-----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, JQb5fqmmrqQJ7tLQdk8PnJnfR3M6IVjTYbkL4/8XJ259M9Y3oA857oH673Q8Evsv DMw1Sw9lhmcJangzaYZ+zQ== 0000950131-96-002299.txt : 19960517 0000950131-96-002299.hdr.sgml : 19960517 ACCESSION NUMBER: 0000950131-96-002299 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AON CORP CENTRAL INDEX KEY: 0000315293 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 363051915 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07933 FILM NUMBER: 96566286 BUSINESS ADDRESS: STREET 1: 123 N WACKER DR CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3127013000 FORMER COMPANY: FORMER CONFORMED NAME: COMBINED INTERNATIONAL CORP DATE OF NAME CHANGE: 19870504 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission file number 1-7933 Aon Corporation --------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-3051915 -------- ------------ (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 123 N. WACKER DR., CHICAGO, ILLINOIS 60606 ------------------------------------ ----- (Address of Principal Executive Offices) (Zip Code) (312) 701-3000 -------------- (Registrant's Telephone Number) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ ____ Number of shares of common stock outstanding: No. Outstanding Class as of 3-31-96 ----- -------------- $1.00 par value Common 108,498,855 Part 1 Financial Information Aon CORPORATION Condensed Consolidated Statements of Financial Position
(millions) As of As of Assets March 31, 1996 Dec. 31, 1995 -------------- ------------- (Unaudited) Investments Fixed maturities Available for sale $ 7,489.5 $ 7,687.1 Equity securities at fair value Common stocks 286.6 300.0 Preferred stocks 688.3 706.3 Mortgage loans on real estate 656.4 632.0 Real estate (net of accumulated depreciation) 38.7 36.5 Policy loans 228.7 226.3 Other long-term investments 125.2 112.6 Short-term investments 1,165.3 938.3 --------- --------- Total investments 10,678.7 10,639.1 Cash 25.5 115.3 Receivables Insurance brokerage and consulting services 2,464.3 2,264.1 Premiums and other 702.1 580.2 Accrued investment income 153.0 152.4 --------- --------- Total receivables 3,319.4 2,996.7 Deferred Policy Acquisition Costs 1,285.7 1,261.5 Intangible Assets 1,575.4 1,597.7 Property and Equipment at Cost (net of 309.6 307.8 accumulated depreciation) Assets Held Under Special Contracts 2,391.9 2,307.2 Other Assets 536.8 510.5 --------- --------- Total Assets $20,123.0 $19,735.8 ========= ========= As of As of Liabilities and Equity March 31, 1996 Dec. 31, 1995 -------------- ------------- (Unaudited) Policy Liabilities Future policy benefits $ 1,482.8 $ 1,475.1 Policy and contract claims 977.9 970.9 Unearned and advance premiums 1,706.1 1,646.2 Other policyholder funds 5,353.5 5,464.2 --------- --------- Total policy liabilities 9,520.3 9,556.4 General Liabilities Insurance premiums payable 3,082.7 2,722.8 Commissions and general expenses 533.0 562.4 Accrued income taxes 344.1 332.6 Short-term borrowings 354.2 352.7 Notes payable 479.3 497.5 Debt guarantee of ESOP 56.8 56.8 Liabilities held under special contracts 2,391.9 2,307.2 Other liabilities 645.6 623.7 --------- --------- Total Liabilities 17,407.9 17,012.1 Commitments and Contingent Liabilities Redeemable Preferred Stock 50.0 50.0 Stockholders' Equity Preferred stock - $1 par value 7.6 8.1 Common stock - $1 par value 111.4 111.4 Paid-in additional capital 447.0 431.8 Net unrealized investment gains 87.4 123.1 Net foreign exchange gains/(losses) (5.7) 1.8 Retained earnings 2,250.4 2,212.1 Less - Treasury stock at cost (92.4) (97.3) Deferred compensation (140.6) (117.3) --------- --------- Total Stockholders' Equity 2,665.1 2,673.7 --------- --------- Total Liabilities and Equity $20,123.0 $19,735.8
========= ========= See the accompanying notes to the condensed consolidated financial statements. 2 Aon CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------- (UNAUDITED) (millions except per share data)
FIRST QUARTER ENDED ---------------------- MARCH 31, MARCH 31, 1996 1995 --------- --------- REVENUE Brokerage commissions and fees........................ $468.0 $424.6 Premiums earned....................................... 378.0 335.7 Net investment income................................. 84.7 80.9 Realized investment gains............................. - 1.1 Other income.......................................... 11.4 10.9 ------ ------ TOTAL REVENUE EARNED................................ 942.1 853.2 ------ ------ BENEFITS AND EXPENSES Commissions and general expenses...................... 529.4 473.7 Benefits to policyholders............................. 186.0 164.1 Interest expense...................................... 9.2 8.4 Amortization of deferred policy acquisition costs.................................... 53.1 49.9 Amortization of intangible assets..................... 18.8 20.4 ------ ------ TOTAL BENEFITS AND EXPENSES......................... 796.5 716.5 ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX...................................... 145.6 136.7 Provision for income tax.............................. 49.1 46.2 ------ ------ INCOME FROM CONTINUING OPERATIONS....................... 96.5 90.5 INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX......... 22.4 20.7 ------ ------ NET INCOME.............................................. $118.9 $111.2 ====== ====== NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS............ $113.8 $104.4 ====== ====== INCOME FROM CONTINUING OPERATIONS PER SHARE (2)......... $ 0.84 $ 0.77 INCOME FROM DISCONTINUED OPERATIONS PER SHARE (1)....... 0.20 0.19 ------ ------ NET INCOME PER SHARE (2)................................ $ 1.04 $ 0.96 ====== ====== CASH DIVIDENDS PAID ON COMMON STOCK..................... $ 0.34 $ 0.32 ====== ====== Average common and common equivalent shares outstanding............................................ 109.7 108.7 ------ ------
