-----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, IvypWnOeCEGZgTx0vOX21sCWXLUU7ZJre1x93SItWZaklfHBAe0RTQo99UsxKX75 lUcjd0azZ+CEjiOl+E6u4w== 0000948572-98-000011.txt : 19980401 0000948572-98-000011.hdr.sgml : 19980401 ACCESSION NUMBER: 0000948572-98-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 001-07933 FILM NUMBER: 98580915 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, 1997 [ ] 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* 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. [ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 25, 1998 was $8,729,515,545. Number of shares of $1.00 par value Common Stock outstanding as of February 25, 1998: 167,971,048. DOCUMENTS FROM WHICH INFORMATION IS INCORPORATED BY REFERENCE: Annual Report to Stockholders of the Registrant for the Year 1997 (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 17, 1998 of the Registrant (Part III) - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. The Registrant is a holding company whose operating subsidiaries carry on business in two distinct segments: (i) insurance brokerage and consulting services, and (ii) 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 (the "Aon Group") including Aon Risk Services Companies, Inc.; Aon Holdings bv; Aon Consulting Worldwide, Inc.; Aon Services Group, Inc.; Aon Re Worldwide, Inc.; and Aon Group Limited provide reinsurance intermediary services, benefits consulting and commercial insurance brokerage services. Aon Group revenues grew significantly in fiscal 1996 and 1997 when the Registrant acquired, among other companies, Bain Hogg Group plc in October 1996, Alexander & Alexander Services Inc. in January 1997, The Minet Group in May 1997, and Jauch & Hubener in November 1997. Combined Insurance Company of America ("Combined Insurance") engages in the marketing of life and accident and health insurance products. 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 7 through 16 of the Annual Report to Stockholders of the Registrant for the Year 1997 ("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"); Aon Holdings bv ("Aon Holdings"); Aon Services Group, Inc. ("Aon Services Group"); Aon Consulting Worldwide, Inc. ("Aon Consulting"); Aon Re Worldwide, Inc. ("Aon Re"); Aon Group Limited ("AGL"). 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 550 offices around the world in more than 100 countries. In 1997, Aon Group employed over 33,000 professionals and support personnel to serve the diverse needs of clients. Aon Risk Services Companies' (formerly Rollins Hudig Hall Co.) 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 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. Subsidiaries of Aon Risk Services Companies and Aon Holdings operate through owned offices in North America and Europe, as well as in South America, Africa, Australia and Asia. The acquisitions of A&A and Bain Hogg significantly augmented the Registrant's presence in Latin America, Asia, Africa and Australia, and the acquisition of Jauch & Hubener strengthened the Registrant's presence throughout Europe. - 2 - Aon Services Group (formerly 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 Services Group operating subsidiaries market and broker both the primary and reinsurance risks of these programs. For individuals and businesses, Aon Services Group provides affinity products for professional liability, life and personal lines. The acquisition of The Minet Group by the Registrant will augment Aon Services Group's already strong expertise in wholesale brokerage and professional liability programs. Subsidiaries of Aon Consulting 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, IPOs, recent mergers and 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. In particular, the 1997 acquisitions of Sodarcan Inc. and Martineau Provencher & Associates will strengthen the Registrant's consulting expertise in Quebec. 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. AGL 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. - 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"). 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 most of which are directly owned by the Registrant's subsidiaries. The life, accident and health distribution network encompasses primarily the agents of Combined Insurance and CLICNY (which operates exclusively in the State of New York). With more than five million policyholders, Combined Insurance has more individual accident policies in force than any other United States company. Combined Insurance, the Registrant's principal life, 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 CLICNY market whole life products through direct sales career agents in the United States. Combined Insurance ranked among the top 140 life insurance companies in the United States in terms of total life premiums in 1996. Life insurance business is conducted by the Registrant's life insurance subsidiaries in the United States, Canada, Europe and Asia Pacific. 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 in Europe. - 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. The Registrant hereby incorporates by reference note 3 of the Notes to Consolidated Financial Statements on page 32 of the Annual Report. A&A's Discontinued Operations The Registrant hereby incorporates by reference note 3 of the Notes to Consolidated Financial Statements page 33 of the Annual Report. 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 or 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 ("HIPPA") was enacted. The Act requires the states to take action to implement the requirements of the Act or to become subject to federal oversight. HIPPA implementation by the states has not materially affected the business of the Registrant's subsidiaries. In addition, recent federal laws and proposals, mandating specific practices by medical insurers, and the health care industry will not, because of the nature of the business of the Registrant's subsidiaries, materially affect the Registrant. 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 federal and 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 40,000 employees at the end of 1997 of whom approximately 35,000 are salaried and hourly employees and the remaining 5,000 are sales representatives who are generally compensated wholly or primarily by commission. ITEM 2. PROPERTIES. The Registrant's subsidiaries own and occupy office buildings in seven 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. - 6 - ITEM 3. LEGAL PROCEEDINGS. The Registrant hereby incorporates by reference note 12 of the Notes to Consolidated Financial Statements on page 42 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 18, 1997 to serve until the meeting of the Board following the annual meeting of stockholders on April 17, 1998. Ages shown are as of December 31, 1997. For information concerning certain directors and executive officers of the Registrant, see item 10 below. As of March 31, 1998, the following individuals are also executive officers of the Registrant as defined in Rule 16a-1(f):
HAS CONTINUOUSLY SERVED AS AN OFFICER OF REGISTRANT OR NAME, AGE, AND ONE OR MORE OF CURRENT OFFICE ITS SUBSIDIARIES BUSINESS EXPERIENCE OR PRINCIPAL POSITION SINCE PAST 5 YEARS --------------------- ----- ------------ Harvey N. Medvin, 61 1972 Mr. Medvin became Vice President and Chief Executive Vice President, Financial Officer of the Registrant in 1982 and Chief Financial Officer was elected to his current position in 1987. He and Treasurer also serves as a Director or Officer of certain of the Registrant's subsidiaries. Daniel T. Cox, 51 1986 Mr. Cox was elected to his current position in Executive Vice President 1991 and, prior to their sale in 1996, had served as Chairman and Chief Executive Officer of certain of the Registrant's underwriting subsidiaries. Mr. Cox has 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, 50 1990 Mr. Conway was Vice President of Combined Senior Vice President and Insurance from 1980 to 1984. Following other Senior Investment Officer 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, 47 1987 Mr. O'Halleran was appointed President and Chief President and Chief Operating Operating Officer of Aon Group, Inc. in 1995. Officer of Aon Group, Inc. Prior thereto, since joining the Registrant in 1987, he held a variety of senior positions in the Registrant's insurance and reinsurance brokerage business.
- 7 - PART II 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 45 of the Annual Report. The Registrant had approximately 12,500 holders of record of its Common Shares as of February 25, 1998. The Registrant hereby incorporates by reference note 8 of the Notes to Consolidated Financial Statements on page 36 of the Annual Report. ITEM 6. SELECTED FINANCIAL DATA. The Registrant hereby incorporates by reference the "Selected Financial Data" table on page 44 of the Annual Report. 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 18 through 24 of the Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Registrant hereby incorporates by reference "Market Risk Exposure" on page 24 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 .......................... 25 - 29 Notes to Consolidated Financial Statements ................. 30 - 42 Report of Ernst & Young LLP, Independent Auditors .......... 43 Quarterly Financial Data ................................... 45 ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. - 8 - 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 Proxy Statement For Annual Meeting of the Stockholders on April 17, 1998, 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. The Registrant also hereby incorporates by reference the information on pages 11 and 12 of the Proxy Statement. 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 1997 Fiscal Year" and "Pension Plan Table" on pages 14 through 17 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, 9 and 10 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 22 of the Proxy Statement. - 9 - 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 Income - Years Ended December 31, 1997, 1996, and 1995 25 Consolidated Statements of Financial Position - As of December 31, 1997 and 1996 26-27 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995 28 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 29 Notes to Consolidated Financial Statements 30-42 Report of Ernst & Young LLP, Independent Auditors 43
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 10Q"). (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"). (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. - 10 - (e) Resolutions establishing terms of 6.875% Notes Due 1999 and 7.40% Notes Due 2002 incorporated by reference to Exhibits 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) Junior Subordinated Indenture dated as of January 13, 1997 between the Registrant and The Bank of New York, as trustee - incorporated by reference to Exhibit 4.1 of the Registrant's Amendment No. 1 to Registration Statement on Form S-4 No. 333-21237 dated March 27, 1997 (the "Capital Securities Registration"). (h) First Supplemental Indenture dated as of January 13, 1997 between the Registrant and the Bank of New York, as trustee - incorporated by reference to Exhibit 4.2 of the Capital Securities Registration. (i) Certificate of Trust of Aon Capital A - incorporated by reference to Exhibit 4.3 of the Capital Securities Registration. (j) Amended and Restated Trust Agreement of Aon Capital A dated as of January 13, 1997 among the Registrant, as Depositor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as Delaware Trustee, the Administrative Trustees named therein and the holders, from time to time, of the Capital Securities - incorporated by reference to Exhibit 4.5 of the Capital Securities Registration. (k) Capital Securities Guarantee Agreement dated as of January 13, 1997 between the Registrant and the Bank of New York, as guarantee trustee - incorporated by reference to Exhibit 4.8 of the Capital Securities Registration. (l) Capital Securities Exchange and Registration Rights Agreement dated as of January 13, 1997 among the Registrant, Aon Capital A and Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co. - incorporated by reference to Exhibit 4.10 of the Capital Securities Registration. (m) Debenture Exchange and Registration Rights Agreement dated as of January 13, 1997 among the Registrant, Aon Capital A and Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co. incorporated by reference to Exhibit 4.11 of the Capital Securities Registration. (n) Guarantee Exchange and Registration Rights Agreement dated as of January 13, 1997 among the Registrant, Aon Capital A and Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co. incorporated by reference to Exhibit 4.12 of the Capital Securities Registration. (o) 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. (p) 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. (q) 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. - 11 - (r) 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"). (s) 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. (t) Statement regarding Computation of Ratio of Earnings to Fixed Charges. (u) Statement regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (v) 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. (w) Annual Report to Stockholders of the Registrant for the year ended December 31, 1997 (for information, and not to be deemed filed, except for those portions specifically incorporated by reference herein). (x) List of Subsidiaries of the Registrant. (y) 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 1997 Annual Report to Stockholders and into Aon's Registration Statement Nos. 33-27984, 33-42575, 33-59037 and 333-21237. (z) Annual Report to the Securities and Exchange Commission on Form 11-K for the Aon Savings Plan for the year ended December 31, 1997 - to be filed by amendment as provided in Rule 15d- 21(b). (aa) Executive Compensation Plans and Arrangements: (A) Aon Stock Option Plan (as amended and restated through 1997) - incorporated by reference to Exhibit 10 (a) to the Registrant's Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the Quarter ended March 31, 1997 (the "First Quarter 1997 Form 10-Q"). (B) Aon Stock Award Plan (as amended and restated through 1997) - incorporated by reference to Exhibit 10(b) to the First Quarter 1997 Form 10-Q. (C) 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"). (D) 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. (E) Employment Agreement dated June 1, 1993 by and among the Registrant, Aon Risk Services, Inc. and Michael D. O'Halleran. (F) Aon Severance Plan - incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report to the Securities and Exchange Commission and Form 10-Q for the quarter ended June 30, 1997. - 12 - (ab) 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. (ac) 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. (ad) 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. (ae) 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"). (af) 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, 1997. - 13 - SIGNATURES Pursuant to the requirements of Scetion 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly cuased this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 21st day of March, 1998. 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 21, 1998 - --------------------------------------- Executive Officer and Director Patrick G. Ryan (Principal Executive Officer) /s/DANIEL T. CARROLL Director March 21, 1998 - --------------------------------------- Daniel T. Carroll /s/FRANKLIN A. COLE Director March 21, 1998 - --------------------------------------- Franklin A. Cole /s/EDGAR D. JANNOTTA Director March 21, 1998 - --------------------------------------- Edgar D. Jannotta /s/PERRY J. LEWIS Director March 21, 1998 - --------------------------------------- Perry J. Lewis /s/JOAN D. MANLEY Director March 21, 1998 - --------------------------------------- Joan D. Manley /s/ANDREW J. McKENNA Director March 21, 1998 - --------------------------------------- Andrew J. McKenna - 14 - SIGNATURE TITLE DATE --------- ----- ---- /s/NEWTON N. MINOW Director March 21, 1998 - --------------------------------------- Newton N. Minow /s/RICHARD C. NOTEBAERT Director March 21, 1998 - --------------------------------------- Richard C. Notebaert /s/PEER PEDERSEN Director March 21, 1998 - --------------------------------------- Peer Pedersen /s/DONALD S. PERKINS Director March 21, 1998 - --------------------------------------- Donald S. Perkins /s/JOHN W. ROGERS, JR. Director March 21, 1998 - --------------------------------------- John W. Rogers, Jr. /s/GEORGE A. SCHAEFER Director March 21, 1998 - --------------------------------------- George A. Schaefer /s/RAYMOND I. SKILLING Director March 21, 1998 - --------------------------------------- Raymond I. Skilling /s/FRED L. TURNER Director March 21, 1998 - --------------------------------------- Fred L. Turner /s/ARNOLD R. WEBER Director March 21, 1998 - --------------------------------------- Arnold R. Weber /s/HARVEY N.MEDVIN Executive Vice President, March 21, 1998 - --------------------------------------- Chief Financial Officer Harvey N. Medvin and Treasurer (Principal Financial and Accounting Officer)
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SCHEDULE I Aon Corporation and Subsidiaries CONSOLIDATED SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1997 Amount shown in Statement (millions) Amortized Fair of Financial Cost or Cost Value Position ---------------- ---------------- ------------------ Fixed maturities - available for sale: U.S. government and agencies ........................... $ 208.6 $ 212.8 $ 212.8 States and political subdivisions ...................... 523.9 554.9 554.9 Debt securities of foreign governments not classified as loans .............................. 841.9 891.8 891.8 Corporate securities ................................... 1,282.9 1,323.6 1,323.6 Public utilities ....................................... 59.4 61.7 61.7 Mortgage-backed securities ............................. 42.6 43.7 43.7 Other fixed maturities ................................. 54.6 55.1 55.1 ---------------- ---------------- ------------------ TOTAL FIXED MATURITIES ...... ..................... 3,013.9 3,143.6 3,143.6 ---------------- ---------------- ------------------ Equity securities - available for sale: Common stocks: Banks, trusts, and insurance companies .................. 197.1 318.6 318.6 Industrial, miscellaneous, and all other ................ 106.3 149.0 149.0 Nonredeemable preferred stocks .......................... 335.4 338.7 338.7 ---------------- ---------------- ------------------ TOTAL EQUITY SECURITIES .............................. 638.8 $ 806.3 806.3 ---------------- ---------------- ------------------ Other: Mortgage loans on real estate ............................. 15.0* 14.7* Real estate - net of depreciation ......................... 11.6 11.6 Policy loans .............................................. 57.8 57.8 Other long-term investments ............................... 199.1* 190.4* Short-term investments .................................... 1,697.7 1,697.7 ---------------- ------------------ TOTAL INVESTMENTS ............................... $ 5,633.9 $ 5,922.1 ================ ================== * Differences between 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) 1997 1996 --------------- -------------- ASSETS Investments in subsidiaries ......................... $ 4,667.8 $ 3,268.9 Notes receivable - subsidiaries ..................... 745.3 482.6 Cash and cash equivalents ........................... 9.5 216.9 Other assets ........................................ 166.2 34.4 --------------- -------------- Total Assets ................................. $ 5,588.8 $ 4,002.8 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Short-term borrowings ............................... $ 764.2 $ 213.4 6.3% long-term debt securities ...................... 99.8 99.8 7.4% long-term debt securities ...................... 99.9 99.9 6.875% long-term debt securities .................... 99.9 99.9 6.7% long-term debt securities ...................... 149.7 149.7 Subordinated debt.................................... 800.0 -- Notes payable - subsidiaries ........................ 488.8 351.4 Notes payable - other ............................... 70.0 -- Debt guarantee of employee stock ownership plan ................................... 33.1 46.1 Accrued expenses and other liabilities .............. 111.3 59.7 --------------- -------------- Total Liabilities ............................ 2,716.7 1,119.9 --------------- -------------- Redeemable preferred stock .......................... 50.0 50.0 STOCKHOLDERS' EQUITY Preferred stock ..................................... - 5.5 Common stock ........................................ 171.5 114.1 Paid-in additional capital .......................... 377.0 475.4 Net unrealized investment gains of subsidiaries ..... 189.0 153.1 Net foreign exchange gains (losses) of subsidiaries . (85.6) 1.0 Retained earnings ................................... 2,463.4 2,356.8 Less treasury stock at cost ......................... (93.2) (121.5) Less deferred compensation .......................... (200.0) (151.5) --------------- -------------- Total Stockholders' Equity ................... 2,822.1 2,832.9 --------------- -------------- Total Liabilities and Stockholders' Equity ... $ 5,588.8 $ 4,002.8 =============== ============== 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 --------------------------------------------------------- 1997 1996 1995 ---------------- ---------------- ---------------- (millions) REVENUE Dividends from subsidiaries $ 179.6 $ 1,026.6 $ 199.3 Other investment income 49.5 44.1 34.3 Realized investment gains (losses) 2.3 (11.0) (4.1) ---------------- ---------------- ---------------- Total Revenue 231.4 1,059.7 229.5 EXPENSES Operating and administrative 6.3 5.7 3.0 Interest - subsidiaries 85.3 20.6 20.0 Interest - other (1) 61.7 43.2 53.6 ---------------- ---------------- ---------------- Total Expenses 153.3 69.5 76.6 ---------------- ---------------- ---------------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 78.1 990.2 152.9 Equity in undistributed income of subsidiaries 220.7 (655.0) 249.9 ---------------- ---------------- ---------------- NET INCOME $ 298.8 $ 335.2 $ 402.8 ================ ================ ================ See notes to condensed financial statements. (1) Interest expense - other allocated to discontinued operations was $5 million and $18 million for the years ended December 31, 1996 and 1995, respectively.
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SCHEDULE II (Continued) Aon Corporation (Parent Company) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31 -------------------------------------------- 1997 1996 1995 -------------- ------------ ------------ (millions) Cash Flows From Operating Activities ....................... $ 124.3 $ 1,016.9 $ 164.5 Cash Flows From Investing Activities: Investments in subsidiaries ............................. (1,354.8) (319.3) (62.6) Notes receivables from subsidiaries ..................... (135.2) (10.8) 1.5 -------------- ------------ ------------ Cash Used by Investing Activities .................. (1,490.0) (330.1) (61.1) -------------- ------------ ------------ Cash Flows From Financing Activities: Treasury stock transactions - net ....................... 21.4 (40.1) (46.4) Issuance (repayment) of short-term borrowings - net ..... 541.7 (139.2) 108.8 Issuance of subordinated debt............................ 800.0 -- -- Issuance (repayment) of notes payable and long-term debt. 113.5 (105.6) 73.6 Retirement of preferred stock ........................... (136.2) (14.2) (75.4) Cash dividends to stockholders .......................... (182.1) (172.9) (171.3) -------------- ------------ ------------ Cash Provided (Used) by Financing Activities ....... 1,158.3 (472.0) (110.7) -------------- ------------ ------------ Increase (Decrease) in Cash and Cash Equivalents ........... (207.4) 214.8 (7.3) Cash and Cash Equivalents at Beginning of Year ............. 216.9 2.1 9.4 -------------- ------------ ------------ Cash and Cash Equivalents at End of Year ................... $ 9.5 $ 216.9 $ 2.1 ============== ============ ============ See notes to condensed financial statements.
- 19 - 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) 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, 1997, 1996 and 1995 were $0.8 million, $1.4 million and $5.0 million, respectively. (3) 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, payments of the amounts as dividends in excess of $360 million may be subject to approval by regulatory authorities. (4) Subsequent Events On February 5, 1998, Aon announced an agreement to acquire Gil y Carvajal, the leading broker in Spain. In addition, Aon announced an agreement in principle to acquire Le Blanc de Nicolay, subject to normal regulatory consents and due diligence. Le Blanc de Nicolay is the largest reinsurance broker in France and is also prominent in retail brokerage and consulting services. Annual revenues of these acquisitions are approximately $125 million. - 20 - Aon Corporation (Parent Company) NOTES TO CONDENSED FINANCIAL STATEMENTS (5) 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, 1997 ----------------------------------- Life/A&H P&C Combined ----------- ---------- --------- Statutory Stockholders' Equity $ 724.3 $ 438.3 $ 1,162.6 Insurance business related adjustments: Deferred policy acquisition costs 421.7 127.3 549.0 Excess of cost over net assets purchased 2.2 - 2.2 Policy liabilities and reinsurance assets 126.3 - 126.3 Deferred income taxes (264.0) 16.9 (247.1) Investment valuation reserves 184.4 - 184.4 Non admitted assets 60.9 7.4 68.3 Unrealized capital gains (FAS 115) 89.9 39.8 129.7 ----------------------------------- Subtotal $ 1,345.7 $ 629.7 1,975.4 ======================== Investment in other operations and other 2,692.5 --------- Investments in subsidiaries 4,667.9 Elimination of parent company contributions (1,845.8) --------- Consolidated Stockholders' Equity $ 2,822.1 =========
(millions) As of December 31, 1996 ----------------------------------- Life/A&H P&C Combined ----------- ---------- --------- Statutory Stockholders' Equity $ 611.7 $ 363.8 $ 975.5 Insurance business related adjustments: Deferred policy acquisition costs 488.8 110.0 598.8 Excess of cost over net assets purchased 2.6 - 2.6 Policy liabilities and reinsurance assets 112.1 - 112.1 Deferred income taxes (185.9) 24.1 (161.8) Investment valuation reserves 133.7 - 133.7 Non admitted assets 47.3 5.9 53.2 Unrealized capital gains (FAS 115) 76.8 34.8 111.6 ----------------------------------- Subtotal $ 1,287.1 $ 538.6 1,825.7 ======================== Investment in other operations and other 1,443.2 --------- Investments in subsidiaries 3,268.9 Elimination of parent company contributions (436.0) --------- Consolidated Stockholders' Equity $ 2,832.9 =========
(millions) As of December 31, 1997 ------------------------------------ Life/A&H P&C Combined ----------- ---------- ---------- Statutory Net Income * $ 264.7 $ 65.8 $ 330.5 Insurance business related adjustments: Deferred policy acquisition costs 65.3 98.3 163.6 Amortization of deferred policy acquisition costs (127.2) (81.0) (208.2) Amortization of cost of insurance purchased - - - Amortization of excess of cost over net assets purchased (0.8) - (0.8) Policy liabilities and reinsurance assets 14.2 - 14.2 Deferred income taxes (80.1) (6.1) (86.2) Change in valuation reserves (3.1) - (3.1) Deferred income (losses) (69.9) 3.2 (66.7) Difference in realized gain on sale of subsidiaries - - - Realized gain on transfer of subsidiary - - - ------------------------------------ Subtotal $ 63.2 $ 80.2 143.3 ======================== Investment in other operations and other 155.5 ---------- Consolidated Net Income - GAAP Basis $ 298.8 ========== * net of intercompany dividends
(millions) As of December 31, 1996 ------------------------------------ Life/A&H P&C Combined ----------- ---------- ---------- Statutory Net Income * $ 807.4 $ 70.7 $ 878.1 Insurance business related adjustments: Deferred policy acquisition costs 121.6 95.1 216.7 Amortization of deferred policy acquisition costs (166.9) (68.7) (235.6) Amortization of cost of insurance purchased (2.0) - (2.0) Amortization of excess of cost over net assets purchased (0.9) - (0.9) Policy liabilities and reinsurance assets 11.8 - 11.8 Deferred income taxes (4.0) (9.2) (13.3) Change in valuation reserves 4.1 - 4.1 Deferred income (losses) 2.8 (3.5) (0.7) Difference in realized gain on sale of subsidiaries (551.2) - (551.2) Realized gain on transfer of subsidiary - - - ------------------------------------- Subtotal $ 222.8 $ 84.4 307.1 ======================== Investment in other operations and other 28.1 ----------- Consolidated Net Income - GAAP Basis $ 335.2 =========== * net of intercompany dividends
(millions) As of December 31, 1995 ------------------------------------ Life/A&H P&C Combined ----------- ---------- ---------- Statutory Net Income * $ 196.7 $ 57.5 $ 254.2 Insurance business related adjustments: Deferred policy acquisition costs 325.6 84.7 410.3 Amortization of deferred policy acquisition costs (240.3) (62.4) (302.7) Amortization of cost of insurance purchased (10.4) - (10.4) Amortization of excess of cost over net assets purchased (4.9) - (4.9) Policy liabilities and reinsurance assets (31.0) - (31.0) Deferred income taxes (17.1) (7.8) (24.9) Change in valuation reserves 5.6 - 5.6 Deferred income (losses) 34.3 5.9 40.2 Difference in realized gain on sale of subsidiaries - - - Realized gain on transfer of subsidiary 7.0 - 7.0 ------------------------------------ Subtotal $ 265.5 $ 77.9 343.4 ======================== Investment in other operations and other 59.4 ---------- Consolidated Net Income - GAAP Basis $ 402.8 ========== * net of intercompany dividends
- 21 - SCHEDULE III Aon Corporation and Subsidiaries SUPPLEMENTARY INSURANCE INFORMATION Future Amorti- policy Unearned zation of benefits, premiums Benefits, deferred Deferred losses, and other Commis- claims, policy Other policy claims policy- Net sions, losses and acqui- oper- acquisition and loss holders' Premium investment fees and settlement sition ating Premiums costs expenses funds revenue income(1) other expenses costs expenses written(2) ----------- --------- --------- -------- ---------- -------- ---------- --------- -------- ---------- (millions) Year ended December 31, 1997 Insurance brokerage and consulting services . $ -- $ -- $ -- $ -- $ 168.6 $3,605.2 $ -- $ -- $ 3,425.0 $ -- Insurance underwriting . 549.0 1,752.0 2,697.8 1,608.9 214.3 34.6 842.3 208.2 529.0 1,596.2 Corporate and other..... -- -- -- -- 111.1 7.9 -- -- 204.5 -- ----------- --------- --------- -------- ---------- -------- ---------- --------- --------- ---------- Total ........ $ 549.0 $ 1,752.0 $ 2,697.8 $1,608.9 $ 494.0 $3,647.7 $ 842.3 $ 208.2 $ 4,158.5 $ 1,596.2 =========== ========= ========= ======== ========== ======== ========== ========= ========= ========== 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 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 =========== ========= ========= ======== ========== ======== ========== ========= ======== ========== (1) The above results reflect allocations of investment income and certain expense elements considered reasonable under the circumstances. (2) Net of reinsurance ceded.
