•rising levels of actual costs that are not known by companies at the time they price their products;•volatile and unpredictable developments, including weather-related and other natural and man-made catastrophes, including acts of terrorism;•changes in levels of capacity and demand, including reinsurance capacity; and•changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers' liabilities develop.46A further declineWe have provided additional details about these obligations in our notes to the financial statements as noted below.Payments due by period (millions) Less than
1 year1-3
years4-5
yearsMore than
5 yearsTotal Notes payable and short-term borrowings (Note 8) $ 593 $ 257 $ 2 $ 1,264 $ 2,116 Interest expense on notes payable 107 174 173 1,008 1,462 Operating leases (Note 8) 325 556 356 742 1,979 Purchase obligations (1) (2) 216 295 194 40 745 Insurance premiums payable 9,415 12 — — 9,427 Future policy benefits 50 123 153 1,345 1,671 Policy and contract claims 833 351 107 536 1,827 NYAG and other regulatory authorities settlement (3) 76 38 — — 114 Other long-term liabilities reflected on the consolidated balance sheet under GAAP 2 3 2 4 11 Total $ 11,617 $ 1,809 $ 987 $ 4,939 $ 19,352 - (1)
- Included in purchase obligations is a $380 million contract for information technology outsourcing with Computer Sciences Corporation. We are free to terminate this contract at any time for an amount calculated per the contract. However, given the nature of the contract, we have included it in our contractual obligations table.
- (2)
- Also included in purchase obligations is a $226 million contract for information technology services in the
credit ratingsU.K. As ofour senior debt and commercial paper may adversely affect our borrowing costs and financial flexibility.On several occasions in recent months,December 31, 2005, we can exit this obligation for approximately $35 million. However, given thecredit rating agencies have lowered the credit ratings of our senior debt and commercial paper. Most recently, on October 31, 2002, Moody's Investors Service lowered its rating of our senior debt to the current rating of "Baa2" from "Baa1." Moody's also placed the rating of our senior debt and the "P-2" rating of our commercial paper under review for possible future downgrade, which it subsequently removed without change. On October 31, 2002, Standard & Poor's Ratings Services placed its "A-" rating of our senior debt on CreditWatch with negative implications, which it subsequently removed without change. As a resultnature of theactions taken by the rating agencies on October 31, 2002,contract, we have included it in our contractual obligations table. - (3)
- The $109 million net present value of this liability has been
required,reflected on the December 31, 2005 balance sheet inlieu of our existing guarantees, to fund an aggregate of approximately $43 millionother liabilities.
We also have obligations with respect to our
automobile finance securitizations. A further downgrade in the credit ratings of our senior debtpension andcommercial paper will increase our borrowing costs and reduce our financial flexibility.Any such further downgrade may trigger a further obligation of our company to fund an aggregate of up to $220 million with respectother benefit plans (see Note 12 to ourpremium finance and automobile finance securitizations. We no longer securitize automobile finance amounts, and, as a result, we expect this amount will decline over time as the outstanding automobile finance securitizations run down. Moreover, some of our debt instruments, such as our 6.20% notes due January 2007 ($250 million of which are outstanding), expressly provide for interest rate increases in the case of certain ratings downgrades. Similarly, any such downgrade would increase our commercial paper interest rates or may result in our inability to access the commercial paper market altogether. If we cannot access the commercial paper market, although we have committed backup lines in excess of our currently outstanding commercial paper borrowings, we cannot assure you that it would not adversely affect ourconsolidated financialposition. A downgrade in the credit ratings of our senior debt may also adversely affect the claims-paying ability or financial strength ratings of our insurance company subsidiaries. See "A decline in the financial strength or claims-paying ability ratings of our insurance underwriting subsidiaries may increase policy cancellations and negatively impact new sales of insurance products" below.We face significant competitive pressures in each of our businesses.We believe that competition in our lines of business is based on service, product features, price, commission structure, financial strength, claims paying ability ratings and name recognition. In particular, we compete with a large number of national, regional and local insurance companies and other financial services providers, brokers and, with respect to our extended warranty business, third-party administrators, manufacturers and distributors.Some of our underwriting competitors have penetrated more markets and offer a more extensive portfolio of products and services and have more competitive pricing than we do, which can adversely affect our ability to compete for business. Some underwriters also have higher claims paying ability ratings and greater financial resources with which to compete and are subject to less government regulation than our underwriting operations.We encounter strong competition for both business and professional talent in our insurance brokerage and risk management services operations from other insurance brokerage firms which also operate on a nationwide or worldwide basis, from a large number of regional and local firms in the United States, the European Union and in other countries and regions, from insurance and reinsurance companies that market and service their insurance products without the assistance of brokers or agents and from other businesses, including commercial and investment banks, accounting firms and consultants that provide risk-related services and products. Our consulting operations compete with independent consulting firms and consulting organizations affiliated with accounting, information systems, technology and financial services firms around the world.47In addition, the increase in competition due to new legislative or industry developments could adversely affect us. These developments include:•an increase in capital-raising by insurance underwriting companies, which could result in new entrants to our markets and an influx of capital into the industry;•the selling of insurance by insurance companies directly to insureds;•the enactment of the Gramm-Leach-Bliley Act of 1999, which, among other things, permits financial institutions, such as banks and savings and loans, to sell insurance products, and also could result in new entrants to our markets;•the establishment of programs in which state-sponsored entities provide property insurance in catastrophe prone areas or other alternative markets types of coverage; and•changes in consumer buying practices caused by the Internet.
New competition as a result of these developments could cause the supply of and demand for our products and services to change, which could adversely affect our results of operations and financial condition.A decline in the financial strength or claims-paying ability ratings of our insurance underwriting subsidiaries may increase policy cancellations and negatively impact new sales of insurance products.Financial strength and claims-paying ability ratings have become increasingly important factors in establishing the competitive position of insurance companies. These ratings are based upon criteria established by the rating agencies for the purpose of rendering an opinion as to an insurance company's financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. They are not evaluations directed toward the protection of investors, nor are they recommendations to buy, sell or hold specific securities. Periodically, the rating agencies evaluate our insurance underwriting subsidiaries to confirm that they continue to meet the criteria of the ratings previously assigned to them. A downgrade, or the potential for a downgrade, of these ratings could, among other things, increase the number of policy cancellations, adversely affect relationships with brokers, retailers and other distributors of their products and services, negatively impact new sales and adversely affect their ability to compete.Combined Specialty Insurance Company (formerly Virginia Surety Company, Inc.), our principal property and casualty insurance company subsidiary, is currently rated "A" (excellent; third highest of 16 rating levels) by A.M. Best Company. Combined Insurance Company of America, the principal insurance subsidiary that underwrites our specialty accident and health insurance business, is currently rated "A" (excellent; third highest of 16 rating levels) by A.M. Best Company, "BBB+" (good; fourth highest of nine rating levels and highest ranking within the level) for financial strength by Standard and Poor's Ratings Services and "Baa1" (adequate; fourth highest of nine rating levels and highest ranking within the level) for financial strength by Moody's Investors Service. We cannot assure you that one or more of the rating agencies will not downgrade or withdraw their financial strength or claims-paying ability ratings in the future.Changes in interest rates and investment prices could reduce the value of our investment portfolio and adversely affect our financial condition or results.Our insurance underwriting subsidiaries carry a substantial investment portfolio of fixed-maturity and equity and other long-term investments. As of December 31, 2002, our fixed-maturity investments (94% of which were investment grade) had a carrying value of $2.1 billion, our equity investments had a carrying value of $62 millionstatements and ourother long-term investments and limited partnerships had a48carrying value of $600 million. Accordingly, changes in interest rates and investment prices could reduce the value of our investment portfolio and adversely affect our financial condition or results.For example, changes in domestic and international interest rates directly affect our income from, and the market value of, fixed-maturity investments. Similarly, general economic conditions, stock market conditions and other factors beyond our control affect the value of our equity investments. We monitor our portfolio for "other than temporary impairments" in carrying value. For securities judged to have an "other than temporary impairment," we recognize a realized loss through the statement of income to write down the value of those securities.For 2002, we recognized impairment losses of $130 million, which includes $51 million to reflect other than temporary impairments existing with respect to prior years. We cannot assure you that we will not have to recognize additional impairment losses in the future, which would negatively affect our financial results.On December 31, 2001, our two major insurance companies sold the vast majority of their limited partnership portfolio, valued at $450 million, to Private Equity Partnership Structures I, LLC, a qualifying special purpose entity. We utilized this qualifying special purpose entity following the guidance contained in Financial Accounting Standards Board Statement No. 140 (Statement No. 140) and other relevant accounting guidance. The common stock interest in Private Equity Partnership Structures I is held by a limited liability company which is owned by one of our subsidiaries (49%) and by a charitable trust, which is not controlled by us, established for victims of the September 11 attacks (51%). Approximately $171 million of investment grade fixed-maturity securities were sold by Private Equity Partnership Structures I to unaffiliated third parties. Private Equity Partnership Structures I then paid our insurance underwriting companies the $171 million in cash and issued to them an additional $279 million in fixed-maturity and preferred stock securities. The fixed-maturity securities our insurance underwriting companies received from Private Equity Partnership Structures I are rated as investment grade by Standard & Poor's Ratings Services. As part of this transaction, our insurance underwriting companies are required to purchase from Private Equity Partnership Structures I additional fixed-maturity securities in an amount equal to the unfunded limited partnership commitments, as they are requested. As of December 31, 2002, these unfunded commitments amount to $100 million. Baseddiscussion onthe actions taken by the ratings agencies on October 31, 2002, credit support arrangements were purchased on January 27, 2003. If our insurance underwriting companies fail to purchase additional fixed-maturity securities as commitments are drawn down, we have guaranteed their purchase.Although the Private Equity Partnership Structures I transaction is expected to reduce the reported earnings volatility historically associated with directly owning limited partnership investments, it will not eliminate our risk of future losses. For instance, we must analyze our preferred stock and fixed-maturity interests in Private Equity Partnership Structures I for other than temporary impairment, based on the valuation of the limited partnership interests held by Private Equity Partnership Structures I and recognize an impairment loss if necessary. We cannot assure you that we will not have to recognize impairment losses with respect to our Private Equity Partnership Structures I interests in the future.Our pension liabilities may continue to grow, which could adversely affect our stockholders' equity or require us to make additional cash contributions to the pension plans.To the extent that the present value of the benefits incurred to date for pension obligations in the major countries in which we operate continue to exceed the market value of the assets supporting these obligations, our financial position and results of operations may be adversely affected. Primarily as a result of the decline in the equity markets, some of our defined benefit pension plans, particularly in the United Kingdom, have suffered significant valuation losses in the assets backing the related pension obligation. On February 12, 2003, we announced that we incurred an after-tax increase to the minimum pension liability and a commensurate reduction in 2002 year-end stockholders' equity of $552 million.49Current projections indicate that our 2003 pension expense would increase by approximately $130 million compared with 2002 and incremental cash contributions of approximately $40 million would be required in 2003. These estimates are based on certain assumptions, including discount rates, interest rates, fair value of assets for some of our plans and expected return on plan assets. Changes in our pension benefit obligations and the related net periodic costs or credits may occur in the future due to any variance of actual results from our assumptions and changes in the number of participating employees. As a result, there can be no assurance that we will not experience future decreases in stockholders' equity or that we will not be required to make additional cash contributions in the future beyond those which have been announced.We are subject to a number of contingencies and legal proceedings which, if determined adversely to us, would adversely affect our financial results.We are subject to numerous claims, tax assessments and lawsuits that arise in the ordinary course of business. The damages that may be claimed are substantial, including in many instances claims for punitive or extraordinary damages. The litigation naming us as a defendant ordinarily involves our activities as a broker or provider of insurance products or as an employer. It is possible that, if the outcomes of these contingencies and legal proceedings were not favorable to us, it could materially adversely affect our future financial results. In addition, our results of operations, financial condition orliquiditymay be adversely affected if in the future our insurance coverage proves to be inadequate or unavailable or there is an increase in liabilities for which we self-insure.above).Our success depends, in part, on the efforts of our senior management and our ability to attract and retain experienced and qualified personnel.We believe that our continued success depends, in part, on the efforts of our senior management. The loss of the services of any of our executive officers for any reason could have a material adverse effect on our business, operating results and financial condition. In addition, our future success depends on our ability to attract and retain experienced underwriters, brokers and other professional personnel. Competition for such experienced professional personnel is intense. If we cannot hire and retain talented personnel, our business, operating results and financial condition could be adversely affected.We are subject to increasing costs arising from errors and omissions claims against us.We have experienced an increase in the frequency and severity of errors and omissions claims against us, which has and will continue to substantially increase our risk management expenses. In our insurance brokerage business, we often assist our clients with matters which include the placement of insurance coverage and the handling of related claims. Errors and omissions claims against us may allege our potential liability for all or part of the amounts in question. Errors and omissions claims could include, for example, the failure of our employees or sub-agents, whether negligently or intentionally, to place coverage correctly or notify claims on behalf of clients or to provide insurance carriers with complete and accurate information relating to the risks being insured. It is not always possible to prevent and detect errors and omissions, and the precautions we take may not be effective in all cases. In addition, errors and omissions claims may harm our reputation or divert management resources away from operating our business.Our businesses are subject to extensive governmental regulation which could reduce our profitability or limit our growth.Our businesses are subject to extensive federal, state and foreign governmental regulation and supervision, which could reduce our profitability or limit our growth by increasing the costs of regulatory compliance, limiting or restricting the products or services we sell or the methods by which we sell our products and services or subjecting our businesses to the possibility of regulatory actions or50proceedings. With respect to our insurance brokerage businesses, this supervision generally includes the licensing of insurance brokers and agents and third-party administrators and the regulation of the handling and investment of client funds held in a fiduciary capacity. Our continuing ability to provide insurance brokering and third-party administration in the jurisdictions in which we currently operate depends on our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in each of these jurisdictions. Also, we can be affected indirectly by the governmental regulation and supervision of other insurance companies. For instance, if we are providing managing general underwriting services for an insurer we may have to contend with regulations affecting our client. Further, regulation affecting the insurance companies with whom our brokers place business can affect how we conduct those operations.Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors. In the United States, this system of regulation, generally administered by a department of insurance in each state in which we do business, affects the way we can conduct our insurance underwriting business. Furthermore, state insurance departments conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters.Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies in several areas, including employee benefit plan regulation, age, race, disability and sex discrimination, investment company regulation, financial services regulation, securities laws and federal taxation, do affect the insurance industry generally and our insurance underwriting subsidiaries in particular. For example, recently adopted federal financial services modernization legislation and privacy laws, such as the Health Insurance Portability and Accountability Act of 1996 and the Gramm-Leach-Bliley Act (as it relates to the use of medical and financial information by insurers), may result in additional regulatory compliance costs, limit the ability of our insurance underwriting subsidiaries to market their products or otherwise constrain the nature and scope of our operations. With respect to our international operations, we are subject to various regulations relating to, among other things, licensing, currency, policy language and terms, reserves and the amount of local investment. These various regulations also add to our cost of doing business through increased compliance expenses, the financial impact of use of capital restrictions and increased training and employee expenses. Furthermore, the loss of a license in a particular jurisdiction could restrict or eliminate our ability to conduct business in that jurisdiction.In all jurisdictions the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities. Generally, such authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals, and to implement regulations. Accordingly, we may be precluded or temporarily suspended from carrying on some or all of our activities or otherwise fined or penalized in a given jurisdiction. No assurances can be given that our businesses can continue to be conducted in any given jurisdiction as they have been in the past.Our significant global operations expose us to various international risks that could adversely affect our business.A significant portion of our operations is conducted outside the United States. Accordingly, we are subject to legal, economic and market risks associated with operating in foreign countries, including:•the general economic and political conditions existing in those countries;•imposition of limitations on conversion of foreign currencies or remittance of dividends and other payments by foreign subsidiaries;•imposition or increase of withholding and other taxes on remittances and other payments by subsidiaries;
51•hyperinflation in certain foreign countries;•imposition or increase of investment and other restrictions by foreign governments;•longer payment cycles;•greater difficulties in accounts receivables collection; and•the requirement of complying with a wide variety of foreign laws.
Some of our foreign brokerage subsidiaries receive revenues in currencies that differ from their functional currencies. We must also translate the financial results of our foreign subsidiaries into United States dollars. Although we use various derivative financial instruments to help protect against adverse transaction and translation effects due to exchange rate fluctuations, we cannot eliminate such risks, and significant changes in exchange rates may adversely affect our results.Our financial results could be adversely affected if our underwriting reserves differ from actual experience.We maintain reserves as an estimate of our liability under insurance policies issued by our insurance underwriting subsidiaries. The reserves that we maintain that could cause variability in our financial results consist of (1) unearned premium reserves, (2) policy and contract claim reserves and (3) future policy benefit reserves. Unearned premium reserves generally reflect our liability to return premiums we have collected under policies in the event of the lapse or cancellation of those policies. Under accounting principles generally accepted in the United States, premiums we have collected generally become "earned" over the life of a policy by means of a reduction in the amount of the unearned premium reserve associated with the policy. Unearned premium reserves are particularly significant with respect to our warranty business, given that the premiums we receive for warranty products generally cover an extended period of time. If there are significant lapses or cancellations of these types of policies, or expected losses for existing policies develop adversely and therefore premiums are not earned as expected, it may be necessary to accelerate the amortization of deferred acquisition expenses associated with the policies because these deferred expenses are amortized over the projected life of the policies or establish additional reserves to cover premium deficiencies.Policy and contract claim reserves reflect our estimated liability for unpaid claims and claims adjustment expenses, including legal and other fees and general expenses for administering the claims adjustment process, and for reported and unreported losses incurred as of the end of each accounting period. If the reserves originally established for future claims prove inadequate, we would be required to increase our liabilities, which could have an adverse effect on our business, results of operations and financial condition.The obligation for policy and contract claims does not represent an exact calculation of liability. Rather, reserves represent our best estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates represent informed judgments based on our assessment of currently available data, as well as estimates of future trends in claims severity, frequency, judicial theories of liability and other factors. Many of these factors are not quantifiable in advance and both internal and external events, such as changes in claims handling procedures, inflation, judicial and legal developments and legislative changes, can cause our estimates to vary. The inherent uncertainty of estimating reserves is greater for certain types of liabilities, where the variables affecting these types of claims are subject to change and long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are periodically refined as experience develops and further losses are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. Because setting the level of reserves for policy and contract claims is inherently uncertain, we cannot assure you that our current reserves will prove adequate in light of subsequent events.52Future policy benefit reserves generally reflect our liability to provide future life insurance benefits and future accident and health insurance benefits on guaranteed renewable and non-cancelable policies. Future policy benefit reserves on accident and health and life products have been provided on the net level premium method. These reserves 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.We may not realize all of the expected benefits from our business transformation plan.In the fourth quarter of 2000, we began a comprehensive business transformation plan designed to enhance client service, improve productivity through process redesign and accelerate revenue growth. Outside of U.S. retail brokerage, the plan has been substantially implemented and has delivered the expected benefits, including improved revenue growth and enhanced productivity. Within U.S. retail brokerage, however, we experienced unexpected delays in implementing components of the plan, as well as higher than expected costs. As a result, we cannot assure you that we will realize all of the expected benefits associated with our business transformation plan. In addition, regardless of whether we are able to realize any of the benefits of the business transformation plan, we have incurred significant costs, which have been greater than those planned.The perceived conflicts associated with our insurance brokerage and underwriting businesses could limit our growth.Historically, we have not been able to fully exploit business opportunities due to the perceived conflicts associated with our insurance brokerage and underwriting businesses. For example, we have refrained from offering our extended warranty products and services through competing insurance brokers. Independent brokers have been reluctant to do business with our insurance underwriting business because they believed that any fees or information provided to us would ultimately benefit our competing brokerage business. These brokers also have been concerned that any information gleaned by our underwriting business regarding their clients and their clients' insurance needs would be shared with our competing brokerage business to solicit new business from these clients. Similarly, competing underwriters have feared that our brokers could share information with our underwriting business in an effort to help secure desirable business or, alternatively, seek price quotes from them only for undesirable business. In the future, these perceived conflicts could limit our ability to expand our product and service offerings and seek new business through independent brokerage channels.Each of our business lines may be adversely affected by an overall decline in economic activity.The demand for property and casualty insurance generally rises as the overall level of economic activity increases and generally falls as such activity decreases, affecting both the commissions generated by our brokerage business and the premiums generated by our underwriting businesses. In particular, a growing number of insolvencies associated with an economic downturn, especially insolvencies in the insurance industry, could adversely affect our brokerage business through the loss of clients or by hampering our ability to place insurance and reinsurance business. Moreover, the results of our consulting business are generally affected by the level of business activity of our clients, which in turn is affected by the level of economic activity in the industries and markets these clients serve. As our clients become adversely affected by declining business conditions, they may choose to delay or forgo consulting engagements with us.Recent and proposed accounting rule changes could negatively affect our financial position and results.Recent accounting changes effected and proposals made could negatively affect our financial position or results of operations. Under Financial Accounting Standards Board Statement No. 142 (Statement No. 142), which we adopted on January 1, 2002, goodwill is no longer being amortized, but53must instead be tested annually for impairment in its value. Goodwill is the excess of cost over net assets purchased relating to business acquisitions. As of December 31, 2002, we had approximately $4.1 billion of goodwill on our balance sheet. If an impairment exists, we must recognize a non-cash charge equal to the impairment, thereby reducing our net worth. Under our principal credit facility that supports our commercial paper program, we are required to maintain a minimum net worth of $2.5 billion. As of December 31, 2002, our net worth calculated for this purpose was $3.9 billion. In connection with our adoption of Statement No. 142 we tested our goodwill and found no impairment as of January 1, 2002. We have finalized our testing for 2002 and found no impairment. However, we cannot assure you that impairment will not exist when we perform testing in future periods, and any impairment charge we would be required to take would have a negative effect on our financial position and results.We have substantial debt outstanding that could adversely affect our financial flexibility.We have substantial debt outstanding. As of December 31, 2002, we had total consolidated debt outstanding (including for this purpose our mandatorily redeemable preferred capital securities) of approximately $2.5 billion. This substantial amount of debt outstanding could adversely affect our financial flexibility.We are a holding company and, therefore, may not be able to receive dividends in needed amounts.Our principal assets are the shares of capital stock of our subsidiaries, including our insurance underwriting companies. We have to rely on dividends from these subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations and for paying dividends to stockholders and corporate expenses. Payments from our underwriting subsidiaries are limited by governmental regulation and will depend on the surplus and future earnings of these subsidiaries. In some circumstances, specific payments from our insurance underwriting subsidiaries may require prior regulatory approval, and we may not be able to receive dividends from these subsidiaries at times and in the amounts we anticipate or require.The volume of premiums we write and our profitability are affected by the availability of reinsurance and the size and adequacy of our insurance company subsidiaries' capital base.The level of business that our insurance underwriting subsidiaries are able to write depends on the size and adequacy of their capital base. Many state insurance laws to which they are subject impose risk-based capital requirements for purposes of regulating insurer solvency. Insurers having less statutory surplus than that required by the risk-based capital model formula generally are subject to varying degrees of regulatory scrutiny and intervention depending on the level of capital inadequacy. As of December 31, 2002, each of our insurance company subsidiaries met the risk-based statutory surplus requirements of every state in which it conducts business.We purchase reinsurance for certain of the risks underwritten by our insurance company subsidiaries. Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase, which may affect the level of business we are able to write and our profitability. We cannot assure you that we will be able to maintain our current reinsurance facilities or that we can obtain other reinsurance facilities in adequate amounts and at favorable rates. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling to bear an increase in net exposures, we would have to reduce the level of our underwriting commitments. Either of these potential developments could adversely affect our underwriting business.54We cannot guarantee that our reinsurers will pay in a timely fashion, if at all.To better manage our portfolio of underwriting risk, we may, from time to time, purchase reinsurance by transferring part of the risk that we will assume (known as ceding) to a reinsurance company in exchange for part of the premium that we will receive in connection with the risk. Although reinsurance would make the reinsurer liable to us to the extent the risk were transferred (or ceded) to the reinsurer, it would not relieve us of our liability to our policyholders. Accordingly, we will bear credit risk with respect to our reinsurers, if any. Recently, due to industry and general economic conditions, there is an increasing risk of insolvency among reinsurance companies, resulting in a greater incidence of litigation and affecting the recoverability of claims. We cannot assure you that our reinsurers, if any, will pay the reinsurance recoverables owed to us or that they will pay these recoverables on a timely basis.Information Concerning Forward-looking StatementsThis report contains certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results, depending on a variety of factors. Potential factors that could impact results include the general economic conditions in different countries around the world, fluctuations in global equity and fixed income markets, exchange rates, rating agency actions, pension funding, changes in commercial property and casualty markets and commercial premium rates, the competitive environment, the actual costs of resolution of contingent liabilities and other loss contingencies, the heightened level of potential errors and omissions liability arising from placements of complex policies and sophisticated reinsurance arrangements in an insurance market in which insurer reserves are under pressure, the ultimate impact of the business transformation plan, and the timing and resolution of related insurance and reinsurance issues relating to the events of September 11, 2001.RECENT DEVELOPMENTSPreviously Planned Divestiture of Insurance Underwriting Businesses and Discontinuance of Certain OperationsAs previously discussed, in fourth quarter 2002, we announced our plans to sell Sheffield Insurance Corporation, a small property-casualty company. In March 2003, we completed the sale.Capital Enhancement ActionsAs previously discussed, we received approximately $223 million ($225 million aggregate principal amount) by privately placing 7.375% senior notes in the fourth quarter 2002. In March 2003, we filed a registration statement with the Securities and Exchange Commission to register the offer to exchange these notes for registered notes having identical terms.BTA LitigationOn February 27, 2003, oral arguments were held before the Second U.S. Circuit Court of Appeals. In the action filed by reinsurers in the U.K., the court decided that it should wait until at least June 2003 to allow determination of the outcome of the U.S. appeal.Other ItemsIn February 2003, our insurance subsidiaries transferred, for appropriate consideration, shares of Endurance Specialty Insurance, Ltd., to other subsidiaries of Aon of approximately $75 million.55
Item 7A. Quantitative and Qualitative DisclosuresaboutAbout Market Risk.Market Risk ExposureWe are
subjectexposed tovarious market risk exposures, includingpotential fluctuations in earnings, cash flows and the fair value of certain of our assets and liabilities due to changes in interest rates, foreign exchangerate, interest raterates and equityprice risk.prices. To manage the risk from these exposures, we enter into a variety of derivative instruments. We do not enter into derivatives or financial instruments for trading purposes.The following
disclosures reflect estimatesdiscussion describes our specific exposures and the strategies we use to manage these risks. See Notes 1 and 14 to the consolidated financial statements for a discussion offuture performanceour accounting policies for financial instruments andeconomic conditions. Actual results may differ.derivatives.We are subject to foreign exchange rate risk
associated withfrom translating the financial statements ofitsour foreign subsidiaries into U.S. dollars.Additionally, some of our foreign brokerage subsidiaries receive revenues in currencies that differ from their functional currencies.Our primary exposures are to the British pound, the Euro, the Canadian dollar and the Australian dollar. We usevarious derivativeover-the-counter (OTC) options and forward contracts to reduce the impact of foreign currency fluctuations on the translation of our foreign operations' financialinstruments (see note 14statements.Additionally, some of our foreign brokerage subsidiaries receive revenues in currencies that differ from their functional currencies. Our U.K. subsidiary earns approximately 36% of its revenue in U.S. dollars, but most of its expenses are incurred in pounds sterling. Our policy is to convert into pounds sterling sufficient U.S. dollar revenue to fund the
consolidated financial statements) to protect against adversesubsidiary's pound sterling expenses using OTC options and forward exchange contracts. At December 31, 2005, we have hedged 35% and 29% of our U.K. subsidiaries' expected U.S. dollar transaction exposure for the years ending December 31, 2006 andtranslation effects of exchange rate fluctuations.2007, respectively. We do not generally hedge exposures beyond three years.The potential
decrease to our consolidated stockholders' equity at December 31, 2002,loss in future earnings from market risk sensitive instruments resulting from a hypothetical 10% adverse change inquoted year-end foreign currency exchange rates, amounts to $207 million and $163 million at December 31, 2002 and 2001, respectively. The impact to 2002 and 2001 pretax income in the event of a hypothetical 10% adverse change in the respective quotedyear-end exchange rates would not be materialafter consideration of derivative positions.in 2005 and 2004.The nature of
theour businesses' incomeof our businessesis affected by changes in international and domestic short-term interest rates. We monitor our net exposure to short-term interest rates and, as appropriate, hedge our exposure with various derivative financial instruments. A hypothetical,1%instantaneous parallel decrease ininterest ratesthe period end yield curve of 100 basis points would cause a decrease, net of derivative positions, of$14 million and$10 million to2002both 2005 and20012004 pretaxincome, respectively.income.The valuation of our fixed-maturity investment portfolio is subject to interest rate risk. A hypothetical 1% (100 basis point) increase in long-term interest rates would decrease the fair value of the portfolio at December 31,
20022005 and20012004 by approximately$85$156 million and$89$119 million, respectively. We have notes payableand capital securitiesoutstanding with a fair value of $2.4 billion and$2.5$2.3 billion at December 31,20022005 and2001,2004, respectively.SuchThis fair value was greater than the carrying value by$36$337 million and$38$165 million at December 31,20022005 and2001,2004, respectively. A hypothetical 1% decrease in interest rates would increase the fair value by approximately6% at5% for both December 31,20022005 and2001.2004.The valuation of our marketable equity security portfolio is subject to equity price risk. If market prices were to decrease by 10%, the fair value of the equity portfolio would have a corresponding decrease of
$6$4 million at both December 31,2002 compared to $38 million at December 31, 2001.2005 and 2004. At December 31,20022005 and2001,2004, there were no outstanding derivatives hedging the price risk on the equity portfolio.PEPS I—In December 2001, we securitized $450 million of limited partnership investments, plus associated limited partnership commitments, via a sale to PEPS I. Aon received $171 million in cash plus $279 million of newly-issued fixed maturity and preferred stock securities of PEPS I. We used the underlying equity in the limited partnerships to determine the fair value of the cash and securities
received in the securitization. At December 31, 2005, a 10% or 20% decrease in the underlying equity of the limited partnerships would have decreased the value of the preferred stock securities by $27 million and $54 million, respectively.
We have selected
the value ranges to representhypothetical changes in foreign currency exchange rates, interest rates and equity market pricesonlyto illustrate the possible impact of these changes; we are not predicting market events.This range ofWe believe these changesreflects changes we believein rates and prices are reasonably possibleoverwithin a one-year period.The translated value of revenue and expense from our international brokerage and underwriting operations are subject to fluctuations in foreign exchange rates. However, the net impact of these fluctuations on Aon's net income or cash flows has not been material.
Item 8. Financial Statements and Supplementary Data.
Management's Report on Internal Control over Financial ReportingManagement of Aon Corporation and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2005.
Our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report on page 70.
/s/ GREGORY C. CASE
Gregory C. Case
President & Chief Executive
Officer
March 8, 2006/s/ DAVID P. BOLGER
David P. Bolger
Executive Vice President,
Chief Financial Officer &
Chief Administrative Officer
March 8, 2006Report of Independent
AuditorsRegistered Public Accounting Firm on
Internal Control Over Financial ReportingBoard of Directors and Stockholders
Aon CorporationWe have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Aon Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Aon Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Aon Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Aon Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Aon Corporation as of December 31, 2005 and 2004 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2005 and our report dated March 7, 2006 expressed an unqualified opinion thereon.
Chicago, Illinois
March 7, 2006Report of Independent Registered Public Accounting Firm on Financial Statements
Board of Directors and Stockholders
Aon CorporationWe have audited the accompanying consolidated statements of financial position of Aon Corporation as of December 31,
20022005 and2001,2004 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31,2002.2005. Our audits also included the financial statement schedulesaslisted in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statementsand schedulesbased on our audits.We conducted our audits in accordance with
auditingthe standardsgenerally accepted inof theUnited States.Public Company Accounting Oversight Board (United States). 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
atas of December 31,20022005 and2001,2004 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,2002,2005, in conformity withaccounting principlesU.S. generally acceptedin the United States.accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.As discussed in Note 1,
in 2002as of December 31, 2003 the Company changed its method of accounting forgoodwill and in 2000 the Company changeditsmethod of accounting forinvolvement with certaincommission and fee revenue and also changed its method of accounting for derivative financial instruments./s/ Ernst & Young LLPChicago, IllinoisFebruary 12, 200357Report By Managementvariable interest entities.Management of Aon Corporation is responsible for the fairness of presentation and integrity of the financial statements and other financial information in the annual report. The financial statementsWe also havebeen prepared in conformity with accounting principles generally accepted in the United States. 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 beenaudited,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 executedin accordance withmanagement's authorization. Judgments are required to assess and balancetherelative costs and expected benefitsstandards ofthose controls. It is management's opinion that its systemthe Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31,2002 was effective2005, based on criteria established inproviding reasonable assurance that its financial statements were freeInternal Control—Integrated Framework issued by the Committee ofmaterial misstatement. In addition, management supports and maintains a professional staff of internal auditors who coordinate audit coverage with the independent auditors and conduct a program of financial and operational audits.The Board of Directors selects an Audit Committee from among its members. All membersSponsoring Organizations of theAudit Committee are independent of the Company. The Audit Committee recommends to the Board of Directors appointment of the independent auditorsTreadway Commission andprovides oversight relating to the review of financial information provided to stockholders and others, the systems of internal control which management and the Board of Directors have established and the audit process. 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.our report dated March 7, 2006 expressed an unqualified opinion thereon.Chicago, Illinois
March 7, 2006
Consolidated Statements of IncomeYears ended December 31 2002 2001 2000 (millions except per share data) REVENUE Brokerage commissions and fees $ 6,202 $ 5,436 $ 4,946 Premiums and other 2,368 2,027 1,921 Investment income (note 7) 252 213 508 Total revenue 8,822 7,676 7,375 EXPENSES General expenses (notes 4, 5 and 15) 6,505 5,813 5,190 Benefits to policyholders 1,375 1,111 1,037 Interest expense 124 127 140 Amortization of intangible assets 54 158 154 Unusual charges (credits)—World Trade Center (note 1) (29 ) 158 — Total expenses 8,029 7,367 6,521 INCOME BEFORE INCOME TAX, MINORITY INTEREST AND ACCOUNTING CHANGE 793 309 854 Provision for income tax (note 9) 293 122 333 INCOME BEFORE MINORITY INTEREST AND ACCOUNTING CHANGE 500 187 521 Minority interest, net of tax—Company-obligated mandatorily redeemable preferred capital securities (note 11) (34 ) (40 ) (40 ) INCOME BEFORE ACCOUNTING CHANGE 466 147 481 Cumulative effect of change in accounting principle, net of tax (note 1) — — (7 ) NET INCOME $ 466 $ 147 $ 474 NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS $ 463 $ 144 $ 471 BASIC NET INCOME PER SHARE: Before accounting change $ 1.65 $ 0.54 $ 1.84 Cumulative effect of change in accounting principle — — (0.03 ) Basic net income per share $ 1.65 $ 0.54 $ 1.81 DILUTIVE NET INCOME PER SHARE: Before accounting change $ 1.64 $ 0.53 $ 1.82 Cumulative effect of change in accounting principle — — (0.03 ) Dilutive net income per share $ 1.64 $ 0.53 $ 1.79 CASH DIVIDENDS PER SHARE PAID ON COMMON STOCK $ 0.825 $ 0.895 $ 0.87 DILUTIVE AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 282.6 272.4 263.0 (millions, except per share data) Years ended December 31 2005 2004 2003
REVENUE Brokerage commissions and fees $ 6,646 $ 6,822 $ 6,545 Premiums and other 2,848 2,788 2,609 Investment income 343 321 310 Total revenue 9,837 9,931 9,464
EXPENSES
General expenses 6,914 6,969 6,569 Benefits to policyholders 1,551 1,516 1,427 Depreciation and amortization 277 303 307 Interest expense 125 136 101 Provision for NewYork and other state settlements 5 180 — Unusual credit — World Trade Center — — (14 ) Total expenses 8,872 9,104 8,390
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAX AND MINORITY INTEREST
965
827
1,074
Provision for income tax 323 282 396 INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 642 545 678 Minority interest, net of tax — Company-obligated mandatorily redeemable preferred capital securities — — (36 ) INCOME FROM CONTINUING OPERATIONS 642 545 642 INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX 95 1 (14 ) NET INCOME $ 737 $ 546 $ 628 NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS $ 735 $ 543 $ 625
BASIC NET INCOME (LOSS) PER SHARE:
Income from continuing operations $ 1.99 $ 1.70 $ 2.01 Discontinued operations 0.29 — (0.04 ) Net income $ 2.28 $ 1.70 $ 1.97 DILUTED NET INCOME (LOSS) PER SHARE: Income from continuing operations $ 1.89 $ 1.63 $ 1.94 Discontinued operations 0.28 — (0.04 ) Net income $ 2.17 $ 1.63 $ 1.90 CASH DIVIDENDS PER SHARE PAID ON COMMON STOCK $ 0.60 $ 0.60 $ 0.60 DILUTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 341.5 336.6 331.8 See accompanying notes to consolidated financial statements.