(1) In April 1996, Aon completed the sale of two of its insurance subsidiaries, Union Fidelity Life Insurance Company and The Life Insurance Company of Virginia. Their results are classified as discontinued operations. (2) Includes the effect of $5.1 million and $6.8 million of dividends incurred on the 8%, 6.25% and Series C preferred stock in first quarter ended March 31, 1996 and 1995, respectively. See the accompanying notes to the condensed consolidated financial statements. 3 Aon CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited) (millions)
First Quarter Ended ---------------------- March 31, March 31, 1996 1995 --------- -------- Cash Provided by Operating Activities................................... $ 242.7 $ 290.6 --------- -------- Cash Flows from Investing Activities: Sale (purchase) of short term investments-net.......................... (236.4) (149.7) Sale or maturity of fixed maturities Held to maturity- - Maturities..................................... - 0.7 Calls and Prepayments......................... - 47.6 Sales......................................... - 3.0 Available for sale- -Maturities..................................... 46.9 21.7 Calls and Prepayments......................... 92.4 52.7 Sales......................................... 325.2 465.6 Sale or maturity of other invesments................................... 315.9 124.8 Purchase of fixed maturities -- Available for sale..................... (305.0) (675.0) Purchase of other investments.......................................... (343.1) (135.8) Acquisition of subsidiaries............................................ (7.2) (63.0) Property and equipment and other....................................... (15.9) (24.3) --------- -------- Cash Used by Investing Activities................................ (127.2) (331.7) --------- -------- Cash Flows from Financing Activities: Treasury stock transactions - net...................................... 12.1 (2.3) Issuance of short-term borrowings - net................................ 1.5 15.3 Repayment of long-term debt............................................ (2.1) (11.7) Interest sensitive life, annuity and investment contract deposits...... 266.5 477.7 Interest sensitive life, annuity and investment contract withdrawals... (426.4) (397.9) Retirement of preferred stock.......................................... (14.1) - Cash dividends to stockholders......................................... (42.2) (41.4) --------- -------- Cash Provided (Used) by Financing Activities..................... (204.7) 39.7 --------- -------- Effect of Exchange Rate Changes on Cash................................. (0.6) 10.3 Increase (Decrease) in Cash............................................. (89.8) 8.9 Cash at Beginning of Period............................................. 115.3 508.8 --------- -------- Cash at End of Period................................................... $ 25.5 $ 517.7 ========= ========
See the accompanying notes to condensed consolidated financial statements. 4 Aon CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Statement of Accounting Principles ---------------------------------- The financial results included in this report are stated in conformity with generally accepted accounting principles and are unaudited but include all normal recurring adjustments which the Registrant ("Aon") considers necessary for a fair presentation of the results for such periods. These interim figures are not necessarily indicative of results for a full year as further discussed below. Refer to the consolidated financial statements and notes in the Annual Report to Stockholders for the year ended December 31, 1995 for additional details of Aon's financial position, as well as a description of the accounting policies which have been continued without material change. The details included in the notes have not changed except as a result of normal transactions in the interim and the events mentioned in the footnotes below. Certain prior period amounts have been reclassified to conform to the current period presentation. 2. Statements of Financial Accounting Standards (SFAS) --------------------------------------------------- As required, in first quarter 1996, Aon adopted SFAS Statement No. 121 (Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of). This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Implementation of this Statement did not have an effect on Aon's financial statements. 