-----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, CybKby/Pb3yajLy65KZ+fVuHkXUCt1hQdWOySc/xhzsEzTlAb7IoGlVWWPOuaX9J cbMz6pF4so8Gz/rPVJn/HQ== 0000948572-99-000053.txt : 20000531 0000948572-99-000053.hdr.sgml : 20000531 ACCESSION NUMBER: 0000948572-99-000053 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AON CORP CENTRAL INDEX KEY: 0000315293 STANDARD INDUSTRIAL CLASSIFICATION: 6321 IRS NUMBER: 363051915 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07933 FILM NUMBER: 99693649 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, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) - OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-7933 Aon Corporation --------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-3051915 -------- ---------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 123 N. WACKER DR, CHICAGO, ILLINOIS 60606 - - - - - - - - - - - - - - - - - ----------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) (312) 701-3000 -------------- (Registrant's Telephone Number) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 3 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of common stock outstanding: No. Outstanding Class as of 6-30-99 ----- ------------- $1.00 par value Common 256,165,977 (Adjusted to reflect a three-for-two stock split paid on May 17, 1999 to stockholders of record on May 4, 1999)
PART 1 FINANCIAL INFORMATION Aon CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (millions) AS OF JUNE AS OF DEC. AS OF JUNE AS OF DEC. 30, 1999 31, 1998 30, 1999 31, 1998 ------------------------ ----------------------- (UNAUDITED) (UNAUDITED) ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY INVESTMENTS INSURANCE PREMIUMS PAYABLE $ 7,640 $ 6,948 Fixed maturities at fair value $ 2,954 $ 3,103 POLICY LIABILITIES Future policy benefits 1,002 986 Equity securities at fair value 684 768 Policy and contract claims 780 779 Unearned and advance premiums 1,925 1,797 Short-term investments 2,201 2,221 Other policyholder funds 1,378 1,261 ---------- ---------- Other investments 519 360 TOTAL POLICY LIABILITIES 5,085 4,823 --------- ---------- GENERAL LIABILITIES TOTAL INVESTMENTS 6,358 6,452 General expenses 1,086 1,259 Short-term borrowings 926 844 Notes payable 814 580 CASH 1,038 723 Other liabilities 1,485 1,367 ---------- ---------- TOTAL LIABILITIES 17,036 15,821 RECEIVABLES Insurance brokerage and COMMITMENTS AND CONTINGENT LIABILITIES consulting services 6,119 5,423 REDEEMABLE PREFERRED STOCK 50 50 Premiums and other 1,133 1,120 COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY THE COMPANY'S JUNIOR Accrued investment income 67 63 SUBORDINATED DEBENTURES 800 800 --------- ---------- TOTAL RECEIVABLES 7,319 6,606 STOCKHOLDERS' EQUITY Common stock - $1 par value 258 172 Paid-in additional capital 484 450 INTANGIBLE ASSETS 3,642 3,500 Accumulated other comprehensive loss (196) (116) Retained earnings 2,871 2,782 Less - Treasury stock at cost (61) (58) OTHER ASSETS 2,647 2,407 Deferred compensation (238) (213) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 3,118 3,017 ---------- ---------- ---------- ---------- TOTAL ASSETS $ 21,004 $ 19,688 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,004 $ 19,688 ========== ========== ========== ==========
See the accompanying notes to the condensed consolidated financial statements. - 2 -
Aon CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) SECOND QUARTER ENDED SIX MONTHS ENDED ------------------------- ------------------------- (millions except per share data) JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ REVENUE Brokerage commissions and fees $ 1,143 $ 1,060 $ 2,255 $ 2,056 Premiums and other 441 423 878 840 Investment income 139 140 289 288 ------------ ------------ ------------ ------------ TOTAL REVENUE 1,723 1,623 3,422 3,184 ------------ ------------ ------------ ------------ EXPENSES General expenses 1,167 1,104 2,476 2,152 Benefits to policyholders 237 227 476 453 Interest expense 24 21 45 41 Amortization of intangible assets 35 31 69 61 ------------ ------------ ------------ ------------ TOTAL EXPENSES 1,463 1,383 3,066 2,707 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAX AND MINORITY INTEREST 260 240 356 477 Provision for income tax 99 90 135 179 ------------ ------------ ------------ ------------ INCOME BEFORE MINORITY INTEREST 161 150 221 298 Minority interest - 8.205% trust preferred capital securities (10) (10) (20) (20) ------------ ------------ ------------ ------------ NET INCOME $ 151 $ 140 $ 201 $ 278 ============ ============ ============ ============ Preferred stock dividends (1) (1) (1) (1) ------------ ------------ ------------ ------------ NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS $ 150 $ 139 $ 200 $ 277 ============ ============ ============ ============ NET INCOME PER SHARE (1): Basic net income per share $ 0.58 $ 0.55 $ 0.77 $ 1.09 ============ ============ ============ ============ Dilutive net income per share $ 0.57 $ 0.54 $ 0.76 $ 1.07 ============ ============ ============ ============ CASH DIVIDENDS PAID ON COMMON STOCK (1) $ 0.21 $ 0.19 $ 0.40 $ 0.36 ============ ============ ============ ============ Dilutive average common and common equivalent shares outstanding (1) 263.7 258.3 262.9 257.6 ------------ ------------ ------------ ------------ (1) Reflects the three-for-two stock split effective May 4, 1999.
