-----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, S+bPZAGnQww1Z0Z6rmNp6DPig/+AlofuFQK6duq1H5yBpqg6789Stnek6YU6epO8 UeiIB1aQMLzHmtxuyToQpw== 0000948572-97-000010.txt : 19970327 0000948572-97-000010.hdr.sgml : 19970327 ACCESSION NUMBER: 0000948572-97-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07933 FILM NUMBER: 97564106 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-K 1 AON CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) _ |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1996 OR _ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number: 1-7933 Aon CORPORATION (Exact Name of Registrant as Specified in its Charter) _______________ DELAWARE (State or Other Jurisdiction of 36-3051915 Incorporation or Organization) (I.R.S. Employer 123 NORTH WACKER DRIVE, Identification No.) CHICAGO, ILLINOIS 60606 (Address of Principal Executive Offices) (Zip Code) (312) 701-3000 (Telephone Number) _______________ Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- Common Stock, $1 par value New York Stock Exchange* 8% Cumulative Perpetual Preferred Stock New York Stock Exchange 6.875% Notes Due 1999 New York Stock Exchange 7.40% Notes Due 2002 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE *The Common Stock of the Registrant is also listed for trading on the Chicago Stock Exchange and The International Stock Exchange London. _______________ 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 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 |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements, incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 26, 1997 was $5,717,654,603. Number of shares of $1.00 par value Common Stock outstanding as of February 26, 1997: 110,945,346. Documents From Which Information Is Incorporated By Reference: Annual Report to Stockholders of the Registrant for the Year 1996 (Parts I, II and IV) Notice of Annual Meeting of Holders of Common Stock and Series C Cumulative Preferred Stock and Proxy Statement for Annual Meeting of Stockholders on April 18, 1997 of the Registrant (Part III) PART I ITEM 1. BUSINESS. The Registrant is a holding company comprised of two distinct segments: insurance brokerage and consulting services and insurance underwriting. Incorporated in 1979, it is the parent corporation of long-established and more recently formed companies. Aon Group, Inc., its subsidiaries and certain other indirect subsidiaries of the Registrant ("Aon Group"): Aon Risk Services Companies, Inc.;Aon Holdings bv; Aon Consulting Worldwide, Inc.; Aon Specialty Group, Inc.; Aon Re Worldwide, Inc.; and Nicholson Jenner Leslie Group Limited provide reinsurance intermediary services, benefits consulting and commercial insurance brokerage services. Aon Group revenues grew significantly in fiscal 1997 and 1996, respectively, when the Registrant acquired Alexander & Alexander Services Inc. in early 1997 and Bain Hogg Group plc in October 1996. Combined Insurance Company of America ("Combined Insurance") and Ryan Insurance Group, Inc. engage in the marketing of life and accident and health insurance products. Ryan Insurance Group, Inc.; Virginia Surety Company, Inc.; and London General Insurance Company Limited offer extended warranty and specialty insurance products. In second quarter 1996, the Registrant and Combined Insurance sold two of Combined Insurance's insurance subsidiaries, Union Fidelity Life Insurance Company ("UFLIC") and The Life Insurance Company of Virginia ("LOV"). In second quarter 1996, Ryan Insurance Group, Inc. sold its North American auto credit underwriting and distribution businesses, including the distribution of auto extended warranty products. The Registrant hereby incorporates by reference pages 6 through 15 of the Annual Report to Stockholders of the Registrant for the Year 1996 ("Annual Report"). Competition and Industry Position (1) INSURANCE BROKERAGE AND CONSULTING SERVICES Aon Group, Inc. ("Aon Group"); Aon Risk Services Companies, Inc. ("Aon Risk Services Companies"); Alexander & Alexander Services Inc. ("A&A"); Aon Holdings bv ("Aon Holdings"); Aon Specialty Group, Inc. ("Aon Specialty Group"); Aon Consulting Worldwide, Inc. ("Aon Consulting"); Aon Re Worldwide,Inc. ("Aon Re"); Nicholson Jenner Leslie Group Limited ("Nicholson Jenner Leslie"); and Bain Hogg Group plc ("Bain Hogg"). Aon Group,is the holding company for the Registrant's commercial brokerage and consulting operation. Aon Group is the fastest growing global insurance brokerage and consulting services firm in the world. The Aon Group companies have more than 400 owned offices around the world in approximately 60 countries. In 1996, Aon Group employed approximately 20,000 professionals and support personnel to serve the diverse needs of clients. Aon Risk Services Companies' (formerly Rollins Hudig Hall Co.), A&A's and Bain Hogg's subsidiaries operate in a highly competitive industry and compete with a large number of retail insurance brokerage and agency firms as well as individual brokers and agents and direct writers of insurance coverage. Aon Risk - 2 - Services Companies' subsidiaries offer comprehensive services to clients including insurance placement, specialized brokerage services, program development and administration, premium financing services, risk management and loss-control consulting. It has also developed certain specialist niche areas such as marine, aviation, directors and officers liability, financial institutions, construction, energy, media and entertainment. Aon Holdings (formerly Rollins Hudig Hall Holdings bv) traces its commercial broking roots to 1688 and is one of the premier brokers in Continental Europe with approximately 3,500 employees and subsidiaries in more than 30 countries. Subsidiaries of Aon Risk Services Companies, Aon Holdings, A&A and Bain Hogg operate through owned offices in North America and Europe, as well as in South America, Africa, Australia and Asia. In 1996, Aon Holdings subsidiaries opened offices in Australia, Germany, France, Portugal, The Netherlands, South Africa, Singapore, New Zealand, Norway and Finland. The acquisitions of A&A and Bain Hogg will significantly augment the Registrant's presence in Latin America, Asia, Africa and Australia. Aon Specialty Group addresses the highly specialized product development, consulting and administrative needs of professional groups, service businesses, governments, health-care providers and commercial organizations. It also provides underwriting management skills, claims and risk management expertise, and third-party administration services to insurance companies. Aon Specialty Group operating subsidiaries market and broker both the primary and reinsurance risks of these programs. For individuals and busineses, ASG provides affinity products for professional liability, life and personal lines. Subsidiaries of Aon Consulting (formerly Godwins International, Inc.) and the European benefits operations of Aon Holdings serve the employee benefit needs of clients around the world. Aon Consulting is one of the world's largest integrated human resources consulting organizations. Focusing on the increasing demand for outsourcing solutions, Aon Consulting targets emerging businesses, IPO's, recent mergers or acquisitions and corporations that are reengineering staff functions. In the United States, the benefits environment continues to change as companies look for ways to manage their benefits costs while increasing the choices offered to their employees. Aon Consulting, with its expertise in all areas of benefits and compensation, and its access to the Registrant's other subsidiaries, is well-positioned to serve this market. Aon Consulting subsidiaries offer services to clients including organizational analysis and HR strategic planning, recruitment and selection, benefits design and management training and development. Benefits issues in foreign countries are becoming more complicated, and Aon Holdings and Aon Consulting anticipate increased demand for their services in these markets. Aon's reinsurance brokerage activities are organized under Aon Re. With the acquisitions of A&A and Bain Hogg, Aon Re is a global leader in the reinsurance and specialist brokerage industry. Aon Re serves the alternative market with reinsurance placement, alternative risk services, captive management services and catastrophe information forecasting. Nicholson Jenner Leslie is a London-based Lloyd's broker that places wholesale and reinsurance business in the London and international markets and serves the needs of a wide range of clients around the world. A majority of Nicholson Jenner Leslie's revenue is derived from sources unaffiliated with Aon. - 3 - (2) INSURANCE UNDERWRITING Combined Insurance Company of America ("Combined Insurance"); Combined Life Insurance Company of New York ("CLICNY");Virginia Surety Company, Inc. ("VSC"); London General Insurance Company Limited ("London General") and Aon Warranty Group,Inc.("Aon Warranty"). In April 1996, the Registrant and Combined Insurance Combined Insurance completed the sales of Combined Insurance's direct response life and health subsidiary, Union Fidelity Life Insurance Company ("UFLIC"), and Combined Insurance's capital accumulation insurance subsidiary, The Life Insurance Company of Virginia ("LOV"). The Registrant's insurance underwriting subsidiaries are part of a highly competitive industry that serves individual consumers in North America, Europe, Latin America and the Pacific by providing accident and health coverage, traditional life insurance and, extended warranties through global distribution networks that are directly owned by the Registrant's subsidiaries. The accident and health distribution network encompasses primarily the agents of Combined Insurance. With more than five million policyholders, Combined Insurance has more individual accident and health policies in force than any other United States company. Combined Insurance, the Registrant's principal accident and health insurer, has a direct sales force of several thousand career agents calling on individuals to sell a broad spectrum of accident and health products. It is one of the few companies with agents that call on customers every six months to renew coverage and to sell additional coverage. Combined Insurance offers a wide range of accident-only and sickness-only insurance products, including short-term disability, cancer aid, Medicare supplement and disability income coverage. Combined Insurance's products are primarily fixed indemnity obligations, thereby not subject to escalating medical costs. Combined Insurance offers a simplified accident and sickness long-term disability policy. In addition, to its traditional business, Combined Insurance is expanding its product distribution through payroll deduction, worksite marketing programs. Combined Insurance and its wholly-owned subsidiary CLICNY (which operates exclusively in the State of New York) market whole life products through direct sales career agents in the United States. Combined Insurance ranked among the top 100 life insurance companies in the United States in terms of total life premiums in 1995. Life insurance business is conducted by the Registrant's life insurance subsidiaries in the United States, Canada, Ireland, Germany, and New Zealand. The Registrant's extended warranty and specialty insurance business, conducted by subsidiaries VSC in North America and London General in Europe, is composed primarily of extended warranty insurance products, professional liability insurance coverages, workers' compensation and specialty financial institution coverages. VSC and London General continue to be one of the world's largest underwriters of consumer extended warranties. The automobile warranty products are sold in the United States, Canada, the United Kingdom, Ireland, France, The Netherlands, Belgium, Spain and Japan. Aon Warranty Group handles the administration of certain extended warranty products on automobiles, electronic goods, personal computers and appliances. It serves manufacturers, distributors and retailers of major worldwide consumer product and financial institutions, associations and affinity groups in North America and Europe. In second quarter 1996, Aon completed the sale of its North American auto credit underwriting and distribution operations, including the distribution of auto extended warranties throughout North America. The extended warranty products will continue to be underwritten by VSC. - 4 - (3) DISCONTINUED OPERATIONS The Life Insurance Company of Virginia ("LOV") and Union Fidelity Life Insurance Company ("UFLIC"). In April 1996, the Registrant and Combined Insurance completed the sales of Combined Insurance's subsidiaries, LOV and UFLIC. The business written by LOV primarily included capital accumulation products and some other life products. UFLIC operated in the United States in the highly competitive direct response life and health marketing segment of the industry. LICENSING AND REGULATION Insurance companies must comply with laws and regulations of the jurisdictions in which they do business. These laws and regulations are designed to ensure financial solvency of insurance companies and to require fair and adequate service and treatment for policyholders. They are enforced by the states in the United States, by industry self-regulating agencies in the United Kingdom, and by various regulatory agencies in other countries through the granting and revoking of licenses to do business, licensing of agents, monitoring of trade practices, policy form approval, minimum loss ratio requirements, limits on premium and commission rates, and minimum reserve and capital requirements. Compliance is monitored by the state insurance departments through periodic regulatory reporting procedures and periodic examinations. The quarterly and annual financial reports to the regulators in the United States utilize accounting principles which are different from the generally accepted accounting principles used in stockholders' reports. The statutory accounting principles, in keeping with the intent to assure the protection of policyholders, are based, in general, on a liquidation concept while generally accepted accounting principles are based on a going-concern concept. The state insurance regulators are members of the National Association of Insurance Commissioners ("NAIC"). This Association seeks to promote uniformity of, and to enhance the state regulation of, insurance. Both the NAIC and the individual states continue to focus on the solvency of insurance companies. This focus is reflected in additional regulatory oversight by the states and emphasis on the enactment or adoption of a series of NAIC model laws and regulations designed to promote solvency. The increase in any solvency-related oversight by the states is not expected to have any significant impact on the insurance business of the Registrant. Several years ago, the NAIC developed a formula for analyzing insurers called risk-based capital ("RBC"). RBC is intended to establish "minimum" capital threshold levels that vary with the size and mix of a company's business. It is designed to identify companies with the capital levels that may require regulatory attention. RBC does not have any significant impact on the insurance business of the Registrant. Insurance companies are generally not subject to any federal regulation of their insurance business because of the existence of a federal law commonly known as the McCarran-Ferguson Act. McCarran-Ferguson provides the insurance industry with immunity from certain aspects of the federal anti-trust law and exempts the business of insurance from federal regulation. In the past several years there have been a number of recommendations that McCarran-Ferguson be repealed entirely or modified to remove the industry's anti-trust exemption and subject it to federal regulation. If McCarran-Ferguson were to be repealed or modified, state regulation of the insurance business would continue. The result could be an additional layer of federal regulation. The Registrant expects that any repeal of anti-trust exemptions available to insurers under the McCarran-Ferguson Act would not have a significant impact on its operations. - 5 - The state insurance holding company laws require prior notice to and approval of the domestic state insurance department of intracorporate transfers of assets within the holding company structure, including the payment of dividends by insurance company subsidiaries. In addition, the premium finance loans by Cananwill, Inc., an indirect wholly-owned subsidiary of the Registrant, are subject to one or more of truth-in-lending and credit regulations, insurance premium finance acts, retail installment sales acts and other similar consumer protection legislation. Failure to comply with such laws or regulations can result in the temporary suspension or permanent loss of the right to engage in business in a particular jurisdiction as well as other penalties. Regulatory authorities in the states in which the operating subsidiaries of Aon Group conduct business may require individual or company licensing to act as brokers, agents, third party administrators, managing general agents, reinsurance intermediaries or adjusters. Under the laws of most states, regulatory authorities have relatively broad discretion with respect to granting, renewing and revoking brokers' and agents' licenses to transact business in the state. The manner of operating in particular states may vary according to the licensing requirements of the particular state, which may require, among other things, that a firm operate in the state through a local corporation. In a few states, licenses are issued only to individual residents or locally-owned business entities. In such cases, Aon Group subsidiaries have arrangements with residents or business entities licensed to act in the state. In 1996 the federal Health Care Insurance Portability and Accountability Act of 1996 was enacted. The Act requires the states to take action to implement the requirements of the Act or to become subject to federal oversight. The Registrant does not believe tht the state action required by the Act will materially affect the business of the Registrant's subsidiaries. In addition, federal laws mandating specific prectices by medical insurers have recently been enacted from which, because of the nature of the business of the Registrant's subsidiaries, the Registrant's subsidiaries are exempt. Numerous states have had legislation introduced to reform the health care system and such legislation has passed in several states. While it is impossible to forecast the precise nature of future state health care changes, the Registrant does not expect a major impact on its operations because of the supplemental nature of most of the policies issued by its insurance subsidiaries and because the coverages are primarily purchased to provide, on a fixed-indemnity basis, protection against loss-of-time or disability benefits. If health care reform does not provide for a significant role for insurance companies currently writing primary medical coverage, the Registrant expects that some of those companies would increase their participation in other segments of the insurance underwriting business, perhaps heightening the competition with Combined Insurance. Combined Insurance and its subsidiaries currently operate successfully in several foreign countries which have national health plans in effect. Clientele No significant part of the Registrant's or its subsidiaries' business is dependent upon a single client or on a few clients, the loss of any one of which would have a material adverse effect on the Registrant. Employees The Registrant's subsidiaries had approximately 28,000 employees at the end of 1996 of whom approximately three-fourths are salaried and hourly employees and the remaining one-fourth are sales representatives who are generally compensated wholly or primarily by commission. - 6 - ITEM 2. PROPERTIES. The Registrant's subsidiaries own and occupy office buildings in eight states and certain foreign countries, and lease office space elsewhere in the United States and in various foreign cities. Loss of the use of any owned or leased property, while potentially disruptive, would have no material impact on the Registrant. ITEM 3. LEGAL PROCEEDINGS. The Registrant hereby incorporates by reference note 12 of the Notes to Consolidated Financial Statements on page 40 of the Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Executive Officers of the Registrant Executive officers of the Registrant are regularly elected by its Board of Directors at the annual meeting of the Board which is held following each annual meeting of the stockholders of the Registrant. The executive officers of the Registrant were elected to their current positions on April 19, 1996 to serve until the meeting of the Board following the annual meeting of stockholders on April 18, 1997. Ages shown are as of December 31, 1996. For information concerning certain executive officers of the Registrant, see item 10 below. As of March 26, 1997, the following individuals are also executive officers of the Registrant as defined in Rule 16a-1(f): - 7 - Has Continuously Served as an Officer of Registrant or Name, Age, and One or Current Office More of its or Principal Subsidiaries Business Experience Position Since Past 5 years - -------------- -------------------- ---------------- Harvey N. Medvin, 60 1972 Mr. Medvin became Vice President Executive Vice President, and Chief Financial Officer of Chief Financial Officer the Registrant in 1982 and was and Treasurer elected to his current position in 1987. He also serves as a Director or Officer of certain of the Registrant's subsidiaries. Daniel T. Cox, 50 1986 Mr. Cox was elected to his Executive Vice President current position in 1991 and, prior to their sale, had served as Chairman and Chief Executive Officer of LOV since 1988 and of Union Fidelity since 1989. Mr. Cox had headed the Registrant's benefits consulting operation since 1987. He also serves as Director or Officer of certain of the Registrant's subsidiaries. Michael A. Conway, 49 1990 Mr. Conway was Vice President of Senior Vice President and Combined Insurance from 1980 to Senior Investment Officer 1984. Following other employment, Mr. Conway rejoined the Registrant in 1990 as Senior Vice President of Combined Insurance and was elected to his current position in 1991. He also serves as Director or Officer of certain of the Registrant's subsidiaries. Michael D. O'Halleran, 46 1987 Mr. O'Halleran was appointed President and Chief Operating President and Chief Operating Officer of Aon Group, Inc. Officer of Aon Group, Inc.in 1995. Prior thereto, since joining the Registrant in 1987, he held a variety of senior positions in the Registrant's insurance and reinsurance brokerage business. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. The Registrant's $1.00 par value common shares ("Common Shares") are traded on the New York, Chicago and London stock exchanges. The Registrant hereby incorporates by reference the "Dividends paid per share" and "Price range" data on page 43 of the Annual Report. The Registrant had approximately 12,900 holders of record of its Common Shares as of February 26, 1997. The Registrant hereby incorporates by reference note 8 of the Notes to Consolidated Financial Statements on pages 34 and 35 of the Annual Report. ITEM 6. SELECTED FINANCIAL DATA. The Registrant hereby incorporates by reference the "Selected Financial Data" table on page 42 of the Annual Report. - 8 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Registrant hereby incorporates by reference "Management's Analysis of Operating Results and Financial Condition" on pages 17 through 23 of the Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Registrant hereby incorporates by reference the following statements, notes and data from the Annual Report. Page(s) ------- Consolidated Financial Statements ........................... 24-28 Notes to Consolidated Financial Statements................... 29-40 Report of Ernst & Young LLP, Independent Auditors............ 41 Quarterly Financial Data .................................. 43 ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. - 9 - PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Registrant hereby incorporates by reference the information on pages 3 and 7 of the Notice of Annual Meeting of Holders of Common Stock and Series C Preferred Stock and Proxy Statement For Annual Meeting of the Stockholders on April 18, 1997, of the Registrant ("Proxy Statement") concerning the following Directors of the Registrant, each of whom also serves as an executive officer of the Registrant as defined in Rule 16a-1(f): Patrick G. Ryan and Raymond I. Skilling. Information concerning additional executive officers of the Registrant is contained in Part I hereof, pursuant to General Instruction G(3) and Instruction 3 to Item 401(b) of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION. The Registrant hereby incorporates by reference the information under the headings "Executive Compensation," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Option Grants in 1996 Fiscal Year" and "Pension Plan Table" on pages 12 through 15 of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The Registrant hereby incorporates by reference the share ownership data contained on pages 2, 8 and 9 of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Registrant hereby incorporates by reference the information under the heading "Transactions With Management" on page 20 of the Proxy Statement. - 10 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) and (2). The Registrant has incorporated by reference from the Annual Report (see Item 8) the following consolidated financial statements of the Registrant and subsidiaries: Annual Report Page(s) ------- Consolidated Statements of Financial Position-- As of December 31, 1996 and 1995 24-25 Consolidated Statements of Income -- Years Ended December 31, 1996, 1995 and 1994 26 Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1996, 1995 and 1994 27 Consolidated Statements of Cash Flows -- Years Ended December 31, 1996, 1995 and 1994 28 Notes to Consolidated Financial Statements 29-40 Report of Ernst & Young LLP, Independent Auditors 41 Financial statement schedules of the Registrant and consolidated subsidiaries not included in the Annual Report but filed herewith: Consolidated Financial Statement Schedules -- ________________________________________________________________________________ Schedule -------- Summary of Investments -- Other than Investments in Related Parties I Parent Company Condensed Financial Statements II Supplementary Insurance Information III Reinsurance IV Valuation and Qualifying Accounts V Schedule VI is omitted as it is immaterial (a)(3). Exhibits (a) Second Restated Certificate of Incorporation of the Registrant-- incorporated by reference to Exhibit 3(a) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1991 (the "1991 Form 10-K"). (b) Certificate of Amendment of the Registrant's Second Restated Certificate of Incorporation -- incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (the "First Quarter 1994 Form 10-Q"). (c) Bylaws of the Registrant -- incorporated by reference to Exhibit (d) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1982 (the "1982 Form 10-K"). - 11 - (d) Indenture dated September 15, 1992 between the Registrant and Continental Bank Corporation (now known as Bank of America Illinois), as Trustee -- incorporated by reference to Exhibit 4(a) to the Registrant's Current Report on Form 8-K dated September 23, 1992. (e) Resolutions establishing terms of 6.875% Notes Due 1999 and 7.40% Notes Due 2002 -- incorporated by reference to Exhibit 4(d) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1992 (the "1992 Form 10-K"). (f) Resolutions establishing the terms of 6.70% Notes Due 2003 and 6.30% Notes Due 2004 incorporated by reference to Exhibits 4(c) and 4(d) of the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1993 (the "1993 Form 10-K"). (g) Certificate of Designation for the Registrant's 8% Cumulative Perpetual Preferred Stock, $1.00 par value -- incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992 (the "Third Quarter 1992 Form 10-Q"). (h) Certificate of Designation for the Registrant's Series C Cumulative Preferred Stock --- incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 9, 1994. (i) Registration Rights Agreement dated November 2, 1992 by and between the Registrant and Frank B. Hall & Co. Inc. -- incorporated by reference to Exhibit 4(c) to the Third Quarter 1992 Form 10-Q. (j) Registration rights agreement by and among the Registrant and certain affiliates of Ryan Insurance Group, Inc. (including Patrick G. Ryan and Andrew J. McKenna) -- incorporated by reference to Exhibit (f) to the 1982 Form 10-K. (k) Deferred Compensation Agreement by and among the Registrant and Registrant's directors who are not salaried employees of Registrant or Registrant's affiliates -- incorporated by reference to Exhibit 10(i) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1987 (the "1987 Form 10-K"). (l) Amendment and Waiver Agreement dated as of November 4, 1991 among the Registrant and each of Patrick G. Ryan, Shirley Ryan, Ryan Enterprises Corporation and Harvey N. Medvin -- incorporated by reference to Exhibit 10(j) to the 1991 Form 10-K. (m) Statement regarding Computation of Per Share Earnings. (n) Statement regarding Computation of Ratio of Earnings to Fixed Charges. (o) Statement regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (p) Aon Corporation 1994 Amended and Restated Outside Director Stock Award Plan -- incorporated by reference to Exhibit 10(b) to the First Quarter 1994 Form 10-Q. (q) Annual Report to Stockholders of the Registrant for the year ended December 31, 1996 (for information, and not to be deemed filed, except for those portions specifically incorporated by reference herein). (r) List of subsidiaries of the Registrant. - 12 - (s) Consent of Ernst & Young LLP to the incorporation by reference into Aon's Annual Report on Form 10-K of its report included in the 1996 Annual Report to Stockholders and into Aon's Registration Statement Nos. 33-27984, 33-42575, 33-57562, 33-59037 and 333-21237. (t) Annual Report to the Securities and Exchange Commission on Form 11-K for the Aon Savings Plan for the year ended December 31, 1996 -- to be filed by amendment as provided in Rule 15d-21(b). (u) Executive Compensation Plans and Arrangements: (A) Aon Stock Option Plan -- incorporated by reference to Exhibit 10(a) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K"). (B) First Amendment to Aon Stock Option Plan -- incorporated by reference to Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (the "Second Quarter 1994 Form 10-Q"). (C) Second Amendment to Aon Stock Option Plan -- incorporated by reference to Exhibit 10(c) to the Second Quarter 1994 Form 10-Q. (D) 1994 Restatement of Aon Savings Plan-- incorporated by reference to Exhibit 10(f) of the 1994 Form 10-K. (E) 1994 Restatement of Aon Employee Stock Ownership Plan -- incorporated by reference to Exhibit 10(g) of the 1994 Form 10-K. (F) Ryan Insurance Group, Inc. Stock Option Plan together with Stock Option Assumption Agreement providing for amendment of the plan -- incorporated by reference to Exhibit 4(b) to Registration Statement No. 2-79114 on Form S-8. (G) Aon Stock Award Plan, as amended -- incorporated by reference to Exhibit 10(a) to the First Quarter 1994 Form 10-Q. (H) First Amendment to the Aon Stock Award Plan -- incorporated by reference to Exhibit 10(b) to the Second Quarter 1994 Form 10-Q. (I) Second Amendment to Aon Stock Award Plan -- incorporated by reference to Exhibit 10(d) to the Second Quarter 1994 Form 10-Q. (J) 1994 Restatement of Aon Pension Plan-- incorporated by reference to Exhibit 10(h) of the 1994 Form 10-K. (K) Aon Corporation 1995 Senior Officer Incentive Compensation Plan incorporated by reference to Exhibit 10(p) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"). (L) Aon Deferred Compensation Plan and First Amendment to the Aon Deferred Compensation Plan -- incorporated by reference to Exhibit 10(q) of the 1995 Form 10-K. (v) Asset Purchase Agreement dated July 24, 1992 between the Registrant and Frank B. Hall & Co. Inc. -- incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1992. - 13 - (w) Stock Purchase Agreement by and among the Registrant, Combined Insurance Company of America, Union Fidelity Life Insurance Company and General Electric Capital Corporation dated as of November 11, 1995 -- incorporated by reference to Exhibit 10(s) of the 1995 Form 10-K. (x) Stock Purchase Agreement by and among the Registrant; Combined Insurance Company of America; The Life Insurance Company of Virginia; Forth Financial Resources, Ltd.; Newco Properties, Inc.; and General Electric Capital Corporation dated as of December 22, 1995 -- incorporated by reference to Exhibit 10(t) of the 1995 Form 10-K. (y) Agreement and Plan of Merger among the Registrant; Subsidiary Corporation, Inc. ("Purchaser"); and Alexander & Alexander Services Inc. ("A&A") dated as of December 11, 1996 -- incorporated by reference to Exhibit (c)(1) of the Registrant's Tender Offer Statement on Schedule 14D-1 filed by the Registrant with the Securities and Exchange Commission ("SEC") on December 16, 1996 (the "Schedule 14D-1") (z) First Amendment to Agreement and Plan of Merger, dated as of January 7, 1997, among the Registrant, Purchaser and A&A -- incorporated by reference to Exhibit (c)(3) to the Schedule 14D-1 filed by the Registrant with the SEC on January 9, 1997. (b) Reports on Form 8-K. The Registrant filed no Current Reports on Form 8-K during the last quarter of the Registrant's year ended December 31, 1996. - 14 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of March, 1997. Aon Corporation By /s/PATRICK G. RYAN --------------------------------------- Patrick G. Ryan, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/PATRICK G. RYAN Chairman, President, Chief March 26, 1997 - ---------------------------- Executive Officer and Director Patrick G. Ryan (Principal Executive Officer) /s/DANIEL T. CARROLL Director March 26, 1997 - ---------------------------- Daniel T. Carroll /s/FRANKLIN A. COLE Director March 26, 1997 - ---------------------------- Franklin A. Cole /s/EDGAR D. JANNOTTA Director March 26, 1997 - ---------------------------- Edgar D. Jannotta /s/PERRY J. LEWIS Director March 26, 1997 - ---------------------------- Perry J. Lewis /s/JOAN D. MANLEY Director March 26, 1997 - ---------------------------- Joan D. Manley - 15 - /s/ANDREW J. MCKENNA Director March 26, 1997 - ---------------------------- Andrew J. McKenna Director - ---------------------------- Newton N. Minow /s/PEER PEDERSEN Director March 26, 1997 - ---------------------------- Peer Pedersen /s/DONALD S. PERKINS Director March 26, 1997 - ---------------------------- Donald S. Perkins /s/JOHN W. ROGERS, JR. Director March 26, 1997 - ---------------------------- John W. Rogers, Jr. /s/GEORGE A. SCHAEFER Director March 26, 1997 - ---------------------------- George A. Schaefer /s/RAYMOND I. SKILLING Director March 26, 1997 - ---------------------------- Raymond I. Skilling /s/FRED L. TURNER Director March 26, 1997 - ---------------------------- Fred L. Turner /s/ARNOLD R. WEBER Director March 26, 1997 - ---------------------------- Arnold R. Weber /s/HARVEY N. MEDVIN Executive Vice President, March 26, 1997 - ---------------------------- Chief Financial Officer Harvey N. Medvin and Treasurer (Principal Financial and Accounting Officer) - 16 -
SCHEDULE I Aon Corporation and Subsidiaries CONSOLIDATED SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1996 Amount shown in Statement (millions) Amortized Fair of Financial Cost Value Position ----------- ----------- ----------- Fixed Maturities - available for sale: US government and agencies ........................... $ 45.4 $ 47.1 $ 47.1 States and political subdivisions .................... 491.1 514.2 514.2 Debt securities of foreign governments not classified as loans ......................... 948.2 989.9 989.9 Corporate securities ................................. 976.0 1,021.6 1,021.6 Public utilities ..................................... 79.7 81.0 81.0 Mortgage-backed securities ........................... 63.6 65.3 65.3 Other fixed maturities ............................... 110.6 107.0 107.0 ----------- ----------- ----------- TOTAL FIXED MATURITIES........................... 2,714.6 2,826.1 2,826.1 ----------- ----------- ----------- Equity securities - available for sale: Common stocks: Banks, trusts, and insurance companies ............... 201.7 255.7 255.7 Industrial, miscellaneous, and all other ............. 70.3 138.1 138.1 Nonredeemable preferred stocks ....................... 479.0 485.4 485.4 ----------- ----------- ----------- TOTAL EQUITY SECURITIES ......................... 751.0 $ 879.2 879.2 ----------- ----------- ----------- Mortgage loans on real estate ............................. 29.7* 29.0* Real estate - net of depreciation ......................... 17.8 17.8 Policy loans .............................................. 58.2 58.2 Other long-term investments ............................... 141.4* 136.2* Short-term investments .................................... 1,266.3 1,266.3 ----------- ----------- TOTAL INVESTMENTS .......................... $ 4,979.0 $ 5,212.8 =========== =========== * Differences between amortized cost and amounts shown in Statements of Financial Position for investments other than fixed maturity and equity securities result from certain valuation allowances.