3. Capital Stock ------------- In first quarter 1996, Aon purchased 59,000 shares of its common stock, at a total cost of $3 million. Aon reissued 257,000 shares of common stock from treasury for employee benefit plans during the first quarter 1996. There were 2.9 million shares of common stock held in treasury at March 31, 1996. In first quarter 1996, Aon purchased and retired 0.6 million shares of its 8% Cumulative Perpetual Preferred Stock at a total cost of $14.1 million. 5 4. Subsequent Events ----------------- On April 1, 1996, Aon completed sales of Union Fidelity Life Insurance Company (UFLIC) and The Life Insurance Company of Virginia (LOV) and received sales proceeds of approximately $1.4 billion. Any gain or loss is expected to be immaterial. As of May 1, 1996, the underwriting of Aon's North American auto credit business has been assumed by Life Reassurance Corporation of America (Life Re), a subsidiary of Life Re Corporation. Additionally, Life Re and a senior management team from Aon's subsidiary, Ryan Dealer Group, have agreed in principle to buy Ryan Dealer Group, while changing its name so Aon can retain the use of the Ryan name. This company promotes the distribution of the auto credit policies and also of extended warranties throughout North America. The extended warranty products will continue to be underwritten by Aon's subsidiary, Virginia Surety Company, while certain auto dealer consulting will continue to be provided by other Aon subsidiaries. Total North American auto credit revenues included in Aon's consolidated statement of income for the quarter ended March 31, 1996 were approximately $40 million. Aon is in the process of evaluating the potential effect on the financial statements related to these transactions, including evaluation of intangible assets created when Aon acquired its auto credit business. As of April 2, 1996, an early retirement program was announced for all eligible employees of Aon's USA operating subsidiaries. In addition, programs similar in nature were introduced in parts of Europe. The costs of these programs will be determined and recognized in the second quarter of 1996. 6 Aon CORPORATION MANAGEMENT'S ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION REVENUE AND INCOME BEFORE INCOME TAX FOR FIRST QUARTER 1996 GENERAL - ------- In fourth quarter 1995, Aon and its wholly owned subsidiary Combined Insurance Company of America (CICA) reached definitive agreements to sell two of its domestic insurance subsidiaries, UFLIC and LOV. The sales of UFLIC and LOV were completed in April, 1996, and are expected to result in an immaterial gain or loss to Aon. The results of UFLIC and LOV are classified in the consolidated statements of operations as discontinued operations. For purposes of the following discussions, comparisons against prior years' results are based on continuing operations. Proceeds from the sales of LOV and UFLIC generated $1.4 billion before taxes and other costs of sale. The after-tax proceeds in excess of the carrying value of the companies sold generated a statutory gain at CICA the parent company of LOV and UFLIC. The majority of the statutory gain was dividended to Aon in April 1996 and will be temporarily used for both debt reductions and short-term investments. CICA reinvested the remaining proceeds in non-affiliated invested assets. The potential long-term uses of the dividend to Aon are the pay down of borrowings to maintain its current debt to equity ratio, the buy back of capital stock, and other general corporate purposes, including acquisitions. In the short-term, some of these uses may yield returns that are lower than could have been generated from the operations of the subsidiaries being sold. CONSOLIDATED RESULTS - -------------------- Brokerage commissions and fees increased $43.4 million or 10.2% in first quarter 1996, reflecting primarily internal growth, as well as business combination activity. Premiums earned increased $42.3 million or 12.6% in first quarter 1996, compared with the same period last year. Extended warranty premiums earned increased $41.2 million or 81.7% in the quarter reflecting a higher volume of new business in the appliance and electronic equipment line. Direct Sales earned premium grew 1.6% from first quarter 1995 of which the strongest growth was in the international segment. Net investment income of $84.7 million increased $3.8 million or 4.7% in the first quarter 1996 when compared to prior year. Investment income growth in first quarter was primarily attributed to higher levels of invested assets. Total revenue increased $88.9 million or 10.4% in the first quarter 1996. Total benefits and expenses increased 11.2% in the same period. Income before income tax increased $8.9 million or 6.5% in the first quarter, due largely to growth in the brokerage and consulting segment. 