59
Consolidated Statements of Financial PositionAs of December 31 (millions) (millions) As of December 31 2005 2004 2002 2001 (millions)
ASSETS ASSETS ASSETS INVESTMENTS INVESTMENTS
INVESTMENTS
Fixed maturities at fair value $ 2,089 $ 2,149 Fixed maturities at fair value $ 4,218 $ 3,482 Equity securities at fair value 62 382 Equity securities at fair value 40 40 Short-term investments 3,836 2,975 Short-term investments 4,291 4,448 Other investments 600 640 Other investments 515 483 Total investments 6,587 6,146 Total investments 9,064 8,453 CASH CASH 506 439
CASH
476
570RECEIVABLES RECEIVABLES
RECEIVABLES
Insurance brokerage and consulting services 8,430 7,033 Insurance brokerage and consulting services 8,072 8,235 Other receivables 1,213 863 Other receivables 1,625 1,645 Total receivables (net of allowance for doubtful accounts: 2002—$177; 2001—$187) 9,643 7,896 Total receivables (net of allowance for doubtful accounts: 2005 — $89;
2004 — $186)9,697 9,880 CURRENT INCOME TAXES CURRENT INCOME TAXES 124 46
CURRENT INCOME TAXES
148
175DEFERRED INCOME TAXES DEFERRED INCOME TAXES 689 582
DEFERRED INCOME TAXES
533
512DEFERRED POLICY ACQUISITION COSTS DEFERRED POLICY ACQUISITION COSTS 882 704
DEFERRED POLICY ACQUISITION COSTS
1,186
1,137GOODWILL GOODWILL
GOODWILL
4,391
4,611(net of accumulated amortization: 2002—$723; 2001—$698) 4,099 3,842 OTHER INTANGIBLE ASSETS OTHER INTANGIBLE ASSETS
OTHER INTANGIBLE ASSETS
115
133(net of accumulated amortization: 2002—$238; 2001—$170) 225 242 PROPERTY AND EQUIPMENT, NET PROPERTY AND EQUIPMENT, NET 865 775
PROPERTY AND EQUIPMENT, NET
537
660OTHER ASSETS OTHER ASSETS 1,714 1,658
OTHER ASSETS
1,671
2,198TOTAL ASSETS $ 25,334 $ 22,330 LIABILITIES AND STOCKHOLDERS' EQUITY INSURANCE PREMIUMS PAYABLE $ 9,904 $ 8,233 POLICY LIABILITIES Future policy benefits 1,310 1,026 TOTAL ASSETS $ 27,818 $ 28,329 Policy and contract claims 1,251 937 Unearned and advance premiums and contract fees 2,610 2,214 Other policyholder funds 139 813 Total policy liabilities 5,310 4,990 GENERAL LIABILITIES General expenses 2,012 1,770 Short-term borrowings 117 257 Notes payable 1,671 1,694 Other liabilities 1,673 1,071 TOTAL LIABILITIES 20,687 18,015 COMMITMENTS AND CONTINGENT LIABILITIES REDEEMABLE PREFERRED STOCK 50 50 COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY THE COMPANY'S JUNIOR SUBORDINATED DEBENTURES 702 800 STOCKHOLDERS' EQUITY Common stock—$1 par value Authorized: 750 shares; issued 333 293 Paid-in additional capital 2,228 1,654 Accumulated other comprehensive loss (954 ) (535 ) Retained earnings 3,251 3,021 Treasury stock at cost (shares: 2002—22.7; 2001—22.5) (794 ) (786 ) Deferred compensation (169 ) (182 ) TOTAL STOCKHOLDERS' EQUITY 3,895 3,465 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,334 $ 22,330 See accompanying notes to consolidated financial statements.
60
Consolidated Statements ofCash Flows
Financial Position (Continued)Years ended December 31 2002 2001 2000 (millions) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 466 $ 147 $ 474 Adjustments to reconcile net income to cash provided by operating activities Cumulative effect of change in accounting principle, net of tax — — 7 Insurance operating assets and liabilities, net of reinsurance 335 (45 ) 46 Amortization of intangible assets 54 158 154 Depreciation and amortization of property, equipment and software 209 181 179 Income taxes 34 (97 ) 145 Special and unusual charges and purchase accounting liabilities (notes 4, 5 and 15) (67 ) 59 (57 ) Valuation changes on investments and income on disposals 87 158 (66 ) Other receivables and liabilities—net 124 (2 ) (143 ) CASH PROVIDED BY OPERATING ACTIVITIES 1,242 559 739 CASH FLOWS FROM INVESTING ACTIVITIES Sale of investments Fixed maturities Maturities 162 120 100 Calls and prepayments 137 100 129 Sales 1,711 1,220 400 Equity securities 351 379 253 Other investments 61 272 281 Purchase of investments Fixed maturities (1,879 ) (1,112 ) (455 ) Equity securities (46 ) (227 ) (148 ) Other investments (27 ) (347 ) (436 ) Short-term investments—net (678 ) (633 ) 3 Acquisition of subsidiaries (111 ) (107 ) (85 ) Property and equipment and other—net (278 ) (281 ) (179 ) CASH USED BY INVESTING ACTIVITIES (597 ) (616 ) (137 ) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 607 — — Retirement of preferred stock—net (87 ) — — Treasury stock transactions—net (10 ) 49 (59 ) Issuance (repayments) of short-term borrowings—net (163 ) (395 ) 11 Issuance of long-term debt 519 400 250 Repayment of long-term debt (547 ) (148 ) (70 ) Interest sensitive, annuity and investment-type contracts Deposits — 20 218 Withdrawals (682 ) (305 ) (437 ) Cash dividends to stockholders (233 ) (241 ) (226 ) CASH USED BY FINANCING ACTIVITIES (596 ) (620 ) (313 ) EFFECT OF EXCHANGE RATE CHANGES ON CASH 18 (2 ) (8 ) INCREASE (DECREASE) IN CASH 67 (679 ) 281 CASH AT BEGINNING OF YEAR 439 1,118 837 CASH AT END OF YEAR $ 506 $ 439 $ 1,118 (millions) As of December 31 2005 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
INSURANCE PREMIUMS PAYABLE
$
9,427
$
9,775
POLICY LIABILITIES
Future policy benefits 1,671 1,542 Policy and contract claims 1,827 1,854 Unearned and advance premiums and contract fees 2,989 2,979 Other policyholder funds 21 18 Total policy liabilities 6,508 6,393
GENERAL LIABILITIES
General expenses 1,661 1,557 Short-term borrowings 7 2 Notes payable 2,105 2,115 Pension, post employment and post retirement liabilities 1,497 1,528 Other liabilities 1,310 1,806 TOTAL LIABILITIES 22,515 23,176
REDEEMABLE PREFERRED STOCK
—
50
STOCKHOLDERS' EQUITY Common stock-$1 par value Authorized: 750 shares; issued 344 339 Paid-in additional capital 2,349 2,197 Accumulated other comprehensive loss (1,155 ) (681 ) Retained earnings 4,573 4,031 Treasury stock at cost (shares: 2005 — 23.0; 2004 — 22.4) (808 ) (783 ) TOTAL STOCKHOLDERS' EQUITY 5,303 5,103 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,818 $ 28,329 See accompanying notes to consolidated financial statements.
61
Consolidated Statements ofStockholders' Equity
Cash FlowsYears Ended December 31 2002 2001 2000 (millions) Common Stock Balance at January 1 $ 293 $ 264 $ 259 Issuance of stock (note 11) 37 — — Issued for business combinations 1 28 4 Issued for employee benefit plans 2 1 1 333 293 264 Paid-in Additional Capital Balance at January 1 1,654 706 525 Issuance of stock (note 11) 570 — — Business combinations (notes 4 and 11) (18 ) 952 141 Employee benefit plans 22 (4 ) 40 2,228 1,654 706 Accumulated Other Comprehensive Income (Loss) Balance at January 1 (535 ) (377 ) (309 ) Cumulative effect of change in accounting principle related to derivatives (note 1) — — 3 Net derivative gains (losses) 22 (6 ) 3 Net unrealized investment gains 42 30 49 Net foreign exchange gains (losses) 69 (58 ) (115 ) Net additional minimum pension liability adjustment (552 ) (124 ) (8 ) Other comprehensive loss (419 ) (158 ) (68 ) (954 ) (535 ) (377 ) Retained Earnings Balance at January 1 3,021 3,127 2,905 Net income 466 147 474 Dividends to stockholders (233 ) (241 ) (226 ) Loss on treasury stock reissued (2 ) (10 ) (24 ) Employee benefit plans (1 ) (2 ) (2 ) 3,251 3,021 3,127 Treasury Stock Balance at January 1 (786 ) (118 ) (90 ) Cost of shares acquired—non-cash exchange (notes 4 and 11) — (783 ) — Cost of shares acquired (13 ) (5 ) (102 ) Shares reissued at average cost 5 120 74 (794 ) (786 ) (118 ) Deferred Compensation Balance at January 1 (182 ) (214 ) (239 ) Net issuance of stock awards (13 ) (3 ) (7 ) Amortization of deferred compensation 26 35 32 (169 ) (182 ) (214 ) Stockholders' Equity at December 31 $ 3,895 $ 3,465 $ 3,388 Comprehensive Income (Loss) Net income $ 466 $ 147 $ 474 Other comprehensive loss (note 3) (419 ) (158 ) (68 ) Comprehensive income (loss) $ 47 $ (11 ) $ 406 (millions) Years ended December 31 2005 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 737 $ 546 $ 628 Adjustments to reconcile net income to cash provided by operating activities (Gain)/loss from disposal of operations (240 ) 8 23 Insurance operating assets and liabilities, net of reinsurance 160 278 305 Depreciation and amortization of property, equipment and software 227 253 251 Amortization of stock awards 69 44 49 Amortization of intangible assets 50 56 63 Income taxes 149 (122 ) 75 Contributions to major defined benefit pension plans (in excess of) less than expense (221 ) 45 (30 ) Expense in excess of cash paid for 2005 restructuring plan 118 — — Provision for New York and other state settlements (71 ) 180 — Other receivables and liabilities — net (92 ) (104 ) (52 ) CASH PROVIDED BY OPERATING ACTIVITIES 886 1,184 1,312
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments Fixed maturities Maturities 232 184 153 Calls and prepayments 234 131 83 Sales 2,053 1,167 1,256 Equity securities 11 8 31 Other investments 18 454 8 Purchase of investments Fixed maturities (3,408 ) (2,102 ) (2,069 ) Equity securities (14 ) (4 ) (1 ) Other investments (10 ) (64 ) — Short-term investments — net (42 ) (670 ) 125 Acquisition of subsidiaries (81 ) (80 ) (56 ) Proceeds from sale of operations 364 133 48 Property and equipment and other — net (126 ) (80 ) (185 ) CASH USED BY INVESTING ACTIVITIES (769 ) (923 ) (607 )
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 76 23 — Preferred stock redemption (50 ) — — Treasury stock transactions — net (25 ) — (6 ) Issuances (repayments) of short-term borrowings — net 5 (49 ) (77 ) Issuance of long-term debt 569 323 122 Repayment of long-term debt (586 ) (320 ) (430 ) Interest sensitive, annuity and investment-type contracts — withdrawals — (51 ) (89 ) Cash dividends to stockholders (193 ) (192 ) (190 ) CASH USED BY FINANCING ACTIVITIES (204 ) (266 ) (670 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(7
)
35
21
INCREASE (DECREASE) IN CASH (94 ) 30 56 CASH AT BEGINNING OF YEAR 570 540 484 CASH AT END OF YEAR $ 476 $ 570 $ 540 See accompanying notes to consolidated financial statements.
62Consolidated Statements of Stockholders' Equity
(millions) Years ended December 31 2005 2004 2003
Common Stock Balance at January 1 $ 339 $ 336 $ 333 Issued for employee benefit plans 5 3 3 344 339 336
Paid-in Additional Capital Balance at January 1
2,197
2,128
2,059
Business combinations 5 4 11 Employee benefit plans 147 65 58 2,349 2,197 2,128
Accumulated Other Comprehensive Income (Loss) Balance at January 1
(681
)
(861
)
(954
)Net derivative gains (losses) (51 ) (10 ) 28 Net unrealized investment gains (losses) (10 ) 42 20 Net foreign exchange translation (240 ) 146 231 Net additional minimum pension liability adjustment (173 ) 2 (186 ) Other comprehensive income (loss) (474 ) 180 93 (1,155 ) (681 ) (861 )
Retained Earnings Balance at January 1
4,031
3,679
3,251
Net income 737 546 628 Dividends to stockholders (194 ) (193 ) (191 ) Loss on treasury stock reissued — (1 ) (8 ) Other (1 ) — (1 ) 4,573 4,031 3,679
Treasury Stock Balance at January 1
(783
)
(784
)
(794
)Cost of shares acquired (25 ) — (5 ) Shares reissued at average cost — 1 15 (808 ) (783 ) (784 ) Stockholders' Equity at December 31 $ 5,303 $ 5,103 $ 4,498
Comprehensive Income
Net income $ 737 $ 546 $ 628 Other comprehensive income (loss) (474 ) 180 93 Comprehensive income $ 263 $ 726 $ 721 See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements1. Summary of Significant Accounting Principles and Practices
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
conformityaccordance withaccounting principlesU.S. generally acceptedin the United States andaccounting principles. The consolidated financial statements include the accounts of Aon Corporation and its majority-owned subsidiaries(Aon). These statements include informed estimates and assumptions that affect("Aon" or theamounts reported. Actual results could differ from"Company"), excluding special-purpose entities ("SPEs") considered variable interest entities ("VIEs") for which Aon is not theamounts reported.primary beneficiary. All material intercompany accounts and transactions have been eliminated.The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from the amounts reported.
Segment Reporting
Aon classifies its businesses into three operating segments: Risk and Insurance Brokerage Services, Consulting and Insurance Underwriting. A fourth segment, Corporate and Other, when combined with the operating segments and after the elimination of intersegment revenues, totals to the amounts included in the consolidated financial statements. Certain amounts in prior years' consolidated financial statements relating to segments have been reclassified to reflect the results of discontinued operations.
Revenue Recognition
Revenue is recognized when all elements of revenue recognition exist as defined in Staff Accounting Bulleting No. 104. Those elements are (1) persuasive evidence of an agreement with the client; (2) a fixed and determinable price for services; (3) those services have been rendered; and (4) collectibility is reasonably assured.
Brokerage
CommissionsCommission and FeesCommission
incomerevenue is primarily recognized at the later of the billing or the effective date of thepolicy. However, in circumstances where a binding order has been received before the endrelated insurance policy, net of an allowance for estimated policy cancellations. Where all of theaccounting period and coverage is effective,elements of revenue recognition have been met, but processing has not yet occurred in the billing system due to timing, an accrual is recorded.The amounts recorded for these accrualsFor policies that aregenerally consistent from period to period and the total accrual has not materially impacted the historical trend ofbilled in installments, revenueand earnings in any quarterly or annual period. Aon's policy for estimating allowances for return commissions on policy cancellationsisto record an allowance based on a historical evaluation of cancellations as a percentage of related revenue. Certain life insurance commissions, commissions on premiums billed directly by insurance companies and certain other carrier compensation are generallyrecognizedas income when received. Revenues may be recorded in advance of the cash receipts in cases where the amounts due to be received have been confirmed by the insurance company, orwhen Aon has sufficient informationin its recordsto estimate the amounts. When insurance underwriters directly bill clients, revenue is recognized when the cash is received or amountsfor premium based revenue accruals in accordance with agreementsdue to Aonhas with insurance carriers.become determinable. Commissions on premium adjustments are recognized as they occur.Policy cancellation reserves and revenue accruals are estimates. Policy cancellations are estimated through an historical evaluation of relevant data. Revenue accruals are estimated through an analysis of the specific transactions.
Fees for claims services, benefit consulting, human capital outsourcing, reinsurance services and other services are recognized when the services are rendered. Aon
may enter intohas multiple year outsourcingagreementsarrangements with clients. Revenues received from theseagreementsarrangements are recorded on a gross basis, inclusive of amounts ultimately passed through to subcontractors, when Aon maintains the performance obligation and are recorded ratably over the life of the contract.The portion of
therevenues received on extended warranty contracts that are for the marketing, administration and servicing of those contracts are reported as earned consistent with the method used to earn the premium portion of those revenues and revenues that represent administrative fee-for-service arrangements, for which Aon does not bear the underwriting risk, are earned as those services are performed. These fee-for-service arrangements include the marketing and servicing ofextended warranty contracts on behalf of other companies and brokerage commissions for accident and health products placed with non-Aon insurance carriers. These revenues are reported in the Insurance Underwriting segment.
Premium Revenue
For accident and health products, premiums 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. For extended warranty products, premium revenues represent the portion of revenue from these contracts that are submitted to an Aon insurance carrier for coverage and are earned over the period of risk in proportion to the amount of insurance protection provided in accordance with
Financial Accounting Standards Board (FASB)FASB Statement No. 60,Accounting and Reporting by Insurance Enterprises.For universal life-type and investment products, generally there is no requirement for payment of premium other than to maintain account values at a level sufficient to pay mortality and expense63charges. Consequently, premiums for universal life-type policies and investment products are not reported as revenue, but as deposits. Policy fee revenue for universal life-type policies and investment products consists of charges for the cost of insurance, policy administration and surrenders assessed during the period. Expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances.Unusual Charges (Credits)—World Trade CenterIn 2001, Aon recorded pretax unusual charges of $158 million ($97 million after-tax or $0.35 per dilutive share), net of insurance and reinsurance recoveries, related to losses sustained as a result of the destruction of the World Trade Center on September 11, 2001 and the death of 175 employees. Costs incurred included $33 million of destroyed depreciable assets at net book value, $40 million for salaries and benefits for deceased and injured employees and other costs, and a $10 million commitment to the Aon Memorial Education fund to support the educational needs of the children of Aon employees who were victims of the September 11thattacks. Offsetting these expenses were estimated insurance recoveries of $60 million as of fourth quarter 2001. These costs also included $192 million of insurance benefits paid by Aon's Combined Insurance Company of America subsidiary (CICA) under life insurance policies issued for the benefit of deceased employees, which were partially offset by reinsurance recoveries of $147 million, resulting in a net charge of $45 million. Reinsurers have disputed their liability as to approximately $90 million of reinsurance recoveries under a Business Travel Accident (BTA) policy issued by CICA to cover U.S.-based employees of subsidiaries of Aon, and legal actions have been filed by both parties. In fourth quarter 2001, Aon recorded a pretax $90 million allowance for a potentially uncollectible receivable related to this dispute. In September 2002, CICA's action with respect to the BTA policy was dismissed by the Court for the lack of subject matter jurisdiction. Prior to year-end, CICA was granted an expedited appeal.During 2002, a settlement was reached with Aon's property insurance carriers pertaining to reimbursement for depreciable assets destroyed. This settlement resulted in a pretax credit of $29 million, which is reported as an Unusual credit—World Trade Center in the consolidated statements of income. Additional claims are in the process of being presented to other insurers for issues related to extra expenses, leasehold interests and business interruption coverage and additional recoveries and gains are expected in future periods when specific claims are settled.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 to policyholders ceded to other companies have been reported as a reduction of premium revenue and benefits to policyholders. Expense reimbursements received in connection with reinsurance ceded have been accounted for as a reduction of the related policy acquisition costs. Reinsurance receivables and prepaid reinsurance premium amounts are reported as assets.
Allowance for Doubtful AccountsUnusual Credit — World Trade CenterAon's policy for estimating allowances for doubtful accounts with respectIn order toreceivables isresume business operations and minimize the loss caused by the World Trade Center disaster, Aon secured temporary office space in Manhattan. Subsequently, permanent space was leased and, during first quarter 2003, Aon assigned this temporary space torecord an allowance based onanother company. The costs relating to this assignment were $46 million pretax in 2003. In fourth quarter 2003, Aon reached ahistorical evaluationfinal settlement ofwrite-offs, aging of balances and other qualitative and quantitative analyses.Stock Compensation PlansAon applies Accounting Principles Board Opinion (APB) No. 25,Accounting for Stock Issued to Employees,and related Interpretations in accounting$200 million for itsstock-based compensation plans.64Accordingly, no compensationoverall World Trade Center property insurance claim. A cash payment of $92 million was received during fourth quarter 2003, in addition to the $108 million already collected in prior years. This settlement resulted in a pretax gain of $60 million. This gain and the $46 million expensehas been recognized for its stock option plandiscussed above, were combined and reported as a $14 million Unusual credit — World Trade Center in theexercise price2003 consolidated statement ofthe options equaled the market price of the stock at the date of grant. Compensation expense has been recognized for stock awards based on the market price at the date of the award.The following table illustrates the effect on net income and earnings per share if Aon had applied the fair value recognition provision of FASB Statement No. 123,Accounting for Stock-Based Compensation, to stock-based employee compensation.Years ended December 31 2002 2001 2000 Net income, as reported $ 466 $ 147 $ 474 Add: Stock based employee compensation
expense included in reported net income, net of related tax effects14 19 16 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects 37 29 32 Pro forma net income $ 443 $ 137 $ 458 Net income per share: Basic As reported $ 1.65 $ 0.54 $ 1.81 Pro forma 1.57 0.51 1.75 Dilutive As reported 1.64 0.53 1.79 Pro forma 1.56 0.50 1.73 The fair value per share of options and awards granted is estimated as $6.21 and $28.54 in 2002, $8.66 and $29.78 in 2001 and $6.33 and $25.73 in 2000, respectively, on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:2002 2001 2000 Dividend yield 2.25 % 2.0 % 2.0 % Expected volatility 21 % 28 % 27 % Risk-free interest rate 4 % 6 % 6 % Expected term life beyond vesting date (in years): Stock options 0.96 1.06 0.94 Stock awards — — — 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 pro forma 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 and awards granted prior to January 1995.income.Income
TaxTaxesDeferred income
tax has beentaxes are provided for theeffectseffect of temporary differences between financial reporting and tax bases of assets and liabilities andhas beenare measured using the enacted marginal tax rates and laws that are currently in effect. Valuation allowances are recorded to reduce the net deferred tax assets to an amount that is more likely than not realizable.Income Per Share
Basic net income per share is computed
based onby dividing net income available for common stockholders by the weighted-average number of common sharesoutstanding, excluding any dilutive effects of options and awards.outstanding. Net income available for common65stockholders is net of all preferred stock dividends.
DilutiveDiluted net income per share is computedbased onby dividing net income available for common stockholders by the weighted-average number of common shares outstanding, plus the dilutive effect of stock options and awards. The dilutive effect of stock options and awards is calculated under the treasury stock method using the average market price for the period.CommonCertain common stock equivalents related to optionsto purchasewere not included in the computation of diluted income per share because those options' exercise price was greater than the average marketprice of the common shares. The number of options excluded from the calculation was 18 million in 2005, 20 million in 2004 and 24 million
4 million and 5in 2003.As required by Emerging Issues Task Force (EITF) Issue No. 04-8, The Effect of Contingently Convertible Investments on Diluted Earnings Per Share, Aon includes in its diluted net income per share computation the impact of any contingently convertible instruments regardless of whether the market price trigger has been met. Aon's 3.5% convertible debt securities, issued in November 2002, may be converted into a maximum of 14 million shares of Aon common stock
in 2002, 2001and2000, respectively, have not been considered because they wouldthese shares have beenanti-dilutive.included in the computation of diluted net income per share (see Note 8 for further information).Income per share is calculated as follows:
(millions, except per share data) 2005 2004 2003 Basic net income: Income from continuing operations $ 642 $ 545 $ 642 Income (loss) from discontinued operations, net of tax 95 1 (14 ) Net income 737 546 628 Preferred stock dividends (2 ) (3 ) (3 ) Net income for basic per share calculation $ 735 $ 543 $ 625 Diluted net income: Income from continuing operations $ 642 $ 545 $ 642 Income (loss) from discontinued operations, net of tax 95 1 (14 ) Net income 737 546 628 Interest expense on convertible debt securities, net of tax 7 7 7 Preferred stock dividends (2 ) (3 ) (3 ) Net income for diluted per share calculation $ 742 $ 550 $ 632 Basic shares outstanding 322 320 317 Effect of convertible debt securities 14 14 14 Common stock equivalents 5 3 1 Diluted potential common shares 341 337 332 Basic net income (loss) per share: Income from continuing operations $ 1.99 $ 1.70 $ 2.01 Discontinued operations 0.29 — (0.04 ) Net income $ 2.28 $ 1.70 $ 1.97 Diluted net income (loss) per share: Income from continuing operations $ 1.89 $ 1.63 $ 1.94 Discontinued operations 0.28 — (0.04 ) Net income $ 2.17 $ 1.63 $ 1.90 Stock Compensation Plans
Aon follows Accounting Principles Board Opinion (APB) No. 25,Accounting for Stock Issued to Employeesand related Interpretations in accounting for its stock-based compensation plans. Under APB No. 25, no compensation expense is recognized for stock options when the exercise price of the options equals the market price of the stock at the date of grant. Compensation expense is recognized on a straight-line basis for stock awards based on the vesting period and market price at the date of the award.
2002 2001 2000 (millions except per share data) Net income $ 466 $ 147 $ 474 Redeemable preferred stock dividends (3 ) (3 ) (3 ) Net income available for common stockholders $ 463 $ 144 $ 471 Basic shares outstanding 281 269 260 Common stock equivalents 2 3 3 Dilutive potential common shares 283 272 263 Net income per share: Basic $ 1.65 $ 0.54 $ 1.81 Dilutive $ 1.64 $ 0.53 $ 1.79 The following table illustrates pro forma net income and pro forma earnings per share as if Aon had applied the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation, to stock-based employee compensation.
(millions, except per share data) 2005 2004 2003 Net income, as reported $ 737 $ 546 $ 628 Add: Stock-based compensation expense included in reported net income, net of tax 45 29 31 Deduct: Stock-based compensation expense determined under fair value method for all awards and options, net of tax 57 47 55 Proforma net income $ 725 $ 528 $ 604
Net income per share:
Basic As reported $ 2.28 $ 1.70 $ 1.97 Pro forma 2.24 1.64 1.89
Diluted
As reported $ 2.17 $ 1.63 $ 1.90 Pro forma 2.14 1.58 1.83 The fair value per share of options and awards granted is estimated as $6.34 and $23.63 in 2005, $6.15 and $25.32 in 2004 and $3.59 and $18.33 in 2003, respectively, on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:
2005 2004 2003 Dividend yield 2.3 % 2.3 % 2.3 % Expected volatility 30.0 % 27.0 % 23.4 % Risk-free interest rate 4.0 % 3.3 % 2.9 % Expected term life beyond vesting date (in years): Stock options 1.0 1.0 1.0 Stock awards — — — 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.
Investments
Short-term investments include certificates of deposit, money market funds and highly liquid debt instruments purchased with maturities of up to one year
(generally three months or less) and money market fundsand are carried at cost, which approximates fair value.Fixed-maturity securities are available for sale and are carried at fair value. The amortized cost of fixed maturities is adjusted for amortization of premiums and the accretion of discounts to maturity,
thatwhich are included in investment income.Marketable equity securities that are held directly by Aon are carried at fair value.
Unrealized gains and temporary unrealized losses on fixed-maturities and directly-held equity securities are excluded from income and are recorded directly to stockholders' equity in accumulated other comprehensive income or loss, net of deferred income taxes.Mortgage loans and policy loans are generally carried at cost or unpaid principal balance.
Private equity investments are generally carried at cost, which approximates fair value, except where Aon has significant influence, in which case they are carried
underusing the equitymethod.method of accounting.Unrealized gains and losses on fixed maturities and marketable equity securities are excluded from income and are recorded directly in stockholders' equity as accumulated other comprehensive income or loss, net of deferred income taxes.
Endurance common stock and warrants —In 2001, Aon
announced that it would co-sponsorinvested $227 million in Endurance Specialty Holdings, Ltd. ("Endurance"), anewBermuda-based insurance and reinsurancecompany with total initial capitalizationcompany. During 2004, Aon sold virtually all of$1.2 billion to provide additional underwriting capacity to commercial property and casualty insurance and reinsurance clients. Aon'sits common stock investment in Endurance,Specialty Insurance Ltd. (Endurance) was fundedwhich resulted inDecember 2001 with $227 milliona pretax gain ofoperating cash. The$48 million. In 2005, Aon sold its remaining common stock investment in Endurance, resulting in a pretax gain of $1 million.In conjunction with the initial common stock investment, Aon also received 4.1 million stock purchase warrants, which allow Aon to purchase additional Endurance common stock through December 2011. These warrants meet the definition of a derivative, which requires them to be recorded in the financial statements at fair value, with changes in fair value recognized in earnings on a current basis. Aon has valued the warrants using the Black-Scholes pricing methodology with the assistance of an independent third party. Aon has determined that the warrants had a fair value of $90 million and $80 million at December 31, 2005 and 2004, respectively.
The assumptions used to value the Endurance stock purchase warrants were as follows:
December 31, 2005 2004 • Maturity (in years) 5.96 6.96 • Spot Price $ 30.86 $ 29.31 • Risk Free Interest Rate 4.95 % 4.40 % ��� Dividend Yield 0.00 % 0.00 % • Volatility 32 % 17 % • Exercise Price $ 12.12 $ 13.20 The model assumes: the warrants are "European-style," which means that they are valued as if the exercise can only occur on the expiration date; the spot and exercise prices are reduced by expected future dividends; and the dividend remains unchanged during the period the warrants are outstanding. Although Endurance currently pays a dividend, a zero dividend yield is used in the Endurance warrants valuation because the future dividend payment value has been reflected in the spot and exercise prices.
The change in value during the period was recognized as investment income in the Corporate and Other segment and was $10 million and $80 million in 2005 and 2003, respectively. There was no net change in value during 2004. The future value of the warrants may vary considerably from the value at December 31, 2005 due to the price movement of the underlying shares, as well as the passage of time and changes in other factors that are employed in the valuation model.
Limited partnership investments are carried
underusing the equity methodand is included in Other Investments in the consolidated statementsoffinancial position.Limited partnership investments are carried under the equity method.accounting. Certain of the limited partnerships in which Aon invests have holdings inpublicly traded equities.publicly-traded equity securities. Changes in market value of these indirectly-heldequitiesequity securities flow through the limited partnerships' financial statements. Aon'sownershipproportionate share of these valuation changes is included in investment income in Aon's Corporate and OtherSegment revenue.segment.PEPS I — In
December2001, Aon securitized $450 million of limited partnership investments, plus associated limited partnership commitments, via a sale to Private Equity Partnership Structures I, LLC (PEPS I).66Aon received $171 million in cash, plus $279 million of newly-issued fixed maturity and preferred stock securities of PEPS I. The underlying equity in the limited partnerships was the basis for determining the fair value of the cash and securities received in the securitization. No significant management assumptions were used in determining the fair value of the cash and securities received in the securitization or the value at December 31,
2002. At December 31, 2002, a 10%2005 or20% decrease in the underlying equity of the limited partnerships would have resulted in a decrease in the value of the preferred stock securities owned by $40 million and $80 million, respectively.2004.General — Income or loss on disposal of
any securities held in the portfolioinvestments is computed using the specificcostscost ofsecuritiesthe security sold and is reported as investment income in the consolidated statements of income.Declines in the fair value of
invested assetsinvestments below cost are evaluated forother than temporaryother-than-temporary impairment losses on a quarterly basis. Impairment losses for declines in the value offixed-maturityinvestmentsand equity securities below costattributable to issuer-specific events are determined based upon all relevant facts and circumstances for each investment and are recognized when appropriate in accordance with Staff Accounting Bulletin (SAB) 59, FASB Statement No. 115,Accounting for Certain Investments in Debt and Equity Securities and related guidance. For fixed-maturity investments with unrealized losses due to market conditions or industry-related events where Aon has the positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery or to maturity, declines in value below cost are assumed to be temporary.Aon's policy for equity securities is to recognize impairment losses on specific securities that have had continuous material unrealized losses for more than three consecutive quarters, or less due to market conditions or industry-related events.
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 investment income in the consolidated statements of income. In general, Aon ceases to accrue investment income when interest or dividend payments are in arrears.
Accounting policies relating to derivative financial instruments are discussed in
noteNote 14.Cash
Cash includes cash balances and investments with initial maturities of three months or less.
Aon maintains premium trust bank accounts for premiums collected from insureds but not yet remitted to insurance companies of $2.9 billion and $3.0 billion at December 31, 2005 and 2004, respectively. These funds and a corresponding liability, are included in short-term investments and insurance premiums payable, respectively, in the accompanying consolidated statements of financial position.
Allowance for Doubtful Accounts
Aon's policy for estimating allowances for doubtful accounts with respect to receivables is to record an allowance based on a historical evaluation of write-offs, aging of balances and other qualitative and quantitative analyses.