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SCHEDULE II Aon Corporation (Parent Company) CONDENSED STATEMENTS OF FINANCIAL POSITION As of December 31, ------------------------- (millions) 1996 1995 ----------- ----------- ASSETS Investments in subsidiaries .......................................... $ 3,268.9 $ 3,617.2 Notes receivable - subsidiaries ...................................... 482.6 468.2 Cash and cash equivalents............................................. 216.9 2.1 Other assets ......................................................... 34.4 6.6 ----------- ----------- Total Assets .................................................... $ 4,002.8 $ 4,094.1 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Short-term borrowings ................................................ $ 213.4 $ 352.7 6.3% long-term debt securities ....................................... 99.8 99.7 7.4% long-term debt securities ....................................... 99.9 99.8 6.875% long-term debt securities ..................................... 99.9 99.8 6.7% long-term debt securities ....................................... 149.7 149.7 Notes payable - subsidiaries ......................................... 351.4 457.0 Notes payable - other ................................................ -- 15.7 Debt guarantee of employee stock ownership plan ...................... 46.1 56.8 Accrued expenses and other liabilities ............................... 59.7 39.2 ----------- ----------- Total Liabilities ............................................... 1,119.9 1,370.4 ----------- ----------- Redeemable Preferred Stock ........................................... 50.0 50.0 STOCKHOLDERS' EQUITY Preferred stock ...................................................... 5.5 8.1 Common stock ......................................................... 114.1 111.4 Paid-in additional capital ........................................... 475.4 431.8 Net unrealized investment gains of subsidiaries ...................... 153.1 123.1 Net foreign exchange gains of subsidiaries ........................... 1.0 1.8 Retained earnings .................................................... 2,356.8 2,212.1 Less treasury stock at cost .......................................... (121.5) (97.3) Less deferred compensation ........................................... (151.5) (117.3) ----------- ----------- Total Stockholders' Equity ...................................... 2,832.9 2,673.7 ----------- ----------- Total Liabilities and Stockholders' Equity ...................... $ 4,002.8 $ 4,094.1 =========== =========== See notes to condensed financial statements.
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SCHEDULE II (Continued) Aon Corporation (Parent Company) CONDENSED STATEMENTS OF INCOME Years ended December 31 --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (millions) REVENUE Dividends from subsidiaries .......................... $ 1,026.6 $ 199.3 $ 166.2 Other investment income .............................. 44.1 34.3 34.8 Realized investment losses ........................... (11.0) (4.1) -- ----------- ----------- ----------- Total Revenue ................................... 1,059.7 229.5 201.0 EXPENSES Operating and administrative ......................... 5.7 3.0 2.3 Interest - subsidiaries ............................... 20.6 20.0 12.2 Interest - other ...................................... 43.2 53.6 45.1 ----------- ----------- ----------- Total Expenses (1)................................ 69.5 76.6 59.6 ----------- ----------- ----------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES ....................................... 990.2 152.9 141.4 Equity in undistributed income of subsidiaries ............. (655.0) 249.9 218.6 ----------- ----------- ----------- NET INCOME ............................................ 335.2 402.8 360.0 =========== =========== =========== See notes to condensed financial statements. (1) Interest expense - other allocated to discontinued operations was $5 million, $18 million and $14 million for the years ended December 31, 1996, 1995 and 1994, respectively.
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SCHEDULE II (Continued) Aon Corporation (Parent Company) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31 --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (millions) Cash Flows From Operating Activities ...................... $ 1,016.9 $ 164.5 $ 164.1 Cash Flows From Investing Activities: Investments in subsidiaries .......................... (319.3) (62.6) (31.3) Notes receivables from subsidiaries .................. (10.8) 1.5 (15.5) ----------- ----------- ----------- Cash Used by Investing Activities ............... (330.1) (61.1) (46.8) ----------- ----------- ----------- Cash Flows From Financing Activities: Treasury stock transactions - net .................... (40.1) (46.4) (15.4) Issuance (repayment) of short-term borrowings - net .. (139.2) 108.8 75.3 Issuance of notes payable and long-term debt ......... -- 73.6 174.5 Repayment of notes payable and long-term debt ........ (105.6) -- (125.0) Retirement of preferred stock ........................ (14.2) (75.4) (58.3) Cash dividends to stockholders ....................... (172.9) (171.3) (162.3) ----------- ----------- ----------- Cash Used by Financing Activities ............... (472.0) (110.7) (111.2) ----------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents .......... 214.8 (7.3) 6.1 Cash and Cash Equivalents at Beginning of Year ............ 2.1 9.4 3.3 ----------- ----------- ----------- Cash and Cash Equivalents at end of Year .................. $ 216.9 $ 2.1 $ 9.4 =========== =========== =========== See notes to condensed financial statements.
- 20 - SCHEDULE II (Continued) Aon Corporation (Parent Company) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. See notes to consolidated financial statements incorporated by reference from the Annual Report. 2. Cash and cash equivalents on the condensed statements of financial position include short-term investments. 3. Payments made as assessments by state guaranty funds to cover losses to policyholders of insurance companies under regulatory supervision for the years ended December 31, 1996, 1995 and 1994 were $1.4 million, $5 million and $6.9 million, respectively. In addition, Aon's reserve for the recognition of probable assessments for known industry insolvencies was $0 million and $7 million at December 31, 1996 and 1995, respectively. 4. Generally, the net assets of Aon's insurance subsidiaries available for transfer to the parent company are limited to the amounts that the insurance subsidiaries' statutory net assets exceed minimum statutory capital requirements; however, payment of the amounts as dividends in excess of $987 million may be subject to approval by regulatory authorities. 5. Subsequent Event On March 21, 1997, Aon's directors approved a three-for-two stock split, payable on May 14, 1997 in the form of a stock dividend of one common share for every two shares held, to stockholders of record as of the close of business on May 1, 1997. Because the stock split was approved subsequent to the distribution of Aon's 1996 Annual Report to Stockholders, references to common stock and earnings per share data in the Annual Report to Stockholders and in this Annual Report on Form 10-K have not been retroactively adjusted. Retroactively adjusting such information to give effect to the stock split for 1996, 1995 and 1994, respectively, would result in net income per share of $1.91, $2.32 and $2.09 and dividends per share of $0.95, $0.89 and $0.84. - 21 - Aon Corporation (Parent Company) NOTES TO CONDENSED FINANCIAL STATEMENTS (6) Below is a reconciliation of the combined statutory stockholders' equity and net income of Aon's insurance subsidiaries to the consolidated stockholders' equity and net income on a basis in accordance with generally accepted accounting principles (GAAP):
(millions) As of December 31, 1996 As of December 31, 1995 ------------------------------------- ------------------------------------- Life/A&H P&C Combined Life/A&H P&C Combined ----------- ----------- ----------- ----------- ----------- ----------- Statutory Stockholders' Equity $ 611.7 $ 363.8 $ 975.5 $ 766.2 $ 296.6 $ 1,062.8 Insurance business related adjustments: Deferred policy acquisition costs 488.8 110.0 598.8 1,177.9 83.6 1,261.5 Cost of insurance purchased -- -- -- 87.2 -- 87.2 Excess of cost over net assets purchased 2.6 -- 2.6 143.4 -- 143.4 Policy liabilities and reinsurance assets 112.1 -- 112.1 100.3 -- 100.3 Deferred income taxes (186.1) 24.3 (161.8) (301.8) 32.1 (269.7) Investment valuation reserves 133.7 -- 133.7 176.3 -- 176.3 Non Admitted Assets 47.3 5.9 53.2 79.6 5.1 84.6 Unrealized capital gains (losses) (FAS 115) 76.8 34.8 111.6 74.8 40.2 115.0 ------------------------------------- ------------------------------------- Subtotal $ 1,287.0 $ 538.8 1,825.7 $ 2,303.9 $ 457.6 2,761.4 ======================== ======================== Investment in other operations and other 1,443.2 855.8 ----------- ----------- Investments in subsidiaries 3,268.9 3,617.2 Elimination of parent company contributions (436.0) (943.5) ----------- ----------- Consolidated Stockholders' Equity $ 2,832.9 $ 2,673.7 =========== ===========
As of December 31, 1996 As of December 31, 1995 ------------------------------------- ------------------------------------- Life/A&H P&C Combined Life/A&H P&C Combined ----------- ----------- ----------- ----------- ----------- ----------- Statutory Net Income * $ 807.4 $ 70.7 $ 878.1 $ 196.7 $ 57.5 $ 254.2 Insurance business related adjustments: Deferred policy acquisition costs 121.6 95.1 216.7 325.6 84.7 410.3 Amortization of deferred policy acquisition costs (166.9) (68.7) (235.6) (240.3) (62.4) (302.7) Amortization of cost of insurance purchased (2.0) -- (2.0) (10.4) -- (10.4) Amortization of excess of cost over net assets purchased (0.9) -- (0.9) (4.9) -- (4.9) Policy liabilities and reinsurance assets 11.8 -- 11.8 -- -- (31.0) Deferred income taxes (4.0) (9.2) (13.3) (24.9) -- (24.9) Change in valuation reserves 4.1 -- 4.1 5.6 -- 5.6 Deferred capital losses 2.8 (3.5) (0.7) 34.3 5.9 40.2 Difference in realized gain on sale of subsidiar net of tax (551.2) (551.2) Realized (gain)/loss on transfer of subsidiary -- -- -- 7.0 -- 7.0 ------------------------------------- ------------------------------------- Subtotal $ 222.8 $ 84.4 307.1 $ 288.8 $ 85.7 343.4 ======================== ======================== Investment in other operations and other 28.1 59.4 ----------- ----------- Consolidated Net Income - GAAP Basis $ 335.2 $ 402.8 =========== =========== * net of intercompany dividends
As of December 31, 1994 ------------------------------------- Life/A&H P&C Combined ----------- ----------- ----------- Statutory Net Income * $ 271.9 $ 34.1 $ 306.0 Insurance business related adjustments: Deferred policy acquisition costs 337.7 76.8 414.5 Amortization of deferred policy acquisition costs (227.7) (48.5) (276.2) Amortization of cost of insurance purchased (13.9) -- (13.9) Amortization of excess of cost over net assets purchased (4.8) -- (4.8) Policy liabilities and reinsurance assets 19.2 -- 19.2 Deferred income taxes (64.7) (6.9) (71.6) Change in valuation reserves 26.6 -- 26.6 Deferred capital losses -- -- -- Difference in realized gain on sale of subsidiary net of tax Realized (gain)/loss on transfer of subsidiary (89.4) -- (89.4) ------------------------------------- Subtotal $ 254.9 $ 55.5 310.4 ======================== Investment in other operations and other 49.6 ----------- Consolidated Net Income - GAAP Basis $ 360.0 =========== * net of intercompany dividends
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SCHEDULE III Aon Corporation and Subsidiaries SUPPLEMENTARY INSURANCE INFORMATION Future Benefit, Amort- policy Unearned claims, ization benefits, premiums losses deferred Deferred losses, and other Net Commis- and policy Other policy claims policy- invest- sions settle- acqui- oper- acquisition and loss holders Premium ment fees ment sition ating Premiums costs(1) expenses funds revenue income(2) & other expenses costs(1) expenses written(3) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (millions) Year ended December 31, 1996 Insurance brokerage and consulting services ............... $ -- $ -- $ -- $ -- $ 83.5 $1,918.8 $ -- $ -- $1,820.2 $ -- Insurance underwriting ... 598.8 1,920.3 2,439.3 1,526.7 197.0 50.1 789.5 207.9 524.1 1,581.6 Corporate and other .................. -- -- -- -- 103.5 8.6 -- -- 100.9 -- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total ............... $ 598.8 $1,920.3 $2,439.3 $1,526.7 $ 384.0 $1,977.5 $ 789.5 $ 207.9 $2,445.2 $1,581.6 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Year ended December 31, 1995 (4) Insurance brokerage and consulting services ............... $ -- $ -- $ -- $ -- $ 75.7 $1,651.3 $ -- $ -- $1,515.1 $ -- Insurance underwriting ... 1,348.7 2,446.0 7,110.4 1,426.5 168.5 44.9 698.5 207.5 487.5 1,596.2 Corporate and other .................. -- -- -- -- 85.2 13.6 -- -- 99.1 -- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total ............... $1,348.7 $2,446.0 $7,110.4 $1,426.5 $ 329.4 $1,709.8 $ 698.5 $ 207.5 $2,101.7 $1,596.2 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Year ended December 31, 1994 (4) Insurance brokerage and consulting services ............... $ -- $ -- $ -- $ -- $ 47.7 $1,388.7 $ -- $ -- $1,279.0 $ -- Insurance underwriting ... 1,290.6 2,378.7 6,931.7 1,322.3 142.3 44.9 626.2 189.7 458.3 1,478.2 Corporate and other .................. -- -- -- -- 67.1 28.2 -- -- 91.0 -- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total ............... $1,290.6 $2,378.7 $6,931.7 $1,322.3 $ 257.1 $1,461.8 $ 626.2 $ 189.7 1,828.3 $1,478.2 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== (1) Includes cost of insurance purchased. (2) The above results reflect allocations of investment income and certain expense elements considered reasonable under the circumstances. (3) Net of reinsurance ceded. (4) Reclassified to conform to the 1996 presentation.
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SCHEDULE IV Aon Corporation and Subsidiaries REINSURANCE Year Ended December 31, 1996 ------------------------------------------------------------------- Percentage Ceded to Assumed of amount Gross other from other Net assumed to (millions) amount companies companies amount net ----------- ----------- ----------- ----------- ----------- Life insurance in force (1) ............................... $ 10,996.7 $ 12,749.8 $ 10,304.1 $ 8,551.0 120.5% =========== =========== =========== =========== =========== Premiums and policy fees Life Insurance .......................................... $ 206.5 $ 133.0 $ 87.7 $ 161.2 54.4% A&H Insurance ........................................... 1,045.3 213.9 112.7 944.1 11.9 Specialty Property & Casualty (2) ....................... 490.3 160.8 91.9 421.4 21.8 ----------- ----------- ----------- ----------- ----------- Total premiums and policy fees ............................ $ 1,742.1 $ 507.7 $ 292.3 $ 1,526.7 19.1% =========== =========== =========== =========== ===========
Year Ended December 31, 1995 ------------------------------------------------------------------- Percentage Ceded to Assumed of amount Gross other from other Net assumed to (millions) amount companies companies amount net ----------- ----------- ----------- ----------- ----------- Life insurance in force (1) ............................... $ 80,176.6 $ 27,936.6 $ 991.4 $ 53,231.4 1.9% =========== =========== =========== =========== =========== Premiums and policy fees Life Insurance .......................................... $ 251.9 $ 83.9 $ 4.0 $ 172.0 2.3% A&H Insurance ........................................... 1,032.9 98.5 5.1 939.5 0.5 Specialty Property & Casualty (2) ....................... 375.0 133.9 73.9 315.0 23.5 ----------- ----------- ----------- ----------- ----------- Total premiums and policy fees ............................ $ 1,659.8 $ 316.3 $ 83.0 $ 1,426.5 5.8% =========== =========== =========== =========== ===========
Year Ended December 31, 1994 ------------------------------------------------------------------- Percentage Ceded to Assumed of amount Gross other from other Net assumed to (millions) amount companies companies amount net ----------- ----------- ----------- ----------- ----------- Life insurance in force (1) ............................... $ 74,047.9 $ 25,109.7 $ 1,173.9 $ 50,112.1 2.3% =========== =========== =========== =========== =========== Premiums and policy fees Life Insurance .......................................... $ 245.0 $ 81.7 $ 5.1 $ 168.4 3.0% A&H Insurance ........................................... 996.2 98.6 6.4 904.0 0.7 Specialty Property & Casualty (2) ....................... 309.9 139.1 79.1 249.9 31.7 ----------- ----------- ----------- ----------- ----------- Total premiums and policy fees ... ........................ $ 1,551.1 $ 319.4 $ 90.6 $ 1,322.3 6.9% =========== =========== =========== =========== =========== (1) Includes credit life insurance. (2) Includes mechanical repair insurance sold through automobile dealers, appliance warranty insurance and property liability insurance.
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SCHEDULE V Aon CORPORATION VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1996, 1995 and 1994 (millions) Additions ---------------------- Charged/ Balance at Charged to (credited) Balance beginning cost and to other Deductions at end Description of year expenses accounts (1) of year - ---------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 - ---------------------------- Reserve for losses (2) (deducted from mortgage loans on real estate) $ 25.6 $ -- $ (24.9) $ -- $ 0.7 Reserve for losses (deducted from other long-term investments) 5.2 -- -- -- 5.2 Allowance for doubtful accounts (4) (deducted from insurance brokerage and consulting services receivables) 47.4 9.5 13.4 (10.5) 59.9 Allowance for doubtful accounts (2) (deducted from premiums and other) 3.9 2.1 (2.9) -- 3.1 Year Ended December 31, 1995 - ---------------------------- Reserve for losses (3) (deducted from mortgage loans on real estate) $ 29.7 $ -- $ (4.1) $ -- $ 25.6 Reserve for losses (3) (deducted from other long-term investments) 6.7 -- 1.0 (2.5) 5.2 Allowance for doubtful accounts (deducted from insurance brokerage and consulting services receivables) 45.2 6.0 -- (3.8) 47.4 Allowance for doubtful accounts (deducted from premiums and other) 3.2 2.0 -- (1.3) 3.9 Year Ended December 31, 1994 - ---------------------------- Reserve for losses (3) (deducted from mortgage loans on real estate) $ 42.0 $ -- $ (12.3) $ -- $ 29.7 Reserve for losses (deducted from long-term bonds) 11.7 -- -- (11.7) -- Reserve for losses (3) (deducted from other long-term investments) 9.3 -- (2.6) -- 6.7 Allowance for doubtful accounts (4) (deducted from insurance brokerage and consulting services receivables) 41.2 7.0 1.3 (4.3) 45.2 Allowance for doubtful accounts (deducted from premiums and other) 3.1 1.4 -- (1.3) 3.2 (1) Amounts deemed to be uncollectible. (2) Amounts shown in additions credited to other accounts primarily represent reduction due to sale of discontinued operations. (3) Amounts shown in additions charged/(credited) to other accounts represent realized investment (gains)/losses. (4) Amounts shown in additions charged to other accounts represent reserves related to acquired business.
- 25 - Cross Reference Sheet, Pursuant to General Instruction G(4) Item in Form 10-K Incorporated by Reference to - ----------------- ---------------------------- Part I Item 1. Business Annual Report to Stockholders of the Registrant for the Year 1996 ("Annual Report")pages 6 through 15. Item 3. Legal Proceedings Annual Report page 40 (note 12 of Notes to Consolidated Financial Statements). Part II Item 5. Market for the Registrant's Annual Report pages 34 and 35 Common Stock and Related (note 8 of Notes to Consolidated Security Holder Matters Financial Statements) and page 43 ("Dividends paid per share" and "Price range"). Item 6. Selected Financial Data Annual Report page 42. Item 7. Management's Discussion and Annual Report pages 17 through Analysis of Financial Condition 23. and Results of Operations Item 8. Financial Statements and Annual Report pages 24 through 41 Supplementary Data and 43. Part III Item 10. Directors and Executive Officers Notice of Annual Meeting of of the Registrant Holders of Common Stock and Series C Preferred Stock and Proxy Statement For Annual Meeting of Stockholders on April 18, 1997 of the Registrant ("Proxy Statement") pages 3 and 7. Item 11. Executive Compensation Proxy Statement pages 12 through 15. Item 12. Security Ownership of Certain Proxy Statement pages 2, 8 and 9. Beneficial Owners and Management Item 13. Certain Relationships and Proxy Statement page 20 Related Transactions ("Transactions With Management"). Part IV Item 14. Exhibits, Financial Statement Annual Report pages 24 through Schedules, and Reports on 41. Form 8-K - 26 - EXHIBIT INDEX Exhibit Number Page Number of Regulation Sequentially S-K, Item 601 Numbered Copy - ------------- ------------- (3) Articles of incorporation and bylaws: (a) Second Restated Certificate of Incorporation of the Registrant -- incorporated by reference to Exhibit 3(a) to the 1991 Form 10-K. (b) Certificate of Amendment of the Registrant's Second Restated Certificate of Incorporation -- incorporated by reference to Exhibit 3 to the First Quarter 1994 Form 10-Q. (c) Bylaws of the Registrant -- incorporated by reference to Exhibit (d) to the 1982 Form 10-K. (d) Certificate of Designation for the Registrant's 8% Cumulative Perpetual Preferred Stock, $1.00 par value -- incorporated by reference to Exhibit 4(a) to the Third Quarter 1992 Form 10-Q. (e) Certificate of Designation for the Registrant's Series C Cumulative Preferred Stock -- incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 9, 1994. (4) Instruments defining the rights of security holders, including indentures: (a) Indenture dated September 15, 1992 between the Registrant and Continental Bank Corporation (now known as Bank of America Illinois), as Trustee -- incorporated by reference to Exhibit 4(a) of the Registrant's Current Report on Form 8-K dated September 23, 1992. (b) Resolutions establishing terms of 6.875% Notes Due 1999 and 7.40% Notes Due 2002 -- incorporated by reference to Exhibit 4(d) to the 1992 Form 10-K. (c) Resolutions establishing the terms of 6.70% Notes Due 2003 incorporated by reference to Exhibit 4(c) to the 1993 Form 10-K. (d) Resolutions establishing the terms of 6.30% Notes Due 2004 incorporated by reference to Exhibit 4(d) to the 1993 Form 10-K. (10) Material Contracts: (a) Aon Stock Option Plan -- incorporated by reference to Exhibit 10(a) to the 1990 Form 10-K. - 27 - EXHIBIT INDEX Exhibit Number Page Number of Regulation Sequentially S-K, Item 601 Numbered Copy - ------------- ------------- (b) First Amendment to Aon Stock Option Plan -- incorporated by reference to the Exhibit 10(a) to the Second Quarter 1994 Form 10-Q. (c) Second Amendment to Aon Stock Option Plan -- incorporated by reference to Exhibit 10(c) to the Second Quarter 1994 Form 10-Q. (d) Ryan Insurance Group, Inc. Stock Option Plan together with Stock Option Assumption Agreement providing for amendment of the plan -- incorporated by reference to Exhibit 4(b) to the Registration Statement No. 2-79114 on Form S-8. (e) Registration Rights Agreement by and among the Registrant and certain affiliates of Ryan Insurance Group, Inc. (including Patrick G. Ryan and Andrew J. McKenna) -- incorporated by reference to Exhibit (f) to the 1982 Form 10-K. (f) 1994 Restatement of Aon Savings Plan -- incorporated by reference to Exhibit 10(f) to the 1994 Form 10-K. (g) 1994 Restatement of Aon Employee Stock Ownership Plan -- incorporated by reference to Exhibit 10(g) to the 1994 Form 10-K. (h) 1994 Restatement of Aon Pension Plan -- incorporated by reference to Exhibit 10(h) to the 1994 Form 10-K. (i) Deferred Compensation Agreement by and among Registrant and Registrant's directors who are not salaried employees of Registrant or Registrant's affiliates -- incorporated by reference to Exhibit 10(i) to the 1987 Form 10-K. (j) Aon Stock Award Plan, as amended -- incorporated by reference to Exhibit 10(a) to the First Quarter 1994 Form 10-Q. (k) Amendment and Waiver Agreement dated as of November 4, 1991 among the Registrant and each of Patrick G. Ryan, Shirley Ryan, Ryan Enterprises Corporation and Harvey N. Medvin -- incorporated by reference to Exhibit 10(j) to the 1991 Form 10-K. (l) Registration Rights Agreement dated November 2, 1992 by and between the Registrant and Frank B. Hall & Co. Inc. -- incorporated by reference to exhibit 4(c) to the Third Quarter 1992 Form 10-Q. (m) Aon Corporation 1994 Amended and Restated Outside Director Stock Award Plan -- incorporated by reference to Exhibit 10(b) to the First Quarter 1994 Form 10-Q. (n) First Amendment to the Aon Stock Award Plan -- incorporated by reference to Exhibit 10(b) to the Second Quarter 1994 Form 10-Q. - 28 - EXHIBIT INDEX Exhibit Number Page Number of Regulation Sequentially S-K, Item 601 Numbered Copy - ------------- ------------- (o) Second Amendment to Aon Stock Award Plan -- incorporated by reference to Exhibit 10(d) to the Second Quarter 1994 Form 10-Q. (p) Aon Corporation 1995 Senior Officer Incentive Compensation Plan -- incorporated by reference to Exhibit 10(p) to the 1995 Form 10-K. (q) Aon Deferred Compensation Plan and First Amendment to the Aon Deferred Compensation Plan -- incorporated by reference to Exhibit 10(q) to the 1995 Form 10-K. (r) Asset Purchase Agreement dated July 24, 1992 between the Registrant and Frank B. Hall & Co. Inc. -- incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1992. (s) Stock Purchase Agreement by and among the Registrant, Combined Insurance Company of America, Union Fidelity Life Insurance Company and General Electric Capital Corporation dated as of November 11, 1995 -- incorporated by reference to Exhibit 10(s) of the 1995 Form 10-K. (t) Stock Purchase Agreement by and among the Registrant; Combined Insurance Company of America; The Life Insurance Company of Virginia; Forth Financial Resources, Ltd.; Newco Properties, Inc.; and General Electric Capital Corporation dated as of December 22, 1995 -- incorporated by reference to Exhibit 10(t) to the 1995 Form 10-K. (u) Agreement and Plan of Merger among the Registrant, Purchaser and A&A dated as of December 11, 1996 -- incorporated by reference to Exhibit (c)(1) to the Registrant's Schedule 14D-1 filed with the SEC on December 16, 1996. (v) First Amendment to Agreement and Plan of Merger dated as of January 7, 1997 among the Registrant, Purchaser and A&A -- incorporated by reference to Exhibit (c)(3) to Schedule 14D-1 filed by the Registrant with the SEC on January 9, 1997. (w) Second Amendment to Aon Employee Stock Option Plan - incorporated by reference to Exhibit 10(a) to the Second Quarter 1996 Form 10-Q. (x) Fifth Amendment to Aon Pension Plan - incorporated by reference to Exhibit 10(b) to the Second Quarter 1996 Form 10-Q. (y) Third Amendment to Aon Savings Plan - incorporated by reference to Exhibit 10(c) to the Second Quarter 1996 Form 10-Q. (z) Third Amendment ot Aon Pension Plan - incorporated by reference to Exhibit 10(d) to Second Quarter 1996 Form 10-Q. - 29 - EXHIBIT INDEX Exhibit Number Page Number of Regulation Sequentially S-K, Item 601 Numbered Copy - ------------- ------------- (a)(a) Share Purchase Agreement between the Registrant and Inchape plc dated 15 October 1996(to be filed by amendment to this form 10-K). (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. (13) Annual Report to Stockholders of the Registrant for the year ended December 31, 1996 (for information, and not to be deemed filed, except for those portions specifically incorporated by reference herein). (21) List of subsidiaries of the Registrant. (23) Consent of Ernst & Young LLP to the incorporation by reference into Aon's Annual Report on Form 10-K of their report included in the 1996 Annual Report to Stockholders and into Aon's Registration Statement Nos. 33-27984, 33-42575, 33-57562, 33-59037 and 333-21237. (99) Annual Report to the Securities and Exchange Commission on Form 11-K for the Aon Savings Plan for the year ended December 31, 1996 -- to be filed by amendment as provided in Rule 15d-21(b). - 30 - EX-11 2 CONSOLIDATED NET INCOME PER SHARE COMPUTATION
EXHIBIT 11 Aon Corporation and Subsidiaries CONSOLIDATED NET INCOME PER SHARE COMPUTATION (millions except per share data) Years Ended December 31 --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- EARNINGS PER SHARE Net income ........................................... $ 335.2 $ 402.8 $ 360.0 Preferred stock dividends ............................ 18.8 24.7 26.8 ----------- ----------- ----------- Net income less preferred stock dividends ....... $ 316.4 $ 378.1 $ 333.2 =========== =========== =========== Average common shares issued ......................... 111.9 110.8 107.1 Net effect of treasury stock activity ................ (3.0) (2.8) (4.4) Weighted average effect of Series B preferred stock .. -- -- 2.8 Net effect of dilutive stock compensation plans based on the treasury stock method .................... 1.3 0.7 0.7 ----------- ----------- ----------- Average common and common equivalent shares outstanding ........................... 110.2 108.7 106.2 =========== =========== =========== NET INCOME PER SHARE (1) (2)............................... $ 2.87 $ 3.48 $ 3.14 =========== =========== =========== (1) Primary and fully diluted net income per share are materially the same. (2) See note 5 to condensed financial statements.