- 22 - SCHEDULE IV Aon Corporation and Subsidiaries REINSURANCE
Year Ended December 31, 1997 -------------------------------------------------------------- Percentage Ceded to Assumed of amount Gross other from other Net assumed to (millions) amount companies companies amount net ---------- ---------- ---------- ---------- ---------- Life insurance in force (1) ...................... $ 10,437.8 $ 12,514.9 $ 8,822.7 $ 6,745.6 130.8% ========== ========== ========== ========== ========== Premiums and policy fees Life Insurance .................................. $ 214.0 $ 153.5 $ 85.8 $ 146.3 58.6% A&H Insurance ................................... 1,072.7 277.7 139.7 934.7 14.9 Specialty Property & Casualty (2) ............................... 634.2 178.3 72.0 527.9 13.6 ---------- ---------- ---------- ---------- ---------- Total premiums and policy fees .................. $ 1,920.9 $ 609.5 $ 297.5 $ 1,608.9 18.5% ========== ========== ========== ========== ========== (1) Includes credit life insurance. (2) Includes mechanical repair insurance sold through automobile dealers, appliance warranty insurance and property liability insurance.
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% ========== ========== ========== ========== ========== (1) Includes credit life insurance. (2) Includes mechanical repair insurance sold through automobile dealers, appliance warranty insurance and property liability insurance.
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% ========== ========== ========== ========== ========== (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, 1997, 1996 and 1995 (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 31,1997 Reserve for losses (3) (deducted from mortgage loans on real estate) $ 0.7 $ - $ (0.4) $ - $ 0.3 Reserve for losses (3) (deducted from other long-term investments) 5.2 - 3.5 - 8.7 Allowance for doubtful accounts (4) (deducted from insurance brokerage and consulting services receivables) 59.9 9.3 66.7 (14.4) 121.5 Allowance for doubtful accounts (deducted from premiums and other) 3.1 2.2 - (0.3) 5.0 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 (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.
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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 1997 ("Annual Report") pages 7 through 16, and 32 and 33. Item 3. Legal Proceedings Annual Report page 42 (note 12 of Notes to Consolidated Financial Statements). Part II Item 5. Market for the Registrant's Common Stock Annual Report page 36 (note 8 of Notes to and Related Security Holder Matters Consolidated Financial Statements) and page 45 ("Dividends paid per share" and "Price range"). Item 6. Selected Financial Data Annual Report page 44. Item 7. Management's Discussion and Analysis of Annual Report pages 18 through 24. Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures Annual Report page 24 ("Market Risk Exposure"). about Market Risk Item 8. Financial Statements and Supplementary Annual Report pages 25 through 43 and 45. Data Part III Item 10. Directors and Executive Officers of the Proxy Statement For Annual Meeting of Stockholders Registrant on April 17, 1998 of the Registrant ("Proxy Statement") pages 3, 7, 11 and 12 . Item 11. Executive Compensation Proxy Statement pages 14 through 17. Item 12. Security Ownership of Certain Beneficial Proxy Statement pages 2, 9 and 10. Owners and Management Item 13. Certain Relationships and Related Proxy Statement page 22 ("Transactions With Transactions Management"). Part IV Item 14. Exhibits, Financial Statement Schedules, Annual Report pages 25 through 43. And Reports on Form 8-K
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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 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. (e) Junior Subordinated Indenture dated as of January 13, 1997 between the Registrant and The Bank of New York, as trustee - incorporated by reference to Exhibit 4.1 of the Registrant's Amendment No. 1 to Registration Statement on Form S-4 No. 333-21237 dated March 27, 1997 (the "Capital Securities Registration"). (f) First Supplemental Indenture dated as of January 13, 1997 between the Registrant and the Bank of New York, as trustee - incorporated by reference to Exhibit 4.2 of the Capital Securities Registration. (g) Certificate of Trust of Aon Capital A - incorporated by reference to Exhibit 4.3 of the Capital Securities Registration. - 26 - EXHIBIT INDEX Exhibit Number Page Number of Regulation Sequentially S-K, Item 601 Numbered Copy - ------------- ------------- (h) Amended and Restated Trust Agreement of Aon Capital A dated as of January 13, 1997 among the Registrant, as Depositor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as Delaware Trustee, the Administrative Trustees named therein and the holders, from time to time, of the Capital Securities - incorporated by reference to Exhibit 4.5 of the Capital Securities Registration. (i) Capital Securities Guarantee Agreement dated as of January 13, 1997 between the Registrant and the Bank of New York, as guarantee trustee - incorporated by reference to Exhibit 4.8 of the Capital Securities Registration. (j) Capital Securities Exchange and Registration Rights Agreement dated as of January 13, 1997 among the Registrant, Aon Capital A and Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co. - incorporated by reference to Exhibit 4.10 of the Capital Securities Registration. (k) Debenture Exchange and Registration Rights Agreement dated as of January 13, 1997 among the Registrant, Aon Capital A and Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co. - incorporated by reference to Exhibit 4.11 of the Capital Securities Registration. (l) Guarantee Exchange and Registration Rights Agreement dated as of January 13, 1997 among the Registrant, Aon Capital A and Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co. - incorporated by reference to Exhibit 4.12 of the Capital Securities Registration. (10) Material Contracts: (a) Aon Stock Option Plan (as amended and restated through 1997)- incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended March 31, 1997 (the "First Quarter 1997 Form 10-Q"). (b) 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. (c) 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. - 27 - EXHIBIT INDEX Exhibit Number Page Number of Regulation Sequentially S-K, Item 601 Numbered Copy - ------------- ------------- (d) Aon Stock Award Plan (as amended and restated through 1997)- incorporated by reference to Exhibit 10(b) to the First Quarter 1997 Form 10-Q. (e) 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. (f) 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. (g) 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. (h) Aon Corporation 1995 Senior Officer Incentive Compensation Plan - incorporated by reference to Exhibit 10(p) to the 1995 Form 10-K. (i) 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. (j) Aon Severance Plan - incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended June 30, 1997. (k) 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. (l) 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. (m) 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. - 28 - EXHIBIT INDEX Exhibit Number Page Number of Regulation Sequentially S-K, Item 601 Numbered Copy - ------------- ------------- (n) 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. (o) 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. (p) Employment Agreement dated June 1, 1993 by and among the Registrant, Aon Risk Services, Inc. and Michael D. O'Halleran. (12) Statements regarding Computation of Ratios. (a) Statement regarding Computation of Ratio of Earnings of 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, 1997. (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 1997 Annual Report to Stockholders and into Aon's Registration Statement Nos. 33-27984, 33-42575, 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, 1997 - to be filed by amendment as provided in Rule 15d-21(b). - 29 -
EX-10 2 EXHIBIT 10(P) EMPLOYMENT AGREEMENT EXHIBIT 10(P) EMPLOYMENT AGREEMENT This Employment Agreement dated as of June 1, 1993 among Aon Corporation, a Delaware corporation ("Aon"), Aon's wholly-owned subsidiary, Aon Risk Services, Inc., a Delaware corporation ("Aon Risk"), and Michael D. O'Halleran ("O'Halleran"). WHEREAS, pursuant to an Employment Agreement dated as of April 15, 1988 (the "Prior Agreement"), O'Halleran has been Chairman and Chief Executive Officer of Aon Risk, and has served as a director and/or officer of subsidiaries of Aon Risk; and WHEREAS, while the term of the Prior Agreement does not end until November 1, 1997, the parties to the Prior Agreement and this Agreement desire to continue the services of O'Halleran beyond November 1, 1997 and provide for new terms and conditions governing O'Halleran's employment by Aon Risk. NOW, THEREFORE, in consideration of the mutual covenant contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I: Scope of Employment 1.1 TERM. O'Halleran will continue to be an employee of one or more of Aon's subsidiaries for a term ending on December 31, 1998 (the "Initial Term"). The term of O'Halleran's employment will be subject to automatic renewal for successive twelve-month periods thereafter unless this Agreement is terminated by O'Halleran or the Aon subsidiary by which he is then principally employed as of the expiration of any such twelve-month period upon not less than 30 days' prior written notice to the other party. 1.2 DUTIES. Aon Risk has caused O'Halleran to be elected, and O'Halleran agrees to serve, as Chairman, Chief executive officer and a director of Aon Risk. O'Halleran will report directly to Aon Risk's board of directors. 1.3 BOARD REPRESENTATION. While Aon, Aon Risk and O'Halleran recognize that the right to elect directors is by law vested in stockholders, it is nevertheless mutually contemplated, subject to such right, that during the entire time that O'Halleran is principally employed by Aon Risk, O'Halleran shall continue to serve as a director of Aon Risk; provided, however, that O'Halleran's removal from Aon Risk's board of directors shall not be deemed a breach of this Agreement. 1.4 EXCLUSIVE EMPLOYMENT. So long as O'Halleran is an employee of any of Aon's subsidiaries, O'Halleran (i) will devote his best efforts and all of his business time, efforts, and attention to furthering the interests of such subsidiaries; and (ii) will not, directly or indirectly, engage in any business activity which is competitive with any business activity conducted by such subsidiaries. 1.5 NO VIOLATION OF COVENANTS AND RESTRICTIONS. O'Halleran agrees not to violate any legally enforceable covenants or restrictions affecting his work for any of Aon's subsidiaries, as set forth in any agreements into which he may have entered, including, but not limited to, employment agreements, sales agreements, deferred compensation agreements, restricted stock or option agreements. O'Halleran will not act in any capacity as a reinsurance intermediary that would violate any then-legally enforceable covenants or restrictions affecting his work. 1.6 REPRESENTATION REGARDING PRIOR EMPLOYMENT. O'Halleran represents and warrants to Aon that he has provided Aon with copies of all covenants and restrictions which may be applicable to his employment hereunder and that all such covenants and restrictions are accurately identified in Exhibit A attached to this Agreement. - 2 - 1.7 TERMINATION. O'Halleran's employment with any of Aon's subsidiaries may be terminated at any time by the Aon subsidiary by which O'Halleran is then principally employed in the event of O'Halleran's dishonesty as determined by the Compensation Committee of Aon's Board of Directors ("Dishonesty"). Such termination is hereinafter referred to as a "Termination for Dishonesty." O'Halleran's employment with any Aon subsidiary may also be terminated at any time for any or no reason by O'Halleran or the Aon Subsidiary by which O'Halleran is then principally employed, upon 10 days' prior written notice given by O'Halleran to such Aon subsidiary ("Voluntary Termination") or given by such Aon subsidiary to O'Halleran ("Involuntary Termination"). ARTICLE II: Compensation 2.1 BASE COMPENSATION. From the date of this Agreement until January 1, 1994, O'Halleran's base salary shall continue at its' current rate per annum. Thereafter, O'Halleran's base salary shall be determined annually by the Board of Directors of the Aon subsidiary by which he is then principally employed, but shall be at a rate not less than $750,000 per year, and shall be subject to the approval of the Compensation Committee of the Board of Directors of Aon. O'Halleran's base compensation shall be payable on the same dates and in the same manner as the base compensation of senior executives of other Aon subsidiaries. 2.2 EXECUTIVE BENEFITS. Subject to the terms of such plans and so long as O'Halleran remains employed by any of Aon's subsidiaries, O'Halleran will be covered under all retirement, employee investment, medical and dental, short-term and long-term disability, life insurance, accident insurance and other similar benefit plans substantially equivalent to such plans maintained from time to time by Aon's subsidiary, Rollins Hudig Hall Group, Inc. for its senior executives. If any such plan bases payments thereunder on the amount of O'Halleran's compensation, his - 3 - compensation for purposes of such plan shall, unless such plan provides otherwise, be deemed to be his base compensation as determined pursuant to Section 2.1 of this Agreement. 2.3 PAYMENTS IN THE EVENT OF INVOLUNTARY TERMINATION. In the event of O'Halleran's Involuntary Termination before December 31, 1998 and so long as O'Halleran continues to satisfy his obligations under Sections 3.2 and 3.3 of this Agreement, he will be paid compensation at the rate of $750,000 per year for the period following such Involuntary Termination (in addition to any amount which may be payable pursuant to Section 2.7 of this Agreement) until (i) December 31, 1998, or (ii) the expiration of two years following such Involuntary Termination, whichever is longer. In addition, if this Agreement is not renewed in accordance with the provisions of Section 1.1 of this Agreement after December 31, 1998 (unless sooner terminated in which case the provisions of the preceding sentence of this section shall only apply), O'Halleran will be paid compensation at the rate of $750,000 per year for the two years following December 31, 1998. 2.4 LOANS. O'Halleran currently owes Aon $300,000 pursuant to an unsecured promissory note (the "Note") which bears interest at the rate of 8% per annum, without compounding. The principal amount and all accrued interest under such Note will become due and payable in full on the second anniversary of such Note; provided, however, that, as additional consideration for the performance of services by O'Halleran, all principal and interest due and payable on the Note will be forgiven (x) if O'Halleran remains an employee of any of Aon's subsidiaries until the date such amounts would otherwise become due and payable on such Note or (y) as provided in Section 2.7. 2.5 RESTRICTED STOCK. Pursuant to the provisions of the Aon Stock Award Plan (the "Plan") Aon will cause to be granted to O'Halleran Aon common stock, par value $1.00 per share ("Aon Stock") in the following amounts effective on the dates set forth opposite such amounts: - 4 - (a) 20,000 January 1, 1994 (b) 20,000 January 1, 1996 (c) 20,000 January 1, 1998 Each of (a), (b), and (c) above shall be considered separate grants under the Plan, and shall be subject to all the terms and conditions of the Plan. Each of the grants outlined hereinabove shall be adjusted accordingly in the event Aon Stock is subject to split, stock dividend, recapitalization or exchange. Notwithstanding anything to the contrary herein, should O'Halleran's employment terminate hereunder for any reason, no subsequent grant shall be effective. 2.6 CLUB MEMBERSHIPS. Aon will pay all initiation fees, periodic membership dues and reasonable client entertainment expenses incurred by O'Halleran at the Big Foot Country Club, the Royal Melbourne Country Club, the Tower Club and the Tavern Club during his employment by any of Aon's subsidiaries pursuant to this Agreement. 2.7 ADDITIONAL COMPENSATION UPON DEATH, EXTENDED TOTAL DISABILITY OR INVOLUNTARY TERMINATION. During the Initial Term, within 30 days after (i) the first date on which O'Halleran has continuously been Totally Disabled (defined and determined in a manner consistent with the long-term disability plan or plans under which O'Halleran is covered pursuant to Section 2.2) for at least one year, (ii) the date of O'Halleran's death while employed by any of Aon's subsidiaries or (iii) the date of O'Halleran's Involuntary Termination (any such date, the "Payment Date"), (a) O'Halleran or the executors or administrators of his estate, as the case may be, shall receive a payment equal to the base compensation set forth in Section 2.1, (b) the principal of and accrued interest on all Notes made pursuant to Section 2.4 shall be forgiven, and (c) the unvested portion of any grant made pursuant to Section 2.5 herein shall accelerate and become fully vested. - 5 - ARTICLE III: CONFIDENTIALITY AND NON-COMPETITION 3.1 ACCESS TO INFORMATION. As an employee and officer of one or more of Aon's subsidiaries, O'Halleran acknowledges that he is expected to obtain access to proprietary, secret or confidential information relating to (i) business, conduct or operations of such subsidiaries and their clients, (ii) research, processes, methods, techniques, computer programs, client lists, client requirements, reports and similar materials used in connection with such subsidiaries' business, and (iii) the enhancement of, or possible uses or applications for, such items or services. 3.2 CONFIDENTIALITY. While O'Halleran is an employee or officer of any subsidiary of Aon and at all times thereafter, he agrees to respect the confidentiality of any information received as a result of his association with any subsidiary of Aon and agrees not to disclose to others any proprietary, secret or confidential information. Upon termination of O'Halleran's employment for any reason, he agrees not to take any confidential, proprietary or secret information or copies thereof with him, nor will he use, duplicate or disclose such information to anyone else. 3.3 NON-SOLICITATION. In light of the special and unique nature of the relationship described herein, as consideration for O'Halleran's employment and in order to protect the legitimate and protectible business interest of Aon Risk and Aon Risk's subsidiaries, including, but not limited to, any confidential and proprietary information to which O'Halleran will obtain access, O'Halleran agrees that for a period of two years following Voluntary Termination of his employment, Termination for Dishonesty or other expiration of his employment under this Agreement, O'Halleran will not directly or indirectly: (a) solicit business from, or assist others in soliciting business from or performing work for, any client of Aon Risk or any subsidiary of Aon Risk which O'Halleran personally handled or - 6 - serviced at any time during the one year period immediately preceding termination; or (b) attempt to hire, hire, assist in hiring or cause to be hired by another, any person who was an employee of Aon Risk or any subsidiary of Aon Risk at any time during the six months preceding termination. 3.4 IRREPARABLE INJURY. O'Halleran expressly acknowledges, recognizes and understands that a breach of any of the provisions of Section 3.2 or Section 3.3 will cause irreparable damage to the business of one or more of Aon's subsidiaries and that such damage will be difficult or impossible to measure. O'Halleran agrees that in the event of any such breach, any Aon subsidiary which may be injured thereby, in addition to such other rights and remedies as it may have, may apply to any court of competent jurisdiction for an order requiring specific performance of the provisions of Section 3.2 and 3.3 and seek temporary, preliminary and permanent injunction relief against any act which would violate any such provision. If any provision of Section 3.2 or Section 3.3 shall be held invalid or unenforceable as written, such provision shall be construed a restricting the activities of O'Halleran to the extent such activities may be lawfully restricted. 3.5 O'HALLERAN'S ACKNOWLEDGEMENT. O'Halleran understands and expressly acknowledges that each of the foregoing provisions is reasonable and necessary to protect and preserve the legitimate and protectible business interest of Aon's subsidiaries, and the economic benefit derived therefrom, and that such restrictions will not prevent O'Halleran from earning a livelihood in his chosen business and are not an undue restraint on him. 3.6 SURVIVAL. The provisions of this Article III shall survive any termination of this Agreement. - 7 - ARTICLE IV: Miscellaneous 4.1 AON GUARANTEE. Aon guarantees the payment of its subsidiaries' obligations to O'Halleran hereunder. 4.2 EXPENSES. Aon will reimburse O'Halleran for all fees and expenses of legal counsel and accountants reasonably incurred by him in connection with the negotiation of this Agreement. As O'Halleran will comply with any legally enforceable covenants and restrictions applicable to his employment hereunder, it is unlikely that litigation will arise regarding such covenants and restrictions. However, in the unlikely event that an action is filed against O'Halleran, Aon will indemnify him and hold him harmless for the fees and expenses of legal counsel selected by Aon subject to O'Halleran's approval (which approval shall not unreasonably be withheld) for the defense of any claim by any of his present or former employers which is based primarily on his alleged violation of the covenants and restrictions identified on Exhibit A. 4.3 GOVERNING LAW. This agreement will be governed by and construed in accordance with the laws of the State of Illinois. 4.4 NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by certified mail to his residence address as it appears on Aon's records in the case of O'Halleran, or to Aon's principal office in the case of Aon or any of its subsidiaries, addressed to the Secretary of Aon. 4.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of Aon and its successors and assigns, including any successor by merger, consolidation or transfer of substantially all of the assets of Aon. Such successor shall assume its performance, and shall have the same duties and obligations as Aon. This Agreement shall be binding upon and inure to the benefit of O'Halleran and his heirs and personal representatives; provided, however, that O'Halleran shall make no assignment of any right or benefit hereunder, except as authorized by - 8 - specific provision hereof. 4.6 SEVERABILITY. If for any reason any provision of this Agreement shall be held invalid in whole or in part, such invalidity shall not affect such provision to the extent not so held invalid, or any other provisions of this Agreement not so held invalid, and such provision and all other such provisions shall to the full extent consistent with law continue in full force and effect. 4.7 ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and supersedes all prior agreements or understandings between the parties, including without limitation the Prior Agreement. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. - 9 - 4.8 HEADINGS. The article and section headings and captions in this Agreement are for convenience only and shall not affect the construction or interpretation of this Agreement. AON CORPORATION By:/S/PATRICK G. RYAN ------------------------ Chairman, President and Chief Executive Officer AON RISK SERVICES, INC. By:/S/JEROME S. HANNER ------------------------ Vice President By:/S/MICHAEL D. O'HALLERAN ------------------------ - 10 - EXHIBIT A Covenants and Restrictions 1. Those covenants and restrictions affecting Michael D. O'Halleran as contained in that certain Agreement dated July 10, 1981 pertaining to the purchase of assets of First Manhattan Intermediaries, Inc. by Thomas A. Greene & Company, Inc. ("TAG"). 2. Those covenants and restrictions affecting Michael D. O'Halleran as contained in any stock option plan or grant made by agreement between Alexander & Alexander Services, Inc. (A&A) and Michael D. O'Halleran, including but not limited to agreements dated March 31, 1983 and August 18, 1986. 3. Those covenants and restrictions affecting Michael D. O'Halleran as contained in any plan of deferred compensation of TAG or A&A, including but not limited to a participation and deferral election agreement between TAG and Michael D. O'Halleran dated November 26, 1986. 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) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Income from continuing operations before provision for income tax (1) $ 541.6 $ 445.6 $ 458.0 $ 397.0 $ 331.6 -------- -------- -------- -------- -------- Add back fixed charges: Interest on indebtedness 69.5 44.7 55.5 46.4 42.3 Interest on ESOP 3.5 4.3 5.3 5.9 6.5 Portion of rents representative of interest factor 44.3 28.6 21.4 28.7 26.1 -------- -------- -------- -------- -------- Income as adjusted $ 658.9 $ 523.2 $ 540.2 $ 478.0 $ 406.5 ======== ======== ======== ======== ======== Fixed charges: Interest on indebtedness $ 69.5 $ 44.7 $ 55.5 $ 46.4 $ 42.3 Interest on ESOP 3.5 4.3 5.3 5.9 6.5 Portion of rents representative of interest factor 44.3 28.6 21.4 28.7 26.1 -------- -------- -------- -------- -------- Total fixed charges $ 117.3 $ 77.6 $ 82.2 $ 81.0 $ 74.9 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 5.6 6.7 6.6 5.9 5.4 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges (2) 7.1 7.9 ======== ======== (1) Income from continuing operations before provision for income taxes and minority interest includes special charges of $172 million and $91 million in the years ended December 31, 1997 and 1996, respectively. (2) The calculation of this ratio of earnings to fixed charges reflects the exclusion of special charges from the income from continuing operations before provision for income taxes component for the years ended December 31, 1997 and 1996, respectively.