7 MAJOR LINES OF BUSINESS - ----------------------- GENERAL - ------- Beginning with the 1995 Annual Report, Aon reclassified its operating segments to reflect the focus of its continuing operations. Insurance underwriting operations were presented as one segment based on the related nature, distribution channels and markets of the continuing products. Insurance underwriting primarily includes life, accident and health insurance and extended warranty products. In this report, 1995 quarterly segments have been reclassified to conform to the 1996 presentation. INSURANCE BROKERAGE AND CONSULTING SERVICES - ------------------------------------------- Beginning with this report, Aon has combined the retail brokerage and reinsurance and wholesale subsegments of Insurance Brokerage and Consulting Services into one subsegment called "Insurance and other services". Also included in this segment is first quarter 1996 revenue of $7.4 million from financing services operations which include service fees received from the placement of insurance premiums and retail auto financing receivables to unaffiliated parties. This operation was previously in the corporate segment. All prior period data has been reclassified to conform to the 1996 presentation. Insurance and other services revenue increased $32.1 million or 8.4% for the first quarter 1996 when compared with the same period last year. Insurance and other services continued to reflect highly competitive property and casualty pricing in the domestic market and increased revenues due to both internal growth and acquisitions. "Consulting" provides a full range of employee benefits and compensation consulting, specialized employee assessment and training programs, and administrative services. This business showed revenue growth of $11 million or 18.2% for the first quarter when compared to prior year, primarily due to the expanding integrated human resources consulting practice. Overall, revenue for the insurance brokerage and consulting services segment increased $43.1 million or 9.8% in the first quarter. Limiting this revenue increase, the brokerage segment continues to be impacted by a soft property and casualty market. Income before income tax increased $8.7 million or 11.4% when compared to first quarter 1995, reflecting recent acquisitions as well as internal growth and improved expenses. Domestic/International Results - ------------------------------ First quarter domestic insurance brokerage and consulting services revenue and income before income tax represent 64% and 46%, respectively, of the total segment. International brokerage revenue of $172.6 million increased 19% for the first quarter. Partially offsetting this increase was the slow growth in benefit plan product sales in the consulting line of business. International brokerage income before income tax increased 14.4% for the quarter. In the international insurance and other services subsegment, revenues are generally highest in the first quarter of the year, while expenses are incurred on a more even basis throughout the year. 8 INSURANCE UNDERWRITING - ---------------------- The insurance underwriting line of business provides direct sales life and accident and health products, credit insurance and extended warranty products to individuals. Revenue increased 13% for the first quarter 1996 when compared to prior year primarily due to growth in the domestic extended warranty lines. In addition, traditional life business in Europe and the Pacific is continuing to run off as planned. Pretax income from insurance underwriting increased $3.3 million or 6% in first quarter 1996, compared with last year, primarily due to good cost controls in both the direct sales and extended warranty lines. Overall, benefit and expense margins in first quarter 1996 did not suggest any significant shift in operating trends. Domestic/International Results - ------------------------------ First quarter domestic insurance underwriting revenue represents 73% of the total segment. Domestic insurance underwriting income before income tax increased 9.4% when compared to its 1995 level. International insurance underwriting revenue of $117.9 million increased 10.4%, principally due to improved premiums earned in both the direct sales and extended warranty lines. International pretax income declined 3.4% primarily due to the continuing runoff of traditional life business in Europe and the Pacific. CORPORATE AND OTHER - ------------------- Revenue in this category consists primarily of investment income on capital and realized investment gains. Allocation of investment income to the insurance underwriting segment is based on the invested assets which underlie policyholder liabilities. Excess invested assets of that segment and related investment income, which do not underlie these liabilities, are reported in this segment. Expenses include interest and other financing expenses, corporate administrative costs, and goodwill amortization associated with acquisitions. Revenue decreased 17.6% for the first quarter 1996, due in part to lower levels of investment income reflecting alternative uses of corporate capital. There were no realized investment gains in first quarter 1996 and $1.1 million in 1995. Income before income tax, excluding realized investment gains, decreased $2 million or 51.3% over the same quarter last year. Expenses had minimal change in 1996 from 1995. DISCONTINUED OPERATIONS - ----------------------- Discontinued operations are composed principally of capital accumulation products and direct