- 31 - EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT 12(a) Aon Corporation and Consolidated Subsidiaries Combined With Unconsolidated Subsidiaries Computation of Ratio of Earnings to Fixed Charges Years Ended December 31, -------------------------------------------------------------- (millions except ratios) 1996 1995 1994 1993 1992(1) -------------------------------------------------------------- Income from continuing operations before provision for income tax $ 445.6 $ 458.0 $ 397.0 $ 331.6 $ 179.1 Add back fixed charges: Interest on indebtedness 44.7 55.5 46.4 42.3 41.9 Interest on ESOP 4.3 5.3 5.9 6.5 6.9 Portion of rents representative of interest factor 28.6 21.4 28.7 26.1 19.2 ---------- ---------- ---------- ---------- ---------- Income as adjusted $ 523.2 $ 540.2 $ 478.0 $ 406.5 $ 247.1 ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest on indebtedness $ 44.7 $ 55.5 $ 46.4 $ 42.3 $ 41.9 Interest on ESOP 4.3 5.3 5.9 6.5 6.9 Portion of rents representative of interest factor 28.6 21.4 28.7 26.1 19.2 ---------- ---------- ---------- ---------- ---------- Total fixed charges 77.6 82.2 81.0 74.9 68.0 ========== ========== ========== ========== ========== Ratio of earnings to fixed charges 6.7 6.6 5.9 5.4 3.6 ========== ========== ========== ========== ========== Ratio of earnings to fixed charges (2) 7.2 8.4 7.6 7.4 5.3 ========== ========== ========== ========== ========== (1) Income from continuing operations before provision for income taxes excludes the cumulative effect of changes in accounting principles. (2) The calculation of this ratio of earnings to fixed charges reflects the addition of the income from discontinued operations before the provision for income tax component.
- 32 - EX-12 4 COMPUTATION OF RATIO OF EARNINGS 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 Years Ended December 31, -------------------------------------------------------------- (millions except ratios) 1996 1995 1994 1993 1992(1) -------------------------------------------------------------- Income from continuing operations before provision for income tax $ 445.6 $ 458.0 $ 397.0 $ 331.6 $ 179.1 Add back fixed charges: Interest on indebtedness 44.7 55.5 46.4 42.3 41.9 Interest on ESOP 4.3 5.3 5.9 6.5 6.9 Portion of rents representative of interest factor 28.6 21.4 28.7 26.1 19.2 ---------- ---------- ---------- ---------- ---------- Income as adjusted $ 523.2 $ 540.2 $ 478.0 $ 406.5 $ 247.1 ========== ========== ========== ========== ========== Fixed charges and preferred stock dividends: Interest on indebtedness $ 44.7 $ 55.5 $ 46.4 $ 42.3 $ 41.9 Preferred stock dividends 28.7 37.5 48.4 47.5 20.3 ---------- ---------- ---------- ---------- ---------- Interest and dividends 73.4 93.0 94.8 89.8 62.2 Interest on ESOP 4.3 5.3 5.9 6.5 6.9 Portion of rents representative of interest factor 28.6 21.4 28.7 26.1 19.2 ---------- ---------- ---------- ---------- ---------- Total fixed charges and preferred stock dividends $ 106.3 $ 119.7 $ 129.4 $ 122.4 $ 88.3 ========== ========== ========== ========== ========== Ratio of earnings to combined fixed charges and preferred stock dividends 4.9 4.5 3.7 3.3 2.8 ========== ========== ========== ========== ========== Ratio of earnings to combined fixed charges and preferred stock dividends (2) 5.2 5.8 4.8 4.5 4.1 ========== ========== ========== ========== ========== (1) Income from continuing operations before provision for income taxes excludes the cumulative effect of changes in accounting principles. (2) This calculation of ratio of earnings to combined fixed charges and preferred stock dividends reflects the addition of the income from discontinued operations before the provision for income tax component.
- 33 - EX-13 5 AON ANNUAL REPORT BROKERAGE AND CONSULTING As the world's fastest-growing global insurance brokerage and consulting services organization, Aon Group is combining its collective knowledge, technological expertise and global distribution capabilities to provide clients with cost-effective, value-added solutions. In the rapidly changing, consolidating insurance industry, Aon pursues a sharply focused strategy, concentrating more of its resources in insurance brokerage and consulting. Consistent with our strategy, we acquired Bain Hogg Group plc last October and, in early 1997, we completed the merger with Alexander & Alexander Services Inc. These companies provide Aon with enhanced resources, access to more insurance markets and a wider range of specialist capabilities. Together, we provide our clients with creative insurance and consulting solutions through local representation supported by a network of more than 400 owned offices in some 60 countries. - 6 - OPERATIONS REVIEW Aon Group comprises four major operating units: Aon Risk Services, Aon Specialty Group, Aon Re Worldwide and Aon Consulting Worldwide. Despite increasingly competitive market conditions, Aon Group had good growth and earnings in 1996, through its acquisition program and internal growth initiatives. The company generated major new business and maintained high retention rates by focusing on strategies to address all of our client segments (global accounts, middle market and small commercial business). To counter the industry's pricing pressures, the company is reducing operating costs through consolidation and elimination of redundancies, and increasing efficiency while maintaining its high standard of services. By focusing on specialized lines of business and our interdependent strategy, the company has improved its ability to offer insurance solutions and distribution on a global basis. OPPORTUNITIES Aon Group differentiates itself through a niche focus on industry and product specializations, by its ability to attract and maintain top professionals, and its unmatched worldwide distribution capabilities. Aon's culture enables synergies to develop among insurance and reinsurance brokerage, risk management and consulting services. Through our collective organizations, Aon Group sees a number of attractive, long-term growth opportunities: enhancing its insurance management services to commercial and industrial organizations and insurance underwriting/distribution organizations; increasing its presence in international markets and emerging markets; bringing capital markets expertise and resources to our clients; and developing and implementing advanced technology applications. OUTLOOK The intermediary role is no longer confined solely to obtaining coverage for clients. Instead, our industry is consolidating into single-source providers of insurance and reinsurance brokerage, consulting services and funding solutions to access non-traditional insurance capital. To adapt to this change, a brokerage and consulting organization must become integral to the process of managing and transferring risk. As our diverse client base demands solutions to increasingly complex risks, Aon Group provides a complete approach to risk management, offering services beyond traditional risk-transfer to include access to alternative markets. The company is well positioned to address the changing needs of the insurance marketplace by offering value-added risk management advice, innovative risk-transfer solutions, and thorough, reliable knowledge of global markets and local customs. - 7 - BROKERAGE AND CONSULTING Services for Today and Tomorrow Aon Group focuses on providing an expanding range of insurance and consulting services, beyond brokerage, to meet the demands of our clients.Our mission is to continue being the preeminent provider of risk management, insurance and reinsurance brokerage and consulting services delivered through an extensive worldwide network of local offices. In cooperation with our clients, we are dedicated to developing innovative ideas and solutions to address risk management issues. Through an interdependent strategy, Aon's expert teams work to deliver seamless, consistent, high-quality service to meet our clients' ever-changing needs. Our clients are large and small, some are global and some are local. Directed by the goal of putting the client first, Aon focuses its vast global resources through local offices and account executives, thereby delivering the best of Aon to every client, anywhere in the world. - 8 - ENHANCED GLOBAL PRESENCE Outside the United States, London is the international focal point of the insurance and reinsurance marketplace. With the addition of Bain Hogg and Alexander & Alexander, Aon is the leading specialist broker in London. Aon's U.K.-based reinsurance and specialty brokerage companies, Nicholson Jenner Leslie, Bain Hogg International and Alexander Howden, operate under the combined name Aon Group Limited. As the preeminent London broker, Aon Group Limited places reinsurance and specialty business into Lloyd's, the London market and worldwide markets. The company is involved in key specialty areas, such as aviation, energy, financial institutions, marine, and directors' and officers' liability. The inclusion of Bain Hogg and Alexander Howden adds significant depth to the company's resources, particularly in reinsurance, accident and health, construction, energy, international property and professional indemnity. In addition to an enhanced London market presence, the additions of Bain Hogg and Alexander & Alexander significantly expand Aon's capabilities, depth and geographic reach of its global insurance and consulting services. Overall, these combinations solidify Aon's position as one of the premier insurance, reinsurance and specialty brokers in the world. Aon is a market leader in the following retail brokerage markets: the United States, the United Kingdom, Australia, Asia, Canada, Mexico, The Netherlands and New Zealand. The combinations also significantly strengthen Aon's brokerage presence in Africa, France, Germany, Latin America and the Middle East. The consulting businesses of Alexander & Alexander add further depth to Aon's integrated human resources consulting operations and its global market position, particularly in the United States, the United Kingdom, Australia and Canada. As an example of our overall service and distribution capabilities, Aon offers premium financing products to the commercial clients of Aon Group and other independent organizations. Also, as part of Aon's services to the automotive industry, our finance company acts principally as a servicer of finance receivables and provides all the key elements to assist auto retailers in establishing captive finance companies. - 9 - BROKERAGE AND CONSULTING GEOGRAPHIC PRESENCE Argentina Hong Kong Russia Aruba Hungary Saipan Australia India Singapore Austria Indonesia Slovak Republic Bahrain Ireland Solomon Islands Belgium Italy South Africa Bermuda Japan South Korea Brazil Kenya Spain Canada Lithuania Swaziland Chile Luxembourg Sweden China Malawi Switzerland Colombia Malaysia Taiwan Czech Republic Malta Thailand Denmark Mexico Turkey Estonia The Netherlands Uganda Fiji The Netherlands Antilles United Arab Emirates Finland New Zealand United Kingdom France Nigeria United States Germany Norway Venezuela Greece Philippines Vietnam Guam Poland Zimbabwe Portugal The two pie charts on the top of page 11 show the 1996 brokerage and consulting services revenue and pretax income (before special charges) by geographic segmentation. Revenue from United States, Europe, and rest of world represents 64%, 30%, and 6%, respectively, of the 1996 total brokerage and consulting revenue. Pretax income from United States, Europe, and rest of world represents 64%, 30%, and 6%, respectively, of the 1996 total brokerage and consulting pretax income. Aon RISK SERVICES OVERVIEW Aon Risk Services (ARS) is Aon's global retail insurance brokerage and risk management services company. The combination of ARS with the retail operations of Alexander & Alexander and Bain Hogg, provides Aon with an enhanced retail distribution network. SERVICES Through its worldwide distribution system, ARS provides complete risk services, including insurance placement, specialized brokerage services, program development and administration, premium financing services, risk management and loss-control consulting. ARS focuses its efforts on industry specialties such as aviation, construction, credit insurance, energy, entertainment, financial institutions and marine, as well as specific product coverages that include accident and health, directors' and officers' liability, international property, workers' compensation, and errors and omissions coverages for major law firms and other professional organizations. MARKETS ARS provides insurance management solutions to targeted markets in varying industries. Aon's resources are delivered by local account executives to global and diverse clients, encompassing large corporate, middle-market and small commercial enterprises. STRENGTHS Market demand has shifted from "insurance buying" to financial and risk management, where knowledge-based solutions are at a premium. Through its proprietary Knowledge Network, ARS combines global knowledge and experience to offer value-added solutions. As a non-hierarchical, highly responsive organization, ARS adds greater value through its targeted focus, industry experience, local expertise and interdependent network of company resources. STRATEGIES ARS will continue to create expert groups focused on developing specialty product coverages, such as workers' compensation, disability and employee services. ARS anticipates growing opportunities in offering services to support banks and other financial institutions as they enter the insurance market. The company is further expanding the global reach of several specialty practices such as construction, energy and health care. Aon SPECIALTY GROUP OVERVIEW Aon Specialty Group (ASG) delivers highly specialized insurance products and services for professional groups, service businesses, governments, health-care providers and commercial organizations. It also provides custom services in managing general underwriting and wholesale brokerage for insurance organizations. SERVICES For insurance companies, ASG provides underwriting management skills, claims and risk management expertise, and third-party administration services. It serves agents and brokers through a network of underwriting managers and wholesale brokerage operations, providing access to markets for specialized business. For individuals and businesses, it provides affinity products for professional liability, life and personal lines. The Aon Healthcare Alliance unit brings a fully integrated line of Aon services to health-care providers. MARKETS ASG is a source of alternative distribution for the products and services of both Aon and the insurance markets it represents. Clients include insurance companies, individual insurance agents and brokers, individual professionals and businesses such as health care providers. Ongoing soft-market conditions will make certain insurance products too costly for traditional distribution sources, resulting in increased opportunities for Aon's alternative distribution methods. STRENGTHS ASG brings an innovative niche focus to the industry, concentrating on thorough knowledge of clients' profession or industry. It excels at multiple-channel distribution systems, state-of-the-art products for specific industries and professionals, and cost-effective delivery of products and services. ASG is the largest program administrator for professional liability, with strong emphasis on accounting, law and health care. STRATEGIES ASG is creating a new program business devoted exclusively to national associations. Using existing back-room capabilities, the new unit will focus on the particular needs of associations and their members. Also, ASG has recently established a network to provide an exchange of people, ideas and technology that facilitates global affinity business growth. Aon RE WORLDWIDE OVERVIEW Aon's reinsurance brokerage activities are organized under Aon Re Worldwide (ARW). With the additional reinsurance business of Alexander & Alexander and Bain Hogg, ARW is a global leader in the reinsurance and specialist brokerage industry. SERVICES ARW provides clients with reinsurance placement, alternative risk services, captive management services and catastrophe information forecasting. It offers reinsurance expertise in niche industries, including aviation, marine and energy, as well as in specialty lines such as professional liability, directors' and officers' liability, errors and omissions, and excess and surplus lines. ARW provides in-depth analysis of clients' exposures and alternative reinsurance options, using sophisticated security and risk portfolio analysis. MARKETS ARW has a strong global presence in most of the major insurance markets. To complement its market leadership in the United States and the United Kingdom, ARW is strengthening its presence in many of the developing regions, such as Latin America and the Pacific. Its primary clients are global, national and regional insurance companies, reinsurance companies, Lloyd's syndicates, affinity and risk retention groups. STRENGTHS ARW's approach is designed to provide the best global brokerage expertise, market intelligence and analytical tools available so their clients can make informed buying decisions. Through a combination of product line and geographical expertise, including significant presence in the United States and London, ARW provides clients with efficient and cost-effective means of reinsuring their exposures. STRATEGIES ARW continues to make significant investments in its technological capabilities. The company provides a unique combination of risk management knowledge, software technology and engineering expertise to provide clients with advanced catastrophic risk management services. Through the development of Aon Capital Markets, ARW is drawing upon Aon's collective expertise and worldwide resources to access non-traditional insurance capital from the global capital markets. Aon CONSULTING WORLDWIDE OVERVIEW Aon Consulting Worldwide (ACW) is one of the world's largest consulting organizations, offering fully integrated human resources consulting services. Its innovative professionals specialize in linking people strategies to business initiatives for improved performance. ACW's approach ensures that our clients are effectively attracting, retaining and utilizing their people "assets." SERVICES ACW offers services in employee benefits, human resources, compensation and change management. Specific services include organizational analysis and HR strategic planning, job design and competency modeling, recruitment and selection, compensation and reward systems, benefits design and management, training and development, HR compliance and risk management, individual and organizational change management. MARKETS ACW serves small, mid-size and large corporations by integrating its services into all aspects of the client's human resources programs. Focusing on the increasing demand for outsourcing solutions, ACW targets emerging businesses, IPOs, recent mergers or acquisitions and corporations that are reengineering staff functions. ACW is well-positioned to provide its services to a variety of industries. For example, the company is the automotive industry's primary provider of employee selection services such as screening, testing and hiring. STRENGTHS ACW offers companies an objective, global perspective that provides integrated solutions and consistent administration, ensuring effective design and implementation of client programs. To enhance efficiencies, ACW creatively uses technology such as computerized testing systems and voice response systems. STATEGIES ACW is targeting a larger share of the global human resources management marketplace. Rather than making large capital investments in "administration centers," ACW creates consulting and administration programs tailored to individual clients' needs. Opportunities also exist by providing services to meet the growing demand for stock-based compensation programs and innovative reward systems. - 10 & 11 - INSURANCE UNDERWRITING Aon's insurance underwriting businesses are focused on meeting the changing needs of individuals throughout the world by offering distinctive products distributed through directly owned and operated networks. In today's unpredictable world, Aon's well-established insurance underwriting companies provide their policyholders with security and confidence about the future. These underwriting companies focus on markets in North America, Europe, Latin America and the Pacific by providing a variety of consumer insurance products, including accident and health coverage, traditional life insurance and extended warranties. Since 1919, Combined Insurance Company of America has maintained a leading position in the supplemental insurance market by providing accident, health and life coverages directly to individual consumers. Aon's specialty property/casualty underwriters, Virginia Surety and its U.K. affiliate, London General Insurance, serve consumers with a variety of extended warranty coverages. - 12 - OPERATIONS REVIEW In early 1996, Aon refined its insurance underwriting focus by completing the sales of two of its insurance underwriting companies and its North American auto credit insurance business. Aon's insurance underwriting business now consists of Combined Insurance Company of America (CICA) and Virginia Surety Company (VSC)/London General Insurance (LGI). These companies demonstrate strong market positions in their primary niche businesses, superior capitalization and liquidity, and generate significant cash flow. For the year, CICA's operating performance reflected modest revenue growth while maintaining strong margins, as it expanded into worksite marketing. VSC/LGI's 1996 results continued to produce strong global revenue and earnings growth by gaining new accounts and enhanced distribution relationships through Aon Warranty Group (AWG), one of the world's largest independent marketers and administrators of consumer extended warranties. AWG's service revenues and income are included in the insurance brokerage and consulting line of business. OPPORTUNITIES CICA is a foundation of Aon's insurance underwriting business through a directly owned and managed global network of more than 7,500 exclusive sales agents. Its key growth strategy is to apply its extensive sales expertise and management techniques to a new worksite marketing program, capitalizing on opportunities in this emerging distribution channel for insurance. CICA is approaching this market on a direct basis, using dedicated account executives, and by partnering with existing Aon Group brokers and consultants to offer a broad range of voluntary benefits. The operations of VSC/LGI and Aon Warranty Group anticipate attractive business opportunities resulting from their link with the Aon Group companies. VSC/LGI's growth will come from new products, such as home warranty programs, enhancements in established consumer markets, and expansion in growing markets such as Asia, the Pacific and South America. OUTLOOK CICA is a strong market leader in its primary niche business with the potential to enhance premium growth through its worksite sales strategy. The company's extensive distribution network of career sales people, who sell directly to individuals and families, gives it a distinct competitive advantage. CICA's focus on the supplemental marketplace enables it to expand premiums on a profitable basis. The extended warranty market is expected to continue growing as more expensive and complex consumer goods are introduced worldwide. VSC/LGI has attractive global growth prospects for additional warranty-related services which are strengthened through synergies with Aon Group. - 13 - Insurance Underwriting Geographic Presence Australia Belgium Canada France Germany Ireland Japan Mexico The Netherlands New Zealand Spain United Kingdom United States The pie charts on the top of page 15 show the 1996 revenue and pretax income (before special charges) for total insurance underwriting and the revenue for direct sales and extended warranty, specialty, and other by geographic segmentation. Total Insurance Underwriting Revenue As shown on the pie chart on the top on the left side, revenue from United States, Europe, and rest of world represents 73%, 17%, and 10%, respectively, of the 1996 total insurance underwriting revenue. As shown on the pie chart below the revenue chart on the left side, pretax income from United States, Europe, and rest of world represents 71%, 15%, and 14%, respectively, of the 1996 total insurance underwriting pretax income. Direct Sales Revenue As shown in the pie chart on the top in the middle, revenue from United States, Europe, and rest of world represents 69%, 15%, and 16%, respectively, of the 1996 total direct sales revenue. Extended Warranty, Specialty and Other Revenue As shown in the pie chart on the top on the right side, revenue from United States, Europe, and rest of world represents 78%, 20%, and 2%, respectively, of the 1996 total extended warranty, specialty and other revenue. Combined Insurance Company of America Overview For more than 77 years, Combined Insurance Company of America (CICA) has been a leading underwriter of supplemental accident, health and life insurance products to individuals and small businesses. CICA's business is conducted primarily through a direct sales division that distributes its products through a 7,500-strong sales force of career insurance agents. Services CICA insures more than five million individual policyholders worldwide. Major product lines include disability income, supplemental accident and health and a basic portfolio of life insurance products. CICA's products are primarily indemnity-type, paying fixed benefits directly to the policyholder. The products provide additional income that the policyholders can use to supplement their existing medical coverage or maintain their lifestyle should an accident or sickness cause them to become disabled or hospitalized. Life insurance protection is offered through a basic portfolio of traditional whole life and term life coverages. Markets CICA is a unique organization focused on providing basic insurance products to customers not served by most insurers. Many of CICA's insureds are self-employed or work for small firms with limited insurance plans. The company writes supplemental insurance policies primarily in North America, as well as in Europe, Australia and New Zealand. In addition to its traditional business, CICA is expanding its product distribution through payroll deduction, worksite marketing programs. Strengths CICA's strengths are due to a unique combination of factors. These factors include: (i) a loyal policyholder base comprising more than five million individuals worldwide; (ii) operations in major countries around the world; (iii) a line of fixed indemnity products at affordable prices which is attractive to the policyholder base in each country; (iv) utilization of opportunities for add-on sales that are created by the marketing approaches; (v) a broad spread of risk resulting directly from the distribution process; and (vi) an effective and well-managed global network of more than 7,500 exclusive sales agents. The combination of these factors results in stable cash flow and earnings with the opportunity for continued growth. Strategies CICA is expanding the distribution of supplemental products to a worksite marketing system. In this environment, CICA is taking advantage of the benefits of payroll deduction as a premium collection method. In addition, the company's traditional direct sales business is offering larger scale policies to individuals, with the option of payment through convenient monthly electronic funds transfer. Virginia Surety/London General Overview Aon's specialty, property and casualty underwriting companies, Virginia Surety Company in North America and London General Insurance Company in Europe (VSC/LGI), are among the world's largest underwriters of consumer extended warranties. Through Aon Warranty Group (AWG), the company offers worldwide administrative services, compliance support, merchandising, direct marketing, training and one of the largest service networks in the world. Services The company designs consumer extended warranty programs tailored to client needs, including the development of contract terms, conditions and pricing. The company provides extended warranty coverages for new and used autos, consumer electronics and appliances, home warranty, and specialty insurance products for cellular phones, credit card enhancements, travel, involuntary unemployment and consumer product property insurance. Markets Extended warranty products are distributed through auto dealers, manufacturers, distributors and retailers of major worldwide consumer product and financial institutions, associations and affinity groups, who offer the warranties to the end consumer. Strengths Leveraging its market experience with its extensive actuarial database of extended warranty service contracts, the company monitors product profitability and success. Extended warranty policies are supplemental products and not catastrophic in nature. The company's knowledge, geographic reach, flexibility, financial stability and commitment to the client and their consumers are unparalleled in its markets. Strategies VSC/LGI will continue to thrive in established markets through expansion and acquisitions while adapting existing programs in emerging markets. Through Aon Warranty Group's interdependent initiatives with Aon Group, the company will further increase its worldwide market presence. - 14 & 15 - MANAGEMENT'S ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION CONSOLIDATED GENERAL At the beginning of second quarter 1996, Aon sold two of its domestic insurance underwriting subsidiaries, Union Fidelity Life Insurance Company (UFLIC) and The Life Insurance Company of Virginia (LOV) (see note 3). The aftertax proceeds from the sales were $1.2 billion. The sales resulted in a $21 million aftertax gain on sale. Consequently, UFLIC and LOV results are classified in the consolidated statements of income as discontinued operations. For purposes of the following consolidated results discussions (1996 compared to 1995 and 1995 compared to 1994), comparisons against prior years' results are based on continuing operations. Also in second quarter 1996, Aon completed the sale of its North American auto credit underwriting and distribution operations, including the distribution of auto extended warranties throughout North America. The extended warranty products will continue to be underwritten by Aon's subsidiary, Virginia Surety Company, Inc. Results of the auto credit underwriting business written prior to the sale are expected to continue to run off as planned. In fourth quarter 1996, Aon acquired Bain Hogg Group plc (Bain Hogg), a leading insurance broker in the United Kingdom and Asia, for approximately $260 million. SPECIAL CHARGES In second quarter 1996, Aon recorded a $30 million pretax charge ($19 million after tax or $0.18 per share) related to a voluntary early retirement program for all eligible employees of Aon's United States (U.S.) operating subsidiaries and similar programs in parts of Europe. Approximately 450 employees, 60% of whom were in the U.S., participated in the early retirement program. These charges were reflected in commissions and general expenses in the consolidated statements of income. In fourth quarter 1996, Aon's management committed to a formal plan of restructuring Aon's European brokerage operations and recorded pretax special charges of $60 million ($40 million aftertax or $0.36 per share) primarily relating to this activity. These charges were reflected in commissions and general expenses in the consolidated statements of income. The restructuring charges include $32 million relating to consolidating real estate space and data processing facilities and equipment, primarily in Europe, in order to merge Aon's existing operations with those of Bain Hogg. The restructuring charges related to consolidating real estate space are expected to be paid out over several years. Special charges for workforce reductions, involving approximately 300 positions, were $12 million. Terminations resulting from workforce reductions are planned to take place within one year. Costs associated with special assessments to be paid relating to the reconstruction of the Lloyd's of London insurance market were $11 million. The remaining charges primarily reflect Aon's exit from certain U.S. insurance underwriting markets. In fourth quarter 1996, pretax special charges related to the restructuring of existing operations were principally associated with the Bain Hogg acquisition. REVENUE AND INCOME BEFORE INCOME TAX CONSOLIDATED RESULTS FOR 1996 COMPARED TO 1995 Total revenues amounted to $3.9 billion, an increase of 12%. This increase was primarily due to the growth in brokerage commissions and fees resulting from business combination activity and internal growth. Brokerage commissions and fees increased 16% to $1.9 billion. Premiums earned of $1.5 billion increased 7% in 1996. Extended warranty premiums earned increased $110 million or 40%, reflecting a higher volume of new business in both the electronic and appliance lines and the auto extended warranty line. The continued phase-out of certain specialty liability programs partially offset this increase. There was also continued modest growth in direct sales business. Net investment income of $384 million increased 17% for the year primarily attributable to investment income associated with the proceeds from the sales of UFLIC and LOV. The pretax investment portfolio yield declined resulting from the investment of new cash flows in lower yielding investments. Investable funds to continuing operations grew approximately $1 billion during 1996. This increase was attributable to the use of the sales proceeds and brokerage cash flows, as well as strong growth in extended warranty business. In addition, net investment income from insurance brokerage and consulting operations increased to $83 million in 1996 from $76 million the prior year, primarily due to brokerage acquisition activity. Net realized investment gains were $8 million in 1996 compared to $13 million in 1995. Revenue excluding realized investment gains increased 12% or $428 million when compared to 1995. - 17 - Commissions and general expenses (excluding interest expense) increased 17% for the year primarily due to growth in the brokerage businesses. Benefits to policyholders increased 13% when compared to 1995, primarily due to a higher volume of new extended warranty business. This increase was partially offset by lower claims paid on auto credit business that has been in runoff since second quarter 1996. It is anticipated that this business will continue to run off as planned. Interest expense increased 8%. Amortization of intangibles, which excludes deferred policy acquisition costs (DPAC), decreased $6 million or 7%, reflecting fully amortized intangibles, particularly in the insurance and other services brokerage business, and offset in part by continued growth in acquired businesses. Overall, benefit and expense margins for the insurance underwriting segment did not suggest any significant shift in operating trends in 1996. Total benefits and expenses increased 14% or $435 million over 1995. The increase reflects the inclusion of pretax special charges of $90 million. Total benefits and expenses, excluding the 1996 special charges, increased 12% over 1995. Income before income tax decreased $12 million or 3% in 1996, primarily due to the inclusion of special charges. Excluding special charges, income before income tax increased 17% or $78 million, largely due to growth in the insurance brokerage and consulting segment related to business combination activity, as well as the earnings associated with the proceeds from the sale of discontinued operations. Fourth quarter revenue increased 20% to $1.1 billion when compared to 1995, primarily reflecting brokerage business combination activity and internal growth. Total benefits and expenses, excluding special charges, increased 18% to $938 million for the quarter. Pretax income decreased $26 million or 27% to $71 million. The decrease in pretax earnings reflects special charges of $60 million recorded in fourth quarter 1996. Excluding special charges, pretax earnings increased 35% when compared to fourth quarter 1995. CONSOLIDATED GEOGRAPHIC DATA (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Revenue: United States $ 2,646 $ 2,449 $2,208 Europe 929 769 635 Rest of World 313 248 198 - ------------------------------------------------------------------- Total Revenue $ 3,888 $ 3,466 $3,041 - ------------------------------------------------------------------- Income Before Income Tax: United States $ 357 $ 328 $ 279 Europe 110 81 78 Rest of World 69 49 40 - ------------------------------------------------------------------- Income before income tax excluding special charges 536 458 397 Special charges* 90 -- -- - ------------------------------------------------------------------- Total Income Before Income Tax $ 446 $ 458 $ 397 =================================================================== Identifiable Assets (continuing operations): United States $ 8,825 $ 6,427 $6,086 Europe 3,921 2,921 2,343 Rest of World 977 679 494 - ------------------------------------------------------------------- Identifiable Assets at December 31 $13,723 $10,027 $8,923 =================================================================== *Of the $90 million special charges in 1996, $35 million were U.S. and $55 million were European. U.S. revenues increased 8% in 1996 compared to 1995, primarily reflecting internal growth and brokerage acquisition activity. U.S. pretax income before special charges increased 9% over prior year, primarily on the strength of acquisition activity and overall expense controls. Total non-U.S. revenue increased 22% in 1996 to $1.2 billion reflecting the improvement in brokerage revenue from acquisitions and internal growth. 