See the accompanying notes to the condensed consolidated financial statements. - 3 -
Aon CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended ------------------------------ June 30, June 30, (millions) 1999 1998 -------------- -------------- Cash Provided by Operating Activities $ 357 $ 784 Cash Flows from Investing Activities: Sale of investments Fixed maturities Maturities 30 59 Calls and prepayments 104 36 Sales 788 1,749 Equity securities 356 1,481 Other investments 38 27 Purchase of investments Fixed maturities (848) (1,776) Equity securities (384) (1,486) Other investments (87) (109) Purchase of short-term investments - net (49) (703) Acquisition of subsidiaries (177) (263) Property and equipment and other (134) (105) ------------ ------------ Cash Used by Investing Activities (363) (1,090) ------------ ------------ Cash Flows from Financing Activities: Treasury stock transactions - net (13) 15 Issuance of short-term borrowings - net 126 167 Issuance (repayment) of long-term debt 252 (13) Interest sensitive life, annuity and investment contracts Deposits 153 221 Withdrawals (91) (48) Cash dividends to stockholders (101) (92) ------------ ------------ Cash Provided by Financing Activities 326 250 ------------ ------------ Effect of Exchange Rate Changes on Cash (5) 5 Increase (Decrease) in Cash 315 (51) Cash at Beginning of Period 723 1,085 ------------ ------------ Cash at End of Period $ 1,038 $ 1,034 ============ ============
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, 1998 for additional details of Aon's financial position, as well as a description of the accounting policies which have been continued without material change. The details included in the notes have not changed except as a result of normal transactions in the interim and the events mentioned in the footnotes below. Certain prior period amounts have been reclassified to conform to the current period presentation. 2. Stock Split ----------- On March 19, 1999, Aon's board of directors authorized a three-for-two stock split of Aon's $1.00 par value common stock, with approximately 86 million shares payable on May 17, 1999. The stock split has not been retroactively reflected in the December 31, 1998 condensed consolidated statement of financial position. The effect of the stock split was to increase common stock and decrease additional paid-in-capital by $86 million. All references in the accompanying financial statements to the number of common shares and per share amounts have been retroactively restated to reflect the stock split. 3 Statements of Financial Accounting Standards (SFAS) ---------------------------------------------------- Derivatives Disclosure ---------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133 (Accounting for Derivative Instruments and Hedging Activities). Statement No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and will require Aon to recognize all derivatives on the statement of financial position at fair value. Aon has not yet determined the effect this statement will have on Aon's earnings and financial position. In June 1999, the FASB issued Statement No. 137 that amends the required adoption date of Statement No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. Early adoption is permitted as of the beginning of any quarter subsequent to the issuance of Statement No. 137. Aon has not yet decided when it will adopt Statement No. 133. - 5 - 4. Comprehensive Income -------------------- The components of comprehensive income, net of related tax, for the second quarter and six months ended June 30, 1999 and 1998 are as follows:
(millions) Second Quarter Ended Six Months Ended -------------------- ---------------- June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 ------------- ------------- ------------- ------------- Net income $ 151 $ 140 $ 201 $ 278 Net unrealized investment losses (37) (6) (100) (12) Net foreign exchange gains (losses) 21 (8) (45) (6) Net additional minimum pension liability reduction 65 - 65 - ----------- ----------- ----------- ----------- Comprehensive income $ 200 $ 126 $ 121 $ 260 =========== =========== =========== ===========
The components of accumulated other comprehensive loss, net of related tax, at June 30, 1999 and December 31, 1998, are as follows:
June 30, December 31, (millions) 1999 1998 --------------- -------------- Net unrealized investment gains (losses) $ (22) $ 78 Net foreign exchange losses (143) (98) Net additional minimum pension liability (31) (96) --------------- -------------- Accumulated other comprehensive loss $ (196) $ (116) =============== ==============
5. Business Segments ----------------- In fourth quarter 1998, Aon adopted FASB Statement No. 131 (Disclosure about Segments of an Enterprise and Related Information). Beginning in 1999, all prior period segment information is restated to conform to the current period presentation. Aon classifies its businesses into three major operating segments: Insurance Brokerage and Other Services, Consulting and Insurance Underwriting; and into one non-operating segment, Corporate and Other. Intercompany revenues and expenses are eliminated in computing consolidated revenues and income before income tax. In accordance with the interim period reporting requirements of Statement No. 131, the segment information located in the tables on pages 12 through 15 is incorporated herein by reference. Amounts reported in the tables for the four segments, when aggregated, total to the amounts in the accompanying condensed consolidated financial statements. - 6 - 6. Notes Payable ------------- In second quarter 1999, Aon filed a universal shelf registration on Form S-3 with the Securities and Exchange Commission for the issuance of $500 million of debt and equity securities. In a public offering based on the shelf registration, Aon issued $250 million of 6.9% debt securities due June, 2004. The net proceeds from the sale of the 6.9% notes were used to reduce outstanding short-term commercial paper borrowings. 7. Capital Stock ------------- During six months 1999, Aon reissued 1.3 million shares of common stock from treasury for employee benefit plans and 333,600 shares in connection with the employee stock purchase plan. Aon purchased 1.2 million shares of its common stock at a total cost of $49.1 million during six months 1999. There were 1.8 million shares of common stock held in treasury at June 30, 1999. 8. Capital Securities ------------------ In 1997, Aon Capital A, a subsidiary trust of Aon, issued $800 million of 8.205% mandatorily redeemable preferred capital securities (capital securities). The sole asset of Aon Capital A is $824 million aggregate principal amount of Aon's 8.205% Junior Subordinated Deferrable Interest Debentures due January 1, 2027. 9. Special Charges --------------- In first quarter 1999, Aon recorded special charges of $163 million ($102 million after tax or $0.39 per share), including provisions for restructuring and pension misselling. These charges are included in general expenses in the condensed consolidated statements of income. Total severance and related pension expenses, involving 900 positions, were $99 million. Of the $99 million, approximately $32 million represents benefits related to pension plans and is included in Aon's total pension liability. Workforce reductions are related to a voluntary early retirement plan for employees of Aon's U.S. and Canadian operating subsidiaries, as well as the consolidation of Aon's European insurance brokerage and other services operations, primarily in the United Kingdom. As of June 30, 1999, approximately $40 million has been paid related to the termination of approximately 800 employees. The remaining payments on these terminations and the remaining terminations plan to be paid by the first quarter 2000. In the consulting segment, special charges of approximately $43 million were recorded in first quarter 1999 to reflect amounts required to make redress payments to customers who purchased private pension plans in the United Kingdom several years ago. These amounts are anticipated to be paid primarily by early 2001. Aon's ultimate exposure from the private pension plan review, as presently calculated, is subject to a number of variable factors including, among others, equity markets, the rate of response to the pension review mailings, the interest rate established quarterly by the U.K. Pension Investment Authority for calculating compensation, and the precise scope, duration, and methodology of the review. - 7 - The remaining charges of $21 million primarily reflect the lease abandonments relating to the consolidation of worldwide brokerage operations, and other exit activities. 10. Income Per Share ---------------- Income per share is computed as follows:
========================================================================================== (millions except per Second Quarter Ended Six Months Ended share data) -------------------- ---------------- June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------ Net income $ 151 $ 140 $ 201 $ 278 Redeemable preferred stock dividends 1 1 1 1 ----- ----- ----- ----- Net income for dilutive and basic $ 150 $ 139 $ 200 $ 277 ===== ===== ===== ===== Basic shares outstanding 260 254 259 254 Common stock equivalents 4 4 4 4 ----- ----- ----- ----- Dilutive potential common shares 264 258 263 258 ========================================================================================== Basic net income per share $0.58 $0.55 $0.77 $1.09 Dilutive net income per share $0.57 $0.54 $0.76 $1.07 ==========================================================================================
11. Alexander & Alexander Services Inc. (A&A) Discontinued Operations ----------------------------------------------------------------- A&A discontinued its insurance underwriting operations in 1985, some of which were then placed into run-off, with the remainder sold in 1987. In connection with those sales, A&A provided indemnities to the purchaser for various estimated and potential liabilities, including provisions to cover future losses attributable to insurance pooling arrangements, a stop-loss reinsurance agreement, and actions or omissions by various underwriting agencies previously managed by an A&A subsidiary. As of June 30, 1999, the liabilities associated with the foregoing indemnities and liabilities of insurance underwriting subsidiaries that are currently in run-off were included in other liabilities in the accompanying condensed consolidated statement of financial position. Such liabilities are net of reinsurance recoverables and other assets. 12. Contingencies ------------- Aon and its subsidiaries are subject to numerous claims, tax assessments and lawsuits that arise in the ordinary course of business. The damages that may be claimed are substantial, including in many instances claims for punitive or extraordinary damages. Accruals for these items have been provided to the extent that losses are deemed probable and are estimable. - 8 - In the fourth quarter of 1998, Aon received an Internal Revenue Service (IRS) revenue agent's report (RAR) proposing adjustments to the tax of certain Aon subsidiaries for the period 1990 through 1993. In the RAR, the IRS has contended that retro-rated extended warranty contracts do not constitute insurance for tax purposes. Accordingly, the IRS has proposed a deferral of deductions for obligations under those contracts. The effect of such deferral would be to increase the current tax obligations of certain Aon subsidiaries by approximately $74 million, $3 million, $5 million and $12 million (plus interest) in years 1990, 1991, 1992 and 1993, respectively. Aon believes that the IRS' position in the RAR is without merit and inconsistent with numerous previous IRS private letter rulings. Aon has commenced an administrative appeal and intends to contest vigorously such treatment. Aon believes that if the contracts are deemed not to be insurance for tax purposes, they would be recharacterized in such a way that the increased taxes for the years in question would be far less than the proposed assessments. In the same RAR, a number of additional items were identified which would also increase the tax of other Aon subsidiaries for 1990 through 1993. Aon believes that these additional items should be resolved through factual substantiation of certain accounting matters. In the second quarter of 1999, Allianz Life Insurance Company of North America, Inc. ("Allianz") filed an amended complaint in Minnesota adding a brokerage subsidiary of Aon as a defendant in an action which Allianz had originally brought against three insurance carriers to all of which Allianz had issued reinsurance cover. These three carriers, together referred to as the "APS Insurers," are American Phoenix Life and Reassurance Company, Phoenix Home Life Mutual Insurance Company and Sun Life Assurance Company of Canada. APS Insurers provided certain reinsurance to a pool of insurers and to certain facilities. Unicover Managers, Inc. ("Unicover"), a New Jersey corporation unrelated to Aon, managed the pool and facilities, which issued reinsurance related to certain workers' compensation insurance coverages. In turn, APS Insurers obtained reinsurance from carriers, including Allianz. Allianz alleges that Centaur Underwriting Management Ltd. ("Centaur"), a Bermuda-based entity unrelated to Aon, is a managing general underwriter that at all material times held underwriting authority for, and was an authorized agent of, the APS Insurers, but has not named Centaur as a defendant. Allianz claims that the reinsurance it issued should be rescinded or that it should be awarded damages, based on alleged fraudulent, negligent and innocent misrepresentations by APS Insurers, through their alleged authorized agents, Centaur and the Aon subsidiary defendant. Aon believes that the Aon subsidiary has meritorious defenses and the Aon subsidiary intends to vigorously defend this claim. While the Allianz lawsuit is among several lawsuits and arbitrations that have been started by various persons that relate directly or indirectly to one or more entities managed by Unicover, the Allianz lawsuit is the only lawsuit or arbitration relating to Unicover in which any Aon related entity is involved as a party. Although the ultimate outcome of all matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on Aon or its subsidiaries, on the basis of present information, availability of insurance coverages and advice received from counsel, it is the opinion of management that the disposition or ultimate determination of such matters will not have a material adverse effect on the consolidated financial position of Aon. 13. Subsequent Event ---------------- In July 1999, Aon acquired Nikols Sedgwick, a leading Italian insurance and reinsurance broker. This acquisition was financed by internal funds and will be accounted for by the purchase method. The effect of the Nikols Sedgwick acquisition is not anticipated to be material to Aon's consolidated financial statements. - 9 - Aon CORPORATION MANAGEMENT'S ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION REVENUE AND INCOME BEFORE INCOME TAX FOR SECOND QUARTER AND SIX MONTHS 1999 CONSOLIDATED RESULTS - - - - - - - - - - - - - - - - - -------------------- INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS - - - - - - - - - - - - - - - - - ------------------------------------------------- This quarterly report contains forward-looking statements relating to such matters as future financial performance, the business of Aon and Year 2000. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors such as changes in worldwide and national economic conditions, fluctuations in foreign currencies, changes in securities and fixed income markets, unpredictability and timing and amounts of returns on private equity holdings, downward commercial property and casualty premium pressures, and the competitive environment. In addition, Aon notes that a variety of factors could cause Aon's actual results and experience relating to compliance with Year 2000 to differ materially from the anticipated results or other expectations expressed in Aon's forward-looking statements concerning Year 2000 issues. These factors include (i) the unanticipated material impact of a system fault of Aon relating to Year 2000, (ii) the failure to successfully remediate, in spite of testing, material systems of Aon, (iii) the time it may take to successfully remediate a failure once it occurs, as well as the resulting costs and loss of revenues, and (iv) the failure of third parties to properly remediate material Year 2000 problems. GENERAL - - - - - - - - - - - - - - - - - ------- Special charges information located in note 9 to the condensed consolidated financial statements is incorporated herein by reference. Brokerage commissions and fees increased $83 million