Deferred Policy Acquisition Costs
Costs of acquiring new and renewal insurance underwriting business, principally the excess of new commissions over renewal commissions, and underwriting and sales expenses that vary with and are primarily related to, the production of new business, are deferred and reported as assets. 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, 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 are deferred and amortized as the related premiums and contract fees are earned.
Intangible AssetsIn general, prior to January 1, 2002, goodwill relating to business acquisitions had been amortized into income over periods not exceeding 40 years using the straight-line method. Goodwill related to acquisitions made after June 30, 2001 has not been amortized. Beginning January 2002, goodwill was not amortized but instead tested for impairment under new authoritative guidance on business combinations and goodwill. See Accounting and Disclosure Changes (note 1) for further information. The cost of other intangible assets is being amortized over a range of 1 to 10 years with a weighted-average life of 3.8 years.67In the unexpected event of a significant deterioration in profitability that is projected to be recurring, Aon would assess the recoverability of its intangible assets through an analysis of expected future cash flows.Property and Equipment
Property and equipment
areis stated at cost, less accumulated depreciation. Depreciation is generallydepreciatedcalculated using the straight-line method overtheirestimated useful lives. Included in this category is internal use software, which is software that is acquired, internally developed or modified solely to meet internal needs, with no plan to market externally. Costs related to directly obtaining, developing or upgrading internal use software are capitalized. These costs are generally amortized using the straight-line method over a range of21 to 10 years. Theweighted- averageweighted-average original life of Aon's software at December 31,20022005 is4.75 years.The components of property and equipment, net are as follows:
(millions) As of December 31, 2005 2004 Software $ 563 $ 592 Computer equipment 283 305 Land and buildings 132 143 Furniture, fixtures and equipment 368 381 Leasehold improvements 357 360 Automobiles 29 31 1,732 1,812 Less: Accumulated depreciation 1,195 1,152 Property and equipment, net $ 537 $ 660 Depreciation expense for the years ended December 31, 2005, 2004 and 2003 was $227 million, $253 million and $251 million, respectively.
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 statementsof financialposition for cashinstruments:Cash and cash equivalents, including short-term
investments,investments: Carrying amounts approximatetheirfair value.Fair value for fixed-maturityFixed-maturity and equity
securitiessecurities: Fair value is based on quoted market prices or, if they are not actively traded, on estimated values obtained from independent pricing services.Derivative financial instruments: Fair value
of derivative financial instrumentsis based on quoted prices for exchange-traded instruments or the cost to terminate or offset with other contracts.Other investments are comprised of Aon's investment in Endurance warrants, mortgage loans, policy loans, private equity investments and limited
partnerships and Aon's investment in Endurance. The fairpartnerships.Endurance warrants: Fair value
for mortgageis determined with the assistance of an independent third party using the Black-Scholes pricing model.Mortgage loans and policy
loansloans: Fair value is estimated using discounted cash flow analysis, using interest rates currently being offered for similar loans to borrowers with similar credit ratings.ItPrivate equity investments and limited partnerships: Carrying amounts approximate fair value, as it is generally not practical to estimate
thefair valueof private equity investments and limited partnershipswithout incurring excessive costs.Deposit-type contracts: Fair value
for liabilities for investment-type contractsis 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 fairNotes payable: Fair value
for notes payableis 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 nonpublicly-traded portion.Future Policy Benefits, Policy and Contract Claims, Unearned Premiums and Contract Fees
Future policy benefit liabilities on
non-universallife,andaccident 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 assumptionsarehave been graded and range from4.5%2% to7.0%6% at December 31,2002.2005. The interest assumption used on most current issues is a level 4%. 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. Interest credit rates for these products range from 2% to 7.3%.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.
ChangesThe estimates are subject to the effects of trends in claim severity and frequency. The process of estimating and establishing policy and contract liabilities is inherently uncertain and the actual ultimate cost of a claim may vary materially from the estimatedliability are reflected in income as theamount reserved. The estimates arerevised.continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.Unearned premiums and contract fees generally are calculated using the pro rata method based on gross premiums. However, in the case of extended warranty,
andcredit life and disability products, the68unearned premiums and contract fees are calculated such that the premiums and contract fees are earned over the period of risk in a reasonable relationship to anticipated claims. The Company considers anticipated investment income in determining whether a premium deficiency exists.
Foreign Currency Translation
In general, foreignForeign 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 aregenerallyreported in stockholders' equity, in accumulated other comprehensive income or loss ("OCI"), net of applicable deferred incometax.taxes. In 2005, management deemed all undistributed earnings of Aon's foreign subsidiaries to be permanently reinvested. The impact of this decision did not have a material effect on Aon's net income. Because oftransaction gainsthe decision to reinvest the undistributed earnings of these foreign subsidiaries, the deferred tax liability of $31 million previously accrued related to the cumulative foreign currency translation adjustment ("CTA") of those subsidiaries was no longer required, resulting in a credit to OCI in 2005. Aon continues to record deferred taxes related to the CTA of its foreign branches of U.S. underwriting subsidiaries.U.K. Accounting Matters
In connection with accounting guidance issued by the Institute of Chartered Accountants in the U.K., Aon, like others in the industry, reassessed whether and
lossesto what extent its U.K. businesses have legal obligations to provide future claims handling and administrative services for brokerage clients. With the assistance of outside legal counsel, Aon performed a detailed factual and legal review of each different business and each of several classes of clients. This review was completed in October 2005. Where a legal obligation was determined to exist, the Company estimated and accrued the costs of such an obligation. The liability recorded during 2005 was $22 million.Also in connection with accounting guidance issued by the Institute of Chartered Accountants in the U.K., Aon refined techniques used to estimate revenue on installment policies in the
consolidated statements of income, after consideration of derivative hedging, is insignificant for all periods presented.U.K. This change in estimate resulted in a one-time $23 million increase to Aon's revenue, which was recorded during 2005.Accounting and Disclosure Changes
As of October 1, 2000, Aon adopted FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended. The adoption of Statement No. 133 resulted in a $5 million cumulative effect of a change in accounting principle before applicable income taxes of $2 million and was recognized as an decrease to accumulated other comprehensive loss (note 3) in the consolidated statement of stockholders' equity for the year ended December 31, 2000. The adoption of Statement No. 133 did not have a material effect on net income for the year ended December 31, 2000. Refer to note 14 for a description of accounting policies relating to derivative financial instruments.In
December 1999, the Securities and Exchange Commission (SEC) issued SAB No. 101, which provides guidance for applying generally accepted accounting principles relating to the timing of revenue recognition in financial statements filed with the SEC. Effective January 1, 2000, in accordance with the provisions of SAB No. 101, Aon established a provision for estimated returned commissions from policy cancellations. In 1999 and previous years, Aon recognized returned commissions when they occurred. The cumulative effect of this accounting change was an after-tax charge of $7 million or $0.03 per share in the first quarter of 2000. Previously reported results for the remaining quarters of 2000 were not impacted by this accounting change.In September 2000, the FASB issued Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.Statement No. 140 replaces Statement No. 125 and revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. Statement No. 140 became effective for all transfers of financial assets occurring after March 31, 2001. Implementation of Statement No. 140 did not have a material impact on Aon's consolidated financial statements.In June 2001, the FASB issued Statement No. 141,Business Combinations, and Statement No. 142,Goodwill and Other Intangible Assets. Statement No. 141 superceded APB Opinion No. 16, and amended or superceded a number of interpretations of APB No. 16. Certain purchase accounting guidance in APB No. 16, as well as certain of its amendments and interpretations, have been carried forward. The statement eliminated the pooling of interests method of accounting for business combinations. It also changed the criteria to recognize intangible assets apart from goodwill. The requirements of Statement No. 141 were effective for any business combination accounted for by the purchase method that was completed after June 30, 2001. Statement No. 142 supercedes APB No. 17. Under Statement No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Separable intangible assets that have finite lives will continue to be amortized over their useful lives. The amortization provisions of Statement No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill acquired prior to July 1, 2001, amortization was discontinued effective as of January 1, 2002. Reported goodwill amortization was $118 million and $114 million for the years ended December 2001 and 2000, respectively.69In accordance with Statement No. 141, other intangible assets which resulted from acquisitions made prior to July 1, 2001, that did not meet the criteria for recognition apart from goodwill (as defined by Statement No. 141) were to be classified as goodwill upon adoption of the statement. Accordingly, Aon has reclassified $287 million of these intangibles, net of accumulated amortization, to goodwill as of January 1, 2002. Amounts on the December 31, 2001 consolidated statement of financial position have been reclassified for this item. In addition, Aon re-examined the useful lives of all intangibles in accordance with Statement No. 142. Reported amortization expense for all other intangibles was $54 million, $40 million and $40 million for the years ended December 31, 2002, 2001 and 2000, respectively.In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 supercedes Statement No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provides new rules on asset impairment and a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of Statement No. 121, the new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The new rules also supercede the provisions of APB No. 30,Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, with regard to reporting the effects of a disposal of a segment of a business and require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred. Statement No. 144 was effective January 1, 2002. This statement did not have a material impact on Aon's consolidated financial statements.In June 2002, the FASB issued Statement No. 146,Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 supercedes Emerging Issues Task Force (EITF) Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Statement No. 146 is effective January 1, 2003. The adoption of this statement is not expected to have a material impact on Aon's consolidated financial statements.In November 2002, the FASB issued Interpretation No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45). Guarantees meeting the characteristics described in FIN 45 are required to be initially recorded at fair value, which is different from the general current practice of recording a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5,Accounting for Contingencies.FIN 45's disclosure requirements are applicable for each guarantee, or each group of similar guarantees, even if the likelihood of the guarantor having to make payments is remote.FIN 45's disclosure requirements are effective for financial statements ending after December 15, 2002. Aon's disclosures may be found in note 14. FIN 45's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Implementation of this Interpretation is not expected to have a material impact on Aon's consolidated financial statements.In January2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46).This interpretation clarifiesFIN 46 provides a framework for identifying variable interest entities (VIEs) and determining when a company should include theapplicationassets, liabilities, non-controlling interests and result ofAccounting Research Bulletin No. 51,Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristicsactivities of acontrollingVIE in its consolidated financialinterest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.statements. FIN 46identifies circumstances in which the consolidation decision should be based on voting interests and other circumstances in which the consolidation decision should be based on variable interests. FIN 46's70disclosure requirements arewas effective immediately forfinancial statements issuedVIEs created after January 31, 2003.Aon's disclosures may be found in note 14.The provisions of FIN 46
are effective immediately for variable interest entities created after Januarywere adopted as of December 31, 2003 for Aon's interests in VIEs that are special purpose entities (SPEs).Aon Capital A is a wholly-owned statutory business trust created for the purpose of issuing mandatorily redeemable capital securities (Capital Securities). The sole asset of Aon Capital A is a $726 million aggregate principal amount of Aon's 8.205% Junior Subordinated Deferrable Interest Debentures due January 1, 2027. Aon determined that it is not the primary beneficiary of Aon Capital A, a VIE, and
are effectivewas required to deconsolidate the Trust based on the provisions of FIN 46 on December 31, 2003. Prior to the deconsolidation of Aon Capital A, the after-tax interest incurred on the Capital Securities was reported as minority interest in the consolidated statements of income. Beginning in 2004, interest expense on these notes payable was reported as part of interest expense in the consolidated statements of income. There was no effect on net income or consolidated stockholders' equity as a result of this deconsolidation.Aon adopted the provisions of FIN 46 for
existingits variableinterest entities no later than the beginninginterests in all other VIEs as ofthe first interim reporting period beginning after June 15, 2003. Aon hasMarch 31, 2004, which did notyet determined thehave a material effectif any, this statement will haveon the consolidated financial statements. See Note 11 for additional information.In 2004, the FASB issued Statement No. 123 (revised 2004)Share-Based Payment ("Statement No. 123(R)"), which is a revision of Statement No. 123. Statement No. 123(R) supersedes APB No. 25 and amends FASB Statement No. 95,Statement of Cash Flows. Generally, the approach in Statement No. 123(R) is similar to the approach described in Statement No. 123. However, Statement No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Statement No. 123(R) originally required adoption no later than July 1, 2005. In April 2005, the Securities and Exchange Commission ("SEC") issued a release that amended the compliance dates for Statement No. 123(R). Under the SEC's new rule, the Company will be required to apply Statement No. 123(R) as of January 1, 2006. Aon plans to adopt Statement No. 123(R) using the modified-prospective method, in which compensation cost is recognized beginning January 1, 2006 (a) based on the requirements of Statement No. 123(R) for all share-based payments granted after January 1, 2006 and (b) based on the requirements of Statement No. 123 for all awards granted to employees prior to January 1, 2006 that remain unvested as of January 1, 2006.
The effect of adopting Statement No. 123(R) in 2006 for stock options issued prior to January 1, 2006, is currently estimated to be approximately $0.04 per diluted income per share. In addition, Statement No. 123(R) requires an adjustment to record the cumulative effect of a change in accounting principle, net of any tax effect, to reflect the compensation cost that would not have been recognized in prior periods had forfeitures been estimated during those periods. This adjustment applies only to compensation cost previously recognized in the financial statements for awards that are unvested as of January 1, 2006, and is currently estimated to be approximately $0.02 per diluted income per share.
Previously Planned Divestiture of Underwriting BusinessIn April 2001, Aon's Board of Directors approved a preliminary plan to spin off its insurance underwriting businesses to Aon's common stockholders, creating two independent, publicly traded companies. In August 2002, Aon announced it was no longer planning to spin off all the underwriting businesses, but was considering a sale or partial spin-off. At that time, a prompt sale of all or part of the underwriting operations, at an acceptable price, was believed to be achievable within a reasonable timeframe. However, due to adverse market conditions for mergers and acquisitions, Aon announced in October 2002 that it had decided not to sell, or spin off, its major underwriting subsidiaries. In fourth quarter 2002, Aon announced its plans to sell Sheffield Insurance Corporation, a small property-casualty company.In 2002, Aon incurred approximately $50 million of pretax expenses associated with its prior spin-off plans and related initiatives that will not be pursued. These expenses, recorded primarily in general expenses in the consolidated statements of income, represent staff build-up and severance costs, corporate overhead and advisory fees and costs tied to an anticipated, but now abandoned, expansion of certain specialty property and casualty underwriting.ReclassificationReclassificationsCertain amounts in prior years' consolidated financial statements have been reclassified to conform to the
20022005 presentation.2. Goodwill and Other Intangible Assets
In accordance with FASB Statement No. 142, allGoodwill represents the excess ofAon's goodwill will no longer be amortized.cost over the fair market value of the net assets acquired. Goodwilland other intangible assets areis allocated to various reporting units, which are eitheratits operating segments or one reporting level below the operating segment.In prior years, goodwill amortization has been systematically expensed in the Corporate and Other segment. Statement No. 142Goodwill is not amortized but is subject to impairment testing at least annually. The impairment testing requires Aon to compare the fair value oftheits reportingunitunits toitstheir carrying valueon an annual basisto determine if there is potential impairment of goodwill. If the fair value ofthea reporting unit is less than its carrying value at the valuation date, an impairment loss would be recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than the recorded amount of goodwill. Fair value is estimated based on various valuationmetrics.approaches. In
first quarter 2002, Aon completed its initial impairment review that indicated that there was no impairment as of January 1, 2002. Inthe fourth quarter2002,2005 and 2004, Aon completed its annual impairment review that affirmedthatthere was no impairment as of October 12002(the annual evaluation date).A reconciliationWhen a business entity is sold, goodwill is allocated to the disposed entity based on the fair value ofnet income forthat entity compared to theyears ended December 31, 2001 and 2000 to adjusted net income had Statement No. 142 andfair value of thereclassification provisions of Statement No. 141 been applicable for all periods presented follows:reporting unit in which it is included.Year Ended December 31, 2001 Year Ended December 31, 2000 Amount Basic Net
Income
Per ShareDilutive Net
Income Per
ShareAmount Basic Net
Income
Per ShareDilutive Net
Income Per
Share(millions, except per share data) Reported net income $ 147 $ 0.54 $ 0.53 $ 474 $ 1.81 $ 1.79 Add back amortization (net of tax): Goodwill 104 0.38 0.38 98 0.37 0.37 Intangible assets reclassified to goodwill 10 0.04 0.04 10 0.04 0.04 Less amortization (net of tax): Other intangible assets—change in amortization periods (5 ) (0.02 ) (0.02 ) (5 ) (0.02 ) (0.02 ) $ 256 $ 0.94 $ 0.93 $ 577 $ 2.20 $ 2.18 The changes in the net carrying amount of goodwill by operating segment for the
yearyears ended December 31,20022005 and 2004, respectively, are as follows:Insurance
Brokerage
and Other
ServicesConsulting Insurance
UnderwritingTotal (millions) Balance as of December 31, 2001 $ 3,239 $ 366 $ 237 $ 3,842 Goodwill acquired during the period 58 5 — 63 Foreign currency revaluation 190 1 3 194 Balance as of December 31, 2002 $ 3,487 $ 372 $ 240 $ 4,099 (millions) Risk and
Insurance
Brokerage
ServicesConsulting Insurance
UnderwritingTotal Balance as of January 1, 2005 $ 3,991 $ 375 $ 245 $ 4,611 Goodwill acquired 69 — 6 75 Income tax adjustments related to previous acquisitions (14 ) — — (14 ) Goodwill related to disposals (1 ) — — (1 ) Foreign currency revaluation (281 ) 3 (2 ) (280 ) Balance as of December 31, 2005 $ 3,764 $ 378 $ 249 $ 4,391 Balance as of January 1, 2004 $ 3,770 $ 381 $ 242 $ 4,393 Goodwill acquired 69 1 — 70 Goodwill related to disposals (48 ) (5 ) — (53 ) Intersegment transfers 4 (4 ) — — Foreign currency revaluation 196 2 3 201 Balance as of December 31, 2004 $ 3,991 $ 375 $ 245 $ 4,611 72Other intangible assets are classified into three categories:- •
- "Customer Related and Contract Based" include client lists as well as non-compete covenants;
- •
- "Present Value of Future Profits" represent the future profits of purchased books of business of the insurance underwriting subsidiaries; and
- •
- "Marketing, Technology and Other" are all other purchased intangibles not included in the preceding categories.
AmortizableOther intangible assets by asset classfollow:are as follows:Customer
Related and
Contract BasedPresent Value
of Future
ProfitsMarketing,
Technology
and OtherTotal (millions) As of December 31, 2002 Gross carrying amount $ 225 $ 76 $ 162 $ 463 Accumulated amortization 148 24 66 238 Net carrying amount $ 77 $ 52 $ 96 $ 225 As of December 31, 2001 Gross carrying amount $ 237 $ 83 $ 92 $ 412 Accumulated amortization 151 3 16 170 Net carrying amount $ 86 $ 80 $ 76 $ 242 (millions) Customer
Related and
Contract BasedPresent Value
of Future
ProfitsMarketing,
Technology
and OtherTotal As of December 31, 2005 Gross carrying amount $ 212 $ 86 $ 175 $ 473 Accumulated amortization 178 79 101 358 Net carrying amount $ 34 $ 7 $ 74 $ 115 As of December 31, 2004 Gross carrying amount $ 218 $ 87 $ 158 $ 463 Accumulated amortization 176 67 87 330 Net carrying amount $ 42 $ 20 $ 71 $ 133 The cost of other intangible assets is being amortized over a range of 2 to 10 years, with a weighted average original life of 7.6 years. Amortization expense for
amortizableintangible assets for the years ending December 31,2003, 2004, 2005,2006, 2007, 2008, 2009 and20072010 is estimated to be$50$40 million,$43$21 million,$37$17 million,$26$15 million and$11$12 million, respectively.When impairment indicators arise, Aon assesses the recoverability of its intangible assets through an analysis of expected future cash flows.
3. Other Comprehensive
LossIncome (Loss)The components of other comprehensive
lossincome (loss) and the related tax effects are as follows:Year ended December 31, 2002 Amount
Before
TaxesIncome Tax
(Expense)
BenefitAmount
Net
of Taxes(millions) Cumulative effect of change in accounting principle related to derivatives $ — $ — $ — Net derivative gains (losses) arising during the year 33 (13 ) 20 Net derivative gains arising during fourth quarter 2000 — — — Reclassification adjustment 3 (1 ) 2 Net derivative gains (losses) 36 (14 ) 22 Unrealized holding gains (losses) arising during the year 31 (12 ) 19 Reclassification adjustment 38 (15 ) 23 Net unrealized investment gains 69 (27 ) 42 Net foreign exchange gains (losses) 113 (44 ) 69 Net additional minimum pension liability adjustment (876 ) 324 (552 ) Total other comprehensive loss $ (658 ) $ 239 $ (419 ) 73(millions) Year ended December 31, 2005 Pretax Income Tax
(Expense)
BenefitNet
of TaxNet derivative losses arising during the year $ (20 ) $ 8 $ (12 ) Reclassification adjustment (64 ) 25 (39 ) Net derivative losses (84 ) 33 (51 )
Unrealized holding losses arising during the year
(8
)
3
(5
)Reclassification adjustment (8 ) 3 (5 ) Net unrealized investment losses (16 ) 6 (10 )
Net foreign exchange translation
(248
)
8
(240
)Net additional minimum pension liability adjustment (253 ) 80 (173 ) Total other comprehensive loss $ (601 ) $ 127 $ (474 ) TheIn 2005, the pretaxamount of $876 million fornet additional minimum pension liability adjustment of $253 million includes$30$19 million related tothedefined benefit pension plans in Canadarecognized forand $4 million related to defined benefit plans in Germany.(millions) Year ended December 31, 2004 Pretax Income Tax
(Expense)
BenefitNet
of TaxNet derivative gains arising during the year $ 33 $ (14 ) $ 19 Reclassification adjustment (48 ) 19 (29 ) Net derivative losses (15 ) 5 (10 )
Unrealized holding gains arising during the year
70
(27
)
43
Reclassification adjustment (2 ) 1 (1 ) Net unrealized investment gains 68 (26 ) 42
Net foreign exchange translation
197
(51
)
146
Net additional minimum pension liability adjustment (18 ) 20 2 Total other comprehensive income $ 232 $ (52 ) $ 180 In 2004, the
first timepretax net additional minimum pension liability adjustment of $18 million included $17 million related to defined benefit pension plans in2002.Canada and $38 million related to defined benefit plans in Germany.Year ended December 31, 2001 Amount
Before
TaxesIncome Tax
(Expense)
BenefitAmount
Net
of Taxes(millions) Cumulative effect of change in accounting principle related to derivatives $ — $ — $ — Net derivative gains (losses) arising during the year (6 ) 2 (4 ) Net derivative gains arising during fourth quarter 2000 — — — Reclassification adjustment (4 ) 2 (2 ) Net derivative gains (losses) (10 ) 4 (6 ) Unrealized holding gains (losses) arising during the year (9 ) 3 (6 ) Reclassification adjustment 59 (23 ) 36 Net unrealized investment gains 50 (20 ) 30 Net foreign exchange gains (losses) (95 ) 37 (58 ) Net additional minimum pension liability adjustment (203 ) 79 (124 ) Total other comprehensive loss $ (258 ) $ 100 $ (158 ) Year ended December 31, 2000 Amount
Before
TaxesIncome Tax
(Expense)
BenefitAmount
Net
of Taxes(millions) Cumulative effect of change in accounting principle related to derivatives $ 5 $ (2 ) $ 3 Net derivative gains (losses) arising during the year — — — Net derivative gains arising during fourth quarter 2000 4 (1 ) 3 Net derivative gains (losses) 9 (3 ) 6 Unrealized holding gains (losses) arising during the year 45 (14 ) 31 Reclassification adjustment 26 (8 ) 18 Net unrealized investment gains 71 (22 ) 49 Net foreign exchange gains (losses) (188 ) 73 (115 ) Net additional minimum pension liability adjustment (13 ) 5 (8 ) Total other comprehensive loss $ (121 ) $ 53 $ (68 ) (millions) Year ended December 31, 2003 Pretax Income Tax
(Expense)
BenefitNet
of TaxNet derivative gains arising during the year $ 68 $ (27 ) $ 41 Reclassification adjustment (22 ) 9 (13 ) Net derivative gains 46 (18 ) 28
Unrealized holding gains arising during the year
31
(11
)
20
Reclassification adjustment — — — Net unrealized investment gains 31 (11 ) 20
Net foreign exchange translation
379
(148
)
231
Net additional minimum pension liability adjustment (225 ) 39 (186 ) Total other comprehensive income $ 231 $ (138 ) $ 93 In 2003, the pretax net additional minimum pension liability adjustment of $225 million included $(4) million related to defined benefit pension plans in Canada.
The components of accumulated other comprehensive loss, net of related tax, are as follows:
(millions) As of December 31, 2005 2004 2003 Net derivative gains (losses) $ (11 ) $ 40 $ 50 Net unrealized investment gains 52 62 20 Net foreign exchange translation (119 ) 121 (25 ) Net additional minimum pension liability (1,077 ) (904 ) (906 ) Accumulated other comprehensive loss $ (1,155 ) $ (681 ) $ (861 ) As of December 31 2002 2001 2000 (millions) Net derivative gains $ 22 $ — $ 6 Net unrealized investment gains (losses) — (42 ) (72 ) Net foreign exchange losses (256 ) (325 ) (267 ) Net additional minimum pension liability (720 ) (168 ) (44 ) Accumulated other comprehensive loss $ (954 ) $ (535 ) $ (377 ) 74Acquisitions
In
2002,2005, 2004 and 2003, Aon completed severalimmaterialsmall acquisitions,mostprimarily related totheits insurance brokerage operations.In these transactions, AonThe following table includes the aggregate amounts paidan aggregateand intangible assets recorded as a result ofapproximately $111 million in cash and $3 million in common stock.the acquisitions.(millions) Years ended December 31, 2005 2004 2003 Amounts paid: Cash $ 81 $ 80 $ 56 Common stock 5 — 8 Total $ 86 $ 80 $ 64
Intangible assets:
Goodwill $ 75 $ 70 $ 45 Other intangible assets 39 30 11 Total $ 114 $ 100 $ 56 Internal funds, short-term borrowings and common stock financed the acquisitions.
Goodwill of approximately $51 million and other intangible assets of approximately $48 million, accounted for on a preliminary basis, resulted from these acquisitions.With respect to certain acquisitions, Aon is contingently liable to issue additional shares based on the occurrence of future events which would increase the purchase price of certain acquisitions. Approximately 230,000 shares were contingently issuable at December 31, 2002 related to current and prior year acquisitions. In January 2003, approximately 173,000 shares were issued in relation to a prior year acquisition.In 2001, Aon acquired ASI Solutions Incorporated (ASI), a worldwide provider of human resource outsourcing and compensation consulting services, and First Extended, Inc. (FEI), an underwriter and administrator of automotive extended warranty products, and certain other insurance brokerage and consulting operations. In these transactions, Aon paid an aggregate of approximately $107 million in cash and $197 million in common stock. Internal funds, short-term borrowings and common stock financed the acquisitions. Goodwill of approximately $282 million and other intangible assets of approximately $72 million, resulted from these acquisitions.In July 2001, Aon acquired the common stock of two entities controlled by Aon's Chairman and Chief Executive Officer. The acquisition was financed by the issuance of approximately 22.4 million shares of Aon common stock. The two acquired entities owned, in the aggregate, approximately 22.4 million shares of Aon common stock, which are included in treasury stock, and had additional net assets, net of expenses, totaling $5 million. This transaction did not have a material effect on Aon's total assets, liabilities or stockholders' equity.In 2000, Aon acquired Actuarial Sciences Associates, Inc., Horizon Consulting Group, Inc., and certain other insurance brokerage and consulting operations for approximately $85 million in cash and $145 million in common stock. Internal funds, short-term borrowings and common stock financed the acquisitions. Goodwill of approximately $225 million resulted from these acquisitions.The results of operations of these acquisitions
all of which were accounted for by the purchase method,are included in the consolidated financial statements from the dates they were acquired. Pro forma results of these acquisitions are not materially different from reported results.In accordance with a 1992 purchase agreement, securities with a value of $41 million, previously held under an escrow agreement (as amended), were released. All current balances with Aon were settled.5. Restructuring Charges
2005 Restructuring
chargesPlanIn
2002, Aon made payments2005, the Company announced that it was reviewing the revenue potential and cost structure of$12each of its businesses. As a result of this review, the Company has adopted restructuring initiatives that are expected to be completed in 2007 and result in cumulative pretax charges totaling approximately $262 million,onincluding workforce reductions and lease consolidation costs, asset impairments and other expenses necessary to implement the restructuringcharges and purchase accounting liabilitiesinitiative. Costs related tobusiness combinations.the restructuring are included in general expenses and depreciation and amortization in the accompanying consolidated statements of income.The following is a summary of 2005 restructuring and related expenses by type incurred and estimated to be incurred through the end of the restructuring initiative:
(millions) Actual
2005Estimated
TotalWorkforce reduction $ 116 $ 157 Lease consolidation 20 57 Asset impairments 17 23 Other related expenses 5 25 Total restructuring and related expenses $ 158 $ 262 The following is a summary of our restructuring and related costs by segment incurred and estimated to be incurred through the end of the restructuring initiative:
(millions) Actual
2005Estimated
TotalRisk & Insurance Brokerage Services $ 143 $ 233 Consulting 8 18 Insurance Underwriting 3 4 Corporate & Other 4 7 Total restructuring and related expenses $ 158 $ 262 As of December 31, 2005, the Company's restructuring liabilities are as follows:
(millions) Balance at January 1, 2005 $ — Expensed in 2005 141 Cash payments in 2005 (23 ) Foreign currency revaluation (2 ) Balance at December 31, 2005 $ 116 Restructuring charges—prior years
In 1996 and 1997, Aon recorded
pretax special charges of $60 million and $145 million, respectively, related to management's commitment to a formal plan ofrestructuringAon's brokerage operationsliabilities as a result of the acquisition of Alexander & Alexander Services, Inc.(A&A). Also in 1997, following management's commitment to a formal plan of restructuring the("A&A&A") and BainHogg brokerage operations, Aon recorded $264 million in costs to restructure those acquisitions. Together, these costs were primarily related to termination benefits of $152 million, lease abandonments and other exit costs of $280 million, and asset impairments of $37 million relating to the abandonment of systems and real estate space. All termination benefits have been paid.Hogg. The remaining liability of75$51$26 million is primarily for lease abandonmentsand other exit costs,and is being paid out overseverala number of years, as planned.The following table sets forth the activity related to these liabilities:
(millions) Balance at December 31, 1999 $ 105 Cash payments in 2000 (25 ) Charge to expense in 2000 4 Foreign currency revaluation (6 ) Balance at December 31, 2000 78 Cash payments in 2001 (19 ) Foreign currency revaluation (1 ) Balance at December 31, 2001 58 Cash payments in 2002 (11 ) Foreign currency revaluation 4 Balance at December 31, 2002 $ 51 (millions) Balance at January 1, 2003 $ 51 Cash payments in 2003 (14 ) Foreign currency revaluation 3 Balance at December 31, 2003 40 Cash payments in 2004 (9 ) Foreign currency revaluation 2 Balance at December 31, 2004 $ 33 Cash payments in 2005 (5 ) Foreign currency revaluation (2 ) Balance at December 31, 2005 $ 26 6. Disposal of Operations
AllIn 2004, Aon sold Cambridge Integrated Services Group ("Cambridge"), its U.S. claims services business, which was included in the Risk and Insurance Brokerage Services segment, to Scandent Holdings Mauritius Limited ("SHM"), for $90 million in cash plus convertible preferred stock in SHM valued at $15 million.Because of Aon's
unpaid liabilities relatingconvertible preferred stock holding and other factors, the results of Cambridge prior toacquisitions are reflectedthe sale date and the pretax gain of $15 million on the sale of this business remained ingeneral expense liabilities inincome from continuing operations. Due to a book-tax basis difference resulting primarily from goodwill, a tax benefit of $26 million was recorded on theconsolidated statements of financial position.sale.5. Business Transformation PlanDiscontinued OperationsIn fourth quarter
2000, after final approval by2005, Aon completed the sale of Swett & Crawford ("Swett"), itsBoardU.S.-based wholesale insurance brokerage unit. Previously, Swett was included in the Risk and Insurance Brokerage Services segment. The sale resulted in a pretax gain ofDirectors,$239 million.In fourth quarter 2005, Aon
begancommitted to sell acomprehensivenon-core Australian brokerage unit, which was previously included in the Risk and Insurance Brokerage Services segment. This operation was sold in early first quarter 2006 for a nominal pretax gain, which will be recognized in first quarter 2006.In 2004, Aon sold the following businesses:
- •
- A small non-core U.S. brokerage unit, resulting in a pretax loss of $4 million on the revaluation of this business,
transformation plan designed to enhance client service, improve productivity through process redesignwhich was previously included in the Risk andaccelerate growth. CostsInsurance Brokerage Services segment. - •
- Its U.K. reinsurance brokerage runoff unit, which was previously included in the Risk and Insurance Brokerage Services segment, resulting in a pretax gain of $1 million.
- •
- Its U.K. claims services businesses, which were previously included in the
plan include special chargesRisk andtransition costs.Insurance Brokerage Services segment, resulting in a pretax loss of $24 million. - •
- A non-core Consulting subsidiary, resulting in a pretax gain of $4 million.