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) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Income from continuing operations before provision for income tax (1) $ 541.6 $ 445.6 $ 458.0 $ 397.0 $ 331.6 Add back fixed charges: Interest on indebtedness 69.5 44.7 55.5 46.4 42.3 Interest on ESOP 3.5 4.3 5.3 5.9 6.5 Portion of rents representative of interest factor 44.3 28.6 21.4 28.7 26.1 -------- -------- -------- -------- -------- Income as adjusted $ 658.9 $ 523.2 $ 540.2 $ 478.0 $ 406.5 ======== ======== ======== ======== ======== Fixed charges and preferred stock dividends: Interest on indebtedness $ 69.5 $ 44.7 $ 55.5 $ 46.4 $ 42.3 Preferred stock dividends 82.1 28.7 37.5 48.4 47.5 -------- -------- -------- -------- -------- Interest and dividends 151.6 73.4 93.0 94.8 89.8 Interest on ESOP 3.5 4.3 5.3 5.9 6.5 Portion of rents representative of interest factor 44.3 28.6 21.4 28.7 26.1 -------- -------- -------- -------- -------- Total fixed charges and preferred stock dividends $ 199.4 $ 106.3 $ 119.7 $ 129.4 $ 122.4 ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and preferred stock dividends (2) 3.3 4.9 4.5 3.7 3.3 -------- -------- -------- -------- -------- Ratio of earnings to combined fixed charges and preferred stock dividends (3) 4.2 5.8 ======== ======== (1) Income from continuing operations before provision for income taxes and minority interest includes special charges of $172 million and $91 million in the years ended December 31, 1997 and 1996, respectively. (2) Included in total fixed charges and preferred stock dividends for the year ended December 31, 1997 are $64 million of pretax distributions on the 8.205% trust preferred capital securities which are classified as "minority interest" on the condensed consolidated statements of operations. (3) The calculation of this ratio of earnings to fixed charges reflects the exclusion of special charges from the income from continuing operations before provision for income taxes component for the years ended December 31, 1997 and 1996, respectively.
EX-13 5 AON ANNUAL REPORT Aon Risk Services A leading global retail insurance brokerage and risk management services company, Aon Risk Services (ARS) offers comprehensive risk management services, including insurance placement, administrative services, program development, risk management and loss control consulting, claims management consulting, premium financing and other fee-based services. ARS strengths are in its global, industry-focused practice groups, which include aviation, energy, marine, entertainment, construction, health care, utilities, railroads and financial institutions. Product-specific services include directors' and officers' liability, workers' compensation, professional liability, export credit, expropriation, property, casualty and fine arts. Technical services, delivered through Aon Worldwide Resources, include loss control, actuarial analysis, risk management consulting and specialized claims adjusting. HIGHLIGHTS During 1997, ARS continued to invest in the talent, technology and product development needed to better serve new and existing clients. We launched AonLine, an innovative, cost-effective network of electronic services designed to meet the information needs of risk managers. As a secure "extranet," it is capitalizing on the Internet for personalized and accessible communications and is available exclusively to Aon clients. OUTLOOK Aon is continually redefining the way we deliver brokerage services. For example, through Aon Enterprise, we are developing fundamental process changes that will improve efficiency and deliver core services to our customers more effectively. ARS continues to be at the forefront in developing alternative risk financing mechanisms ranging from captive insurance companies to multi-line, multi-year, high-aggregate excess programs. ARS provides risk management services to companies of all sizes in every corner of the globe. Through our Strategic Account Management initiative, we are able to streamline the delivery of the full range of Aon resources to larger clients. Many of these companies are focusing on a broader definition of risk management, requiring more complex services, a responsive and far-reaching network and the expertise necessary to provide innovative solutions. They want value-added strategic partnerships, and we expect Aon will be their choice for long-term risk management. Aon Risk Services is a leading global insurance broker, providing a comprehensive range of risk management services to assist clients in evaluating and managing risk exposures. Aon Risk Services in brief: o Fastest-growing global broker o Owned offices in more than 100 countries o Offers a variety of services to complement traditional brokerage needs, including: risk identification risk control strategic risk planning creative risk financing risk management information systems merger and acquisition due diligence - 7 - Aon Re Worldwide Aon's global reinsurance operations are coordinated under the Aon Re Worldwide (ARW) umbrella. With offices in 50 countries, ARW is a leader in the major insurance markets of North America, the U.K., Continental Europe, Japan and Australia as well as rapidly emerging markets in Latin America and Asia-Pacific. ARW provides an array of services to aid its clients in the design, structure and implementation of risk transfer programs. We offer traditional treaty and facultative reinsurance placement services as well as capital market products and sophisticated risk portfolio analysis. HIGHLIGHTS During 1997, ARW expanded its global reinsurance network through organic growth and strategic acquisitions. We enhanced our North American presence by adding offices in Canada and the southeastern United States. We deepened our penetration in Europe, Australia, Canada, Asia and Latin America through Aon Group Limited, which brought together the collective expertise of the Alexander Howden Group, Bain Hogg, Jauch & Hubener, the Minet Group and Nicholson Jenner Leslie. We continued to strengthen our position as a leader in developing capital market and risk transfer innovations. For example, we placed three CatEPuts (Catastrophe Equity Put programs) for clients. And, we worked with newly launched Aon Capital Markets to enhance our ability to assist clients in managing their risks on a comprehensive basis. OUTLOOK The global reinsurance market is undergoing significant changes as consolidation occurs in all sectors. ARW is at the forefront of the industry and continues to look for opportunities to extend its global reach. We also will continue to make significant investments in technology and value-added services in order to provide the most comprehensive risk management services. We will further strengthen our global reinsurance network to ensure that the most advanced products and services are available to Aon clients anywhere in the world. Aon Re Worldwide is the world's largest reinsurance intermediary, providing treaty and facultative placements, industry- and coverage-specific expertise as well as analytical consulting services. Aon Re Worldwide in brief: o Offices in 50 countries o Traditional reinsurance coverage and alternative risk financing solutions o Clients include global, national and regional insurance companies, reinsurance companies, Lloyd's syndicates, affinity groups, risk retention groups and single parent captives o Services include actuarial analysis, catastrophe exposure modeling, non-traditional financial products, risk portfolio analysis and security analysis o Product line expertise includes accident and health, aviation, life, marine and energy and specialty non-marine - 8 - Look up the definition of global business and you should find the name Sara Lee Corporation. This $20 billion company is one of Aon's most prominent clients and one that really brings out the best in our global network, which now stretches across 550 offices and more than 100 countries. As Sara Lee's primary insurance broker, everything Aon does for them must have a global reach. "We manage global risks, global resources, global commu-nication systems," says Carol Murphy, Strategic Account Manager of the Aon/Sara Lee team. "And, we deliver on a local level, supplying local risk management needs in a program coordinated globally." All of Aon's offices are electronically linked via several proprietary computer systems, providing up-to-the-minute client information. "With operations in more than 40 countries and a global distribution system that enables us to market branded consumer products in more than 140 countries, we rely on solid partnerships to support our broad global presence," says Vincent Coffey, Sara Lee Corporation's Director, Risk Management. "Aon has put together a team that meets our needs in virtually every corner of the world. With 42% of our sales now coming from business conducted outside the U.S., Aon has grown with us to support our risk management needs worldwide." In the Chicago office, 20 of our risk specialists are dedicated to Sara Lee while more than 100 others are strate-gically located around the world. "We use our global network to help Sara Lee achieve its global growth strategies," adds Carol. "For instance, we were part of the planning team for Sara Lee's integration of Aoste, a French acquisition with $800 million in revenues. We had to make sure that in addition to providing the best local insurance service, we were in sync with the company's global standards and objectives." Sara Lee also benefits from Aon's Strategic Account Management (SAM) initiative designed to build stronger partnerships with its major clients. The SAM team responsible for Sara Lee deeply understands its business, its expectations and its goals. As a result, Aon has been able to help Sara Lee strengthen the risk management synergy between its U.S. and European businesses as well as help with recent divestitures as Sara Lee focuses on building leadership brands on a global basis. "Aon people know our business, act with a sense of urgency, know where to find solutions in the global marketplace and, above all, have great integrity," adds Vince, who has worked with Aon since 1989. "We share a philosophy of business. Aon believes in a collaborative partnership and progressive business management. That's the way we like to do business." Anytime, anywhere, Aon's global network delivers Insuring Sara Lee's global brands is a round-the-clock job for Carol Murphy, Aon Strategic Account Manager, and Vincent Coffey, Sara Lee Director, Risk Management (as shown in photo). - 9 - Aon Services Group Aon Services Group (ASG) designs and delivers specialized retail and wholesale insurance products and services for associations and affinity groups, service businesses, insurance companies, independent insurance agents and brokers, governments, health care providers and commercial organizations. Through its subsidiaries, ASG provides wholesale brokerage capabilities, as well as program administration and claims management expertise for insurance organizations. ASG's thorough knowledge of targeted industries and market segments, together with leading-edge products and multiple-channel distribution systems, has produced recognized experts in program administration for professional liability, with specialized expertise in the accounting, health care and legal professions. HIGHLIGHTS In 1997, Aon Services Group changed its name from Aon Specialty Group to reflect the fact that it provides not only highly specialized insurance products but many comprehensive, value-added services as well. We concentrated our efforts on consolidating existing ASG units and assimilating several key acquisitions. We integrated Alexander Howden North America and Swett & Crawford into ASG's wholesale brokerage unit, merged Alexander & Alexander's health care practice unit with the Aon Healthcare Alliance, and added segments of several other acquisitions into our Affinity Insurance Services unit. OUTLOOK ASG has a solid position as a premier provider of wholesale brokerage services. Additional resources have strengthened Aon Healthcare Alliance's ability to offer a wide array of products and services to all segments of the health care industry. We are increasing our efforts to distribute insurance to affinity groups in Europe, Latin America and other global markets. We also are developing our reputation and expertise in third-party claims administration. In order to offer more products and services to more clients, we are enhancing existing distribution networks and promoting greater interdependence with other Aon units. Aon Services Group consists of several highly focused specialty companies, providing industry-specific expertise, unique insurance coverages and wholesale brokerage services. Aon Services Group in brief: o A premier direct marketer of specialty coverages to affinity groups and associations o A leading provider of products, services, resources and expertise to the health care industry o The largest U.S. wholesale insurance brokerage operation o A rapidly growing third-party claims administration organization o A leading provider of comprehensive underwriting management programs for various industries, including financial services, media, entertainment, sports and leisure and government entities o Our Affinity Insurance Services produces $1 billion in premiums from more than 5 million policyholders - 10 - At Aon, our concept of teamwork is called "interdependence," meaning two or more companies working together for the benefit of a client. In bringing together the best of Aon, we believe our culture of interdependent, innovative problem solving clearly distinguishes our service from the competition. By breaking down barriers that often exist between brokerage specialties, Aon professionals can pool the best expertise and resources to provide a full range of solutions. Working as an integrated, networked global team, we can meet our clients' risk management, risk transfer and consulting needs anywhere in the world. A good example is our developing partnership with Philips Electronics N.V., the Dutch company of more than 100 businesses ranging from lighting, medical products, electronics and consumer products to film and music. Aon has been managing most of Philips' risk exposures since 1996 when Philips remarketed its insurance programs. Soft market pricing and Aon's expanded service base convinced the company to rethink its traditional internal captive-based insurance programs and turn to Aon. "When Philips restructured its risk management operations, Aon was ready to step in," says Kik Thole, Strategic Account Manager. "We are able to bring all the resources of Aon together and deliver them to Philips seamlessly." Philips Risk Manager Arjen Ronner explains, "Risk management reengineering is an ongoing process, involving both strategy and implementation. Aon is able to assist our local managers with many of the administrative tasks so that they can focus their efforts on the critical risk management issues." For Philips' diverse businesses, Aon developed a comprehensive multi-line, multi-year program, which is managed out of Holland and supported by global practices in New York and London. Most recently, our Hong Kong office was instrumental in securing insurance coverage for Philips' joint ventures throughout China. "We need an experienced, competent team of marketing and technical specialists," adds Arjen Ronner. "Our Aon account team in Rotterdam is able to access resources from around the world and deliver them to our door." Resourceful interdependence brings the best of Aon to every client Philips Risk Manager Arjen Ronner (left) and Kik Thole, Aon Strategic Account Manager (as shown in photo), work together with Aon companies worldwide. - 11 - Aon Consulting Worldwide Focused on linking people strategies to business strategies, Aon Consulting Worldwide (ACW) specializes in human resources consulting services. From offices on five continents, Aon consultants help clients maximize their performance and improve bottom-line results. The ACW approach ensures that clients attract, retain and develop the best people. ACW is organized into four consulting groups: Employee Benefits, Human Resources, Compensation and Change Management. Within these groups, we offer 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. HIGHLIGHTS During 1997, ACW solidified its position in several key markets. In employee benefit programs, our services are increasingly in demand as clients cope with the pressures of health care industry reform. In human resources management, the outsourcing trend is growing and the demand is strong for our services. We are seeing significant gains in the middle market, where companies are finding our outsourcing services to be very cost effective. ACW is a leader in innovative retirement plan consulting and creative compensation strategies. To help clients manage these activities, we work in conjunction with Aon Risk Services to offer a full package of services in risk management, employee benefits, compensation, human resources and change management. OUTLOOK In a marketplace where many companies offer various human resources consulting services, ACW is growing and distinguishing itself as a fully integrated human resources consulting organization. Building from a strong Aon Group client base, ACW is able to offer clients a full spectrum of services and the scale of a truly global organization, both in reach and expertise. Increasingly, multinationals are looking to us for an integrated approach for the delivery of the diverse products and services that Aon offers worldwide. Aon Consulting Worldwide serves the growing demand for integrated, cost-effective ways to align human resources solutions with business strategies. Aon Consulting Worldwide in brief: o One of the world's leading global human resources consulting firms o More than 110 offices worldwide o Designs and administers benefits packages that balance employer and employee needs o Develops innovative compensation and reward programs o Implements comprehensive change management programs o Improves employee selections systems, skills assessment and performance measurements - 12 - The business of risk management demands innovative solutions, teamwork, in-depth industry knowledge and absolute client focus. Aon has become a global leader in risk management because it has been able to attract, retain and develop the best people with the best skills in the industry. Because of our depth of talent and expertise, we've been able to establish long-term relationships with the world's top businesses. Our 40,000 employees worldwide share goals aligned with the interests of our clients and other stakeholders. A good example is our relationship with Tomkins PLC, a $7 billion multinational company. Managing risk for Tomkins' more than 100 different businesses is a totally engaging responsibility for Aon risk management experts. "We have some of the industry's best people working on the Tomkins account," explains Charlie Miller, Strategic Account Director in Cincinnati, Ohio, the U.S. hub office for Aon's Tomkins service team. "We always give them a very high level of customer service." London-based Tomkins produces everything from Murray lawn mowers in the U.S. to Ranks Hovis McDougall food products in the U.K. Aon's accomplished team of risk and liability specialists is involved in the administration of the Tomkins account, providing needs assessment, strategic planning and project management as a platform for the day-to-day service delivery. "Risk management is an expertise we outsource," says Richard Marchant, Tomkins Administration Director and Company Secretary. "We look to our colleagues at Aon for the expertise and knowledge we need. We work with individuals we rely on. That's what makes this relationship work so well." To fully serve the needs of Tomkins and its many businesses worldwide, the team uses a combination of Anistics Omega, Aon's comprehensive database of claims, exposure, policy, premium allocation and property information, along with e-mail and document management systems, all tailored to Tomkins' needs. Together, these give Tomkins and Aon instant access to quality risk management information. "We couldn't manage the extensive needs of a diverse global company without a comprehensive database and fast, reliable communications," explains Julia Harrop, Worldwide Account Director, and head of the Aon-Tomkins team in Shrewsbury, England. "This is a complex account that requires careful selection of appropriate resources for the many different businesses we serve." From Tomkins' point of view, working with the Aon team means working with the best. "As far as I'm concerned, Aon is the number one broker," adds Richard Marchant. "They have the resources and the expertise we need for the future." Knowledgeable, responsive, creative . . . Aon people are determined to be the best The Tomkins-Aon team is headed by Richard Marchant, Tomkins Company Secretary, (left) and Aon Account Directors Charlie Miller and Julia Harrop (as shown in photo). - 13 - Virginia Surety Company and London General Insurance Company Virginia Surety Company (VSC) and its sister company, London General Insurance Company (LGI), provide innovative insurance programs as well as underwriting expertise for a variety of traditional and non-traditional insurance programs. Their expertise and capabilities in consumer extended warranties are unsurpassed. In addition, Aon Warranty Group (AWG) offers a range of fee-based services that include premium administration, claim processing, information systems and accounting support, customer service, customer care management, value-added after-sale products, training and profit management services. Our distribution channels include auto dealerships, manufacturers, retailers, distributors, financial institutions, direct mail, telemarketing, affinity groups, associations and the Internet. HIGHLIGHTS During 1997, we maintained our position as the world's largest independent provider and administrator of warranties for consumer products such as automotive, consumer electronics and appliances, personal computers and homes. We're experiencing significant growth in our specialty insurance products for credit card enhancement programs, cellular phones, power sports and involuntary unemployment. Through new operations in Argentina, Australia, Brazil and Japan, AWG is creating new business opportunities and strengthening Aon's global development. In April, AWG acquired Innovative Services International and expanded its offerings to include a new Customer Care Management program, a fast-growing call center service that enhances our core products. OUTLOOK Through operations on five continents, VSC, LGI and AWG will continue to expand their reach, product offerings and distribution systems into new and existing markets. As we expand, we expect our fastest growing business will continue to be our warranty operations. We'll build our consumer care services by providing customer service, technical support and claims services for an ever-growing list of retailers and consumer brand marketers. Virginia Surety and its sister companies offer comprehensive consumer extended warranty and consumer service programs. Virginia Surety in brief: o VSC is rated A+ by A. M. Best o VSC/LGI is the world's largest independent underwriter of extended warranties o More than 4 million policies issued in 1997 Aon Warranty Group in brief: o One of the largest independent service contract administrators in the world o Call centers average 183,000 service calls daily - 14 - Imagine dealing with more than 180,000 phone calls daily. And, for each call, you have a smile in your voice and an answer at the ready. That's just what the customer service representatives at Aon Warranty Group and Virginia Surety Company are doing every day for their manufacturing and retail clients. A comprehensive operation of three independent call centers, Aon's new customer care service is being provided as an added-value service to our clients. It's just one of the new opportunities Aon has developed to serve customers' evolving needs. For example, when consumers call the local store of a national retail chain, the phone line connects to an Aon call center. The call center representative can pull up all the vital information about that particular store on his or her PC screen and can give a quick and efficient response. The consumer is satisfied and the retailer doesn't have to employ in-store staff to handle phone inquiries. In addition to this rapidly growing service, three other Aon call centers in the U.S. answer claim center calls for auto, home, appliance and electronic warranties as well as 24-hour-a-day technical service support calls for manufacturers of computers and other consumer products. And every caller gets an answer. While handling calls for a leading manufacturer of consumer brand clothing, Aon's customer service was able to find one thrifty caller the right button to match his 40-year-old pair of blue jeans. From risk management, loss control and claims management to added-value services such as extended product warranties and customer service programs, Aon provides the services and products that serve the spectrum of client needs. For example, we underwrite and administer service contracts for household names across America and around the globe, including Office Depot, the world's largest office products retailer, operating over 600 retail stores. "When we looked for the ideal partner to help us develop our service contract business, the clear choice was Aon Warranty Group," says Julie Siderfin, Office Depot's Manager of Service Contract Sales. Aon Warranty Group has served Office Depot for several years. "In that time, we've seen service contract sales rise dramatically," she adds. "And, in the months and years ahead, we're looking forward to expanding our relationship with Aon Warranty Group." Distinctive products and services create value-added opportunities Aon Customer Service Representative Denise Black (as shown in photo) responds to hundreds of consumer calls daily. - 15 - Combined Insurance Company of America Serving the needs of both individuals and businesses, Combined Insurance Company of America (CICA) is a leading distributor and underwriter of supplemental insurance policies, including life, health, accident and disability income. Many of CICA's nearly 5 million insureds are self-employed or work in firms with modest employee benefits. CICA's competitively priced policies help the insured supplement their employer-provided benefit plans to maintain financial stability in a time of need. We offer a full range of supplemental insurance products with additional services for the worksite, including voluntary benefit enrollment administration and preparation of benefit statements. HIGHLIGHTS During 1997, CICA took steps to develop new markets and strengthen existing lines. For our traditional product lines, we introduced higher benefit accident policies with convenient monthly payment options. We aggressively pursued our target market with an array of new worksite products -- all capable of being customized to the individual employee and paid through payroll deduction. We introduced administrative services specifically designed for small employers to enhance the value of their benefit programs. In addition to offering these products directly into the market, CICA is working closely with Aon Risk Services retail brokers to introduce CICA services to existing ARS clients. OUTLOOK CICA will continue expanding its product lines, its customer base and its geographic presence. As baby boomers age, the senior market represents a significant opportunity and CICA is launching a comprehensive portfolio of insurance products aimed at the growing senior population, including a new long-term care policy. Internationally, CICA is expanding its worksite marketing in the United Kingdom and Latin America. In its traditional market, CICA is introducing improved products attuned to market needs with affordable payment options. CICA will continue its tradition of selling to individuals in the workplace by using enhanced products, payroll deduction and other worksite marketing techniques. For more than 75 years, Combined Insurance Company of America has sold supplemental life, health and accident coverage to individuals in their homes and at their place of work. Combined Insurance Company of America in brief: o Operations in the U.S., U.K., Canada, Australia, Ireland, Germany, Mexico, New Zealand, The Netherlands and Argentina o Individual and employer insurance programs o The largest issuer of individual accident policies in the U.S., Canada, Australia and Ireland o The 4th largest writer of individual accident and health insurance premiums among U.S. companies o The 2nd largest writer of individual accident and health premiums in Canada - 16 - *** PAGE 17 WAS OMITTED *** - 17 - Management's Analysis of Operating Results and Financial Condition CONSOLIDATED RESULTS General In 1997, Aon invested approximately $1.6 billion in business combinations in its brokerage and consulting businesses. These business combinations were financed primarily by the issuance of capital securities, internal funds and the issuance of commercial paper. The major 1997 acquisitions include: Alexander & Alexander Services Inc. (A&A)--a leading global insurance brokerage and consulting company; Minet --a worldwide specialty reinsurance and wholesale brokerage operation; Sodarcan --a Canadian insurance brokerage and consulting company; and Jauch & Hubener --the largest insurance brokerage and consulting firm in Germany. 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. These items were accounted for using the purchase method of accounting and the goodwill created is amortized principally over forty years. Because of these acquisitions all brokerage revenue and income comparisons are significantly impacted. In 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 after-tax proceeds from the sales were $1.2 billion. The sales resulted in a $21 million after-tax gain on sale. UFLIC and LOV results are classified in the consolidated statements of income as discontinued operations in 1996 and 1995. For purposes of the following consolidated results discussions (1997 compared to 1996 and 1996 compared to 1995), comparisons against prior years' results are based on continuing operations. In 1996, Aon sold the distribution rights of its North American auto extended warranty business. However, it is still being underwritten by Aon's subsidiary, Virginia Surety Company, Inc. As part of the same transaction, Aon sold its North American auto credit insurance and distribution operations. Results of the auto credit underwriting business written prior to the sale are continuing to run off as planned. Special Charges All of Aon's special charges are reflected in commissions and general expenses in the consolidated statements of income. In first quarter 1997, Aon recorded pretax special charges of $145 million ($91 million after-tax or $0.54 per share), primarily related to management's commitment to a formal plan of restructuring Aon's brokerage operations as a result of the acquisition of A&A. Pretax restructuring charges include approximately $105 million associated with real estate activities including the closure, abandonment and consolidation of duplicate facilities around the world, and other consolidation costs. The restructuring charges related to consolidating real estate space are expected to be paid out over several years. Special charges for severance and related costs, involving over 600 positions, were approximately $40 million. Terminations resulting from workforce reductions are substantially complete. In connection with the first quarter 1997 special charges, Aon had approximately $80 million remaining unpaid in the commissions and general expenses liability at December 31, 1997. In 1997, as a result of the acquisition of A&A, Aon had established approximately $200 million of purchase accounting liabilities primarily relating to costs associated with the consolidation of real estate activities and severance liabilities for approximately 2,000 positions. In connection with these items, Aon had approximately $100 million remaining unpaid in the commission and general expense liability at December 31, 1997. In second quarter 1997, Aon recorded pretax special charges of $27 million ($17 million after-tax or $0.10 per share) to recognize investment losses incurred at A&A before Aon acquired A&A. Aon discovered in the second quarter that A&A's investment portfolio, as it had been constructed before Aon's acquisition, had included certain highly volatile securities which had been incorrectly classified as high quality money market instruments. At Aon's acquisition date, the carrying value of certain securities in A&A's portfolio was overstated by the previously unrecognized investment losses. In second quarter 1996, Aon recorded a $30 million pretax charge ($19 million after-tax or $0.12 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. In fourth quarter 1996, Aon's management committed to a formal plan of restructuring Aon's European brokerage operations primarily as a result of the Bain Hogg acquisition and recorded pretax special charges of $60 million ($40 million after-tax or $0.24 per share) primarily relating to this activity. 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 work-force reductions took place within one year from the date of acquisition. 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. - 18 - MANAGEMENT'S ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION In connection with the 1996 special charges, Aon had approximately $30 million remaining in the commissions and general expenses liability at December 31, 1997 representing amounts related to the special charges that have not yet been paid. As a result of the Bain Hogg acquisition, approximately $85 million of purchase accounting liabilities were established primarily relating to both the costs associated with the consolidation of real estate activities and severance liabilities. In connection with these items, Aon had approximately $55 million remaining unpaid in the commission and general expense liability at December 31, 1997. Revenue and Income Before Income Tax Consolidated Results for 1997 Compared to 1996 Total revenues amounted to $5.8 billion, an increase of 48% in 1997. This increase was largely attributable to growth in brokerage commissions and fees resulting from business combination activity. Brokerage commissions and fees increased 88% to $3.6 billion. Premiums earned of $1.6 billion increased 5% in 1997. Extended warranty premiums earned increased $110 million or 24% reflecting continued growth of new business in the mechanical, appliance and the electronic lines. There was minimal growth in direct sales business as a result of changes in the consumer insurance market. The planned run-off of North American auto credit business partially offset this growth in premiums earned. Net investment income of $494 million increased 29% for the year primarily attributable to brokerage acquisitions, and to income received on certain private equity investment holdings. The investment portfolio yield declined five basis points as a result of investment of new cash flows in lower yielding investments, as well as the change in portfolio mix attributable to acquisitions. Pretax realized investment gains were $6 million in 1997 compared to $8 million in 1996. Revenue excluding realized investment gains increased 48% or $1.9 billion when compared to 1996. Commissions and general expenses (excluding interest expense) increased 70% for the year primarily due to growth in the brokerage businesses. Benefits to policyholders increased 7% when compared to 1996, reflecting a higher volume of new extended warranty business, as well as growth in capital accumulation products. This increase was partially offset by the profitable phase out of certain specialty liability programs and the run-off of auto credit business as planned. It is anticipated that this business will continue to run-off as planned. Interest expense increased 73% as a result of acquisition financing. Amortization of intangibles, which excludes deferred policy acquisition costs (DPAC), increased $44 million or 58%, reflecting brokerage acquisitions. Overall, benefit and expense margins for the insurance underwriting segment did not suggest any significant shift in operating trends in 1997. Total benefits and expenses increased 51% or $1.8 billion over 1996. The increase reflects the inclusion of 1997 and 1996 pretax special charges of $172 million and $90 million, respectively. Total benefits and expenses, excluding the 1997 and 1996 special charges, increased 50% over 1996, primarily reflecting brokerage acquisition activity. References to income before income tax exclude minority interest related to the issuance of 8.205% mandatorily redeemable preferred capital securities (capital securities) (see note 8). Income before income tax increased $96 million or 22% in 1997, primarily due to acquisition activity. Excluding special charges, income before income tax increased 33% or $178 million. Fourth quarter revenue increased 42% to $1.5 billion when compared to 1996, primarily reflecting brokerage business combination activity. Total benefits and expenses, excluding special charges, increased 41% to $1.3 billion for the quarter. Pretax income increased $126 million or 178% to $197 million. The increase in pretax earnings reflects growth in the insurance brokerage and consulting segment related to business combination activity. Excluding special charges, pretax earnings increased 50% compared to fourth quarter 1996.
