ------------ ------------ Including special charges ................................ (46.0) N/A (59.2) N/A ------------ ------------ ------------ ------------ Total income before income tax .......................... $ 151.9 50.0% $ 167.1 (32.3%) ============ ============ ============ ============
- 15 - Aon CORPORATION REVENUE BY MAJOR PRODUCT LINE Second Quarter Ended Six Months Ended --------------------------- --------------------------- June 30, Percent June 30, Percent (millions) 1997 Change 1997 Change ------------ ------------ ------------ ------------ Insurance brokerage and consulting services Insurance and other services .................................... $ 778.8 99.1% $ 1,530.4 90.2% Consulting ...................................................... 144.2 102.5 273.3 91.8 ------------ ------------ ------------ ------------ Total revenue............................................... $ 923.0 99.7% $ 1,803.7 90.4% ============ ============ ============ ============ Insurance underwriting Direct sales - life, accident and health ........................ $ 259.7 1.0% $ 514.4 0.7% Extended warranty ............................................... 147.8 28.2 277.2 23.6 Other ........................................................... 66.2 (7.4) 127.5 (12.1) ------------ ------------ ------------ ------------ Total revenue............................................... $ 473.7 6.7% $ 919.1 4.4% ============ ============ ============ ============ Corporate and other Investment income on capital and other .......................... $ 27.8 6.5% $ 53.6 13.8% Realized investment gains ....................................... -- -- 2.4 -- ------------ ------------ ------------ ------------ Total revenue............................................... $ 27.8 6.5% $ 56.0 18.9% ============ ============ ============ ============
- 16 - NET INCOME FOR SECOND QUARTER AND FIRST HALF 1997 References to share data reflect the three-for-two stock split announced on March 21, 1997, payable on May 14, 1997. Second quarter net income was $84.2 million ($0.48 per share) compared to $86.3 million ($0.49 per share) in 1996. Net income for first half was $84.9 million ($0.46 per share) compared to $205.2 million ($1.18 per share). Included in first half 1997 net income is after-tax realized investment gains of $0.01 per share with no comparable gains or losses in 1996. The decrease in first half 1997 net income and the related per share amount is primarily influenced by: (1) after-tax 1997 special charges of $107.5 million ($0.64 per share) compared to after-tax 1996 special charges of $19.5 million ($0.12 per share); (2) the 1997 deduction for after-tax distributions on the capital securities (reflected as "minority interest" on the condensed consolidated statements of operations); (3) operating results from 1996 discontinued operations due to the completion of the sales of UFLIC and LOV in second quarter 1996 ($0.13 per share); and (4) after-tax gain on disposal of discontinued operations in 1996 ($0.13 per share). Operating income from continuing operations before special charges, and realized investment gains was $101.1 million ($0.58 per share) and $190.9 million ($1.09 per share) in the second quarter and first half 1997, respectively, compared to $84.8 million ($0.48 per share) and $181.5 million ($1.04 per share) in the second quarter and first half 1996, respectively. The effective tax rate on continuing operations for operating income, which excludes after-tax realized investment gains, was 37.5%, up from 34.5% for first half 1997 and 1996, respectively, due to changes in business mix. Realized gains were taxed at 37.5% and 36% for first half 1997 and 1996, respectively. Average shares outstanding for second quarter 1997 increased 2.8% when compared to 1996 primarily due to the conversion of preferred stock to common stock in fourth quarter 1996. CASH FLOW AND FINANCIAL POSITION AT THE END OF FIRST HALF 1997 General - ------- Consistent with financial statement presentation, the following cash flow discussion reflects the acquisition of A&A in first quarter 1997 and Bain Hogg in fourth quarter 1996. As a result of these transactions, the amounts contained in the condensed consolidated statement of cash flows for the first half 1997 are not comparable to the same period in 1996. Cash flows from operating activities in first half 1997 were $294.3 million, a decrease of $3.1 million from first half 1996. This decrease primarily reflects the timing of settlement of insurance segment receivables and payables, as well as the payments on special charges and valuation adjustments relating to the acquisitions of A&A and Bain Hogg. Investing activities used cash of $417 million which was made available from financing and operating activities. Cash used for acquisition activity during the first half 1997 was $1.3 billion, primarily reflecting the A&A acquisition. - 17 - Cash totaling $1,066.5 million was provided during first half 1997 from financing activities. The increase is primarily a result of funds provided on the issuance of the capital securities. Cash was used to pay dividends of $82.2 million on common stock, $5.4 million on 8% cumulative perpetual preferred stock, and $1.3 million on redeemable preferred stock. Aon's operating subsidiaries anticipate that there will be adequate liquidity to meet their needs in the foreseeable