In
connection with the overall plan and strategic initiatives,2003, Aonrecorded total net expenses of $294 million, ofsold its automotive finance servicing business, which$6 million of income, $218 million of expenses and $82 million of expenses were recordedhad been in2002,run-off since first quarter 2001 and2000, respectively, and are reflected in general expenseswas included in theconsolidated statements of income.In 2000, expenses included costs related to termination benefits of $54 million, covering notification to 750 employees.Corporate and Othercosts to exit an activity of $6 million were incurred, which included $2 million for abandoned leases and $4 million for direct costs necessary to complete portionssegment. A pretax loss on the revaluation of the businesstransformation plan and cash settlement necessary to exit contractual obligations. Other expensesof$22$23 millionwere alsowas recorded in2000, including fixed asset impairments of $20 million (of which $16 million related to information systems assets), as well as $2 million of other costs.2003.For 2001, expenses included costs related to termination benefits of $109 million, covering notification to 3,150 employees. Other costs to exit an activity of $21 million were incurred, which included $10 million for abandoned leases and $11 million for direct costs necessary to complete portions of the business transformation plan and cash settlements necessary to exit contractual obligations.Other expenses of $88 million were recorded in 2001.Asubsidiary of Aon has acted as a servicing agent for a limited partnership affiliated with automobile dealerships to provide auto financing to dealerships on a cooperative basis through various financing conduit facilities. This subsidiary also has a general partnership interest in the limited partnership. Continued competition from financing provided by the financing arms of automobile manufacturers caused Aon to evaluate whether it wished to continue in this servicing partner relationship. In first quarter 2001, Aon elected to cease servicing new business and run off its existing service obligation. The limited partnership affiliated with automobile dealerships established allowances for uncollectible loan balances. In conjunction with the decision to discontinue new auto financing receivables, the limited partners are not obligated to contribute76additional capital beyond what they have already provided for any shortfall in the reserves for their individual book of business. Aon is required to fund any shortfalls in accordance with Aon's limited recourse to the funding facility arranged by the servicing agent. The servicing agent estimated the liability that Aon would have for the existing shortfall at the time Aon decided to discontinue new auto loan financing under the facility. Aon recorded a charge to establish this obligation in accordance with FASB Statement No. 5, which amounted to an expense of $44 million. For the year 2000, the last full year of operation, these servicing operations, which were part of Aon's Insurance Brokerage and Other Services segment, generated revenue of $42 million and pretax income of $3 million.During 2001 Aon exited four other joint venture operations as a part of its business transformation process. For the year 2000, the last full year of operation, these joint ventures, which were part of Aon's Insurance Brokerage and Other Services segment, generated less than $1 million of revenue and incurred nearly $3 million of pretax losses. The total cost to exit these four joint ventures was $12 million. Additional expenses in 2001 included a provision of $14 million for discontinuing supplemental accident and health insurance business operations in Mississippi. The expense included severance costs and expenses associated with the reassignment of agents, as well as estimated costs for resolving asserted and unasserted claims and suits. A $5 million expense was recorded relating to the write-down of certain agent receivables in conjunction with the restructuring of a worksite marketing agent commission pay structure and operations.Further fixed asset impairments of $10 million (of which $9 million related to information systems assets) were taken in 2001, as well as $3 million of other costs.In the second quarter 2002, $6 million of pretax costs previously incurred in connection with the business transformation plan in the U.S. were reversed and included as a credit to general expenses.Approximately 3,700 employees have either departed voluntarily or have positions that have been eliminated. Most of the terminations have occurred and are related to the Insurance Brokerage and Other Services segment in the U.S. and the U.K.The following table sets forth the activity related to the liability for termination benefits and other costs to exit an activity:Termination
BenefitsOther Costs
to Exit an
ActivityTotal (millions) Expense charged in 2000 $ 54 $ 6 $ 60 Cash payments in 2000 (13 ) (3 ) (16 ) Balance at December 31, 2000 41 3 44 Expense charged in 2001 109 21 130 Cash payments in 2001 (73 ) (20 ) (93 ) Foreign currency revaluation (2 ) — (2 ) Balance at December 31, 2001 75 4 79 Credit to expense in 2002 (6 ) — (6 ) Cash payments in 2002 (46 ) (3 ) (49 ) Foreign currency revaluation 4 — 4 Balance at December 31, 2002 $ 27 $ 1 $ 28 All of Aon's unpaid liabilities relating to business transformation plan are reflected in general expense liabilities in the consolidated statements of financial position. Termination benefits of $15 million and $2 million are expected to be paid in 2003 and 2004, respectively, with the remainder payable thereafter.776.&A Discontinued OperationsPrior to its acquisition by Aon, A&A discontinued its property and casualty insurance underwriting operations in 1985, some of which were then placed into run-off, with the remainder sold in 1987. In connection with those sales, A&A provided indemnities to the purchaser for various estimated and potential liabilities, including provisions to cover future losses attributable to insurance pooling arrangements, a stop-loss reinsurance agreement and actions or omissions by various underwriting agencies previously managed by an A&A subsidiary.
In January 2002, Aon settled certain of these liabilities. The settlement had no material effect on the consolidated financial statements.As of December 31,2002,2005 and 2004, the liabilities associated with the foregoing indemnities were included in other liabilities in the consolidated statements of financial position. Such liabilities amounted to$48$5 million and $16 million, respectively, net of reinsurance recoverables and other assets of$101 million.$83 million and $82 million, respectively. In 2005, a pretax expense of $11 million was recorded for consulting and legal costs related to completed and contemplated settlements and actuarial refinements to claims reserves and reinsurance recoverables. The insurance liabilities represent estimates of known and future claims expected to be settled over the next 20 to 30 years, principally with regards to asbestos, pollution and other health
hazardexposures.Although these insurance liabilities represent a best estimate of the probable liabilities, adverse developments may occur given the nature of the information available and the variables inherent in the estimation processes.
Based on current estimates, management believes that the established liabilitiesThe operating results of all these businesses are classified as discontinued operations
are sufficient.and prior years' operating results have been reclassified to discontinued operations, as follows.78(millions) Years ended December 31, 2005 2004 2003 Revenues: Swett $ 183 $ 228 $ 242 U.K. brokerage units — 29 79 Automotive finance servicing business — — 13 Other 10 17 25 Total revenues $ 193 $ 274 $ 359 Pretax gain (loss): Operations: Swett $ 2 $ 49 $ 53 U.K. brokerage units — (16 ) (16 ) Automotive finance servicing business — (1 ) (32 ) Other (8 ) 1 (1 ) (6 ) 33 4 Gain (loss) on sale: Swett 239 — — U.K. brokerage units (3 ) (23 ) — Automotive finance servicing business — — (23 ) 236 (23 ) (23 ) Total pretax gain (loss) $ 230 $ 10 $ (19 ) After-tax gain (loss): Operations $ (6 ) $ 19 $ — Sale 101 (18 ) (14 ) Total $ 95 $ 1 $ (14 ) 7. Investments
The components of investment income are as follows:
Years ended December 31 2002 2001 2000 (millions) Short-term investments $ 131 $ 191 $ 214 Fixed maturities: Interest income 118 137 172 Income on disposals 51 37 13 Losses on disposals(1) (33 ) (21 ) (12 ) Total 136 153 173 Equity securities: Dividend income 15 25 31 Income on disposals 3 13 28 Losses on disposals(1) (63 ) (37 ) (9 ) Total (45 ) 1 50 Limited partnerships—equity earnings 14 (94 ) 73 Other investments: Interest, dividend and other income 40 10 11 Endurance Specialty—equity earnings 21 — — Losses on disposals(1) (39 ) (41 ) (5 ) Total 22 (31 ) 6 Gross investment income 258 220 516 Less: investment expenses 6 7 8 Investment income $ 252 $ 213 $ 508 (millions) Years ended December 31, 2005 2004 2003 Short-term investments $ 162 $ 94 $ 92 Fixed maturities: Interest income 164 120 93 Income on disposals 16 8 21 Losses (1) (6 ) (7 ) (19 ) Total 174 121 95 Equity securities: Dividend income 2 3 4 Income on disposals — 4 9 Losses (1) — (3 ) (2 ) Total 2 4 11 Limited partnerships — equity earnings 1 6 1 Other investments: Interest, dividend and other income 13 8 11 Endurance — warrants 10 — 80 Endurance — equity earnings — 38 46 Net gains (losses) (1) (13 ) 56 (19 ) Total 10 102 118 Gross investment income 349 327 317 Less: investment expenses 6 6 7 Investment income $ 343 $ 321 $ 310 - (1)
IncludesIn addition to losses on disposals, includes other-than-temporary impairment write-downs of$130$11 million,$57$3 million and$10$36 million in2002, 20012005, 2004 and2000,2003, respectively.
The components of net unrealized investment gains
(losses)are as follows:As of December 31 2002 2001 2000 (millions) Fixed maturities $ (4 ) $ (28 ) $ (45 ) Equity securities 3 (43 ) (72 ) Other investments 3 4 — Deferred tax credit (charge) (2 ) 25 45 Net unrealized investment gains (losses) $ — $ (42 ) $ (72 ) 79(millions) As of December 31, 2005 2004 2003 Fixed maturities $ (39 ) $ 12 $ (4 ) Equity securities (1 ) 1 5 Other investments 125 88 32 Deferred taxes (33 ) (39 ) (13 ) Net unrealized investment gains $ 52 $ 62 $ 20 The pretax changes in net unrealized investment gains
(losses)are as follows:(millions) Years ended December 31, 2005 2004 2003 Fixed maturities $ (51 ) $ 16 $ — Equity securities (2 ) (4 ) 2 Other investments 37 56 29 Total $ (16 ) $ 68 $ 31 Years ended December 31 2002 2001 2000 (millions) Fixed maturities $ 24 $ 17 $ 55 Equity securities 46 29 16 Other investments (1 ) 4 — Total $ 69 $ 50 $ 71 The amortized cost and fair value of investments in fixed maturities by type and equity securities are as follows:
As of December 31, 2002 Amortized
CostGross
Unrealized
GainsGross
Unrealized
LossesFair
Value(millions) U.S. government and agencies $ 378 $ 7 $ — $ 385 States and political subdivisions 4 1 — 5 Foreign governments 564 9 — 573 Corporate securities 1,140 16 (36 ) 1,120 Mortgage-backed securities 7 — (1 ) 6 Total fixed maturities 2,093 33 (37 ) 2,089 Total equity securities 59 5 (2 ) 62 Total $ 2,152 $ 38 $ (39 ) $ 2,151 As of December 31, 2001 Amortized
CostGross
Unrealized
GainsGross
Unrealized
LossesFair
Value(millions) U.S. government and agencies $ 355 $ 8 $ (2 ) $ 361 States and political subdivisions 3 — — 3 Foreign governments 515 8 (2 ) 521 Corporate securities 1,243 14 (54 ) 1,203 Mortgage-backed securities 42 — — 42 Other fixed maturities 19 — — 19 Total fixed maturities 2,177 30 (58 ) 2,149 Total equity securities 425 6 (49 ) 382 Total $ 2,602 $ 36 $ (107 ) $ 2,531 80(millions) As of December 31, 2005 Amortized
CostGross
Unrealized
GainsGross
Unrealized
LossesFair
ValueGovernment: U.S. government and agencies $ 439 $ 2 $ (8 ) $ 433 U.S. state and political subdivisions 111 — (1 ) 110 Foreign governments: Canada 662 3 (7 ) 658 U.K. 221 1 — 222 Other 959 6 (13 ) 952 Total foreign governments 1,842 10 (20 ) 1,832 Corporate securities: Basic materials 68 — (1 ) 67 Consumer cyclical 46 — (1 ) 45 Consumer staples 58 — (1 ) 57 Diversified 107 — — 107 Energy 129 1 (2 ) 128 Financial 748 1 (11 ) 738 Technology 147 1 (3 ) 145 Transport & services 27 — — 27 Utilities 87 1 (2 ) 86 Other 25 — — 25 Total 1,442 4 (21 ) 1,425 Mortgage-and asset-backed securities 423 1 (6 ) 418 Total fixed maturities 4,257 17 (56 ) 4,218 Total equity securities 41 — (1 ) 40 Total $ 4,298 $ 17 $ (57 ) $ 4,258 (millions) As of December 31, 2004 Amortized
CostGross
Unrealized
GainsGross
Unrealized
LossesFair
ValueGovernment: U.S. government and agencies $ 408 $ 3 $ (4 ) $ 407 U.S. state and political subdivisions 66 1 — 67 Foreign governments: Canada 625 9 (1 ) 633 U.K. 359 — (2 ) 357 Other 699 7 (5 ) 701 Total foreign governments 1,683 16 (8 ) 1,691 Corporate securities: Basic materials 53 1 — 54 Consumer cyclical 46 2 (1 ) 47 Consumer staples 59 1 — 60 Diversified 197 — — 197 Energy 131 4 — 135 Financial 518 4 (7 ) 515 Technology 55 — (1 ) 54 Utilities 98 1 — 99 Other 16 — — 16 Total 1,173 13 (9 ) 1,177 Mortgage-and asset-backed securities 140 1 (1 ) 140 Total fixed maturities 3,470 34 (22 ) 3,482 Total equity securities 39 1 �� 40 Total $ 3,509 $ 35 $ (22 ) $ 3,522 The amortized cost and fair value of fixed maturities by contractual maturity as of December 31, 2005, are as follows:
As of December 31, 2002 Amortized
CostFair
Value(millions) Amortized
CostFair
Value(millions) Due in one year or less $ 96 $ 98 $ 291 $ 289 Due after one year through five years 1,135 1,143 1,953 1,933 Due after five years through ten years 359 362 1,222 1,212 Due after ten years 496 480 368 366 Mortgage-backed securities 7 6 Mortgage-and asset-backed securities 423 418 Total fixed maturities $ 2,093 $ 2,089 $ 4,257 $ 4,218 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.
Securities on deposit for regulatory authoritiesThe following table analyzes our investment positions with unrealized losses segmented by type and period of continuous unrealized loss asrequiredof December 31, 2005.Investment Grade ($ in millions) 0-6
Months6-12
Months>12
MonthsTotal FIXED MATURITIES U.S. government and agencies # of positions 31 15 18 64 Fair Value $ 122 $ 63 $ 176 $ 361 Amortized Cost 123 64 182 369 Unrealized Loss (1 ) (1 ) (6 ) (8 )
States and political subdivisions
# of positions 20 8 2 30 Fair Value $ 69 $ 7 $ 6 $ 82 Amortized Cost 70 7 6 83 Unrealized Loss (1 ) — — (1 )
Foreign government
# of positions 72 45 28 145 Fair Value $ 605 $ 289 $ 248 $ 1,142 Amortized Cost 611 295 256 1,162 Unrealized Loss (6 ) (6 ) (8 ) (20 )
Corporate securities
# of positions 293 141 57 491 Fair Value $ 556 $ 256 $ 172 $ 984 Amortized Cost 564 262 179 1,005 Unrealized Loss (8 ) (6 ) (7 ) (21 )
Mortgage and asset backed securities
# of positions 194 170 18 382 Fair Value $ 177 $ 116 $ 20 $ 313 Amortized Cost 179 119 21 319 Unrealized Loss (2 ) (3 ) (1 ) (6 )
TOTAL FIXED MATURITIES
# of positions 610 379 123 1,112 Fair Value $ 1,529 $ 731 $ 622 $ 2,882 Amortized Cost 1,547 747 644 2,938 Unrealized Loss (18 ) (16 ) (22 ) (56 )
% of Total Unrealized Loss
31
%
28
%
39
%
98
%Not Rated ($ in millions) 0-6
Months6-12
Months>12
MonthsTotal TOTAL EQUITY SECURITIES # of positions 3 1 — 4 Fair Value $ 32 $ 1 $ — $ 33 Amortized Cost 33 1 — 34 Unrealized Loss (1 ) — — (1 )
% of Total Unrealized Loss
2%
0%
0%
2%
For categorization purposes, Aon considers any rating of Baa or higher by
law, all relatingMoody's Investor Services or equivalent rating agency tothe insurance underwriting subsidiaries, amounted to $343be investment grade. Aon had no fixed maturities below investment grade with an unrealized loss.Aon's fixed-maturity portfolio in total had a $56 million gross unrealized loss at December 31,
20022005 and$290 million at December 31, 2001. Aon maintains premium trust bank accounts for premiums collected from insureds but not yet remittedis subject toinsurance companiesinterest rate, market and credit risks. No single position had an unrealized loss greater than $2 million. With a carrying value of$2.8 billion and $2.3approximately $4.2 billion at December 31,20022005, Aon's total fixed-maturity portfolio is approximately 98% investment grade based on market value. Fixed-maturity securities with an unrealized loss are all investment grade and2001, respectively.have a weighted average rating of "Aa" based on amortized cost. Aon's non publicly-traded fixed maturity portfolio had a carrying value of $366 million, including $81 million in notes issued by PEPS I to Aon since December 2001. In February 2006, Aon, via its U.K. subsidiary, contributed $33 million of these notes to one of the U.K. pension plans. Valuations of these securities primarily reflect the fundamental analysis of the issuer and current market price of comparable securities.AtAon's equity portfolio is comprised of non-redeemable preferred stocks, publicly traded common stocks and other common and preferred stocks not publicly traded. This portfolio had $1 million of gross unrealized losses at December 31,20022005 and2001, Aon had $129 millionis subject to interest rate, market, credit, illiquidity, concentration and$25 million, respectively, of non-income producing investments, which excludes private equity investments carried on the equity method, held for at least twelve months, that have not declared dividends during 2002 and 2001.operational performance risks.Limited Partnership Securitization.
On December 31,In 2001, Aon sold the vast majority of its limited partnership (LP) portfolio, valued at $450 million, to PEPS I, aQualified Special Purpose Entity (QSPE).QSPE. The common stock interest in PEPS I is held by a limited liability company which is owned by one of Aon's subsidiaries (49%) and by a charitable trust, which is not controlled by Aon, established for victims of the September 11th attacks (51%). Approximately $171 million of investment grade fixed-maturity securities were sold by PEPS I to unaffiliated third parties. PEPS I then paid Aon's insurance underwriting subsidiaries the $171 million in cash and issued to them an additional $279 million in fixed-maturity and preferred stock securities. The fixed-maturity securities Aon subsidiaries received from PEPS I are rated as investment grade by Standard & Poor's Ratings Services.In second quarter 2002,Aon recognizeda $32 millionimpairmentwrite-downwritedowns on a portion of the preferred stocksecurities.securities of $27 million in 2003.As part of this transaction, the insurance underwriting subsidiaries
arewere required to purchase from PEPS I additional fixed-maturity securities in an amount equal to the unfunded limited partnership commitments, as they are requested. In2002,2004, Aon's insurance underwriting subsidiaries funded$38$13 million of commitments. Beginning in July 2004, Aon Parent is funding all future commitments. Aon Parent funded $12 million and $7 million of commitments in 2005 and 2004, respectively. As of December 31,2002,2005, these unfunded commitmentsamountamounted to$100$48 million.Based on the downgrades to Aon and the underwriting subsidiaries made by the ratings agencies in October 2002, credit support arrangements were put in place on January 27, 2003, whereby $100 million of cash of one of Aon's underwriting subsidiaries has been pledged as collateral for these commitments. If the insurance underwriting subsidiaries fail to purchase additional fixed-maturity securities as commitments are drawn down, Aon has guaranteed their purchase.These commitments have specific expiration dates and the general partners may decide not to draw on these commitments.To achieve the benefits of the securitization, Aon gave up all future voting interests in and control over the limited partnership interests sold to PEPS I and has no voting interest, control or significant influence over the business activities of PEPS I.
Aon
hasobtained a true sale/non-consolidation opinion from qualified external legal counsel.PEPS I holds limited partnership investments. The legal documents that established PEPS I specify the actions that PEPS I and the servicer will undertake when PEPS I is required to make a voting decision (due to the general partner of a limited partnership calling for the vote of limited partners or proxy voting on a money market fund that PEPS I is invested in). Additionally, the legal documents contain specific instructions regarding actions to be taken if PEPS I receives (or has the ability to receive) distributions of investments held by limited partnerships in which it is invested. In instances where the general partner of a given investment may distribute underlying invested company shares to the limited partners (such as PEPS I), the legal documents that establish PEPS I outline
veryspecific disposal instructions.Throughout the life of PEPS I, at least 10% of the beneficial interests will be held by parties other than
the transferor,Aon, its affiliates, or its agents. This 10% threshold is accomplished through the first tranche notes outstanding to unaffiliated third party investors.PEPS I
will investinvests cash collected from the limited partnerships pending distribution to holders of beneficial interests. PEPS I invests only in relatively risk free investments with maturities no later than an expected distribution date.All holders of
each oftheabovebeneficial interests have the right to pledge or exchange (sell), without any constraints, the beneficial interests that they hold. As such, there are no conditions that constrain the beneficial interest holders from pledging or exchanging their beneficial interest(s) and provide the transferor with more than a trivial benefit.Other
Securities on deposit for regulatory authorities as required by law, all relating to the insurance underwriting subsidiaries, amounted to $739 million at December 31, 2005 and $606 million at December 31, 2004.
At December 31, 2005 and 2004, Aon had $195 million and $173 million, respectively, of non-income producing investments, which excludes derivatives that are marked to market through the income statement, as well as private equity investments carried on the equity method, held for at least twelve months, that have not declared dividends during 2005 and 2004.
8. Debt and Lease Commitments
Notes Payable
The following is a summary of outstanding notes payable:
As of December 31 2002 2001 (millions) Commercial paper $ — $ 254 3.5% convertible debt securities, due November 2012 296 — 6.2% debt securities, due January 2007(1) 250 250 8.65% debt securities, due May 2005 250 250 7.375% debt securities, due December 2012 223 — 6.9% debt securities, due July 2004 216 250 6.7% debt securities, due June 2003 150 150 LIBOR +1% debt securities, (3.025% at December 31, 2002) due January 2003 150 150 6.3% debt securities, due January 2004 89 100 7.4% debt securities, due October 2002 — 100 Euro credit facility(2) — 87 Notes payable, due in varying installments, with interest at 3.7% to 8.1% 47 103 Total notes payable $ 1,671 $ 1,694 (millions) As of December 31, 2005 2004 8.205% junior subordinated deferrable interest debentures, due January 2027 $ 726 $ 726 3.5% convertible debt securities, due November 2012 297 297 6.2% debt securities, due January 2007 (1) 250 250 7.375% debt securities, due December 2012 224 223 8.65% debt securities, due May 2005 — 250 Euro credit facility 581 334 Notes payable, due in varying installments, with interest at 0.9% to 15.9% 27 35 Total notes payable $ 2,105 $ 2,115 - (1)
- Rate increased to 6.7% in January
2003. (2)Excludes $76 million2003 and$152 million classified as short-term borrowings at6.95% in January 2005.
Aon created Aon Capital A, a wholly-owned statutory business trust, for the purpose of issuing mandatorily redeemable preferred capital securities. Aon received cash and an investment in 100% of the common equity of Aon Capital A by issuing 8.205% Junior Subordinated Deferrable Interest Debentures (subordinated debt) to Aon Capital A. Aon determined that it is not the primary beneficiary of Aon Capital A, a VIE and was required to deconsolidate Aon Capital A upon the adoption of FIN 46 on December 31,
2002 and 2001, respectively.
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Commercial paper borrowings2003. As a result of $254 million at December 31, 2001 were included inthe deconsolidation, Aon increased its notes payable basedfor the subordinated debt by $726 million. See Note 11, "Redeemable Preferred Stock, Capital Securities and Stockholders' Equity" for further information on Aon's intent and ability to maintain or refinance these obligations on a long-term basis through 2005.Aon Capital A.
In November 2002, Aon completed a private offering of $300 million aggregate principal amount of 3.5% convertible senior debentures due in 2012. NetThe net proceeds from this offering were $296 million. The debentures are unsecured obligations and are convertible into Aon common stock at an initial conversion price of approximately $21.475 per common share under certain circumstances including (1) during any fiscal quarter, beginning after December 31, 2002, if the closing price of Aon's common stock exceeds 120% of the conversion price (i.e. $25.77) for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the previous fiscal quarter, or (2) subject to certain exceptions, during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of the debentures for each day of the ten trading day period was less than 95% of the product of the closing sale price of Aon's common stock and the number of shares issuable upon conversion of $1,000 principal amount of the debentures. Aon will be required to pay additional contingent interest, beginning November 15, 2007, if the trading price of the debentures for each of the five trading days immediately preceding the first day of the six month interest period equals or exceeds 120% of the par value of the debentures. Aon has reserved approximately 14 million shares for the potential conversion of these debentures. Beginning November 19, 2007, Aon may redeem any of the debentures at an initial redemption price of 101% of the principal amount, plus accrued interest. The debentures were sold to qualified institutional buyers. We have reserved approximately 14 million shares for the potential conversion of these debentures. In January 2003, Aon filed a registration statement with the SEC to register the resale of the debentures.
In December 2002, Aon completed a private offering of $225 million aggregate principal amount of 7.375% senior notes due 2012. Net proceeds from this offering were $223 million. The debentures were sold to qualified institutional buyers.
Aon has used the net proceeds of both offerings to repay outstanding commercial paper, other short-term debt and certain other notes payable. In addition, some of the funds were used to repurchase a portion of Aon's 8.205% Mandatorily Redeemable Preferred Capital Securities (see note 11). A portion of the funds were invested and utilized to repay $150 million of LIBOR + 1% debt securities that matured in January 2003.
In December 2001, Aon issued $150 million of debt securities with a floating interest rate of LIBOR +1% due January 2003 and $250 million of 6.2% debt securities due January 2007. ThisThe interest rate on these debt was initially soldsecurities is subject to qualified institutional buyers under Rule 144A ofadjustment in the Securities Act and the net proceeds were usedevent that Aon's credit ratings change. Due to reduce short-term borrowings. In December 2002, Aon consummated an offer to exchange the 6.2% notes for registered notes having identical terms. Because of the ratings downgrades during 2002 and 2004, the interest rate on the 6.2% debt securities was increased to 6.7%, effective January 2003.2003 and 6.95% effective January 2005.
Interest isIn 2001, certain of Aon's European subsidiaries entered into a committed bank credit facility. At December 31, 2004, Aon had borrowed €250 million ($334 million) under the facility, which was classified as notes payable semi-annually on most debt securities.in the consolidated statements of financial position. In February 2005, Aon replaced this facility with a new €650 million multi-currency revolving loan credit facility. The new
facility included a €325 million three-year and a €325 million five-year revolving loan facility. In October 2005, Aon amended this facility. The amendment extends the term of each revolving loan facility to five years from the date of the amendment, with an option to extend each facility for two additional one-year periods. Thus, this facility will mature in October 2010, unless Aon opts to extend the facility. In addition, the amendment eliminates the requirement that a representation regarding material adverse change be made at the time of each borrowing request and on the first day of each interest period, deletes certain covenants related to acquisitions and investments and revises certain covenants related to mergers and dispositions. Commitment fees of 8.75 basis points are payable on the unused portion of the facility. At December 31, 2005, Aon has borrowed €490 million ($581 million) under this facility, which is classified as notes payable in the consolidated statements of financial position. Aon has guaranteed the obligations of its subsidiaries with respect to this facility.
At December 31, 2004, Aon had a $775 million U.S. committed bank credit facility to support commercial paper and other short-term borrowings. No amounts were outstanding under this facility at December 31, 2004. In February 2005, Aon replaced this facility with a new $600 million three-year revolving credit facility. This facility permits the issuance of up to $150 million in letters of credit. In September 2005, Aon amended the facility. The three-year term of the facility was extended to a five-year term with a maturity date of February 2010, certain covenants related to guarantors and acquisitions were deleted and certain covenants related to mergers, acquisitions and indebtedness were revised. At December 31, 2005, Aon had $20 million in letters of credit outstanding. Based on Aon's current credit ratings, commitment fees of 10 basis points are payable on the unused portion of the facility.
For both the U.S. and Euro facilities, Aon is required to maintain consolidated net worth, as defined, of at least $2.5 billion, a ratio of consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) to consolidated interest expense of 4 to 1 and a ratio of consolidated debt to EBITDA of not greater than 3 to 1.
Aon also has other foreign facilities available, which include a 364-day £37.5 million ($65 million) facility and a 10 million Canadian dollar ($9 million) facility, both of which expire in September 2006 and a €20 million ($24 million) facility, which has no set expiration date.
Outstanding debt securities, including Aon Capital A's, are not redeemable by Aon prior to maturity except for the 3.5% convertible debt securities, which are redeemable by Aon beginning in 2007. There are no sinking fund provisions. MaturitiesInterest is payable semi-annually on most debt securities. Repayments of notes payable are $309 million, $312$593 million, $255 million, $4$2 million, $1 million and $265$1 million in 2003, 2004, 2005, 2006, 2007, 2008, 2009 and 2007,2010, respectively.
In September 2001, Aon entered into a new committed bank credit facility under which certain European subsidiaries can borrow up to EUR 500 million. At December 31, 2002, Aon had borrowed EUR 74 million ($76 million) under this facility which is classified as short-term borrowings in the consolidated statements of financial position. Aon has guaranteed the obligations of its subsidiaries with respect to this facility.
83
Aon had $875 million of other unused committed bank credit facilities at December 31, 2002 to support $1 million of commercial paper and other short-term borrowings. Aon has recently renegotiated the size of the short-term portion of the bank credit facilities, reducing the total amount to $775 million in February 2003. Commitment fees of 10 basis points are payable on the unused short-term portion and 12.5 basis points on the unused long-term portion. The facility requires Aon to maintain consolidated net worth of at least $2.5 billion, a ratio of consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) to consolidated interest expense of 4 to 1 and contains certain other restrictions relating to mergers and the sale or pledging of assets. No amounts were outstanding under this facility at December 31, 2002.
Information related to notes payable and short-term borrowings is as follows:
| | Years ended December 31 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2005 | 2004 | 2003 | |||||||||||||||||
| | 2002 | 2001 | 2000 | |||||||||||||||||
| Interest paid (millions) | $ | 123 | $ | 127 | $ | 140 | $ | 130 | $ | 147 | $ | 103 | ||||||||
| Weighted-average interest rates—short-term borrowings | 3.3 | % | 4.5 | % | 6.4 | % | ||||||||||||||
| Weighted-average interest rates — short-term borrowings | 3.5 | % | 3.5 | % | 2.6 | % | ||||||||||||||
Lease Commitments
Aon has noncancelable operating leases for certain office space, equipment and automobiles. These leases expire at various dates and may contain renewal and expansion options. In addition to base rental costs, occupancy lease agreements generally provide for rent escalations resulting from increased assessments for real estate taxes and other charges. Approximately 82% of Aon's lease obligations are for the use of office space. Rental expensesexpense for all operating leases amounted to $289$345 million, in 2002, $242$387 million in 2001 and $217$381 million in 2000. Futurefor 2005, 2004 and 2003, respectively, after deducting rentals from subleases ($29 million, $34 million and $31 million for 2005, 2004 and 2003, respectively).
At December 31, 2005, future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year, at December 31, 2002 are:net of sub-lease rental income, most of which pertain to real estate leases, are as follows:
| (millions) | | |||||
|---|---|---|---|---|---|---|
| | (millions) | |||||
| 2003 | $ | 311 | ||||
| 2004 | 282 | |||||
| 2005 | 258 | |||||
| 2006 | 230 | $ | 325 | |||
| 2007 | 197 | 305 | ||||
| 2008 | 251 | |||||
| 2009 | 200 | |||||
| 2010 | 156 | |||||
| Later years | 904 | 742 | ||||
| Total minimum payments required | $ | 2,182 | $ | 1,979 | ||
Aon and its principal domestic subsidiaries are included in a consolidated life-nonlife federal income tax return. Aon's foreigninternational subsidiaries file various income tax returns in their foreign jurisdictions.
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Income (loss)from continuing operations before income tax and the cumulative effect of a change in accounting principleminority interest and the provision for income tax consist of the following:
| | Years ended December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000(1) | |||||||
| | (millions) | |||||||||
| Income (loss) before income tax: | ||||||||||
| U.S. | $ | 166 | $ | (66 | ) | $ | 454 | |||
| Foreign | 627 | 375 | 400 | |||||||
| Total | $ | 793 | $ | 309 | $ | 854 | ||||
| Provision for income tax: | ||||||||||
| Current: | ||||||||||
| Federal | $ | 34 | $ | 15 | $ | 115 | ||||
| Foreign | 191 | 122 | 124 | |||||||
| State | 13 | 6 | 28 | |||||||
| Total current | 238 | 143 | 267 | |||||||
| Deferred (credit): | ||||||||||
| Federal | 28 | (28 | ) | 46 | ||||||
| Foreign | 21 | 9 | 16 | |||||||
| State | 6 | (2 | ) | 4 | ||||||
| Total deferred | 55 | (21 | ) | 66 | ||||||
| Provision for income tax | $ | 293 | $ | 122 | $ | 333 | ||||
(1)Before cumulative effect(millions) Years ended December 31, 2005 2004 2003 Income from continuing operations before income tax and minority interest: U.S. $ 306 $ 66 $ 313 International 659 761 761 Total $ 965 $ 827 $ 1,074 Provision for income tax: Current: Federal $ 12 $ 105 $ 70 International 194 277 213 State 17 32 41 Total current 223 414 324 Deferred (credit): Federal 51 (140 ) 45 International 39 14 18 State 10 (6 ) 9 Total deferred 100 (132 ) 72 Provision for income tax $ 323 $ 282 $ 396 Income from continuing operations before income tax and minority interest shown above is based on the location of
changethe corporate unit to which such earnings are attributable. However, because such earnings inaccounting principle.
During 2002, 2001 and 2000,In 2003, Aon's consolidated statementsstatement of income reflectreflected a tax benefit of $24$22 million $26 million and $26 million, respectively, on the 8.205% Capital Securities issued(see Note 11). As a result of the adoption of FIN 46 on December 31, 2003, Aon was required to deconsolidate the Capital Securities, which was completely offset by an increase in January 1997 (see note 11).notes payable. In 2005 and 2004, interest expense on these notes payable was reported as a part of interest expense in the consolidated statements of income and the related tax benefit is included in the provision for income tax.
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 | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||
| Statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |
| Tax-exempt investment income | (0.3 | ) | (0.7 | ) | (0.5 | ) | |
| Amortization of intangible assets relating to acquired businesses | 0.3 | 4.3 | 2.1 | ||||
| State income taxes | 1.6 | 1.4 | 2.5 | ||||
| Other—net | 0.4 | (0.5 | ) | (0.1 | ) | ||
| Effective tax rate | 37.0 | % | 39.5 | % | 39.0 | % | |
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| Years ended December 31, | 2005 | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|---|
| Statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |
| State income taxes, net of federal benefit | 1.8 | 2.0 | 3.0 | ||||
| Taxes on international operations | (0.7 | ) | (0.7 | ) | (2.4 | ) | |
| Adjustments to prior year taxes | (5.4 | ) | (1.9 | ) | 0.6 | ||
| Deferred tax adjustments | 1.9 | 1.3 | — | ||||
| Basis difference in businesses sold | — | (3.9 | ) | — | |||
| Other — net | 0.9 | 2.3 | 0.7 | ||||
| Effective tax rate | 33.5 | % | 34.1 | % | 36.9 | % | |
Significant components of Aon's deferred tax assets and liabilities are as follows:
| | As of December 31 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | |||||||||||||||
| (millions) As of December 31, | (millions) As of December 31, | 2005 | 2004 | ||||||||||||||
| | | (millions) | |||||||||||||||
| Deferred tax assets: | Deferred tax assets: | Deferred tax assets: | |||||||||||||||
| Employee benefit plans | $ | 400 | $ | 141 | Employee benefit plans | $ | 501 | $ | 548 | ||||||||
| Unrealized foreign exchange losses | 171 | 210 | Unearned and advanced premiums and contract fees | 211 | 168 | ||||||||||||
| Unearned and advanced premiums and contract fees | 150 | 110 | Net operating loss and tax credit carryforwards | 52 | 66 | ||||||||||||
| Net operating loss and tax credit carryforwards | 82 | 81 | Certain purchase accounting and special charges | 69 | 90 | ||||||||||||
| Certain purchase accounting and special charges | 32 | 81 | Other | 19 | 43 | ||||||||||||
| Unrealized investment losses | — | 26 | |||||||||||||||
| Other | 141 | 146 | 852 | 915 | |||||||||||||
| Valuation allowance on deferred tax assets | Valuation allowance on deferred tax assets | (26 | ) | (41 | ) | ||||||||||||
| Total | 976 | 795 | Total | 826 | 874 | ||||||||||||
| Deferred tax liabilities: | Deferred tax liabilities: | Deferred tax liabilities: | |||||||||||||||
| Policy acquisition costs | (167 | ) | (91 | ) | Policy acquisition costs | (191 | ) | (210 | ) | ||||||||
| Unrealized investment gains | (16 | ) | — | Unrealized investment gains | (26 | ) | (65 | ) | |||||||||
| Other | (71 | ) | (101 | ) | Unrealized foreign exchange gains | (22 | ) | (59 | ) | ||||||||
| Other | (54 | ) | (28 | ) | |||||||||||||
| Total | (254 | ) | (192 | ) | |||||||||||||
| Total | (293 | ) | (362 | ) | |||||||||||||
| Valuation allowance on deferred tax assets | (33 | ) | (21 | ) | |||||||||||||
| Net deferred tax assets | $ | 689 | $ | 582 | |||||||||||||
| Net deferred tax asset | Net deferred tax asset | $ | 533 | $ | 512 | ||||||||||||
There are limitations onValuation allowances have been established primarily with regard to the utilizationtax benefits of certain net operating loss and tax credit carryforwards. Valuation allowances were reduced to $26 million in 2005 from $41 million in 2004, attributable largely to the assessment of the potential future utilization of U.S. Federal tax net operating loss carryforwards after a change of control, consequently, there will be annual limitations onand the realization of theseU.S. federal alternative minimum tax assets. Accordingly,credit carryforwards. To the extent valuation allowances were established for various acquisitions. Subsequently, recognizedprovided originally through acquisition accounting, the tax benefits recognized for thesesuch items would reducehave been recorded as a reduction in goodwill. The valuation allowance changed to $33 million in 2002 from $21 million in 2001, corresponding to increases in related deferred tax assets, with no effect on net income. Although future earnings cannot be predicted with certainty, management currently believes that the realization of the net deferred tax asset after consideration of the valuation allowance is more likely than not.