CONSOLIDATED GEOGRAPHIC DATA (millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Revenue: United States $ 3,413 $ 2,646 $ 2,449 United Kingdom 1,158 535 453 Continental Europe 439 394 316 Rest of world 741 313 248 - -------------------------------------------------------------------------------------- Total revenue $ 5,751 $ 3,888 $ 3,466 - -------------------------------------------------------------------------------------- Income before income tax: United States $ 413 $ 357 $ 328 United Kingdom 168 87 61 Continental Europe 33 23 20 Rest of world 100 69 49 - -------------------------------------------------------------------------------------- Income before income tax excluding special charges 714 536 458 Special charges 172 90 - - -------------------------------------------------------------------------------------- Total income before income tax $ 542 $ 446 $ 458 ====================================================================================== Identifiable assets (continuing operations): United States $10,122 $ 8,825 $ 6,427 United Kingdom 4,990 2,157 1,577 Continental Europe 2,139 1,764 1,344 Rest of world 1,440 977 679 - -------------------------------------------------------------------------------------- Identifiable assets at December 31 $18,691 $13,723 $10,027 ====================================================================================== Of the $172 million special charges in 1997, $60 million were U.S., $107 million were European, and $5 million were rest of world. Of the $90 million special charges in 1996, $35 million were U.S. and $55 million were European.
U.S. revenues increased 29% in 1997 compared to 1996, while pretax income before special charges increased 16% over prior year, both due to acquisition activity, organic growth and overall expense controls. - 19 - MANAGEMENT'S ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION European revenue increased 72% in 1997 to $1.6 billion, and rest of world revenue of $0.7 billion rose 137%. European pretax income before special charges increased 83% to $201 million and rest of world pretax income before special charges increased to $100 million. Both the revenue and pretax income before special charges have increased primarily due to acquisitions. Revenue and Income Before Income Tax Consolidated Results for 1996 Compared to 1995 Total revenue amounted to $3.9 billion in 1996, an increase of 12%. Brokerage commissions and fees increased 16% to $1.9 billion resulting from business combination activity and internal growth. Premiums earned were $1.5 billion or 7% above 1995. A higher volume of new business in the auto extended warranty line and in both the electronic and appliance lines was partially offset by the continued phase-out of certain specialty liability programs. 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. Commissions and general expenses (excluding interest expense) increased 17% for the year primarily reflecting brokerage growth. 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 run-off since second quarter 1996. Interest expense increased 8% reflecting higher levels of short-term borrowings for the year. Total benefits and expenses increased 14% over 1995. Income before income tax decreased by 3% or $12 million due largely 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. MAJOR LINES OF BUSINESS General For purposes of the major lines of business discussion, comparisons against 1996 results exclude the discontinued operations and the special charges. A discussion of discontinued operations follows the Major Lines of Business section. Insurance Brokerage and Consulting Services Aon's retail brokerage, reinsurance and wholesale operations are included in "Insurance and other services." Also included is Aon Warranty Group which provides marketing and administrative services to clients. In addition, "Insurance and other services" includes revenue from financing services operations related to placement of insurance premiums and retail auto financing receivables. Further, the start-up of Aon Capital Markets has been included.
INSURANCE BROKERAGE AND CONSULTING SERVICES (millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Revenue: Insurance and other services $3,221 $1,728 $1,477 Consulting 553 274 250 - -------------------------------------------------------------------------------------- Total revenue 3,774 2,002 1,727 - -------------------------------------------------------------------------------------- Operating expenses 3,240 1,705 1,467 Amortization of intangibles 40 40 48 - -------------------------------------------------------------------------------------- Total expenses 3,280 1,745 1,515 - -------------------------------------------------------------------------------------- Income before income tax excluding special charges 494 257 212 Special charges 145 75 - - -------------------------------------------------------------------------------------- Income before income tax $ 349 $ 182 $ 212 ====================================================================================== Identifiable assets at December 31 $8,523 $5,025 $3,343 ======================================================================================
Total 1997 brokerage and consulting services revenue was $3.8 billion, up 89%. Included in insurance and other services is retail revenue of $2.3 billion and reinsurance & wholesale revenue of $0.9 billion. Acquisitions accounted for the majority of this revenue growth. Excluding the impact of acquisitions, revenue and income before income tax results related to brokerage core businesses grew approximately 5% in a very competitive environment. Insurance and other services results were positively impacted by acquisitions, especially the inclusion of A&A in 1997. Retail brokerage results continued to reflect 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. Aon Warranty Group provides warranty marketing and administrative services to clients. This activity generated revenue of $75 million in 1997. Also included in insurance and other services revenue are financing service fees of $52 million, an increase of 49% over 1996. In the consulting line of business, 1997 revenue increased 102% to $553 million. Revenue growth was primarily influenced by acquisition activity and, to a lesser extent, expansion of integrated human resources consulting programs. The growth of consulting revenue and pretax income was offset by a decline in revenues in the automotive consulting operations. - 20 - MANAGEMENT'S ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
INSURANCE BROKERAGE AND CONSULTING SERVICES GEOGRAPHIC DATA (millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Revenue: United States $2,028 $1,291 $1,202 United Kingdom 864 297 194 Continental Europe 335 302 258 Rest of world 547 112 73 - -------------------------------------------------------------------------------------- Total revenue $3,774 $2,002 $1,727 - -------------------------------------------------------------------------------------- Income before income tax: United States $ 265 $ 165 $ 153 United Kingdom 120 47 30 Continental Europe 40 29 26 Rest of world 69 16 3 - -------------------------------------------------------------------------------------- Income before income tax excluding special charges 494 257 212 Special charges 145 75 - - -------------------------------------------------------------------------------------- Total income before income tax $ 349 $ 182 $ 212 ======================================================================================
U.S. revenue of $2.0 billion in 1997 was up 57% from 1996, European revenue of $1.2 billion increased 100% from 1996, and rest of world revenue increased to $547 million. Total pretax income was $494 million in 1997, up 92% from $257 million in 1996. U.S. pretax income was up 61% from 1996. European pretax income rose 111%, and rest of world pretax income was $69 million. 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 1997 1996 1995 - -------------------------------------------------------------------------------------- Revenue: Direct sales $1,035 $1,030 $1,014 Extended warranty 574 464 332 Specialty and other 249 280 294 - -------------------------------------------------------------------------------------- Total revenue 1,858 1,774 1,640 - -------------------------------------------------------------------------------------- Benefits to policyholders 842 790 699 Operating expenses 530 512 488 Amortization of DPAC 208 208 207 - -------------------------------------------------------------------------------------- Total benefits and expenses 1,580 1,510 1,394 - -------------------------------------------------------------------------------------- Income before income tax excluding special charges 278 264 246 Special charges - 12 - - -------------------------------------------------------------------------------------- Income before income tax $ 278 $ 252 $ 246 ====================================================================================== Identifiable assets at December 31 $4,936 $4,786 $3,736 ======================================================================================
Revenue was $1.9 billion in 1997, up 5% from $1.8 billion in 1996, primarily due to growth in the worldwide extended warranty lines. Direct sales business had minimal growth reflecting difficult market conditions for accident, while life and health grew satisfactorily. Direct sales continued to expand its product distribution through work-site marketing programs. Direct sales accident and health business improved its pretax margin in part due to good general expense controls and good international health product sales. The run-off of certain specialty liability programs is now substantially complete, while auto credit business continues to run-off. Pretax income was $278 million in 1997, up 5% from $264 million last year.
INSURANCE UNDERWRITING GEOGRAPHIC DATA (millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Revenue: United States $1,308 $1,287 $1,188 United Kingdom 274 223 209 Continental Europe 102 84 81 Rest of world 174 180 162 - -------------------------------------------------------------------------------------- Total revenue $1,858 $1,774 $1,640 - -------------------------------------------------------------------------------------- Income before income tax: United States $ 200 $ 187 $ 180 United Kingdom 41 31 27 Continental Europe 9 9 7 Rest of world 28 37 32 - -------------------------------------------------------------------------------------- Income before income tax excluding special charges 278 264 246 Special charges - 12 - - -------------------------------------------------------------------------------------- Total income before income tax $ 278 $ 252 $ 246 ======================================================================================
U.S. revenue of $1.3 billion was up 2% in 1997 while European revenue of $376 million rose 22%, principally due to growth in premiums earned in both the extended warranty and capital accumulation products. Rest of world revenue declined slightly. 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 before special charges rose 7% in 1997. European pretax income increased 25% while rest of world pretax income declined $9 million. 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. The remaining 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. - 21 - MANAGEMENT'S ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
CORPORATE AND OTHER (millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Revenue: Investment income on capital and other $ 113 $ 104 $ 86 Realized investment gains 6 8 13 - -------------------------------------------------------------------------------------- Total revenue 119 112 99 - -------------------------------------------------------------------------------------- Operating expenses 26 20 27 Interest expense 70 40 37 Amortization of intangibles 81 37 35 - -------------------------------------------------------------------------------------- Total expenses 177 97 99 - -------------------------------------------------------------------------------------- Income (loss) before income tax excluding special charges (58) 15 - Special charges 27 3 - - -------------------------------------------------------------------------------------- Income (loss) before income tax $ (85) $ 12 $ - ====================================================================================== Identifiable assets at December 31 $5,232 $3,912 $2,948 ======================================================================================
Revenue increased 6% over 1996 to $119 million. Higher levels of investment income received on certain private equity investment holdings contributed to the increase. Realized investment gains declined $2 million in 1997 when compared to 1996. Excluding these gains from both years, revenue increased 9%. Pretax income decreased $73 million in 1997. Contributing to the decrease were interest expense and goodwill amortization related to acquisitions. Excluding realized investment gains from both years, pretax income decreased $71 million. Discontinued Operations Discontinued operations in 1997 are comprised of certain insurance underwriting subsidiaries acquired with A&A that are currently in run-off and the indemnification of certain liabilities relating to subsidiaries sold by A&A prior to Aon's acquisition. Management believes that, based on current esti-mates, these discontinued operations are adequately reserved. The liability is included as a component of other liabilities on the consolidated statement of financial position. The liability increased during the fourth quarter of 1997 due to the commutation of a finite risk reinsurance contract (see note 3). Discontinued operations in 1996 and prior were composed principally of U.S. based capital accumulation products and direct response insurance products. After-tax income on these businesses has been segregated as "Income From Dis-continued 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. INCOME TAX AND NET INCOME On March 21, 1997, the Board of Directors authorized a three-for-two stock split, payable in the form of a stock dividend, of Aon's $1.00 par value common stock. All references to share data in the accompanying management's discussion and analysis and financial statements reflect the three-for-two stock split. The earnings per share and average shares outstanding have been restated for Financial Accounting Standards Board (FASB) Statement No. 128 "Earnings Per Share," and the following discussion is on a dilutive basis. Basic net income on a per share basis was $1.71 and $1.93 in 1997 and 1996, respectively. Net income for 1997 was $299 million or $1.68 per share compared to $335 million or $1.90 per share in 1996. Net income for fourth quarter 1997 amounted to $113 million or $0.65 per share compared to $46 million or $0.25 per share for 1996. The decrease in 1997 net income and related per share amount is primarily influenced by: (1) after-tax 1997 special charges of $108 million ($0.64 per share) compared to after-tax 1996 special charges of $59 million ($0.36 per share); (2) the 1997 deduction for after-tax distributions on the capital securities (reflected as "minority interest" on the consolidated statement of income); (3) operating results from 1996 discontinued operations due to the completion of the sales of UFLIC and LOV in second quarter 1996 ($0.13 per share); and (4) after-tax gain on sale of discontinued operations in 1996 ($0.13 per share). Dividends on the 8% and redeemable preferred stocks in 1997 and dividends on the 8%, 6.25% and redeemable preferred stocks in 1996 and 1995 have been deducted from net income to compute earnings per share. Operating income from continuing operations before special charges and realized investment gains, was $402 million or $2.30 per share in 1997 compared to $346 million or $1.97 per share in 1996. Aon's effective operating income tax rate on continuing operations was 37.5% in 1997 and 34.5% in 1996. Realized investment gains were taxed at 37.5% and 36% for 1997 and 1996, respectively. Average shares outstanding for 1997 increased 1% primarily due to business combinations. LIQUIDITY Consistent with financial statement presentation, the following cash flow and financial position discussion primarily reflects brokerage acquisitions. In addition, the sales of UFLIC and LOV in 1996 have significantly impacted the consolidated statements of equity and cash flows. Aon's operating subsidiaries anticipate that there will be adequate liquidity to meet their needs in the foreseeable future. Aon's routine liquidity needs are primarily for servicing its debt and for the payment of dividends on stock issues and the capital securities. Dividends from Aon's subsidiaries are the primary source for meeting these requirements. After meeting its routine dividend and debt servicing requirements, Aon used a majority of the remaining dividends received throughout the year to invest in the operational segments of its businesses. 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 1997 again exceeded the risk-based capital target set by the National Association of Insurance Commissioners by a satisfactory level. At December 31, 1997, Aon had back-up lines of credit available of $900 million. The businesses of Aon's operating subsidiaries continue to provide substantial positive cash flow. Brokerage cash flow has - 22 - MANAGEMENT'S ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION been used primarily for acquisition related activities. Given Aon's fixed maturity portfolio's average life of 6.3 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. In 1997, Aon completed various acquisitions with an aggregate purchase price of approximately $1.6 billion, which were funded by the issuance of commercial paper, internal funds, and the issuance of $800 million of capital securities. The capital securities are designated on the consolidated statements of financial position as "Company-obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust holding solely the Company's Junior Subordinated Debentures" (see note 8). Cash flow from operations per the Consolidated Statements of Cash Flows increased $430 million from 1996 to $784 million. This increase primarily reflects 1997 brokerage acquisitions, the timing of the settlement of insurance segment receivables and payables, and payments on special charges and valuation adjustments relating to the acquisitions. Investing activities used cash of $1.4 billion in 1997, which was made available from financing and operating activities. Investing activities provided cash of $238 million in 1996. Cash totaling $1.3 billion was provided by financing activities in 1997. The increase primarily reflected the issuance of commercial paper and the proceeds from the sale of the capital securities. Partially offsetting this increase was the use of funds to purchase and retire 5,446,000 shares of the 8% preferred stock at a total cost of $136 million. The net cash provided from capital accumulation product deposits and withdrawals was $329 million in 1997. Cash was used to pay dividends of $169 million on common stock, $11 million on the 8% preferred stock, and $2 million on redeemable preferred stock. Total assets increased $5.0 billion to $18.7 billion, primarily due to the brokerage acquisitions. Invested assets at December 31, 1997 increased $709 million from year end 1996 levels. Year 2000 Aon began work on the computer Year 2000 issue in 1995 and expects to complete its efforts by mid 1999. Software applications, hardware, and technology infrastructure have been upgraded or replaced both to improve the computing capabilities for all businesses and ensure that all systems are Year 2000 compliant. Replacing hardware and software in this fashion is considered a normal cost of doing business and is being expensed or capitalized as appropriate. Aon's Year 2000 remediation cost for all lines of business is expected to be less than $50 million through 1999. Aon has established a full-time Year 2000 project coordinator and a global contact for all major business units. The effort includes representatives from Aon's legal and internal audit staffs. In addition, individual Aon business units have formally evaluated their Year 2000 compliance status in a survey and are identifying specific hardware and software compliance issues where appropriate. These inventories include Aon's internal systems and services as well as exposure from suppliers, service providers, and customers. The individual business units will be making the necessary changes to become compliant according to their plans and the progress will be monitored by Aon's Year 2000 compliance coordinating team. Aon has established a program to contact insurance underwriters and external business partners in connection with their Year 2000 compliance programs. Aon does not warrant, however, that these companies' Year 2000 compliance activities will be completely successful. INVESTMENT OPERATIONS Aon 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 to long-term instruments. Longer-term assets which support capital include private equity investments that are expected to generate returns in excess of those available in the public capital markets. With a carrying value of $3.1 billion, Aon's total fixed maturity portfolio is invested primarily in investment grade holdings (96.4%) and has a fair value which is 104.3% of amortized cost.
INVESTED ASSETS (millions) As of December 31 1997 1996 - ----------------------------------------------------------------------- Short-term investments: Brokerage and consulting $1,473 $ 875 Insurance and other 225 392 Fixed maturities 3,144 2,826 Equity securities 806 879 Other 274 241 - ----------------------------------------------------------------------- Total invested assets $5,922 $5,213 =======================================================================
- 23 - MANAGEMENT'S ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
INVESTMENT INCOME (millions) As of December 31 1997 1996 - ----------------------------------------------------------------------- Short-term investments: Brokerage and consulting $ 164 $ 83 Insurance and other 14 22 Fixed maturities 210 197 Equity securities 95 61 Other 23 31 - ----------------------------------------------------------------------- Gross investment income 506 394 Investment expenses 12 10 - ----------------------------------------------------------------------- Net investment income $ 494 $ 384 =======================================================================
Market Risk Exposure Aon is subject to various market risk exposures including foreign exchange rate risk, interest rate risk, and equity price risk. The following disclosure reflects estimates of future performance and economic conditions. Actual results may differ. Aon is subject to foreign exchange rate risk associated with translating financial statements of its foreign subsidiaries into U.S. dollars. Additionally, certain of Aon's foreign subsidiaries receive revenues in currencies that differ from the currency in which their operating expenses are denominated. Aon's primary exposures are associated with the British Pound, the Dutch Guilder, the Canadian Dollar, the Australian Dollar, and the German Mark. Aon uses forward contracts and foreign currency futures and options to protect against adverse transaction and translation effects due to exchange rate fluctuations. The potential decrease to Aon's consolidated equity resulting from a hypothetical 10% adverse change in quoted year end foreign currency exchange rates amounts to $120 million. The impact to pretax net income in the event of a hypothetical 10% adverse change in the quoted year end exchange rates would not be material after consideration of derivative positions. Due to the nature of Aon's businesses, operating earnings are affected by changes in international and domestic short-term interest rates. Aon hedges against fluctuations in short-term interest rates with Eurodollar and Eurosterling futures contracts, interest rate swaps, and interest rate caps. A hypothetical 1% decrease in interest rates would have a decrease, net of derivative positions, of $24 million to pretax income. Aon's earnings are also affected by interest rate risks related to short-term borrowings. A hypothetical 1% decrease in short-term interest rates would correspondingly decrease Aon's interest expense by $8 million, partially offsetting the loss of short-term investment income. The valuation of Aon's fixed maturity portfolio is subject to long-term interest rate risk. Aon generally uses treasury options and futures and interest rate swaps to hedge the value of the fixed maturity portfolio. A hypothetical 1% increase in long-term interest rates would decrease the fair value of the portfolio, net of derivative positions, by approximately $155 million. Aon has long-term notes payable and capital securities outstanding at December 31, 1997 with a fair value of $1.5 billion. Such fair value exceeded the carrying value by approximately $100 million. A hypothetical 1% decrease in interest rates would increase the fair value by approximately 10%. The valuation of Aon's marketable equity portfolio is subject to equity price risk. If market prices were to decrease 10%, the fair value of the equity portfolio would have a corresponding decrease of $81 million. At December 31, 1997 there were no outstanding derivatives hedging the price risk on the equity portfolio. CAPITAL RESOURCES In 1997, short-term borrowings increased $551 million. This increase was primarily attributable to commercial paper used primarily for acquisition activity. Notes payable increased in 1997 by $116 million when compared to year end 1996, due to both acquisition financing and acquired debt. On November 3, 1997, Aon exercised its option to redeem all of the remaining outstanding shares of 8% preferred stock at a redemption price of $25.00 per share plus accrued dividends. The cost of repurchasing these shares was approximately $136 million, financed primarily by short-term borrowings. Aon Corporation borrows funds from and lends funds to its various subsidiaries. As of December 31, 1997, Aon Corporation held obligations to its subsidiaries of approximately $0.5 billion. Generally, these obligations have competitive interest rates. In 1997, common stockholders' equity per share increased to $16.80, up from $16.21 in 1996. Total stockholders' equity decreased $11 million primarily due to the retirement of the 8% preferred stock and the foreign exchange loss. The foreign exchange loss results from lower exchange rates at year end 1997 compared to year end 1996 for most major European currencies. Principal factors favorably contributing to equity were net income and net unrealized investment gains. - 24 -
CONSOLIDATED STATEMENTS OF INCOME (millions except per share data) Years ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- REVENUE Brokerage commissions and fees $3,605.2 $1,918.8 $1,651.3 Premiums earned 1,608.9 1,526.7 1,426.5 Net investment income (note 4) 494.0 384.0 329.4 Realized investment gains (note 4) 6.3 8.1 13.1 Other income 36.2 50.6 45.4 --------- ---------- ---------- Total revenue 5,750.6 3,888.2 3,465.7 ========================================================================================================== BENEFITS AND EXPENSES Commissions and general expenses 3,968.3 2,328.6 1,982.3 Benefits to policyholders 842.3 789.5 698.5 Interest expense 69.5 40.1 37.3 Amortization of deferred policy acquisition costs 208.2 207.9 207.5 Amortization of intangible assets 120.7 76.5 82.1 --------- ---------- ---------- Total benefits and expenses 5,209.0 3,442.6 3,007.7 ========================================================================================================== INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND MINORITY INTEREST 541.6 445.6 458.0 Provision for income tax (note 6) 203.1 153.8 154.3 --------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 338.5 291.8 303.7 Minority interest, net of tax--Company-obligated mandatorily redeemable preferred capital securities (note 8) (39.7) - - --------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS 298.8 291.8 303.7 DISCONTINUED OPERATIONS (note 3): Income from discontinued operations, net of tax - 22.4 99.1 Gain on sale of discontinued operations, net of tax - 21.0 - --------- ---------- ---------- NET INCOME $ 298.8 $ 335.2 $ 402.8 ========================================================================================================== NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS $ 287.2 $ 316.4 $ 378.1 ========================================================================================================== DILUTIVE PER SHARE Income from continuing operations $ 1.68 $ 1.64 $ 1.71 Discontinued operations - 0.26 0.59 --------- ---------- ---------- Net income 1.68 1.90 2.30 --------- ---------- ---------- BASIC PER SHARE Income from continuing operations 1.71 1.67 1.72 Discontinued operations - 0.26 0.61 --------- ---------- ---------- Net income 1.71 1.93 2.33 --------- ---------- ---------- CASH DIVIDENDS PAID ON COMMON STOCK $ 1.02 $ 0.95 $ 0.89 ========================================================================================================== AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING--DILUTIVE 170.5 168.9 167.3 ========================================================================================================== See accompanying notes to consolidated financial statements.