or 8% in second quarter 1999 and $199 million or 10% in six months 1999, reflecting post-second quarter 1998 business combination activity and internal growth. Premiums and other is primarily related to insurance underwriting operations. Premiums and other increased $18 million or 4% in second quarter 1999 and $38 million or 5% in six months 1999, compared with the same periods last year. Extended warranty premiums earned increased $8 million or 6% in the quarter, primarily reflecting continued growth in the appliance and electronics warranty lines. Direct sales premiums earned increased $14 million or 6% reflecting the introduction of several new products, growth in worksite marketing, and geographic expansion. The runoff of North American auto credit business partially offset this growth in premiums earned. Investment income includes income on disposals and related expenses. For the quarter, investment income is down $1 million or 1% compared to prior year, primarily due to short-term interest rates. Included in second quarter 1999 investment income is an $8.5 million settlement of a dispute with an unrelated third party. For six months 1999, investment income is up $1 million compared to 1998. The primary factors causing this - 10 - change are short-term interest rate decline, the dispute settlement, and approximately $30 million gain on disposal of tax-exempt bonds in first quarter 1999. Investment income from insurance brokerage and other services, primarily relating to fiduciary funds, decreased $11 million in second quarter 1999 compared to prior year. Consulting operations investment income declined $1 million in the quarter compared to prior year. A reduction in short-term interest rates contributed to the overall investment income decline in the brokerage segments. Total revenue increased $100 million or 6% in second quarter 1999 and $238 million or 7% in six months 1999, attributable to post-second quarter 1998 brokerage acquisition activity and internal growth in the operating segments. Benefits to policyholders increased $10 million or 4% in second quarter 1999 and $23 million or 5% in six months 1999. The increase in the quarter and six months was consistent with growth in related premiums earned and reflected no unusual claims activity. The run-off of auto credit business as planned partially offset the increase in policyholder benefits. Total expenses increased $80 million or 6% in second quarter and $359 million or 13% in six months 1999 when compared to prior year. The six months 1999 increase reflects the inclusion of first quarter 1999 pretax special charges of $163 million. Total expenses, excluding the 1999 special charges, increased 7% for the six months when compared to 1998. Second quarter and six months 1999 expenses increased over prior year primarily due to investments in new business initiatives, technology and product development. Restructuring liabilities for recent acquisitions and 1999 special charges have been reduced by payments as planned. Due to the early retirement program in first quarter 1999 and significant changes in interest rates, Aon revalued its domestic and U.K. pension plans as of April 1, 1999. The revaluation resulted in a reduction of pension expense, the effect of which was reflected in second quarter and six months 1999 general expenses. References to income before income tax are before minority interest related to the issuance of 8.205% mandatorily redeemable preferred capital securities (capital securities). Income before income tax increased $20 million or 8% in second quarter 1999. Six months 1999 income before income tax decreased $121 million or 25% when compared to prior year, primarily due to the inclusion of special charges. Excluding special charges, income before income tax increased $42 million or 9% in six months 1999 when compared to prior year, reflecting internal growth in each of the operating business segments, in addition to the impact of business combination activity in 1999 and 1998 in the insurance and other services and consulting segments. Total annualized cost savings are projected to be approximately $50 million related to first quarter 1999 restructuring activity. BUSINESS SEGMENTS - - - - - - - - - - - - - - - - - ----------------- GENERAL - - - - - - - - - - - - - - - - - ------- For purposes of the following business segments discussions, comparisons against 1998 results exclude discontinued operations and special charges. In addition, references to income before income tax exclude minority interest related to the capital securities. A review of financial performance for each of the four business segments follow. - 11 - INSURANCE BROKERAGE AND OTHER SERVICES - - - - - - - - - - - - - - - - - -------------------------------------- The Insurance Brokerage and Other Services segment consists principally of Aon's retail, reinsurance, specialty and wholesale brokerage operations. Second quarter 1999 Insurance Brokerage and Other Services revenue increased $66 million or 7% and six months 1999 revenue increased $173 million or 9%. Post-second quarter 1998 acquisitions as well as internal growth accounted for the majority of revenue growth. Excluding the impact of acquisitions, commissions and fee revenue for brokerage core businesses grew approximately 4% in the quarter and 5% in six months in a very competitive environment. Revenue earned related to reinsurance obtained by Unicover pool members (see Footnote 12 - - - - - - - - - - - - - - - - - - Contingencies) was $9 million for six months 1999. Revenue earned for full year 1998 was $15 million and is anticipated to be approximately $28 million for full year 1999.
======================================================================================== Insurance Brokerage and Other Services (millions) Second quarter ended June 30, Six months ended June 30, 1999 1998 1999 1998 ======================================================================================== Revenue: United States $ 537 $ 455 $ 1,020 $ 867 United Kingdom 218 221 407 406 Europe 143 154 368 331 Rest of World 122 124 222 240 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total Revenue $ 1,020 $ 954 $ 2,017 $ 1,844 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Income before income tax excluding special charges $ 188 $ 182 $ 372 $ 350 Special charges - - (119) - - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Income before income tax $ 188 $ 182 $ 253 $ 350 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
U.S. revenue of $537 million in second quarter 1999 was up 18% from 1998. Total international revenues in the quarter declined $16 million or 3% when compared to prior year, primarily reflecting the impact of foreign exchange rates, and to a lesser extent, a reduction in short-term interest rates. U.S. revenue of $1 billion in six months 1999 was up 18% from 1998. European revenue of $368 million increased 11% from 1998, primarily due to acquisition activity. Rest of world revenue declined in 1999 primarily due to the impact of foreign exchange and short-term interest rates. Insurance Brokerage and Other Services quarter and six months segment results were impacted positively by acquisitions, in particular the second quarter 1998 acquisition of Le Blanc de Nicolay and the Auto Insurance Specialists acquisition in third quarter 1998. Retail brokerage results continued to reflect competitive property and casualty pricing in the quarter and six months results. Pretax income grew 3% in the quarter over 1998 and six months 1999 pretax income, excluding first quarter 1999 special charges, grew 6% over 1998, primarily due to both internal growth and to acquisitions. Pretax margins in this segment declined slightly in 1999, reflecting investment in claims management operations, market-pricing pressures and investment in new initiatives. - 12 - CONSULTING - - - - - - - - - - - - - - - - - ---------- The Consulting segment provides a full range of employee benefits, human resources, compensation, and change management services. In the Consulting segment, second quarter 1999 revenue increased 4% to $161 million while six months 1999 revenue increased 4% to $317 million. Acquisition activity subsequent to second quarter 1998 and internal growth influenced revenue growth. Excluding the impact of acquisitions and foreign exchange, revenue for consulting core businesses grew approximately 7% in the quarter and 6% in six months 1999.