Aon recognized, as an adjustment to additional paid-in-capital, income tax benefits attributable to employee stock compensation as follows: 2005, $11 million; 2004, $0 million; and 2003, $2 million.
U.S. deferred income taxes are not provided on unremitted foreign earnings that are considered permanently reinvested, which at December 31, 2005 amounted to approximately $1.8 billion. It is not practicable to determine the income tax liability that might be incurred if all such earnings were remitted to the U.S. The American Jobs Creation Act of 2004 introduced a temporary incentive for U.S. multinationals to repatriate, in 2004 or 2005, certain foreign earnings at an effective tax rate of
5.25%. In 2005, Aon repatriated $101 million pursuant to this legislation and incurred a current tax expense of $5 million.
At December 31, 2002,2005, Aon had domestic federal operating loss carryforwards of $55$27 million whichthat will expire at various dates from 20032006 to 2021. At December 31, 2002, Aon had2021, state operating loss carryforwards of $349 million that will expire at various dates from 2006 to 2024 and foreign operating loss carryforwards of $113$89 million, which expire at various dates.
Prior to 1984, life insurance companies were required to accumulate certain untaxed amounts in a memorandum "policyholders'policyholders' surplus account."account ("PSA"). Under the Tax Reform Act of 1984, the "policyholders' surplus account"PSA balances were "capped" at December 31, 1983 and the balances willwere to be taxed only to the extent distributed to stockholders or when they exceed certain prescribed limits. The American Jobs Creation Act of 2004 suspended for 2005 and 2006 the application of the rules imposing income tax on distributions from the PSA. As of December 31, 2002,2005, the combined "policyholders' surplus account"PSA of Aon's life insurance subsidiaries approximates $363is approximately $262 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 approximately $127$92 million.
The amount of income taxes paid in 2002, 20012005, 2004 and 20002003 was $238$309 million, $193$413 million and $158$296 million, respectively.
10. 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 the captive insurance operations of numerous automobile dealerships and insurers, certain newer accident and health initiatives, as well as certain property casualty lines. Aon's insurance subsidiaries remain liable to the extent that the reinsuring companiesreinsurers are unable to meet their obligations.
A summary of reinsurance activity is as follows:
| | Years ended December 31 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||||||||||
| (millions) Years ended December 31, | 2005 | 2004 | 2003 | |||||||||||||||
| | (millions) | |||||||||||||||||
| Ceded premiums earned | $ | 1,190 | $ | 921 | $ | 845 | $ | 1,106 | $ | 1,379 | $ | 1,261 | ||||||
| Ceded premiums written | 1,371 | 1,020 | 888 | 1,039 | 1,226 | 1,307 | ||||||||||||
| Assumed premiums earned | 493 | 391 | 379 | 208 | 336 | 366 | ||||||||||||
| Assumed premiums written | 533 | 384 | 304 | 206 | 336 | 382 | ||||||||||||
| Ceded benefits to policyholders | 703 | 630 | 552 | 548 | 804 | 796 | ||||||||||||
Activity in the liability for policy and contract claims is summarized as follows:
| (millions) Years ended December 31, | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Liabilities at beginning of year | $ | 825 | $ | 751 | $ | 529 | |||||
| Incurred losses: | |||||||||||
| Current year | 1,389 | 1,435 | 1,319 | ||||||||
| Prior years (1) | 20 | (1) | 87 | ||||||||
| Total | 1,409 | 1,434 | 1,406 | ||||||||
| Payment of claims: | |||||||||||
| Current year | (942) | (915) | (798) | ||||||||
| Prior years | (467) | (445) | (386) | ||||||||
| Total | (1,409) | (1,360) | (1,184) | ||||||||
| Liabilities at end of year | |||||||||||
| (net of reinsurance recoverables: | |||||||||||
| 2005 — $1,002; 2004 — $1,029; 2003 — $858) | $ | 825 | $ | 825 | $ | 751 | |||||
- (1)
- For 2003, prior years' incurred losses primarily represent losses from business produced by NPS. NPS stopped initiating any new business in mid-2002.
| | Years ended December 31 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||||
| | (millions) | |||||||||||
| Liabilities at beginning of year | $ | 455 | $ | 377 | $ | 448 | ||||||
| Incurred losses: | ||||||||||||
| Current year | 1,235 | 1,110 | 840 | |||||||||
| Prior years | 25 | (11 | ) | 16 | ||||||||
| Total | 1,260 | 1,099 | 856 | |||||||||
| Payment of claims: | ||||||||||||
| Current year | (930 | ) | (769 | ) | (633 | ) | ||||||
| Prior years | (256 | ) | (252 | ) | (294 | ) | ||||||
| Total | (1,186 | ) | (1,021 | ) | (927 | ) | ||||||
| Liabilities at end of year (net of reinsurance recoverables: | ||||||||||||
| 2002—$722; 2001—$482; 2000—$424) | $ | 529 | $ | 455 | $ | 377 | ||||||
11. Redeemable Preferred Stock, Capital Securities and Stockholders' Equity
Redeemable Preferred Stock
At December 31, 2002, one2004, 1 million shares of redeemable preferred stock were outstanding. Dividends arewere cumulative at an annual rate of $2.55 per share. TheThese shares of redeemable preferred stock will bewere redeemable at the option of Aon or the holders, in whole or in part, at $50.00 per share plus accrued but unpaid dividends, beginning one year after the occurrencedeath of a certain future event.the last of the original two owners, which occurred in September 2004. In September 2005, Aon redeemed all of the outstanding shares of redeemable preferred stock.
Capital Securities
In January 1997, Aon created Aon Capital A is a wholly-owned statutory business trust created for the purpose of issuing mandatorily redeemable preferred capital securities (Capital Securities)("Capital Securities"). The sole asset of Aon Capital A is athe $726 million aggregate principal amount of Aon's 8.205% Junior Subordinated Deferrable Interest Debentures (subordinated debt) due January 1, 2027. The back-up guarantees, in the
87
aggregate, provide a full and unconditional guarantee of the trust'sAon Capital A'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. Aon received $800 million in cash and a $24 million investment in 100% of the common equity of Aon Capital A by issuing $824 million of subordinated debt. During 2002, approximately $98 million (face value) of the Capital Securities were repurchased on the open market and were used to retire $98 million of the debt to Aon Capital A. The Capital Securities are subject to mandatory redemption on January 1, 2027 (upon the maturity of the subordinated debt) or are redeemable in whole, but not in part, at the option of Aon (through its prepayment of the subordinated debt) upon the occurrence of certain events. During 2002, approximately $98 million of the Capital Securities were repurchased on the open market for $87 million excluding accrued interest. An after-tax gain on the repurchases of $7 million is included in minority interest in the consolidated statements of income.
Interest is payable semi-annually on the Capital Securities. The
Aon has determined that it is not the primary beneficiary of Aon Capital Securities are categorizedA, a VIE and was required to deconsolidate the Trust upon the adoption of FIN 46 on December 31, 2003, which was completely offset by an increase in notes payable. Prior to the consolidated statementsdeconsolidation of financial position as "Company-Obligated Mandatorily Redeemable PreferredAon Capital Securities of Subsidiary Trust Holding Solely Aon's Junior Subordinated Debentures." TheA, the after-tax interest incurred on the Capital Securities iswas reported as minority interest in the consolidated statements of income. Beginning in 2004, interest expense on these notes payable was reported as part of interest expense in the consolidated statements of income. There was no effect on net income or consolidated stockholders' equity as a result of this deconsolidation.
Common Stock
In December 2001,November 2005, Aon filed a universal shelf registrationannounced that its Board of Directors had authorized the repurchase of up to $1 billion of Aon's common stock. Shares may be repurchased through the open market or in privately negotiated transactions from time to time, based on Form S-3prevailing market conditions and will be funded from available capital. Any repurchased shares will be available for the issuance of $750 million of debtuse in connection with employee stock plans and equity securities. In November 2002, Aon completed a public offering of 36.8for other corporate purposes. The Company repurchased 0.7 million shares at a cost of its common stock at $17.18 per share, raising net proceeds of $607 million.$25 million in 2005. In 2004, Aon has used the net proceeds to repay commercial paper and other short-term debt. A portion of the funds were invested and were utilized to repay debt maturing in 2003.
Aon repurchased 0.4 million, 0.1 million and 3.5 million shares in 2002, 2001 and 2000, respectively,did not repurchase any of its common stock. Share repurchases in 2000 were made primarily to provideIn 2003, Aon repurchased 0.1 million shares. In 2006, through March 6, the Company has repurchased 3.2 million shares for stock compensation plans. In addition, Aon issued 3.5 million new sharesat a cost of common stock in 2002 for employee benefit plans and for acquisitions.$126 million.
In connection with the acquisition of two entities controlled by Aon's Chairmanthen-Chairman and Chief Executive Officer in 2001, (note 4), Aon obtained approximately 22.4 million shares of its common stock. These treasury shares are restricted as to their reissuance. The acquisition was financed by the issuance of approximately 22.4
In 2005, Aon issued 4.1 million new shares of Aon stock.common stock for employee benefit plans, 0.7 million shares in connection with employee stock purchase plans and 0.2 million shares in connection with acquisitions.
Dividends
A summary of dividends declaredpaid is as follows:
| | Years ended December 31 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||||||||||
| (millions) Years ended December 31, | 2005 | 2004 | 2003 | |||||||||||||||
| | (millions) | |||||||||||||||||
| Redeemable preferred stock | $ | 3 | $ | 3 | $ | 3 | $ | 2 | $ | 3 | $ | 3 | ||||||
| Common stock | 230 | 238 | 223 | 191 | 189 | 187 | ||||||||||||
| Total dividends declared | $ | 233 | $ | 241 | $ | 226 | ||||||||||||
| Total dividends paid | $ | 193 | $ | 192 | $ | 190 | ||||||||||||
Dividends paid per common share were $0.60 for the years ended December 31, 2005, 2004 and 2003.
Statutory Capital and Surplus
Generally, the capital and surplus of Aon's insurance subsidiaries available for transfer to the parent company areis limited to the amountsamount that the insurance subsidiaries' statutory capital and surplus exceedexceeds minimum statutory capital requirements; however, payments of the amounts as dividends in excess of $105$197 million may be subject to approval by regulatory authorities. See noteNote 9 for possible tax effects of distributions made out of untaxed earnings.
88
Net statutory income (loss) of the insurance subsidiaries is summarized as follows:
| | Years ended December 31 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||
| | (millions) | ||||||||
| Life insurance | $ | (13 | ) | $ | (61 | ) | $ | 133 | |
| Property casualty | (64 | ) | 60 | 49 | |||||
| (millions) Years ended December 31, | 2005 | 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Accident & Health and Life | $ | 157 | $ | 193 | $ | 95 | ||||
| Warranty, Credit and Property & Casualty | 78 | 123 | (21 | ) | ||||||
Statutory capital and surplus of the insurance subsidiaries isare summarized as follows:
| (millions) As of December 31, | 2005 | 2004 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Accident & Health and Life | $ | 901 | $ | 840 | $ | 700 | |||
| Warranty, Credit and Property & Casualty | 702 | 676 | 611 | ||||||
| | As of December 31 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||
| | (millions) | ||||||||
| Life insurance | $ | 537 | $ | 421 | $ | 492 | |||
| Property casualty | 448 | 484 | 491 | ||||||
The National Association of Insurance Commissioners revised the Accounting Practices and Procedures Manual in a process referred to as Codification. The revised manual was effective January 1, 2001. The domiciliary states of Aon's major insurance subsidiaries have adopted the provisions of the revised manual. The revised manual changed, to some extent, prescribed statutory accounting practices and resulted in changes to the accounting practices that Aon's major insurance subsidiaries use to prepare their statutory-basis financial statements. The impact of these changes was to increase Aon's major insurance subsidiaries' statutory capital and surplus by approximately 6% as of January 1, 2001.
Savings and Profit Sharing Plans
Aon subsidiaries maintain contributory savings plans with both contributory and non-contributory accounts for the benefit of United StatesU.S. salaried and commissioned employees. The non-contributory accounts were established in lieu of a defined pension benefit in 2004 for certain U.S. employees. Provisions made for these plans were $48$47 million, $43 million and $39$54 million in 2002, 20012005, 2004 and 2000,2003, respectively.
Pension and Other Postretirement Benefits
Aon sponsors defined benefit pension and postretirement health and welfare plans that provide retirement, medical and life insurance benefits. The postretirement healthcare plans are contributory, with retiree contributions adjusted annually; the life insurance and pension plans are noncontributory.
Effective January 1, 2004, the U.S. pension plans were closed to new employees.
In 1999, Aon's U.K. pension plans were closed to new employees. All new employees became participants in a defined contribution plan. The provisions for the defined contribution plan were $20 million, $20 million and $19 million in 2005, 2004 and 2003, respectively.
U.S. Pension and Other Benefit Plans
The following tables provide a reconciliation of the changes in obligations and fair value of assets for the years ended December 31, 20022005 and 20012004 and a statement of the funded status as of
89
December 31, 20022005 and 2001,2004, for both qualified and non-qualifiednonqualified plans. The measurement date for the U.S. plans is November 30.
| | Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2002 | 2001 | ||||||||||||||||||||||
| (millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||
| | (millions) | |||||||||||||||||||||||||
| Reconciliation of benefit obligation | ||||||||||||||||||||||||||
| Obligation at beginning of period | $ | 961 | $ | 792 | $ | 73 | $ | 69 | ||||||||||||||||||
| Projected benefit obligation at beginning of period | $ | 1,546 | $ | 1,340 | $ | 79 | $ | 74 | ||||||||||||||||||
| Service cost | 46 | 33 | 3 | 2 | 62 | 67 | 3 | 3 | ||||||||||||||||||
| Interest cost | 72 | 65 | 5 | 5 | 93 | 85 | 4 | 4 | ||||||||||||||||||
| Participant contributions | — | — | 7 | 6 | — | — | 8 | 8 | ||||||||||||||||||
| Plan amendments | (9 | ) | — | — | — | |||||||||||||||||||||
| Curtailment | (8 | ) | (8 | ) | — | — | ||||||||||||||||||||
| Plan amendment | 20 | — | — | — | ||||||||||||||||||||||
| Actuarial loss (gain) | 35 | 12 | 1 | (1 | ) | 43 | 68 | (8 | ) | 1 | ||||||||||||||||
| Benefit payments | (53 | ) | (49 | ) | (13 | ) | (13 | ) | (61 | ) | (57 | ) | (12 | ) | (13 | ) | ||||||||||
| Curtailments | — | (10 | ) | — | — | |||||||||||||||||||||
| Acquisitions | — | 21 | — | — | ||||||||||||||||||||||
| Change in interest rate | 55 | 97 | 4 | 5 | ||||||||||||||||||||||
| Change in discount rate | 63 | 51 | 1 | 2 | ||||||||||||||||||||||
| Obligation at end of period | $ | 1,107 | $ | 961 | $ | 80 | $ | 73 | ||||||||||||||||||
| Projected benefit obligation at end of period | $ | 1,758 | $ | 1,546 | $ | 75 | $ | 79 | ||||||||||||||||||
| Accumulated benefit obligation at end of period | $ | 1,614 | $ | 1,421 | $ | 75 | $ | 79 | ||||||||||||||||||
Reconciliation of fair value of plan assets | ||||||||||||||||||||||||||
| Fair value at beginning of period | $ | 931 | $ | 932 | $ | 8 | $ | 8 | $ | 969 | $ | 929 | $ | 8 | $ | 8 | ||||||||||
| Actual return on plan assets | (91 | ) | 21 | — | — | 114 | 94 | — | — | |||||||||||||||||
| Participant contributions | — | — | 7 | 6 | — | — | 8 | 8 | ||||||||||||||||||
| Employer contributions | 2 | 2 | 6 | 7 | 304 | 3 | 4 | 5 | ||||||||||||||||||
| Benefit payments | (53 | ) | (49 | ) | (13 | ) | (13 | ) | (61 | ) | (57 | ) | (12 | ) | (13 | ) | ||||||||||
| Acquisitions | — | 25 | — | — | ||||||||||||||||||||||
| Fair value at end of period | $ | 789 | $ | 931 | $ | 8 | $ | 8 | $ | 1,326 | $ | 969 | $ | 8 | $ | 8 | ||||||||||
| Market related value at end of period | $ | 1,395 | $ | 1,111 | $ | 8 | $ | 8 | ||||||||||||||||||
| Funded status | ||||||||||||||||||||||||||
| Funded status at end of period | $ | (318 | ) | $ | (30 | ) | $ | (72 | ) | $ | (65 | ) | $ | (432 | ) | $ | (577 | ) | $ | (67 | ) | $ | (71 | ) | ||
| Unrecognized prior-service | (11 | ) | (3 | ) | — | — | ||||||||||||||||||||
| Unrecognized prior-service cost | 14 | (7 | ) | (10 | ) | (11 | ) | |||||||||||||||||||
| Unrecognized loss (gain) | 363 | 76 | (6 | ) | (12 | ) | 623 | 584 | (4 | ) | 3 | |||||||||||||||
| Net amount recognized | $ | 34 | $ | 43 | $ | (78 | ) | $ | (77 | ) | $ | 205 | $ | — | $ | (81 | ) | $ | (79 | ) | ||||||
| Prepaid benefit cost | $ | — | $ | 93 | $ | — | $ | — | ||||||||||||||||||
| Accrued benefit liability | (213 | ) | (60 | ) | (78 | ) | (77 | ) | ||||||||||||||||||
| Amounts recognized in the statements of financial position consist of: | ||||||||||||||||||||||||||
| Accrued benefit liability (included in pension, post employment and post retirement liabilities) | $ | (288 | ) | $ | (452 | ) | $ | (81 | ) | $ | (79 | ) | ||||||||||||||
| Intangible pension asset (included in other assets) | 14 | — | — | — | ||||||||||||||||||||||
| Other comprehensive income | 247 | 10 | — | — | 479 | 452 | — | — | ||||||||||||||||||
| Net amount recognized | $ | 34 | $ | 43 | $ | (78 | ) | $ | (77 | ) | $ | 205 | $ | — | $ | (81 | ) | $ | (79 | ) | ||||||
The increase in amounts recognized in other comprehensive income related to the minimum pension liability for U.S. pension plans was $27 million and $108 million in 2005 and 2004, respectively.
In 2002,2005, plans with a projected benefit obligation (PBO)("PBO") and an accumulated benefit obligation ("ABO") in excess of the fair value of plan assets had a PBO of $1.1$1.8 billion, an ABO of $1.6 billion and plan assets with a fair value of $1.3 billion.
In 2004, plans with an accumulated benefit obligation (ABO)a PBO and ABO in excess of the fair value of plan assets had a PBO of $1.5 billion, an ABO of $1 billion. In 2001, plans$1.4 billion and plan assets with a PBO in excess of the fair value of plan assets were unfunded plans with a PBO of $71 million, and plans with an ABO in excess of the fair value of plan assets were unfunded plans with an ABO of $60 million.$1.0 billion.
In both 2002 and 2001, pension plan assets include 3.7 million shares of common stock issued by Aon on which dividends of $3.1 million and $3.3 million were received in 2002 and 2001, respectively.
90
The following table provides the components of net periodic benefit cost (credit) for the plans for the years ended December 31, 2002, 2001 and 2000:plans:
| | Pension Benefits | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (millions) | |||||||||
| Service cost | $ | 46 | $ | 33 | $ | 32 | ||||
| Interest cost | 72 | 65 | 60 | |||||||
| Expected return on plan assets | (108 | ) | (104 | ) | (95 | ) | ||||
| Amortization of prior-service | (2 | ) | (1 | ) | (1 | ) | ||||
| Amortization of net (gain) loss | 2 | (8 | ) | (7 | ) | |||||
| Net periodic benefit cost (credit) | $ | 10 | $ | (15 | ) | $ | (11 | ) | ||
| | Other Benefits | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (millions) | |||||||||
| Service cost | $ | 3 | $ | 2 | $ | 2 | ||||
| Interest cost | 5 | 5 | 5 | |||||||
| Amortization of prior-service | — | — | (5 | ) | ||||||
| Amortization of net gain | (1 | ) | (1 | ) | (1 | ) | ||||
| Net periodic benefit cost | $ | 7 | $ | 6 | $ | 1 | ||||
| (millions) Pension Benefits | 2005 | 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Service cost | $ | 62 | $ | 67 | $ | 52 | ||||
| Interest cost | 93 | 85 | 77 | |||||||
| Expected return on plan assets | (93 | ) | (92 | ) | (78 | ) | ||||
| Amortization of prior-service cost | (2 | ) | (2 | ) | (2 | ) | ||||
| Amortization of net loss | 39 | 22 | 11 | |||||||
| Net periodic benefit cost | $ | 99 | $ | 80 | $ | 60 | ||||
| (millions) Other Benefits | 2005 | 2004 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Service cost | $ | 3 | $ | 3 | $ | 3 | |||
| Interest cost | 4 | 4 | 5 | ||||||
| Amortization of prior-service cost | (1 | ) | (1 | ) | — | ||||
| Net periodic benefit cost | $ | 6 | $ | 6 | $ | 8 | |||
The weighted-average assumptions for the measurement period forused to determine future U.S. benefit obligations are shownas follows:
| | Pension Benefits | Other Benefits | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2005 | 2004 | 2005 | 2004 | |||||
| Discount rate | 5.75 | % | 6.0 | % | 5.75 | % | 6.0 | % | |
| Rate of compensation increase | 3.5 | 3.5 | — | — | |||||
The weighted-average assumptions used to determine the U.S. net periodic benefit cost are as follows:
| | Pension Benefits | Other Benefits | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||
| Discount rate | 6.0 | % | 6.25 | % | 7.0 | % | 6.0 | % | 6.25 | % | 7.0 | % | |
| Expected return on plan assets | 8.5 | 8.5 | 8.5 | — | — | — | |||||||
| Rate of compensation increase | 3.5 | 3.5 | 3.5 | — | — | 3.5 | |||||||
Expected Return on Plan Assets
To determine the expected long-term rate of return on plan assets, the historical performance, investment community forecasts and current market conditions are analyzed to develop expected returns for each asset class used by the plans. The expected returns for each asset class are weighted by the target allocations of the plans.
Plan Assets
Aon's U.S. pension plan asset allocation as of December 31, 2005 and 2004 is as follows:
| | | Fair Value of Plan Assets | ||||||
|---|---|---|---|---|---|---|---|---|
| | Target Allocation | |||||||
| Asset Class | 2005 | 2004 | ||||||
| Equities | 80 | % | 61 | % | 74 | % | ||
| Domestic equities | 45 | 38 | 45 | |||||
| International equities | 15 | 8 | 11 | |||||
| Limited partnerships and other | 15 | 11 | 11 | |||||
| Real estate and REITs | 5 | 4 | 4 | |||||
| Aon common stock | — | — | 3 | |||||
| Debt securities | 20 | 39 | 26 | |||||
| Fixed maturities | 20 | 22 | 23 | |||||
| Invested cash | No target | 17 | 3 | |||||
| Total | 100 | % | 100 | % | ||||
Pension plan assets did not include any Aon common stock at December 31, 2005. At December 31, 2004, pension plan assets included $30 million of Aon common stock. Dividends from Aon stock received by the plan in 2005 and 2004 were $0.4 million and $0.9 million, respectively. In November 2005, Aon contributed $200 million to its U.S. pension plan. As of the following table:plan measurement date, these funds were invested in invested cash.
| | Pension Benefits | Other Benefits | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2002 | 2001 | |||||
| Discount rate | 7.0 | % | 7.5 | % | 7.0 | % | 7.5 | % | |
| Expected return on plan assets | 8.5 | 10.3 | — | — | |||||
| Rate of compensation increase | 3.5 | 4.0 | 3.5 | 4.0 | |||||
Investment Policy and Strategy
The investment policy, as established by the Aon Pension Plan Investment Committee, seeks reasonable asset growth at prudent risk levels within target allocations. Aon believes that plan assets are well-diversified and are of appropriate quality. The investment portfolio asset allocation is reviewed quarterly and re-balanced to within policy target allocations. The investment policy is reviewed at least annually and revised, as deemed appropriate by the Aon Pension Plan Investment Committee.
Aon's U.S. other benefit plan assets of $8 million at both December 31, 2005 and 2004 were invested in money market instruments.
Cash Flows
Contributions
Based on current assumptions, Aon expects to contribute $6 million to U.S. pension plans during 2006 to satisfy minimum funding requirements and $4 million to fund other postretirement benefit plans during 2006.
Estimated Future Benefit Payments
Estimated future benefit payments for U.S. plans are as follows at December 31, 2005:
| (millions) | Pension Benefits | Other Benefits | ||||
|---|---|---|---|---|---|---|
| 2006 | $ | 63 | $ | 4 | ||
| 2007 | 66 | 4 | ||||
| 2008 | 70 | 4 | ||||
| 2009 | 75 | 4 | ||||
| 2010 | 81 | 4 | ||||
| 2011—2015 | 527 | 24 | ||||
Assumptions for Other Postretirement Benefits
The employer'sAssumed health care cost trend rates at December 31:
| | 2005 | 2004 | |||
|---|---|---|---|---|---|
| Assumed healthcare cost trend rate | 12 | % | 10.5 | % | |
| Ultimate trend rate | 5 | % | 5.5 | % | |
| Year that the ultimate trend rate is reached | 2012 | 2014 | |||
Aon's liability for future plan cost increase for pre-65 and Medical Supplement plan coverage is limited in any year to 5% per annum. For measurement purposes in 2002, 2001 and 2000, the annual rateBecause of increase in the per capita cost of covered health care benefits (trend rate) adjusted for actual current year cost experience was assumed to be 11.5%, 12.0% and 7.5%, respectively, decreasing gradually to 5.5% in year 2014 and remaining the same thereafter. However, with the employer funding increasethis cap, limited to 5% per year, net employer trend rates for these plans are effectively limited to 5% per year in the future.
The $50 per month subsidy for future post-65 retirees is assumed not to increase in future years. Therefore, there is no employer trend for future post-65 retirees. As a result, a 1% change in assumed healthcare cost trend rates has no effect on the service and interest cost components of net periodic postretirement healthcare benefit cost andor on the accumulated postretirement benefit obligation for the measurement period ended in 2002.2005.
International Pension Plans
The following tables provide a reconciliation of the changes in the benefit obligations and fair value of assets for the years ended December 31, 20022005 and 20012004 and a statement of the funded status as of
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December 31, 20022005 and 2001,2004, for material international pension plans, which are located in the United Kingdom U.K.
and theThe Netherlands. The measurement datedates for these plans isare September 30.30 and December 31, respectively.
| | International Pension | International Pension Plans | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | ||||||||||||
| (millions) | 2005 | 2004 | ||||||||||||
| | (millions) | |||||||||||||
| Reconciliation of benefit obligation | ||||||||||||||
| Obligation at beginning of period | $ | 2,011 | $ | 2,036 | ||||||||||
| Projected benefit obligation at beginning of period | $ | 3,847 | $ | 3,324 | ||||||||||
| Service cost | 45 | 51 | 60 | 64 | ||||||||||
| Interest cost | 133 | 124 | 197 | 185 | ||||||||||
| Participant contributions | 3 | 4 | 4 | 3 | ||||||||||
| Actuarial loss | 285 | 139 | ||||||||||||
| Benefit payments | (80 | ) | (69 | ) | (106 | ) | (103 | ) | ||||||
| Change in interest rate | 300 | (81 | ) | |||||||||||
| Change in discount rate | 345 | (63 | ) | |||||||||||
| Foreign exchange translation | 242 | (54 | ) | (430 | ) | 298 | ||||||||
| Obligation at end of period | $ | 2,654 | $ | 2,011 | ||||||||||
| Projected benefit obligation at end of period | $ | 4,202 | $ | 3,847 | ||||||||||
| Accumulated benefit obligation at end of period | $ | 3,720 | $ | 3,385 | ||||||||||
| Reconciliation of fair value of plan assets | ||||||||||||||
| Fair value at beginning of period | $ | 1,693 | $ | 2,000 | $ | 2,718 | $ | 2,239 | ||||||
| Actual return on plan assets | (98 | ) | (243 | ) | 463 | 188 | ||||||||
| Employer contributions | 74 | 53 | 168 | 181 | ||||||||||
| Participant contributions | 3 | 4 | 4 | 3 | ||||||||||
| Benefit payments | (80 | ) | (69 | ) | (106 | ) | (103 | ) | ||||||
| Foreign exchange translation | 185 | (52 | ) | (305 | ) | 210 | ||||||||
| Fair value at end of period | $ | 1,777 | $ | 1,693 | $ | 2,942 | $ | 2,718 | ||||||
| Funded status | ||||||||||||||
| Funded status at end of period | $ | (877 | ) | $ | (318 | ) | $ | (1,260 | ) | $ | (1,129 | ) | ||
| Unrecognized prior service | 1 | 2 | ||||||||||||
| Unrecognized loss | 1,286 | 660 | 1,737 | 1,635 | ||||||||||
| Net amount recognized | $ | 409 | $ | 342 | $ | 478 | $ | 508 | ||||||
| Prepaid benefit cost | $ | 64 | $ | 221 | ||||||||||
| Accrued benefit liability | (555 | ) | (144 | ) | ||||||||||
| Amounts recognized in the statement of financial position consist of: | Amounts recognized in the statement of financial position consist of: | |||||||||||||
| Prepaid benefit cost and intangible pension asset (included in other assets) | $ | 116 | $ | 123 | ||||||||||
| Accrued benefit liability (included in pension, post employment and post retirement liabilities) | (815 | ) | (694 | ) | ||||||||||
| Other comprehensive income | 900 | 265 | 1,177 | 1,079 | ||||||||||
| Net amount recognized | $ | 409 | $ | 342 | $ | 478 | $ | 508 | ||||||
The change in amounts recognized in other comprehensive income related to the minimum pension liability was an increase of $98 million and a decrease of $46 million in 2005 and 2004, respectively.
In 2002,2005, plans with a PBO in excess of the fair value of plan assets had a PBO of $2.7$4.2 billion and plan assets with a fair value of $1.8$2.9 billion and plans with an ABO in excess of the fair value of plan assets had an ABO of $2.1$3.4 billion and plan assets with a fair value of $1.6$2.6 billion.
In 2001,2004, plans with a PBO in excess of the fair value of plan assets had a PBO of $1.9$3.8 billion and plan assets with a fair value of $1.5$2.7 billion and plans with an ABO in excess of the fair value of plan assets had an ABO of $1.0$3.0 billion and plan assets with a fair value of $0.9$2.4 billion.
The following table provides the components of net periodic benefit cost for the international plans for the measurement period ended in 2002, 2001 and 2000:plans:
| | 2002 | 2001 | 2000 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (millions) Years ended December 31, | 2005 | 2004 | 2003 | |||||||||||||||||
| | (millions) | |||||||||||||||||||
| Service cost | $ | 45 | $ | 51 | $ | 65 | $ | 60 | $ | 64 | $ | 51 | ||||||||
| Interest cost | 133 | 124 | 123 | 197 | 185 | 152 | ||||||||||||||
| Expected return on plan assets | (163 | ) | (182 | ) | (193 | ) | (184 | ) | (165 | ) | (134 | ) | ||||||||
| Amortization of prior service cost | 1 | — | — | |||||||||||||||||
| Amortization of net loss | 31 | 11 | 10 | 69 | 70 | 58 | ||||||||||||||
| Net periodic benefit cost | $ | 46 | $ | 4 | $ | 5 | $ | 143 | $ | 154 | $ | 127 | ||||||||
The range of weighted-average assumptions forused to determine the measurement period for the international pension benefit obligations are shown in the following table:as follows:
| Pension Benefits | |||||
|---|---|---|---|---|---|
| Discount rate | % | % | |||
| Rate of compensation increase | 3.25 – 3.5 | 3.25 – 3.5 | |||
The range of weighted-average assumptions used to determine the international net periodic benefit costs are as follows:
| Pension Benefits | 2005 | 2004 | 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Discount rate | 4.5 – 5.6 | % | 5.25 – 5.5 | % | % | ||||||||
| Expected return on plan assets | 6.0 | 6.0 | |||||||||||
| Rate of compensation increase | 3.5 – 4.0 | 3.75 – 4.0 | |||||||||||
Expected Return on Plan Assets
To determine the expected long-term rate of return on plan assets, the historical performance, investment community forecasts and current market conditions are analyzed to develop expected returns for each asset class used by the plans. The expected returns for each asset class are weighted by the target allocations of the plans.
Plan Assets
Aon's international pension plan asset allocation at December 31, 2005 and 2004 is as follows:
| | | | Fair Value of Plan Assets | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Allocation Range | Target Allocation | ||||||||
| Asset Class | 2005 | 2004 | ||||||||
| Equities | 43 – 71 | % | 61% | 63 | % | 61 | % | |||
| Equities | 58 | 57 | ||||||||
| Real estate | 5 | 4 | ||||||||
| Debt securities | 29 – 57 | 39 | 37 | 39 | ||||||
| Fixed maturities | 37 | 37 | ||||||||
| Invested cash | — | 2 | ||||||||
| Total | 100 | % | 100 | % | ||||||
Investment Policy and Strategy
The investment policies for international plans are established by the local pension plan trustees and seek to maintain the plans' ability to meet liabilities and to comply with local minimum funding requirements. Plan assets are invested, within asset allocation ranges as shown above, in diversified portfolios that provide adequate levels of return at an acceptable level of risk. The investment policies are reviewed at least annually and revised, as deemed appropriate to ensure that the objectives are being met.
Cash Flows
Contributions
Based on current assumptions, Aon expects to contribute $180 million to its international pension plans during 2006 to satisfy minimum funding requirements.