- 25 -
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (millions) As of December 31 1997 1996 - ---------------------------------------------------------------------------------------------------------- ASSETS INVESTMENTS Fixed maturities -- at fair value $ 3,143.6 $ 2,826.1 Equity securities -- at fair value 806.3 879.2 Short-term investments 1,697.7 1,266.3 Other investments 274.5 241.2 ---------- ---------- Total investments 5,922.1 5,212.8 ========================================================================================================== CASH 1,084.7 410.1 RECEIVABLES Insurance brokerage and consulting services receivables 5,320.5 3,565.9 Premiums and other 862.6 989.3 Accrued investment income 66.8 69.2 ---------- ---------- Total receivables (net of allowance for doubtful accounts: 1997--$126; 1996--$63) 6,249.9 4,624.4 ========================================================================================================== DEFERRED INCOME TAXES 137.0 - DEFERRED POLICY ACQUISITION COSTS 549.0 598.8 INTANGIBLE ASSETS (net of accumulated amortization: 1997--$979; 1996--$859) 3,094.5 1,597.7 PROPERTY AND EQUIPMENT AT COST (net of accumulated depreciation: 1997--$446; 1996--$339) 456.8 323.2 OTHER ASSETS 1,197.2 955.7 ========================================================================================================== TOTAL ASSETS $18,691.2 $13,722.7 ========================================================================================================== See accompanying notes to consolidated financial statements.
- 26 -
(millions) As of December 31 1997 1996 - ---------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY POLICY LIABILITIES Future policy benefits $ 942.6 $ 1,079.4 Policy and contract claims 809.4 840.9 Unearned and advance premiums 1,869.7 1,925.2 Other policyholder funds 828.1 514.1 ---------- ---------- Total policy liabilities 4,449.8 4,359.6 ========================================================================================================== INSURANCE PREMIUMS PAYABLE 6,379.8 4,143.7 GENERAL LIABILITIES Commissions and general expenses 1,488.8 776.8 Accrued income taxes Current 180.1 80.1 Deferred - 16.5 Short-term borrowings 764.2 213.4 Notes payable 637.1 521.2 Other liabilities 1,119.3 728.5 ---------- ---------- TOTAL LIABILITIES 15,019.1 10,839.8 ========================================================================================================== COMMITMENTS AND CONTINGENT LIABILITIES REDEEMABLE PREFERRED STOCK 50.0 50.0 COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY THE COMPANY'S JUNIOR SUBORDINATED DEBENTURES 800.0 - STOCKHOLDERS' EQUITY Preferred stock--$1 par value Authorized --25 shares; issued 8% cumulative perpetual preferred stock - 5.5 Common stock--$1 par value Authorized --300 shares; issued 171.5 114.1 Paid-in additional capital 377.0 475.4 Net unrealized investment gains 189.0 153.1 Net foreign exchange gains (losses) (85.6) 1.0 Retained earnings 2,463.4 2,356.8 Less treasury stock at cost (shares: 1997--3.5; 1996--4.8) (93.2) (121.5) Less deferred compensation (200.0) (151.5) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 2,822.1 2,832.9 ========================================================================================================== TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,691.2 $13,722.7 ==========================================================================================================
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (millions) Years ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- PREFERRED STOCK Balance at January 1 $ 5.5 $ 8.1 $ 11.1 Retirement of preferred stock (5.5) (0.5) (3.0) Conversion of preferred stock to common stock - (2.1) - --------- ---------- ---------- - 5.5 8.1 ========================================================================================================== COMMON STOCK Balance at January 1 114.1 111.4 110.6 Effect of three-for-two stock split 57.1 - - Shares issued for business combinations 0.3 0.1 0.8 Conversion of preferred stock to common stock - 2.6 - --------- ---------- ---------- 171.5 114.1 111.4 ========================================================================================================== PAID-IN ADDITIONAL CAPITAL Balance at January 1 475.4 431.8 485.2 Effect of three-for-two stock split (57.1) - - Stock awards 79.1 55.2 19.2 Adjustment for business combinations 10.3 2.2 (0.6) Retirement and conversion of preferred stock (130.7) (3.8) (72.0) --------- ---------- ---------- 377.0 475.4 431.8 ========================================================================================================== NET UNREALIZED INVESTMENT GAINS (LOSSES) Balance at January 1 153.1 123.1 (142.8) Net unrealized investment gains 35.9 30.0 265.9 --------- ---------- ---------- 189.0 153.1 123.1 ========================================================================================================== NET FOREIGN EXCHANGE GAINS (LOSSES) Balance at January 1 1.0 1.8 (19.7) Net foreign exchange gains (losses) (86.6) (0.8) 21.5 --------- ---------- ---------- (85.6) 1.0 1.8 ========================================================================================================== RETAINED EARNINGS Balance at January 1 2,356.8 2,212.1 1,998.1 Net income 298.8 335.2 402.8 Dividends to stockholders (180.2) (171.8) (170.4) Loss on treasury stock reissued (6.9) (16.0) (21.7) Adjustment for business combinations (5.0) (2.4) 3.7 Retirement of preferred stock (0.1) (0.3) (0.4) --------- ---------- ---------- 2,463.4 2,356.8 2,212.1 ========================================================================================================== TREASURY STOCK Balance at January 1 (121.5) (97.3) (72.9) Cost of shares acquired (11.4) (66.1) (71.8) Shares reissued at average cost 39.7 41.9 47.4 --------- ---------- ---------- (93.2) (121.5) (97.3) ========================================================================================================== DEFERRED COMPENSATION Balance at January 1 (151.5) (117.3) (112.2) Issuance of stock awards (80.6) (56.8) (21.2) Debt guarantee of employee stock ownership plan 13.0 10.7 8.7 Amortization of deferred compensation 19.1 11.9 7.4 --------- ---------- ---------- (200.0) (151.5) (117.3) ========================================================================================================== STOCKHOLDERS' EQUITY AT DECEMBER 31 $2,822.1 $2,832.9 $2,673.7 ========================================================================================================== See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (millions) Years ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 298.8 $ 335.2 $ 402.8 Adjustments to reconcile net income to cash provided by operating activities Policy liabilities (154.6) 766.7 445.4 Deferred policy acquisition costs (163.6) (213.1) (410.3) Amortization of deferred policy acquisition costs 208.2 235.6 302.7 Amortization of intangible assets 120.7 79.0 94.2 Other amortization and depreciation 120.5 65.0 63.7 Other operating assets and liabilities 358.4 (887.7) (284.6) Realized investment gains, net of tax (4.3) (5.1) (4.3) Gain on sale of discontinued operations - (21.0) - --------- ---------- ---------- CASH PROVIDED BY OPERATING ACTIVITIES 784.1 354.6 609.6 ========================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES Sale of investments Fixed maturities Maturities 104.7 135.5 125.1 Calls and prepayments 155.6 204.5 391.5 Sales 2,175.0 979.7 2,428.8 Equity securities 1,827.3 636.1 1,215.6 Other investments 54.6 200.6 265.2 Purchase of investments Short-term--net (31.3) (65.2) (126.9) Fixed maturities (2,766.5) (1,843.3) (3,222.1) Equity securities (1,723.7) (661.3) (1,131.0) Other investments (111.2) (302.1) (362.9) Acquisition of subsidiaries (1,648.9) (342.2) (109.6) Disposition of subsidiaries - 1,370.0 - Acquired fiduciary funds from acquisitions 734.0 - - Property and equipment and other (145.9) (74.8) (97.9) --------- ---------- ---------- CASH PROVIDED (USED) BY INVESTING ACTIVITIES (1,376.3) 237.5 (624.2) ========================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES Treasury stock transactions --net 21.4 (40.1) (46.4) Issuance (repayment) of short-term borrowings--net 541.7 (139.2) 108.8 Issuance of mandatorily redeemable preferred capital securities 800.0 - - Issuance of long-term debt - - 20.1 Repayment of long-term debt (74.1) (5.7) (12.5) Interest sensitive life, annuity and investment contracts Deposits 373.2 508.1 1,287.5 Withdrawals (44.2) (437.4) (1,487.6) Retirement of preferred stock (136.2) (14.2) (75.4) Cash dividends to stockholders (182.1) (172.9) (171.3) --------- ---------- ---------- CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,299.7 (301.4) (376.8) ========================================================================================================== EFFECT OF EXCHANGE RATE CHANGES ON CASH (32.9) 4.1 (2.1) INCREASE (DECREASE) IN CASH 674.6 294.8 (393.5) CASH AT BEGINNING OF YEAR 410.1 115.3 508.8 --------- ---------- ---------- CASH AT END OF YEAR $ 1,084.7 $ 410.1 $ 115.3 ========================================================================================================== See accompanying notes to consolidated financial statements.
- 29 - 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. 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. The segment information located in the tables on pages 19 through 22 is incorporated herein by reference. 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 and extended warranty products, premiums collected are reported as earned in proportion to insurance protection provided over the period covered by the policies. For life products, 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. Reinsurance receivables and prepaid reinsurance premium amounts are reported as assets. Special Charges The special charges information located on pages 18 and 19 is incorporated herein by reference. 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 is computed in accordance with the Financial Accounting Standards Board (FASB) Statement No. 128 "Earnings Per Share." Basic earnings per share is computed based on the weighted average number of common shares outstanding, excluding any dilutive effects of options, awards and convertible securities. Common shares outstanding include 4,230,000 shares, 4,520,000 shares and 4,901,000 shares held by the employee stock ownership plan in 1997, 1996 and 1995, respectively. Income available to common shareholders is net of all preferred dividends. Dilutive earnings per share is computed based on the weighted average number of common shares outstanding plus the dilutive effects of options, awards and convertible securities. The dilutive effect of options and awards is calculated under the treasury stock method using the average market price for the period. Earnings per share is calculated as follows:
(millions except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------------- Income from continuing operations $ 299 $ 292 $ 304 8% preferred stock dividends (9) (11) (16) Redeemable preferred stock dividends (3) (2) (2) -------- -------- -------- Continuing income for dilutive $ 287 $ 279 $ 286 6.25% preferred stock dividends - (5) (7) -------- -------- -------- Continuing income for basic $ 287 $ 274 $ 279 - -------------------------------------------------------------------------------------- Basic shares outstanding 168 164 162 Common stock equivalents 3 2 1 6.25% convertible preferred shares - 3 4 -------- -------- -------- Dilutive potential common shares 171 169 167 - -------------------------------------------------------------------------------------- Dilutive earnings per share $1.68 $1.64 $1.71 Basic earnings per share $1.71 $1.67 $1.72 ======================================================================================
A three-for-two stock split of Aon's $1.00 par value common stock was effected on May 14, 1997 with 57 million shares issued to common stockholders of record as of May 1, 1997. All references in the accompanying financial statements and retroactively restated to reflect the stock split. 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 - 30 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of discounts to maturity that are included in net investment income. 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. Other investments are carried generally at cost. Realized investment gains or losses are computed using specific costs of securities sold. Investments that have declines in fair value below cost, which are judged to be other than temporary, are written down to estimated fair values. Reserves for certain other investments are established based on an evaluation of the respective investment portfolio and current economic conditions. Write-downs and changes in reserves are included in realized investment gains and losses in the consolidated 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 other intangible assets 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. 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 investments are comprised of mortgage loans, policy loans, real estate joint ventures and limited partnerships. 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. It was not practicable to estimate the fair value of joint ventures and limited partnerships 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. Future Policy Benefits, Unearned Premiums, and Policy and Contract Claims Future policy benefit liabilities on non-universal life 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, 1997. Withdrawal assumptions are based principally on insurance subsidiaries' experience and vary by plan, year of issue, and duration. Policyholder liabilities on universal life 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 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. The deferred tax benefit of foreign exchange losses is $51 million at December 31, 1997, compared to the deferred tax effect of foreign exchange gains of $1 million at December 31, 1996 and 1995. Accounting Changes In 1997, the FASB issued Statement No. 128, "Earnings Per Share." Aon adopted this statement in its December 31, - 31 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1997 financial statements and has restated prior periods presented as required. Implementation of this Statement did not have a material effect on Aon's financial statements. In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and classifying components of comprehensive income in the financial statements and requires that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in-capital in the equity section of a statement of financial position. The FASB also issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" in 1997. This Statement establishes standards for providing disclosures related to products and services, geographic area, and major customers. Aon anticipates adopting these statements in its 1998 financial statements as required. Implementation of these statements is not expected to have a material effect on Aon's financial statements. In 1997, Aon adopted FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Implementation of this Statement did not have a material effect on Aon's financial statements. In 1996, Aon adopted the disclosure requirements of FASB Statement No. 123, "Accounting for Stock-Based Compensation." As allowed by Statement No. 123, Aon chose 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 (see note 10). Reclassification Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the 1997 presentation. 2. BUSINESS COMBINATIONS Purchase Method In 1997, Aon acquired Alexander & Alexander Services Inc. (A&A), the Minet Group (Minet) and Jauch & Hubener for approximately $1.6 billion in transactions accounted for by the purchase method. Certain purchase price allocations for 1997 acquisitions will be finalized in 1998. Additionally, Aon acquired certain other operations at an aggregate cost of $86 million and $110 million in 1996 and 1995, respectively. The 1997 acquisitions were financed primarily by the issuance of capital securities (see note 8), issuance of commercial paper and internal funds. Intangible assets of approximately $1.5 billion were created by these acquisitions. In 1997, as a result of the A&A acquisition, Aon established approximately $200 million of purchase accounting liabilities, primarily relating to severance and related costs for approximately 2,000 terminations and the consolidation of real estate space. In connection with these items, Aon had approximately $100 million remaining unpaid in the commission and general expense liability at December 31, 1997. The 1997 consolidated statement of income included the operations of A&A since January 1, 1997. If the A&A acquisition had been consummated on January 1, 1996, the unaudited proforma consolidation results of operations would have resulted in total revenues of $5.2 billion, income from continuing operations of $258 million and net income of $291 million. In October 1996, Aon acquired Bain Hogg for approximately $260 million. This acquisition was financed by internal funds. The 1996 consolidated statement of income includes the operations of Bain Hogg since the date of acquisition. Aon's 1996 revenues would have been approximately $260 million greater had the acquisition occurred on January 1, 1996. As a result of this acquisition, approximately $85 million of purchase accounting liabilities were established primarily relating to both the costs associated with the consolidation of real estate activities and severance liabilities. In connection with these items, Aon had approximately $55 million remaining unpaid in the commission and general expense liability at December 31, 1997. Pursuant to a 1994 purchase agreement, Aon is contingently liable through 1999 to issue up to 292,000 additional shares of common stock based on a formula relating to future earnings of that operation. In accordance with a 1992 purchase agreement, securities with a value of $50 million are being held in escrow. The escrowed securities will be released on a predetermined schedule between 1998 and 2007. Pooling of Interests Method In 1997, 1996 and 1995, Aon issued 274,000 shares, 819,000 shares and 2,106,000 shares of common stock, respectively, for mergers with insurance brokerage and consulting organizations. In connection with several of the mergers, 760,000 shares issued to sellers are being held in escrow at December 31, 1997, 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. 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 after-tax sales proceeds of approximately $1.2 billion. The gain on sale of discontinued operations was $21 million, net of taxes. For 1996 and 1995, the discontinued operations had revenues of $293 million and $1,145 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 and $53 million in 1996 and 1995, 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 and $18 million in 1996 and 1995, respectively. The allocation of interest expense was based on the ratio of discontinued net assets to total consolidated equity and debt. - 32 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A&A's Discontinued Operations A&A discontinued its insurance underwriting operations in 1985, some of which were then placed into run-off, the remainder sold in 1987. In connection with those sales, A&A provided indemnities to the purchaser for various estimated and potential liabilities, including provisions to cover future losses attributable to insurance pooling arrangements, a stop-loss reinsurance agreement, and actions or omissions by various underwriting agencies previously managed by an A&A subsidiary. As of December 31, 1997, the liabilities associated with the foregoing indemnities and liabilities of insurance underwriting subsidiaries that are currently in run-off were included in other liabilities in the accompanying statement of financial position and amount to $152 million. Such liabilities are net of reinsurance recoverables and other assets of $176 million. The insurance liabilities represent estimates of known and future claims expected to be made under occurrence-based insurance policies and reinsurance business covering principally asbestos, environmental pollution, and latent disease risks in the United States along with substantial litigation-related expenses. Those claims are expected to develop and be settled over the next twenty to thirty years. The insurance liabilities cannot be estimated using conventional actuarial reserving techniques because of, among other matters, the inadequacy of available historical experience to support such techniques and because case law and scientific standards for measuring the adequacy of site clean-up are still evolving. Therefore, independent actuaries have combined available exposure information with other relevant industry data and have used various projection techniques to estimate the insurance liabilities, which liabilities consist principally of incurred but not reported losses. Although these insurance liabilities represent A&A's best estimate of the probable liabilities, adverse developments may occur due to the nature of the information available to A&A and the variables inherent in the estimation processes. Based on current estimates, management believes that the established liabilities of discontinued operations are sufficient to cover A&A's exposures. 4. INVESTMENTS The components of net investment income are as follows:
(millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Fixed maturities $210 $197 $164 Equity securities 95 61 59 Short-term investments 178 105 86 Other 23 31 28 - -------------------------------------------------------------------------------------- Gross investment income 506 394 337 Investment expenses 12 10 8 - -------------------------------------------------------------------------------------- Net investment income $494 $384 $329 ======================================================================================
Realized gains (losses) on investments are as follows:
(millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Fixed maturities: Gross gains $ 27 $13 $ 8 Gross losses (14) (9) (3) Equity securities 20 12 12 Other (27) (8) (4) - -------------------------------------------------------------------------------------- Total before tax 6 8 13 Less applicable tax 2 3 5 - -------------------------------------------------------------------------------------- Total net realized investment gains $ 4 $ 5 $ 8 ======================================================================================
The components of net unrealized gains (losses) are as follows:
(millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Fixed maturities $130 $112 $115 Equity securities 167 128 78 Deferred tax charge (108) (87) (70) - -------------------------------------------------------------------------------------- Net unrealized investment gains $189 $153 $123 ======================================================================================
The changes in net unrealized investment gains (losses) are as follows:
(millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Fixed maturities: Available for sale $18 $(3) $273 Held to maturity - - 234 Equity securities 39 50 128 - -------------------------------------------------------------------------------------- Total $57 $47 $635 ======================================================================================
The amortized cost and fair value of investments in fixed maturities and equity securities are as follows:
Gross Gross As of December 31, 1997 Amortized Unrealized Unrealized Fair (millions) Cost Gains Losses Value - -------------------------------------------------------------------------------------- U.S. government and agencies $ 209 $ 4 $ - $ 213 States and political subdivisions 524 31 - 555 Foreign governments 842 51 (1) 892 Corporate securities 1,342 53 (10) 1,385 Mortgage-backed securities 42 2 - 44 Other fixed maturities 55 1 (1) 55 - -------------------------------------------------------------------------------------- Total fixed maturities 3,014 142 (12) 3,144 Total equity securities 639 175 (8) 806 - -------------------------------------------------------------------------------------- Total $3,653 $317 $(20) $3,950 ======================================================================================
Gross Gross As of December 31, 1997 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 ======================================================================================
- 33 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and fair value of fixed maturities, by contractual maturity as of December 31, 1997, are 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 $ 110 Due after one year through five years 858 891 Due after five years through ten years 937 991 Due after ten years 1,068 1,108 Mortgage-backed securities 42 44 - ----------------------------------------------------------------------- Total $3,014 $3,144 ======================================================================= Securities on deposit for regulatory authorities as required by law amounted to $309 million at December 31, 1997 and $308 million at December 31, 1996. As required by the by-laws of Lloyd's brokers, assets subject to floating charges for the benefit of insurance creditors amounted to $953 million and $853 million at December 31, 1997 and 1996, respectively. Aon maintains premium trust bank accounts for premiums collected from insureds but not yet remitted to insurance companies of $1.4 billion and $0.6 billion at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, respectively, Aon had $96 million and $42 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 1997 1996 - ----------------------------------------------------------------------- 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 Debt guarantee of employee stock ownership plan (ESOP) 33 46 Notes payable, due in varying installments, with interest at 6% to 8% 154 25 - ----------------------------------------------------------------------- Total notes payable $637 $521 ======================================================================= 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, excluding the debt guarantee of ESOP, are $27 million, $108 million, $6 million, $2 million and $100 million in 1998, 1999, 2000, 2001 and 2002, respectively. In addition, Aon has $900 million of committed bank credit facilities at December 31, 1997 to support its commercial paper program. Information related to notes payable (excluding the debt guarantee of ESOP) and short-term borrowings is as follows:
Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Interest paid (millions) $70 $45 $54 Weighted average interest rates -- short-term borrowings 5.6% 5.3% 5.9% ======================================================================================
Debt Guarantee of ESOP Aon's 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 classified as notes payable in the accompanying statements of financial position. An equivalent amount, representing deferred compensation, is recorded as a deduction from stockholders' equity. The ESOP paid $16 million, $15 million and $14 million in 1997, 1996 and 1995, 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. 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 642,000 shares in 1997. The remaining unallocated shares at December 31, 1997, will be released for allocation annually through 1999. The following table details the shares held by the ESOP: (thousands) As of December 31 1997 1996 - ----------------------------------------------------------------------- Allocated 2,787 2,435 Committed to be released 709 642 Unallocated 734 1,443 - ----------------------------------------------------------------------- Total 4,230 4,520 ======================================================================= 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, 1997 are: (millions) Minimum Lease Payments - ----------------------------------------------------------------------- 1998 $ 177 1999 160 2000 143 2001 121 2002 95 Later years 417 - ----------------------------------------------------------------------- Total minimum payments required $1,113 ======================================================================= Rental expenses for all operating leases for the years ended December 31, 1997, 1996 and 1995, amounted to $177 million, $114 million and $103 million, respectively. - 34 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 1997 1996 1995 - -------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Tax-exempt investment income (3.1) (3.7) (3.8) State income taxes 2.8 3.5 2.8 Other--net 2.8 (0.3) (0.3) - -------------------------------------------------------------------------------------- Effective tax rate 37.5% 34.5% 33.7% ====================================================================================== The provision for income tax is made up of the following components: (millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Current: Federal $ 21 $115 $111 Foreign 35 55 45 State 18 25 20 - -------------------------------------------------------------------------------------- Total current $74 $195 $176 - -------------------------------------------------------------------------------------- Deferred (credit): Federal $100 $ (9) $(17) Foreign 24 (31) (4) State 5 (1) (1) - -------------------------------------------------------------------------------------- Total deferred 129 (41) (22) - -------------------------------------------------------------------------------------- Provision for income tax $203 $154 $154 ======================================================================================
During 1997, Aon's consolidated statement of income reflects a tax benefit of $24 million on the capital securities. Significant components of Aon's deferred tax assets and liabilities are as follows: (millions) As of December 31 1997 1996 - ----------------------------------------------------------------------- Deferred tax assets: Insurance reserve amounts $ 129 $ 140 Net operating loss and tax credit carryforwards 86 - Certain purchase accounting and restructuring liabilities 100 40 Other--net 83 54 - ----------------------------------------------------------------------- Total deferred tax assets 398 234 - ----------------------------------------------------------------------- Deferred tax liabilities: Policy acquisition costs (54) (65) Unrealized investment gains (108) (87) Other--net (43) (99) - ----------------------------------------------------------------------- Total deferred tax liabilities (205) (251) - ----------------------------------------------------------------------- Valuation allowance (56) - - ----------------------------------------------------------------------- Net deferred tax assets (liabilities) $ 137 $ (17) ======================================================================= As of December 31, 1997, a U.S. subsidiary of Aon (A&A) had U.S. federal net operating loss carryforwards of $96 million which expire in years 2008 through 2010, and federal foreign tax credit carryforwards of $18 million which expire in years 1998 through 2000. The Internal Revenue Code imposes limitations on the utilization of federal net operating loss and tax credit carry-forwards after a change of control, consequently, there will be annual limitations on the realization of these tax assets. Accordingly, in connection with the purchase of A&A, a $56 million valuation allowance was established. Subsequently recognized tax benefits for these items would reduce goodwill. Although future earnings cannot be predicted with certainty, management currently believes that realization of the net deferred tax asset after consideration of the valuation allowance is more likely than not. 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, 1997, 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 taxes payable would be $127 million. The amount of income taxes paid in 1997, 1996 and 1995 was $137 million, $387 million and $256 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 1997 1996 1995 - -------------------------------------------------------------------------------------- Ceded premiums earned $609 $508 $316 Ceded premiums written 713 667 369 Assumed premiums earned 298 292 83 Assumed premiums written 284 276 101 Ceded benefits to policyholders 286 220 153 ======================================================================================
- 35 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Activity in the liability for policy contract claims is summarized as follows:
(millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Liabilities at beginning of year $ 535 $ 715 $ 681 Incurred losses: Continuing operations --current year 814 774 672 Continuing operations --prior year (50) (36) (17) Discontinued operations* - 90 361 - -------------------------------------------------------------------------------------- Total 764 828 1,016 - -------------------------------------------------------------------------------------- Payment of claims: Current year (538) (552) (651) Prior years (241) (283) (331) - -------------------------------------------------------------------------------------- Total (779) (835) (982) - -------------------------------------------------------------------------------------- Liability for business sold - (173) - - -------------------------------------------------------------------------------------- Liabilities at end of year (net of reinsurance recoverables: 1997--$289, 1996--$306, 1995--$256) $ 520 $ 535 $ 715 ====================================================================================== *excludes A&A discontinued operations.