======================================================================================== Consulting (millions) Second quarter ended June 30, Six months ended June 30, 1999 1998 1999 1998 ======================================================================================== Revenue: United States $ 98 $ 100 $ 189 $ 187 United Kingdom 38 34 72 66 Europe 9 7 25 20 Rest of World 16 14 31 32 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total Revenue $ 161 $ 155 $ 317 $ 305 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Income before income tax excluding special charges $ 19 $ 15 $ 36 $ 30 Special Charges - - (44) - - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Income (loss) before income tax $ 19 $ 15 $ (8) $ 30 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
U.S. revenue of $98 million in second quarter 1999 was down 2% from 1998, reflecting lower than anticipated revenues for human resources consulting and change management operations. United Kingdom and European revenue of $47 million increased 15% from 1998, primarily reflecting favorable performance at a majority of foreign business units. Rest of world revenues increased $2 million in the quarter when compared to prior year. U.S. revenue of $189 million in six months 1999 was up 1% from 1998. United Kingdom and European revenue of $97 million increased 13% from 1998. The impact of foreign exchange rates contributed to a $1 million decline in rest of world revenues when compared to prior year. Pretax income increased to $19 million from $15 million in second quarter 1998, a 27% increase. The increase reflects international revenue growth mentioned above and strong organic growth in the U.S. employee benefits operations, United Kingdom and Canada. Pretax margins in this segment increased in 1999 when compared to prior year. Pretax income in six months 1999 increased $6 million or 20% reflecting strong organic revenue growth and reductions in overall expenses. - 13 - INSURANCE UNDERWRITING - - - - - - - - - - - - - - - - - ---------------------- The Insurance Underwriting segment is comprised of direct sales life and accident and health, warranty, specialty and other insurance products.
======================================================================================== Insurance Underwriting (millions) Second quarter ended June 30, Six months ended June 30, 1999 1998 1999 1998 ======================================================================================== Revenue: Direct sales $ 275 $ 261 $ 540 $ 519 Extended warranty 163 157 336 316 Specialty and other 64 65 123 122 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total revenue $ 502 $ 483 $ 999 $ 957 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Income before income tax $ 75 $ 69 $ 139 $ 133 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Revenue: United States $ 349 $ 334 $ 691 $ 671 United Kingdom 79 75 161 143 Europe 28 30 58 56 Rest of World 46 44 89 87 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total revenue $ 502 $ 483 $ 999 $ 957 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------
Revenue was $502 million in second quarter 1999, up 4% from 1998. Revenue was $999 million in six months 1999, up 4% from 1998. Direct sales continued to expand its product distribution through worksite marketing programs and the introduction of new product initiatives on a global basis. Auto credit business continues to runoff. U.S. revenue of $349 million was up 4% in second quarter 1999, principally due to growth in revenues for direct sales and appliance and electronic warranty lines of business. United Kingdom and European revenue of $107 million rose 2%. Rest of world revenue was $46 million, up $2 million from prior year. U.S. revenue of $691 million was up 3% in six months 1999, principally due to growth in revenues for direct sales and the mechanical extended warranty line of business. United Kingdom and European revenue of $219 million rose 10%, primarily reflecting a higher volume of new business in the appliance and electronic extended warranty lines. Rest of world revenue was $89 million, up $2 million from prior year. Pretax income increased $6 million or 9% in second quarter 1999 and $6 million or 5% in six months 1999 when compared to prior year. Growth in the quarter reflects revenue earned from the introduction of several new direct sales products and worksite marketing in addition to expense ratio improvements in the extended warranty lines. Start-up costs related to new direct sales product initiatives and investments in new products partially offset the direct sales revenue growth and extended warranty improvements. Overall, benefit and expense margins in second quarter 1999 did not suggest any significant shift in operating trends. - 14 - CORPORATE AND OTHER - - - - - - - - - - - - - - - - - ------------------- Revenue in this category consists primarily of investment income, including income on disposals, which is not otherwise allocated to the operating segments. Corporate operating expenses include administrative and certain information technology costs.
======================================================================================= Corporate and Other (millions) Second quarter ended June 30, Six months ended June 30, 1999 1998 1999 1998 ======================================================================================= Total revenue $ 40 $ 31 $ 89 $ 78 - - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------- Loss before income tax $ (22) $ (26) $ (28) $ (36) - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------
Corporate and Other revenue for the second quarter 1999 was $40 million, up $9 million from the second quarter 1998. In the quarter, there was a settlement of a dispute with an unrelated third party for $8.5 million. Six months 1999 revenue was $89 million, up $11 million from prior year. Included in six months 1999 was approximately $30 million of gains from disposal of $500 million in tax-exempt bonds in first quarter 1999. The sale of these bonds (and the reinvestment of proceeds in foreign source income securities) was part of a program designed to enable Aon to fully utilize foreign tax credits. The switch from tax-exempt to taxable bonds increased Aon's effective tax rate from 37.5% in first quarter 1999 to 38.25% in second quarter 1999. Less revenue from private equity investments and lower yields on corporate assets affected six months 1999 revenue growth. The timing of revenues from private equity investments varies significantly between periods. The goal is long-term yields from private equities which exceed long-term security market rates. Corporate and Other expenses for the quarter were $62 million, up $5 million from the same period last year. Six months 1999 expenses were $117 million, up $3 million from prior year. Expenses in this segment are composed of interest expense, goodwill amortization and general expenses. For the second quarter 1999, Corporate and Other expenses also included costs related to the launch of the Aon branding campaign. For the quarter and six months, interest expense and goodwill amortization increased over prior year, reflecting the financing of acquisitions made during the last twelve months. General expenses, excluding branding, were down somewhat, in line with expectations. - 15 - NET INCOME FOR SECOND QUARTER AND SIX MONTHS 1999 References to share data reflect the three-for-two stock split announced on March 19, 1999 and paid on May 17, 1999. Second quarter 1999 net income was $151 million ($0.57 dilutive per share) compared to $140 million ($0.54 dilutive per share) in 1998. Six months 1999 net income was $201 million ($0.76 dilutive per share) compared