Estimated Future Benefit Payments
Estimated future pension benefit payments for international plans are as follows at December 31, 2005:
| (millions) | | ||
|---|---|---|---|
| 2006 | $ | 93 | |
| 2007 | 97 | ||
| 2008 | 110 | ||
| 2009 | 116 | ||
| 2010 | 123 | ||
| 2011—2015 | 769 | ||
13. Stock Compensation Plans
In 2001, Aon stockholders approved the AonAon's Stock Incentive Plan which replaced all existing incentive compensation plans, includingprovides for the Aon Stock Award Plan and the Aon Stock Option Plan. Under the new plan,grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and restricted stock awards may be granted.units. The annual rate ofat which awards are granted each year is based upon financial and competitive business conditions. The number of shares authorized to be issued under the new plan is equal to 18% of the number of common shares outstanding of Aon.outstanding.
Stock Awards
Stock awards, in the form of restricted stock units, are granted to certain officers and employees of Aon. Generally, employees are required to complete three continuous years of service before the award beginsstock awards begin to vest in increments until the completion of a 10-year period of continuous employment. In 2003 and 2002, a significantlarge number of stock awards were granted that vest annually over five years, with the initial vesting occurring after one year of continuous service. In 2005 and 2004, a large number of stock awards were granted that will not vest until five years after the date of grant. For most employees, beginning in 2005, individual incentive compensation over $50,000 will partially be paid in restricted stock units, which will vest ratably over three years. In general, most awarded sharesstock awards are issued as they become vested. In certain circumstances, an employee can elect to defer the receipt of vested shares to a later date. With certain limited exceptions, any break in continuous employment will cause forfeiture of all unvested awards. The compensation cost associated with each stock award is deferred and amortized over the period of continuous employment using the straight-line method. At December 31, 20022005, 2004 and 2001,2003, the number of shares available for awardstock awards is included with options available for grant.
Aon commonCommon stock awards outstanding consist of the following:
| | Years ended December 31 | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||
| | (shares in thousands) | ||||||
| Shares outstanding at beginning of year | 7,424 | 8,881 | 9,865 | ||||
| Granted | 1,024 | 258 | 586 | ||||
| Vested | (1,432 | ) | (1,488 | ) | (1,216 | ) | |
| Canceled | (533 | ) | (227 | ) | (354 | ) | |
| Shares outstanding at end of year | 6,483 | 7,424 | 8,881 | ||||
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| (shares in thousands) Years ended December 31, | 2005 | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|---|
| Shares outstanding at beginning of year | 8,784 | 7,061 | 6,483 | ||||
| Granted | 4,842 | 3,439 | 2,529 | ||||
| Vested | (1,164 | ) | (1,330 | ) | (1,413 | ) | |
| Canceled | (677 | ) | (386 | ) | (538 | ) | |
| Shares outstanding at end of year | 11,785 | 8,784 | 7,061 | ||||
Stock Options
Options to purchase common stock are granted to certain officers and employees of Aon and its subsidiaries at 100% of market value on the date of grant. Generally, employees are required to complete two continuous years of service before the options begin to vest in increments until the completion of a 4-year period of continuous employment. For all grants made prior to an amendment to the former stock option plan in 2000, employees were required to complete three continuous years of service before the options began to vest in increments until the completion of a 6-year period of continuous employment.
A summary of Aon's stock option activity (including options granted pursuant to the former Aon Stock Award Plan) and related information consists of the following:is as follows:
| | Years ended December 31 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||||||||
| | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | |||||||||
| | (shares in thousands) | ||||||||||||||
| Beginning outstanding | 21,298 | $ | 32 | 16,156 | $ | 29 | 11,223 | $ | 31 | ||||||
| Granted | 5,552 | 34 | 7,647 | 34 | 6,812 | 25 | |||||||||
| Exercised | (877 | ) | 20 | (1,751 | ) | 18 | (1,174 | ) | 17 | ||||||
| Canceled | (1,495 | ) | 33 | (754 | ) | 32 | (705 | ) | 33 | ||||||
| Ending outstanding | 24,478 | $ | 32 | 21,298 | $ | 32 | 16,156 | $ | 29 | ||||||
| Exercisable at end of year | 5,308 | $ | 30 | 2,538 | $ | 29 | 2,607 | $ | 21 | ||||||
| Options available for grant | 22,771 | 14,444 | 2,368 | ||||||||||||
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| (shares in thousands) Years ended December 31, | 2005 | 2004 | 2003 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | |||||||||
| Beginning outstanding | 34,188 | $ | 29 | 31,627 | $ | 29 | 24,478 | $ | 32 | ||||||
| Granted | 6,295 | 24 | 5,233 | 27 | 9,226 | 20 | |||||||||
| Exercised | (2,671 | ) | 24 | (475 | ) | 23 | (13 | ) | 24 | ||||||
| Canceled | (2,100 | ) | 29 | (2,197 | ) | 29 | (2,064 | ) | 27 | ||||||
| Ending outstanding | 35,712 | $ | 29 | 34,188 | $ | 29 | 31,627 | $ | 29 | ||||||
| Exercisable at end of year | 18,178 | $ | 32 | 15,060 | $ | 32 | 9,574 | $ | 32 | ||||||
| Options available for grant | 10,322 | 11,885 | 15,742 | ||||||||||||
A summary of options outstanding and exercisable is as follows:
| | As of December 31, 2002 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Options Outstanding | | Options Exercisable | |||||||||
| Range of Exercise Prices | Shares Outstanding | Weighted-Average Remaining Contractual Life (years) | Weighted-Average Exercise Price | Shares Exercisable | Weighted-Average Exercise Price | |||||||
| | (Shares in thousands) | |||||||||||
| $14.92 - $22.89 | 1,565 | 4.6 | $ | 20.02 | 942 | $ | 22.40 | |||||
| 23.56 - 23.94 | 4,986 | 7.0 | 23.93 | 1,524 | 23.93 | |||||||
| 26.53 - 31.22 | 2,140 | 5.1 | 29.31 | 1,211 | 29.03 | |||||||
| 31.53 - 32.53 | 3,589 | 8.3 | 32.51 | 17 | 31.53 | |||||||
| 32.64 - 35.35 | 3,692 | 8.1 | 34.87 | 177 | 35.28 | |||||||
| 35.36 - 36.74 | 439 | 8.2 | 36.00 | 42 | 35.92 | |||||||
| 36.88 - 49.29 | 8,067 | 7.8 | 39.64 | 1,395 | 43.33 | |||||||
| $14.92 - $49.29 | 24,478 | 7.3 | $ | 32.45 | 5,308 | $ | 30.42 | |||||
As of December 31, 2001 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Options Outstanding | | Options Exercisable | |||||||||
| Range of Exercise Prices | Shares Outstanding | Weighted-Average Remaining Contractual Life (years) | Weighted-Average Exercise Price | Shares Exercisable | Weighted-Average Exercise Price | |||||||
| | (Shares in thousands) | |||||||||||
| $14.69 - $22.89 | 1,471 | 1.0 | $ | 20.95 | 1,022 | $ | 20.09 | |||||
| 23.41 - 23.94 | 5,735 | 8.1 | 23.93 | 40 | 23.69 | |||||||
| 26.53 - 31.22 | 2,304 | 6.1 | 29.35 | 734 | 28.71 | |||||||
| 31.53 - 32.53 | 3,804 | 9.3 | 32.51 | — | — | |||||||
| 32.64 - 35.18 | 2,330 | 9.4 | 34.74 | 4 | 35.06 | |||||||
| 35.20 - 43.33 | 3,803 | 7.4 | 39.44 | 712 | 41.57 | |||||||
| 43.44 - 49.29 | 1,851 | 7.2 | 43.57 | 26 | 46.26 | |||||||
| $14.69 - $49.29 | 21,298 | 7.5 | $ | 31.50 | 2,538 | $ | 28.96 | |||||
| (Shares in thousands) As of December 31, 2005 | Options Outstanding | | Options Exercisable | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices | Shares Outstanding | Weighted- Average Remaining Contractual Life (years) | Weighted- Average Exercise Price | Shares Exercisable | Weighted- Average Exercise Price | |||||||
| $14.92 — $19.70 | 5,135 | 7.17 | $ | 19.43 | 1,398 | $ | 19.15 | |||||
| 19.76 — 23.94 | 8,013 | 6.81 | 22.91 | 3,526 | 23.54 | |||||||
| 23.95 — 27.03 | 6,455 | 8.99 | 26.12 | 60 | 25.50 | |||||||
| 27.16 — 32.53 | 5,988 | 5.38 | 30.28 | 4,365 | 31.38 | |||||||
| 32.64 — 36.88 | 7,181 | 5.72 | 35.99 | 5,890 | 35.83 | |||||||
| 37.13 — 49.29 | 2,940 | 2.77 | 43.28 | 2,939 | 43.28 | |||||||
| $14.92 — $49.29 | 35,712 | 6.47 | $ | 28.53 | 18,178 | $ | 32.26 | |||||
Employee Stock Purchase PlansPlan
United States
Effective July 1, 1998, Aon adoptedhas an employee stock purchase plan that provides for the purchase of a maximum of 7.5 million shares of Aon's common stock by eligible U.S. employees. Under the original plan, shares of Aon's common stock couldmay be purchased at 6-month3-month intervals at 85% of the lower of the fair market value of the common stock on the first or the last day of each 6-month3-month period. Effective July 1, 2000, the plan was amended by changing the purchase period to 3-month intervals. In 2002, 20012005, 2004 and 2000, 312,0002003, 697,000 shares, 680,000754,000 shares and 940,000734,000 shares, respectively, were issued to employees under the plan. In the first quarter 2002, the plan was suspended in anticipation of the planned divestiture of the insurance underwriting businesses (note 1). The plan was reactivated as of January 1, 2003. There was no compensation expense associated with this plan.
United Kingdom
In 1999, Aon adopted an employee stock purchase plan that provides for the purchase of approximately 720,000 shares of Aon common stock by eligible U.K. employees after a 3-year period
95
and is similar to the U.S. plan described above. In 2002, 4,000 shares were issued to employees under the plan. No shares were issued under the plan in 2001 or 2000. There was no compensation expense associated with this plan.
14. Financial Instruments
Financial Risk Management
Aon is exposed to market risk from changes in foreign currency exchange rates, interest rates and equity securitiessecurity prices. To manage the risk related to these exposures, Aon enters into various derivative transactions thattransactions. The derivatives have the effect of reducing theseAon's market risks by creating offsetting market exposures. If Aon diddoes not useenter into derivative contracts, its exposure to market risk would be higher.transactions for trading purposes.
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.
Certain derivatives also give rise to credit risks from the 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 ofusing master netting agreements, entering into non-exchange-traded derivatives with highly rated major financial institutions and by using exchange-traded instruments. Aon closely monitors the creditworthinesscredit-worthiness of, and exposure to, its counterparties and considers its credit risk to be minimal. At December 31, 20022005 and 2001,2004, Aon placed cash and securities relating to these derivative contracts in escrow amounting to $11$6 million and $5 million, respectively.
Foreign currency forward contracts (forwards) and interest rate swaps entered into require no up-front premium. Forwards settle at the expiration of the related contract. The net effect of swap payments is settled periodically and reported in income. The premium and commission paid for purchased options, including interest rate caps and floors, and premium received, net of commission paid, for written options represent the cost basis of the position until it expires or is closed. The commission paid for futures contracts represents the cost basis of the position, until it expires or is closed. Exchange-traded futures are valued and settled daily. Unless otherwise noted, derivative instruments are generally reported in other receivables and liabilities in the consolidated statements of financial position.
Accounting Policy for Derivative Instruments
Effective October 1, 2000, Aon adopted FASB Statement No. 133. FASB Statement No. 133 requires allAll derivative instruments to beare recognized in the consolidated statements of financial position at fair value. Unless otherwise noted, derivative instruments with a positive fair value are reported in other receivables and derivative instruments with a negative fair value are reported in other liabilities in the consolidated statements of financial position. Where Aon has entered into master netting agreements with counterparties, the derivative positions are netted by program and are reported accordingly in other receivables or other liabilities. Changes in the fair value of derivative instruments are recognized immediately in earnings, unless the derivative is designated as a hedge and qualifies for hedge accounting.
FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities, identifies three hedging relationships where a derivative (hedging instrument) may qualify for hedge accounting: (i) a hedge of the change in fair value of a recognized asset or liability or firm commitment (fair("fair value hedge)hedge"), (ii) a hedge of the variability in cash flows from a recognized variable-rate asset or liability or forecasted transaction (cash("cash flow hedge)hedge"), and (iii) a hedge of the net investment in a foreign subsidiary.subsidiary ("net investment hedge"). Under hedge accounting, recognition of derivative gains and losses can be matched in the same period with that of the hedged exposure and thereby minimize earnings volatility.
In order for a derivative to qualify for hedge accounting, the derivative must be formally documented and designated as a fair value, cash flow, or a net investment hedge at inceptionby documenting the relationship between the derivative and be consistent withthe hedged item. The documentation will include a description of the hedging instrument, the hedge item, the risk being hedged, Aon's overall risk management policy. Theobjective and strategy for undertaking the hedge, and the method for assessing the effectiveness of the hedge. Additionally, the hedge relationship must be expected to be highly effective at offsetting changes in either the fair value or cash flows of the hedged item at both inception of the hedge and on an ongoing basis. Aon assesses the ongoing effectiveness of its hedges at the end of each quarter.
For a highly effectivefair value hedge, changesthe change in the fair value of the hedging instrument must be expected to substantially offset changes in the fair value of the hedged item. Aon performs frequent analyses to measure hedge effectiveness.
96
The change in fair value of a hedging instrument designated and qualified as a fair value hedge and the change in fair value of the hedged item attributable to the risk being hedged are both recognized currently in earnings. TheFor a cash flow hedge, the effective portion of the change in fair value of a hedging instrument designated and qualified as a cash flow hedge is recognized in other comprehensive income (OCI)OCI and subsequently reclassified to income when the hedged item affects earnings. The ineffective portion of the change in fair value of a cash flow hedge is recognized
immediately in earnings. For a derivative designated and qualified as a hedge of a net investment in a foreign subsidiary,hedge, the effective portion of the change in fair value of the hedging instrument is reported in OCI as part of the cumulative translation adjustment. Theadjustment while the ineffective portion of the change in fair value of a hedge of a net investment in a foreign subsidiary is recognized immediately in earnings.
Prior toChanges in the adoption of FASB Statement No. 133, the ineffective portion of the change in fair value of a hedging instrumentderivative that is not designated and qualifiedas an accounting hedge (known as an "economic hedge") are recorded in either investment income or general expenses (depending on the hedged exposure) in the current period's consolidated statements of income.
Aon discontinues hedge accounting prospectively when (1) the derivative expires or is sold, terminated, or exercised, (2) it determines that the derivative is no longer effective in offsetting changes in the hedged item's fair value or cash flows, (3) a hedged forecasted transaction is no longer probable of occurring in the time period described in the hedge documentation, (4) the hedged item matures or is sold, or (5) management elects to discontinue hedge accounting voluntarily.
When hedge accounting is discontinued because the derivative no longer qualifies as a fair value hedge, wasAon will continue to carry the derivative in the consolidated statements of financial position at its fair value, recognize subsequent changes in the fair value of the derivative in current-period earnings, cease to adjust the hedged asset or liability for changes in its fair value, and begin to amortize the hedged item's cumulative basis adjustment into earnings over the remaining life of the hedged item using a method that approximates the level-yield method.
When hedge accounting is discontinued because the derivative no longer qualifies as a cash flow hedge, Aon will continue to carry the derivative in the consolidated statements of financial position at its fair value, recognize subsequent changes in the fair value of the derivative in current-period earnings, and continue to defer the derivative gain or loss in accumulated OCI until the hedged forecasted transaction affects earnings. If the hedged forecasted transaction is probable of not recognizedoccurring in the time period described in the hedge documentation or within a two month period of time thereafter, the deferred derivative gain or loss would be reclassified immediately into earnings.
Foreign Exchange Risk Management
Certain of Aon's foreign brokerage subsidiaries, primarily in the United Kingdom,U.K., receive revenues in currencies (primarily in U.S. dollars) that differ from their functional currencies. The foreign subsidiary's functional currency revenue will fluctuate as the currency exchange rates change. To reduce thethis variability, of cash flows from these transactions, Aon has entered intouses foreign exchange forwards and options with settlement dates prior to December 2004. Upon adoptionhedge the foreign exchange risk of FASB Statement No. 133,the forecasted revenue for up to a maximum of three years in the future. Aon has designated and qualified forwards are accounted forthese derivatives as cash flow hedges of its forecasted transactions.foreign currency denominated revenue. As of December 31, 2002,2005, a $32$13 million pretax gainloss has been deferred to OCI, $21$9 million of which is expected to impact pretaxbe reclassified to earnings as an adjustment to general expenses in 2003. There was2006. Deferred gains or losses will be reclassified from OCI to general expenses when the hedged revenue is recognized. This hedge had no material ineffectiveness recorded.
Priorin 2005. Aon also uses over-the-counter options and forward contracts, which have not been designated as hedges for accounting purposes, to hedge economic risks that arise from fluctuations in the adoption of FASB Statement No. 133, these transactions did not qualify for hedge accounting and changescurrency exchange rates. Changes in the fair value related toof these derivatives were recorded in general expenses in the consolidated statements of income. Certain other forward and option contracts did not meet the hedging requirements of FASB Statement No. 133. Changes in fair value related to these contracts wereare recorded in general expenses in the consolidated statements of income.
Aon uses exchange-traded foreign currency futures and options on futures, as well as over-the-counter options and forward contracts to reduce the impact of foreign currency fluctuations on the translation of the financial statements of Aon's foreign operations. These derivatives are not affordedeligible for hedge accounting as defined by FASB Statement No. 133treatment and prior guidance. Changeschanges in the fair value of these derivatives are recorded in general expenses in the consolidated statements of income.
Aon also uses foreign currency forward contracts to offset foreign exchange risk associated with foreign denominated (primarily British pounds) inter-company notes. These derivatives were not designated as a hedge because changes in their fair value were largely offset in earnings by remeasuring
the notes for changes in spot exchange rates. Changes in the fair value of these derivatives were recorded in general expenses in the consolidated statements of income.
Aon also uses foreign currency forward contracts to hedge certain of its net investments in foreign underwriting operations (primarily Canadian dollar, Euro and British pound). During 2002, there were2005, this hedge had no designatedineffectiveness, and qualifying hedges of this exposure.a $15 million pretax loss has been included in OCI.
In 2000,2005, Aon subsidiaries entered into a cross currency swapcross-currency swaps to hedge the foreign currency and interest rate risks associated with a foreign denominated fixed-rate policyholder liability. This swap hasterm intercompany borrowings. These swaps have been designated as cash flow hedges. As of December 31, 2005, a fair value hedge$1 million pretax loss has been deferred to OCI, which is expected to be reclassified to earnings in 2006 as an adjustment to interest income. The reclassification from OCI will offset the related Statement No. 52 transaction gain or loss arising from the remeasurement of the combined exposure. There wasborrowing due to changes in spot exchange rates and to record interest income at the interest rate implicit in the derivative. This hedge had no material ineffectiveness related to this hedge.in 2005.
Interest Rate Risk Management
Aon uses futures contracts and purchasespurchased options on futures contracts to reduce the price volatility of its fixed-maturity portfolio. Upon adoptionDerivatives designated as hedging the aggregate interest rate exposure of FASB Statement No. 133, derivativesthe fixed-maturity portfolio do not qualify as hedges. Changes in their fair value were recorded in investment income. Derivatives designated and qualified as hedging specific fixed-income securities are accounted for as fair value hedges. There were no designated and qualified hedges at December 31, 2002. Prior toChanges in the adoption of FASB Statement No. 133, realized gains and losses on derivatives that qualified as hedges were deferred and reported as
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an adjustmentfair value of the cost basis ofhedge and the hedged item and are being amortized into earnings over the remaining life of the hedged item.recorded in investment income.
Aon occasionally enters into receive-fixed-pay-floating interest rate swaps to hedge changes in the fair value of its fixed-rate notes. The interest rate swaps qualify as fair value hedges and there washave no ineffectiveness recorded. Realizedbecause their critical terms (e.g., amount, maturity date) match those of the hedged debt. Upon the termination of this type of hedge, the swap realized gains and losses on swaps qualifiedthat have been deferred as hedges are deferred and reported as adjustments ofan adjustment to the cost basis of the hedged items anditem are being amortized into earningsinterest expense over the remaining life of the hedged items. Prior to the adoption of FASB Statement No. 133, Aon purchased futures contracts to hedge the fair value of its fixed-rate notes from changes in interest rates. Aon deferred the gains from the termination of the contracts and is amortizing these gains over the remaining life of the fixed-rate notes.
Aon issued fixed-rate notes in May 2000. Aon purchased options on interest rate swaps to hedge against the change in interest rates prior to the issuance. These options qualified as a hedge of an anticipated transaction under prior accounting guidance and related gains were deferred and are being amortized as an offset to interest expense over the remaining life of the notes. Upon the adoption of FASB Statement No. 133, pretax deferred gains of $5 million were reclassified to OCI. At December 31, 2002, $3 million remains in OCI, $1 million of which is expected to offset interest expense in 2003.
Aon enters into interest rate swap and floor agreements and uses exchange-traded futures and options to limit its net exposure to decreasing short-term interest rates, primarily relating to U.S. dollar denominated brokerage fiduciary funds held on behalf of clients in the U.S. and the U.K. Aon also sells exchange-traded futures to limit its exposure to increasing long-term interest rates. Since the adoption of FASB Statement No. 133, thereThese derivatives were nonot designated as a hedge and qualified cash flow hedges of these exposures. Changeschanges in their fair value related to these contracts were recorded in investment income in the consolidated statements of income. Under prior accounting guidance, realized gains
In 2005 and losses were deferred and recognized in earnings as the hedged item affected earnings.
Aon uses2004, receive-fixed-pay-floating interest rate swaps and caps to limit its exposure to changes in interest rates related towere designated as cash flow hedges of the interest rate guarantees provided byrisk of a subsidiaryportion of Aon to certain unaffiliated entities. Under prior accounting guidance, these derivatives qualified for hedge accounting treatment,Aon's U.S. dollar denominated brokerage funds held on behalf of U.K. clients and realized gainsother U.S. and losses were deferred and recognized in earnings as the hedged item affected earnings. In August 2000, these guarantees were replaced with new offsettingU.K. operating funds. These interest rate swaps between Aon and an unaffiliated entity, with Aon essentially retainingdo not have maturities greater than one year. Changes in the same exposure. Following the replacementfair value of the original hedged item,swaps were recorded in OCI and will be reclassified to earnings as an adjustment to investment income over the term of the swap. As of December 31, 2005, a $2 million pretax loss related to this hedge accounting was terminated and previously deferred realized gains and losses as well as previously unrecognized changesrecorded in fair value were recognizedOCI, which is expected to be reclassified to investment income in earnings. The termination of this hedging relationship did not have a2006. This hedge had no material effect on pretax earnings. The adoption of FASB Statement No. 133 did not affect the accounting for these derivative instruments.ineffectiveness in 2005.
Equity Price Risk Management
Aon sells futures contracts and purchases options to reduce the price volatility of its equity securities portfolio and equity securities it owns indirectly through limited partnership investments. Since the adoption of FASB Statement No. 133, thereThese derivatives were nonot designated as a hedge and qualified hedges of this exposure. Prior to the adoption of FASB Statement No. 133, realized gains and losses on derivatives that qualified as hedgeschanges in their fair value were deferred and reported as an adjustment of the cost basis of the hedged item and are being amortized into earnings over the remaining life of the hedged item. Realized gains and losses on derivatives that did not qualify for hedge accounting treatment were recognized immediatelyrecorded in investment income in the consolidated statements of income.
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Other Financial InstrumentsUnconsolidated SPEs Excluding PEPS I
Prior to 2002, an Aon subsidiary issued fixed- and floating-rate Guaranteed Investment Contracts (GICS) and floating-rate funding agreements and invested the proceeds primarily in the U.S. fixed income markets. The assets backing the GICS are subject to varying elements of credit and market risk. This program is currently in run-off.
Unconsolidated Special Purpose Entities (SPEs) Excluding PEPS I. Certain of Aon's subsidiaries make short-term loans (generally with terms of 12 months or less) to businesses for the financing ofto finance insurance premiums and then securitizesell ("securitize") the finance receivables through securitization transactions that meet the criteria for sale accounting in accordance with FASB Statement No. 140.140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. These premium financing securitizations are accomplished through the use ofby using special purpose entities which are considered QSPEsqualifying SPEs ("QSPEs") pursuant to FASB Statement No. 140 and FIN 46 and commercial paper multi-seller, non-qualified bank conduits (multi-seller non-qualified SPEs)(SPEs). FASB Statement No. 140 provides that a QSPE should not be consolidated in the financial statements of a transferor or its affiliates (Aon's subsidiaries).
Premium financing securitizations performed by Aon's U.S., U.K., Canadian and Australian subsidiaries utilizeuse multi-seller non-qualified SPEs. Based on an analysis ofBy analyzing the qualitative and quantitative factors of the SPEs, Aon has determined that it isthese subsidiaries are not the sponsor of the SPEs. Additionally, independent third parties (i) have made substantial equity investments in the SPEs, (ii) have voting control of the SPEs and (iii) generally have the risks and rewards of ownership of the assets of the SPEs. Based on these factors and the fact that these subsidiaries do not have a significant variable interest in the multi-seller SPEs, Aon has determined that non-consolidation to be the appropriate accounting treatment in accordance with current accounting guidance.is appropriate.
AsAon or one of its QSPEs sells undivided interests in specified premium financing receivables to the independent SPEs. Under the terms of these agreements, new receivables increase the amounts available to securitize as collections (administered by Aon) reduce previously sold receivables. The amount advanced from third parties at any one time under the accounts receivable sales agreement was limited to a maximum of $1.9 billion and $2 billion at December 31, 20022005 and 2001,2004, respectively.
At both December 31, 2005 and 2004, $1.8 billion was advanced under these programs from the maximum commitment containedSPEs. Aon records at fair value the retained interest, which is included in these agreements was $1.7 billioninsurance brokerage and $1.4 billion, respectively,consulting services receivables in the consolidated balance sheets.
Aon recorded gains associated with the sale of receivables. When Aon calculated the gains, all fees related to this facility were included. The gains included in revenue in the consolidated statements of income, were $65 million, $81 million and $69 million for the maximum credit risk under recourse provisions was approximately $97years ended December 31, 2005, 2004 and $82 million, respectively, which represents2003, respectively.
Aon retains servicing rights for sold receivables and a servicing fee is earned as income over the extentservicing period. The servicing fees are included in the gain/loss calculation. At December 31, 2005 and 2004, the fair value of the servicing rights approximates the estimated costs to service the receivables and accordingly, Aon has not recorded any servicing assets or liabilities related to this servicing activity.
Aon estimates fair value by discounting estimated future cash flows from the servicing rights and servicing costs using discount rates that approximate current market rates and expected future prepayment rates.
The SPEs bear the credit risks on the receivables, subject to limited recourse. These recourse obligations arein the form of credit loss reserves, which were formerly guaranteed by Aon. As of December 31, 2002During 2005, Aon eliminated the percentage guarantee for all facilities, replacing it with other collateral enhancements. Also in 2005, the Canadian facility was amended, reducing the ratings trigger and 2001,adding the unpaid principal amount of securitized receivables outstandingfinancial covenants from the credit facility. The Australian facility was $1.6 billionrenewed, increasing the facility by AUD50 million. The U.S. facility was amended in 2005, extending the facility to July 2006 and $1.3 billion, respectively.reducing its size by $100 million.
A subsidiary of Aon is also a general partner in a limited partnership ("LP") that purchased automobile installment contracts from automobile dealers and subsequently securitizedintends to renew these contracts through securitization transactions in accordance withconduit facilities when they expire. If there are adverse bank, regulatory, tax or accounting rule changes, the requirements of FASB Statement No. 140. Effective April 1, 2001, the LP ceased purchasing and securitizing new automobile installment contracts. A subsidiary of Aon services the existing portfolio for the LP. Aon acts as a performance guarantor with respect to its subsidiary's servicing duties under the securitization agreement. Aon uses the equity method of accounting to record its share of the net income or loss of the LP. As of December 31, 2002 and 2001, the remaining unpaid principal amount of securitized installment contracts outstanding was $466 million and $1 billion, respectively. As of December 31, 2002 and 2001, as the general partner of the LP, Aon had approximately $121 million and $143 million, respectively, of recourse with respect to a limited guarantee relatingCompany's access to the LP's securitization agreement. In February 2003, an agreement was reached with the beneficial interest holders, reducing the amount of recourse to Aon to $66 million.conduit facilities and SPEs would be restricted.
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
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be exercised in deriving conclusions about Aon's business or financial condition based on the fair value disclosures. The basis for determining the fair value of financial instruments is discussed in Note 1. The carrying value and fair value of certain of Aon's financial instruments are as follows:
| | As of December 31 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | |||||||||||
| | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||
| | (millions) | ||||||||||||
| Assets: | |||||||||||||
| Fixed maturities and equity securities | $ | 2,151 | $ | 2,151 | $ | 2,531 | $ | 2,531 | |||||
| Other investments | 600 | 599 | 640 | 639 | |||||||||
| Cash, receivables and short-term investments* | 13,906 | 13,906 | 11,264 | 11,264 | |||||||||
| Derivatives | 79 | 79 | 46 | 46 | |||||||||
| Liabilities: | |||||||||||||
| Investment-type insurance contracts | 139 | 136 | 813 | 782 | |||||||||
| Short-term borrowings, premium payables and general expenses | 12,033 | 12,033 | 10,260 | 10,260 | |||||||||
| Notes payable | 1,671 | 1,754 | 1,694 | 1,750 | |||||||||
| Capital securities | 702 | 632 | 800 | 782 | |||||||||
| Derivatives | 45 | 45 | 55 | 55 | |||||||||
*Excludes derivatives.
| (millions) As of December 31, | 2005 | 2004 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||
| Assets: | |||||||||||||
| Fixed maturities and equity securities | $ | $4,258 | $ | 4,258 | $ | 3,522 | $ | 3,522 | |||||
| Other investments | 515 | 514 | 483 | 482 | |||||||||
| Cash, receivables and short-term investments | 14,376 | 14,376 | 14,749 | 14,749 | |||||||||
| Derivatives | 88 | 88 | 149 | 149 | |||||||||
| Liabilities: | |||||||||||||
| Deposit-type insurance contracts | 21 | 21 | 18 | 18 | |||||||||
| Short-term borrowings, premium payables and general expenses | 11,095 | 11,095 | 11,334 | 11,334 | |||||||||
| Notes payable | 2,105 | 2,442 | 2,115 | 2,280 | |||||||||
| Derivatives | 91 | 91 | 86 | 86 | |||||||||
Guarantees and Indemnifications
Aon provides a variety of guarantees and indemnifications to its customers and others to allow Aon or others to complete a wide variety of business transactions.others. The maximum potential amount of future payments representrepresents the notional amounts that could become payable under the guarantees and indemnifications if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or other methods. These amounts may bear no relationship to the expected future payments, if any, for these guarantees and indemnifications. Any anticipated amounts payable which are deemed to be probable and estimable are properly reflectedaccrued in Aon's consolidated financial statements.
Refer to Other Financial Instruments, above, for guarantees associated with Aon's premium and auto loan financing securitizations. Guarantees associated with Aon's limited partnership securitization are disclosed in noteNote 7. Indemnities related to discontinued operations are disclosed in noteNote 6. Contingent shares issuable related to prior acquisitions are disclosed in note 4.
Aon and its subsidiaries have issued letters of credit to cover contingent payments of approximately $60$11 million for taxes and other business obligations to third parties. Amounts have beenare accrued in the consolidated financial statements for these letters of credit to the extent they are probable and estimable.
Aon has certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. Costs associated with these guarantees, to the extent estimable and probable, are provided in Aon's allowance for doubtful accounts. The maximum exposure with respect to such contractual contingent guarantees was approximately $30$17 million at December 31, 2002.2005.
Aon expects that as prudent business interests dictate, additional guarantees and indemnifications may be issued from time to time.
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Aon and its subsidiaries are subject to numerous claims, tax assessments, lawsuits and lawsuitsproceedings that arise in the ordinary course of business. The damages thatclaimed in these matters are or may be claimed are substantial, including, in many instances, claims for punitive, treble or extraordinary damages. Aon has purchased errors and omissions ("E&O") insurance and other appropriate insurance to provide protection against losses that arise in such matters. Accruals for these items, net of insurance receivables, when applicable, have been provided to the extent that losses are deemed probable and are reasonably estimable. These accruals and receivables are adjusted from time to time as developments warrant.
In 2004, Aon, other insurance brokers, insurers and numerous other industry participants received subpoenas and other requests for information from the secondoffice of the Attorney General of the State of New York and from other states relating to certain practices in the insurance industry.
On March 4, 2005, Aon entered into an agreement (the "Settlement Agreement") with the Attorney General of the State of New York, the Superintendent of Insurance of the State of New York, the Attorney General of the State of Connecticut, the Illinois Attorney General and the Director of the Division of Insurance, Illinois Department of Financial and Professional Regulation (collectively, the "State Agencies") to resolve all the issues related to investigations conducted by the State Agencies.
As has been described in detail in Aon's previous financial filings, the Settlement Agreement requires Aon to pay between 2005-2007 a total of $190 million into a fund (the "Fund") to be distributed to certain Eligible Policyholder clients. The Settlement Agreement set forth the procedures under which Aon mailed notices to its Eligible Policyholder clients and distributes the Fund to Participating Policyholder clients. In order to obtain a payment from the Fund, Participating Policyholders were required to tender a release of claims against the Company arising from acts, omissions, transactions or conduct that are the subject of the lawsuits.
As required by the Settlement Agreement, within 60 days of the effective date of that agreement, the Company commenced the implementation of certain business reforms, including agreeing not to accept contingent compensation as defined in the Settlement Agreement.
In accordance with APB Opinion No. 21,Interest on Receivables and Payables, the Company discounted the payment stream associated with the Settlement Agreement and recorded the present value of the liability and corresponding expense of $180 million in the financial statements as of December 31, 2004. The discount was determined using Aon's incremental borrowing rate. The Company did not discount the payment made on September 1, 2005. The settlement was considered fully tax deductible and is not treated as a permanent difference in the Company's tax calculation.
Purported clients have also filed civil litigation against Aon and other companies under a variety of laws and legal theories relating to broker compensation practices and other issues under investigation by New York and other states. As previously reported, a putative class action styledDaniel v. Aon (Affinity) has been pending in the Circuit Court of Cook County, Illinois since August 1999. On March 9, 2005, the Court gave preliminary approval to a nationwide class action settlement within the $40 million reserve established in the fourth quarter of 1999, Allianz Life Insurance Company of North America, Inc. ("Allianz") filed an amended complaint in Minnesota adding a brokerage subsidiary of Aon as a defendant in an action which Allianz brought against three insurance carriers reinsured by Allianz. These three carriers provided certain types of workers' compensation reinsurance to a pool of insurers and to certain facilities managed by Unicover Managers, Inc. ("Unicover"), a New Jersey corporation not affiliated with Aon. Allianz alleges that the Aon subsidiary acted as an agent of the three carriers when placing reinsurance coverage on their behalf. Allianz claims that the reinsurance it issued should be rescinded or that it should be awarded damages, based on alleged fraudulent, negligent and innocent misrepresentations by the carriers, through their agents, including the Aon subsidiary defendant.