8. REDEEMABLE PREFERRED STOCK, CAPITAL SECURITIES AND STOCKHOLDERS' EQUITY Redeemable Preferred Stock At December 31, 1997, 1,000,000 shares of redeemable preferred stock are outstanding. 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. Capital Securities In January 1997, Aon created Aon Capital A, a wholly-owned statutory business trust, for the purpose of issuing mandatorily redeemable preferred capital securities (Capital Securities). The sole asset of Aon Capital A is $824 million aggregate principal amount of Aon's 8.205% Junior Subordinated Deferrable Interest Debentures due January 1, 2027. The back-up guarantees, in the aggregate, provide a full and unconditional guarantee of the Trust's obligations under the 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 A&A acquisition. 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. The capital securities are categorized on the consolidated statement of financial position as "Company-obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust holding solely the Company's Junior Subordinated Debentures." The after-tax interest incurred on the capital securities is reported as minority interest on the consolidated statement of income. 8% Cumulative Perpetual Preferred Stock At December 31, 1996, 5,446,000 shares of 8% cumulative perpetual preferred stock were outstanding. Dividends were cumulative at the annual rate of $2.00 per share. In November 1997, Aon purchased and retired all of the remaining outstanding shares at a total cost of $136 million. 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 1.83 shares of com-mon stock for a total of 3,909,000 common shares. Common Stock Aon repurchased 202,000, 1,931,000 and 2,969,000 shares in 1997, 1996 and 1995, 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 1997 1996 1995 - -------------------------------------------------------------------------------------- Redeemable preferred stock $ 2 $ 2 $ 2 8% cumulative perpetual preferred stock 9 11 16 6.25% cumulative convertible exchangeable preferred stock - 5 7 Common stock 169 154 145 - -------------------------------------------------------------------------------------- Total dividends incurred $180 $172 $170 ======================================================================================
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 in 1995 and the statutory gain on the sale of LOV and UFLIC in 1996), is summarized as follows: (millions) Years ended December 31 1997 1996 1995 - --------------------------------------------------------------------------- Life insurance $265 $807 $197 Property casualty 66 71 58 =========================================================================== Statutory capital and surplus of the insurance subsidiaries is summarized as follows: (millions) As of December 31 1997 1996 1995 - --------------------------------------------------------------------------- Life insurance $724 $612 $766 Property casualty 438 364 296 =========================================================================== - 36 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. EMPLOYEE BENEFITS Savings and Profit Sharing Plans Certain of Aon's subsidiaries maintain contributory savings plans 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 plans are based on a match of 100% of employee contributions up to a maximum of 3% of eligible compensation. Provisions made for these plans were $22 million in 1997, and $14 million in 1996 and 1995, respectively. The provision made in 1997 increased as compared to 1996 primarily due to the acquisition of A&A. 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 $14 million, $12 million and $11 million in 1997, 1996 and 1995, respectively. Domestic Pension Plan Certain of Aon's subsidiaries maintain non-contributory defined benefit pension plans 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 plans 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 1997, 1996 and 1995 is as follows:
(millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Defined benefit plan: Service cost-benefit earned $ 32 $ 21 $ 17 Interest cost on projected benefit obligation 46 21 19 Actual return on plan assets (159) (51) (66) Net amortization and deferral 97 29 44 - -------------------------------------------------------------------------------------- Net periodic pension cost $ 16 $ 20 $ 14 ======================================================================================
The weighted average assumptions used in accounting for the defined benefit plan were: Years ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------- Assumed discount rate 7.5% 7.8% 7.5% 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% ============================================================================= 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. 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 plans. (millions) As of December 31 1997 1996 - ----------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $(580) $(255) Accumulated benefit obligation (595) (261) - ----------------------------------------------------------------------- Projected benefit obligation (692) (305) Plan assets at fair value 853 317 - ----------------------------------------------------------------------- Difference between projected benefit obligation and plan assets 161 12 Unrecognized net gain (123) (63) Unrecognized prior service cost 1 1 - ----------------------------------------------------------------------- Pension cost included in other assets (liabilities) $ 37 $ (50) - ----------------------------------------------------------------------- 1997 includes the A&A pension plan, including a projected benefit obligation of $336 million and plan assets at fair value of $469 million. Plan assets include marketable equity securities and corporate and government debt securities, including securities issued by Aon totaling $50 million and $35 million in 1997 and 1996, respectively. 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 1997 1996 1995 - -------------------------------------------------------------------------------------- United Kingdom: Service cost-benefit earned $ 44 $ 11 $ 11 Interest cost on projected benefit obligation 85 17 15 Actual return on plan assets (197) (28) (29) Net amortization and deferral 71 6 11 - -------------------------------------------------------------------------------------- Net periodic pension cost $ 3 $ 6 $ 8 ====================================================================================== The Netherlands: Service cost-benefit earned $ 4 $ 4 $ 4 Interest cost on projected benefit obligation 8 9 9 Actual return on plan assets (10) (11) (11) Net amortization and deferral - - - - -------------------------------------------------------------------------------------- Net periodic pension cost $ 2 $ 2 $ 2 ======================================================================================
- 37 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average assumptions used in accounting for these defined benefit plans were: Years ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------- United Kingdom: Assumed discount rate 7.0% 8.0% 9.0% Rate of compensation increase 5.5% 5.5% 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 1997 and 1996 consolidated statements of financial position for Aon's foreign defined benefit pension plans. United Kingdom: (millions) As of December 31 1997 1996 - ----------------------------------------------------------------------- Projected benefit obligation $(1,501) $(617) Plan assets at fair value 1,602 680 - ----------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 101 63 Unrecognized net loss 138 6 Unrecognized prior service cost - 1 Unrecognized net transition obligation 1 1 - ----------------------------------------------------------------------- Prepaid pension cost included in other assets $ 240 $71 ======================================================================= The Netherlands: (millions) As of December 31 1997 1996 - ----------------------------------------------------------------------- Projected benefit obligation $(122) $(136) Plan assets at fair value 149 165 - ----------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 27 29 Unrecognized net loss 15 18 - ----------------------------------------------------------------------- Prepaid pension cost included in other assets $ 42 $ 47 ======================================================================= The funded status and the amounts recognized in the consolidated statements of financial position increased in 1997 as compared to 1996 primarily due to acquisitions. 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, 1997 1996 (millions) Medical Life Medical Life - -------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $(30) $(11) $(17) $ (7) Fully eligible active plan participants (5) (1) (5) (2) Other active plan participants (12) (2) (7) (2) - -------------------------------------------------------------------------------------- (47) (14) (29) (11) - -------------------------------------------------------------------------------------- Plan assets at fair value - 7 - - - -------------------------------------------------------------------------------------- Unrecognized prior service (12) (4) (16) (5) Unrecognized net gain (15) (8) (20) (7) - -------------------------------------------------------------------------------------- Accrued postretirement benefit liability $(74) $(19) $(65) $(23) ======================================================================================
Net periodic postretirement benefit cost includes the following components:
(millions) Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------- Service cost $ 2 $ 1 $ 1 Interest cost 4 3 3 Return on assets (1) - - Amortization of prior service (6) (7) (7) - -------------------------------------------------------------------------------------- Net periodic postretirement benefit credit $ (1) $ (3) $ (3) ======================================================================================
For measurement purposes in 1997, 1996 and 1995, an 8.5%, 9.5% and 10.5%, 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. Assumptions used in determining the APBO are summarized below: As of December 31 1997 1996 1995 - ----------------------------------------------------------------------- Weighted-average discount rate 7.5% 7.8% 7.5% Weighted-average rate of compensation increase 5.0% 5.0% 5.0% ======================================================================= - 38 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. STOCK COMPENSATION PLANS Stock Award Plan In 1997, Aon's stockholders approved an amendment to the Aon Stock Award Plan that increased the aggregate number of common stock that Aon could award up to 12,900,000 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 1997 1996 1995 - -------------------------------------------------------------------------------------- Shares outstanding at beginning of year 5,210 3,914 3,254 Granted 1,869 1,793 1,063 Vested and exercised (570) (398) (324) Canceled (95) (99) (79) - -------------------------------------------------------------------------------------- Shares outstanding at end of year 6,414 5,210 3,914 ======================================================================================
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. In 1997, Aon's stockholders approved an amendment to the Aon Stock Option Plan that increased the aggregate number of common stock that Aon could issue up to 23,300,000 shares. 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 applies Accounting Principles Board Option No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than the Aon Stock Award Plan. Had compensation cost for the stock award and the stock option plans been determined based upon the fair value at the grant date for these plans consistent with the methodology prescribed under Statement No. 123, Aon's net income and net income per share for 1997, 1996 and 1995 would have been reduced to the following pro forma amounts:
(millions except per share data) Years ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------- Net income: As reported $299 $335 $403 Pro forma 292 330 401 Net income per share: Diluted As reported 1.68 1.90 2.30 Pro forma 1.64 1.87 2.29 Basic As reported 1.71 1.93 2.33 Pro forma 1.67 1.90 2.32 ===========================================================================================
The fair value per share of options and awards granted is estimated as $8.97 and $41.59 in 1997, $8.19 and $30.87 in 1996, and $5.60 and $22.39 in 1995, respectively, on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 2.5%; expected volatility of 20%, risk-free interest rate of 6%; and an expected term life of 1.35 years and 0 years for the stock option plan and the stock award plan, respectively. The compensation cost as generated by the Black-Scholes model, may not be indicative of the future benefit, if any, that may be received by the option holder. The proforma information reflected above may not be representative of the amounts to be expected in future years as the fair value method of accounting contained in FASB Statement No. 123 has not been applied to options granted prior to January 1995. A summary of Aon's stock option activity and related information consists of the following:
Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------ Weighted Weighted Average Average Exercise Exercise Price (shares in thousands) Shares Price Shares Price Shares Range - ------------------------------------------------------------------------------------------ Beginning Outstanding 5,276 $26 5,212 $21 5,019 $ 9-24 Granted (at fair value) 1,646 48 1,535 35 1,629 21-25 Exercised (579) 20 (732) 17 (1,121) 9-19 Canceled (291) 29 (739) 23 (315) 11-24 - ------------------------------------------------------------------------------------------ Ending outstanding 6,052 31 5,276 26 5,212 13-25 - ------------------------------------------------------------------------------------------ Exercisable at end of year 696 21 465 19 638 13-23 - ------------------------------------------------------------------------------------------ Options available for grant 5,727 1,295 2,175 ==========================================================================================
A summary of options outstanding and options exercisable is as follows:
As of December 31, 1997 (shares in thousands) Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Shares Contractual Exercise Shares Exercise Prices Outstanding Life (years) Price Exercisable Price - ---------------------------------------------------------------------------------- $17.33-$22.29 651 2.2 $20.00 296 $18.92 22.64- 22.64 1,070 3.2 22.64 251 22.64 22.83- 23.83 1,052 3.2 23.41 23 23.07 23.89- 32.58 382 2.7 24.57 126 24.47 34.33- 54.97 2,897 8.0 44.95 - - - ---------------------------------------------------------------------------------- $17.33-$54.97 6,052 5.2 $31.10 696 $21.41 ==================================================================================
- 39 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 (shares in thousands) Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Shares Contractual Exercise Shares Exercise Prices Outstanding Life (years) Price Exercisable Price - ---------------------------------------------------------------------------------- $16.33-$22.29 1,038 2.7 $19.29 353 $17.63 22.64- 22.64 1,203 4.2 22.64 - - 22.83- 23.83 1,119 5.1 23.77 21 22.97 23.89- 32.58 465 3.7 24.51 91 24.00 34.33- 40.17 1,451 6.3 34.75 - - - ---------------------------------------------------------------------------------- $16.33-$40.17 5,276 4.6 $25.71 465 $19.12 ==================================================================================
11. FINANCIAL INSTRUMENTS Financial Risk Management Aon is exposed to market risk from changes in foreign currency exchange rates, interest rates and equity prices. 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, 1997 and 1996, Aon placed securities in escrow amounting to $6 million and $13 million, respectively, relating to these derivative contracts. Foreign Exchange Risk Management Aon uses foreign currency futures, options, and forward contracts to manage the effects of foreign currency fluctuations on the translation of the financial statements of Aon's foreign operations. Generally, related gains and losses on these contracts are reflected as an adjustment to income when settled. For contracts designated as hedges of a net investment in foreign subsidiary, realized and unrealized gains 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 and options 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. Forward contracts entered into require no up-front premium and settle at the expiration of the related contract. Interest Rate Risk Management Aon uses interest rate derivative contracts to manage the interest rate risk associated with assets and liabilities underlying its underwriting and brokerage businesses. Interest rate derivatives are also utilized to manage the company's funding and other corporate risks. Interest rate swap agreements are used 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, 1997 and 1996, 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. 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 also enters into interest rate swap and cap agreements and purchases exchange-traded Eurodollar and Eurosterling futures to limit its exposure to decreasing short-term interest rates, primarily relating to brokerage fiduciary funds. The net effect of swap payments are settled periodically and reported in income. There is no settlement of underlying notional amounts. Exchange-traded Eurodollar and Eurosterling futures are valued and settled daily, with amounts reported in income when the contract expires. The commission paid for these futures contracts represents the cost basis of the position, until it is expired or closed. 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. 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. In most cases, derivatives hedging the invested asset portfolio are hedging groups of invested assets. The sale, maturity or extinguishment of a hedged invested asset within a group would not affect the accounting method for the derivative. The accounting relating to the termination of a hedge would differ from the company's regular accounting practices if the hedge ceases to meet the criteria for hedge accounting. The following criteria must be met in order for a derivative to qualify for hedge accounting. The derivative must be designated as a hedge at inception and be consistent with Aon's policy for risk management. The hedged group of invested assets must have a reliably measurable fair value and changes in fair value must have the potential to affect future earnings. - 40 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Changes in the fair value of the derivative must be expected to substantially offset changes in the fair value of the designated group of invested assets attributable to the risk being hedged. If the criteria for hedge accounting is not met, the resulting gain or loss from the hedge would be realized through the statement of operations in the current period. 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. 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 1997 1996 - ---------------------------------------------------------------------------- Foreign currency management Forwards $ 208 $ 157 Futures 435 - Interest rate and asset/liability duration management Eurodollar futures 639 1,741 Eurosterling futures 664 - Treasury futures - 220 Call options 4 72 Put options 60 - Interest rate caps 120 - Interest rate swaps --pay fixed 93 90 Interest rate swaps --receive fixed 502 85 Basis rate swaps --pay and receive variable 140 90 Interest rate management for anticipated transactions Treasury futures - 100 Call options - 250 Put options - 500 Interest rate caps - 22 ============================================================================= Aon amortized $3 million in 1997, 1996 and 1995, respectively, of net deferred gains relating to derivatives into income. Realized losses related to anticipated transactions were immaterial for the years ended December 31, 1997 and 1996. The interest rates on Aon's outstanding swaps at December 31 are presented below: Receive Pay Pay Receive Fixed Variable Fixed Variable - ------------------------------------------------------------ 1997 4.0-8.4% 5.8% 6.0-9.7% 5.6-6.5% 1996 5.8-6.8% 5.6% 6.0-9.7% 5.6-6.0% ============================================================ As of December 31, 1997, swaps have maturities ranging from January 1998 to January 2007. 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 have maturities ranging from December 2000 to August 2002 and require payments based on the three month LIBOR index and provide for receipts based on the two-year treasury rate. Other outstanding contracts generally have terms that are less than one year. 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, 1997 and 1996 totaled $173 million and $154 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 1998. As of December 31, 1997 and 1996, the maximum commitment contained in these agreements was $2.0 billion and $1.2 billion, respectively. Aon's credit risk relates to amounts that may be due under recourse provisions that could exceed recorded estimates. At December 31, 1997 and 1996, this exposure was approximately $93 million and $42 million, respectively. 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 1997 1996 - -------------------------------------------------------------------------------------- Carrying Fair Carrying Fair millions) Value Value Value Value - -------------------------------------------------------------------------------------- Assets: Fixed maturities and equity securities $3,950 $3,950 $3,705 $3,705 Other investments 248 247 241 240 Cash, receivables and short-term investments 9,169 9,169 6,301 6,301 Derivatives* - 8 - 10 Liabilities: Investment type insurance contracts $ 823 $ 831 $ 507 $ 509 Short-term borrowings, premium payables and commissions and general expenses 8,770 8,770 5,134 5,134 Notes payable 637 643 521 524 Capital securities 800 900 - - ====================================================================================== *Derivatives with a carrying value of $21 million and a fair value of $21 million are included in other asset categories at December 31, 1997 and 1996.
- 41 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. CONTINGENCIES Aon and its subsidiaries are subject to numerous claims and lawsuits that arise in the ordinary course of business. Some of these cases are being litigated in jurisdictions which have judicial precedents and evidentiary rules which are generally believed to favor individual plaintiffs against corporate defendants. The damages that may be claimed in these and other jurisdictions are substantial, including in many instances claims for punitive or extraordinary damages. Accruals for these lawsuits have been provided to the extent that losses are deemed probable and are estimable. At the time of Aon's acquisition of A&A in January 1997, A&A was facing various legal claims, several of which remain ongoing. In a 1988 action, alleging that certain A&A subsidiaries placed risks with financially unsound reinsurance companies, plaintiffs sought $36 million in damages. Most of the exposure to these claims was extinguished as a result of the Lloyd's of London Reconstruction and Renewal Plan. Aon currently believes the loss that might result from the remaining exposure would not be material to its financial position or results of operation. In 1992, the purchaser of a company A&A sold in 1987 asserted claims under the indemnification provision of the sales agreement. While the possibility of substantial exposure remains, based on current facts and circumstances, Aon believes the possibility of material loss resulting from these exposures is remote. 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 con-solidated financial position of Aon. - 42 - 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Chicago, Illinois February 10, 1998 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, 1997, 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 Audit Committee, without the presence of management, to discuss the adequacy of internal control and to review the quality of financial reporting. - 43 -
SELECTED FINANCIAL DATA (millions except common stock and per share data) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Brokerage commissions and fees $ 3,605 $ 1,919 $ 1,651 $ 1,389 $ 1,190 Premiums earned 1,609 1,527 1,427 1,322 1,278 Net investment income 494 384 329 257 227 Realized investment gains 6 8 13 19 30 Other income 37 50 46 54 46 -------------------------------------------------------------------- Total revenue 5,751 3,888 3,466 3,041 2,771 ==================================================================================================================== Operating income* $ 402 $ 346 $ 295 $ 256 $ 214 Income from continuing operations 299 292 304 269 228 Discontinued operations - 43 99 91 96 Net income 299 335 403 360 324 ==================================================================================================================== DILUTIVE PER SHARE DATA** Operating income* $ 2.30 $ 1.97 $ 1.66 $ 1.44 $ 1.18 Income from continuing operations 1.68 1.64 1.71 1.51 1.27 Discontinued operations - 0.26 0.59 0.57 0.63 Net income 1.68 1.90 2.30 2.08 1.90 BASIC PER SHARE DATA** Income from continuing operations 1.71 1.67 1.72 1.53 1.28 Net income 1.71 1.93 2.33 2.12 1.92 ==================================================================================================================== BALANCE SHEET DATA ASSETS Investments $ 5,922 $ 5,213 $10,639 $ 9,783 $ 9,652 Brokerage receivables 5,320 3,566 2,264 1,882 1,615 Other 7,449 4,944 6,833 6,257 5,012 -------------------------------------------------------------------- Total assets $18,691 $13,723 $19,736 $17,922 $16,279 ==================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities $ 4,450 $ 4,360 $ 9,556 $ 9,310 $ 8,776 Insurance premiums payable 6,380 4,144 2,723 2,409 1,948 Notes payable 637 521 554 561 594 General liabilities 3,552 1,815 4,179 3,335 2,673 -------------------------------------------------------------------- Total liabilities 15,019 10,840 17,012 15,615 13,991 Redeemable preferred stock 50 50 50 50 - Capital securities 800 - - - - Stockholders' equity 2,822 2,833 2,674 2,257 2,288 -------------------------------------------------------------------- Total liabilities and stockholders' equity $18,691 $13,723 $19,736 $17,922 $16,279 ==================================================================================================================== COMMON STOCK DATA** Dividends paid per share $ 1.02 $ 0.95 $ 0.89 $ 0.84 $ 0.79 Stockholders' equity per share 16.80 16.21 15.18 12.20 12.63 Price range 587/8-403/16 431/8 -315/8 337/8-207/8 237/8-191/2 26-20 Market price at year-end 58.625 41.375 33.250 21.375 21.500 Common stockholders 12,698 13,030 13,520 14,163 14,615 Shares outstanding (in millions) 168.0 166.4 162.4 161.5 152.4 ==================================================================================================================== * Operating income is from continuing operations and excludes after-tax realized investment gains, 1997 special charges of $108 million, 1996 special charges of $59 million and a retroactive tax charge in 1993 of $5 million. ** Per share and common stock data have been restated to reflect the 1997 three-for-two stock split. The earnings per share amounts prior to 1997 have been restated as required to comply with FASB Statement No. 128, "Earnings Per Share."
- 44 -
QUARTERLY FINANCIAL DATA (millions except common stock and per share data) 1Q 2Q 3Q 4Q 1997 - -------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Brokerage commissions and fees $ 842 $ 885 $ 923 $ 955 $3,605 Premiums earned 384 409 398 418 1,609 Net investment income 116 118 119 141 494 Realized investment gains 2 - 3 1 6 Other income 10 13 8 6 37 -------------------------------------------------------------------- Total revenue 1,354 1,425 1,451 1,521 5,751 -------------------------------------------------------------------- Operating income* 90 101 99 112 402 Net income 1 84 101 113 299 ==================================================================================================================== DILUTIVE PER SHARE DATA** Operating income* $ 0.52 $ 0.58 $ 0.56 $ 0.65 $ 2.30 Net income (loss) (0.02) 0.48 0.57 0.65 1.68 BASIC NET INCOME (LOSS) PER SHARE** (0.02) 0.48 0.58 0.66 1.71 ==================================================================================================================== COMMON STOCK DATA** Dividends paid per share $ 0.24 $ 0.26 $ 0.26 $ 0.26 $ 1.02 Stockholders' equity per share 15.34 16.04 16.60 16.80 16.80 Price range 447/8-405/8 533/8-403/16 561/8-501/16 587/8-501/4 587/8-403/16 Shares outstanding (in millions) 166.9 167.2 167.7 168.0 168.0 Average monthly trading volume (in millions) 3.3 3.7 3.9 4.1 3.8 ==================================================================================================================== * Operating income is from continuing operations and excludes after-tax realized investment gains of $4 million and $5 million in 1997 and 1996, respectively, after-tax special charges of $91 million and $17 million in first quarter 1997 and second quarter 1997, respectively, and after-tax special charges of $19 million and $40 million in second quarter 1996 and fourth quarter 1996, respectively. ** Per share and shares outstanding data have been restated to reflect the 1997 three-for-two stock split. The 1996 and first three quarters of 1997 earnings per share amounts have been restated as required to comply with FASB Statement No. 128, "Earnings Per Share."
(millions except common stock and per share data) 1Q 2Q 3Q 4Q 1996 - -------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Brokerage commissions and fees $ 468 $ 445 $ 455 $ 551 $1,919 Premiums earned 378 381 382 386 1,527 Net investment income 85 93 92 114 384 Realized investment gains - - 3 5 8 Other income 11 13 12 14 50 -------------------------------------------------------------------- Total revenue 942 932 944 1,070 3,888 -------------------------------------------------------------------- Operating income* 97 85 82 82 346 Income from continuing operations 97 65 84 46 292 Discontinued operations 22 21 - - 43 Net income 119 86 84 46 335 ==================================================================================================================== DILUTIVE PER SHARE DATA** Operating income* $ 0.55 $ 0.48 $ 0.47 $ 0.47 $ 1.97 Income from continuing operations 0.55 0.36 0.48 0.25 1.64 Discontinued operations 0.13 0.13 - - 0.26 Net income 0.68 0.49 0.48 0.25 1.90 BASIC NET INCOME PER SHARE** 0.70 0.50 0.48 0.26 1.93 ==================================================================================================================== COMMON STOCK DATA** Dividends paid per share $ 0.23 $ 0.24 $ 0.24 $ 0.24 $ 0.95 Stockholders' equity per share 15.17 15.43 15.53 16.21 16.21 Price range 367/8-321/2 371/4-331/4 363/8-315/8 431/8-36 431/8-315/8 Shares outstanding (in millions) 162.7 161.9 162.4 166.4 166.4 Average monthly trading volume (in millions) 3.0 4.7 2.3 3.6 3.4 ==================================================================================================================== * Operating income is from continuing operations and excludes after-tax realized investment gains of $4 million and $5 million in 1997 and 1996, respectively, after-tax special charges of $91 million and $17 million in first quarter 1997 and second quarter 1997, respectively, and after-tax special charges of $19 million and $40 million in second quarter 1996 and fourth quarter 1996, respectively. ** Per share and shares outstanding data have been restated to reflect the 1997 three-for-two stock split. The 1996 and first three quarters of 1997 earnings per share amounts have been restated as required to comply with FASB Statement No. 128, "Earnings Per Share."