1996 European revenue of $929 million rose 21%, while all other non-U.S. revenues increased 26% when compared to prior year. Non-U.S. pretax income before special charges increased 38% to $179 million. Pretax income before special charges from European operations increased 36% while all other non-U.S. pretax income before special charges rose 41% or $20 million in 1996. - 18 - REVENUE AND INCOME BEFORE INCOME TAX CONSOLIDATED RESULTS FOR 1995 COMPARED TO 1994 Total revenue amounted to $3.5 billion in 1995, an increase of 14%. Brokerage commissions and fees increased 19% to $1.7 billion resulting from business combination activity and internal growth. Premiums earned were $1.4 billion or 8% above 1994. A higher volume of new business in the extended warranty electronic and appliance lines was partially offset by the continued phase-out of certain specialty liability programs. Net investment income of $329 million increased 28% for the year. Higher levels of short-term investments, primarily due to brokerage acquisition activity and internal growth, contributed to the increase. Commissions and general expenses (excluding interest expense) increased 15% for the year primarily reflecting brokerage growth. Benefits to policyholders increased 12% when compared to 1994 primarily due to a higher volume of new extended warranty business. Partially offsetting this increase were lower benefits, related to the runoff of certain specialty programs. Interest expense increased 14% reflecting higher levels of short-term borrowings for the year. Total benefits and expenses increased 14% over 1994. Income before income tax increased by 15% or $61 million due largely to growth in the insurance brokerage and consulting businesses, and to a lesser extent, growth in the insurance underwriting extended warranty business and the continued favorable phase-out of certain specialty liability underwriting programs. MAJOR LINES OF BUSINESS GENERAL In second quarter 1996, Aon reported an aftertax gain on sale of discontinued operations of $21 million related to the sales of UFLIC and LOV. Aon also reported pretax special charges of $90 million in 1996 related principally to early retirement programs and consolidation of global brokerage operations, particularly in Europe. For purposes of the major lines of business discussion, comparisons against 1995 results exclude the discontinued operations and the special charges. A discussion of discontinued operations performance follows the major lines of business section. INSURANCE BROKERAGE AND CONSULTING SERVICES Beginning in 1996, Aon's retail brokerage and reinsurance and wholesale segments were combined into one segment called "Insurance and other services." Also included in this segment is revenue from financing services operations which includes service fees received from the placement of insurance premiums and retail auto financing receivables with unaffiliated parties; this was previously reported in the corporate segment. All prior period data has been reclassified to conform to the 1996 presentation. In 1996, Aon invested approximately $370 million in business combinations in its brokerage and consulting businesses. These business combinations were financed primarily by internal funds and the issuance of common stock. The major 1996 acquisitions include: Bain Hogg-a leading insurance brokerage company in the United Kingdom and Asia; Wesselhoeft Ahlers & Schues OHG-a retail brokerage and consulting operation in Germany; and S. Mark Brockington & Associates, Inc.-a U.S. retail operation specializing in providing insurance products to the transportation industry. INSURANCE BROKERAGE AND CONSULTING SERVICES (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Revenue: Insurance and other services $1,728 $1,477 $1,220 Consulting 274 250 222 - ------------------------------------------------------------------- Total revenue* 2,002 1,727 1,442 - ------------------------------------------------------------------- Operating expenses 1,705 1,467 1,232 Amortization of intangibles 40 48 47 - ------------------------------------------------------------------- Total expenses 1,745 1,515 1,279 - ------------------------------------------------------------------- Income before income tax excluding special charges 257 212 163 Special charges 75 -- -- - ------------------------------------------------------------------- Income before income tax $ 182 $ 212 $ 163 =================================================================== Identifiable assets at December 31 $5,025 $3,343 $3,009 =================================================================== *Includes net investment income, primarily relating to fiduciary funds, of $83 million, $76 million and $48 million in 1996, 1995 and 1994, respectively. Total 1996 brokerage and consulting services revenue was $2 billion, up 16%. Acquisitions accounted for approximately one-half of this revenue growth. Excluding the impact of acquisitions, revenue and income before income tax results demonstrated satisfactory growth given a very competitive environment. Insurance and other services (retail, reinsurance and wholesale brokerage) results were positively impacted by acquisitions, especially the inclusion of Bain Hogg in fourth quarter 1996, and good internal growth, particularly in non-U.S. operations. Insurance and other services retail brokerage results continued to be influenced by highly competitive property and casualty pricing in the U.S. market. Pretax income growth was slowed primarily due to market pressures experienced in the reinsurance brokerage business. - 19 - Included in insurance and other services revenue are financing service fees of $35 million, an increase of 37% over 1995. In addition, Aon Warranty Group provided warranty marketing and administrative services to the warranty underwriting operations. This activity generated revenue of $21 million in 1996. In the consulting line of business, 1996 revenue increased 10% to $274 million. Expansion of the integrated human resources consulting programs contributed to this improvement. Limiting the growth of consulting revenue and pretax income was a decline in revenues in the automotive consulting operations. Measures were taken to reduce costs in the automotive operations. INSURANCE BROKERAGE AND CONSULTING SERVICES GEOGRAPHIC DATA (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Revenue: United States $1,291 $1,202 $1,053 Europe 599 452 353 Rest of World 112 73 36 - ------------------------------------------------------------------- Total Revenue $2,002 $1,727 $1,442 - ------------------------------------------------------------------- Income Before Income Tax: United States $ 165 $ 153 $ 118 Europe 76 56 47 Rest of World 16 3 (2) - ------------------------------------------------------------------- Income before income tax excluding special charges 257 212 163 Special charges 75 -- -- - ------------------------------------------------------------------- Total Income Before Income Tax $ 182 $ 212 $ 163 =================================================================== U.S. revenue of $1.3 billion in 1996 was up 7% over 1995 while non-U.S. revenue increased 35%. Total pretax income was $257 million in 1996, up 21% from $212 million in 1995. U.S. pretax income was up 8% from 1995. Non-U.S. pretax income rose 56%, partially influenced by the fourth quarter 1996 acquisition of Bain Hogg. INSURANCE UNDERWRITING The insurance underwriting line of business provides a variety of direct sales life and accident and health products, and extended warranty products to individuals. INSURANCE UNDERWRITING (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Revenue: Direct sales $1,030 $1,014 $ 976 Extended warranty and specialty 514 386 316 Other 230 240 217 - ------------------------------------------------------------------- Total revenue 1,774 1,640 1,509 - ------------------------------------------------------------------- Benefits to policyholders 790 699 626 Operating expenses 512 488 458 Amortization of DPAC and intangibles 208 207 190 - ------------------------------------------------------------------- Total benefits and expenses 1,510 1,394 1,274 - ------------------------------------------------------------------- Income before income tax excluding special charges 264 246 235 Special charges 12 -- -- - ------------------------------------------------------------------- Income before income tax $ 252 $ 246 $ 235 =================================================================== Identifiable assets at December 31 $4,786 $3,736 $3,119 =================================================================== Revenue was $1.8 billion in 1996, up 8% from $1.6 billion in 1995. Direct sales business grew modestly, with 1996 revenue up 2% to $1 billion as the company continued to expand its product distribution through payroll deduction, worksite marketing programs. In general, expense margins decreased while benefit levels increased slightly, particularly in the extended warranty line. Direct sales accident and health business maintained its pretax margin in part due to good general expense controls and strong international health product sales. Certain specialty liability programs and auto credit business continued to be run off profitably. Pretax income was $264 million in 1996, up 7% from $246 million last year. INSURANCE UNDERWRITING GEOGRAPHIC DATA (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Revenue: United States $1,287 $1,188 $1,105 Europe 307 290 252 Rest of World 180 162 152 - ------------------------------------------------------------------- Total Revenue $1,774 $1,640 $1,509 - ------------------------------------------------------------------- Income Before Income Tax: United States $ 187 $ 180 $ 172 Europe 40 34 35 Rest of World 37 32 28 - ------------------------------------------------------------------- Income before income tax excluding special charges 264 246 235 Special charges 12 -- -- - ------------------------------------------------------------------- Total Income Before Income Tax $ 252 $ 246 $ 235 =================================================================== - 20 - U.S. revenue of $1.3 billion was up 8% in 1996 while non-U.S. revenue of $487 million rose 8% principally due to improved premiums earned in the extended warranty lines. Traditional life business in Europe and the Pacific continued to run off as planned. In addition, there was a higher volume of new business in the appliance and electronics extended warranty lines both domestically and internationally. U.S. pretax income rose 4% in 1996. Non-U.S. pretax income increased 17%, reflecting reduced expense levels pertaining to unit-linked business, which was sold in late 1996 with no significant gain or loss. CORPORATE AND OTHER Revenue 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. CORPORATE AND OTHER (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Revenue: Investment income on capital and other $ 104 $ 86 $ 71 Realized investment gains 8 13 19 - ------------------------------------------------------------------- Total revenue 112 99 90 - ------------------------------------------------------------------- Operating expenses 20 27 29 Interest expense 40 37 33 Amortization of intangibles 37 35 29 - ------------------------------------------------------------------- Total expenses 97 99 91 - ------------------------------------------------------------------- Income before income tax excluding special charges 15 -- (1) Special charges 3 -- -- - ------------------------------------------------------------------- Income before income tax $ 12 $ -- $ (1) =================================================================== Identifiable assets at December 31 $3,912 $2,948 $2,795 =================================================================== Revenue increased 13% over 1995 to $112 million. Realized investment gains declined $5 million in 1996 when compared to 1995. Excluding these gains from both years, revenue increased 21%, benefiting from investment income associated with a portion of the proceeds from the sales of UFLIC and LOV. Pretax income increased $15 million in 1996 largely due to availability of the sales proceeds. Partially offsetting this increase was a reduction in realized investment gains. Excluding realized investment gains from both years, pretax income increased $20 million over 1995. In addition, financing costs and certain goodwill amortization related to acquisitions grew more slowly when compared to the growth in revenue. DISCONTINUED OPERATIONS Discontinued operations are composed principally of capital accumulation products and direct response insurance products. Substantially all of the revenue and income before income tax, generated from discontinued operations, was U.S. Aftertax income on these businesses has been segregated as "Income From Discontinued Operations" in the consolidated statements of income. With the completion of the sales of UFLIC and LOV on April 1, 1996, there were no operating results from these discontinued operations going forward. In addition, in second quarter 1996, a $21 million gain on sale of discontinued operations, net of taxes, was recorded. INCOME TAX AND NET INCOME Net income for 1996 was $335 million or $2.87 per share compared to $403 million or $3.48 per share in 1995. Net income for fourth quarter 1996 amounted to $46 million or $0.38 per share compared to $93 million or $0.80 per share for 1995. Dividends on the 8%, 6.25% and redeemable preferred stock have been deducted from net income to compute earnings per share. Operating income from continuing operations before special charges and realized investment gains, was $346 million or $2.97 per share in 1996 compared to $295 million or $2.49 per share in 1995. Aon's effective operating income tax rate on continuing operations was 34.5% in 1996 and 33.7% in 1995, while realized investment gains were taxed at a 36% rate for both years. Average shares outstanding for 1996 increased 1% primarily due to the issuance of common shares related to business combinations and the conversion of preferred stock to common stock. - 21 - LIQUIDITY Consistent with financial statement presentation, the following cash flow and financial position discussion reflects the completion of the sales of UFLIC and LOV in April 1996. As a result of the sales, the consolidated statement of financial position at December 31, 1996, and the related consolidated statements of stockholders' equity and cash flows have been significantly impacted when compared to year-end 1995 and year-end 1994. Aon's operating subsidiaries anticipate 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. Dividends from Aon's subsidiaries are the primary source for meeting these requirements. There are certain regulatory restrictions relating to dividend capacity of insurance subsidiaries that are discussed in note 8. Insurance subsidiaries' statutory capital and surplus at year-end 1996 again exceeded the risk-based capital target set by the National Association of Insurance Commissioners by a satisfactory level. At December 31, 1996, Aon had short-term, back-up lines of credit available of $335 million. Aon measures capital accumulation product asset and liability durations to determine its net exposure to changes in interest rates. Aon's exposure to interest-sensitive products was substantially diminished following the sale of LOV because their products were principally interest-sensitive and investment-type. Through the use of hedging programs utilizing derivative financial instruments (derivatives) (see note 11), Aon improved its overall asset and liability duration match and hedged fair values of its available for sale portfolio. In administering its hedging programs, Aon performs analyses that have demonstrated that Aon achieves a high degree of correlation. The businesses of Aon's operating subsidiaries continue to provide substantial positive cash flow. Brokerage cash flow has been used primarily for acquisition financing. Given Aon's fixed maturity portfolio's average life of 6.8 years, access to lines of credit, and an uninterrupted trend in Aon's positive cash flow, Aon expects sufficient cash flow to meet both short-term and long-term cash needs. Future cash flow to service debt and pay dividends was enhanced by the completion of the sales of UFLIC and LOV in 1996. Sales proceeds generated approximately $1.2 billion after taxes and other costs of sale. The aftertax proceeds in excess of the carrying value of the companies sold generated a statutory gain at CICA, the parent company of UFLIC and LOV. In April 1996, CICA dividended $650 million of this gain to Aon. CICA reinvested the remaining proceeds primarily in non-affiliated assets. After meeting its routine dividend and debt servicing requirements, Aon used a majority of the remaining dividends received throughout the year to both reduce short-term debt and invest in the operational segments of its businesses. In early 1997, Aon completed the merger with Alexander and Alexander Services Inc. (A&A). The purchase price of approximately $1.2 billion was funded by the issuance of commercial paper, internal funds, and the issuance of trust preferred capital securities (capital securities) (see note 8). Aon's management anticipates a commitment to a restructuring plan primarily related to its brokerage operations in first quarter 1997 given the completion of the A&A acquisition. Cash provided by operating activities in 1996 decreased $255 million from 1995 to $355 million. This decrease primarily reflects the federal income tax payments relating to the sales of UFLIC and LOV. The tax payments are included as a reduction in operating activity whereas the sales proceeds are treated as investment activity. The remaining decrease is partially attributable to the reduced return on the proceeds from discontinued operations. Cash provided by investing activities was $238 million in 1996, up $862 million from 1995. This increase is primarily attributable to the sales of UFLIC and LOV. Cash used for acquisition activity during 1996 was $342 million, primarily reflecting the Bain Hogg acquisition. Cash totaling $301 million was used in 1996 for financing activities. Aon repurchased 1.3 million shares of its common stock at a total cost of $66 million. In 1996, Aon purchased and retired 553,000 shares of its 8% preferred stock at a total cost of $14 million. The repurchase of capital stock was primarily funded by a portion of the proceeds received from the sales of UFLIC and LOV. The net cash provided from capital accumulation product deposits and withdrawals was $71 million in 1996. Cash was used to pay dividends of $154 million on common stock, $11 million on the 8% preferred stock, $6 million on 6.25% preferred stock and $2 million on redeemable preferred stock. Assets and liabilities held under special contracts, which relate primarily to designated funds of group pension, variable life and annuity policyholders in 1996 and to discontinued operations in 1995, decreased $2.2 billion from 1995, reflecting the sale of discontinued operations. The net investment income generated from these assets is not included in the consolidated statements of income. Total assets decreased $6 billion to $13.7 billion, while invested assets at December 31, 1996 decreased $5.4 billion from year-end levels, primarily due to the sales of UFLIC and LOV. - 22 - INVESTMENT OPERATIONS Aon Corporation invests in broad asset categories related to its diversified operations. Investments are managed with the objective of maximizing earnings while matching asset and liability durations and considering regulatory requirements. Aon maintains well-capitalized operating companies. The financial strength of these companies permits an overall diversified investment portfolio for stability in volatile financial markets. Investment characteristics mirror liability characteristics of the respective operating units. Aon's insurance brokerage and consulting businesses invest fiduciary funds in shorter term obligations. Investments underlying interest-sensitive capital accumulation insurance products are primarily intermediate-term obligations, while indemnity and other types of non-interest sensitive insurance liabilities are primarily supported by intermediate and longer-term instruments. Longer-term assets also include private equity investments that are anticipated to generate returns in excess of those available in the public capital markets. With a carrying value of $3 billion, Aon's total fixed maturity portfolio is invested primarily in investment grade holdings (97%) and has a market value which is 104% of amortized cost. At December 31, 1996 and 1995, Aon's fixed maturity portfolio included mortgage-backed securities with an amortized cost of $64 million and $2 billion, respectively. The amortized cost and fair value of Aon's mortgage-backed securities are presented in note 4. Substantially all of the mortgage-backed securities included in Aon's fixed maturities portfolio at December 31, 1995 related to discontinued operations. After the sales of UFLIC and LOV in 1996, Aon's interest in and exposure to certain market risks associated with mortgage-backed securities was minimal. Aon maintained investment reserves related to mortgage loan losses on real estate holdings and real estate ventures and limited partnerships. These reserves are a product of Aon's continuing review of the characteristics and risks of its investment portfolio and current environmental and economic conditions. These reserves totaled $6 million at year-end 1996, down $25 million from the year-end 1995 level of $31 million. Substantially all of the decrease in reserves was related to the removal of assets and liabilities of discontinued operations. INVESTED ASSETS--CONTINUING OPERATIONS (millions) 1996 1995 - ---------------------------------------------------------- Short-term investments: Brokerage and consulting $ 874 $ 724 Insurance and other 392 191 Fixed maturities 2,826 2,325 Non-redeemable preferred stock 485 490 Common stocks and partnerships 489 322 Mortgages and real estate 88 63 Policy loans and other 59 69 - ---------------------------------------------------------- Total invested assets $5,213 $4,184 ========================================================== Investment Income (millions) 1996 1995 - ---------------------------------------------------------- Short-term investments: Brokerage and consulting $ 83 $ 76 Insurance and other 22 10 Fixed maturities 197 164 Non-redeemable preferred stock 45 33 Common stocks and partnerships 32 42 Mortgages and real estate 8 4 Policy loans and other 7 8 - ---------------------------------------------------------- Gross investment income 394 337 Investment expenses 10 8 - ---------------------------------------------------------- Net investment income $384 $329 ========================================================== CAPITAL RESOURCES In early 1997, Aon completed the merger with A&A for a purchase price of approximately $1.2 billion. This acquisition was financed by the issuance of capital securities (see note 8), internal funds, and the issuance of commercial paper. In 1996, short-term borrowings decreased $139 million. This decrease was primarily attributable to the use of sales proceeds to paydown commercial paper. Credit agreements providing lines of credit for commercial paper contain no restrictive covenants. In November 1996, each outstanding share of Aon's 6.25% Cumulative Convertible Exchangeable Preferred Stock (6.25% preferred stock) (see note 8) was converted by the holders into 1.22 shares of common stock for a total of 2,606,000 shares. Commencing on or after November 1, 1997, Aon has the option to redeem all or any part of the 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 December 31, 1996, 5,446,000 shares of 8% preferred stock were outstanding. Aon Corporation borrows funds from and lends funds to its various subsidiaries. As of December 31, 1996, Aon Corporation held obligations to its subsidiaries of approximately $350 million. Generally, these obligations have competitive interest rates. In 1996, stockholders' equity per common share increased to $24.31, up from $22.77 in 1995. The principal factors influencing this increase were net income which includes the aftertax gain on sale of discontinued operations of $21 million, and a $30 million increase in net unrealized investment gains. Partially offsetting this increase was the repurchase of common stock for treasury at a cost of $66 million, the increase in deferred compensation and dividends. - 23 -
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (millions) As of December 31 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- ASSETS INVESTMENTS Fixed maturities available for sale--at fair value $ 2,826.1 $ 7,687.1 Equity securities--at fair value 879.2 1,006.3 Mortgage loans on real estate (net of reserve for losses: 1996--$1; 1995--$26) 29.0 632.0 Real estate (net of accumulated depreciation: 1996--$8; 1995--$8) 17.8 36.5 Policy loans 58.2 226.3 Other long-term investments 136.2 112.6 Short-term investments 1,266.3 938.3 -------------------------- Total investments 5,212.8 10,639.1 - ------------------------------------------------------------------------------------------------------------------------- CASH 410.1 115.3 RECEIVABLES Insurance brokerage and consulting services receivables 3,565.9 2,264.1 Premiums and other 989.3 580.2 Accrued investment income 69.2 152.4 -------------------------- Total receivables (net of allowance for doubtful accounts: 1996--$63; 1995--$51) 4,624.4 2,996.7 - ------------------------------------------------------------------------------------------------------------------------- DEFERRED POLICY ACQUISITION COSTS 598.8 1,261.5 COST OF INSURANCE AND RENEWAL RIGHTS PURCHASED (net of accumulated amortization: 1996--$665; 1995--$625) 537.5 640.1 EXCESS OF COST OVER NET ASSETS PURCHASED (net of accumulated amortization: 1996--$194; 1995--$157) 1,060.2 957.6 PROPERTY AND EQUIPMENT AT COST (net of accumulated depreciation: 1996--$339; 1995--$307) 323.2 307.8 ASSETS HELD UNDER SPECIAL CONTRACTS 87.3 2,307.2 OTHER ASSETS 868.4 510.5 - ------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $13,722.7 $19,735.8 - ------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
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(millions) As of December 31 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY POLICY LIABILITIES Future policy benefits $ 1,079.4 $ 1,475.1 Policy and contract claims 840.9 970.9 Unearned and advance premiums 1,925.2 1,646.2 Other policyholder funds 514.1 5,464.2 -------------------------- Total policy liabilities 4,359.6 9,556.4 - ------------------------------------------------------------------------------------------------------------------------- INSURANCE PREMIUMS PAYABLE 4,143.7 2,722.8 GENERAL LIABILITIES Commissions and general expenses 776.8 562.4 Accrued income taxes Current 80.1 107.1 Deferred 16.5 225.5 Short-term borrowings 213.4 352.7 Notes payable 475.1 497.5 Debt guarantee of employee stock ownership plan 46.1 56.8 Liabilities held under special contracts 87.3 2,307.2 Other liabilities 641.2 623.7 -------------------------- TOTAL LIABILITIES 10,839.8 17,012.1 - ------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENT LIABILITIES REDEEMABLE PREFERRED STOCK 50.0 50.0 STOCKHOLDERS' EQUITY Preferred stock--$1 par value Authorized--25 shares; issued 8% cumulative perpetual preferred stock 5.5 6.0 6.25% cumulative convertible exchangeable preferred stock -- 2.1 Common stock--$1 par value Authorized--300 shares; issued 114.1 111.4 Paid-in additional capital 475.4 431.8 Net unrealized investment gains 153.1 123.1 Net foreign exchange gains 1.0 1.8 Retained earnings 2,356.8 2,212.1 Less treasury stock at cost (shares: 1996--3.2; 1995--3.1) (121.5) (97.3) Less deferred compensation (151.5) (117.3) -------------------------- TOTAL STOCKHOLDERS' EQUITY 2,832.9 2,673.7 - ------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,722.7 $19,735.8 =========================================================================================================================
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CONSOLIDATED STATEMENTS OF INCOME (millions except per share data) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- REVENUE Brokerage commissions and fees $1,918.8 $1,651.3 $1,388.7 Premiums earned 1,526.7 1,426.5 1,322.3 Net investment income (note 4) 384.0 329.4 257.1 Realized investment gains (note 4) 8.1 13.1 19.1 Other income 50.6 45.4 54.0 ----------------------------------------- Total revenue 3,888.2 3,465.7 3,041.2 - ------------------------------------------------------------------------------------------------------------------------- BENEFITS AND EXPENSES Commissions and general expenses 2,328.6 1,982.3 1,719.2 Benefits to policyholders 789.5 698.5 626.2 Interest expense 40.1 37.3 32.7 Amortization of deferred policy acquisition costs 207.9 207.5 189.3 Amortization of intangible assets 76.5 82.1 76.8 ----------------------------------------- Total benefits and expenses 3,442.6 3,007.7 2,644.2 - ------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX 445.6 458.0 397.0 Provision for income tax (note 6) 153.8 154.3 128.5 ----------------------------------------- INCOME FROM CONTINUING OPERATIONS 291.8 303.7 268.5 DISCONTINUED OPERATIONS (note 3): Income from discontinued operations, net of tax 22.4 99.1 91.5 Gain on sale of discontinued operations, net of tax 21.0 -- -- ----------------------------------------- NET INCOME $ 335.2 $ 402.8 $ 360.0 - ------------------------------------------------------------------------------------------------------------------------- Net income available for common stockholders $ 316.4 $ 378.1 $ 327.6 - ------------------------------------------------------------------------------------------------------------------------- PER SHARE Income from continuing operations $ 2.48 $ 2.57 $ 2.28 Discontinued operations 0.39 0.91 0.86 ----------------------------------------- Net income $ 2.87 $ 3.48 $ 3.14 ----------------------------------------- Cash dividends paid on common stock $ 1.42 $ 1.34 $ 1.26 - ------------------------------------------------------------------------------------------------------------------------- AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 110.2 108.7 106.2 ========================================================================================================================= See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK Balance at January 1 $ 8.1 $ 11.1 $ 13.8 Retirement of preferred stock (0.5) (3.0) (1.3) Conversion of preferred stock to common stock (2.1) -- (1.4) ----------------------------------------- 5.5 8.1 11.1 - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance at January 1 111.4 110.6 70.0 Shares issued for business combinations 0.1 0.8 5.3 Effect of three-for-two stock split -- -- 35.3 Conversion of preferred stock to common stock 2.6 -- -- ----------------------------------------- 114.1 111.4 110.6 - ------------------------------------------------------------------------------------------------------------------------- PAID-IN ADDITIONAL CAPITAL Balance at January 1 431.8 485.2 605.7 Stock awards 55.2 19.2 10.8 Adjustment for business combinations 2.2 (0.6) 1.9 Retirement and conversion of preferred stock (13.8) (72.0) (97.9) Effect of three-for-two stock split -- -- (35.3) ----------------------------------------- 475.4 431.8 485.2 - ------------------------------------------------------------------------------------------------------------------------- NET UNREALIZED INVESTMENT GAINS (LOSSES) Balance at January 1 123.1 (142.8) 50.3 Effect of a change in accounting principles at January 1 -- -- 148.2 Net unrealized investment gains (losses) 30.0 265.9 (341.3) ----------------------------------------- 153.1 123.1 (142.8) - ------------------------------------------------------------------------------------------------------------------------- NET FOREIGN EXCHANGE GAINS (LOSSES) Balance at January 1 1.8 (19.7) (61.0) Net foreign exchange gains (losses) (0.8) 21.5 41.3 ----------------------------------------- 1.0 1.8 (19.7) - ------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at January 1 2,212.1 1,998.1 1,784.9 Net income 335.2 402.8 360.0 Dividends to stockholders (171.8) (170.4) (162.0) Loss on treasury stock reissued (16.0) (21.7) -- Adjustment for business combinations (2.4) 3.7 27.6 Retirement of preferred stock (0.3) (0.4) (12.4) ----------------------------------------- 2,356.8 2,212.1 1,998.1 - ------------------------------------------------------------------------------------------------------------------------- TREASURY STOCK Balance at January 1 (97.3) (72.9) (69.3) Cost of shares acquired (66.1) (71.8) (26.6) Shares reissued at average cost 41.9 47.4 73.0 Conversion of common stock to redeemable preferred stock -- -- (50.0) ----------------------------------------- (121.5) (97.3) (72.9) - ------------------------------------------------------------------------------------------------------------------------- DEFERRED COMPENSATION Balance at January 1 (117.3) (112.2) (106.6) Issuance of stock awards (56.8) (21.2) (18.3) Debt guarantee of employee stock ownership plan 10.7 8.7 7.0 Amortization of deferred compensation 11.9 7.4 5.7 ----------------------------------------- (151.5) (117.3) (112.2) - ------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY AT DECEMBER 31 $2,832.9 $2,673.7 $2,257.4 ========================================================================================================================= See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 335.2 $ 402.8 $ 360.0 Adjustments to reconcile net income to cash provided by operating activities Policy liabilities 766.7 445.4 298.6 Deferred policy acquisition costs (213.1) (410.3) (414.5) Amortization of deferred policy acquisition costs 235.6 302.7 276.2 Amortization of intangible assets 79.0 94.2 92.2 Other amortization and depreciation 65.0 63.7 57.3 Other operating assets and liabilities (887.7) (284.6) 31.8 Realized investment gains (5.1) (4.3) (5.8) Gain on sale of discontinued operations (21.0) -- -- ----------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 354.6 609.6 695.8 - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Sale (purchase) of short-term investments--net (65.2) (126.9) 143.4 Sale or maturity of fixed maturities Available for sale--Maturities 135.5 121.2 109.5 Calls and prepayments 204.5 249.5 312.2 Sales 979.7 2,425.8 883.9 Held to maturity -- Maturities -- 3.9 49.2 Calls and prepayments -- 142.0 727.6 Sales -- 3.0 -- Sale of equity investments 636.1 1,215.6 686.5 Sale or maturity of other investments 200.6 265.2 292.7 Purchase of fixed maturities Available for sale (1,843.3) (3,222.1) (1,591.2) Held to maturity -- -- (734.8) Purchase of equity investments (661.3) (1,131.0) (805.1) Purchase of other investments (302.1) (362.9) (336.5) Acquisition of subsidiaries (342.2) (109.6) (22.0) Disposition of subsidiaries 1,370.0 -- -- Property and equipment and other (74.8) (97.9) (76.9) ----------------------------------------- CASH PROVIDED (USED) BY INVESTING ACTIVITIES 237.5 (624.2) (361.5) - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Treasury stock transactions--net (40.1) (46.4) (15.4) Issuance (repayment) of short-term borrowings--net (139.2) 108.8 75.3 Issuance of long-term debt -- 20.1 99.7 Repayment of long-term debt (5.7) (12.5) (128.0) Interest sensitive life, annuity and investment contracts Deposits 508.1 1,287.5 1,557.5 Withdrawals (437.4) (1,487.6) (1,362.4) Retirement of preferred stock (14.2) (75.4) (58.3) Cash dividends to stockholders (172.9) (171.3) (162.3) ----------------------------------------- CASH PROVIDED (USED) BY FINANCING ACTIVITIES (301.4) (376.8) 6.1 - ------------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 4.1 (2.1) 4.6 INCREASE (DECREASE) IN CASH 294.8 (393.5) 345.0 CASH AT BEGINNING OF YEAR 115.3 508.8 163.8 ----------------------------------------- CASH AT END OF YEAR $ 410.1 $ 115.3 $ 508.8 - ------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