future. Aon's liquidity needs are primarily for servicing its debt and for the payment of dividends on stock issues and capital securities. The businesses of Aon's operating subsidiaries continue to provide substantial positive cash flow. Brokerage cash flow has been used primarily for acquisition financing. Aon anticipates continuation of the company's positive cash flow, the ability of the parent company to access adequate short-term lines of credit, and sufficient cash flow in the long-term. Due to the contractual nature of its insurance policyholder liabilities which are intermediate to long-term in nature, Aon has invested primarily in fixed maturities. With a carrying value of $2.9 billion, Aon's total fixed maturity portfolio is invested primarily in investment grade holdings (96%) and has a fair value which is 103.9% of amortized cost. Total assets increased $3.7 billion to $17.4 billion since year-end 1996, primarily due to the acquisition of A&A. Invested assets at June 30, 1997 decreased $61.7 million from year-end levels, primarily due to lower levels of short-term investments. The amortized cost and fair value of less than investment grade fixed maturity investments, at June 30, 1997, were $96.5 million and $104.1 million, respectively. The carrying value of non-income producing investments in Aon's portfolio at June 30, 1997 was $63.8 million, or 1.2% of total invested assets. Aon uses derivative financial instruments (primarily financial futures, swaps, options and foreign exchange forwards) to: (a) manage its overall asset/liability duration match; (b) hedge asset price risk associated with financial instruments whose change in value is reported under SFAS 115; and (c) hedge foreign currency transaction risk and other business risks. As of June 30, 1997, Aon had open contracts which had unrealized gains of approximately $18.7 million. Insurance brokerage and consulting services receivables and insurance premiums payable increased $1 billion and $1.6 billion, respectively, in first half 1997 when compared to year-end 1996, primarily reflecting the A&A acquisition. When compared to 1996, excess of cost over net assets purchased (goodwill) increased approximately $1.1 billion due to the A&A acquisition (see note 6). In first quarter 1997, Aon completed the aquisition of A&A. The purchase price of approximately $1.2 billion was funded by the issuance of commercial paper, internal funds, and the issuance of $800 million of 8.205% mandatorily redeemable preferred capital securities (capital securities). The capital securities are designated on the condensed consolidated statement of financial position as "Company-obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust holding solely the Company's Junior Subordinated Debentures." Short-term borrowings increased at the end of second quarter 1997 by $265.9 million when compared to year-end 1996, primarily due to the issuance of commercial paper for acquisition financing. Notes payable increased at the end of second quarter 1997 by $146.5 million when compared to year-end 1996, primarily due to acquisition financing. Included in notes payable at June 30, 1997 is approximately $25 million which represents the principal amount of notes due within one year. - 18 - Commencing on or after November 1, 1997, Aon has the option to redeem all or any part of its 8% Cumulative Perpetual Preferred Stock (8% preferred stock) at a redemption price of $25.00 per share plus accrued dividends. It is anticipated that Aon will most likely exercise its option to redeem all of the remaining outstanding shares. At June 30, 1997, 5,446,000 shares of 8% preferred stock were outstanding. Stockholders' equity decreased $15.4 million in first half 1997 to $16.04 per share, a decrease of $0.17 per share since year-end 1996. The principal factors influencing this decrease were $107.5 million of after-tax special charges which reduced net income, net foreign exchange losses of $47.1 million, and dividends to stockholders of $88.9 million. Partially offsetting this decrease were net unrealized investment gains of $6.1 million. Review by Independent Auditors - ------------------------------ The condensed consolidated financial statements at June 30, 1997, and for the second quarter and first half then ended have been reviewed, prior to filing, by Ernst & Young LLP, Aon's independent auditors, and their report is included herein. - 19 - INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Stockholders Aon Corporation We have reviewed the accompanying condensed consolidated statement of financial position of Aon Corporation as of June 30, 1997, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 1997 and 1996, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated statement of financial position of Aon Corporation as of December 31, 1996, 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 11, 1997, 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, 1996, 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 August 5, 1997 - 20 - PART II ------- OTHER INFORMATION ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The exhibits filed with this report are listed on the -------- attached Exhibit Index. (b) Reports on Form 8-K - No Current Reports on Form 8-K were filed for the ------------------- quarter ended June 30, 1997. SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Aon Corporation (Registrant) August 14, 1997 /s/ Harvey N. Medvin -------------------- HARVEY N. MEDVIN EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER (Principal Financial and Accounting Officer) - 21 - Aon CORPORATION --------------- EXHIBIT INDEX ------------- Exhibit Number In Regulation S-K Page Item 601 Exhibit Table No. - ---------------------- --- (10) Aon Severance Plan (11) Statement regarding Computation of Per Share Earnings. (12) Statements regarding Computation of Ratios. (a) Statement regarding Computation of Ratio of Earnings to Fixed Charges. (b) Statement regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (15) Letter re: Unaudited Interim Financial Information (27) Financial Data Schedule - 22 - EX-10 2 AON SEVERANCE PLAN Aon SEVERANCE PLAN Aon Severance Plan Preamble The name of this plan is the Aon Severance Plan (the "Plan"). Its purpose is to compensate staff employees of Aon Corporation and its subsidiaries for unavoidable and permanent loss of employment under the circumstances specified below. Benefits are in consideration of the waiver of any employment-related litigation and claims against Aon Corporation or its subsidiaries. The Plan shall be effective as of May 1, 1997, and apply to employees notified of termination of employment by Aon Corporation or by a subsidiary on or after that date. All prior existing severance pay plans, programs or practices for employees, whether formal or informal, are hereby revoked and terminated. SECTION 1 --------- DEFINITIONS ----------- 1.01 "Board" shall mean the board of directors of Aon Corporation. 1.02 "Cause" shall mean: (a) excessive absenteeism or tardiness which violates the Company's attendance standards; (b) unsatisfactory job performance; (c) violation of Company policies; (d) breach of fiduciary duty; theft; fraud; dishonesty; embezzlement; violation of securities laws; violation of non-competition, nonsolicitation or confidentiality agreements; (e) falsification of employment application or other business records; (f) insubordination (e.g., failure to follow direct supervisory instructions); (g) unethical or criminal conduct. 1.03 "Committee" shall mean the Benefits Committee appointed by the Board. The Committee is designated as the plan administrator and named fiduciary. 1.04 "Company" shall mean Aon Corporation and its majority owned subsidiaries. 1.05 "Compensation" shall mean solely salary and fixed base compensation. Compensation shall be determined before excluding any pretax deferrals for retirement, health, welfare, death, insurance, or similar plans of the Company. The following are examples of items that are not included in Compensation: (a) net and deferred commission payments; (b) bonuses; (c) stock awards; (d) expense reimbursements; (e) income from exercise of stock options; (f) overtime pay; (g) overrides; and (h) car allowances. - 2 - 1.06 "Employee" shall mean any regular United States staff employee of the Company working 20 or more hours a week. The term, "Employee" shall not include independent contractors, any individual treated as an independent contractor by the Company but considered an employee by the Internal Revenue Service or other third party, leased employees, and temporary employees. 1.07 "Involuntary Termination of Employment" shall mean any Termination of Employment with the Company due to the following: (a) Elimination of the Employee's job, provided that (i) the Employee has made a good faith effort to secure another position within the Company; and (ii) there is no possibility that another position may be secured within the Company. A temporary or seasonal lay-off shall not be considered an Involuntary Termination of Employment. (b) Divestiture or other disposition of a subsidiary or unit of the Company, where an Employee of such subsidiary or unit is not employed by the acquiring company or offered employment by the acquiring company. An Involuntary Termination of Employment shall not include, among other events: Resignation; Termination of Employment for Cause; and Termination of Employment on account of disability. 1.08 "Participant" shall mean an Employee eligible for benefits under Section 2.01. 1.09 "Plan" shall mean the Aon Severance Plan. 1.10 "Release" shall mean a release of Employee claims in the form set forth in Appendix A. 1.11 "Resignation" shall mean a Termination of Employment effected by the Employee, or effected by mutual agreement between the Employee and the Company. 1.12 "Termination of Employment" shall mean the cessation of the classification of an Employee as an active employee on the payroll records of the Company. - 3 - SECTION 2 --------- ELIGIBILITY ----------- 2.01 Eligibility. Any Employee of the Company who: (a) incurs an Involuntary ----------- Termination of Employment; (b) signs a Release in accordance with Section 2.03, which Release shall have become effective under its terms; and (c) returns all Company property in the possession of the Employee, shall receive benefits in accordance with Section 3 of this Plan. 2.02 Involuntary Termination. Involuntary Termination of Employment shall be a ----------------------- condition to receipt of benefits under this Plan. The determination of whether an Employee has incurred an Involuntary Termination of Employment shall be made based on the good faith belief of the Corporate Human Resources Department. 