EX-21 6 AON CORPORATION SUBIDIARIES Exhibit 21 Aon Corporation Delaware 120524 Canada Inc. Canada 164226 Canada Inc. Canada 1e Katharinastrase 29 Vermogensverwaltungsges mbH Germany 2674025 Canada Inc. Canada 2711613 Canada Inc. Canada 2e Katharinastrase 29 Vermogensverwaltungsges mbH Germany 3194680 Canada Inc. Canada 3381455 Canada Inc. Canada A Morel & Cie Sa France A&A (UK) Limited United Kingdom A&A Real Estate Services Inc. New York 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 A.H.E. Alexander Howden de Espana S.A. Spain A.H.G. Far East Ltd. Hong Kong A.H.O.H. (Bermuda) Limited Bermuda A/S Assurance Norway AA & JG Denison & Company Ltd. United Kingdom AAA Auto Club South Finance, L.P. Illinois AAA Missouri Automotive Financial Services Illinois AARE Corporation New York ABS Insurance Agency Ltd. United Kingdom ACGLRA Corp. Texas ACGMGA Corp. Texas ACN 006 278 226 Australia ACN 008 497 318 Australia ACN 051 158 984 Australia ACP Insurance Agency, Inc. Texas AGR Disposition Company Inc. California AIS Affinity Insurance Agency, Inc. California AIV Beteiligungsgesellschaft mbh Germany 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 ASCOMIN S.A. Belgium ATJ Capital Forsakringsmakleri AB Sweden AUSCO, Inc. Illinois AV Agrar Versicherungsdienst GmbH Germany Acedale Co. Ltd. Hong Kong Adam & Adam Limited New Zealand 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 of Washington, Inc. Washington 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 Agte Gebruder GmbH Germany Aidec Ciskei (Pty) Ltd. South Africa Aidec Gazankulu (Pty) Limited South Africa Aidec Kangwane (Pty) Limited South Africa Aidec Kwandebele (Pty) Limited South Africa Aidec Lebowa (Pty) Limited South Africa Aidec M.I.B. North West (Pty) Limited South Africa Aidec Venda (Pty) Limited South Africa Aircrew Underwriting Agencies Ltd. United Kingdom Airscope Insurance Services Limited United Kingdom Aldebaran S.R.L. Rome Italy Alexander & Alexander (Asia) Holdings Pte. Ltd. Singapore Alexander & Alexander (C.I.) Limited Guernsey Alexander & Alexander (Hong Kong) Holdings Ltd. Hong Kong Alexander & Alexander (Ireland) Limited Ireland Alexander & Alexander (Isle of Man) Limited United Kingdom Alexander & Alexander (Malaysia) Sdn. Bhd. Malaysia Alexander & Alexander (PNG) Pty. Ltd. Papau New Guinea Alexander & Alexander (Taiwan) Ltd. Taiwan Alexander & Alexander (Thailand) Ltd. Thailand Alexander & Alexander (UK) Ltd. United Kingdom Alexander & Alexander Australia Holdings Ltd. Australia Alexander & Alexander B.V. Netherlands Alexander & Alexander Benefits Services (Arizona) Inc. Arizona Alexander & Alexander Benefits Services Inc. New Jersey Alexander & Alexander Benefits Services Inc. Ohio Alexander & Alexander Benefits Services Inc. Virginia Alexander & Alexander Benefits Services Inc. (TX) Texas Alexander & Alexander Benefits Services of Louisiana Louisiana Alexander & Alexander Canada Inc. Canada Alexander & Alexander Consultants S.A. France Alexander & Alexander Consulting Group Inc. New Jersey Alexander & Alexander Consulting Group, Inc. Texas Alexander & Alexander Corretores e Consultores de Seguros Lda. Portugal Alexander & Alexander Europe B.V. Netherlands Alexander & Alexander Europe GmbH Austria Alexander & Alexander Europe Ltd. United Kingdom Alexander & Alexander Far East Inc. California Alexander & Alexander Far East Partners Hong Kong Alexander & Alexander Finance Limited United Kingdom Alexander & Alexander France S.A. France Alexander & Alexander Galicia, S.A. Spain Alexander & Alexander Holdings (NZ) Ltd. New Zealand Alexander & Alexander Holdings B.V. Netherlands Alexander & Alexander Inc. Maryland Alexander & Alexander Insurance Agency Ltd. Taiwan Alexander & Alexander Insurance Benefits Services Inc. Massachusetts Alexander & Alexander Insurance Brokers - Hungary Hungary Alexander & Alexander Insurance Brokers Ltd. Poland Poland Alexander & Alexander International Inc. Maryland Alexander & Alexander Italia S.P.A. Italy Alexander & Alexander Korea Inc. Korea Alexander & Alexander LTDA. Corretores de Seguros Brazil Alexander & Alexander Limited Australia Alexander & Alexander Limited United Kingdom Alexander & Alexander Ltd. Fiji Alexander & Alexander Ltd. New Zealand Alexander & Alexander Ltd. (Thailand) Thailand Alexander & Alexander Mexico Agente de Seguros y de Fianza S.A. de C.V. Mexico Alexander & Alexander Middle East Limited Bermuda Alexander & Alexander Pte. Ltd. Singapore Alexander & Alexander Risk Management Services, Inc. Taiwan Alexander & Alexander S.R.O. (Czech. Republic) Czech Republic Alexander & Alexander Scandinavia AB Sweden Alexander & Alexander Securities Corporation Delaware Alexander & Alexander Services (India) Pvt. Ltd. India Alexander & Alexander Services UK Limited Scotland Alexander & Alexander Sigorta Musavirlk Anomim Sirketi Turkey Alexander & Alexander Spain Correduria de Seguros, S.A. Spain Alexander & Alexander Telemarketing Brazil Alexander & Alexander Trustee Jersey Ltd. Jersey, Channel Islands Alexander & Alexander U.K. Pension Trustees Ltd. United Kingdom Alexander & Alexander of California, Inc. California Alexander & Alexander of Colombia Ltda. Colombia Alexander & Alexander of Connecticut Inc. Connecticut Alexander & Alexander of Idaho, Inc. Idaho Alexander & Alexander of Japan, Inc. Nevada Alexander & Alexander of Kansas, Inc. Kansas Alexander & Alexander of Kentucky, Inc. Kentucky Alexander & Alexander of Long Island Inc. Connecticut Alexander & Alexander of Michigan, Inc. Michigan Alexander & Alexander of Mississippi Inc. Mississippi Alexander & Alexander of Missouri Inc. Missouri Alexander & Alexander of New York Inc. New York Alexander & Alexander of Ohio, Inc. Ohio Alexander & Alexander of Texas, Inc. Texas Alexander & Alexander of Virginia, Inc. Virginia Alexander & Alexander of Washington Inc. Washington Alexander & Alexander of Wyoming, Inc. Wyoming Alexander & Alexander of the Carolinas Inc. North Carolina Alexander & Alexander, Inc. Florida Alexander & Alexander, Inc. Louisiana Alexander & Alexander, Inc. Massachusetts Alexander & Alexander, Inc. Oklahoma Alexander & Alexander, Inc. Tennessee Alexander & Alexander, Inc. West Virginia Alexander & Associates Inc. Texas Alexander & Davidson de Colombia LTDA. Colombia Alexander Administration Services Ltd. Isle of Man Alexander Clay Communications Limited United Kingdom Alexander Clay and Partners Consulting United Kingdom Alexander Consulting Investment Services Inc. Maryland Alexander Coyle Hamilton Ltd. Ireland Alexander Financial Services Ltd. Scotland Alexander Hellas E.P.E. Greece Alexander Howden (Hellas) Ltd. Guernsey Alexander Howden (Kazakhstan) Ltd. Kazakhstan Alexander Howden Asia Pacific Ltd. United Kingdom Alexander Howden Brasil Ltda. Brazil Alexander Howden Canada Limited Canada Alexander Howden Del Peru S.A. Reinsurance Brokers Peru Alexander Howden Energy & Partners Scandinavia Norway Alexander Howden Far East Ptd. Ltd. Singapore Alexander Howden Financial Services Limited United Kingdom Alexander Howden Group (Asia) Pte. Ltd. Singapore Alexander Howden Group (Australia) Limited Australia Alexander Howden Group (Bermuda) Ltd. Bermuda Alexander Howden Group Agency Management Ltd. United Kingdom Alexander Howden Group Canada Limited Canada Alexander Howden Group Limited Bermuda Alexander Howden Holdings Limited United Kingdom Alexander Howden Insurance Services of Texas, Inc. Texas Alexander Howden International Limited United Kingdom Alexander Howden Leasing Ltd. United Kingdom Alexander Howden Limited United Kingdom Alexander Howden North America, Inc. Georgia Alexander Howden North America, Inc. Massachusetts Alexander Howden North America, Inc. New York Alexander Howden North America, Inc. Ohio Alexander Howden North America, Inc. Texas Alexander Howden Ossa De Colombia SA Colombia Alexander Howden Previsionales y Personas Ltda. Colombia Alexander Howden Reinsurance Brokers (Australia) Ltd. Australia Alexander Howden Reinsurance Brokers (NZ) Ltd. New Zealand Alexander Howden Reinsurance Intermediaries, Inc. New York Alexander Howden UK Limited United Kingdom Alexander Howden Underwriting Limited United Kingdom Alexander Howden Y Asociados S.A. de C.V. Mexico Alexander Howden de Espana Spain Alexander Howden de Venezuela Venezuela Alexander Insurance Managers (Barbados) Ltd. Barbados Alexander Insurance Managers (Cayman) Ltd. Cayman Islands Alexander Insurance Managers (Dublin) Ltd. Ireland Alexander Insurance Managers (Guernsey) Ltd. Guernsey Alexander Insurance Managers (Holdings) Ltd. Guernsey Alexander Insurance Managers (Isle of Man) Ltd. Isle of Man Alexander Insurance Managers (Jersey) Ltd. Jersey, Channel Islands Alexander Insurance Managers (Luxembourg) S.A. Luxembourg Alexander Insurance Managers (Singapore) Pte. Ltd. Singapore Alexander Insurance Managers Ltd. Bermuda Alexander Insurance Managers N.V. Netherlands Alexander Lippo (Hong Kong) Ltd. Hong Kong Alexander MacFarlane Corretora de Seguros Ltda. Brazil Alexander Portfolio Management Ltd. New Zealand Alexander R.M.C. Brown Partners Ltd. Australia Alexander Reinsurance Intermediaries, Inc. New York Alexander Risk Management and Consulting Services, Inc. Texas Alexander Stenhouse & Partners Limited Scotland Alexander Stenhouse Belgium International Belgium Alexander Stenhouse Insurance Agency, Inc. Texas Alexander Stenhouse Limited United Kingdom Alexander Stenhouse Magee Limited Ireland Alexander Stenhouse Management Services Ltd. Scotland Alexander Stenhouse Nominees Ltd. Australia Alexander Stenhouse Risk Management S.A. Spain Alexander Stenhouse UK Ltd. United Kingdom Alexander Underwriting Agencies Limited Bermuda Alexander Underwriting Services Inc. Maryland Alexander Underwriting Services Limited United Kingdom Alexander Watkins S.A. de C.V. Mexico Alexander of Hawaii Inc. Hawaii Alexander of Texas Inc. Texas Alexander y Alexander Chile Ltda. Chile Alexander, Ayling, Barrios & Cia, S.A. Argentina Allen Insurance Associates California Alpenbeck Limited United Kingdom American Associates, Inc. Texas American Insurance Brokers, Ltd. Indiana American National General Agencies, Inc. Colorado American Special Risk Insurance Company Delaware Anchor Reinsurance Company, Ltd. Bermuda Anchor Underwriting Managers, Ltd. Bermuda Anderson and Anderson Insurance Brokers, Inc. California Anderson and Anderson of Los Angeles Insurance Brokers, Inc. California Anderson and Anderson of Orange County Insurance Brokers, Inc. California Anderson and Anderson/Benefits Insurance Brokers, Inc. California Anderson and Anderson/D-K&S Insurance Brokers, Inc. California Anglo-Swiss Reinsurance Brokers Ltd. Switzerland Anistics Ltd. United Kingdom Anscor Insurance Brokers Inc. Philippines Aon WACUS Kreditversicherungsmakler GmbH & Co. Germany Aon WACUS Verwaltungs GmbH Germany Aon (Deutschland) GmbH Germany Aon (Panama) Ltd. S.A. Panama Aon Advisors (U.K.) Limited United Kingdom Aon Advisors, Inc. Virginia Aon Alexander & Alexander N.V. Belgium Aon Annuity Group, Inc. Texas Aon Antillen nv Netherland Antilles Aon Artscope Kunstversicherungsmakler GmbH Germany Aon Aruba nv Netherland Antilles Aon Asia Insurance Services bv Netherlands Aon Automotive Group, Inc. Illinois Aon Aviation, Inc. Illinois Aon Belgium nv Belgium Aon Benefit Services, Inc. Massachusetts Aon Benefits Insurance Brokers (Singapore) Pte. Ltd. Singapore Aon Boels & Begault S.A. Belgium Aon Broker Services, Inc. Illinois Aon Capital A 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 Captive Services Aruba nv Netherland Antilles Aon Ceska republika spol. s.r.o. Czech Republic Aon Compensation and Benefits Limited United Kingdom Aon Construction Services International Limited United Kingdom Aon Consulting & Insurance Services California Aon Consulting Agency, Inc. Texas Aon Consulting Belgium S.A. Belgium Aon Consulting Denmark A/S Denmark Aon Consulting Financial Services Limited United Kingdom Aon Consulting GmbH Germany Aon Consulting Hong Kong Ltd. Hong Kong Aon Consulting Limited United Kingdom Aon Consulting Nederland cv Netherlands Aon Consulting Pty Limited Australia Aon Consulting South Africa (Pty) Ltd. South Africa Aon Consulting Thailand Ltd. Thailand Aon Consulting Worldwide, Inc. Maryland Aon Consulting, Inc. Florida 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, Limited Les Consultants Aon, Limitee Quebec Aon Credit Services Corporation Delaware Aon Denmark A/S Denmark Aon Direct Group Small Company Life and Health Agents Illinois Aon Eesti AS Estland Aon Employee Benefits of Ohio, Inc. Ohio Aon Enterprise Insurance Services, Inc. Illinois Aon Entertainment Risk Services Limited United Kingdom Aon Entertainment, Ltd. New York Aon European Investments Limited United Kingdom Aon Financial Institutions Services, Inc. Illinois Aon Financial Services Group of Colorado, Inc. 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Delaware 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 Hudig-Schreinemacher V.O.F. Netherlands Aon ISI, Inc. Colorado 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 Managers (USA) Inc. Vermont Aon Insurance Services California Aon Insurance Services, Inc. Pennsylvania Aon Intermediaries (Bermuda) Ltd. Bermuda 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 Consulting (Pty) Ltd. South Africa Aon Lumley South Africa (Pty) Ltd. South Africa Aon Magyarorszag Alkusz Kft. Hungary Aon Managed Care Risk & Insurance Services, Inc. California Aon Management Hong Kong Ltd. Hong Kong Aon Management Institute, Inc. Connecticut Aon Medical Consultants, Inc. Delaware Aon Mibrag Versicherungsvermittlungs GmbH Germany Aon Natural Resources Ltd. Labuan Aon Nominees Limited United Kingdom Aon Norway A/S Norway Aon OWA Insurance Services GmbH & Co. Germany Aon OWA Verwaltungs GmbH Germany Aon Overseas Holdings Limited United Kingdom Aon Partnership Limited United Kingdom Aon Pension Trustees Limited United Kingdom Aon Polska sp.z.o.o. Poland Aon Portugal, Corretores de Seguros, S.A. Portugal Aon Private Risk Management Insurance Agency, Inc. Illinois 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 Reed Stenhouse Acquisition Corp. Canada Aon Reed Stenhouse Inc. Canada Aon Risk Consultants (Bermuda ) Ltd. Bermuda Aon Risk Consultants (Europe) Limited United Kingdom Aon Risk Consultants BV Netherlands Aon Risk Consultants, Inc. Illinois Aon Risk Management Services Italia srl. Italy Aon Risk Management Services Scandinavia A/S Denmark Aon Risk Managers, Inc. Illinois Aon Risk Resources Insurance Agency, Inc. Illinois Aon Risk Resources Limited United Kingdom Aon Risk Resources, Inc. 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New Zealand Aon Risk Services Singapore (Insurance Brokers) Pte. Ltd. Singapore Aon Risk Services Taiwan Ltd. Taiwan 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 Mexico New Mexico 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 Services Group Limited United Kingdom Aon Services Group of Tennessee, Inc. Tennessee Aon Services Group, Inc. Delaware Aon Sigorta Brokerlik ve Musavirlik AS Turkey Aon Slovensko spol.s r.o. Slovak Republic Aon South Africa (Pty) Ltd. South Africa Aon Special Risks, Inc. Illinois Aon Specialty Denmark A/S Denmark Aon Stockholm AB Sweden Aon Superannuation Pty Limited Australia Aon Surety & Guarantee Limited United Kingdom Aon Sweden AB Sweden Aon Sweden Syd AB Sweden Aon Technical Insurance Services, Inc. Illinois Aon Technology Brokers, Inc. California Aon Telecom, Inc. Illinois Aon Trade Credit Insurance Services, Inc. California Aon Trade Credit, Inc. Illinois Aon Trade Credit, Inc. New York Aon UK Holdings Limited United Kingdom Aon UK Limited United Kingdom Aon Vietnam Vietnam Aon Warranty Group Limited (UK) United Kingdom Aon Warranty Group, Inc. Illinois Aon Warranty Services, Inc. Illinois Aon Worldwide Resources, Inc. Illinois Aon bv Netherlands Aon makelaars in assurantien bv Netherlands Aon/Albert G. Ruben Company (New York) Inc. New York Aon/Albert G. Ruben Insurance Services, Inc. California Aon/Brockinton Agency of Texas, Inc. Texas Aporia Leasing Limited United Kingdom Artscope Insurance Services Limited United Kingdom Artscope International Insurance Services Limited United Kingdom Ascom Nijmegen B.V. Netherlands Asesores Kennedy Agente de Seguros y de Fianzas, S.A. de C.V. Mexico Asesores y Corredores De Seguros, S.A. Republica Dominica Asia Area Underwriters Ltd. Hong Kong Asian American Finance Limited Bermuda Asian Reinsurance Underwriters Ltd. Hong Kong Assekurazkontor fur Industrie und Verkehr GmbH Germany Assistance Au Management Et A La Prevention Des Risques De L'Entreprise France Associated Brokers International Zimbabwe Associated Fund Adminstrators Botswana (Pty) Limited Botswana Associated Ins. Broker of Botswana Botswana Assuco Holdings Ltd. Guernsey Assurances D.M.L. Itee Canada Assurantie Groep Langeveldt c.v. Netherlands Atkins Kroll Insurance Inc. Guam Atlanta International Insurance Company New York Attorneys' Advantage Insurance Agency, Inc. Illinois 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 E P International (Canada) Holding Inc. Canada B E P International Corp. New Jersey B E P International Holding Inc. Canada B E P International US Inc. Delaware B.L. Carnie Hogg Robinson Ltd. United Kingdom B.N. Shepp Associates Ltd. 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Corredoros de Reasguro Chile Bain Hogg Colombiana Ltd. Colombia Bain Hogg Group Limited 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. 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 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 Barros & Carrion, Inc. 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California Cananwill, Inc. Pennsylvania Captive Assurance Partners California Carstens & Schues GmbH & Co. Germany Carstens & Schues Poland Ltd. Poland Carstens & Schues Verwaltungs GmbH Germany Catz & Lips B.V. Netherlands Centris Services Limited United Kingdom Centurion, Agente de Seguros, S.A. de C.V. Mexico Chemical & Oil Insurance Brokers (Pty) Ltd. South Africa Christopher Paul Insurance Services Ltd. United Kingdom Cinema Completions International, Inc. Delaware Citadel Insurance Company Texas City and County Purchasing Group Unknown Citytrust Insurance Brokers Association Philippines 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. 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United Kingdom Credit & Political Insurance Services Ltd. United Kingdom Credit & Political Risks Reinsurance Consultants Ltd. United Kingdom Credit Indemnity & Financial Services Ltd. United Kingdom Credit Insurance Research Unit Ltd. United Kingdom Crotty MacRedmond Insurance Limited Ireland Customer Loyalty Institute Michigan D. Hudig & Co. b.v. Netherlands DA&A Insurance Agency, Inc. Texas DUO A/S Norway Dale & Compagnie (1990) Itee Canada Dale Intermediaries Ltd. Canada Dale-Parizeau International Inc. Canada Dale-Parizeau Management Ltd. Bermuda Dealer Development Services, Ltd. United Kingdom Deanborne Limited United Kingdom Denison Pension Trustees Ltd. United Kingdom Diot Minet (France) SA France Dobson Park L. G. Limited Guernsey Document Risk Management Limited United Kingdom Dominion Mutual Insurance Brokers Ltd. Canada Don Flower Aviation Underwriters, Inc. Kansas Dormante Holdings Limited United Kingdom Downes & Burke (Special Risks) Ltd. 