- 28 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include the accounts of Aon Corporation and its operating subsidiaries (Aon). These statements include informed estimates and assumptions that affect the amounts reported. Actual results could differ from the amounts reported. All material intercompany accounts and transactions have been eliminated. BROKERAGE COMMISSIONS AND FEES In general, commission income is recognized at the later of the billing or effective date of the related insurance policies. Contingent commissions, certain life insurance commissions and commissions on premiums billed directly by insurance companies are generally recognized as income when received. Commissions on premium adjustments, including policy cancellations, are recognized as they occur. Fees for claim administration services, benefit consulting, reinsurance services and other services are recognized when the services are rendered. RECOGNITION OF PREMIUM REVENUE In general, for accident and health, extended warranty and credit products, premiums collected are reported as earned in proportion to insurance protection provided over the period covered by the policies. For life products other than credit, premiums are recognized as revenue when due. REINSURANCE Reinsurance premiums, commissions and expense reimbursements on reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and benefits ceded to other companies have been reported as a reduction of premium revenue and benefits. Expense reimbursements received in connection with reinsurance ceded have been accounted for as a reduction of the related policy acquisition costs or, to the extent such reimbursements exceed the related acquisition costs, as other revenue. All reinsurance receivables and prepaid reinsurance premium amounts are reported as assets. SPECIAL CHARGES In second quarter 1996, Aon recorded a $30 million pretax charge related to a voluntary early retirement program for all eligible employees of Aon's United States (U.S.) operating subsidiaries and similar programs in parts of Europe. Approximately 450 employees, 60% of whom were in the U.S., participated in the early retirement program. In fourth quarter 1996, Aon recorded pretax special charges of $60 million primarily related to management's commitment to a formal plan of restructuring Aon's European brokerage operations. The restructuring charges include $32 million relating to consolidating real estate space and data processing facilities and equipment, primarily in Europe, in order to merge Aon's existing operations with those of Bain Hogg Group plc (Bain Hogg). The restructuring charges related to consolidating real estate space are expected to be paid out over several years. Special charges of $12 million for workforce reductions are planned to take place within one year and involve approximately 300 positions. Costs associated with special assessments to be paid relating to the reconstruction of the Lloyd's of London insurance market were $11 million. The remaining charges primarily reflect Aon's exit from certain U.S. insurance underwriting markets. These charges were reflected in commissions and general expenses in the consolidated statements of income. INCOME TAX Deferred income tax has been provided for the effects of temporary differences between financial reporting and tax bases of assets and liabilities and has been measured using the enacted marginal tax rates and laws that are currently in effect. EARNINGS PER SHARE Earnings per share are computed based on the weighted average number of common and common equivalent shares outstanding during the respective period. Common shares outstanding include 3,013,000 shares, 3,267,000 shares and 3,386,000 shares held by the employee stock ownership plan in 1996, 1995 and 1994, respectively. Common equivalent shares include dilutive stock awards and stock options and, prior to 1995, Series B conversion preferred stock. The 8% cumulative perpetual preferred stock (8% preferred stock), the 6.25% cumulative convertible exchangeable preferred stock (6.25% preferred stock) and the redeemable preferred stock are not considered common equivalent shares. Accordingly, the dividends on the 8%, 6.25% and redeemable preferred stock have been deducted from net income to compute earnings per share. There is no material difference between primary and fully diluted per share amounts. Income available for common stockholders is net of dividends on all preferred stock. INVESTMENTS Fixed maturities are available for sale and are carried at fair value. The amortized cost of fixed maturities is adjusted for amortization of premiums to the first call date and the accretion of discounts to maturity that are included in net investment income. Included in fixed maturities are investments in collateralized mortgage obligations whose amortized cost is determined using the interest method including anticipated prepayments. Prepayment assumptions are obtained from dealer surveys. The retrospective adjustment method is used to adjust for prepayment activity. Equity securities are valued at fair value. Unrealized gains and temporary unrealized losses on fixed maturities available for sale and equity securities are excluded from income and are recorded directly to stockholders' equity, net of related deferred income taxes. Mortgage loans are carried at amortized cost, net of reserves. Real estate is carried generally at cost less accumulated depreciation. Policy loans are carried at unpaid principal balance. Other long-term investments are carried generally at cost. Realized investment gains or losses are computed using specific costs of securities sold. - 29 - Investments that have declines in fair value below cost, which are judged to be other than temporary, are written down to estimated fair values. Additionally, reserves for mortgage loan losses are based on discounted cash flows using the loan's initial effective interest rate. Reserves for certain other long-term investments are established based on an evaluation of the respective investment portfolio and current economic conditions. Writedowns and changes in reserves are included in realized investment gains and losses in the statements of income. In general, Aon ceases to accrue investment income where interest or dividend payments are in arrears. Accounting policies relating to derivative financial instruments are discussed in note 11. DEFERRED POLICY ACQUISITION COSTS Costs of acquiring new and renewal insurance underwriting business, principally the excess of new commissions over renewal commissions, underwriting and sales expenses that vary with and are primarily related to the production of new business, are deferred. For long-duration life and health products, amortization of deferred policy acquisition costs is related to and based on the expected premium revenues of the policies. In general, such amortization is adjusted to reflect current withdrawal experience. Expected premium revenues are estimated by using the same assumptions used in estimating future policy benefits. For extended warranty and short-duration health insurance, costs of acquiring and renewing business, which are deferred, are amortized as the related premium is earned. OTHER INTANGIBLE ASSETS In general, the excess of cost over net assets purchased relating to business acquisitions is being amortized into income over periods not exceeding forty years using the straight-line method. The cost of insurance and renewal rights purchased of certain subsidiaries is being amortized over a range of 4 to 25 years. PROPERTY AND EQUIPMENT Property and equipment are generally depreciated using the straight-line method over their estimated useful lives. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amounts in the consolidated statements of financial position for cash and cash equivalents, including short-term investments, approximate their fair value. Fair value for fixed maturity and equity securities is based on quoted market prices or, if they are not actively traded, on estimated values obtained from independent pricing services. However, the fair value for fixed maturity and equity securities relating to the discontinued operations were based on the underlying purchase agreements at December 31, 1995. The fair value for mortgage loans and policy loans is estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Fair value of derivatives is based on quoted prices for exchange-traded instruments or the cost to terminate or offset with other contracts. In general, other long-term investments are comprised of real estate joint ventures and limited partnerships. It was not practicable to estimate the fair value of other long-term investments because of the inability to estimate fair value without incurring excessive costs. In addition, the determination of the fair value of investment commitments was deemed impractical due to the inability to estimate future cash flows. Fair value for liabilities for investment-type contracts is estimated using discounted cash flow calculations based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. The fair value for notes payable is based on quoted market prices for the publicly traded portion and on estimates using discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements for the non-publicly traded portion. ASSETS AND LIABILITIES HELD UNDER SPECIAL CONTRACTS Assets held under special contracts principally represent designated funds of group pension, variable life, annuity and unit-linked policyholders. These assets are offset by liabilities that represent such policyholders' equity in those assets. The net investment income generated from these assets is not included in the consolidated statements of income. FUTURE POLICY BENEFITS, UNEARNED PREMIUMS AND POLICY AND CONTRACT CLAIMS Future policy benefit liabilities on non-universal life-type and accident and health products have been provided on the net level premium method. The liabilities are calculated based on assumptions as to investment yield, mortality, morbidity and withdrawal rates that were determined at the date of issue and provide for possible adverse deviations. Interest assumptions are graded and range from 7.0% to 5.0% at December 31, 1996. Withdrawal assumptions are based principally on insurance subsidiaries' experience and vary by plan, year of issue and duration. Policyholder liabilities on universal life-type and investment products are generally based on policy account values. Unearned premiums generally are calculated using the pro rata method based on gross premiums. However, in the case of extended warranty and credit products, the unearned premiums are calculated such that the premiums are earned over the period of risk in a reasonable relationship to anticipated claims. Policy and contract claim liabilities represent estimates for reported claims, as well as provisions for losses incurred, but not yet reported. These claim liabilities are based on historical experience and are estimates of the ultimate amount to be paid when the claims are settled. Changes in the estimated liability are reflected in income as the estimates are revised. FOREIGN CURRENCY TRANSLATION In general, foreign revenues and expenses are translated at average exchange rates. Foreign assets and liabilities are translated at year-end exchange rates. Net foreign exchange gains and losses on translation are generally reported in stockholders' equity, net of deferred income tax of $1 million at December 31, 1996 and 1995. ACCOUNTING CHANGES In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123 "Accounting for Stock- - 30 - Based Compensation." As allowed by Statement No. 123, Aon has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options and awards is measured as the excess, if any, of the quoted market price of Aon's stock at the grant date over the amount an employee must pay to acquire the stock. Aon has adopted the disclosure requirements of Statement No. 123. See note 10. In 1996, Aon adopted FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Implementation of this Statement did not have a material effect on Aon's financial statements. In 1996, the FASB issued Statement No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement provides accounting and reporting standards for sales, securitization and servicing of receivables and other financial assets and extinguishments of liabilities. The provisions of this Statement are to be applied to transactions occurring after December 31, 1996. Aon anticipates adopting this Statement in its 1997 financial statements as required. Implementation of this Statement is not expected to have a material effect on Aon's financial statements. Aon adopted FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in 1994. On November 15, 1995, the FASB issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." In accordance with provisions in that Special Report, Aon reclassified $2.9 billion of held to maturity securities, substantially all of which related to discontinued operations, to available for sale. 2. BUSINESS COMBINATIONS PURCHASE METHOD In October 1996, Aon acquired Bain Hogg for approximately $260 million. This acquisition was financed by internal funds. The 1996 statement of income included the operations of Bain Hogg since the date of acquisition. The purchase price allocation will be finalized during 1997. Aon's 1996 revenues would have been approximately $260 million greater had the acquisition occurred on January 1, 1996. In addition, during 1996, 1995 and 1994, subsidiaries of Aon acquired certain insurance brokerage and consulting services operations that were financed primarily by internal funds and the reissuance of common stock from treasury. Pursuant to a 1994 purchase agreement with one of the brokerage operations, Aon is contingently liable through 1999 to issue up to 239,000 additional shares of common stock based on a formula relating to future earnings of that operation. The aggregate cost of these acquisitions, excluding Bain Hogg, was $86 million, $110 million and $22 million in 1996, 1995 and 1994, respectively. The pro forma results of these operations, as if the acquisitions had occurred as of the beginning of the year, have an immaterial effect on Aon's consolidated revenue and net income. In accordance with a 1992 purchase agreement, securities with a value of $125 million are being held in escrow. The escrowed securities will be released on a pre-determined schedule between 1997 and 2007. POOLING OF INTERESTS METHOD In 1996, 1995 and 1994, Aon issued 546,000 shares, 1,404,000 shares and 5,546,000 shares of common stock, respectively, for mergers with insurance brokerage and consulting organizations. In connection with several of the mergers, 700,000 shares are being held in escrow at December 31, 1996, pending the resolution of contingencies. Aon's prior period financial statements have not been restated for the mergers because the effect of the above mergers was not material. 1997 ACQUISITION In early 1997, Aon completed its acquisition of Alexander & Alexander Services Inc. (A&A) for a purchase price of approximately $1.2 billion. The acquisition was financed primarily by the issuance of trust preferred capital securities (see note 8), issuance of commercial paper and internal funds. Aon will account for this acquisition as a purchase, and the application of purchase accounting in 1997 will result in a significant increase in intangible assets. Based on 1995 total insurance services and other revenue, A&A ranked as the world's fourth largest insurance brokerage company. 3. DISCONTINUED OPERATIONS In April 1996, Aon completed the sales of its domestic direct response life and health subsidiary, Union Fidelity Life Insurance Company (UFLIC) and its capital accumulation life insurance subsidiary, The Life Insurance Company of Virginia (LOV) to General Electric Capital Corporation and received aftertax sales proceeds of approximately $1.2 billion. The gain on sale of discontinued operations was $21 million, net of taxes. For 1996, 1995 and 1994, the discontinued operations had revenues of $293 million, $1,145 million and $1,116 million, respectively. The revenues and corresponding benefits and expenses were reported on a net basis in the consolidated statements of income and were net of taxes of $12 million, $53 million and $49 million in 1996, 1995 and 1994, respectively. Income from discontinued operations that was earned subsequent to the commitment to the plan to dispose was $22 million and $15 million, net of taxes, in 1996 and 1995, respectively. Included in discontinued operations is pretax interest expense of $5 million, $18 million and $14 million in 1996, 1995 and 1994, respectively. The allocation of interest expense was based on the ratio of discontinued net assets to total consolidated equity and debt. - 31 - The assets and liabilities after reinvestment of net sales proceeds of discontinued operations included in the consolidated statement of financial position at December 31, 1995 were as follows: (millions) - ------------------------------------------------------------------ Investments $5,470 Deferred policy acquisition costs 630 Intangible assets 150 Assets held under special contracts 2,020 Receivables and other assets 260 - ------------------------------------------------------------------ Total Assets $8,530 ================================================================== Policy liabilities $6,170 Liabilities held under special contracts 2,020 General and other liabilities 340 - ------------------------------------------------------------------ Total Liabilities $8,530 ================================================================== 4. INVESTMENTS The components of net investment income are as follows: (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Fixed maturities $197 $164 $132 Equity securities 61 59 56 Short-term investments 105 86 58 Other 31 28 19 - ------------------------------------------------------------------- Gross investment income 394 337 265 Investment expenses 10 8 8 - ------------------------------------------------------------------- Net investment income $384 $329 $257 =================================================================== Realized gains (losses) on investments are as follows: (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Fixed maturities available for sale: Gross gains $13 $ 8 $ 12 Gross losses (9) (3) (4) Equity securities 12 12 31 Other (8) (4) (20) - ------------------------------------------------------------------- Total before tax 8 13 19 Less applicable tax 3 5 7 - ------------------------------------------------------------------- Total net realized investment gains $ 5 $ 8 $ 12 =================================================================== The components of net unrealized gains (losses) are as follows: (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Fixed maturities $112 $115 $(158) Equity securities 128 78 (50) Deferred tax credit (charge) (87) (70) 35 Deferred policy acquisition costs -- -- 30 - ------------------------------------------------------------------- Net unrealized investment gains (losses) $153 $123 $(143) =================================================================== The changes in net unrealized investment gains (losses) are as follows: (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Fixed maturities: Available for sale $ (3) $273 $(403) Held to maturity -- 234 (351) Equity securities 50 128 (131) - ------------------------------------------------------------------- Total $47 $635 $(885) =================================================================== The cumulative effect of the adoption of Statement No. 115 on January 1, 1994, increased stockholders' equity by $148 million (net of adjustments to deferred policy acquisition costs of $14 million and deferred income taxes of $83 million) to reflect the net unrealized fixed maturities holding gains on securities previously carried at amortized cost; there was no effect on net income as a result of the adoption. The amortized cost and fair value of investments in available for sale fixed maturities and equity securities are as follows: As of December 31, 1996 Gross Gross Amortized Unrealized Unrealized Fair (millions) Cost Gains Losses Value - ------------------------------------------------------------------------------ U.S. government and agencies $ 45 $ 2 $ -- $ 47 States and political subdivisions 491 24 (1) 514 Foreign governments 948 44 (2) 990 Corporate securities 1,056 54 (7) 1,103 Mortgage-backed securities 64 1 -- 65 Other fixed maturities 110 -- (3) 107 - ------------------------------------------------------------------------------ Total fixed maturities 2,714 125 (13) 2,826 Total equity securities 751 142 (14) 879 - ------------------------------------------------------------------------------ Total $3,465 $267 $(27) $3,705 ============================================================================== As of December 31, 1995 Gross Gross Amortized Unrealized Unrealized Fair (millions) Cost Gains Losses Value - ------------------------------------------------------------------------------ U.S. government and agencies $ 151 $ 4 $ -- $ 155 States and political subdivisions 444 31 -- 475 Foreign governments 798 34 -- 832 Corporate securities 4,046 57 (11) 4,092 Mortgage-backed securities 2,033 2 -- 2,035 Other fixed maturities 100 1 (3) 98 - ------------------------------------------------------------------------------ Total fixed maturities 7,572 129 (14) 7,687 Total equity securities 928 120 (42) 1,006 - ------------------------------------------------------------------------------ Total $8,500 $249 $(56) $8,693 ============================================================================== The amortized cost and fair value of fixed maturities, by contractual maturity, as of December 31, 1996 is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair (millions) Cost Value - ----------------------------------------------------------------- Due in one year or less $ 109 $ 111 Due after one year through five years 712 742 Due after five years through ten years 1,119 1,175 Due after ten years 710 733 Mortgage-backed securities 64 65 - ----------------------------------------------------------------- Total available for sale $2,714 $2,826 ================================================================= - 32 - Securities on deposit for regulatory authorities as required by law amounted to $308 million at December 31, 1996 and $320 million at December 31, 1995. As required by the by-laws of Lloyd's brokers, assets subject to floating charges for the benefit of insurance creditors amounted to $853 million and $566 million at December 31, 1996 and 1995, respectively. Aon maintains premium trust bank accounts for premiums collected from insureds but not yet remitted to insurance companies of $580 million and $495 million at December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, respectively, Aon had $42 million and $72 million of non-income producing investments. 5. DEBT AND LEASE COMMITMENTS Notes Payable The following is a summary of notes payable: (millions) As of December 31 1996 1995 - ----------------------------------------------------------------- 6.3% debt securities, due January 2004 $100 $100 6.7% debt securities, due June 2003 150 150 6.875% debt securities, due October 1999 100 100 7.4% debt securities, due October 2002 100 100 Notes payable, due in varying installments, with interest at 6% to 8% 25 48 - ----------------------------------------------------------------- Total notes payable $475 $498 ================================================================= Interest is payable semiannually on all debt securities. In addition, the debt securities are not redeemable by Aon prior to maturity and contain no sinking fund provisions. Maturities of notes payable are $4 million, $14 million, $104 million and $1 million in 1997, 1998, 1999 and 2000, respectively. In addition, Aon has credit agreements providing lines of credit for commercial paper. The available commercial paper back-up lines of credit totaled $335 million at December 31, 1996. Information related to notes payable and short-term borrowings is as follows: Years ended December 31 1996 1995 1994 - ---------------------------------------------------------- Interest paid (millions) $45 $54 $44 Weighted average interest rates-- short-term borrowings 5.3% 5.9% 4.5% ========================================================== Guaranteed Debt Aon's employee stock ownership plan (ESOP) has entered into loan agreements to purchase Aon common stock. The loans are unconditionally guaranteed by Aon and therefore the unpaid balance of the loans is reflected as debt in the accompanying statements of financial position. An equivalent amount, representing deferred compensation, is recorded as a deduction from stockholders' equity. The ESOP paid $15 million, $14 million and $13 million in 1996, 1995 and 1994, respectively, in loan principal and interest from contributions made by Aon to the ESOP as well as dividend proceeds of common stock held by the ESOP. The loans have an interest rate of 8.35% and serially mature through 1999. Interest expense incurred by the ESOP related to these loans amounted to $4 million, $5 million and $6 million in 1996, 1995 and 1994, respectively. Future contributions, as determined by Aon's Board of Directors, plus dividends earned on shares held by the ESOP will be used to service the loans. The ESOP allocated 396,000 shares in 1996. The remaining unallocated shares at December 31, 1996 will be released for allocation annually through early 1999. The following table details the shares held in the ESOP: (thousands) As of December 31 1996 1995 - ------------------------------------------------------------------ Allocated 1,623 1,481 Committed to be released 428 396 Unallocated 962 1,390 - ------------------------------------------------------------------ Total 3,013 3,267 ================================================================== Lease Commitments Aon has noncancelable operating leases for certain office space,equipment and automobiles. Future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 1996 are: (millions) Minimum Lease Payments - --------------------------------------------------------- 1997 $ 134 1998 125 1999 118 2000 105 2001 93 Later years 485 - --------------------------------------------------------- Total minimum payments required $1,060 - --------------------------------------------------------- Rental expenses for all operating leases for the years ended December 31, 1996, 1995 and 1994, amounted to $114 million, $103 million and $93 million, respectively. 6. INCOME TAX Aon and its principal domestic subsidiaries are included in a consolidated life-nonlife federal income tax return. Aon's foreign subsidiaries file various income tax returns in their foreign jurisdictions. A reconciliation of the income tax provisions based on the U.S. statutory corporate tax rate to the provisions reflected in the consolidated financial statements is as follows: Years ended December 31 1996 1995 1994 - ---------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Tax-exempt investment income (3.7) (3.8) (4.0) State income taxes 3.5 2.8 2.3 Other--net (0.3) (0.3) (0.9) - ---------------------------------------------------------- Effective tax rate 34.5% 33.7% 32.4% - ---------------------------------------------------------- - 33 - The provision for income tax is made up of the following components: (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Current: Federal $115 $111 $ 59 Foreign 55 45 62 State 25 20 14 - ------------------------------------------------------------------- Total current $195 $176 $135 - ------------------------------------------------------------------- Deferred (credit): Federal $ (9) $ (17) $ 3 Foreign (31) (4) 1 State (1) (1) (10) - ------------------------------------------------------------------- Total deferred (41) (22) (6) - ------------------------------------------------------------------- Provision for income tax $154 $154 $129 =================================================================== Significant components of Aon's deferred tax liabilities and assets are as follows: (millions) As of December 31 1996 1995 - ------------------------------------------------------------------ Deferred tax liabilities: Policy acquisition costs $ 65 $298 Unrealized investment gains 87 70 Other--net 99 197 - ------------------------------------------------------------------ Total deferred tax liabilities 251 565 - ------------------------------------------------------------------ Deferred tax assets: Insurance reserve amounts 140 217 Other--net 94 122 - ------------------------------------------------------------------ Total deferred tax assets 234 339 - ------------------------------------------------------------------ Net deferred tax liabilities $ 17 $226 ================================================================== Prior to 1984, the life insurance companies were required to accumulate certain untaxed amounts in a memorandum "policyholders' surplus account." Under the Tax Reform Act of 1984, the "policyholders' surplus account" balances were "capped" at December 31, 1983 and the balances will be taxed only to the extent distributed to stockholders or when they exceed certain prescribed limits. As of December 31, 1996, the combined "policyholders' surplus account" of Aon's life insurance subsidiaries approximates $363 million. Aon's life insurance subsidiaries do not intend to make any taxable distributions or exceed the prescribed limits in the foreseeable future; therefore, no income tax provision has been made. However, if such taxes were assessed, the amount of tax payable would be $127 million. The amount of income taxes paid in 1996, 1995 and 1994 was $387 million, $256 million and $167 million, respectively. 7. REINSURANCE AND CLAIM RESERVES Aon's insurance subsidiaries are involved in both the cession and assumption of reinsurance with other companies. Aon's reinsurance consists primarily of short-duration contracts that are entered into with numerous automobile dealerships and insurers. Aon's insurance subsidiaries would remain liable to the extent that the reinsuring companies were unable to meet their obligations. A summary of reinsurance activity is as follows: (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Ceded premiums earned $508 $316 $319 Ceded premiums written 667 369 340 Assumed premiums earned 292 83 91 Assumed premiums written 276 101 99 Ceded benefits to policyholders 220 153 170 =================================================================== Activity in the liability for policy contract claims is summarized as follows: (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Liabilities at beginning of year $ 715 $ 681 $ 686 Incurred losses: Continuing operations--current year 830 726 596 Continuing operations--prior year (92) (71) (59) Discontinued operations 90 361 386 - ------------------------------------------------------------------- Total 828 1,016 923 - ------------------------------------------------------------------- Payment of claims: Current year (552) (651) (582) Prior years (283) (331) (346) - ------------------------------------------------------------------- Total (835) (982) (928) - ------------------------------------------------------------------- Liability for business sold (173) -- -- Liabilities at end of year (net of reinsurance recoverables: 1996--$306, 1995--$256, 1994--$263) $ 535 $ 715 $ 681 =================================================================== 8. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Redeemable Preferred Stock In 1994, Aon issued 1,000,000 shares of redeemable preferred stock to a former officer in exchange for 1,500,000 shares of Aon common stock. Dividends are cumulative at an annual rate of $2.55 per share. The shares of redeemable preferred stock will be redeemable at the option of Aon or the holders, in whole or in part, at $50.00 per share no sooner than February 9, 1999. 8% Cumulative Perpetual Preferred Stock At December 31, 1996, 5,446,000 shares of cumulative 8% perpetual preferred stock are outstanding. In 1996 and 1995, 553,000 shares and 3,001,000 shares were purchased and retired at a total cost of $14 million and $75 million, respectively. Dividends are cumulative at the annual rate of $2.00 per share. At its option, Aon may redeem all or any part of the stock at any time on or after November 1, 1997 at a redemption price of $25.00 per share plus all accrued and unpaid dividends. The holders of the stock have limited voting rights. 