2.03 Release. As a condition to receipt of benefits under this Plan, the ------- Employee must sign a Release which shall have become effective in accordance with its terms. The failure or refusal of an Employee to sign a Release, or the revocation of a Release (to the extent permitted by its terms) shall disqualify the employee from receiving benefits under this Plan. If an Employee files a legal action asserting any claim or demand within the scope of the Release, the Company shall retain all rights and benefits of the Release and may (a) cancel all future obligations under the Release; and (b) recoup the value of all payments and benefits paid under this Plan, together with the Company's costs and attorneys fees. 2.04 Disabled Employees. An Employee receiving benefits under the Company's ------------------- short-term disability plan who: (a) following commencement of such benefits, is scheduled to incur an Involuntary Termination of Employment; and (b) meets all the requirements of Section 2.01, shall be entitled to benefits under this Plan; provided, however, that the number of weeks during which benefits are paid (or deemed to be paid) under Section 3 of this Plan shall be reduced by the number of weeks in which the Employee receives short-term disability benefits after the scheduled date of Termination of Employment. 2.05 Alexander & Alexander Employees. Any Employee who was employed by ----------------------------------- Alexander & Alexander Services, Inc., or any of its subsidiaries on January 15, 1997, shall not be eligible for benefits under this Plan until the Board or its designee shall amend this Plan to permit such eligibility. 2.06 Service until Termination of Employment. An Employee otherwise entitled --------------------------------------- to receive benefits under Section 2.01 of this Plan shall not receive benefits unless such Employee: (a) works satisfactorily through the date determined by the Company to be the date of Termination of Employment; and (b) prior to such date, neither voluntarily terminates employment nor is terminated for Cause. - 4 - SECTION 3 --------- BENEFITS -------- 3.01 Company-Provided Benefits. An Employee eligible for benefits under -------------------------- Section 2.01 shall receive an amount equal to one week's Compensation multiplied by the lesser of: (a) the total of such Employee's Years of Service plus four; or (b) 30. All Company-provided benefits under this Section 3.01, in the case of a part-time Employee, will be pro rated based upon the average number of hours worked by the part-time Employee and the number of hours worked by full-time Employees in the part-time Employee's location. For purposes of this Section 3.01, "Years of Service" means the number of years of continuous employment with the Company. Partial years of service will be rounded to the closest Year of Service. With respect to employment with an employer whose business was acquired by or merged into the Company ("the Acquired Employer"), Years of Service shall include employment with the Acquired Employer beginning with such Employee's most recent date of hire with the Acquired Employer through the date of such merger or acquisition. The foregoing applies only to individuals employed by the Acquired Employer at the time of the acquisition or merger. 3.02 90-Day Subsidy for Health Benefits. Participants who elect continuation ---------------------------------- of health care coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), shall be entitled to continue medical (including HMO) and dental coverage under COBRA for the 90-day period following termination of employment at a cost no greater than that paid by similarly situated active Employees. 3.03 Form of Payment. Benefits under this Plan will be paid in a lump sum, ---------------- unless the Company decides otherwise. 3.04 Other Benefit Plans. No amount paid to a Participant under this Plan --------------------- shall be deemed to be compensation with respect to the Employee's entitlement to benefits under any employee benefit plan established by the Company for its employees unless otherwise specifically provided in such plan. 3.05 Rehired Employees. A Participant who receives benefits under this Plan ------------------ and who is rehired as an Employee at any time before the end of a number of weeks described in Section 3.01(a), will be required to reimburse the Company for benefits paid during, or attributable to, the period of rehire. - 5 - 3.06 Laws Requiring Payments. To the extent that any federal, state or local ----------------------- law, including "plant closing" laws, requires the Company to make a payment of any kind to an Employee because of such Employee's involuntary termination due to a layoff, reduction in force, plant or facility closing, sale of business, change of control, or other similar event, the benefits provided under this Plan shall be reduced dollar for dollar or eliminated. 