to $278 million ($1.07 dilutive per share) in 1998. Six months 1999 net income was primarily influenced by after-tax 1999 special charges of $102 million ($0.39 per share) with no comparable amount in six months 1998. Basic net income per share, including 1999 special charges, was $0.58 and $0.55 in second quarter 1999 and 1998, respectively, and $0.77 and $1.09 in six months 1999 and 1998, respectively. Dividends on the redeemable preferred stock have been deducted from net income to compute income per share. The effective tax rate was increased to 38.25% for second quarter 1999 from 37.5% in first quarter 1999 and 1998 as part of a program designed to enable Aon to fully utilize foreign tax credits by switching from tax-exempt to taxable bonds. Dilutive average shares outstanding for second quarter 1999 increased 2% when compared to 1998, primarily due to the reissuance of common shares from treasury for employee stock compensation benefits, increase in common stock equivalents and, to a lesser extent, for acquisition financing. CASH FLOW AND FINANCIAL POSITION AT THE END OF SIX MONTHS 1999 Cash flows provided by operating activities in six months 1999 were $357 million, a decrease of $427 million from six months 1998. The decrease primarily represents the timing of the settlement of brokerage receivables and payables and special charges in first quarter 1999. Investing activities used cash of $363 million, which was made available from financing and operating activities. Cash of $49 million was used during six months 1999 for the purchase of short-term investments. Cash used for acquisition activity during six months 1999 was $177 million, primarily reflecting brokerage acquisitions. Cash totaling $326 million was provided during six months 1999 from financing activities. This was primarily due to the issuance of $250 million of 6.9% debt securities in second quarter 1999. Cash was used to pay dividends of $100 million on common stock and $1 million on redeemable preferred stock during six months 1999. Aon's operating subsidiaries anticipate that there will be adequate liquidity to meet their needs in the foreseeable future. Aon's liquidity needs are primarily for servicing its debt and for the payment of dividends on stock issues and capital securities. The businesses of Aon's operating subsidiaries continue to provide substantial positive cash flow. Brokerage cash flow has been used primarily for acquisition financing. Aon anticipates continuation of the company's positive cash flow, the ability of the parent company to access adequate short-term lines of credit, and sufficient cash flow in the long term. - 16 - Due to the contractual nature of its insurance policyholder liabilities, which are intermediate to long-term in nature, Aon has invested primarily in fixed maturities. With a carrying value of $3 billion, Aon's total fixed maturity portfolio is invested primarily in investment grade holdings (95%) and has a fair value which is 99.5% of amortized cost. Total assets increased $1.3 billion to $21 billion since year-end 1998. Invested assets at June 30, 1999 decreased $94 million from year-end levels, principally reflecting declines in market value and the impact of foreign exchange rates. At June 30, 1999, less than investment grade fixed maturity investments had an amortized cost of $155 million and a fair value of $156 million. The carrying value of non-income producing investments in Aon's portfolio at June 30, 1999 was $36 million, or 0.6% of total invested assets. Aon uses derivative financial instruments (primarily financial futures, swaps, options and foreign exchange forwards) to: (a) hedge foreign currency translation and transaction risks and other business risks (i.e. interest rate and credit risk); (b) hedge asset price risk associated with financial instruments whose change in value is reported under SFAS 115; and (c) manage its overall asset/liability duration match. As of June 30, 1999, Aon had open contracts, related to the above, which had unrealized losses of approximately $8 million. Insurance brokerage and consulting services receivables increased $696 million when compared to year-end 1998. Insurance premiums payable increased $692 million in six months 1999, reflecting acquisitions and the receipt of client fiduciary funds. Short-term borrowings increased at the end of six months 1999 by $82 million when compared to year-end 1998. During second quarter 1999, short-term borrowings were reduced by proceeds from the 6.9% debt securities issuance (see below). The net increase in short-term borrowings, compared to year-end 1998, is principally due to the financing of acquisitions and other general corporate purposes. Notes payable increased at the end of six months 1999 by $234 million when compared to year-end 1998. The principal factor influencing this increase is the issuance of $250 million of 6.9% debt securities due June 2004 (see note 6). Included in notes payable at June 30, 1999 is approximately $105 million, which represents the principal amount of notes due within one year. Of this amount, approximately $100 million represents Aon's 6.875% debt securities, due October 1, 1999, which are anticipated to be redeemed at 100% of the principal amount plus accrued interest. Stockholders' equity increased $101 million in six months 1999 to $12.17 per share, an increase of $0.34 per share since year-end 1998. The principal factors influencing this increase were net income (which includes $102 million of after-tax special charges) and a $65 million reduction of the additional minimum pension liability due to the revaluation of the U.K. pension plans. Partially offsetting this increase were net unrealized investment losses of $100 million, net foreign exchange losses of $45 million and dividends to stockholders of $101 million. Unrealized investment gains and losses and foreign exchange gains and losses fluctuations from period to period are largely based on market conditions. YEAR 2000 READINESS DISCLOSURE Aon's State of Readiness - - - - - - - - - - - - - - - - - ------------------------ Aon is affected by both its own computer information systems and by third parties with which it has business relationships, in the processing of data relating to the Year 2000 and beyond. Aon began work on the computer Year 2000 issue in 1995 and expects to complete substantially all of its efforts by the end of third quarter 1999. In 1997, Aon designated a full-time Year 2000 project coordinator who established - 17 - Aon's Year 2000 project office to monitor the progress of and act as a central contact for its major business units worldwide. Year 2000 efforts under the direction of the Aon Executive Vice President of Business Systems Solutions are focused primarily on two areas: internal systems readiness and readiness of carriers with whom Aon places insurance business on behalf of its clients. Information Technology (IT) - - - - - - - - - - - - - - - - - --------------------------- In a corporate-wide Year 2000 readiness analysis completed in early 1998, individual business units were required to formally develop plans, where they had not already done so, to achieve Year 2000 compliance, and to provide their plans to the project office. Each plan consisted of an evaluation of the compliance status of internal IT systems and an identification of specific hardware and software compliance issues. As a result of this effort, the project office is currently tracking over 200 worldwide business unit plans. Each business unit is required to report its progress against its plan on a monthly basis to the project office. It is each business unit's responsibility to ensure that adequate testing of systems is