6.25% Cumulative Convertible Exchangeable Preferred Stock At December 31, 1995, 2,136,000 shares of 6.25% cumulative convertible exchangeable preferred stock were outstanding. Dividends were cumulative at the annual rate of $3.125 per share. In November 1996, each share of 6.25% preferred stock was converted by the holders into 1.22 shares of common stock for a total of 2,606,000 common shares. - 34 - Series B Conversion Preferred Stock At December 1, 1994, 1,439,000 shares of Series B conversion preferred stock were outstanding and each share of stock was automatically converted, pursuant to the stock's terms, into one and one half shares of common stock issued from treasury. Dividends were cumulative at an annualized rate of $3.04 per share. Aon repurchased 1,210,000 shares of its outstanding stock for $58 million in 1994. These shares were canceled and retired. Common Stock Aon repurchased 1,287,000, 1,979,000 and 844,000 shares in 1996, 1995 and 1994, respectively, of its common stock, primarily to provide shares for stock compensation plans and the conversion of preferred stock. Dividends A summary of dividends incurred is as follows: (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Redeemable preferred stock $ 2 $ 2 $ 2 8% cumulative perpetual preferred stock 11 16 18 6.25% cumulative convertible exchangeable preferred stock 5 7 7 Series B conversion preferred stock -- -- 6 Common stock 154 145 129 - ------------------------------------------------------------------- Total dividends incurred $172 $170 $162 - ------------------------------------------------------------------- Subsequent Event In January 1997, Aon created Aon Capital A, a statutory business trust created for the purpose of issuing mandatorily redeemable preferred capital securities (capital securities). 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 the acquisition of 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. Interest is payable semi-annually on the capital securities. Statutory Capital and Surplus Generally, the capital and surplus of Aon's insurance subsidiaries available for transfer to the parent company are limited to the amounts that the insurance subsidiaries' statutory capital and surplus exceed minimum statutory capital requirements; however, payments of the amounts as dividends may be subject to approval by regulatory authorities. See note 6 for possible tax effects of distributions made out of untaxed earnings. Net statutory income of the insurance subsidiaries (including LOV and UFLIC through 1995 and the statutory gain on the sale of LOV and UFLIC in 1996), is summarized as follows: (millions)Years ended December 31 1996 1995 1994 - ------------------------------------------------------------- Life insurance $807 $197 $272 Property casualty 71 58 34 ============================================================= Statutory capital and surplus of the insurance subsidiaries (including LOV and UFLIC at December 31, 1995) is summarized as follows: (millions) As of December 31 1996 1995 - ------------------------------------------------------------- Life insurance $612 $766 Property casualty 364 296 ============================================================= 9. EMPLOYEE BENEFITS Savings and Profit Sharing Plans Certain of Aon's subsidiaries maintain a contributory savings plan for the benefit of United States salaried and commissioned employees and a contributory profit sharing plan for the benefit of Canadian salaried employees and commissioned agents. The company contribution for the savings plan is based on a match of 100% of employee contributions up to a maximum of 3% of eligible compensation. Provisions made for these plans were $14 million, $14 million and $13 million in 1996, 1995 and 1994, respectively. Employee Stock Ownership Plan Certain of Aon's subsidiaries maintain a leveraged ESOP for the benefit of the United States salaried and certain commissioned employees. Shares are allocated to eligible employees over a period of ten years through 1998. Contributions to the ESOP amounted to $12 million, $11 million and $9 million in 1996, 1995 and 1994, respectively. Domestic Pension Plan Certain of Aon's subsidiaries maintain a non-contributory defined benefit pension plan providing retirement benefits for salaried employees and certain commissioned employees in the United States based on years of service and salary. Aon's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as Aon determines to be appropriate from time to time. A summary of the components of net periodic pension cost for the defined benefit plans in 1996, 1995 and 1994 is as follows: (millions)Years ended December 31 1996 1995 1994 - ------------------------------------------------------------- Defined benefit plan: Service cost-benefit earned $ 21 $ 17 $ 21 Interest cost on projected benefit obligation 21 19 17 Actual return on plan assets (51) (66) (3) Net amortization and deferral 29 44 (18) - ------------------------------------------------------------- Net periodic pension cost $ 20 $ 14 $ 17 ============================================================= The weighted average assumptions used in accounting for the defined benefit plan were: Years ended December 31 1996 1995 1994 - --------------------------------------------------------------- Assumed discount rate 7.8% 7.5% 8.5% Rate of compensation increase 5.0% 5.0% 5.0% Expected long-term rate of return on plan assets 9.0% 9.0% 9.0% =============================================================== - 35 - In April 1996, Aon established a limited time early retirement incentive program that provided benefits through the defined benefit plan. The additional cost of termination benefits applicable for 1996, resulting from the program, was $19 million. Also in 1996, Aon completed the sales of LOV and UFLIC which resulted in a curtailment gain of $8 million, which is included in the gain on sale of discontinued operations. As a result of the sales of these units, affected employees became fully vested in their accrued benefits in the defined benefit plan. During 1994, the Aon Pension Plan was amended to reduce the maximum amount of compensation that can be considered under the plan as required by law and to provide increases in benefits to current pensioners. Net periodic pension cost for 1994 decreased $2 million as a result of these amendments. The following table sets forth the funded status and amounts recognized in the consolidated statements of financial position for Aon's U.S. defined benefit pension plan. (millions) As of December 31 1996 1995 - ------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $255 $218 Accumulated benefit obligation 261 224 - ------------------------------------------------------------- Projected benefit obligation 305 286 Plan assets at fair value 317 282 - ------------------------------------------------------------- Plan assets greater than (less than) projected benefit obligation 12 (4) Unrecognized net gain (63) (26) Unrecognized prior service cost 1 2 - ------------------------------------------------------------- Pension cost included in other liabilities $ (50) $ (28) ============================================================= Plan assets include marketable equity securities, deposit administration insurance contracts and corporate and government debt securities including securities issued by Aon totaling $35 million and $28 million in 1996 and 1995, respectively. In addition, $186 million of plan assets were held under a special contract with a subsidiary of Aon in 1995. FOREIGN PENSION PLANS Certain of Aon's foreign subsidiaries maintain contributory and non-contributory defined benefit pension plans for employees outside of the United States that provide retirement benefits based on service and salary. Material plans are maintained in the United Kingdom and The Netherlands. The funding policy for these plans is to contribute the amounts required by the plan provisions or applicable regulations, although additional amounts may be contributed from time to time. A summary of the components of net periodic pension cost for the material defined benefit plans, grouped by country, is as follows: (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------------ United Kingdom: Service cost-benefit earned $ 11 $ 11 $ 8 Interest cost on projected benefit obligation 17 15 10 Actual loss (return) on plan assets (28) (29) 6 Net amortization and deferral 6 11 (20) - ------------------------------------------------------------------------ Net periodic pension cost $ 6 $ 8 $ 4 ======================================================================== The Netherlands: Service cost-benefit earned $ 4 $ 4 $ 2 Interest cost on projected benefit obligation 9 9 8 Actual return on plan assets (11) (11) (9) Net amortization and deferral -- -- 1 - ------------------------------------------------------------------------ Net periodic pension cost $ 2 $ 2 $ 2 ======================================================================== The weighted average assumptions used in accounting for these defined benefit plans were: Years ended December 31 1996 1995 1994 - --------------------------------------------------------------- United Kingdom: Assumed discount rate 8.0% 9.0% 9.0% Rate of compensation increase 5.5% 7.0% 7.0% Expected long-term rate of return on plan assets 10.0% 10.0% 10.0% - --------------------------------------------------------------- The Netherlands: Assumed discount rate 7.0% 7.0% 7.0% Rate of compensation increase 4.0% 4.0% 4.0% Expected long-term rate of return on plan assets 7.0% 7.0% 7.0% =============================================================== The following tables set forth the funded status and the amounts recognized in the 1996 and 1995 consolidated statements of financial position for Aon's foreign defined benefit pension plans. United Kingdom: (millions) As of December 31 1996 1995 - ------------------------------------------------------------- Projected benefit obligation $617 $192 Plan assets at fair value 680 212 - ------------------------------------------------------------- Plan assets in excess of projected benefit obligation 63 20 Unrecognized net loss 6 4 Unrecognized prior service cost 1 1 Unrecognized net transition obligation 1 1 - ------------------------------------------------------------- Prepaid pension cost included in other assets $ 71 $ 26 ============================================================= The Netherlands: (millions) As of December 31 1996 1995 - ------------------------------------------------------------- Projected benefit obligation $136 $140 Plan assets at fair value 165 168 - ------------------------------------------------------------- Plan assets in excess of projected benefit obligation 29 28 Unrecognized net loss 18 19 - ------------------------------------------------------------- Prepaid pension cost included in other assets $ 47 $ 47 ============================================================= - 36 - The funded status and the amounts recognized in the consolidated statements of financial position increased in 1996 as compared to 1995 primarily due to the acquisition of Bain Hogg. Postretirement Benefits Other Than Pensions Aon sponsors defined benefit postretirement health and welfare plans that cover both salaried and nonsalaried employees in the U.S., as well as certain other salaried employees in Canada. In the U.S., one plan provides medical benefits, prior to and subsequent to Medicare eligibility and the other provides life insurance benefits. In Canada, the plans provide both extended health care benefits and life insurance benefits. The postretirement health care plans are contributory, with retiree contributions adjusted annually; the life insurance plans are noncontributory. The employer's liability for future plan cost increase is limited in any year to 5% per annum. All plans are funded on a pay-as-you go basis. In 1996, Aon completed the sales of LOV and UFLIC resulting in a curtailment gain of $5 million which was included in the gain on sale of discontinued operations. The following table sets forth the plans' combined funded status: As of December 31 1996 1995 (millions) Medical Life Medical Life - --------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $17 $ 7 $15 $ 8 Fully eligible active plan participants 5 2 8 4 Other active plan participants 7 2 9 2 - --------------------------------------------------------------------------- 29 11 32 14 Unrecognized prior service 16 5 22 6 Unrecognized net gain 20 7 20 5 - --------------------------------------------------------------------------- Accrued postretirement benefit liability $65 $23 $74 $25 =========================================================================== Net periodic postretirement benefit cost includes the following components: (millions) Years ended December 31 1996 1995 1994 - ------------------------------------------------------------------- Service cost $ 1 $ 1 $ 1 Interest cost 3 3 4 Amortization of prior service (7) (7) (6) - ------------------------------------------------------------------- Net periodic postretirement benefit credit $(3) $(3) $(1) =================================================================== For measurement purposes in 1996, 1995 and 1994, a 9.5%, 10.5% and 11.5%, respectively, annual rate of increase in the per capita cost of covered health care benefits (trend rate) adjusted for actual current year cost experience was assumed, decreasing gradually to 6% in year 2000 and remaining the same thereafter. However, with the employer funding increase cap limited to 5% per year, net employer trend rates are effectively limited to 5% per year in the future. Increasing the assumed health care cost trend rates by one percentage point would result in no change in the accumulated postretirement benefit obligation (APBO) as of December 31, 1996 because of the 5% cap on future employer funding increases. Assumptions used in determining the APBO are summarized below: As of December 31 1996 1995 1994 - --------------------------------------------------------------------------- Weighted-average discount rate 7.8% 7.5% 8.5% Weighted-average rate of compensation increase 5.0% 5.0% 5.0% =========================================================================== 10. STOCK COMPENSATION PLANS Stock Award Plan In 1994, Aon's stockholders approved an amendment to the Aon Stock Award Plan that increased the aggregate number of common stock that Aon could award to 5,025,000 shares. Generally, the award plan requires the employees to complete three continuous years of service before the award begins to vest in increments until the completion of a ten-year period of continuous employment. In general, most awarded shares are issued as they become vested. With certain limited exceptions, any break in continuous employment will cause forfeiture of all unvested awards. The compensation cost associated with each award is deferred and amortized over the period of continuous employment using the straight line method. Aon common stock awards outstanding consist of the following: (thousands) Years ended December 31 1996 1995 1994 - ----------------------------------------------------------------------- Shares outstanding at beginning of year 2,609 2,169 1,672 Granted 1,195 709 726 Vested and exercised (265) (216) (214) Canceled (66) (53) (15) - ----------------------------------------------------------------------- Shares outstanding at end of year 3,473 2,609 2,169 ======================================================================= Stock Option Plan Under a nonqualified stock option plan, options to purchase common stock were granted to certain officers and employees of Aon and its subsidiaries at 100% of market value on the date of grant. Generally, the option plan requires employees to complete three continuous years of service before the options begin to vest in increments until the completion of a seven-year period of continuous employment. Aon adopted the disclosure-only option under Statement No. 123, "Accounting for Stock-Based Compensation," as of December 31, 1996. If the accounting provisions of the new Statement had been adopted as of the beginning of 1996, the effect on both the 1996 and 1995 net income and net income per share would have been immaterial. Further, based on the current and anticipated use of stock options, it is not anticipated that the impact of Statement No. 123's accounting provisions would be material in future periods. - 37 - A summary of Aon's stock option activity and related information consists of the following:
Years ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------------- Weighted Average Exercise Price Price (shares in thousands) Shares Price Shares Range Shares Range - -------------------------------------------------------------------------------------- Beginning outstanding 3,475 $32 3,346 $14-36 2,699 $14-36 Granted (at fair value) 1,023 52 1,086 32-38 1,134 31-36 Exercised (488) 26 (747) 14-29 (353) 14-26 Canceled (493) 35 (210) 17-36 (134) 14-36 - -------------------------------------------------------------------------------------- Ending outstanding 3,517 39 3,475 20-38 3,346 14-36 - -------------------------------------------------------------------------------------- Exercisable at end of year 310 29 425 20-35 648 14-32 - -------------------------------------------------------------------------------------- Options available for grant 863 1,450 2,326 - --------------------------------------------------------------------------------------
A summary of options outstanding and options exercisable at December 31, 1996 is as follows:
(shares in thousands) Options Outstanding Options Exercisable - --------------------------------------------------------------------------------------- Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise As of Contractual Exercise As of Exercise Prices 12/31/96 Life(Years) Price 12/31/96 Price - --------------------------------------------------------------------------------------- $24.50-$33.44 692 2.7 $28.94 235 $26.44 33.96- 33.96 802 4.2 33.96 -- -- 34.25- 35.75 746 5.1 35.65 14 34.46 35.83- 48.88 310 3.7 36.77 61 36.00 51.50- 60.25 967 6.3 52.13 -- -- - --------------------------------------------------------------------------------------- $24.50-$60.25 3,517 4.6 $38.56 310 $28.68 - ---------------------------------------------------------------------------------------
11. FINANCIAL INSTRUMENTS Financial Risk Management Aon is exposed to market risk from changes in interest rates and foreign currency exchange rates. To manage the volatility related to these exposures, Aon enters into various derivative transactions that have the effect of reducing these risks by creating offsetting market exposures. If Aon did not use derivative contracts, its exposure and market risk would be higher. Derivative transactions are governed by a uniform set of policies and procedures covering areas such as authorization, counterparty exposure and hedging practices. Positions are monitored using techniques such as market value and sensitivity analyses. In addition to creating market risks that offset the underlying business exposures, certain derivatives also give rise to credit risks due to possible non-performance by counterparties. The credit risk is generally limited to the fair value of those contracts that are favorable to Aon. Aon has limited its credit risk by restricting investments in derivative contracts to a diverse group of highly rated major financial institutions and by using exchange-traded instruments. Aon closely monitors the creditworthiness of and exposure to its counterparties and considers its credit risk to be minimal. At December 31, 1996 and 1995, Aon placed securities in escrow amounting to $13 million and $1 million, respectively, relating to these derivative contracts. Interest Rate Risk Management Aon uses interest rate derivative contracts to manage the interest rate risk associated with assets and liabilities underlying its underwriting businesses. Interest rate derivatives are also utilized to manage the company's funding and other corporate risks. Interest rate swap agreements have been used primarily to manage asset and liability durations. Exchange-traded Eurodollar futures, used in conjunction with basis rate swaps, are used to manage asset liability durations related to various other crediting arrangements emanating from other insurance businesses. As of December 31, 1996 and 1995, these swap agreements had the net effect of shortening asset durations. Variable rates received on interest rate and basis rate swap agreements correlate with crediting rates paid on outstanding liabilities. The net effect of swap payments is settled periodically and reported in income. There is no settlement of underlying notional amounts. Exchange-traded treasury futures and options are used primarily as a hedge against the value of Aon's available for sale fixed maturity and equity investments. Aon sells futures as well as writes call options and limits its risk on these written options to a spread by purchasing call options. Exchange-traded futures and options are valued and settled daily. The premium that Aon pays for purchased options and receives for written options represents the cost basis of the option until it expires or is closed. Aon also enters into interest rate swap agreements, sells exchange-traded interest rate futures and purchases interest rate caps to limit its interest expense on short-term borrowings. The premium that Aon pays for interest rate caps represents the cost basis of the position until it expires or is closed. Aon performs frequent analyses to measure the degree of correlation associated with its derivative programs. Aon assesses the adequacy of the correlation analyses results in determining whether the derivatives qualify for hedge accounting. The premium that Aon pays or receives for options (including interest rate caps and floors) represents the cost basis of the option until it expires or is closed. Realized gains and losses on derivatives that qualify as hedges are deferred and reported as an adjustment of the cost basis of the hedged item. Deferred gains and losses are amortized into income over the remaining life of the hedged item. Outstanding derivatives that are hedges of items carried at fair value are reflected in the financial statements at fair value with changes in the derivative fair value reported as unrealized gains and losses directly in stockholders' equity. In January 1997, Aon issued $800 million of 8.205% capital securities (see note 8). To hedge its exposure to rising long-term interest rates associated with the anticipated debt issue, Aon entered into various exchange-traded derivative contracts including treasury futures and options. The hedge was in place from December 1996 until January 1997. Foreign Exchange Risk Management Aon uses foreign currency futures, options and forward contracts to hedge against the effects of foreign currency fluctuations on the translation of the financial statements of Aon's - 38 - foreign operations. Generally, realized and unrealized gains and losses on those derivatives are recorded directly to stockholders' equity, as a component of net unrealized foreign exchange gains and losses. Certain of Aon's foreign brokerage subsidiaries receive revenues in currencies that differ from the currency in which their operating expenses are denominated. To reduce the variability of cash flows from these operations, foreign forward exchange contracts having settlement dates that are primarily less than one year are used. Related gains or losses on these contracts are reflected as an adjustment to the expense component on the statement of income when the currencies are exchanged to settle expense commitments. Contracts entered into require no up-front premium and settle at the expiration of the related contract. Notional and Other Data The following are the notional amounts of Aon's outstanding derivatives grouped by the types of risks being managed: (millions) As of December 31 1996 1995 - -------------------------------------------------------------------------- Interest rate and asset/liability duration management Net Eurodollar futures $1,741 $820 Treasury futures 220 -- Call options 72 -- Interest rate swaps--pay fixed 90 260 Interest rate swaps--receive fixed 85 10 Basis rate swaps--pay and receive variable 90 70 Interest rate management for anticipated transactions Treasury futures 100 -- Call options 250 -- Put options 500 -- Interest rate caps 22 72 Foreign currency management--forwards 157 62 ========================================================================== During each of the years, 1996, 1995 and 1994, Aon amortized $3 million of net deferred gains relating to derivatives into income. Realized losses related to anticipated transactions were immaterial for the years ended December 31, 1996 and 1995. The interest rates on Aon's outstanding swaps at December 31 are presented below: Receive Pay Pay Receive Fixed Variable Fixed Variable - ---------------------------------------------------------------------- 1996 5.8-6.8% 5.6% 6.0-9.7% 5.6-6.0% 1995 -- -- 7.9-8.3% 5.4% ====================================================================== As of December 31, 1996, the swaps have maturities ranging from May 1997 to December 2026. Aon receives variable rates based on the one month commercial paper and the six month London Interbank Offer Rate (LIBOR) rate. Aon pays variable rates based on the three- and six-month LIBOR rates. Basis rate swaps mature in December 2000 and require payments based on the three month LIBOR index and provide for receipts based on the two-year treasury rate. Eurodollar futures, with maturities ranging from March 1997 to June 2001, effectively convert the variable rate basis swap payments to fixed payments. Other outstanding contracts generally have lives that are 90 days or less. Other Financial Instruments Aon has certain investment commitments to provide capital and fixed-rate loans as well as certain forward contract purchase commitments. The investment commitments, which would be collateralized by related properties of the underlying investments, involve varying elements of credit and market risk. Investment commitments outstanding at December 31, 1996 and 1995 totaled $154 million and $196 million, respectively. Subsidiaries of Aon have entered into agreements with financial institutions, whereby the subsidiaries sold certain receivables, with limited recourse. Agreements provide for sales of receivables on a continuing basis through September 1997. As of December 31, 1996 and 1995, the maximum commitment contained in these agreements was $1,155 million and $752 million, respectively. Accounts receivable sold in 1996, 1995 and 1994 amounted to $1,726 million, $1,253 million and $1,095 million, respectively. Outstanding receivables of $1,077 million and $687 million, remained to be collected at December 31, 1996 and 1995, respectively. Aon's credit risk relates to amounts that may be due under recourse provisions that could exceed recorded estimates. At December 31, 1996 and 1995, this exposure was approximately $42 million. Fair Value of Financial Instruments Accounting standards require the disclosure of fair values for certain financial instruments. The fair value disclosures are not intended to encompass the majority of policy liabilities, various other non-financial instruments or other intangible assets related to Aon's business. Accordingly, care should be exercised in deriving conclusions about Aon's business or financial condition based on the fair value disclosures. The carrying value and fair value of certain of Aon's financial instruments are as follows: As of December 31 1996 1995 - ------------------------------------------------------------- Carrying Fair Carrying Fair (millions) Value Value Value Value - ------------------------------------------------------------- Assets: Fixed maturities and equity securities (note 4) $3,705 $3,705 $8,693 $8,693 Mortgage loans on real estate 29 29 632 684 Policy loans 58 57 226 223 Cash, receivables, short-term and other long-term investments 6,437 6,437 4,163 4,163 Derivatives* -- 10 1 1 Liabilities: Investment type insurance contracts $ 507 $ 509 $3,666 $3,711 Short-term borrowings, premium payables and commissions and general expenses 5,134 5,134 3,638 3,638 Notes payable 475 478 498 513 Derivatives -- -- -- 24 ============================================================= *Derivatives with a carrying value of $21 million and a fair value of $21 million are included in other asset categories at December 31, 1996. - 39 - 12. LITIGATION 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. Although the ultimate outcome of these suits cannot be ascertained and liabilities in indeterminate amounts may be imposed on Aon or its subsidiaries, on the basis of present information, availability of insurance coverages and advice received from counsel, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of Aon. 13. SEGMENT INFORMATION Aon Corporation is a multinational holding company. Its businesses serve consumers and commercial operations in North America, South America, Europe, Africa, Asia and Australia. Aon's continuing operations are concentrated into two core businesses. Insurance brokerage and consulting services provide services for commercial, industrial and insurance company clients. Insurance underwriting provides life, accident and health insurance and extended warranty products for individual consumers, delivered through controlled distribution channels. Certain reclassifications of prior period segment information have been made to conform to the current period presentation. The segment information located in the tables on pages 18 through 21 is incorporated herein by reference. - 40 - REPORTS BY INDEPENDENT AUDITORS AND MANAGEMENT REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS Aon CORPORATION We have audited the accompanying consolidated statements of financial position of Aon Corporation as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aon Corporation at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in note 4, the Company changed its method of accounting for certain investments in 1994. /s/ Ernst & Young LLP Chicago, Illinois February 11, 1997 REPORT BY MANAGEMENT The management of Aon Corporation is responsible for the integrity and objectivity of the financial statements and other financial information in the annual report. The statements have been prepared in conformity with generally accepted accounting principles. These statements include informed estimates and judgments for those transactions not yet complete or for which the ultimate effects cannot be measured precisely. Financial information elsewhere in this report is consistent with that in the financial statements. The consolidated financial statements have been audited by our independent auditors. Their role is to render an independent professional opinion on Aon's financial statements. Management maintains a system of internal control designed to meet its responsibilities for reliable financial statements. The system is designed to provide reasonable assurance, at appropriate costs, that assets are safeguarded and that transactions are properly recorded and executed in accordance with management's authorization. Judgments are required to assess and balance the relative costs and expected benefits of those controls. It is management's opinion that its system of internal control, as of December 31, 1996, was effective in providing reasonable assurance that its financial statements were free of material misstatement. In addition, management supports and maintains a professional staff of internal auditors who coordinate audit coverage with the independent auditors and conduct an extensive program of financial and operational audits. The Board of Directors selects an Audit Committee from among its members. No member of the Audit Committee is an employee of Aon. The Audit Committee is responsible to the Board for reviewing the accounting and auditing procedures and financial practices of Aon and for recommending appointment of the independent auditors. The Audit Committee meets periodically with management, internal auditors and independent auditors to review the work of each and satisfy itself that those parties are properly discharging their responsibilities. Both the independent auditors and the internal auditors have free access to the Committee, without the presence of management, to discuss the adequacy of internal control and to review the quality of financial reporting. - 41 -
SELECTED FINANCIAL DATA (millions except common stock and per share data) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA Brokerage commissions and fees $ 1,919 $ 1,651 $ 1,389 $ 1,190 $ 714 Premiums earned 1,527 1,427 1,322 1,278 1,275 Net investment income 384 329 257 227 223 Realized investment gains 8 13 19 30 24 Other income 50 46 54 46 42 Total revenue 3,888 3,466 3,041 2,771 2,278 - ------------------------------------------------------------------------------------------------------------ Income from continuing operations $ 292 $ 304 $ 269 $ 228 $ 134 Discontinued operations 43 99 91 96 72 Net income 335 403 360 324 127 Operating income from continuing operations* 346 295 256 214 171 - ------------------------------------------------------------------------------------------------------------ PER SHARE DATA Income from continuing operations $ 2.48 $ 2.57 $ 2.28 $ 1.91 $ 1.24 Discontinued operations 0.39 0.91 0.86 0.90 0.69 Net income 2.87 3.48 3.14 2.81 1.17 Operating income from continuing operations* 2.97 2.49 2.16 1.79 1.60 - ------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA ASSETS Investments $ 5,213 $10,639 $ 9,783 $ 9,652 $ 9,088 Brokerage receivables 3,566 2,264 1,882 1,615 1,524 Other 4,944 6,833 6,257 5,012 3,678 ------------------------------------------------------- Total assets $13,723 $19,736 $17,922 $16,279 $14,290 - ------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities $ 4,360 $ 9,556 $ 9,310 $ 8,776 $ 7,759 Insurance premiums payable 4,144 2,723 2,409 1,948 1,866 Notes payable 521 554 561 594 556 General liabilities 1,815 4,179 3,335 2,673 2,005 ------------------------------------------------------- Total liabilities 10,840 17,012 15,615 13,991 12,186 Redeemable preferred stock 50 50 50 -- -- Stockholders' equity 2,833 2,674 2,257 2,288 2,104 ------------------------------------------------------- Total liabilities and stockholders' equity $13,723 $19,736 $17,922 $16,279 $14,290 - ------------------------------------------------------------------------------------------------------------ COMMON STOCK DATA Dividends paid per share $ 1.42 $ 1.34 $ 1.26 $ 1.18 $ 1.11 Stockholders' equity per share 24.31 22.77 18.30 18.95 17.48 Price range 643/4-471/2 507/8-313/8 353/4-291/4 39-307/8 36-261/8 Market price at year-end 62.125 49.875 32.000 32.250 36.000 Common stockholders 13,030 13,520 14,163 14,615 14,746 Shares outstanding (in millions) 110.9 108.3 107.7 101.6 100.0 - ------------------------------------------------------------------------------------------------------------ *Operating income from continuing operations excludes aftertax realized investment gains, 1996 special charges of $59 million, a retroactive tax charge in 1993 of $5 million, the 1992 cumulative effect of changes in accounting principles of $80 million, and 1992 special charges of $54 million.