response products. Substantially all of the revenue and income before income tax generated from discontinued operations is domestic. These amounts have been segregated as "Income From Discontinued Operations" in the consolidated statements of operations. First quarter 1996 revenue of $292.8 million increased a modest 2.3% when compared to prior year. Income before income tax, excluding realized investment losses, improved 6.8% when compared to prior year. Improved 1996 results were in part due to favorable claims experience at LOV and improved interest rate spreads. At UFLIC, strong growth in third party business was offset by the continued runoff of the medicare supplement line. The effective operating income tax rate on discontinued operations was 35% in 1996 and 1995, respectively. With the completion of the sales of LOV and UFLIC on April 1, 1996, there will be no operating results from these discontinued operations going forward. 9 Aon CORPORATION MAJOR LINES OF BUSINESS ----------------------- (millions) First Quarter Ended --------------------- March 31, Percent 1996 Change (1) --------- ---------- Revenue Insurance brokerage and consulting services..... $485.0 9.8% Insurance underwriting.......................... 436.1 13.0 Corporate and other............................. 21.0 (17.6) ------ ----- Total revenue................................ $942.1 10.4% ====== ===== Income Before Income Tax Insurance brokerage and consulting services..... $ 85.2 11.4% Insurance underwriting.......................... 58.5 6.0 Corporate and other............................. 1.9 (62.0) ------ ----- Total income before income tax............... $145.6 6.5% ====== ===== (1) Prior period amounts have been reclassified to conform to the 1996 presentation. 10 Aon CORPORATION REVENUE BY MAJOR PRODUCT LINE ----------------------------- (MILLIONS) FIRST QUARTER ENDED ------------------- MARCH 31, PERCENT 1996 CHANGE(1) --------- --------- INSURANCE BROKERAGE AND CONSULTING SERVICES Insurance and other services................. $413.7 8.4% Consulting................................... 71.3 18.2 --------- --------- TOTAL REVENUE........................ $485.0 9.8% ========= ========= INSURANCE UNDERWRITING Direct sales - life, accident and health..... $253.6 2.1% Warranty and other........................... 182.5 32.9 --------- --------- TOTAL REVENUE........................ $436.1 13.0% ========= ========= CORPORATE AND OTHER Investment income on capital and other....... $ 21.0 (13.9)% Realized investment gains.................... - N/A --------- --------- TOTAL REVENUE........................ $ 21.0 (17.6)% ========= ========= (1) Prior period amounts have been reclassified to conform to the 1996 presentation. 11 NET INCOME FOR FIRST QUARTER 1996 First quarter net income was $118.9 million ($1.04 per share) compared to $111.2 million ($0.96 per share) in 1995. Included in net income is operating income from continuing operations of $96.5 million ($0.84 per share) in 1996 compared to $89.8 million ($0.76 per share) in 1995. The effective tax rate on continuing operations operating income, which excludes after-tax realized investment gains was 33.7%, for first quarter 1996 and for the full year 1995. Realized gains were taxed at 36%. Average shares outstanding for first quarter increased 0.9% primarily due to the reissuance of common shares from treasury for employee benefits plans. CASH FLOW AND FINANCIAL POSITION AT THE END OF FIRST QUARTER 1996 Cash flows from operating activities (including discontinued operations) in first quarter 1996 were $242.7 million, a decrease of $47.9 million from first quarter 1995. This decrease primarily reflects the timing of settlement of insurance segment receivables and payables. Investing activities used cash of $127.2 million which was made available primarily from operations. Cash used for acquisition activity during the first quarter 1996 was $7.2 million. Cash totaling $204.7 million was used during first quarter 1996 for financing activities. Net cash used from capital accumulation product deposits and withdrawals was $159.9 million in first quarter 1996. Cash was used to pay dividends of $36.8 million on common stock, $3 million on 8% cumulative perpetual preferred stock, $1.7 million on 6.25% cumulative convertible exchangeable preferred stock and $0.7 million on Series C preferred stock. Included in notes payable at March 31, 1996 is approximately $5 million which represents the principal amount of notes due within one year. Aon's operating subsidiaries anticipate that there will be adequate liquidity to meet their needs in the foreseeable future. After the sales of UFLIC and LOV, Aon anticipates continuation of the company's positive cash flow, the ability of the parent company to access adequate short-term lines of credit, and sufficient cash flow in the long-term. The businesses of Aon's operating subsidiaries continue to provide substantial positive cash flow. Brokerage cash flow has been used primarily for servicing acquisition-related debt. Due to the contractual nature of its insurance policyholder liabilities which are intermediate to long-term in nature, Aon has invested primarily in fixed maturities. With a carrying value of $7.5 billion, Aon's total fixed maturity portfolio both for continuing and discontinued operations is invested primarily in investment grade holdings (96%) and has a market value which is 101.1% of amortized cost. Mortgage-backed securities, primarily collateralized mortgage obligations (CMO's), included in the fixed maturities portfolio, totaled $2 billion. Substantially all of the mortgaged-backed securities included in Aon's fixed maturity portfolio at March 31, 1996 relate to discontinued operations. Since the finalization of the sales, Aon's interest in and exposure to certain market risks associated with mortgaged-backed securities is minimal. 