On August 30, 2002, two of the three carriers referred to above filed a complaint2004. The Court held hearings in the United States District Court forfourth quarter of 2005 to consider whether to grant final approval to the Districtsettlement, and is expected to issue a decision in first quarter 2006.
Beginning in June 2004, a number of Connecticutother putative class actions have been filed against the Aon brokerage subsidiary. The two carriersand other companies by purported clients under a variety of legal theories, including state tort, contract, fiduciary duty, antitrust and statutory theories and federal antitrust and Racketeer Influenced and Corrupt Organizations Act theories. These actions are currently involvedpending at early stages in an arbitration proceeding with Allianz, related to the original litigation,state court in which Allianz seeks the recission of the reinsurance placements. These carriers also seek to recover from the Aon brokerage subsidiary any damages, costsCalifornia and expenses, including legal fees, suffered by such carriers as a result of an adverse arbitration award.Illinois and in federal court in New Jersey. Aon believes that the Aon subsidiaryit has meritorious defenses in
all of these cases and the Aon subsidiary intends to vigorously defend this claim. On January 8, 2003, the two carriers dismissed their lawsuit without prejudice, meaning it could be refiled at a later time.itself against these claims. The remaining Unicover issues are complex, and therefore, the timing and amountoutcome of resolution cannot be determined at this time. In early October 2002, there was reportedly an award made by arbitrators in an arbitration held in New York among Unicover Managers, Inc., Unicover pool members and the three carriers referred to above. Aon has not received a copy of the arbitration award and therefore cannot make an informed statement as to its content.
Certain United Kingdom subsidiaries of Aon have been required by their regulatory body, the Personal Investment Authority (PIA), to review advice given by those subsidiaries to individuals who bought pension plans during the period from April 1988 to June 1994. These reviews have resulted in a requirement to pay compensation to clients based on guidelines issued by the PIA. Aon's ultimate exposure from the private pension plan review, as presently calculated, is subject to a number of variable factors including, among others, general level of pricing in the equity markets, the interest rate established quarterly for calculating compensation, and the precise scope, duration and methodology of the review, including whether recent regulatory guidance will have to be applied to previously settled claims. These variable factors are ones that the U.K. Financial Services Authority, the current governing body in the U.K., has used as a basis in the past for establishing the calculation tables to determine redress or compensatory amounts. Because Aon is unable to predict if, or how, regulators may change these tables or if, or how, they may apply future regulatory guidance to previous claims, Aon has been, and will continue to be, unable to determine a range or estimate of additional possible exposure.
One of Aon's insurance subsidiaries is a defendant in more than twenty lawsuits in Mississippi. The lawsuits generally allege misconduct by the subsidiary in the solicitation and sale of insurance policies. Attorneys representing the plaintiffs in these lawsuits have advised the subsidiary that approximately 2,700 other current or former policyholders may file similar claims. Each lawsuit includes, and each threatened claim could include, a request for punitive damages. Aon's insurance subsidiary has been litigating the pending suits and investigating the claims. In the second quarter 2002, Aon negotiated a compromise of several of the lawsuits and approximately 2,000 of the claims. In the third quarter of
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2002, the settlement of approximately 1,000 of these claims has been concluded. The remainder of the settlements is of uncertain status. Aon's insurance subsidiary has filed a lawsuit against the claimaints' attorney asserting that the settlements were not appropriately completed. If these settlements are concluded, there will still be at least 2,700 threatened claims outstanding. Each of the remaining lawsuits, and any threatened claim is being investigated and vigorously defended.losses or other payments that may occur as a result, cannot be predicted at this time.
On August 8, 2002, Daniel & Raizel Taubenfeld, a purportedBeginning in late October 2004, several putative securities class actions have been filed against Aon stockholder, filed a putative class action lawsuit in the United StatesU.S. District Court for the Northern District of Illinois, Eastern Division, on behalf of purchasers of Aon Common Stock between May 4, 1999 and August 6, 2002. The complaint names Aon, Patrick G. Ryan, Chairman and Chief Executive Officer, and Harvey N. Medvin, Executive Vice President and Chief Financial Officer, as defendants, and contains allegations of violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under such Act relating to Aon's press release issued on August 7, 2002. The plaintiff seeks, among other things,Illinois. Also beginning in late October 2004, several putative ERISA class action certification, compensatory damages in an unspecified amount and an award of costs and expenses, including counsel fees. On January 17, 2003, the lead plaintiff filed a "Consolidated Amended Complaint" against the same defendants which alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under such Act. Aon intends to defend this action vigorously.
There have been nine other putative class action lawsuitsactions were filed against Aon and certain of its officers and directors in the United StatesU.S. District Court for the Northern District of IllinoisIllinois. Aon believes it has meritorious defenses in all of these cases and intends to vigorously defend itself against these claims. The outcome of these lawsuits, and any losses or other payments that eachmay occur as a result, cannot be predicted at this time.
In May 2005, the Office of the U.S. Attorney for the Southern District of New York and the Securities and Exchange Commission sent to Aon subpoenas seeking information relevant to these agencies' industry-wide investigations of finite risk insurance. Aon is substantially similarfully cooperating with these investigations.
In July 2004, several subsidiaries of Aon were joined as defendants in an action in a U.K. court between British Petroleum ("BP") and underwriters who subscribed to policies of insurance covering various offshore energy projects on which BP and its co-venturers have incurred losses. BP settled on confidential terms with underwriters, but asserted a claim against Aon for approximately $96 million, which BP claims is a shortfall between its total losses and what it recovered in the settlements with underwriters, plus interest and costs. The trial in this matter concluded in December 2005, and judgment is expected to be issued sometime in the first half of 2006. Aon believes it has meritorious defenses and has vigorously defended itself against these claims. The ultimate outcome of this matter, and any losses or other payments that may occur as a result, cannot be predicted at this time.
In February 2006, Lloyds announced that it had brought suit in London against Benfield and a subsidiary of Aon to recover alleged losses relating to these brokers' placement of insurance for Lloyds's New Central Fund. Lloyds alleges that its brokers did not fairly present the risk to reinsurers and thus that the brokers should be held liable for reinsurers' failure to pay approximately £325 million ($563 million based on December 31, 2005 exchange rate) in claims. Aon disputes Lloyds's allegations, believes that it has meritorious defenses and intends to vigorously defend itself against Lloyd's claims.
Fiduciary Counselors, Inc., a former Aon subsidiary, has asked Aon Consulting, Inc. of New Jersey to defend and indemnify it with regard to claims that may be asserted in an arbitration relating to the lawsuit describedformer subsidiary's service from November 1999 to November 2000 as an independent fiduciary for the development and construction of the Diplomat Resort and Country Club in the immediately preceding paragraph. All of these actions have been consolidated with the Taubenfeld actionHollywood and a lead plaintiffHallendale, Florida (the "Project"). Aon has been appointed by the court. Aon intendsconditionally agreed to defend each of these actions vigorously.
Aon has also received a complaint which purports to be a shareholder's derivative action against Aon and each of Aon's directors. This complaint, which is styledBernard Stern v. Patrick Ryan, et al. was filed in the United States District Court for the Northern District of Illinois on September 13, 2002. This lawsuit makes allegations which are substantially similarindemnify Fiduciary Counselors with respect to the original Taubenfeld lawsuit.potential arbitration demand. The prospective claimants, a labor union pension fund that owns the Project and its current independent fiduciary, allege that Fiduciary Counselors breached fiduciary duties and other obligations under ERISA. The prospective claimants have asserted that their claims are valued at over $100 million. Aon intendsbelieves that there are meritorious defenses both as to defend this action vigorously.liability and damages and continues to evaluate whether the matter may be resolved without formal arbitration.
Although the ultimate outcome of all matters referred to above cannot be ascertained, and liabilities in indeterminate amounts may be imposed on Aon or its subsidiaries, on the basis of present information, amounts already provided, availability of insurance coverages and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the consolidated financial position of Aon. However, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by an unfavorable resolution of these matters.
16. Segment Information
Aon classifies its businesses into three operating segments: Risk and Insurance Brokerage and Other Services, Consulting and Insurance Underwriting. A fourth non-operating segment, Corporate and Other, when aggregatedcombined with the operating segments and after the elimination of intersegment revenues, totals to the amounts in the accompanying consolidated financial statements. Certain segment information in prior periods' consolidated financial statements has been reclassified to reflect sold business reported as discontinued operations.
The accounting policies of the operating segments are the same as those described in Note 1, except that the disaggregated financial results have been prepared using a management approach, which is consistent with the basis and manner in which Aon senior management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. Aon evaluates performance based on stand-alone operating segment income before income taxes and generally accounts for intersegment revenue as if the revenue were from third parties, that is, considered by management to be at current market prices.
Revenues are generally attributed to geographic areas based on the location of the resources producing the revenues. Intercompany revenues and expenses are eliminated in computing consolidated revenues and income before tax. There are no material inter-segment amounts to be eliminated. Long-lived assets and related depreciation and amortization are not material.
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Consolidated revenue by geographic area is as follows:
| | Total | United States | United Kingdom | Continent of Europe | Rest of World | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (millions) | |||||||||||||||
| Revenue for the years ended December 31: | ||||||||||||||||
| 2002 | $ | 8,822 | $ | 5,034 | $ | 1,621 | $ | 1,117 | $ | 1,050 | ||||||
| 2001 | 7,676 | 4,463 | 1,390 | 938 | 885 | |||||||||||
| 2000 | 7,375 | 4,350 | 1,363 | 833 | 829 | |||||||||||
| (millions) | Total | United States | United Kingdom | Continent of Europe | Rest of World | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31: | ||||||||||||||||
| 2005 | $ | 9,837 | $ | 4,859 | $ | 1,567 | $ | 1,802 | $ | 1,609 | ||||||
| 2004 | 9,931 | 5,020 | 1,732 | 1,719 | 1,460 | |||||||||||
| 2003 | 9,464 | 4,956 | 1,756 | 1,469 | 1,283 | |||||||||||
The Risk and Insurance Brokerage and Other Services segment consists principally of Aon's retail and reinsurance and wholesale brokerage operations, as well as related insurance services, including claims services, underwriting management, captive insurance company management services, claims services and premium financing. Aon's retail brokerage area provides a broad spectrumDuring 2004, Aon sold essentially all of advisory and outsourcingits claim services including risk identification and assessment, alternative risk financing, safety engineering, loss management and program administration for clients. This area also designs, places and implements customized insurance solutions. Aon's reinsurance brokerage activities offer sophisticated advisory services in program design that enhance the risk/return characteristics of insurance policy portfolios and improve capital utilization, along with the evaluation of catastrophic loss exposures. Aon also actively participates in placement and captive management services, designing programs that enable clients to effectively retain a portion of certain risks that are cost prohibitive or unavailable in the traditional insurance markets. Aon offers claims administration and loss cost management services to insurance companies, firms with self-insurance programs and to agents and brokers for the benefits of their customers.businesses.
The wholesale operations, serving thousands of independent insurance brokers and agents nationwide, provide brokering expertise and underwriting solutions, with custom-designed products and services in several specialty areas, including entertainment, public entities, directors' and officers' and professional liability, workers' compensation, media, financial institutions, marine, aviation, construction, healthcare and energy.
Our Consulting segment is one of the world's largest integrated human capital consulting organizations. The operations of thisthe Consulting segment provide a full range of human capital management services. These services are delivered predominantly to corporate clientele utilizing fivesix major practices: employee benefits, human resource outsourcing, compensation, management consulting, outsourcingcommunications and communications.strategic human resource consulting.
The Insurance Underwriting segment provides specialty insurance products including supplemental accident, health and life insurance coverage through several distribution networks, most of which are directly owned by Aon's subsidiaries. Extended warranty and select property and casualty insurance products are sold through automobile dealership retailers, independent agents and brokers, Aon brokers and other channels.
Operating segment revenue by productsub-segment is as follows:
| | Total Operating | Retail | Reinsurance, Wholesale, Claims and Other Services | Consulting | Accident, Health and Life | Extended Warranty and Casualty | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (millions) | ||||||||||||||||||
| Revenue for the years ended December 31: | |||||||||||||||||||
| 2002 | $ | 8,843 | $ | 3,333 | $ | 1,930 | $ | 1,054 | $ | 1,733 | $ | 793 | |||||||
| 2001 | 7,847 | 3,009 | 1,650 | 938 | 1,507 | 743 | |||||||||||||
| 2000 | 7,304 | 2,947 | 1,420 | 770 | 1,424 | 743 | |||||||||||||
| (millions) Years ended December 31, | 2005 | 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Risk management and insurance brokerage — Americas | $ | 2,172 | $ | 2,067 | $ | 2,040 | ||||
| Risk management and insurance brokerage — International | 2,383 | 2,357 | 2,074 | |||||||
| Reinsurance brokerage and related services | 845 | 861 | 873 | |||||||
| Claims services | — | 212 | 352 | |||||||
| Total Risk and Insurance Brokerage Services | 5,400 | 5,497 | 5,339 | |||||||
Consulting services | 981 | 949 | 898 | |||||||
| Outsourcing | 274 | 298 | 287 | |||||||
| Total Consulting | 1,255 | 1,247 | 1,185 | |||||||
Accident & health and life | 1,805 | 1,721 | 1,594 | |||||||
| Warranty, credit and property & casualty | 1,383 | 1,429 | 1,289 | |||||||
| Total Insurance Underwriting | 3,188 | 3,150 | 2,883 | |||||||
Intersegment revenues | (62 | ) | (72 | ) | (68 | ) | ||||
| Total operating segments | $ | 9,781 | $ | 9,822 | $ | 9,339 | ||||
103
Selected information reflectingfor Aon's operating segments is as follows:
| | Insurance Brokerage and Other Services | Consulting | Insurance Underwriting | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Years ended December 31 | ||||||||||||||||||||||||||||
| | 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | ||||||||||||||||||||
| | (millions) | ||||||||||||||||||||||||||||
| Revenue by geographic area: | |||||||||||||||||||||||||||||
| United States | $ | 2,604 | $ | 2,425 | $ | 2,277 | $ | 703 | $ | 628 | $ | 486 | $ | 1,784 | $ | 1,615 | $ | 1,545 | |||||||||||
| United Kingdom | 1,087 | 918 | 889 | 160 | 157 | 151 | 363 | 302 | 308 | ||||||||||||||||||||
| Continent of Europe | 857 | 733 | 654 | 105 | 77 | 67 | 151 | 125 | 111 | ||||||||||||||||||||
| Rest of World | 715 | 583 | 547 | 86 | 76 | 66 | 228 | 208 | 203 | ||||||||||||||||||||
| Total revenues | 5,263 | 4,659 | 4,367 | 1,054 | 938 | 770 | 2,526 | 2,250 | 2,167 | ||||||||||||||||||||
| General expenses(1) | 4,479 | 4,074 | 3,640 | 932 | 810 | 661 | 997 | 854 | 830 | ||||||||||||||||||||
| Benefits to policyholders | — | — | — | — | — | — | 1,375 | 1,111 | 1,037 | ||||||||||||||||||||
| Amortization of intangible assets | 50 | 38 | 37 | 2 | 2 | 3 | 2 | — | — | ||||||||||||||||||||
| Unusual charges/(credits)—World | |||||||||||||||||||||||||||||
| Trade Center | (29 | ) | 23 | — | — | — | — | — | 135 | — | |||||||||||||||||||
| Total expenses | 4,500 | 4,135 | 3,677 | 934 | 812 | 664 | 2,374 | 2,100 | 1,867 | ||||||||||||||||||||
| Income before income tax | $ | 763 | $ | 524 | $ | 690 | $ | 120 | $ | 126 | $ | 106 | $ | 152 | $ | 150 | $ | 300 | |||||||||||
| Identifiable assets at December 31 | $ | 12,528 | $ | 10,393 | $ | 10,035 | $ | 313 | $ | 232 | $ | 232 | $ | 5,999 | $ | 5,526 | $ | 5,594 | |||||||||||
| | Risk and Insurance Brokerage Services | | | | | | | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (millions) Years ended December 31, | Consulting | Insurance Underwriting | |||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||||
| Revenue by geographic area: | |||||||||||||||||||||||||||||
| United States | $ | 2,007 | $ | 2,151 | $ | 2,224 | $ | 730 | $ | 754 | $ | 762 | $ | 2,175 | $ | 2,108 | $ | 1,953 | |||||||||||
| United Kingdom | 1,014 | 1,056 | 1,093 | 206 | 213 | 182 | 340 | 456 | 460 | ||||||||||||||||||||
| Continent of Europe | 1,279 | 1,265 | 1,112 | 186 | 162 | 139 | 330 | 284 | 211 | ||||||||||||||||||||
| Rest of World | 1,100 | 1,025 | 910 | 133 | 118 | 102 | 343 | 302 | 259 | ||||||||||||||||||||
| Total revenues (1) | 5,400 | 5,497 | 5,339 | 1,255 | 1,247 | 1,185 | 3,188 | 3,150 | 2,883 | ||||||||||||||||||||
General expenses (1) (2) (3) | 4,677 | 4,768 | 4,548 | 1,144 | 1,115 | 1,075 | 1,323 | 1,380 | 1,260 | ||||||||||||||||||||
| Benefits to policyholders | — | — | — | — | — | — | 1,551 | 1,516 | 1,427 | ||||||||||||||||||||
| Provision for New York and other state settlements | 4 | 153 | — | 1 | 27 | — | — | — | — | ||||||||||||||||||||
| Total expenses | 4,681 | 4,921 | 4,548 | 1,145 | 1,142 | 1,075 | 2,874 | 2,896 | 2,687 | ||||||||||||||||||||
| Income before income tax | $ | 719 | $ | 576 | $ | 791 | $ | 110 | $ | 105 | $ | 110 | $ | 314 | $ | 254 | $ | 196 | |||||||||||
| Identifiable assets at December 31 | $ | 12,566 | $ | 13,235 | $ | 13,174 | $ | 319 | $ | 333 | $ | 296 | $ | 7,233 | $ | 7,122 | $ | 6,598 | |||||||||||
- (1)
- Excludes the elimination of intersegment revenues and expenses of $62 million, $72 million and $68 million for 2005, 2004 and 2003, respectively.
- (2)
- Insurance underwriting general expenses include amortization of deferred acquisition costs of
$275$433 million,$231$437 million and$218$399 million in2002, 20012005, 2004 and2000,2003, respectively. - (3)
- Includes depreciation and amortization expense.
Corporate and Other segment revenue consists of investment income from equity, fixed-maturity and short-term investments that are assets primarily of valuation changes of investments in limited partnerships and certain other investments (whichthe insurance underwriting subsidiaries that exceed policyholders liabilities. These assets may include non-income producing equities),equities, valuation changes in limited partnership investments and income and losses on disposals of all securities, including those pertaining to assets maintained by the operating segments. Corporate and Other segment general expenses include administrative and certain information technology costs.
Selected information reflectingfor Aon's Corporate and Other segment is as follows:
| | Corporate and Other | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Years ended December 31 | ||||||||||
| | 2002 | 2001 | 2000 | ||||||||
| | (millions) | ||||||||||
| Revenue | $ | (21 | ) | $ | (171 | ) | $ | 71 | |||
| General expenses | 97 | 75 | 59 | ||||||||
| Interest expense | 124 | 127 | 140 | ||||||||
| Amortization of goodwill | — | 118 | 114 | ||||||||
| Total expenses | 221 | 320 | 313 | ||||||||
| Loss before income tax | $ | (242 | ) | $ | (491 | ) | $ | (242 | ) | ||
| Identifiable assets at December 31* | $ | 6,494 | $ | 6,179 | $ | 6,390 | |||||
| | Corporate and Other | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (millions) Years ended December 31, | 2005 | 2004 | 2003 | ||||||||
| Revenue | $ | 56 | $ | 109 | $ | 125 | |||||
| General expenses (1) | 109 | 81 | 61 | ||||||||
| Interest expense | 125 | 136 | 101 | ||||||||
| Unusual credit —World Trade Center | — | — | (14 | ) | |||||||
| Total expenses | 234 | 217 | 148 | ||||||||
| Loss before income tax | $ | (178 | ) | $ | (108 | ) | $ | (23 | ) | ||
| Identifiable assets at December 31 | $ | 7,700 | $ | 7,639 | $ | 6,959 | |||||
*(1)Limited partnerships were $25 million, $42 million and $602 million as of December 31, 2002, 2001 and 2000, respectively.Includes depreciation expense.
104
Selected information reflectingfor Aon's investment income is as follows:
| (millions) Years ended December 31, | (millions) Years ended December 31, | 2005 | 2004 | 2003 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Years ended December 31 | ||||||||||||||||||
| Risk and Insurance Brokerage Services | Risk and Insurance Brokerage Services | ||||||||||||||||||
| | 2002 | 2001 | 2000 | (primarily short-term investments) | $ | 129 | $ | 80 | $ | 68 | |||||||||
| | (millions) | ||||||||||||||||||
| Insurance Brokerage and Other Services (primarily short-term investments) | $ | 113 | $ | 156 | $ | 186 | |||||||||||||
| Consulting (primarily short-term investments) | 2 | 5 | 6 | Consulting (primarily short-term investments) | 4 | 3 | 2 | ||||||||||||
| Insurance Underwriting (primarily fixed maturities) | 158 | 223 | 245 | Insurance Underwriting (primarily fixed maturities) | 154 | 129 | 115 | ||||||||||||
| Corporate and Other (primarily equity investments and limited partnerships) | (21 | ) | (171 | ) | 71 | ||||||||||||||
| Corporate and Other (primarily equity and other investments and limited partnerships) | Corporate and Other (primarily equity and other investments and limited partnerships) | 56 | 109 | 125 | |||||||||||||||
| Total investment income | $ | 252 | $ | 213 | $ | 508 | Total investment income | $ | 343 | $ | 321 | $ | 310 | ||||||
105
Quarterly Financial Data
| | 1Q | 2Q | 3Q | 4Q | 2002 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (millions except common stock and per share data) | ||||||||||||||||
| INCOME STATEMENT DATA(1) | |||||||||||||||||
| Brokerage commissions and fees | $ | 1,444 | $ | 1,510 | $ | 1,551 | $ | 1,697 | $ | 6,202 | |||||||
| Premiums and other | 535 | 638 | 607 | 588 | 2,368 | ||||||||||||
| Investment income (loss) | 109 | (26 | ) | 88 | 81 | 252 | |||||||||||
| Total revenue | $ | 2,088 | $ | 2,122 | $ | 2,246 | $ | 2,366 | $ | 8,822 | |||||||
| Net Income | $ | 160 | $ | — | $ | 128 | $ | 178 | $ | 466 | |||||||
| DILUTIVE PER SHARE DATA(1) | $ | 0.57 | $ | — | $ | 0.46 | $ | 0.59 | $ | 1.64 | |||||||
BASIC NET INCOME PER SHARE(1) | $ | 0.58 | $ | — | $ | 0.46 | $ | 0.59 | $ | 1.65 | |||||||
| COMMON STOCK DATA | |||||||||||||||||
| Dividends paid per share | $ | 0.225 | $ | 0.225 | $ | 0.225 | $ | 0.15 | $ | 0.825 | |||||||
| Stockholders' equity per share | 12.97 | 13.53 | 13.60 | 12.56 | 12.56 | ||||||||||||
| Price range | 36.23-31.76 | 39.63-28.00 | 29.83-13.50 | 21.95-15.59 | 39.63-13.50 | ||||||||||||
| Shares outstanding (in millions) | 272.0 | 272.8 | 273.0 | 310.2 | 310.2 | ||||||||||||
| Average monthly trading volume (in millions) | 16.4 | 19.6 | 41.7 | 39.1 | 29.2 | ||||||||||||
| (millions except per share data) | 1Q | 2Q | 3Q | 4Q | 2005 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| INCOME STATEMENT DATA | |||||||||||||||||
| Brokerage commissions and fees | $ | 1,675 | $ | 1,664 | $ | 1,582 | $ | 1,725 | $ | 6,646 | |||||||
| Premiums and other | 698 | 718 | 732 | 700 | 2,848 | ||||||||||||
| Investment income | 91 | 74 | 73 | 105 | 343 | ||||||||||||
| Total revenue | $ | 2,464 | $ | 2,456 | $ | 2,387 | $ | 2,530 | $ | 9,837 | |||||||
| Income from continuing operations | $ | 198 | $ | 180 | $ | 120 | $ | 144 | $ | 642 | |||||||
| Discontinued operations | 2 | 11 | 2 | 80 | 95 | ||||||||||||
| Net Income | $ | 200 | $ | 191 | $ | 122 | $ | 224 | $ | 737 | |||||||
| PER SHARE DATA | |||||||||||||||||
| Diluted: | |||||||||||||||||
| Income from continuing operations | $ | 0.58 | $ | 0.54 | $ | 0.35 | $ | 0.42 | $ | 1.89 | |||||||
| Discontinued operations | 0.01 | 0.03 | 0.01 | 0.23 | 0.28 | ||||||||||||
| Net income | $ | 0.59 | $ | 0.57 | $ | 0.36 | $ | 0.65 | $ | 2.17 | |||||||
| Basic: | |||||||||||||||||
| Income from continuing operations | $ | 0.61 | $ | 0.56 | $ | 0.36 | $ | 0.44 | $ | 1.99 | |||||||
| Discontinued operations | 0.01 | 0.03 | 0.01 | 0.25 | 0.29 | ||||||||||||
| Net income | $ | 0.62 | $ | 0.59 | $ | 0.37 | $ | 0.69 | $ | 2.28 | |||||||
| COMMON STOCK DATA | |||||||||||||||||
| Dividends paid per share | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.60 | |||||||
| Stockholders' equity per share | 16.19 | 16.49 | 16.65 | 16.51 | 16.51 | ||||||||||||
| Price range | 25.44-21.35 | 26.10-20.65 | 32.87-24.90 | 37.14-30.62 | 37.14-20.65 | ||||||||||||
| Shares outstanding | 317.8 | 318.5 | 320.0 | 321.2 | 321.2 | ||||||||||||
| Average monthly trading volume | 24.5 | 25.6 | 25.7 | 27.7 | 25.9 | ||||||||||||
| (millions except per share data) | 1Q | 2Q | 3Q | 4Q(1) | 2004 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| INCOME STATEMENT DATA | |||||||||||||||||
| Brokerage commissions and fees | $ | 1,739 | $ | 1,691 | $ | 1,601 | $ | 1,791 | $ | 6,822 | |||||||
| Premiums and other | 692 | 716 | 693 | 687 | 2,788 | ||||||||||||
| Investment income | 80 | 69 | 50 | 122 | 321 | ||||||||||||
| Total revenue | $ | 2,511 | $ | 2,476 | $ | 2,344 | $ | 2,600 | $ | 9,931 | |||||||
| Income from continuing operations | $ | 193 | $ | 167 | $ | 112 | $ | 73 | $ | 545 | |||||||
| Discontinued operations | (23 | ) | 6 | 10 | 8 | 1 | |||||||||||
| Net Income | $ | 170 | $ | 173 | $ | 122 | $ | 81 | $ | 546 | |||||||
| PER SHARE DATA | |||||||||||||||||
| Diluted: | |||||||||||||||||
| Income from continuing operations | $ | 0.58 | $ | 0.50 | $ | 0.33 | $ | 0.22 | $ | 1.63 | |||||||
| Discontinued operations | (0.07 | ) | 0.02 | 0.03 | 0.02 | — | |||||||||||
| Net income | $ | 0.51 | $ | 0.52 | $ | 0.36 | $ | 0.24 | $ | 1.63 | |||||||
| Basic: | |||||||||||||||||
| Income from continuing operations | $ | 0.60 | $ | 0.52 | $ | 0.35 | $ | 0.23 | $ | 1.70 | |||||||
| Discontinued operations | (0.07 | ) | 0.02 | 0.03 | 0.02 | — | |||||||||||
| Net income | $ | 0.53 | $ | 0.54 | $ | 0.38 | $ | 0.25 | $ | 1.70 | |||||||
| COMMON STOCK DATA | |||||||||||||||||
| Dividends paid per share | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.60 | |||||||
| Stockholders' equity per share | 14.77 | 14.94 | 15.38 | 16.11 | 16.11 | ||||||||||||
| Price range | 29.10-23.47 | 29.04-25.15 | 29.40-24.46 | 29.05-18.17 | 29.40-18.17 | ||||||||||||
| Shares outstanding | 315.1 | 315.8 | 316.5 | 316.8 | 316.8 | ||||||||||||
| Average monthly trading volume | 18.6 | 21.9 | 17.0 | 46.0 | 25.9 | ||||||||||||
- (1)
InIncludes $140 million after-tax charge for settlements with thefirst quarter of 2002, Aon adopted FASB Statement No. 142, GoodwillNew York Attorney General andOther Intangible Assets, effective January 1, 2002. Beginning in 2002, amortization of goodwill is no longer included in net income. (See note 2other regulatory authorities and for costs to settle theconsolidated financial statements)Daniel class action lawsuit.
| | 1Q | 2Q | 3Q | 4Q | 2001 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (millions except common stock and per share data) | ||||||||||||||||
| INCOME STATEMENT DATA | |||||||||||||||||
| Brokerage commissions and fees | $ | 1,281 | $ | 1,347 | $ | 1,297 | $ | 1,511 | $ | 5,436 | |||||||
| Premiums and other | 508 | 492 | 510 | 517 | 2,027 | ||||||||||||
| Investment income | 22 | 78 | 105 | 8 | 213 | ||||||||||||
| Total revenue | $ | 1,811 | $ | 1,917 | $ | 1,912 | $ | 2,036 | $ | 7,676 | |||||||
| Net Income | $ | 19 | $ | 29 | $ | 72 | $ | 27 | $ | 147 | |||||||
| DILUTIVE PER SHARE DATA | $ | 0.07 | $ | 0.11 | $ | 0.26 | $ | 0.10 | $ | 0.53 | |||||||
BASIC NET INCOME PER SHARE | $ | 0.07 | $ | 0.11 | $ | 0.26 | $ | 0.10 | $ | 0.54 | |||||||
| COMMON STOCK DATA | |||||||||||||||||
| Dividends paid per share | $ | 0.22 | $ | 0.225 | $ | 0.225 | $ | 0.225 | $ | 0.895 | |||||||
| Stockholders' equity per share | 12.84 | 13.02 | 13.47 | 12.82 | 12.82 | ||||||||||||
| Price range | 38.18-30.81 | 36.50-29.75 | 42-33.26 | 44.80-32.50 | 44.80-29.75 | ||||||||||||
| Shares outstanding (in millions) | 261.9 | 266.5 | 269.2 | 270.2 | 270.2 | ||||||||||||
| Average monthly trading volume (in millions) | 17.6 | 21.4 | 20.4 | 24.4 | 21.0 | ||||||||||||
106
Aon Corporation
(Parent Company)
CONDENSED STATEMENTS OF FINANCIAL POSITION
| | | December 31 | | As of December 31 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | ||||||||||||||||
| (millions) | (millions) | 2005 | 2004 | |||||||||||||||
| | | (millions) | ||||||||||||||||
| ASSETS | ASSETS | ASSETS | ||||||||||||||||
| Investments in subsidiaries | $ | 6,499 | $ | 6,552 | Investments in subsidiaries | $ | 6,742 | $ | 7,304 | |||||||||
| Other investments | 20 | 20 | Other investments | 135 | 111 | |||||||||||||
| Notes receivable—subsidiaries | 223 | 58 | Notes receivable — subsidiaries | 23 | 59 | |||||||||||||
| Cash and cash equivalents | 130 | 4 | Cash and cash equivalents | 837 | 248 | |||||||||||||
| Other assets | 123 | 39 | Other assets | 192 | 220 | |||||||||||||
| Total Assets | $ | 6,995 | $ | 6,673 | Total Assets | $ | 7,929 | $ | 7,942 | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
| LIABILITIES | LIABILITIES | |||||||||||||||||
| Short-term borrowings | $ | 1 | $ | 254 | Subordinated debt | $ | 726 | $ | 726 | |||||||||
| 6.3% long-term debt securities | 89 | 100 | Notes payable — subsidiaries | 703 | 721 | |||||||||||||
| 7.4% long-term debt securities | — | 100 | 3.5% long-term debt securities | 297 | 297 | |||||||||||||
| 8.65% long-term debt securities | 250 | 250 | 6.2% long-term debt securities | 250 | 250 | |||||||||||||
| 6.9% long-term debt securities | 216 | 250 | 7.375% long-term debt securities | 224 | 223 | |||||||||||||
| 6.7% long-term debt securities | 150 | 150 | 8.65% long-term debt securities | — | 250 | |||||||||||||
| 6.2% long-term debt securities | 250 | 250 | Accrued expenses and other liabilities | 426 | 322 | |||||||||||||
| 3.5% long-term debt securities | 296 | — | ||||||||||||||||
| 7.375% long-term debt securities | 223 | — | Total Liabilities | 2,626 | 2,789 | |||||||||||||
| Floating rate long-term debt securities | 150 | 150 | ||||||||||||||||
Redeemable Preferred Stock | Redeemable Preferred Stock | — | 50 | |||||||||||||||
STOCKHOLDERS' EQUITY | STOCKHOLDERS' EQUITY | |||||||||||||||||
| Common stock | Common stock | 344 | 339 | |||||||||||||||
| Subordinated debt | 702 | 800 | Paid-in additional capital | 2,349 | 2,197 | |||||||||||||
| Notes payable—subsidiaries | 526 | 595 | Accumulated other comprehensive loss | (1,155 | ) | (681 | ) | |||||||||||
| Notes payable—other | — | 70 | Retained earnings | 4,573 | 4,031 | |||||||||||||
| Accrued expenses and other liabilities | 197 | 189 | Less treasury stock at cost | (808 | ) | (783 | ) | |||||||||||
| Total Liabilities | 3,050 | 3,158 | Total Stockholders' Equity | 5,303 | 5,103 | |||||||||||||
Redeemable Preferred Stock | 50 | 50 | Total Liabilities and Stockholders' Equity | $ | 7,929 | $ | 7,942 | |||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||||
| Common stock | 333 | 293 | ||||||||||||||||
| Paid-in additional capital | 2,228 | 1,654 | ||||||||||||||||
| Accumulated other comprehensive loss | (954 | ) | (535 | ) | ||||||||||||||
| Retained earnings | 3,251 | 3,021 | ||||||||||||||||
| Less treasury stock at cost | (794 | ) | (786 | ) | ||||||||||||||
| Less deferred compensation | (169 | ) | (182 | ) | ||||||||||||||
| Total Stockholders' Equity | 3,895 | 3,465 | ||||||||||||||||
| Total Liabilities and Stockholders' Equity | $ | 6,995 | $ | 6,673 | ||||||||||||||
See notes to condensed financial statements.