- 42 -
QUARTERLY FINANCIAL DATA (millions except common stock and per share data) 1Q 2Q 3Q 4Q 1996 - ------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA Brokerage commissions and fees $468.0 $445.5 $454.5 $ 550.8 $1,918.8 Premiums earned 378.0 381.3 382.1 385.3 1,526.7 Net investment income 84.7 92.6 92.4 114.3 384.0 Realized investment gains -- -- 3.1 5.0 8.1 Other income 11.4 13.0 12.2 14.0 50.6 ----------------------------------------------------------- Total revenue 942.1 932.4 944.3 1,069.4 3,888.2 ----------------------------------------------------------- Income from continuing operations 96.5 65.3 83.8 46.2 291.8 Discontinued operations 22.4 21.0 -- -- 43.4 Net income 118.9 86.3 83.8 46.2 335.2 Operating income from continuing operations* 96.5 84.8 81.8 82.5 345.6 - ------------------------------------------------------------------------------------------------------------------ PER SHARE DATA Income from continuing operations $ 0.84 $ 0.55 $ 0.72 $ 0.38 $ 2.48 Discontinued operations 0.20 0.19 -- -- 0.39 Net income 1.04 0.74 0.72 0.38 2.87 Operating income from continuing operations* 0.84 0.73 0.70 0.71 2.97 - ------------------------------------------------------------------------------------------------------------------ COMMON STOCK DATA Dividends paid per share $ 0.34 $ 0.36 $ 0.36 $ 0.36 $ 1.42 Stockholders' equity per share 22.76 23.15 23.29 24.31 24.31 Price range 553/8-483/4 557/8-497/8 541/2-471/2 643/4-54 643/4-471/2 Average dividend yield 2.6% 2.7% 2.8% 2.4% 2.5% Shares outstanding (in millions) 108.5 107.9 108.3 110.9 110.9 Average monthly trading volume (in millions) 3.0 4.7 2.3 3.6 3.4 ==================================================================================================================
(millions except common stock and per share data) 1Q 2Q 3Q 4Q 1995 - ------------------------------------------------------------------------------------------------------------------ Income Statement Data Brokerage commissions and fees $424.6 $400.2 $400.9 $ 425.6 $1,651.3 Premiums earned 335.7 364.7 358.1 368.0 1,426.5 Net investment income 80.9 77.5 86.6 84.4 329.4 Realized investment gains 1.1 (0.6) 8.8 3.8 13.1 Other income 10.9 10.1 11.3 13.1 45.4 ----------------------------------------------------------- Total revenue 853.2 851.9 865.7 894.9 3,465.7 ----------------------------------------------------------- Income from continuing operations 90.5 71.7 77.0 64.5 303.7 Discontinued operations 20.7 27.0 23.0 28.4 99.1 Net income 111.2 98.7 100.0 92.9 402.8 Operating income from continuing operations* 89.8 72.0 71.4 62.0 295.2 - ------------------------------------------------------------------------------------------------------------------ Per Share Data Income from continuing operations $ 0.77 $ 0.60 $ 0.66 $ 0.54 $ 2.57 Discontinued operations 0.19 0.25 0.21 0.26 0.91 Net income 0.96 0.85 0.87 0.80 3.48 Operating income from continuing operations* 0.76 0.60 0.61 0.52 2.49 - ------------------------------------------------------------------------------------------------------------------ Common Stock Data Dividends paid per share $ 0.32 $ 0.34 $ 0.34 $ 0.34 $ 1.34 Stockholders' equity per share 19.79 21.63 21.89 22.77 22.77 Price range 371/2-313/8 38-355/8 413/4-361/4 507/8-401/2 507/8-313/8 Average dividend yield 3.7% 3.7% 3.4% 3.0% 3.3% Shares outstanding (in millions) 108.0 107.1 108.0 108.3 108.3 Average monthly trading volume (in millions) 1.4 1.8 2.1 3.1 2.1 ================================================================================================================== *Operating income from continuing operations excludes aftertax realized investment gains of $5 million and $8 million in 1996 and 1995, respectively, and special charges of $19 million and $40 million in second quarter 1996 and fourth quarter 1996, respectively.
- 43 - EX-21 6 AON CORPORATION SUBIDIARIES Aon Corporation Subsidiaries As of December 31, 1996 Corporate Name Jurisdiction - --------------------------------------------- -------------- A. J. Norcott & Company (Holdings) Limited United Kingdom A. J. Norcott & Partners (Northern) Limited United Kingdom A. J. Norcott & Partners (Scotland) Limited United Kingdom A. J. Norcott & Partners Limited United Kingdom A. J. Norcott Benefit Consultants Limited United Kingdom A.H. Laseur B.V. Netherlands AAA Auto Club South Finance, L.P. Illinois AAA Missouri Automotive Financial Services Illinois AOPA Insurance Agency, Inc. Maryland AOPA Insurance Agency, Inc. Texas APM Services Limited Hong Kong APS International Limited United Kingdom APS Life & Pensions Limited United Kingdom APS Overseas Investments Limited United Kingdom ARM COVERAGE INC. New York ARS Holdings, Inc. Illinois ARS Holdings, Inc. Louisiana Acedale Co. Ltd. Hong Kong Adams & Porter Financial Services, Inc. Texas Adams & Porter Services, Inc. Texas Advantage Plus Insurance Services, Inc. Illinois Adviser 151 Limited United Kingdom Affinity Insurance Services, Inc. Pennsylvania Agencia Interoceanica de Subscripcion y Administracion S. A. Mexico Agostini Insurance Brokers Ltd. Trinidad Agricola Training Limited United Kingdom Agricola Underwriting Limited United Kingdom Agricola Underwriting Management Limited New Zealand Agricola Underwriting Management Pty Ltd. Australia Agricultural Risk Management Chile Chile Agricultural Risk Management North America, Inc. Kansas Agricultural Risk Management Pacific Limited New Zealand Agricultural Risk Management Pty. Australia Agricultural Risk Management, Limited United Kingdom Airscope Insurance Services Limited United Kingdom Alpenbeck Limited United Kingdom American Associates, Inc. Texas American Insurance Brokers, Ltd. Indiana American National General Agencies, Inc. Colorado Anchor Reinsurance Company, Ltd. Bermuda Anchor Underwriting Managers, Ltd. Bermuda Anscor Insurance Brokers Inc. Philippines Aon Advisors (U.K.) Limited United Kingdom Aon Advisors, Inc. Virginia Aon Antillen nv Netherland Antilles Aon Aruba nv Netherland Antilles Aon Automotive Group, Inc. Illinois Aon Aviation, Inc. Illinois Aon Belgium nv Belgium Aon Broker Services, Inc. Illinois Aon Capital A Delaware Aon Capital Corporation Delaware Aon Capital Management, Inc. Delaware Aon Capital Markets, Inc. Delaware Aon Captive Management, Ltd. U.S. Virgin Islands Aon Captive Services (Nederland) bv Netherlands Aon Captive Services Antillen nv Netherland Antilles Aon Construction Services International Limited United Kingdom Aon Consulting & Insurance Services California Aon Consulting Denmark A/S Denmark Aon Consulting Hong Kong Ltd. Hong Kong Aon Consulting Limited United Kingdom Aon Consulting Nederland cv Netherlands Aon Consulting Pty Limited Australia Aon Consulting Thailand Ltd. Thailand Aon Consulting Worldwide, Inc. Delaware Aon Consulting, Inc. Florida Aon Consulting, Inc. Massachusetts Aon Consulting, Inc. Michigan Aon Consulting, Inc. Minnesota Aon Consulting, Inc. New York Aon Consulting, Inc. Ohio Aon Consulting, Inc. Pennsylvania Aon Consulting, Inc. Texas Aon Consulting, Inc. Agency Texas Aon Consulting, Limited Les Consultants Aon, Limitee Quebec Aon Denmark A/S Denmark Aon Direct Group Small Company Life and Health Agents Illinois Aon Direct Group, Inc. California Aon Eesti AS Estland Aon Employee Benefits of Ohio, Inc. Ohio Aon Entertainment Risk Services Limited United Kingdom Aon Entertainment, Ltd. New York Aon Financial Institutions Services, Inc. Illinois Aon Financial Services Group of Colorado, Inc. Colorado Aon Financial Services Group of New York, Inc. New York Aon Financial Services Group, Inc. California Aon Financial Services Group, Inc. Illinois Aon Financial Services Group, Inc. Pennsylvania Aon Financial Services Group, Inc. Texas Aon Finland OY Finland Aon France S.A. France Aon GGI Acquisition Corporation, Inc. Texas Aon General Agency, Inc. Texas Aon Groep Nederland bv Netherlands Aon Group, Inc. Delaware Aon Hamond & Regine, Inc. New York Aon Hazard Limited United Kingdom Aon Healthcare Risk, Inc. Florida Aon Holdings (Scandinavia) A/S Denmark Aon Holdings Antillen nv Netherland Antilles Aon Holdings Asia Ltd. Hong Kong Aon Holdings Australia Ltd. Australia Aon Holdings Deutschland GmbH Germany Aon Holdings Limited United Kingdom Aon Holdings New Zealand Pty. Ltd. New Zealand Aon Holdings bv Netherlands Aon Hudig Groningen bv Netherlands Aon Hudig Hengelo bv Netherlands Aon Hudig Nijmegen bv Netherlands Aon Hudig Noordwijk bv Netherlands Aon Hudig Tilburg bv Netherlands Aon Hudig Venlo bv Netherlands Aon Hudig cv Netherlands Aon Iberia, Correduria de Seguros, S.A. Spain Aon India Limited United Kingdom Aon Insurance Management Services - Virgin Islands, Inc. U.S. Virgin Islands Aon Insurance Management Services, Inc. Delaware Aon Insurance Management of Texas, Inc. Texas Aon Insurance Services California Aon Insurance Services, Inc. Pennsylvania Aon Intermediaries (Bermuda) Ltd. Bermuda Aon International Panama Ltd. S.A. Panama Aon International bv Netherlands Aon Investment Consulting Inc. Florida Aon Investment Holdings, Inc. Delaware Aon Italia SpA Italy Aon Life Agency of Texas, Inc. Texas Aon Lumley South Africa (Pty) Ltd. South Africa Aon Magyarorszag Alkusz Kft. Hungary Aon Managed Care, Inc. California Aon Management Hong Kong Ltd. Hong Kong Aon Management Institute, Inc. Connecticut Aon Medical Consultants, Inc. Delaware Aon Nominees Limited United Kingdom Aon Norway A/S Norway Aon Overseas Holdings Limited United Kingdom Aon Partnership Limited United Kingdom Aon Polska sp.z.o.o. Poland Aon Portugal, Corretores de Seguros, S.A. Portugal Aon Properties Limited United Kingdom Aon Pyramid International Limited United Kingdom Aon Re (Bermuda) Ltd. Bermuda Aon Re (Thailand) Ltd. Thailand Aon Re Accident & Health Limited United Kingdom Aon Re Asia Ltd. Singapore Aon Re Aviation Limited United Kingdom Aon Re China Ltd. Hong Kong Aon Re Inc. Illinois Aon Re International Limited United Kingdom Aon Re Latinoamericana, S.A. Mexico Aon Re Limited United Kingdom Aon Re Netherlands cv Netherlands Aon Re Non-Marine Limited United Kingdom Aon Re North American Limited United Kingdom Aon Re Panama, S.A. Panama Aon Re Special Risks Limited United Kingdom Aon Re UK Limited United Kingdom Aon Re Worldwide Limited United Kingdom Aon Re Worldwide, Inc. Delaware Aon Risk Consultants (Bermuda ) Ltd. Bermuda Aon Risk Consultants (Europe) Limited United Kingdom Aon Risk Consultants, Inc. Illinois Aon Risk Management Services Italia srl. Italy Aon Risk Management Services Scandinavia A/S Denmark Aon Risk Resources Limited United Kingdom Aon Risk Resources, Inc. Delaware Aon Risk Services (Antilles) nv Netherland Antilles Aon Risk Services (B.C.) Inc. British Columbia Aon Risk Services (Barbados) Ltd. Barbados Aon Risk Services (Bermuda) Ltd. Bermuda Aon Risk Services (Cayman) Ltd. Cayman Islands Aon Risk Services (Europe) S.A. Luxembourg Aon Risk Services (Holdings) of Latin America, Inc. Delaware Aon Risk Services (Holdings) of the Americas, Inc. Illinois Aon Risk Services (Nederland) BV Netherlands Aon Risk Services (Nederland) bv Netherlands Aon Risk Services (Vermont) Inc. Vermont Aon Risk Services Australia Ltd. Australia Aon Risk Services Canada Inc. Canada Aon Risk Services Companies, Inc. Delaware Aon Risk Services France S.A. France Aon Risk Services Holdings UK Limited United Kingdom Aon Risk Services Hong Kong Ltd. Hong Kong Aon Risk Services Inc. Ontario Aon Risk Services International (Holdings) Inc. Delaware Aon Risk Services Japan Ltd. Japan Aon Risk Services Korea Ltd. Korea Aon Risk Services Limited United Kingdom Aon Risk Services New Zealand Pty. Ltd. New Zealand Aon Risk Services Thailand Ltd. Thailand Aon Risk Services UK Limited United Kingdom Aon Risk Services of Missouri, Inc. Missouri Aon Risk Services of Texas, Inc. Texas Aon Risk Services, Inc. Delaware Aon Risk Services, Inc. U.S.A. New York Aon Risk Services, Inc. of Alabama Alabama Aon Risk Services, Inc. of Arizona Arizona Aon Risk Services, Inc. of Arkansas Arkansas Aon Risk Services, Inc. of Central California Insurance Services California Aon Risk Services, Inc. of Colorado Colorado Aon Risk Services, Inc. of Connecticut Connecticut Aon Risk Services, Inc. of Florida Florida Aon Risk Services, Inc. of Georgia Georgia Aon Risk Services, Inc. of Hawaii Hawaii Aon Risk Services, Inc. of Idaho Idaho Aon Risk Services, Inc. of Illinois Illinois Aon Risk Services, Inc. of Indiana Indiana Aon Risk Services, Inc. of Kansas Kansas Aon Risk Services, Inc. of Kentucky Kentucky Aon Risk Services, Inc. of Louisiana Louisiana Aon Risk Services, Inc. of Massachusetts Massachusetts Aon Risk Services, Inc. of Michigan Michigan Aon Risk Services, Inc. of Minnesota Minnesota Aon Risk Services, Inc. of Montana Montana Aon Risk Services, Inc. of Nebraska Nebraska Aon Risk Services, Inc. of Nevada Nevada Aon Risk Services, Inc. of New Jersey New Jersey Aon Risk Services, Inc. of New York New York Aon Risk Services, Inc. of Northern California Insurance Services California Aon Risk Services, Inc. of Ohio Ohio Aon Risk Services, Inc. of Oklahoma Oklahoma Aon Risk Services, Inc. of Oregon Oregon Aon Risk Services, Inc. of Pennsylvania Pennsylvania Aon Risk Services, Inc. of Rhode Island Rhode Island Aon Risk Services, Inc. of Southern California Insurance Services California Aon Risk Services, Inc. of Tennessee Tennessee Aon Risk Services, Inc. of Utah Utah Aon Risk Services, Inc. of Virginia Virginia Aon Risk Services, Inc. of Washington Washington Aon Risk Services, Inc. of Washington, D.C. District of Columbia Aon Risk Services, Inc. of Wisconsin Wisconsin Aon Risk Services, Inc. of Wyoming Wyoming Aon Risk Services, Inc. of the Carolinas North Carolina Aon Risk Strategies, Inc. Delaware Aon Risk Technologies, Inc. Delaware Aon Securities Corporation New York Aon Select, Inc. Pennsylvania Aon Service Corporation Illinois Aon Sigorta Brokerlik ve Musavirlik AS Turkey Aon South Africa (Pty) Ltd. South Africa Aon Special Risks, Inc. Illinois Aon Specialty Denmark A/S Denmark Aon Specialty Group of Tennessee, Inc. Tennessee Aon Specialty Group, Inc. Delaware Aon Specialty Limited United Kingdom Aon Superannuation Pty Limited Australia Aon Surety & Guarantee Limited United Kingdom Aon Sweden AB Sweden Aon Technical Insurance Services, Inc. Illinois Aon Technology Brokers, Inc. California Aon Telecom, Inc. Illinois Aon Texas Acquisition Corporation Texas Aon UK Limited United Kingdom Aon Vietnam Vietnam Aon Warranty Group, Inc. Illinois Aon Warranty Services, Inc. Illinois Aon makelaars in assurantien bv Netherlands Aon/Albert G. Ruben Company (New York) Inc. New York Aon/Albert G. Ruben Insurance Services, Inc. California Artscope Insurance Services Limited United Kingdom Artscope International Insurance Services Agency GmbH Germany Artscope International Insurance Services Limited United Kingdom Artscope International Kunstversicherungsmakler GmbH Germany Ascom Nijmegen B.V. Netherlands Asia Area Underwriters Ltd. Hong Kong Associated Brokers International Zimbabwe Assuco Holdings Ltd. Guernsey Assurantie Groep Langeveldt c.v. Netherlands Atkins Kroll Insurance Inc. Guam Attorneys' Advantage Insurance Agency, Inc. Illinois Austpac Insurance Brokers Pty. Ltd. Australia Auto Conduit Corporation, The Delaware Automotive Development Centers, Inc. Illinois Automotive Warranty Services of Florida, Inc. Florida Automotive Warranty Services, Inc. Delaware Ayala-Bain Insurance Company Philippines B.L. Carnie Hogg Robinson Ltd. United Kingdom B.V. Assurantiekantoor Langeveldt-Schroder Netherlands BEC Insurance Services Ltd. United Kingdom BH No. 1 Ltd. United Kingdom BRIC, Inc. North Carolina Bain Clarkson (HK) Ltd. Hong Kong Bain Clarkson Limited United Kingdom Bain Clarkson Members Underwriting Agency Ltd. United Kingdom Bain Clarkson R.B. Ltd. United Kingdom Bain Clarkson Sweden A.B. Sweden Bain Clarkson Underwriting Management Ltd. United Kingdom Bain Dawes (London) Ltd. United Kingdom Bain Dawes Services Ltd. United Kingdom Bain Hogg (Americas) Inc. Florida Bain Hogg (Fiji) LTd. Fiji Bain Hogg (Vanuatu) Ltd. Vanuatu Bain Hogg Australia (Holdings) Ltd. Australia Bain Hogg Australia (Investments) Pty Ltd. Australia Bain Hogg Australia Ltd. Australia Bain Hogg Chile S.A. Corredoros de Reasguro Chile Bain Hogg Colombiana Ltd. Colombia Bain Hogg Group PLC United Kingdom Bain Hogg Hellas Ltd. United Kingdom Bain Hogg Holdings Limited United Kingdom Bain Hogg Insurance Management (Guernsey) Ltd. Guernsey Bain Hogg Insurance Management (Isle of Man) Ltd. Isle of Man Bain Hogg Intermediaro de Reaseguro SA de CV Mexico Bain Hogg International Holdings Ltd. United Kingdom Bain Hogg International Ltd. Taiwan Bain Hogg International Ltd. United Kingdom Bain Hogg Ltd. United Kingdom Bain Hogg Malawi Ltd. Malawi Bain Hogg Management Ltd. United Kingdom Bain Hogg New Zealand Ltd. New Zealand Bain Hogg Pensions Pty Ltd. Australia Bain Hogg Robinson Inc. Delaware Bain Hogg Robinson Pty Ltd. Australia Bain Hogg Russian Insurance Brokers Ltd. Russia Bain Hogg Solomon Islands Ltd. Solomon Islands Bain Hogg Trustees Ltd. United Kingdom Bain Hogg Uganda Ltd. Uganda Bain Insurance Brokers Kenya Ltd. Kenya Bankers Insurance Service Corp. Illinois Baoviet Inchcape Insurance Brokers Ltd. Vietnam BenefitsMedia, Inc. Tennessee Berkely Agency Ltd. New York Berkely Coverage Corporation New York Berkely-ARM, Inc. New York BerkelyCare, LTD. New York Black Portch & Swain (Financial Services) Ltd. United Kingdom Black Portch & Swain Ltd. United Kingdom Blom & Van der Aa BV Netherlands Blom & Van der Aa Holding BV Netherlands Boels Begault Holdings S.A. Belgium Brennan Group, Inc., The Delaware British Continental and Overseas Agencies (BCOA) SA France Broadgate Holdings Ltd. United Kingdom Bruno Sforni S.p.A. Italy Bruns Ten Brink & Co. b.v. Netherlands Bruns Ten Brink Groep b.v. Netherlands Bruns Ten Brink Herverzekeringen b.v. Netherlands Bryson Associates Incorporated Pennsylvania Bureau d'Assurances Pirrotte GmbH Luxembourg Bureau d'Assurances Pirrotte GmbH & Co. KG Luxembourg Burlington Insurance Services Ltd. United Kingdom C.I.C. Realty, Inc. Illinois C.V. 'T Huys Ter Merwe Netherlands CCC Agency, Inc. of Illinois Illinois CECAR - Compagnie Europeene de Courtage d'Assurances et de Reassurances SAe France CECAR Deutschland GmbH Germany CECAR Inchcape Asia Ltd. Hong Kong CECAR Portugal Portugal CIA Deutschland Kreditversicherungsmakler und Beratungs GmbH Germany CIA Italia S.R.L. Italy CIA Link Ltd. United Kingdom CIA Supplier Finance Ltd. United Kingdom CIC - Hilldale, Inc. Illinois CIC - Wells, Inc. Illinois CIC - Westmont, Inc. Illinois CICA - Court, Inc. Illinois CICA Realty Corporation Illinois CICA Seguros de Mexico SA de CV Mexico CICA Superannuation Nominees Pty. Ltd. Australia CJP, Inc. Delaware CRiON nv Belgium California Group Services California Camperdown 100 Limited United Kingdom Camperdown 101 Limited United Kingdom Cananwill Corporation Delaware Cananwill, Inc. California Cananwill, Inc. Pennsylvania Carstens & Schues GmbH Germany Carstens & Schues Poland Ltd. Poland Catz & Lips B.V. Netherlands Centris Services Limited United Kingdom Chemical & Oil Insurance Brokers (Pty) Ltd. South Africa Christopher Paul Insurance Services Ltd. United Kingdom Cinema Completions International, Inc. Delaware Citadel Insurance Company Texas Claims Control Ltd. New Zealand Clarkson Bain Japan Ltd. United Kingdom Clarkson LMS Ltd. United Kingdom Clarkson Puckle Group, Ltd. Unknown Clarkson Puckle Holdings Ltd. United Kingdom Clarkson Puckle Ibex Ltd. United Kingdom Clarkson Puckle Ltd. United Kingdom Clarkson Puckle Marine Holdings Ltd. United Kingdom Clarkson Puckle Overseas Holdings Ltd. United Kingdom Cogrup Correduria de Seguros, S.A. Spain Cogrup, S.L. Spain Cole Booth Potter of New Jersey, Inc. New Jersey Cole Booth Potter, Inc. Pennsylvania Columbia Automotive Services, Inc. Illinois Combined Administrative Services Corp. Illinois Combined Insurance Company of America Illinois Combined Insurance Company of Ireland Limited Ireland Combined Insurance Company of New Zealand Limited New Zealand Combined Life Assurance Company Limited United Kingdom Combined Life Assurance Company of Europe Limited Ireland Combined Life Insurance Company of Australia Limited Australia Combined Life Insurance Company of New York New York Commercial Credit Corporation United Kingdom Commercial and Political Risk Consultants Ltd. United Kingdom Commercial and Political Risk Services Ltd. United Kingdom CompLogic, Inc. Rhode Island Consumer Program Administrators, Inc. Illinois Contract & Investment Recoveries Ltd. United Kingdom Correteje de Reaseguros Bain Hogg Venezolana C.A. Venezuela Coughlan General Insurances Limited Ireland Credit & Political Insurance Services Ltd. United Kingdom Credit & Political Risks Reinsurance Consultants Ltd. United Kingdom Credit Indemnity & Financial Services Ltd. United Kingdom Credit Insurance Associates Inc. California Credit Insurance Research Unit Ltd. United Kingdom Credit International Associates Inc. New York Crotty MacRedmond Insurance Limited Ireland Customer Loyalty Institute Michigan D. Hudig & Co. b.v. Netherlands DUO A/S Norway Dealer Development Services, Ltd. United Kingdom Deanborne Limited United Kingdom Dobson Park L. G. Limited Guernsey Document Risk Management Limited United Kingdom Dominion Mutual Insurance Brokers Ltd. Canada Don Flower Aviation Underwriters, Inc. Kansas Downes & Burke (Special Risks) Ltd. United Kingdom Dreadnaught Insurance Company Limited Bermuda DuPage Care Administrators, Inc. Illinois Duoband Enterprises Ltd. United Kingdom E. Lillie & Co. Limited United Kingdom ENTAB Insurance Services Ltd. United Kingdom ERAS (International) Ltd. United Kingdom Eastaf Holdings Ltd. United Kingdom Edgar Ward Ltd. United Kingdom Edward Lumley & Sons (Underwriting Agencies) Ltd. United Kingdom Elektrorisk Beheer bv Netherlands Elm Lane Limited United Kingdom Employee Benefit Communications, Inc. Florida Entertainment Managers Insurance Services, Inc. California