3.07 Other Company-Provided Payments. The amount of benefits due an Employee --------------------------------- in accordance with Section 3.01 shall be reduced, dollar for dollar, by Company-provided payments due the Employee upon Termination of Employment under such other individual employment arrangements as may cover the Employee. - 6 - SECTION 4 --------- ADMINISTRATION -------------- 4.01 Participant Rights. If the claim of any Employee for benefits under the ------------------- Plan is denied, the Company shall provide adequate notice in writing to such claimant, setting forth the specific reasons for such denial. The notice shall be written in a manner calculated to be understood by the claimant. The Company shall afford such Employee whose claim for benefits has been denied 60 days from the date notice of such denial is delivered or mailed in which to appeal the decision in writing to the Committee. If the Employee appeals the decision in writing within 60 days, the Committee shall review the written comments and any submissions of the Employee and render its decision regarding the appeal all within 60 days of such appeal. 4.02 Committee Actions. The Committee may, from time to time, adopt rules and ----------------- regulations for carrying out the Plan. The Committee shall have the exclusive right and discretionary authority to construe the provisions of the Plan, including without limitation, the power to interpret disputed, ambiguous or uncertain terms, and such other powers as may be necessary to carry out the provisions of the Plan. The Committee shall also have the discretionary authority to determine on appeal all questions relating to the eligibility of Employees to receive benefits under the Plan and the amount of such benefits, and resolve all questions pertaining to the administration, interpretation and application of the Plan provisions. Actions taken in good faith by the Company, the Committee, or any employee of the Company shall be conclusive and binding on all interested parties and shall be given the maximum possible deference allowed by the law. The Committee has the authority to delegate its administrative responsibilities. 4.03 Amendment and Termination. The Plan may, at any time be amended, --------------------------- modified, or terminated by action of the Board. - 7 - SECTION 5 --------- GENERAL PROVISIONS ------------------ 5.01 Notices. Unless otherwise indicated, all notices to the Company shall be ------- delivered to the attention of the Secretary of the Company. Any notice or filing required or permitted to be given to the Company under this Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the Company at the principal office of the Company. 5.02 Controlling Law. Except to the extent superseded by federal law, the laws --------------- of Illinois shall be controlling in all matters relating to the Plan. 5.03 Captions. The captions of Sections and paragraphs of this Plan are for -------- convenience only and shall not control or affect the meaning or construction of any of its provisions. 5.04 Action by the Company. Any action required or permitted by a Company ---------------------- under the Plan shall be by resolution of its Board or any person or persons authorized by resolution of its Board. 5.05 Facility of Payment. Any amounts payable under this Plan to any person ------------------- under legal disability or who, in the judgment of the Company, is unable to properly manage his financial affairs may be paid to the legal representative of such person or may be applied for the benefit of such person in any manner which the Company may select. 5.06 Severability. Whenever possible, each provision of the Plan shall be ------------ interpreted in such manner as to be effective and valid under applicable law. If, however, any provision of the Plan shall be held to be prohibited by or invalid under applicable law, then (a) such provision shall be deemed amended to, and to have contained from the outset such language as shall be necessary to, accomplish the objectives of the provision as originally written to the fullest extent permitted by law; and (b) all other provisions of the Plan shall remain in full force and effect. 5.07 Liability. No member of the Board, no employee of the Company, and no --------- member of the Committee (nor the Committee itself) shall be liable for any act or action under this Plan whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or, except in circumstances involving his bad faith, gross negligence or fraud, for anything done or omitted to be done by himself. The Company will fully indemnify and hold the members of the Committee harmless from any liability under this Plan, except in circumstances involving a Committee member's bad faith, gross negligence, or fraud. The Company or the Committee may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligation or duties - 8 - under this Plan, or with respect to any action or proceeding or any question of law, and shall not be liable with respect to any action taken or omitted by it in good faith pursuant to the advice of counsel. 5.08 Successors. The provisions of the Plan shall bind and inure to the ---------- benefit of the Company and its successors and assigns. The term "successors" as used herein shall include any corporation or other business entity which shall by merger, consolidation, purchase, or otherwise, acquire all or substantially all of the business and assets of the Company and successors of any such corporation or other business entity. 