12 The assets and liabilities, after reinvestment of net sales proceeds of discontinued operations, included in the consolidated statement of financial position at March 31, 1996 are as follows:
(millions) - ------------------------------------------------------------------------------- Investments $5,400 Deferred policy acquisition costs 650 Intangible assets 150 Assets held under special contracts 2,100 Receivables and other assets 200 - ------------------------------------------------------------------------------- Total Assets $8,500 =============================================================================== Policy liabilities $6,050 Liabilities held under special contracts 2,100 General and other liabilities 350 - ------------------------------------------------------------------------------- Total liabilities $8,500 ===============================================================================
The investment portfolio of the continuing operations is of the same quality as the overall portfolio at March 31, 1996. However, mortgage-backed securities and mortgage loans represent approximately $100 million in value of the continuing portfolio. Total assets increased $387.2 million to $20.1 billion since year-end 1995, primarily due to growth in the assets of the continuing operations. Invested assets at March 31, 1996 increased $39.6 million from year-end levels, primarily due to growth in short-term investments relating to insurance brokerage business. The amortized cost and fair value of less than investment grade fixed maturity investments, at March 31, 1996, were $289.7 million and $300.1 million, respectively. The carrying value of non-income producing investments in Aon's portfolio at March 31, 1996 was $10.7 million, or 0.5% of total invested assets. Mortgage loans held totaled $656.4 million or 6.1% of total invested assets. Aon maintained separate investment reserves related to mortgage loan losses on real estate holdings, which include real estate ventures and limited partnerships, totaling $30.1 million at the end of first quarter 1996, down $0.7 million from the year end 1995 level of $30.8 million. These reserves are a product of Aon's continuing review of the characteristics and risks of its investment portfolio and current environmental and economic conditions. Aon measures capital accumulation product asset and liability durations to determine its net exposure to changes in interest rates. Aon's exposure to interest-sensitive products has been substantially diminished following the sale of LOV because LOV's products are principally interest-sensitive and investment- type. Non-interest-sensitive products do not require as close monitoring of duration matching. Aon adjusts its duration mismatch subject to market conditions and its outlook on interest rate trends. As of March 31, 1996, assets and interest-sensitive liabilities were closely matched with the aggregate estimated duration variance of less than one year. Aon uses derivative financial instruments (primarily financial futures, swaps and options) to: (a) manage its overall asset/liability duration match; (b) hedge asset price risk associated with financial instruments whose change in value is reported under SFAS 115; and (c) hedge other business risks. As of March 31, 1996, Aon had open contracts which had unrealized gains of approximately $1.4 million. 13 Stockholders' equity decreased $8.6 million in first quarter 1996 to $22.76 per share, a decrease of $0.01 per share since year-end 1995. The principal factors influencing this decrease were the adverse change in net unrealized investment gains of $35.7 million and dividends to stockholders of $81.1 million. Included in dividends is an accrual for the common stock dividend that will be paid in the second quarter 1996. Review by Independent Auditors - ------------------------------ The condensed consolidated financial statements at March 31, 1996, and for the first quarter then ended have been reviewed, prior to filing, by Ernst & Young LLP, Aon's independent auditors, and their report is included herein. 