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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 Re (Latin America) Inc. Panama Friis & Company, Inc. California Futuro 3000 S.R.L. Italy G.E.F. Insurance Ltd. U.S. Virgin Islands Garantie Europeene de Publication S.A. France Gardner Mountain Barr, Inc. New York 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 Gestas (1995) Inc. Canada Gestionnaires Westpar (1995) Itee Canada Gilliland & McReynolds, Inc. Texas Gilman Swire Willis Ltd. Hong Kong Gilroy Broome & Scrini (Trustees) Ltd. United Kingdom 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 Gras Savoye Rumania Romania Greville Baylis Parry & Associates Ltd. United Kingdom Greyfriars Marketing Services Pty Ltd. Australia Groupe DPI Inc. Quebec Groupement Europeen d'Assurances Generales France Growth Enterprises Ltd. Bahamas Guardrisk Insurance Company Limited South Africa Guernsey Nominees (Pty) Limited Guernsey Gwelforth Ltd. United Kingdom 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. Unknown 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 Halford, Shead & Co. Limited United Kingdom Hall & Company (Overseas) Ltd. United Kingdom Hall & Company (UK) Ltd. United Kingdom Hamburger Gesellschaft zur Forderung des Versicherungswesen mbH Germany Hamburger Ruckversicherungs - Agentur GmbH Germany Hanse Assekuranz-Vermittlungs GmbH Germany Hanseatische Assekuranz Kontor GmbH Germany Hanseatische Assekuranz Vermittlungs AG Germany Harbour Pacific Holdings Pty., Ltd. Australia Harbour Pacific Underwriting Management Pty Limited Australia Harmony Home Warranty Company, Inc. California Heath Hudig Langeveldt Sdn. Bhd. Malaysia Heiland Versicherungs-Service GmbH Germany Heli Agency Korea Hellenic Bain Hogg S.A. Greece Hemisphere Marine & General Assurance Ltd. Bermuda 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 North America, Inc. Delaware Hogg Robinson Services (Kenya) Ltd. Kenya Howden Chile Consultores Ltda. Chile Howden Chile Reaseguros Ltda. Chile Howden Cover Hispanoamericana (Bermuda) Ltd. Bermuda Howden Dastur Reinsurance Brokers (Private) Ltd. India Howden Management & Data Services Ltd. United Kingdom Howden Sterling Asia Limited Hong Kong Howell King & Company Ltd. United Kingdom Hudig Langeveldt Pte Ltd. Singapore 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 Pensioenbureau B.V. Netherlands Hudig-Langeveldt Reinsurance B.V. Netherlands Hudig-Langeveldt Saat B.V. Netherlands Human Relations Strategies Limited United Kingdom Huntington T. Block Insurance Agency, Inc. District of Columbia Huntington T. Block Insurance Agency, Inc. Ohio Hydrocarbon Risk Consultants Ltd. United Kingdom IOC Reinsurance Brokers Ltd. Canada IRBJ Disposition Company Illinois IRBJ Disposition Company United Kingdom IRISC (London) Limited United Kingdom IRISC Limited United Kingdom IRISC Specialty, Inc. Delaware IRISC Technical Services (Hong Kong) Limited Hong Kong IRISC, Inc. New Jersey IRM France S.A. France ISPP Purchasing Group Missouri 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 Holdings (HK) Ltd. Hong Kong Inchcape Insurances (Macau) Ltd. Macau Indemnity Insurance Services (Pty) Limited South Africa Independent Dealer Services, Inc. Missouri Independent Engineering Services Ltd. United Kingdom Inmobiliaria Ramos Rosada, S.A. de C.V. Mexico Insurance Administrators Inc. Texas Insurance Brokers Service, Inc. Illinois Insurance Broking Services (Pty) Limited Guernsey Insurance Holdings Africa Ltd. Kenya Insurance Planning, Inc. Nevada Insurance Underwriters Agency, Inc. Arizona Integrated Risk Finance Limited United Kingdom Integrated Risk Resources Limited United Kingdom Interbroke Ltd. Switzerland Interglobe Management AG Switzerland Interims Limited United Kingdom International Industrial Insurances Limited Ireland International Insurance Brokers Ltd. Jamaica International Insurance Brokers Ltd. New Zealand 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 H Minet (Insurance) Ltd. Ireland J H Minet & Company (Tanzania) Ltd. Tanzania J H Minet (Inter-Gremium) AG Switzerland J H Minet Agencies Ltd. United Kingdom J H Minet Puerto Rico Inc. Puerto Rico J H Minet Reinsurance Brokers Ltd. United Kingdom J&H Risk Management Consultants GmbH Germany J&H Unison Holdings BV Netherlands J&H Vorsorgefonds Switzerland 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. Ltd. Bahamas JFS (Sudamerica) SA Uruguay JFS Fenchurch Limited United Kingdom JFS Greig Fester Limited United Kingdom JML-Minet A.G. Switzerland James S. Kemper & Co. International Ltd. Bermuda Jaspers Industrie Assekuranz GmbH & Co. KG Germany Jauch & Hubener (KG) Austria Jauch & Hubener AG Switzerland Jauch & Hubener Beratungs AG Switzerland Jauch & Hubener CSFR Spol s.r.o. Slovak Republic Jauch & Hubener Ges mbH & Co. KG Austria Jauch & Hubener GmbH Austria Jauch & Hubener KGaA Germany Jauch & Hubener Kft. Hungary Jauch & Hubener Management betriebliche Versorgungen Germany Jauch & Hubener Personalvorsorgestiftung Switzerland Jauch & Hubener Privates Vorsorgemanagement GmbH Germany Jauch & Hubener Reinsurance Brokers Ltd. United Kingdom Jauch & Hubener Reinsurance Inter. Services of North America New Jersey Jauch & Hubener Ruckversicherungs-Vermittlungsges mbH Germany Jauch & Hubener Vergutungs-und Vorsorgemanagement GmbH Germany Jauch & Hubener Verwaltungs- GmbH Germany Jauch & Hubener d.o.o. Slovak Republic Jauch & Hubener do Brasil Ltda. Brazil Jauch & Hubener spol sro Czech Republic 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 C. Lloyd Reinsurance Brokers Ltd. Australia John Scott Insurance Brokers Limited United Kingdom Johnson & Higgins PB Co. Thailand Joost & Preuss GmbH Germany Joseph U. Moore, Inc. Florida Jover Prevision Correduria de Seguros Spain K & K Insurance Brokers, Inc. Canada Ontario 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 California Insurance Services, Inc. California K & K of Nevada, Inc. Nevada Karl Alt & Co. GmbH Germany Keeling & Company California Keith Rayment & Associates Ltd. United Kingdom Key-Royal Automotive Company, Inc. Alabama Keyaction Ltd. United Kingdom Kininmonth Limited Ireland Kroller Holdings B.V. Netherlands L & G LMX Limited United Kingdom L & G Seascope Insurance Holdings Limited United Kingdom L. & F. Longobardi SRL Italy LIB Financial Services Ltd. United Kingdom LIB Ltd. United Kingdom La Societe de Courtage Meloche Alexander Inc. Canada Langeveldt Groep B.V. Netherlands Langeveldt de Vos b.v. Netherlands Laurila, Kauriala & Grig Ltd. Russia Laverack & Haines, Inc. New York Les Intermediaires Dale-Parizeau Itee Canada 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 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 Y A Ltda. Asesorias Integrales Colombia M Y A Salud - Agentes De Medicina Prepagada (Colombia) Colombia M&M Insurance Agency, Inc. Texas M.I. B. Healthcare Services (Pty) Limited South Africa M.I.B. Aidec (Pty) Limited South Africa M.I.B. Border (Pty) Limited South Africa M.I.B. Employee Benefits (Pty) Limited South Africa M.I.B. Group (Pty) Limited South Africa M.I.B. Holdings Co. Ltd. Malta M.I.B. House Investment (Pty) Limited South Africa M.I.B. Property Holdings (Pty) Limited South Africa M.I.B. Reinsurance Brokers (Namibia) (Pty) Limited Namibia M.I.B. Reinsurance Brokers (Pty) Limited South Africa MAB Insurance Services Ltd. United Kingdom MC Brokers Co. Ltd. Thailand MIB UK (Holdings) Ltd. United Kingdom MLH & A (Canada) Inc. Canada MLH & A Inc. Canada MLH International Inc. Ontario MTF Insurance Agency, Inc. Texas 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 Management and Regulator Services, Inc. New York Mansell Investments Ltd. Gibraltar Mansfeld, Hubener & Partners Gmbh Germany Manzitti Howden Beck s.p.a. Italy 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 Marvyn Hughes International Ltd. United Kingdom Max Mattiessen AB Sweden Media/Professional Insurance Agency Limited United Kingdom Media/Professional Insurance Agency, Inc. Missouri Mediterranean Insurance Brokers Ltd. Malta Mediterranean Insurance Training Centre Malta Mibsa Investments (Namibia) (Pty) Limited Namibia Minahan Reinsurance Management Limited United Kingdom Minerva Holdings (Pvt) Limited Zimbabwe Minet (Singapore) Pte. Ltd. Singapore Minet (Taiwan) Ltd. Taiwan Minet AB Sweden Minet AS Norway Minet Africa Holdings Ltd. United Kingdom Minet Agricultural Insurance Brokers Pty. Ltd. Australia Minet Airport Insurance Services Ltd. United Kingdom Minet Archer Ltd. New Zealand Minet Australia Holdings Pty. Ltd. Australia Minet Australia Ltd. Australia Minet Benefit Services (International) Ltd. Guernsey Minet Botswana (Pty) Ltd. Botswana Minet Burn & Roche Pty. Ltd. Australia Minet China Ltd. Hong Kong Minet Commercial Ltd. United Kingdom Minet Consultancy Services Ltd. (Kenya) Kenya Minet Consultancy Services Ltd. (UK) United Kingdom Minet Denison Financial Services Ltd. United Kingdom Minet Denison Insurance Services Ltd. United Kingdom Minet Direct Marketing Services Ltd. United Kingdom Minet Duncan Insurance Brokers Ltd. United Kingdom Minet Employees' Trust Company Ltd. United Kingdom Minet Europe Holdings Ltd. United Kingdom Minet Financial Services Ltd. United Kingdom Minet Firstbrokers Oy Finland Minet Group Holdings United Kingdom Minet Group PLC United Kingdom Minet Group Services Ltd. United Kingdom Minet Holdings Guernsey Limited Guernsey Minet Holdings Inc. New York Minet Hong Kong Ltd. Hong Kong Minet ICDC Insurance Brokers Ltd. Kenya Minet Inc. (Canada) Canada Minet Ins. Brokers (Holdings) (NZ) Ltd. New Zealand Minet Ins. Brokers (Zimbabwe) (Pvt) Ltd. Zimbabwe Minet Insurance Brokers (Holdings) Ltd. United Kingdom Minet Insurance Brokers (Thailand) Ltd. Thailand Minet Insurance Brokers (Uganda) Limited Uganda Minet Insurance Brokers, Inc. Unknown Minet Insurance Services (UK) Ltd. United Kingdom Minet Insurance Services, Inc. California Minet Insurance Services, Inc. of Texas Texas Minet International (Holdings) Ltd. United Kingdom Minet Italia & Partners SpA Italy Minet Italia srl Italy Minet Kingsway (Lesotho) (Pty) Ltd. Lesotho Minet Limited Uganda Minet Limited (Bermuda) Bermuda Minet Lindgren i Helsingborg Sweden Minet Ltd. United Kingdom Minet Members Agency Holdings Ltd. United Kingdom Minet New Zealand Ltd. New Zealand Minet Nigeria Nigeria Minet Nominees Ltd. United Kingdom Minet Professional Services (Europe) Ltd. United Kingdom Minet Professional Services Ltd. (Australia) Australia Minet Professional Services Ltd. (UK) United Kingdom Minet Properties (1989) Ltd. United Kingdom Minet Properties Ltd. United Kingdom Minet RAIA Insurance Brokers Limited Hong Kong Minet Re (Bermuda) Limited Bermuda Minet Re GmbH Germany Minet Re International Ltd. United Kingdom Minet Re North America, Inc. Georgia Minet Risk Services (Barbados) Ltd. Barbados Minet Risk Services (Bermuda) Ltd. Bermuda Minet Risk Services (Guernsey) Ltd. Guernsey Minet Risk Services (Jersey) Ltd. Jersey, Channel Islands Minet Risk Services (Singapore) Ltd. Singapore Minet Risk Services (Vermont), Inc. (USA) Vermont Minet S.A. de C.V. Mexico Minet Settlement Services, Inc. Minnesota Minet Trans Risk Services Ltd. United Kingdom Minet Trustees Ltd. United Kingdom Minet West Africa Ltd. United Kingdom Minet Zambia Limited Zambia Minet Zimbabwe (Pvt) Ltd. Zimbabwe Minet a.s. Czech Republic Minet, Inc. (USA) New Jersey Minken Properties Ltd. Kenya Montgomery General Agency of New Jersey, Inc. New Jersey Morency, Weible & Sapa, Inc. Illinois Motorists Service Corporation Delaware Motorplan Limited United Kingdom Muirfield Underwriters, Ltd. Delaware N.V. Verzekering Maatschappij Van 1890 Netherlands NB Life Agents, Inc. New York NRC Reinsurance Company Ltd. Bermuda NSU Benefit Corporation Indiana National Care Provider Insurance, Inc. California National Product Care Company Illinois National Sports Underwriters, Inc. Indiana Needler Heath (UK) Ltd. United Kingdom Needler Heath Dixon Ltd. United Kingdom New Co. #1 L.L.C. Delaware 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 Nissho Iwai (Japan) Japan Nixon Constable & Company Ltd. United Kingdom North Derbyshire Finance Company Limited, The United Kingdom Norwegian Insurance Partners A/S Norway Norwegian Insurance Partners as (Non-Marine) Norway Nova Reinsurance Brokers, Inc. Illinois OLD ARS-AZ INC. Arizona OLD ARS-IN CORP. Indiana OUM & Associates of California, A Corporation California OUM & Associates of New York, A Corporation New York OUM & Associates of Ohio, A Corporation Ohio 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 Oak Brook Holding, Inc. Delaware Oak Brook Life Insurance Company Arizona Ohio Cap Insurance Company, Inc. Unknown Ohrinsoo Agency Korea Olarescu & B. I. Davis Asesores y Corredores de Seguros S.A. Peru Old RHH North, Inc. California Orobio Mees Herman B.V. Netherlands P I Insurance Brokers (Pty) Limited South Africa P M R Re, Inc. New York P.I. Consultants Ltd. Hong Kong P.T. Alexander Lippo Indonesia Indonesia PBA Inc. Minnesota PLCM Group, Inc. Florida PLCM Group, Inc. Illinois PLCM Group, Inc. Pennsylvania PROVIA Gesselschaft fur betriebliche Risicoanalyse mbH Germany PT RNJ Ratna Nusa Jaya Indonesia Pacific Wholesale Insurance Brokers Pty Limited Australia Paladin Reinsurance Corporation New York 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 Pilots International Association North Dakota Pinerich Limited Ireland Poitras, Lavigueur (1995) Inc. Quebec Poland Puckle Insurance Brokers Ltd. United Kingdom Premier Auto Finance, Inc. Delaware Premier Auto Finance, L.P. Illinois Prescot Insurance Holdings Ltd. United Kingdom Private Client Trustees Ltd. Ireland Product Care, Inc. Illinois Professional & General Ins. Company (Bermuda) Ltd. Bermuda Professional Liability Services Limited United Kingdom Professional Sports Insurance Co. Ltd. Bermuda Progressive Ideal Sdn Bhd. Malaysia Promotora Zircon S.A. de C.V. Mexico Property Owners Database Limited United Kingdom Proruck Ruckversicherungs - AG Germany Provider Services, Ltd. Bermuda R&M Reinsurance Intermediaries Ltd. Trinidad R.B. Jones Corporation Delaware 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 REISA Insurance Brokers Pty. Ltd. Australia REIV Insurance Brokers (Pty) Ltd. Australia RHH Empreendimentos e Servicos Ltda. Brazil RHH Surety & Guarantee Limited United Kingdom RIP Services Limited Guernsey Ralph S. Harris (Insurance) Pty. Ltd. Zimbabwe Rath & Strong, Inc. Massachusetts Reed Stenhouse Asia Pacific Ltd. Scotland Reed Stenhouse Companies Ltd. Canada Reed Stenhouse Europe Holdings B.V. Netherlands Reed Stenhouse Gmbh Germany Reed Stenhouse Netherlands B.V. Netherlands Reed Stenhouse Underwriting Management Ltd. Scotland Resource Insurance Services, Inc. Indiana Revasa S.p.A. Italy Risconcept Inc. Canada Risk Funding Services (Pty) Limited South Africa Risk Management Consultants Ltd. United Kingdom Risk Management Consultants of Canada Ltd. Canada RiskNet Worldwide, Inc. Oregon Risque et Finance SA France 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 Associates B.V. Netherlands Rollins Hudig Hall Finance bv Netherlands 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 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 Royal Home Protection Plan, Inc. Delaware Ruben Entertainment Insurance Services 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 Rydata Limited United Kingdom S A Credit & Insurance Brokers (Pty) Limited South Africa S W Holdings (SA) (Pty) Limited South Africa S W Insurance Brokers (Pty) Limited South Africa S. Hammond Story Agency, Inc. Georgia S. Mark Brockinton & Associates of Texas, Inc. Texas S. Mark Brockinton & Associates, Inc. Arkansas SASE France Societe Des Assures Du Sud Set France SHL Pacific Regional Holdings Inc. California SIS Services of New York, Inc. New York SLE Worldwide Australia Pty Limited Australia SLE Worldwide Limited United Kingdom SLE Worldwide Mexico, Agente de Seguros, S.A. de C.V. Mexico SLE Worldwide, Inc. Delaware SRA, Inc. Texas SRS General Insurance Services, Inc. California SRS Insurance Services, Inc. California 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 Savoy Insurance Brokers Ltd. United Kingdom Saxonbeech Ltd. United Kingdom Scarborough & Company, Inc. Delaware Scarborough Insurance Agency of Massachusetts, Inc. Massachusetts Sceptre Agency, Inc. Texas Scottish & Commonwealth Insurance Co. Ltd. Bermuda 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 Securities Guarantee Company 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 of Virginia, Inc. Virginia ServicePlan, Inc. Illinois Services De Risques Aon Inc. Canada Servicios A.B.S., S.A. Mexico Servicios Inmoboliarios Guadalajara, S.C. Mexico Servicios Y Garantias Ryan S.L. Spain Sherwood Insurance Services California Sherwood Insurance Services of Washington, Inc. Washington Shoreline Insurance Agency, Inc. Rhode Island Simco Insurance Brokers Pte Singapore Singer Group, Inc., The Texas Singer Plan, Inc. Delaware Societe Generale de Courtage d'Assurances France Societe canadienne de gestion de reassurance, inc. Quebec Sodarcan Inc. Canada Sodartec Inc. Canada Soriero & Company, Inc. Texas Sorim (1987) Ltd. United Kingdom Sorim Services (1987) Ltd. United Kingdom Southern Cross Underwriting Pty. Limited Australia Special Risk Services Limited United Kingdom Special Risk Services, Inc. New Jersey Spicafab Limited United Kingdom Square One, Inc. Texas Steetley Leslie & Godwin Limited Guernsey Steeves Lumley Ltd. Australia Stenhouse (South East Asia) Pte. Ltd. Singapore Stenhouse Marketing Services (London) Ltd. United Kingdom Stenhouse Marketing Services, Inc. Delaware Stenhouse Reed Shaw Africa (Pty) Ltd. South Africa Sterling Life Insurance Company Arizona Stichting Employee Fund Aon Netherlands Stichting Werknemerscertificaten HLG Netherlands Structured Compensation Ltd. United Kingdom Sumner & McMillan United Kingdom Sumner & McMillan Limited (Ireland) Ireland Superannuation Fund (CICNZ) Limited New Zealand Surety & Guarantee Consultants Limited United Kingdom Surveyors Claims Services Ltd. United Kingdom Swaziland Construction Insurance Brokers (Pty) Ltd. Swaziland Swaziland Corporate Risk Management (Pty) Ltd. Swaziland Swaziland Employee Benefit Consultants (Pty) Ltd. Swaziland Swaziland Insurance Brokers (Pty) Ltd. Swaziland Swaziland Reinsurance Brokers (Pty) Ltd. Swaziland Swett & Crawford California Swett & Crawford Ins. Agency of Massachusetts, Inc. Massachusetts Swett & Crawford of Arizona, Inc. Arizona Swett & Crawford of Connecticut, Inc. Connecticut Swett & Crawford of Hawaii, Inc. Hawaii Swett & Crawford of Pennsylvania, Inc. Pennsylvania Swett & Crawford of Texas, Inc. Texas Swett Insurance Managers of California, Inc. California Swett Insurance Managers of Idaho, Inc. Idaho Swett Insurance Managers of Maine, Inc. Maine Swett Insurance Managers of Nevada, Inc. Nevada Swett Insurance Managers of Pennsylvania, Inc. Pennsylvania Swett Insurance Managers, Inc. Colorado T M Insurance Brokers (Pty) Limited South Africa TREV Properties Corporation Delaware TTF Insurance Services Ltd. United Kingdom Tabma-Hall Insurance Services Pty. Limited Australia Tethercrest Ltd. United Kingdom Texas Star Insurance Agency Not Applicable Texecur Versicherungs Vermittlungs GmbH Germany The Alexander Consulting Group Ltd. Canada The Alexander Consulting Group Ltd. New Zealand The Alexander Consulting Group Ltd. Scotland The Credit Insurance Association France SA France The Credit Insurance Association Ltd. United Kingdom The Entertainment Coalition Not Applicable The Swett & Crawford Group, Inc. California Tholwana MIB Pty Limited South Africa Trans Caribbean Insurance Services, Inc. American Samoa Travellers Club International Ltd. United Kingdom Trent Insurance Company Ltd. Bermuda Trust Property & Casualty Insurance Company Vermont U.S. Rating Bureau, Inc. Delaware Underwriters Marine Services Limited United Kingdom Underwriters Marine Services of Texas, Inc. Texas Underwriters Marine Services, Inc. Louisiana Union Centurion, S.A.de C.V. Mexico Unison Consultants Europe E.E.I.G. Belgium Unison GEIE Belgium Unison SA Belgium Unison Technical Services Belgium United Car & Van Rental Ltd. United Kingdom United Iranian Insurance Services plc Teheran Iran Uzbeksugurta Howden Lihou Republic of Uzbekistan VECCI Insurance Services Ltd. Australia VOL Mortgage Corporation Delaware VOL Properties Corporation Delaware Valex Insurance Agency, Inc. Texas Varity Risk Management Services Ltd. United Kingdom Vassal Properties (Pty) Ltd. Botswana Verband der Jauch & Hubener Unterstutzungskassen Germany Vesselforward Ltd. United Kingdom Virginia Surety Company, Inc. Illinois WACUS Kreditversicherungsmakler GmbH Austria WACUS Magyarorszag Hitelbitzositasi Tanacsado es Kozvetito Kft. Hungary WAS Betriebsfuhrungs-GmbH Germany WAVECA CA Venezuela WMD Underwriting Agencies Ltd. United Kingdom Wackerbarth H. Limited United Kingdom Wackerbarth Hardman (Holdings) Limited United Kingdom Wackerbarth International Holdings Bv Netherlands Wexford Underwriting Managers, Inc. Delaware Whitehouse Moorman Holdings Ltd. United Kingdom Wilfredo Armstrong S.A. Argentina William Gallagher Associates of California, Inc. California William Gallagher Associates of Maryland, Inc. Maryland William Gallagher Associates of New Jersey, Inc. New Jersey Willis Corroon (PVT) Ltd. Zimbabwe Winchester Financial Services (Pty) Limited South Africa Windhock Insurance Brokers (Pty) Limited Namibia World Insurance Network Ltd. Cardiff Worldwide Insurance Network Limited United Kingdom Worldwide Integrated Services Company Texas Wyrm Systems Pty Limited South Africa XB-Lumley Insurance Brokers (Pty) Ltd. South Africa Y&D Properties Ltd. Canada ZAO Aon Insurance Brokers Russia Zimbabwe Risk Managers (Pvt) Ltd. Zimbabwe 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 10, 1998, included in the 1997 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 10, 1998, 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. We also consent to the incorporation by reference in the Registration Statements pertaining to the employer's stock option, stock award and savings plans (Form S-8 Nos. 33-27984, 33-42575 and 33-59037) and the offer to exchange Capital Securities (Form S-4 No. 333-21237) of Aon Capital A of our report dated February 10, 1998, 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, 1998 EX-27.1 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 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 3,144 3,027 2,903 2,734 0 0 0 0 0 0 0 0 806 858 814 711 15 22 24 25 12 12 12 14 5,922 5,527 5,151 5,061 1,085 1,404 1,332 1,270 61 0 0 0 549 560 570 575 18,691 17,832 17,407 17,317 943 1,083 1,080 1,081 1,870 2,015 2,017 1,980 809 834 835 841 828 695 679 558 1,401 1,272 1,147 964 50 50 50 50 0 6 6 6 171 171 171 171 2,651 2,744 2,641 2,519 18,691 17,832 17,407 17,317 1,609 1,192 793 384 494 353 233 116 6 5 2 2 3,642 2,680 1,750 852 842 634 421 205 208 159 112 54 4,159 2,921 1,907 935 542 345 167 15 203 129 63 6 299 186 104 9 0 0 0 0 0 0 0 0 0 0 0 0 299 186 85 1 1.71 1.05 0.47 (0.02) 1.68 1.03 0.46 (0.02) 535 535 535 535 814 0 0 0 (50) 0 0 0 538 0 0 0 241 0 0 0 520 0 0 0 0 0 0 0 Includes short-term borrowings and debt guarantee of ESOP. Common stock at par value; adjusted to reflect the three-for-two stock split on May 14, 1997. Does not include Company-obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust holding solely the Company's Junior Subordinated Debentures. Preferred stock at par value; Aon purchased and retired all outstanding shares in November 1997. Includes brokerage commissions and fees and other income. Aon adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" effective December 31, 1997 and announced a three-for-two stock split effective May 14, 1997. Accordingly, all prior period per share amounts have been restated. Available on an annual basis only.
EX-27.2 9 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 9-MOS 6-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 2,826 2,707 2,559 7,490 0 0 0 0 0 0 0 0 879 821 773 975 29 34 34 656 18 19 23 39 5,213 4,923 5,047 10,679 410 226 104 26 35 0 0 0 599 622 630 1,286 13,723 12,227 11,999 20,123 1,080 886 877 1,483 1,925 1,675 1,627 1,706 841 867 870 978 514 367 361 5,354 735 583 624 890 50 50 50 50 6 8 8 8 114 112 112 111 2,713 2,598 2,575 2,546 13,723 12,227 11,999 20,123 1,527 1,141 759 378 384 270 177 85 8 3 0 0 1,969 1,405 938 479 790 582 379 186 208 156 108 53 2,445 1,706 1,141 557 446 375 247 146 154 129 85 49 292 246 162 97 43 43 43 22 0 0 0 0 0 0 0 0 335 289 205 119 1.93 1.68 1.20 0.70 1.90 1.65 1.17 0.68 715 715 715 715 864 0 0 0 (36) 0 0 0 725 0 0 0 283 0 0 0 535 0 0 0 0 0 0 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. Aon adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" effective December 31, 1997 and announced a three-for-two stock split effective May 14, 1997. Accordingly, all prior period per share amounts have been restated. Includes discontinued operations. Includes liability for business sold of $173 million. Available on an annual basis only.
EX-27.3 10 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-31-1995 JAN-01-1995 DEC-31-1995 7,687 0 0 1,006 632 37 10,639 115 19 1,262 19,736 1,475 1,646 971 5,464 907 50 8 111 2,555 19,736 1,427 329 13 1,697 699 208 2,101 458 154 304 99 0 0 403 2.33 2.30 681 1,030 (14) 651 331 715 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. Aon adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" effective December 31, 1997 and announced a three-for-two stock split effective May 14, 1997. Accordingly, all prior period per share amounts have been restated. Includes discontinued operations.
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