performed to ensure Year 2000 functionality. The original readiness target date to remediate or replace most mission critical applications was December 31, 1998, with substantially all business units expected to be fully compliant by the end of third quarter 1999. Testing on some of these systems is continuing into the third quarter 1999. Business units have made good progress and are well along in the process of replacing or modifying applications found to be non-compliant. During January 1999, a business unit readiness review and risk assessment for each business unit was performed. Dates were established for internal audit reviews of test documentation for selected units. Business units were put on a watch list if any mission critical application replacement, remediation, or testing seemed to have a material risk of extending into third quarter 1999. Contingency plans are required for all major business units with mission critical systems on the watch list. An analysis of all newly acquired business units is completed immediately after acquisition and appropriate plans are put into action. Progress and concerns are reported to Aon's senior and business unit management. A written report was prepared for management for any business unit with a mission critical application on the watch list as of June 30, 1999. These applications will be tracked by the 2000 program office and reported to management monthly. Non-IT - - - - - - - - - - - - - - - - - ------ With respect to non-IT issues, a project coordinator is working with Aon's facilities management and third party leasing management company to ensure premises issues are addressed in Aon-owned and leased properties in the United States. Outside of the U.S., local chief financial officers have been instructed to make similar inquiries. The results of these efforts were reviewed for U.S. and European locations as of December 31, 1998. Some relatively minor problems were uncovered and are in the process of being fixed. The majority of the issues were with personal computer-based facility management systems. Aon has some risk on a location by location basis related to the possible failure of government agencies, public utilities and providers of telecommunication and transportation services. Due to Aon's dispersion of facilities, the largest concentrated risks in this regard are in the Chicago, New York and London locations. - 18 - Third Parties - - - - - - - - - - - - - - - - - ------------- Third parties having a material relationship with Aon have Year 2000 issues to address and resolve. Such third parties primarily include issuers of investment securities, financial institutions, governmental agencies, telecommunication companies, and insurance carriers. An aspect of the project is to identify these third parties and contact them to seek written assurance as to the third party's anticipation of being Year 2000 compliant. The nature of Aon's follow-up depends upon its assessment of the response and of the materiality of the effect of non-compliance by third parties on Aon. Significant third parties determined to be at risk for Year 2000 failure will be reported to appropriate Aon management for possible preemptive action to minimize adverse impact on Aon's operations. As of June 30, 1999, Aon is not aware of any significant third party with a Year 2000 issue that would materially impact Aon's results of operations, liquidity, or capital resources. However, Aon has no means of ensuring that such third parties will be Year 2000 ready. The inability of third parties to complete their Year 2000 remediation process in a timely fashion could materially impact Aon. The effect of non-compliance by third parties is not determinable. In 1998, Aon compiled information on and assessed the compliance status of insurance carriers with whom it places business on behalf of its clients. Questionnaires were sent to approximately 2,700 carriers worldwide. An intensive follow-up effort, focusing on U.S. carriers who receive the bulk of insurance placements by U.S. business units, produced a response rate of close to 100%. Aon is in the process of updating compliance status on all U.S. carriers. A similar update effort for significant non-U.S. carriers is being executed in London. Both efforts are expected to be completed by the end of August 1999. Costs to Address Aon's Year 2000 Issues Aon's Year 2000 remediation costs for all business units are projected to be approximately $70 million through December 31, 1999. As of June 30, 1999, Aon has incurred approximately $57 million related to all phases of the Year 2000 project. Virtually all of the total remaining project costs will be incurred and expensed in third quarter 1999. These costs are being funded through business unit operating cash flows. Risks of Aon's Year 2000 Issues Aon's management believes it has an effective program in place to resolve the Year 2000 issues in a timely manner. As noted above, Aon has not yet completed all necessary Year 2000 program activities for all mission critical applications for the 200 business units being tested. In addition, disruption in the economy generally resulting from Year 2000 issues could also materially adversely affect Aon. The amount of potential liability and lost revenue related to that disruption cannot be reasonably estimated at this time. With regard to non-compliance resulting from Aon's IT systems, Aon will devote its financial and personnel resources to remediate problems as soon as detected. With regard to non-compliance resulting from third party failure, Aon is in the process of determining, through responses and other appropriate action, where there is any material likelihood of non-compliance having a potentially material impact; however, the potential impact and related costs are not known at this time. Aon's Contingency Plans Contingency planning at Aon has two distinct components. First, all major business units require both a Millennium Event Plan and a Business Continuity Plan. These plans are being developed on a business unit basis and are scheduled for completion by September 30, 1999. Secondly, technical contingency plans have been successfully invoked for a number of business units to date. These include changing compliance strategies from replacement to remediation (and vice versa) and partial remediation to meet critical dates prior to January 1, 2000. The latter will require completion of full remediation in 1999. In - 19 - addition, preparations must be made for IT software and hardware that have Year 2000 "bugs" and that are not revealed until after December 31, 1999, despite testing. Aon anticipates handling these situations with immediate program fixes, swapped backup hardware or process work-around. Aon does not anticipate that problems of this nature will be significant due to thorough testing and the distributed nature of Aon's systems. REVIEW BY INDEPENDENT AUDITORS - - - - - - - - - - - - - - - - - ------------------------------ The condensed consolidated financial statements at June 30, 1999, and for the second quarter and six months then ended have been reviewed, prior to filing, by Ernst & Young LLP, Aon's independent auditors, and their report is included herein. - 20 - INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Stockholders Aon Corporation We have reviewed the accompanying condensed consolidated statement of financial position of Aon Corporation as of June 30, 1999, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 1999 and 1998, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated statement of financial position of Aon Corporation as of December 31, 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended, not presented