5.09 Unfunded Status of the Plan. Payments made to the Participant pursuant to --------------------------- the Plan shall be made only from the general assets of the Company. Nothing contained in this Plan shall be deemed to create a trust of any kind. - 9 - IN WITNESS WHEREOF, Aon Corporation hereby adopts the Aon Severance Plan, effective as set forth above, as of this 5th day of May , 1997. ------- ---------------- -- AON CORPORATION By: /s/ Daniel T. Cox ----------------------- Daniel T. Cox Executive Vice President - 10 - APPENDIX A AON SEVERANCE PLAN ------------------ WAIVER AND RELEASE OF CLAIMS ---------------------------- In exchange for benefits to be provided to me under the Aon Severance Plan (the "Plan") , which I acknowledge I am not otherwise entitled to receive, I freely and voluntarily agree to this WAIVER AND RELEASE OF CLAIMS. 1. In signing this WAIVER AND RELEASE OF CLAIMS, I hereby waive and release any and all claims that I may ever have had or that I now have against the following persons and organizations: a. Aon Corporation, its affiliates, successors and subsidiaries; and, b. Any and all officers, directors, employees, shareholders and agents of Aon Corporation, its affiliates, successors and subsidiaries. 2. I understand and agree that, in signing this document, I am waiving and releasing any and all claims of whatever nature that I may ever have had or now have against the persons and organizations listed in paragraph 1. I understand and agree that among the claims that I am waiving and releasing are the following: a. Claims of age discrimination in employment under the federal Age Discrimination in Employment Act of 1967; b. Claims of race, color, sex, national origin and religious discrimination or harassment in employment under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1866, 42 U.S.C. ss. 1981, as amended; c. Claims of disability discrimination under the Americans With Disabilities Act; d. Claims of discrimination in employment under any other federal, state or local statute, ordinance, regulation or constitution; e. Claims under any employment agreement or any claims of breach of contract; and, f. Any common law or statutory claims of wrongful discharge and any other common law tort or statutory claims. I understand and agree that I am waiving and releasing any and all claims that I may ever have had or that I now have, regardless of their nature or origin, and that the fact that such claim is not listed in subparagraphs (a) through (f) above, does not mean that such claim is not included in this WAIVER AND RELEASE OF CLAIMS. 3. I agree that I will never sue any of the persons or organizations listed in paragraph 1 and I further agree that I will never seek or receive damages for any claim or charge of employment discrimination, for any claim released by this WAIVER AND RELEASE OF CLAIMS. I also agree to withdraw any pending lawsuit I may have against any of the - 11 - persons or organizations listed in paragraph 1 arising out of my employment, including the termination of my employment. 4. In signing this agreement, I agree and understand that this WAIVER AND RELEASE OF CLAIMS will be binding not only on me but also on my heirs, administrators and assigns with respect to the claims covered by this agreement. As of the date of my signing of this agreement, I have made no assignment of any claims against any of the persons or organizations described in paragraph 1. 5. I hereby acknowledge that, at the time I was given this WAIVER AND RELEASE OF CLAIMS, I was informed in writing that I had at least 45 days from the date I received all the information described in paragraph below in which to consider whether I would sign this WAIVER AND RELEASE OF CLAIMS. I also acknowledge that, at the time I was given this WAIVER AND RELEASE OF CLAIMS, I was informed in writing that I should consult with an attorney before signing this agreement. I have had an opportunity to consult with an attorney and have either had such consultations or have decided of my own free will that I will sign this agreement without consulting with legal counsel. 6. I acknowledge that, at the time I was given this WAIVER AND RELEASE OF CLAIMS, I was given a complete description of the Plan, including a description of the group of persons who are covered by this program, the rules of eligibility and any time limits applicable to such program. Finally, I acknowledge that I have received a list of ages and job titles of all individuals in my organizational unit who are eligible or were selected to receive benefits under the Plan as well as the ages and job titles of individuals in my organizational unit who are not eligible or were not selected to receive benefits under the Plan. 7. I acknowledge that I have been informed that I may revoke my acceptance of this WAIVER AND RELEASE OF CLAIMS by delivering a letter to the Corporate Human Resources Department (see address below), within seven days of the date I have signed this agreement. I understand that this WAIVER AND RELEASE OF CLAIMS will not become effective until the eighth day following my signing of this agreement. I understand and intend that, in the event I do not revoke my acceptance of this agreement within the seven-day period described in this paragraph, this WAIVER AND RELEASE OF CLAIMS will be legally binding and enforceable on me, my heirs, administrators and assigns. 