14 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Stockholders Aon Corporation We have reviewed the accompanying condensed consolidated statement of financial position of Aon Corporation as of March 31, 1996, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated statement of financial position of Aon Corporation as of December 31, 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended, not presented herein, and in our report dated February 8, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 1995, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived. /s/ Ernst & Young LLP ERNST & YOUNG LLP Chicago, Illinois May 2, 1996 15 PART II ------- OTHER INFORMATION ----------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- (a) The Annual Meeting of Stockholders of the Registrant was held on April 19, 1996. (b) Not applicable. (c) Set forth below is the tabulation of the votes on each nominee for election as a director: Withhold Name For Authority ---- --- --------- Daniel T. Carroll 93,358,273 274,129 Franklin A. Cole 93,381,659 250,743 Edgar D. Jannotta 93,372,094 260,308 Perry J. Lewis 93,387,238 245,164 Joan D. Manley 93,393,299 239,103 Andrew J. McKenna 93,387,399 245,003 Newton N. Minow 92,371,191 1,261,211 Peer Pedersen 92,351,947 1,280,455 Donald S. Perkins 93,381,379 251,023 John W. Rogers, Jr. 93,376,951 255,451 Patrick G. Ryan 93,378,391 254,011 George A. Schaefer 93,393,352 239,050 Raymond I. Skilling 93,387,896 244,506 Fred L. Turner 93,401,028 231,374 Arnold R. Weber 93,385,598 246,804 16 Set forth below is the tabulation of the vote on the selection of Ernst & Young LLP as auditors for the Registrant for the 1996 fiscal year. For Against Abstain --- ------- ------- 93,307,316 119,744 205,342 (d) Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The exhibits filed with this report are listed on the attached Exhibit Index. (b) Reports on Form 8-K - No Current Reports on Form 8-K were filed for the quarter ended March 31, 1996. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Aon Corporation --------------- (Registrant) May 15, 1996 /s/ Harvey N. Medvin ----------------------------------------- HARVEY N. MEDVIN EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER (Principal Financial and Accounting Officer) 17 Aon CORPORATION --------------- EXHIBIT INDEX -------------
Exhibit Number In Regulation S-K, Page Item 601 Exhibit Table No. - ---------------------- ---- (11) Statement regarding Computation of Per Share Earnings. 19 (12) Statements regarding Computation of Ratios. (a) Statement regarding Computation of Ratio of Earnings to Fixed Charges. 20 (b) Statement regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. 21 (15) Letter re: Unaudited Interim Financial Information. 22 (27) Financial Data Schedule
18 EX-11 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 Aon Corporation and Subsidiaries CONSOLIDATED NET INCOME PER SHARE COMPUTATION (millions except per share data)
First Quarter Ended ---------------------- March 31, March 31, 1996 1995 --------- --------- EARNINGS PER SHARE Net income............................................. $118.9 $111.2 Preferred stock dividends.............................. 5.1 6.8 ------ ------ Net income less preferred stock dividends............ $113.8 $104.4 ====== ====== Average common shares issued........................... 111.4 110.6 Net effect of treasury stock activity.................. (3.1) (2.4) Net effect of dilutive stock compensation plans based on the treasury stock method........................ 1.4 0.5 ------ ------ Average common and common equivalent shares outstanding...................................... 109.7 108.7 ====== ====== Net income per share ....................................... $ 1.04 $ 0.96 ====== ======
19 EX-12.(A) 3 RATIO OF EARNING TO FIXED CHARGES Exhibit 12(a) Aon Corporation and Consolidated Subsidiaries Combined With Unconsolidated Subsidiaries Computation of Ratio of Earnings to Fixed Charges
First Quarter Ended March 31, Years Ended December 31, ---------------- ------------------------------------------- (millions except ratios) 1996 1995 1995 1994 1993 1992 (1) 1991 ------- ------- ------- ------- ------- ------- ------- Income from continuing operations before provision for income taxes $145.6 $136.7 $458.0 $397.0 $331.6 $179.1 $242.4 Add back fixed charges: Interest on indebtedness 13.8 13.0 55.5 46.4 42.3 41.9 40.7 Interest on ESOP 1.2 1.4 5.3 5.9 6.5 6.9 7.2 Portion of rents representative of interest factor 6.7 7.2 21.4 28.7 26.1 19.2 15.4 ------ ------ ------ ------ ------ ------ ------ Income as adjusted $167.3 $158.3 $540.2 $478.0 $406.5 $247.1 $305.7 ====== ====== ====== ====== ====== ====== ====== Fixed charges: Interest on indebtedness: $ 13.8 $ 13.0 $ 55.5 $ 46.4 $ 42.3 $ 41.9 $ 40.7 Interest on ESOP 1.2 1.4 5.3 5.9 6.5 6.9 7.2 Portion of rents representative of interest factor 6.7 7.2 21.4 28.7 26.1 19.2 15.4 ------ ------ ------ ------ ------ ------ ------ Total fixed charges $ 21.7 $ 21.6 $ 82.2 $ 81.0 $ 74.9 $ 68.0 $ 63.3 ====== ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 7.7 7.3 6.6 5.9 5.4 3.6 4.8 ====== ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges (2) 9.3 8.8 8.4 7.6 7.4 5.3 6.2 ====== ====== ====== ====== ====== ====== ====== (1) Income from continuing operations before provision for income taxes excludes the cumulative effect of changes in accounting principles. (2) The calculation of this ratio of earnings to fixed charges reflects the addition of the income from discounted operations before the provision for income tax component for each period presented.