herein, and in our report dated February 9, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived. /s/ ERNST & YOUNG LLP ---------------------- ERNST & YOUNG LLP Chicago, Illinois August 3, 1999 - 21 - PART II ------- OTHER INFORMATION ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The exhibits filed with this report are listed on the -------- attached Exhibit Index. (b) Reports on Form 8-K - No Current Reports on Form 8-K were filed for ------------------- the quarter ended June 30, 1999. SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Aon Corporation (Registrant) August 16, 1999 /s/ Harvey N. Medvin -------------------------------------------- HARVEY N. MEDVIN EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (Principal Financial and Accounting Officer) - 22 - Aon CORPORATION - - - - - - - - - - - - - - - - - --------------- Exhibit Number In Regulation S-K Item 601 Exhibit Table - - - - - - - - - - - - - - - - - ---------------------- (12) Statements regarding Computation of Ratios. (a) Statement regarding Computation of Ratio of Earnings to Fixed Charges. (b) Statement regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (15) Letter re: Unaudited Interim Financial Information (27) Financial Data Schedule - 23 - EX-12 2 COMPUTATION OF RATIOS OF EARNINGS - EXHIBIT 12A
Exhibit 12(a) Aon Corporation and Consolidated Subsidiaries Combined With Unconsolidated Subsidiaries Computation of Ratio of Earnings to Fixed Charges Six Months Ended June 30, Years Ended December 31, -------------- --------------------------------------- (millions except ratios) 1999 1998 1998 1997 1996 1995 1994 ------ ------ ------- ------ ------ ------- ------- Income from continuing operations before provision for income taxes (1) $ 356 $ 477 $ 931 $ 542 $ 446 $ 458 $ 397 Add back fixed charges: Interest on indebtedness 45 41 87 70 45 56 46 Interest on ESOP 1 2 2 3 4 5 6 Portion of rents representative of interest factor 25 22 51 44 29 21 29 ------ ------ ------- ------ ------ ------ ------ Income as adjusted $ 427 $ 542 $1,071 $ 659 $ 524 $ 540 $ 478 ====== ====== ======= ====== ====== ====== ====== Fixed charges: Interest on indebtedness $ 45 $ 41 $ 87 $ 70 $ 45 $ 56 $ 46 Interest on ESOP 1 2 2 3 4 5 6 Portion of rents representative of interest factor 25 22 51 44 29 21 29 ------ ------ ------- ------ ------ ------ ------ Total fixed charges $ 71 $ 65 $ 140 $ 117 $ 78 $ 82 $ 81 ====== ====== ======= ====== ====== ====== ====== Ratio of earnings to fixed charges 6.0 8.4 7.6 5.6 6.7 6.6 5.9 ====== ====== ======= ====== ====== ====== ====== Ratio of earnings to fixed charges (2) 8.3 7.1 7.9 ====== ====== ====== (1) Income from continuing operations before provision for income taxes and minority interest includes special charges of $163 million for the six months ended June 30, 1999, $172 million for the year ended December 31, 1997 and $90 million for the year ended December 31, 1996. (2) The calculation of this ratio of earnings to fixed charges reflects the exclusion of special charges from the income from continuing operations before provision for income taxes component for the six months ended June 30, 1999 and for the years ended December 31, 1997 and 1996.
EX-12 3 COMPUTATION OF RATIOS OF EARNINGS - EXHIBIT 12B
Exhibit 12(b) Aon Corporation and Consolidated Subsidiaries Combined With Unconsolidated Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Six Months Ended June 30, Years Ended December 31, ------------- ----------------------------------- (millions except ratios) 1999 1998 1998 1997 1996 1995 1994 ------ ------ ------ ------- ------ ------ ------ Income from continuing operations before provision for income taxes (1) $ 356 $ 477 $ 931 $ 542 $ 446 $ 458 $ 397 Add back fixed charges: Interest on indebtedness 45 41 87 70 45 56 46 Interest on ESOP 1 2 2 3 4 5 6 Portion of rents representative of interest factor 25 22 51 44 29 21 29 ------ ------ ------ ------ ------ ------ ------ Income as adjusted $ 427 $ 542 $1,071 $ 659 $ 524 $ 540 $ 478 ====== ====== ====== ====== ====== ====== ====== Fixed charges and preferred stock dividends: Interest on indebtedness $ 45 $ 41 $ 87 $ 70 $ 45 $ 56 $ 46 Preferred stock dividends 35 35 70 82 29 38 48 ------ ------ ------ ------ ------ ------ ------ Interest and dividends 80 76 157 152 74 94 94 Interest on ESOP 1 2 2 3 4 5 6 Portion of rents representative of interest factor 25 22 51 44 29 21 29 ------ ------ ------ ------ ------ ----- ------ Total fixed charges and preferred stock dividends $ 106 $ 100 $ 210 $ 199 $ 107 $ 120 $ 129 ====== ====== ====== ====== ====== ====== ====== Ratio of earnings to combined fixed charges and preferred stock dividends (2) 4.0 5.4 5.1 3.3 4.9 4.5 3.7 ====== ====== ====== ====== ====== ====== ====== Ratio of earnings to combined fixed charges and preferred stock dividends (3) 5.6 4.2 5.8 ====== ====== ====== (1) Income from continuing operations before provision for income taxes and minority interest includes special charges of $163 million for the six months ended June 30, 1999, $172 million for the year ended December 31, 1997 and $90 million for the year ended December 31, 1996. (2) Included in total fixed charges and preferred stock dividends are $32 million for the six months ended June 30, 1999 and 1998, $66 million for the year ended December 31, 1998 and $64 million for the year ended December 31, 1997, of pretax distributions on the 8.205% mandatorily redeemable preferred capital securities which are classified as "minority interest" on the condensed consolidated statements of operations. (3) The calculation of this ratio of earnings to fixed charges reflects the exclusion of special charges from the income from continuing operations before provision for income taxes component for the six months ended June 30, 1999 and for the years ended December 31, 1997 and 1996.
EX-15 4 UNAUDITED INTERIM FINANCIAL INFORMATION Exhibit 15 Board of Directors and Stockholders Aon Corporation We are aware of the incorporation by reference in the Registration Statements of Aon Corporation ("Aon") described in the following table of our report dated August 3, 1999 relating to the unaudited condensed consolidated interim financial statements of Aon Corporation that are included in its Form 10-Q for the quarter ended June 30, 1999: Registration Statement ---------------------- Form Number Purpose ---- ------ ------- S-8 33-27984 Pertaining to Aon's savings plan S-8 33-42575 Pertaining to Aon's stock award plan and stock option plan S-8 33-59037 Pertaining to Aon's stock award plan and stock option plan S-4 333-21237 Offer to exchange Capital Securities of Aon Capital A S-3 333-50607 Pertaining to the registration of 369,000 shares of common stock S-3 333-78723 Pertaining to the registration of debt securities, preferred stock and common stock Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statements prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. /s/ ERNST & YOUNG LLP ---------------------- ERNST & YOUNG LLP Chicago, Illinois August 3, 1999 EX-27 5 FDS -- 5
5 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 USD 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1.0 3,239 3,638 7,410 91 0 0 1,506 786 21,004 0 814 850 0 258 2,860 21,004 0 3,422 0 0 3,066 0 45 356 135 221 0 0 0 201 0.77 0.76 Includes short-term investments. Includes fixed maturities and equity securities at fair value. Not applicable based on current reporting format. Represents notes payable. Redeemable preferred stock. Includes Company-obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely the Company's Junior Subordinated Debentures. Adjusted to reflect three-for-two stock split effective May 4,1999. Represents total expenses.
-----END PRIVACY-ENHANCED MESSAGE-----