Entertainment Managers Insurance Services, Inc. Ontario Equiscope Insurance Services Limited United Kingdom Ernest A. Notcutt & Co. Ltd. United Kingdom Ernest A. Notcutt (Overseas) Ltd. United Kingdom Ernest Notcutt Insurance Services Ltd. United Kingdom Europa Services Ltd. Malta ExcelNet (Guernsey) Ltd. Guernsey ExcelNet Ltd. United Kingdom Excess Underwriters Agency, Inc. New York Expatriate Consultancy Limited, The United Kingdom Fabels-Versteeg b.v. Netherlands Far East Agency Korea Finance Associates, Inc. Texas Financial Solutions Insurance Services of California, Inc. California Financial Solutions Insurance Services, Inc. Illinois France Fenwick Limited United Kingdom Frank B. Hall & Co. Holdings (N.Z.) Limited New Zealand Frank B. Hall (Reinsurance) France S.A. France Frank B. Hall (Underwriting Managers) Ltd. Bermuda Frank B. Hall Insurance Brokers (S) Pte. Ltd. Singapore Frank B. Hall Ireland Ltd. Ireland Frank B. Hall Management Services Pty. Ltd. Australia Frank B. Hall Re (Latin America) Inc. Panama Friis & Company, Inc. California G.E.F. Insurance Ltd. U.S. Virgin Islands GBV Gesellschaft Fur Betriebliche Beratung und verwaltung GmbH Germany Garantie Europeene de Publication S.A. France Gardner Mountain Financial Services Ltd. United Kingdom Gardner Mountain Management Services Ltd. United Kingdom Gardner Mountain Trustees Ltd. United Kingdom Gateway Alternatives, L.L.C. Delaware Gateway Insurance Company, Ltd. Bermuda Gilman Swire Willis Ltd. Hong Kong Go Pro Agency, Inc. of San Antonio Texas Go Pro Life Agency, Inc. of San Antonio Texas Go Pro Underwriting Managers of Virginia, Inc. Virginia Go Pro Underwriting Managers, Inc. Texas Godwins (Overseas) Limited United Kingdom Godwins (Trustees) Limited United Kingdom Godwins Acquisition Co. North Carolina Godwins Group Limited United Kingdom Godwins Limited United Kingdom Godwins Securities, Inc. Washington Gotuaco del Rosario & Associates, Inc. Philippines Greville Baylis Parry & Associates Ltd. United Kingdom Greyfriars Marketing Services Pty Ltd. Australia Growth Enterprises Ltd. Bahamas H.A.R.B. Ltd. United Kingdom H.L. Puckle (Underwriting) Ltd. United Kingdom H.Z. Financial, L.P. Illinois HHL (Taiwan) Ltd. Taiwan HHL Reinsurance Brokers Inc. Philippines HHL Reinsurance Brokers Pte. Ltd. Singapore HHL Reinsurance Services Sdn. Bhd. Malaysia HLS Hudig-Langeveldt Stanner GmbH Germany HRGM 1989 Ltd. United Kingdom HRGM Cargo Ltd. United Kingdom HRGM Ltd. United Kingdom HRGM Management Services Ltd. United Kingdom HRGM Marine Ltd. United Kingdom Hadenmead Ltd. United Kingdom Hall & Company (Overseas) Ltd. United Kingdom Hall & Company (UK) Ltd. United Kingdom Hansa Hoken GmbH Versicherungsmakler Germany Hanseatische Assekuranz Kontor GmbH Germany Hanseatische Assekuranz Vermittlungs AG Germany Harbour Pacific Holdings Pty., Ltd. Australia Harbour Pacific Underwriting Management Pty Limited Australia Havag Hudig-Langeveldt GmbH Germany Heath Hudig Langeveldt Pte Ltd. Singapore Heath Hudig Langeveldt Sdn. Bhd. Malaysia Heinz Hahn GmbH Germany Heli Agency Korea Hellenic Bain Hogg S.A. Greece Highplain Limited United Kingdom Hobbs & Partners Ltd. United Kingdom Hodgson McCreery & Company Limited United Kingdom Hogg Automotive Insurance Services Ltd. United Kingdom Hogg Group Overseas Ltd. United Kingdom Hogg Group plc United Kingdom Hogg Robinson & Gardner Mountain (Insurance) Ltd. United Kingdom Hogg Robinson (Nigeria) Unlimited Nigeria Hogg Robinson (Scotland) Ltd. Scotland Hogg Robinson Holdings (Pty) Ltd. South Africa Hogg Robinson Illinois Inc. Illinois Hogg Robinson Insurance Brokers Inc. California Hogg Robinson Investment Holdings (Pty) Ltd. South Africa Hogg Robinson North America Inc. Delaware Hogg Robinson Services (Kenya) Ltd. Kenya Hudig-Langeveldt Berlin GmbH Germany Hudig-Langeveldt Coens N.V. Belgium Hudig-Langeveldt Janson Elffers B.V. Netherlands Hudig-Langeveldt Kyoritsu Ltd. Japan Hudig-Langeveldt Makelaardij in Assurantien bv Netherlands Hudig-Langeveldt Merwestad bv Netherlands Hudig-Langeveldt Mibrag Versicherungs Vermittlungs GmbH Germany Hudig-Langeveldt Pensioenbureau B.V. Netherlands Hudig-Langeveldt Reinsurance B.V. Netherlands Hudig-Langeveldt Saat B.V. Netherlands Hudig-Langeveldt Schreinemacher V.O.F. Netherlands Hudig-Langeveldt Schroder Versicherungsvermittlung GmbH Germany Huntington T. Block Insurance Agency, Inc. District of Columbia Huntington T. Block Insurance Agency, Inc. Ohio IRISC (London) Limited United Kingdom IRISC L.L.C. Delaware IRISC Limited United Kingdom IRISC Specialty, Inc. Delaware IRISC, Inc. New Jersey ITA Insurance, Inc. Utah Ibex Managers Ltd. Kenya Impact Forecasting, L.L.C. Illinois Inchcape Continental Insurance Holdings (Eastern Europe) Ltd. Cyprus Inchcape Continental Insurance Holdings BV Netherlands Inchcape H.R. (Asia) Ltd. Hong Kong Inchcape Insurance Agencies (HK) LTd. Hong Kong Inchcape Insurance Agencies Pte Ltd. Singapore Inchcape Insurance Brokers (HK) Ltd. Hong Kong Inchcape Insurance Brokers (M) Sdn Bhd Malaysia Inchcape Insurance Brokers (Thailand ) Ltd. Thailand Inchcape Insurance Brokers Pte Ltd. Singapore Inchcape Insurance Holdings (HK) Ltd. Hong Kong Inchcape Insurances (Macau) Ltd. Macau Independent Dealer Services, Inc. Missouri Inmobiliaria Ramos Rosada, S.A. de C.V. Mexico Insurance Brokers Service, Inc. Illinois Insurance Holdings Africa Ltd. Kenya Insurance Underwriters Agency, Inc. Arizona Insurmark Agency Corporation Ohio Interbroke Ltd. Switzerland Interims Limited United Kingdom International Industrial Insurances Limited Ireland International Insurance Brokers Ltd. Jamaica International Shipowners Mutual Insurance Association Limited Bermuda Interocean (Italia) S.p.A. Italy Interocean Reinsurance Company, S.A. Panama Investment Facility Company Four One Two (Pty) Ltd. South Africa Investment Insurance International (Managers) Ltd. United Kingdom ItalCECAR S.p.A. Italy J.C.J. Van Dalen Beheer B.V. Netherlands J.H. Blades & Co. (Agency), Inc. Texas J.H. Blades & Co., Inc. Texas J.H. Blades Insurance Services California J.H. Blades, Inc. Oklahoma J.H. Lea & Company, Inc. Illinois J.S. Johnson & Co. Bahamas JFS (Sudamerica) SA Uruguay JFS Fenchurch Limited United Kingdom JFS Greig Fester Limited United Kingdom James S. Kemper & Co. International Ltd. Bermuda Jenner Fenton Slade (Special Risks) Limited United Kingdom Jenner Fenton Slade Group Limited United Kingdom Jenner Fenton Slade Limited United Kingdom Jenner Fenton Slade Political Risks Limited United Kingdom Jenner Fenton Slade Reinsurance Brokers Limited United Kingdom Jenner Fenton Slade Surety and Specie Limited United Kingdom John Scott Insurance Brokers Limited United Kingdom Jonny Pape GmbH Germany Joseph U. Moore, Inc. Florida Jover Prevision Correduria de Seguros Spain K & K Insurance Group of Florida, Inc. Florida K & K Insurance Group, Inc. Indiana K & K Insurance Specialties, Inc. Indiana K & K Specialties, Inc. Indiana K & K of Nevada, Inc. Nevada Karl Alt & Co. GmbH Germany Keeling & Company California Key-Royal Automotive Company, Inc. Alabama Kininmonth Limited Ireland Kroller Holdings B.V. Netherlands L & G LMX Limited United Kingdom L & G Seascope Insurance Holdings Limited United Kingdom Langeveldt Groep B.V. Netherlands Langeveldt de Vos b.v. Netherlands Laurila, Kauriala & Grig Ltd. Russia Laverack & Haines, Inc. New York Lescorp Limited United Kingdom Leslie & Godwin (C.I.) Limited Guernsey Leslie & Godwin (Reinsurance) Copenhagen A/S Denmark Leslie & Godwin (Scotland) Limited Scotland Leslie & Godwin (U.K.) Limited United Kingdom Leslie & Godwin (WFG) Limited United Kingdom Leslie & Godwin AXL Limited United Kingdom Leslie & Godwin Aviation Holdings Limited United Kingdom Leslie & Godwin Aviation Limited United Kingdom Leslie & Godwin Aviation Reinsurance Services Limited United Kingdom Leslie & Godwin Financial Risks Limited United Kingdom Leslie & Godwin GmbH Germany Leslie & Godwin Group Limited United Kingdom Leslie & Godwin Insurance Brokers Ltd. Ontario Leslie & Godwin Insurance Brokers, Inc. New York Leslie & Godwin International Limited United Kingdom Leslie & Godwin Investments Limited United Kingdom Leslie & Godwin Limited United Kingdom Leslie & Godwin Marine Holdings Limited United Kingdom Leslie & Godwin Non-Marine Limited United Kingdom Leslie & Godwin Overseas Reinsurance Holdings Limited United Kingdom Leslie & Godwin Reinsurance Holdings Limited United Kingdom Lloyd Paulista Corretores de Seguros e Reaseguros S.A. Brazil London General Holdings Limited United Kingdom London General Insurance Company Limited United Kingdom Loss Management Group Ltd. United Kingdom Lowndes Lambert Insurance Limited Ireland Lumley Employee Benefits (Pty) Ltd. South Africa Lumley Insurance Brokers (Pty) Ltd. South Africa Lumley JFS Limited United Kingdom Lumley Municipal & General Insurance Brokers (Natal) (Pty) Ltd. South Africa Lumley Municipal & General Insurance Brokers (Orange Free State) (Pty)Ltd. South Africa Lumley Municipal & General Insurance Brokers (Pty) Ltd. South Africa Lumley Municipal & General Insurance Brokers (Transvaal) (Pty) Ltd. South Africa Lumley Petro-Energy Insurance Brokers (Pty) Ltd. South Africa Lynn & Schaller Insurance Brokers, Inc. California M.I.B. Holdings Co. Ltd. Malta MAB Insurance Services Ltd. United Kingdom MC Brokers Co. Ltd. Thailand MacDonagh & Boland (International) Limited Ireland MacDonagh & Boland Group Limited Ireland MacDonagh Boland Beech Hill Limited Ireland MacDonagh Boland Crotty MacRedmond Limited Ireland MacDonagh Boland Cullen Duggan Limited Ireland MacDonagh Boland Foley Woollam Limited Ireland Macey Clifton Walters Limited United Kingdom Macey Williams Insurance Services Limited United Kingdom Macey Williams Limited United Kingdom Madison Intermediaries Pty. Limited Australia Madison Reinsurance Holdings, Inc. Illinois Mahamy Company plc (Rollins Hudig Hall Iran) Iran Maritime Underwriters, Ltd. Bermuda Marketing and Training Resources, Inc. Illinois Martec Australia Pty Limited Australia Martec Finance Pty Limited Australia Martin Boyer Company, Inc. Illinois Mayflower National Life Insurance Company Indiana Media/Professional Insurance Agency Limited United Kingdom Media/Professional Insurance Agency, Inc. Missouri Mediterranean Insurance Brokers Ltd. Malta Mediterranean Insurance Training Centre Malta Minahan Reinsurance Management Limited United Kingdom Morency, Weible & Sapa, Inc. Illinois Motorists Service Corporation Delaware Motorplan Limited United Kingdom Muirfield Underwriters, Ltd. Delaware NB Life Agents, Inc. New York NSU Benefit Corporation Indiana National Care Provider Insurance, Inc. California National Product Care Company Illinois National Sports Underwriters, Inc. Indiana Nicholson Chamberlain Colls Australia Limited Australia Nicholson Chamberlain Colls Group Limited United Kingdom Nicholson Chamberlain Colls Marine Limited United Kingdom Nicholson Jenner Leslie Group Limited United Kingdom Nicholson Leslie (North America) Limited United Kingdom Nicholson Leslie Accident & Health Limited United Kingdom Nicholson Leslie Agencies Limited United Kingdom Nicholson Leslie Asia Pte Ltd Singapore Nicholson Leslie Australia Holdings Limited Australia Nicholson Leslie Aviation Limited United Kingdom Nicholson Leslie Aviation Reinsurance Brokers United Kingdom Nicholson Leslie BankAssure Limited United Kingdom Nicholson Leslie Bankscope Insurance Services Limited United Kingdom Nicholson Leslie Bankscope Marine Insurance Consultants United Kingdom Nicholson Leslie Energy Resources Limited United Kingdom Nicholson Leslie Financial Institutions Limited United Kingdom Nicholson Leslie International (Reinsurance Brokers) Limited United Kingdom Nicholson Leslie International Limited United Kingdom Nicholson Leslie Investments Limited United Kingdom Nicholson Leslie Italia S.P.A. Italy Nicholson Leslie Limited United Kingdom Nicholson Leslie Management Services Limited United Kingdom Nicholson Leslie Marine Limited United Kingdom Nicholson Leslie Nederland Reinsurance brokers cv Netherlands Nicholson Leslie Non-Marine Reinsurance Brokers Limited United Kingdom Nicholson Leslie North American Reinsurance Brokers, Limited United Kingdom Nicholson Leslie Property Limited United Kingdom Nicholson Leslie Special Risks Limited United Kingdom Nicholson Leslie Special Risks Limited United Kingdom Nicholson Stewart-Brown Limited United Kingdom North Derbyshire Finance Company Limited, The United Kingdom Nova Reinsurance Brokers, Inc. Illinois OUM & Associates of California, A Corporation California OUM & Associates of New York, A Corporation New York OUM & Associates of Ohio, A Corporation Ohio OUM & Associates, A Corporation Washington OUM Risk Consultants, Inc. Washington OWA Hoken (UK) Limited United Kingdom OWA Insurance Services (France) SA France OWA Insurance Services Austria Gesellschaft mbH Austria OWA Insurance Services Austria GmbH & Co. KG Austria OWA Insurance Services GmbH Germany Oak Brook Holding, Inc. Delaware Oak Brook Life Insurance Company Arizona Ohrinsoo Agency Korea Olandis Insurance Agency, Inc. Illinois Olarescu & B. I. Davis Asesores y Corredores de Seguros S.A. Peru Old RHH North, Inc. California P M R Re, Inc. New York P.I. Consultants Ltd. Hong Kong PLCM Group, Inc. Florida PLCM Group, Inc. Illinois PLCM Group, Inc. Pennsylvania PT RNJ Ratna Nusa Jaya Indonesia Pacific Wholesale Insurance Brokers Pty Limited Australia Pandimar Consultants, Inc. New York Paribas Assurantien B.V. Netherlands Parker Risk Management (Barbados) Ltd. Barbados Parker Risk Management (Bermuda) Ltd. Bermuda Parker Risk Management (Cayman) Ltd. Cayman Islands Parker Risk Management (Guernsey) Ltd. Guernsey Parker Risk Management (S) Pte Ltd Singapore Parker Risk Management, Inc. Colorado Pat Ryan & Associates, B.V. Netherlands Paul J.F. Schultz oHG Germany Pernas HHL Insurance Brokers Sdn Bhd Malaysia Pernas HHL Reinsurance Brokers Sdn. Bhd. Malaysia Pinerich Ltd. Northern Ireland Poland Puckle Insurance Brokers Ltd. United Kingdom Preferred Risk Strategies, A Corporation Washington Premier Auto Finance, Inc. Delaware Premier Auto Finance, L.P. Illinois Product Care, Inc. Illinois Production Life Insurance Company Arizona Professional Sports Insurance Co. Ltd. Bermuda Progressive Ideal Sdn Bhd. Malaysia Property Owners Database Limited United Kingdom Provider Services, Ltd. Bermuda Pyramid Services, Inc. Connecticut R.E.I. (NSW) Insurance Brokers Pty. Ltd. Australia R.E.I.A. Insurance Brokers Pty. Ltd. Australia R.G. Reis (Management Services) Ltd. United Kingdom R.G. Reis Life Consultants Ltd. United Kingdom R.G. Reis Pension Fund Trustees Ltd. United Kingdom RAMRO y Asociados, S.C. Mexico RBH Acquisition Co. Delaware RBH General Agencies (Canada) Inc. Quebec RHH Empreendimentos e Servicos Ltda. Brazil RHH Surety & Guarantee Limited United Kingdom RIP Services Limited Guernsey Resource Insurance Services, Inc. Indiana Revasa S.p.A. Italy Risk Management Consultants Ltd. United Kingdom Rockford Holding, Inc. Delaware Rockford Life Insurance Company Arizona Rollins Heath (Japan) Ltd. Japan Rollins Heath Korea Co. Ltd. Korea Rollins Hudig Hall & Co. (N.S.W.) Pty. Ltd. Australia Rollins Hudig Hall (Hong Kong) Ltd. Hong Kong Rollins Hudig Hall (Nederland) Limited United Kingdom Rollins Hudig Hall (Scandinavia) A/S Norway Rollins Hudig Hall (Singapore) Pte Ltd Singapore Rollins Hudig Hall Associates B.V. Netherlands Rollins Hudig Hall Ceska Republika spol. s.r.o. Czech Republic Rollins Hudig Hall Finance bv Netherlands Rollins Hudig Hall Insurance Brokers ZAO Russia Rollins Hudig Hall Mexico Agente De Seguros Y De Fianzas, S.A. De C.V. Mexico Rollins Hudig Hall Middle East United Arab Emirates Rollins Hudig Hall Netherlands b.v. Netherlands Rollins Hudig Hall Services Limited United Kingdom Rollins Hudig Hall Slovensko spol.s r.o. Slovak Republic Rollins Hudig Hall Sweden AB Sweden Rollins Hudig Hall Versicherungsmakler Gesellschaft m.b.H. Austria Rollins Hudig Hall do Brazil Corretora de Seguros Ltda. Brazil Rollins Hudig Hall of Alaska, Inc. Alaska Rollins Technical Services Co. Illinois Ropeco Pty Ltd. Australia Rostron Hancock Ltd. United Kingdom Roundwise Limited United Kingdom Ryan Insurance Group France S.A.R.L. France Ryan Insurance Group, Inc. Delaware Ryan Warranty Services Canada, Inc. Canada Ryan Warranty Services Quebec, Inc. Ontario Ryan/CSI, Inc. Illinois S. Mark Brockinton & Associates of Texas, Inc. Texas S. Mark Brockinton & Associates, Inc. Arkansas SIS Services of New York, Inc. New York SLE Worldwide Australia Pty Limited Australia SLE Worldwide Canada Brokers, Ltd. Ontario SLE Worldwide Limited United Kingdom SLE Worldwide Mexico, Agente de Seguros, S.A. de C.V. Mexico SLE Worldwide, Inc. Delaware Saat Van Marwijk Beheer B.V. Netherlands Saat Van Marwijk Noordwijk B.V. Netherlands Sang Woon Agency Korea Santos da Cunha, Abreu & Associados, Lda. Portugal Saxonbeech Ltd. United Kingdom Scarborough & Company, Inc. Delaware Scarborough Insurance Agency of Massachusetts, Inc. Massachusetts Seascope Cargo Insurance Services Limited United Kingdom Seascope Insurance Holdings Limited United Kingdom Seascope Insurance Services Limited United Kingdom Seascope Marine Insurance Services Limited United Kingdom Seascope Marine Limited United Kingdom Seascope Reinsurance Services Limited United Kingdom Select Direct Limited Scotland Self-Insurers Service, Inc. Delaware Service Protection, Inc. Illinois Service Saver, Incorporated Florida ServicePlan of Florida, Inc. Florida ServicePlan of Ohio, Inc. Ohio ServicePlan, Inc. Illinois Services De Risques Aon Inc. Canada Servicios Y Garantias Ryan S.L. Spain Sherwood Insurance Services California Shoreline Insurance Agency, Inc. Rhode Island Simco Insurance Brokers Pte Singapore Singer Group, Inc., The Texas Singer Plan, Inc. Delaware Square One, Inc. Texas Steetley Leslie & Godwin Limited Guernsey Steeves Lumley Ltd. Australia Sterling Life Insurance Company Arizona Stichting Employee Fund Aon Netherlands Stichting Werknemerscertificaten HLG Netherlands Strong Management Services Pty. Ltd. Australia Structured Compensation Ltd. United Kingdom Subsidiary Corporation, Inc. Maryland Sumner & McMillan United Kingdom Sumner & McMillan (Ireland) Ireland Superannuation Fund (CICNZ) Limited New Zealand Surety & Guarantee Consultants Limited United Kingdom Surveyors Claims Services Ltd. United Kingdom Swaziland Corporate Risk Management (Pty) Ltd. Swaziland Swaziland Employee Benefit Consultants (Pty) Ltd. Swaziland Swaziland Reinsurance Brokers (Pty) Ltd. Swaziland TREV Properties Corporation Delaware TTF Insurance Services Ltd. United Kingdom Tabma-Hall Insurance Services Pty. Limited Australia Tethercrest Ltd. United Kingdom Texecur Versicherungs Vermittlungs GmbH Germany The Auto Leasing Corporation Delaware The Credit Insurance Association France SA France The Credit Insurance Association Ltd. United Kingdom U.S. Rating Bureau, Inc. Delaware Underwriters Marine Services Limited United Kingdom Underwriters Marine Services of Texas, Inc. Texas Underwriters Marine Services, Inc. Louisiana United Car & Van Rental Ltd. United Kingdom VOL Mortgage Corporation Delaware VOL Properties Corporation Delaware Varity Risk Management Services Ltd. United Kingdom Verum-HLG B.V. Netherlands Vesselforward Ltd. United Kingdom Virginia Surety Company, Inc. Illinois WACUS Kreditversicherungsmakler GmbH Austria WACUS Magyarorszag Hitelbitzositasi Tanacsado es Kozvetito Kit Hungary WAS Betriebsfuhrungs-GmbH Germany Wacus/Hudig-Langeveldt GmbH Germany Wacus/Hudig-Langeveldt Kreditversicherungsmakler und Beratungs GmbH & Co. Germany Wacus/Hudig-Langeveldt, Kreditversicherungsmakler und Beratungs Germany Wesselhoeft Ahlers & Schues oHG Germany Wexford Underwriting Managers, Inc. Delaware Whitehouse Moorman Holdings Ltd. United Kingdom Wilfredo Armstrong S.A. Argentina Willis Corroon (PVT) Ltd. Zimbabwe Worldwide Insurance Network Limited United Kingdom Worldwide Integrated Services Company Texas XB-Lumley Insurance Brokers (Pty) Ltd. South Africa nv Insurance Louis Delhaize (en abrege INSURDEL) Belgium EX-23 7 EXHIBIT 23 AON CORPORATION Exhibit 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Aon Corporation of our report dated February 11, 1997, included in the 1996 Annual Report to Stockholders of Aon Corporation. Our audits also included the financial statement schedules of Aon Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, with respect to which the date is February 11, 1997 (except for Note 5 to Schedule II, as to which the date is March 21, 1997), the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 4 to the consolidated financial statements in the 1996 Annual Report to Stockholders of Aon Corporation, the Company changed its method of accounting for certain investments in 1994. We also consent to the incorporation by reference in the Registration Statements pertaining to the employer's stock option and savings plans (Form S-8 Nos. 33-27984, 33-42575 and 33-59037), the right to offer preferred stock (Form S-3 No. 33-57562) of Aon Corporation and the offer to exchange Capital Securities (Form S-4 No. 333-21237) of Aon Capital A of our report dated February 11, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report, included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of Aon Corporation. ERNST & YOUNG LLP Chicago, Illinois March 24, 1997 EX-27 8 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 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 2,826 0 0 879 29 18 5,213 410 35 599 13,723 1,080 1,925 841 514 735 50 6 114 2,713 13,723 1,527 384 8 1,969 790 208 2,445 446 154 292 43 0 0 335 2.87 2.87 715 920 (92) 725 283 535 0 Includes short-term borrowings and debt guarantee of ESOP. Common stock at par value. Preferred stock at par value. Includes brokerage commissions and fees and other income. Includes discontinued operations. Includes liability for business sold of $173 million.
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