20 EX-12.(B) 4 RATIO OF EARNINGS TO COMBINED FIXED CHARGES 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
First Quarter Ended March 31, Years Ended December 31, ----------------- ----------------------------------------------- (millions except ratios) 1996 1995 1995 1994 1993 1992 (1) 1991 ------ ------ ------ ------ ------ ------- ------ Income from continuing operations before provision for income taxes $145.6 $136.7 $458.0 $397.0 $331.6 $179.1 $242.4 Add back fixed charges: Interest on indebtedness 13.8 13.0 55.5 46.4 42.3 41.9 40.7 Interest on ESOP 1.2 1.4 5.3 5.9 6.5 6.9 7.2 Portion of rents representative of interest factor 6.7 7.2 21.4 28.7 26.1 19.2 15.4 ------ ------ ------ ------ ------ ------ ------ Income as adjusted $167.3 $158.3 $540.2 $478.0 $406.5 $247.1 $305.7 ====== ====== ====== ====== ====== ====== ====== Fixed charges and preferred stock dividends: Interest on indebtedness: $ 13.8 $ 13.0 $ 55.5 $ 46.4 $ 42.3 $ 41.9 $ 40.7 Preferred stock dividends 7.8 10.3 37.5 48.4 47.5 20.3 3.5 ------ ------ ------ ------ ------ ------ ------ Interest and dividends 21.6 23.3 93.0 94.8 89.8 62.2 44.2 Interest on ESOP 1.2 1.4 5.3 5.9 6.5 6.9 7.2 Portion of rents representative of interest factor 6.7 7.2 21.4 28.7 26.1 19.2 15.4 ------ ------ ------ ------ ------ ------- ------ Total fixed charges and preferred stock dividends $ 29.5 $ 31.9 $119.7 $129.4 $122.4 $ 88.3 $ 66.8 ====== ====== ====== ====== ====== ====== ====== Ratio of earnings to combined fixed charges and preferred stock dividends 5.7 5.0 4.5 3.7 3.3 2.8 4.6 ====== ====== ====== ====== ====== ====== ====== Ratio of earnings to combined fixed charges and preferred stock dividends (2) 6.8 6.0 5.8 4.8 4.5 4.1 5.9 ====== ====== ====== ====== ====== ====== ====== (1) Income from continuing operations before provision for income taxes excludes the cumulative effect of changes in accounting principles. (2) The calculation of this ratio of earnings to fixed charges reflects the addition of the income from discontinued operations before the provision for income tax component for each period presented.
21 EX-15 5 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION Exhibit 15 Board of Directors and Stockholders Aon Corporation We are aware of the incorporation by reference in the Registration Statements of Aon Corporation ("Aon") described in the following table of our report dated May 2, 1996 relating to the unaudited condensed consolidated interim financial statements of Aon Corporation that are included in its Form 10-Q for the quarter ended March 31, 1996:
Registration Statement ---------------------- Form Number Purpose ---- ------ ------- S-8 2-79114 Pertaining to Aon's stock option plan S-8 2-82791 Pertaining to Aon's stock option plan S-8 33-27984 Pertaining to Aon's savings plan S-8 33-42575 Pertaining to Aon's stock award plan and stock option plan S-8 33-59037 Pertaining to Aon's stock award plan and stock option plan S-3 33-57562 Registration of Aon's 8% cumulative perpetual preferred stock and 6 1/4% cumulative convertible exchangeable preferred stock
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statements prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. /s/ Ernst & Young LLP ERNST & YOUNG LLP Chicago, Illinois May 2, 1996 22 EX-27 6 FINANCIAL DATA SCHEDULE WORKSHEET
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 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 7,490 0 0 975 656 39 10,679 26 0 1,286 20,123 1,483 1,706 978 5,354 890 111 50 8 2,546 20,123 378 85 0 479 186 53 557 146 49 97 22 0 0 119 1.04 1.04 715 0 0 0 0 0 0 Available on an annual basis only. Includes short-term borrowings and debt guarantee of ESOP. Common stock at par value. Preferred stock at par value. Includes brokerage commissions and fees and other income.
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