8. I agree to continue to respect the trade secrets and other confidential information to which I have had access while employed. Insofar as I have already signed any written agreement or agreements not to deal with customers or clients or not to hire employees of my employing company or its affiliates for any period of time after cessation of employment, I confirm that I shall fulfill the terms of such agreement or agreements. - 12 - 9. This WAIVER AND RELEASE OF CLAIMS will be interpreted and enforced according to the laws of the state of Illinois. If any part of this WAIVER AND RELEASE OF CLAIMS is judged by a court of competent jurisdiction to be illegal, invalid or inoperable, then that part only will be stricken. A suitable and equitable provision will be substituted in order to carry out, so far as may be enforceable and valid, the intent and purpose of the stricken part, and the rest of this WAIVER AND RELEASE OF CLAIMS will continue in full force and effect. I acknowledge that the number of years of service used to calculate my benefit under the Aon Severance Plan is ____, based on my hire date of , 19__. ___________________________ _____________________________ NAME (Please Print) SIGNATURE ___________________________ _____________________________ DATE SOCIAL SECURITY NUMBER Return the original signed copy of this form on or before the 45th day after you have received all the information described in paragraph 6 (above) to: Corporate Human Resources ____________________________ ____________________________ 123 North Wacker Drive Chicago, IL 60606 - 13 - EX-11 3 CONSOLIDATED NET INCOME PER SHARE COMPUTATION
EXHIBIT 11 Aon Corporation and Subsidiaries CONSOLIDATED NET INCOME PER SHARE COMPUTATION (millions except per share data) Second Quarter Ended Six Months Ended --------------------------- --------------------------- June 30, June 30, June 30, June 30, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ EARNINGS PER SHARE (1) Net income ................................................. $ 84.2 $ 86.3 $ 84.9 $ 205.2 Preferred stock dividends .................................. 3.3 5.1 6.7 10.2 ------------ ------------ ------------ ------------ Net income available for common stockholders .......... $ 80.9 $ 81.2 $ 78.2 $ 195.0 ============ ============ ============ ============ Average common shares issued ............................... 171.2 167.3 171.2 167.3 Net effect of treasury stock activity and dilutive stock compensation plans based on the treasury stock method . (1.9) (2.6) (2.0) (2.6) ------------ ------------ ------------ ------------ Average common and common equivalent shares outstanding ...................................... 169.3 164.7 169.2 164.7 ============ ============ ============ ============ Net income per share ............................................ $ 0.48 $ 0.49 $ 0.46 $ 1.18 ============ ============ ============ ============ (1) Adjusted to reflect the three-for-two stock split on May 14, 1997
EX-12 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Aon Corporation and Consolidated Subsidiaries Exhibit 12(a) Combined With Unconsolidated Subsidiaries Computation of Ratio of Earnings to Fixed Charges Six Months Ended June 30, Years Ended December 31, --------------- --------------------------------------------- (millions except ratios) 1997 1996 1996 1995 1994 1993 1992 (1) ------ ------ ------ ------ ------ ------ --------- Income from continuing operations before provision for income taxes (2) ......................... $167.1 $246.9 $445.6 $458.0 $397.0 $331.6 $179.1 Add back fixed charges: Interest on indebtedness ........................................ 30.6 23.9 44.7 55.5 46.4 42.3 41.9 Interest on ESOP ................................................ 1.9 2.4 4.3 5.3 5.9 6.5 6.9 Portion of rents representative of interest factor ............................................... 29.4 13.4 28.6 21.4 28.7 26.1 19.2 ------ ------ ------ ------- ------ ------ ------- Income as adjusted ......................................... $229.0 $286.6 $523.2 $540.2 $478.0 $406.5 $247.1 ====== ====== ====== ======= ====== ====== ======= Fixed charges: Interest on indebtedness ........................................ $ 30.6 $ 23.9 $ 44.7 $ 55.5 $ 46.4 $ 42.3 $ 41.9 Interest on ESOP ................................................ 1.9 2.4 4.3 5.3 5.9 6.5 6.9 Portion of rents representative of interest factor ............................................... 29.4 13.4 28.6 21.4 28.7 26.1 19.2 ------- ------ ------ ------- ------ ------ ------- Total fixed charges ........................................ $ 61.9 $ 39.7 $ 77.6 $ 82.2 $ 81.0 $ 74.9 $ 68.0 ======= ====== ====== ======= ====== ====== ======= Ratio of earnings to fixed charges .............................. 3.7 7.2 6.7 6.6 5.9 5.4 3.6 ======= ======= ====== ======= ======= ====== ======= Ratio of earnings to fixed charges (3) .......................... 6.5 8.0 7.9 4.9 ======= ======= ====== ======= (1) Income from continuing operations before provision for income taxes excludes the cumulative effect of changes in accounting principles. (2) Income from continuing operations before provision for income taxes and minority interest includes special charges of $172 million and $30.2 million for six months ended June 30, 1997 and 1996 , respectively, and $90.5 million and $86.5 million in the years ended December 31, 1996 and 1992, respectively. (3) The calculation of this ratio of earnings to fixed charges reflects the exclusion of special charges from the income from continuing operations before provision for income taxes component for the six months ended June 30, 1997 and 1996, respectively, and the years ended December 31, 1996 and 1992, respectively.
EX-12 5 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Aon Corporation and Consolidated Subsidiaries Exhibit 12(b) Combined With Unconsolidated Subsidiaries Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends Six Months Ended June 30, Years Ended December 31, --------------- --------------------------------------------- (millions except ratios) 1997 1996 1996 1995 1994 1993 1992 (1) ------ ------ ------ ------ ------ ------ --------- Income from continuing operations before provision for income taxes (2) ......................... $167.1 $246.9 $445.6 $458.0 $397.0 $331.6 $179.1 Add back fixed charges: Interest on indebtedness ........................................ 30.6 23.9 44.7 55.5 46.4 42.3 41.9 Interest on ESOP ................................................ 1.9 2.4 4.3 5.3 5.9 6.5 6.9 Portion of rents representative of interest factor ............................................... 29.4 13.4 28.6 21.4 28.7 26.1 19.2 ------ ------ ------ ------- ------ ------ ------- Income as adjusted ......................................... $229.0 $286.6 $523.2 $540.2 $478.0 $406.5 $247.1 ====== ====== ====== ======= ====== ====== ======= Fixed charges: Interest on indebtedness ........................................ $ 30.6 $ 23.9 $ 44.7 $ 55.5 $ 46.4 $ 42.3 $ 41.9 Preferred stock dividends........................................ 42.0 15.7 28.7 37.5 48.4 47.5 20.3 ----- ------ ------ ------ ------ ------ ------ Interest and dividends........................................ 72.6 39.6 73.4 93.0 94.8 89.8 62.2 Interest on ESOP ................................................ 1.9 2.4 4.3 5.3 5.9 6.5 6.9 Portion of rents representative of interest factor ............................................... 29.4 13.4 28.6 21.4 28.7 26.1 19.2 ------- ------ ------ ------- ------ ------ ------- Total fixed charges and preferred stock dividends.. ........................................ $103.9 $ 55.4 $106.3 $119.7 $129.4 $122.4 $ 88.3 ======= ====== ====== ======= ====== ====== ======= Ratio of earnings to combined fixed charges and preferred stock dividends (3)...................... 2.2 5.2 4.9 4.5 3.7 3.3 2.8 ======= ======= ====== ======= ====== ====== ======= Ratio of earnings to combined fixed charges and preferred stock dividends (4)...................... 3.9 5.7 5.8 3.8 ======= ======= ====== ======= (1) Income from continuing operations before provision for income taxes excludes the cumulative effect of changes in accounting principles. (2) Income from continuing operations before provision for income taxes and minority interest includes special charges of $172 million and $30.2 million for six months ended June 30, 1997 and 1996 , respectively, and $90.5 million and $86.5 million in the years ended December 31, 1996 and 1992, respectively. (3) Included in total fixed charges and preferred stock dividends for the six months ended June 30, 1997 are $31.2 million of pretax distributions on the 8.205% trust preferred capital securities which are classified as "minority interest" on the condensed cosolidated statements of operations. (4) The calculation of this ratio of earnings to fixed charges reflects the exclusion of special charges from the income from continuing operations before provision for income taxes component for the six months ended June 30, 1997 and 1996, respectively, and the years ended December 31, 1996 and 1992, respectively.
EX-15 6 ERNST & YOUNG LETTER OF CONSENT Exhibit 15 Board of Directors and Stockholders Aon Corporation We are aware of the incorporation by reference in the Registration Statements of Aon Corporation ("Aon") described in the following table of our report dated August 5, 1997 relating to the unaudited condensed consolidated interim financial statements of Aon Corporation that are included in its Form 10-Q for the quarter ended June 30, 1997: 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-3 33-57562 Registration of Aon's 8% cumulative perpetual preferred stock and 6 1/4% cumulative convertible exchangeable preferred stock S-4 333-21237 Offer to exchange Capital Securities of Aon Capital A Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statements prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. ERNST & YOUNG LLP Chicago, Illinois August 5, 1997 EX-27 7 FDS 7
7 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. 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 2,903 0 0 814 24 12 5,151 1,332 0 570 17,407 1,080 2,017 835 679 1,147 50 6 171 2,641 17,407 793 233 2 1,750 421 112 1,907 167 63 104 0 0 0 85 0.46 0.00 715 0 0 0 0 0 0 Available on an annual basis only. Includes short-term borrowings and debt guarantee of ESOP. Common stock at par value; adjusted to reflect three-for-two stock split on May 14, 1997. Preferred stock at par value. Does not incude Company-obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust holding solely to Company's Junior Subordinated Debentures. Includes brokerage commissions and fees and other income.
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