107
Aon Corporation
(Parent Company)
CONDENSED STATEMENTS OF INCOME
| | | Years Ended December 31 | | Years Ended December 31 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||||||||||||||
| | (millions) | |||||||||||||||||||||
| (millions) | (millions) | 2005 | 2004 | 2003 | ||||||||||||||||||
| REVENUE | REVENUE | REVENUE | ||||||||||||||||||||
| Dividends from subsidiaries | $ | 288 | $ | 333 | $ | 379 | Dividends from subsidiaries | $ | 915 | $ | 320 | $ | 278 | |||||||||
| Other investment income | 68 | 1 | 9 | Other investment income | 21 | 20 | 18 | |||||||||||||||
| Total Revenue | 356 | 334 | 388 | Total Revenue | 936 | 340 | 296 | |||||||||||||||
EXPENSES | EXPENSES | EXPENSES | ||||||||||||||||||||
| Operating and administrative | 14 | 14 | 22 | Operating and administrative | 12 | 1 | 3 | |||||||||||||||
| Interest—subsidiaries | 81 | 93 | 103 | Interest — subsidiaries | 26 | 19 | 71 | |||||||||||||||
| Interest—other | 99 | 107 | 122 | Interest — other | 111 | 130 | 90 | |||||||||||||||
| Total Expenses | 194 | 214 | 247 | Total Expenses | 149 | 150 | 164 | |||||||||||||||
INCOME BEFORE INCOME TAXES AND EQUITY (DEFICIT) IN UNDISTRIBUTED INCOME OF SUBSIDIARIES | 162 | 120 | 141 | |||||||||||||||||||
INCOME BEFORE INCOME TAXES AND EQUITY IN | INCOME BEFORE INCOME TAXES AND EQUITY IN | |||||||||||||||||||||
| Income tax benefit | 50 | 85 | 95 | UNDISTRIBUTED INCOME OF SUBSIDIARIES | 787 | 190 | 132 | |||||||||||||||
| Income tax benefit | 51 | 52 | 58 | |||||||||||||||||||
| 212 | 205 | 236 | ||||||||||||||||||||
EQUITY (DEFICIT) IN UNDISTRIBUTED INCOME OF SUBSIDIARIES | 254 | (58 | ) | 238 | ||||||||||||||||||
| 838 | 242 | 190 | ||||||||||||||||||||
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES | EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES | (101 | ) | 304 | 438 | |||||||||||||||||
| NET INCOME | $ | 466 | $ | 147 | $ | 474 | NET INCOME | $ | 737 | $ | 546 | $ | 628 | |||||||||
See notes to condensed financial statements.
108
Aon Corporation
(Parent Company)
CONDENSED STATEMENTS OF CASH FLOWS
| | | Years Ended December 31 | | Years Ended December 31 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||||||||||||||||
| | (millions) | |||||||||||||||||||||||
| (millions) | (millions) | 2005 | 2004 | 2003 | ||||||||||||||||||||
| Cash Flows From Operating Activities | Cash Flows From Operating Activities | $ | 193 | $ | 170 | $ | 137 | Cash Flows From Operating Activities | $ | 929 | $ | 185 | $ | 220 | ||||||||||
Cash Flows From Investing Activities: | Cash Flows From Investing Activities: | Cash Flows From Investing Activities: | ||||||||||||||||||||||
| Investments in subsidiaries | (17 | ) | (24 | ) | (124 | ) | Investments in subsidiaries | 93 | 151 | 208 | ||||||||||||||
| Other investments | — | (20 | ) | — | Other investments | (5 | ) | (6 | ) | 32 | ||||||||||||||
| Notes receivables from subsidiaries | (200 | ) | 60 | (40 | ) | Notes receivables from subsidiaries | 39 | 306 | (97 | ) | ||||||||||||||
| Cash Provided (Used) by Investing Activities | (217 | ) | 16 | (164 | ) | Cash Provided by Investing Activities | 127 | 451 | 143 | |||||||||||||||
Cash Flows From Financing Activities: | Cash Flows From Financing Activities: | Cash Flows From Financing Activities: | ||||||||||||||||||||||
| Treasury stock transactions—net | (10 | ) | 49 | (59 | ) | Treasury stock transactions — net | (25 | ) | — | (6 | ) | |||||||||||||
| Issuance of common stock | 607 | — | — | Issuance of common stock | 76 | 23 | — | |||||||||||||||||
| Retirement of preferred stock—net | (87 | ) | — | — | Redemption of preferred stock | (50 | ) | — | — | |||||||||||||||
| Issuance (repayment) of short-term borrowings—net | (253 | ) | (599 | ) | 30 | Repayment of notes payable and long-term debt | (250 | ) | (305 | ) | (299 | ) | ||||||||||||
| Repayment of notes payable and long-term debt | (393 | ) | — | — | Notes payable to subsidiaries | (25 | ) | (42 | ) | 130 | ||||||||||||||
| Issuance of notes payable and long-term debt | 519 | 608 | 266 | Cash dividends to stockholders | (193 | ) | (192 | ) | (190 | ) | ||||||||||||||
| Cash dividends to stockholders | (233 | ) | (241 | ) | (226 | ) | ||||||||||||||||||
| Cash Used by Financing Activities | (467 | ) | (516 | ) | (365 | ) | ||||||||||||||||||
| Cash Provided (Used) by Financing Activities | 150 | (183 | ) | 11 | ||||||||||||||||||||
Increase (Decrease) in Cash and Cash Equivalents | Increase (Decrease) in Cash and Cash Equivalents | 126 | 3 | (16 | ) | Increase (Decrease) in Cash and Cash Equivalents | 589 | 120 | (2 | ) | ||||||||||||||
| Cash and Cash Equivalents at Beginning of Year | Cash and Cash Equivalents at Beginning of Year | 4 | 1 | 17 | Cash and Cash Equivalents at Beginning of Year | 248 | 128 | 130 | ||||||||||||||||
| Cash and Cash Equivalents at End of Year | Cash and Cash Equivalents at End of Year | $ | 130 | $ | 4 | $ | 1 | Cash and Cash Equivalents at End of Year | $ | 837 | $ | 248 | $ | 128 | ||||||||||
See notes to condensed financial statements.
109
Aon Corporation
(Parent Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- (1)
- See notes to consolidated financial statements included in Item 15(a).
- (2)
In 2001, the Condensed Statements of Cash Flows exclude the impact of certain non-cash transfers primarily related to notes receivable from subsidiaries and notes payable to subsidiaries.(3)During 2001, Aon reclassified $520 million of notes receivable—subsidiaries to investments in subsidiaries related to its shared services operations.(4)- Investments in subsidiaries include approximately
$2.6$2.7 billion invested in countries outside of theUnited States,U.S., primarily denominated in the British Pound, the Euro, the Canadian dollar and the Australian dollar. (5)(3)- Guarantees and Indemnifications
Aon provides a variety of guarantees and indemnifications to its customers and others to allow Aon or others to complete a wide variety of business transactions. The maximum potential amount of future payments representrepresents the notional amounts that could become payable under the guarantees and indemnifications if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or other methods. These amounts may bear no relationship to the expected future payments, if any, for these guarantees and indemnifications. Aon does not currently anticipate making future payments to any of its subsidiaries, or third parties on behalf of its subsidiaries, for these guarantees and indemnifications.
One of Aon's insurance underwriting subsidiaries holds a $95 million demand note receivable from another Aon subsidiary as of December 31, 2002. Aon has guaranteed the repayment of this note in the event that the obligated subsidiary is unable to make the principal payment, in whole or in part, when contractually due.
Aon has unconditionally guaranteed the obligations of certain of its operating subsidiaries with respect to specific noncancelable operating leases. At December 31, 2002, future minimum payments (excluding sublease income) under these leases were approximately $95 million. These amounts are included in lease commitments, which are reflected in note 8 to the consolidated financial statements.
Aon has provided indemnification under surety bonds issued by third parties of approximately $170 million as of December 31, 2002. These license, performance and other types of surety bonds are issued to permit operating subsidiaries of Aon to conduct business in various jurisdictions and to indemnify third parties for nonperformance by these subsidiaries.
A bank provides overdraft facilities for certain of Aon's foreign subsidiaries. Aon has guaranteed repayment of this facilitythese facilities in the unlikely event that the foreign subsidiaries are unable to repay. Aon has also issued guarantees and/or other letters of support for various bank lines and various other credit facilities for certain of its foreign operations (including the Euro credit facility discussed in noteNote 8 to the consolidated financial statements). Aon's maximum potential liability with regard to these exposures was $160$581 million at December 31, 2002.2005.
Aon has guaranteeda liability for its commitment to contribute $6 million to the contractual performanceAon Memorial Education Fund to support the educational needs of certain subsidiaries for third-party outsourcing agreements, which extend through 2009. However, in no case can the cumulative amountchildren of these guarantees exceed $50 million.Aon employees who were victims of the September 11, 2001 attacks.
Aon has guaranteed the contractual performance of certain subsidiaries for other agreements, which extend no later than June 30, 2003. Aon does not expect to incur any additional expenses or liabilities as a result of these guarantees. The notional amounts involved are $130 million.
Aon has guaranteed the obligations of one of its major Netherlands' subsidiaries through 2007. Management believes there is sufficient operating cash flow, liquidity and equity at this subsidiary to cover current obligations and future obligations as they come due.
Aon has issued various other guarantees for miscellaneous purposes at its international subsidiaries for $4 million.
Aon expects that as prudent business interests dictate, additional guarantees and indemnifications may be issued from time to time.
110
Aon CORPORATIONCorporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2002, 2001,2005, 2004, and 2000
2003
| | | Additions | | | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Description | Balance at beginning of year | Charged to cost and expenses | Charged/(credited) to other accounts | Deductions(1) | Balance at end of year | |||||||||||
| | (millions) | |||||||||||||||
| Year ended December 31, 2002 | ||||||||||||||||
| Allowance for doubtful accounts(2) (deducted from insurance brokerage and consulting receivables) | $ | 93 | $ | 23 | $ | 2 | $ | (39 | ) | $ | 79 | |||||
| Allowance for doubtful accounts (deducted from premiums and other) | 94 | 7 | — | (3 | ) | 98 | ||||||||||
Year ended December 31, 2001 | ||||||||||||||||
| Allowance for doubtful accounts(2) (deducted from insurance brokerage and consulting receivables) | $ | 88 | $ | 30 | $ | (2 | ) | $ | (23 | ) | $ | 93 | ||||
| Allowance for doubtful accounts (deducted from premiums and other) | 4 | 90 | — | — | 94 | |||||||||||
Year ended December 31, 2000 | ||||||||||||||||
| Allowance for doubtful accounts(2) (deducted from insurance brokerage and consulting receivables) | $ | 88 | $ | 19 | $ | (2 | ) | $ | (17 | ) | $ | 88 | ||||
| Allowance for doubtful accounts (deducted from premiums and other) | 6 | — | — | (2 | ) | 4 | ||||||||||
| | | Additions | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Description | Balance at beginning of year | Charged to cost and expenses | Charged/ (credited) to other accounts (2) | Deductions (1) | Balance at end of year | ||||||||||
| | (millions) | ||||||||||||||
| Year ended December 31, 2005 | |||||||||||||||
Allowance for doubtful accounts (deducted from insurance brokerage and consulting receivables) (3) | $ | 92 | $ | 17 | $ | (8 | ) | $ | (16 | ) | $ | 85 | |||
Allowance for doubtful accounts (deducted from premiums and other)(4) | 94 | 2 | — | (92 | ) | 4 | |||||||||
Year ended December 31, 2004 | |||||||||||||||
Allowance for doubtful accounts (deducted from insurance brokerage and consulting receivables) (3) | $ | 83 | $ | 29 | $ | 1 | $ | (21 | ) | $ | 92 | ||||
Allowance for doubtful accounts (deducted from premiums and other) | 99 | 1 | — | (6 | ) | 94 | |||||||||
Year ended December 31, 2003 | |||||||||||||||
Allowance for doubtful accounts (deducted from insurance brokerage and consulting receivables) (3) | $ | 74 | $ | 42 | $ | 8 | $ | (41 | ) | $ | 83 | ||||
Allowance for doubtful accounts (deducted from premiums and other) | 98 | 2 | — | (1 | ) | 99 | |||||||||
- (1)
- Amounts deemed to be uncollectible.
- (2)
- Amounts
shown in additions charged/(credited) to other accountsprimarily representreserveschanges due to foreign exchange. - (3)
- Amounts for all years have been restated to reflect the transfer of the assets of Swett & Crawford to assets held-for-sale.
- (4)
- Deduction principally represents write-off of uncollectible reinsurance receivable related to
acquired business and foreign exchange.the World Trade Center, which was previously fully reserved.
111
Aon Corporation and Subsidiaries
CONSOLIDATED SUMMARY OF INVESTMENTS—
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 2002
2005
| | | Amortized Cost or Cost | Fair Value | Amount Shown in Statement of Financial Position | | Amortized Cost or Cost | Fair Value | Amount Shown in Statement of Financial Position | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (millions) | |||||||||||||||||||||||
| Fixed maturities—available for sale: | ||||||||||||||||||||||||
| (millions) | (millions) | | ||||||||||||||||||||||
| Fixed maturities — available for sale: | Fixed maturities — available for sale: | |||||||||||||||||||||||
| U.S. government and agencies | $ | 378 | $ | 385 | $ | 385 | U.S. government and agencies | $ | 439 | $ | 433 | $ | 433 | |||||||||||
| States and political subdivisions | 4 | 5 | 5 | States and political subdivisions | 111 | 110 | 110 | |||||||||||||||||
| Debt securities of foreign governments not classified as loans | 564 | 573 | 573 | Debt securities of foreign governments not classified as loans | 1,842 | 1,832 | 1,832 | |||||||||||||||||
| Corporate securities | 1,082 | 1,064 | 1,064 | Corporate securities | 1,355 | 1,339 | 1,339 | |||||||||||||||||
| Public utilities | 58 | 56 | 56 | Public utilities | 87 | 86 | 86 | |||||||||||||||||
| Mortgage-backed securities | 7 | 6 | 6 | Mortgage-backed and asset-backed securities | 423 | 418 | 418 | |||||||||||||||||
| Total fixed maturities | 2,093 | 2,089 | 2,089 | Total fixed maturities | 4,257 | 4,218 | 4,218 | |||||||||||||||||
| Equity securities—available for sale: | ||||||||||||||||||||||||
| Equity securities — available for sale: | Equity securities — available for sale: | |||||||||||||||||||||||
| Common stocks: | Common stocks: | |||||||||||||||||||||||
| Banks, trusts and insurance companies | 3 | 3 | 3 | Public utilities | 1 | 1 | 1 | |||||||||||||||||
| Industrial, miscellaneous and all other | 37 | 42 | 42 | Industrial, miscellaneous and all other | 39 | 38 | 38 | |||||||||||||||||
| Non-redeemable preferred stocks | 19 | 17 | 17 | Non-redeemable preferred stocks | 1 | 1 | 1 | |||||||||||||||||
| Total equity securities | 59 | 62 | 62 | Total equity securities | 41 | 40 | 40 | |||||||||||||||||
| Mortgage loans on real estate | 2 | * | 2 | * | ||||||||||||||||||||
| Other Investments: | Other Investments: | |||||||||||||||||||||||
| Policy loans | Policy loans | 50 | * | 50 | * | Policy loans | 59 | 59 | ||||||||||||||||
| Other long-term investments | Other long-term investments | 548 | * | 548 | * | Other long-term investments | ||||||||||||||||||
| Endurance warrants | — | 90 | ||||||||||||||||||||||
| PEPS I preferred stock | 61 | 187 | ||||||||||||||||||||||
| Other | 178 | 179 | ||||||||||||||||||||||
| Total other long-term investments | 239 | 456 | ||||||||||||||||||||||
| Total other investments | 298 | 515 | ||||||||||||||||||||||
| Short-term investments | Short-term investments | 3,836 | 3,836 | Short-term investments | 4,292 | 4,291 | ||||||||||||||||||
| TOTAL INVESTMENTS | $ | 6,588 | $ | 6,587 | TOTAL INVESTMENTS | $ | 8,888 | $ | 9,064 | |||||||||||||||
*(1)These investment categories are combinedCost for investments accounted for on the equity method represents original cost adjusted for equity method earnings andare shown as other investments in the Statement of Financial Position.other-than-temporary impairment losses, if any.
112
Aon Corporation and Subsidiaries
REINSURANCE
| | Year Ended December 31, 2005 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (millions) | Gross amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | ||||||||||||
| Life insurance in force | $ | 17,182 | $ | 14,149 | $ | 4,929 | $ | 7,962 | 62 | % | |||||||
| Premiums | |||||||||||||||||
| Life Insurance | $ | 221 | $ | 66 | $ | 14 | $ | 169 | 8 | % | |||||||
| A&H Insurance | 1,870 | 265 | 72 | 1,677 | 4 | % | |||||||||||
| Specialty Property & Casualty Insurance, including Warranty | 1,655 | 775 | 122 | 1,002 | 12 | % | |||||||||||
| Total premiums | $ | 3,746 | $ | 1,106 | $ | 208 | $ | 2,848 | 7 | % | |||||||
Year Ended December 31, 2004 | |||||||||||||||||
| (millions) | Gross amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | ||||||||||||
| Life insurance in force | $ | 20,529 | $ | 15,873 | $ | 5,208 | $ | 9,864 | 53 | % | |||||||
| Premiums | |||||||||||||||||
| Life Insurance | $ | 219 | $ | 114 | $ | 45 | $ | 150 | 30 | % | |||||||
| A&H Insurance | 1,873 | 376 | 154 | 1,651 | 9 | % | |||||||||||
| Specialty Property & Casualty Insurance, including Warranty | 1,739 | 889 | 137 | 987 | 14 | % | |||||||||||
| Total premiums | $ | 3,831 | $ | 1,379 | $ | 336 | $ | 2,788 | 12 | % | |||||||
Year Ended December 31, 2003 | |||||||||||||||||
| (millions) | Gross amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | ||||||||||||
| Life insurance in force | $ | 19,310 | $ | 17,861 | $ | 7,474 | $ | 8,923 | 84 | % | |||||||
| Premiums | |||||||||||||||||
| Life Insurance | $ | 219 | $ | 87 | $ | 26 | $ | 158 | 16 | % | |||||||
| A&H Insurance | 1,754 | 394 | 162 | 1,522 | 11 | % | |||||||||||
| Specialty Property & Casualty Insurance, including Warranty | 1,471 | 780 | 178 | 869 | 20 | % | |||||||||||
| Total premiums | $ | 3,444 | $ | 1,261 | $ | 366 | $ | 2,549 | 14 | % | |||||||
SCHEDULE II.3
Aon Corporation and SubsidiariesREINSURANCE
| | Year Ended December 31, 2002 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Gross amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | ||||||||||||
| | (millions) | ||||||||||||||||
| Life insurance in force | $ | 19,401 | $ | 20,803 | $ | 8,735 | $ | 7,333 | 119 | % | |||||||
| Premiums | |||||||||||||||||
| Life Insurance | $ | 257 | $ | 133 | $ | 48 | $ | 172 | 28 | % | |||||||
| A&H Insurance | 1,574 | 377 | 259 | 1,456 | 18 | % | |||||||||||
| Specialty Property & Casualty, including Warranty | 1,226 | 680 | 186 | 732 | 25 | % | |||||||||||
| Total premiums | $ | 3,057 | $ | 1,190 | $ | 493 | $ | 2,360 | 21 | % | |||||||
Year Ended December 31, 2001 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Gross amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | ||||||||||||
| | (millions) | ||||||||||||||||
| Life insurance in force | $ | 20,265 | $ | 13,660 | $ | 11,189 | $ | 17,794 | 63 | % | |||||||
| Premiums | |||||||||||||||||
| Life Insurance | $ | 198 | $ | 110 | $ | 76 | $ | 164 | 46 | % | |||||||
| A&H Insurance | 1,293 | 329 | 222 | 1,186 | 19 | % | |||||||||||
| Specialty Property & Casualty, including Warranty | 1,061 | 482 | 93 | 672 | 14 | % | |||||||||||
| Total premiums | $ | 2,552 | $ | 921 | $ | 391 | $ | 2,022 | 19 | % | |||||||
Year Ended December 31, 2000 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Gross amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | ||||||||||||
| | (millions) | ||||||||||||||||
| Life insurance in force | $ | 18,803 | $ | 9,442 | $ | 9,367 | $ | 18,728 | 50 | % | |||||||
| Premiums | |||||||||||||||||
| Life Insurance | $ | 198 | $ | 156 | $ | 102 | $ | 144 | 71 | % | |||||||
| A&H Insurance | 1,209 | 309 | 189 | 1,089 | 17 | % | |||||||||||
| Specialty Property & Casualty, including Warranty | 965 | 380 | 88 | 673 | 13 | % | |||||||||||
| Total premiums | $ | 2,372 | $ | 845 | $ | 379 | $ | 1,906 | 20 | % | |||||||
113
SCHEDULE II.3
Aon Corporation and Subsidiaries
SUPPLEMENTARY INSURANCE INFORMATION
| | Deferred policy acquisition costs | Future policy benefits, losses, claims and loss expenses | Unearned premiums and other policyholders' funds | Premium revenue | Net investment income(1) | Commissions, fees and other | Benefits, claims, losses and settlement expenses | Amortization of deferred policy acquisition costs(2) | Other operating expenses(2) | Premiums written(3) | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (millions) | |||||||||||||||||||||||||||||||
| Year ended December 31, 2002 | ||||||||||||||||||||||||||||||||
| Insurance brokerage and other services | $ | — | $ | — | $ | — | $ | — | $ | 113 | $ | 5,150 | $ | — | $ | 31 | $ | 4,469 | $ | — | ||||||||||||
| Consulting | — | — | — | — | 2 | 1,052 | — | — | 934 | — | ||||||||||||||||||||||
| Insurance underwriting | 882 | 2,561 | 2,749 | 2,360 | 158 | 8 | 1,375 | 275 | 724 | 2,511 | ||||||||||||||||||||||
| Corporate and other | — | — | — | — | (21 | ) | — | — | — | 221 | — | |||||||||||||||||||||
| Total | $ | 882 | $ | 2,561 | $ | 2,749 | $ | 2,360 | $ | 252 | $ | 6,210 | $ | 1,375 | $ | 306 | $ | 6,348 | $ | 2,511 | ||||||||||||
| Year ended December 31, 2001 | ||||||||||||||||||||||||||||||||
| Insurance brokerage and other services | $ | — | $ | — | $ | — | $ | — | $ | 156 | $ | 4,503 | $ | — | $ | 38 | $ | 4,097 | $ | — | ||||||||||||
| Consulting | — | — | — | — | 5 | 933 | — | — | 812 | — | ||||||||||||||||||||||
| Insurance underwriting | 704 | 1,963 | 3,027 | 2,022 | 223 | 5 | 1,111 | 231 | 758 | 1,966 | ||||||||||||||||||||||
| Corporate and other | — | — | — | — | (171 | ) | — | — | — | 320 | — | |||||||||||||||||||||
| Total | $ | 704 | $ | 1,963 | $ | 3,027 | $ | 2,022 | $ | 213 | $ | 5,441 | $ | 1,111 | $ | 269 | $ | 5,987 | $ | 1,966 | ||||||||||||
| Year ended December 31, 2000 | ||||||||||||||||||||||||||||||||
| Insurance brokerage and other services | $ | — | $ | — | $ | — | $ | — | $ | 186 | $ | 4,181 | $ | — | $ | 40 | $ | 3,637 | $ | — | ||||||||||||
| Consulting | — | — | — | — | 6 | 764 | — | — | 664 | — | ||||||||||||||||||||||
| Insurance underwriting | 656 | 1,855 | 3,122 | 1,906 | 245 | 16 | 1,037 | 218 | 612 | 1,887 | ||||||||||||||||||||||
| Corporate and other | — | — | — | — | 71 | — | — | — | 313 | — | ||||||||||||||||||||||
| Total | $ | 656 | $ | 1,855 | $ | 3,122 | $ | 1,906 | $ | 508 | $ | 4,961 | $ | 1,037 | $ | 258 | $ | 5,226 | $ | 1,887 | ||||||||||||
| (millions) | Deferred policy acquisition costs | Future policy benefits, losses, claims and loss expenses | Unearned premiums and other policyholders' funds | Premium revenue | Net investment income (1)(2) | Commissions, fees and other (2) | Benefits, claims, losses and settlement expenses | Amortization of deferred policy acquisition costs (2) | Other operating expenses (2) | Premiums written (3) | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | |||||||||||||||||||||||||||||||||
| Year ended December 31, 2005 | |||||||||||||||||||||||||||||||||
Risk and insurance brokerage services | $ | — | $ | — | $ | — | $ | — | $ | 129 | $ | 5,271 | $ | — | $ | — | $ | 4,681 | $ | — | |||||||||||||
| Consulting | — | — | — | — | 4 | 1,251 | — | — | 1,145 | — | |||||||||||||||||||||||
| Insurance underwriting | 1,186 | 3,498 | 3,009 | 2,848 | 154 | 186 | 1,551 | 433 | 890 | 2,764 | |||||||||||||||||||||||
| Corporate and other | — | — | — | — | 56 | — | — | — | 234 | — | |||||||||||||||||||||||
| Intersegment elimination | — | — | — | — | — | (62 | ) | — | — | (62 | ) | — | |||||||||||||||||||||
| Total | $ | 1,186 | $ | 3,498 | $ | 3,009 | $ | 2,848 | $ | 343 | $ | 6,646 | $ | 1,551 | $ | 433 | $ | 6,888 | $ | 2,764 | |||||||||||||
Year ended December 31, 2004 | |||||||||||||||||||||||||||||||||
Risk and insurance brokerage services | $ | — | $ | — | $ | — | $ | — | $ | 80 | $ | 5,417 | $ | — | $ | — | $ | 4,921 | $ | — | |||||||||||||
| Consulting | — | — | — | — | 3 | 1,244 | — | — | 1,142 | — | |||||||||||||||||||||||
| Insurance underwriting | 1,137 | 3,396 | 2,997 | 2,788 | 129 | 233 | 1,516 | 437 | 943 | 2,806 | |||||||||||||||||||||||
| Corporate and other | — | — | — | — | 109 | — | — | — | 217 | — | |||||||||||||||||||||||
| Intersegment elimination | — | — | — | — | — | (72 | ) | — | — | (72 | ) | — | |||||||||||||||||||||
| Total | $ | 1,137 | $ | 3,396 | $ | 2,997 | $ | 2,788 | $ | 321 | $ | 6,822 | $ | 1,516 | $ | 437 | $ | 7,151 | $ | 2,806 | |||||||||||||
Year ended December 31, 2003 | |||||||||||||||||||||||||||||||||
Risk and insurance brokerage services | $ | — | $ | — | $ | — | $ | — | $ | 68 | $ | 5,271 | $ | — | $ | — | $ | 4,548 | $ | — | |||||||||||||
| Consulting | — | — | — | — | 2 | 1,183 | — | — | 1,075 | — | |||||||||||||||||||||||
| Insurance underwriting | 1,021 | 3,005 | 2,927 | 2,549 | 115 | 219 | 1,427 | 399 | 861 | 2,667 | |||||||||||||||||||||||
| Corporate and other | — | — | — | — | 125 | — | — | — | 148 | — | |||||||||||||||||||||||
| Intersegment elimination | — | — | — | — | — | (68 | ) | — | — | (68 | ) | — | |||||||||||||||||||||
| Total | $ | 1,021 | $ | 3,005 | $ | 2,927 | $ | 2,549 | $ | 310 | $ | 6,605 | $ | 1,427 | $ | 399 | $ | 6,564 | $ | 2,667 | |||||||||||||
- (1)
- The above results reflect allocations of investment income and certain expense elements considered reasonable under the circumstances. Results include income (loss) on disposals of investments and
other than temporaryother-than-temporary impairments. - (2)
- Certain
amounts inprior years'amortization of deferred policy acquisition costs and other operating expensesamounts have been reclassified to conform to the20022005 presentation. - (3)
- Net of reinsurance ceded.
114
Item 9. Changes in and Disagreements withWith Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 10. Directors and Executive Officers of the Registrant.
The Registrant hereby incorporates by reference the information under the heading "Election of Directors" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders on May 16, 2003 ("Proxy Statement") and 2002 Report of Financial and General Information. 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 under the heading "Compensation of the Board of Directors" 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 2002 Fiscal Year" and "Pension Plan Table" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Our shareholders approved the Aon Stock Incentive Plan in 2001. This plan is designed to further align our directors', management's and key employees' interests with the company's long-term performance and the long-term interests of our shareholders.
The following table summarizes the number of shares of our common stock that may be issued under our equity compensation plans as of December 31, 2002.
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Options, Warrants, and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights | Number of Securities Remaining Available for Future Issuance (Excluding Securities Reflected in the First Column) | ||||
|---|---|---|---|---|---|---|---|
| Equity compensation plans approved by security holders(1) | 34,767,035 | $ | 32.45 | (2) | 27,615,210 | ||
| Equity compensation plans not approved by security holders(3,5,6) | 1,762,505 | £ | 23.10 | (4) | — | ||
| Total | 36,529,540 | 27,615,210 | |||||
(1)Aon Stock Incentive PlanThe total number of shares of stock authorized for issuance in connection with awards under the Aon Stock Incentive Plan and any pre-existing plans is 18% of total outstanding common shares; securities remaining available for future issuance includes other equity plans.(2)Indicates weighted average exercise price of 24,478,100 outstanding options under the Aon Stock Incentive Plan.(3)Aon UK Sharesave SchemeThe Aon UK Sharesave Scheme (the "UK Scheme") is available solely to employees in the United Kingdom. Under the UK Scheme, employees authorize Aon to deduct a specified amount from compensation each pay period for deposit into a savings account for a three-year term. If a
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participant's deductions continue through the last day of the term, the participant is credited with a tax-free cash bonus equal to 2.75 times the monthly payroll deduction. Participants may cease participation in the UK Scheme at any time. Participants are also granted options at the beginning of each savings period and may direct Aon to purchase or issue shares of Aon common stock at a price equal to 85% of the market value at the beginning of the period, utilizing the accumulated amounts in their account. Options may be exercised generally within six months after the last day of the term, or after death, injury, disability, redundancy or retirement. If a participant ceases to be employed by Aon for other reason, or declines to purchase Aon common stock during any of the available purchase periods, the participant's right to purchase shares of Aon common stock or accumulate additional payroll deductions lapses. The UK Scheme was approved by the Board of Directors in 1999. No specific authorization of shares of Aon common stock for the UK Scheme has been made.
(4)As of December 31, 2002, 36 individuals held options granted under the UK Scheme for a total of 6,360 shares of Aon common stock at an option price of £23.10.(5)Aon Supplemental Savings PlanThe Aon Supplemental Savings Plan (the "ASSP") was adopted by the board of directors in 1998. It is a nonqualified supplemental retirement plan that provides benefits to participants in the Aon Savings Plan whose employer matching contributions are limited because of IRS-imposed restrictions. Under the ASSP, participants are credited with the additional matching contributions they would have received under the Aon Savings Plan—100% of the first 1% to 3% of compensation (the First Tier Match) and 75% of the next 4% to 6% of compensation (the Second Tier Match)—had compensation up to $500,000 been considered. Participants in the ASSP may elect to have Tier I allocations credited to their accounts as if invested in a money market account or as if invested in Aon common stock. Tier II allocations are maintained in an Aon common stock account unless the participant is age 55 or more. If so, the participant may elect to direct his or her allocation to the money market account. Amounts maintained in the Aon common stock account may not be moved to the money market account, regardless of the participant's age. Before the beginning of each plan year, an election may be made by any participant to transfer some or all of a participant's money market account to the Aon common stock account. All amounts credited to the Aon common stock account are credited with dividends.
Payments from the Aon common stock account are made only in shares of Aon common stock. Payments from the money market account are made in cash. Payments may be made in single sum or ten annual installments.
No specific authorization of shares of Aon common stock for the plan has been made.
(6)Aon Supplemental Employee Stock Ownership PlanThe Aon Supplemental Employee Stock Ownership Plan was a plan established in 1989 as a nonqualified supplemental retirement plan that provided benefits to participants in the Aon Employee Stock Ownership Plan whose employer contributions were limited because of IRS-imposed restrictions. As of 1998, no additional amounts have been credited to participant accounts, although account balances are maintained for participants, and credited with dividends, until distribution is required under the plan. Distributions are made solely in Aon common stock.
No specific authorization of shares of Aon common stock for the plan has been made.
The Registrant hereby incorporates by reference the share ownership data contained under the headings "Voting Securities and Principal Holders Thereof" and "Ownership of Common Shares" of the Proxy Statement.
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Item 13. Certain Relationships and Related Transactions.
The Registrant hereby incorporates by reference the information under the heading "Certain Relationships and Related Transactions" of the Proxy Statement.
Item 14.9A. Controls and Procedures.
Disclosure Controls and Procedures
The Registrant has established disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to the officers who certify the Registrant's financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K,December 31, 2005, the principal executive officer and principal financial officer of the Registrant have concluded that the Registrant's disclosure controls and procedures (as defined in Rules 13a-14(c)13a-15(e) and 15d-14(c)15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Registrant in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SecuritiesSEC rules and Exchange Commission.forms.
There were no significant changes in the Registrant's internal controls or in other factors that could significantly affect those controls subsequent to the date of their most recent evaluation.
Internal Control Over Financial Reporting
Information regarding the Registrant's Internal Control Over Financial Reporting is set forth in Part II, Item 8 of this Report and is incorporated by reference herein.
Not applicable.
Item 10. Directors and Executive Officers of the Registrant.
Information relating to Aon's directors, including members of the audit committee and Aon's audit committee financial expert, is set forth under the heading "Election of Directors" in our Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on May 19, 2006 (the "Proxy Statement") and is incorporated herein by reference from the Proxy Statement. Information concerning Aon's executive officers is contained in Part I hereof, pursuant to General Instruction G(3) and Instruction 3 to Item 401(b) of Regulation S-K. Also incorporated herein by reference is the information under the heading "Board of Directors — Corporate Governance — Audit Committee Financial Expert," the information under the heading "Board of Directors — Committees and Meetings — Audit Committee" and the information under the heading "Board of Directors — Corporate Governance — Code of Ethics" in the Proxy Statement. Information relating to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference from the discussion under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.
Item 11. Executive Compensation.
Information relating to director and executive officer compensation is set forth under the headings "Compensation of the Board of Directors," "Executive Compensation," "Summary Compensation Table," "Option Grants in 2005 Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Pension Plan Tables," and "Employment and Severance Agreements" of the Proxy Statement and all such information is incorporated herein by reference from the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information relating to securities authorized for issuance under equity compensation plans is set forth under the heading "Equity Compensation Plan Information" in the Proxy Statement and is hereby incorporated by reference.
Information relating to the security ownership of certain beneficial owners of Aon's common stock is set forth under the headings "Principal Holders of Voting Securities" and "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement and all such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Aon hereby incorporates by reference the information under the heading "Certain Relationships and Related Transactions" in the Proxy Statement.
Item 14. Principal Accountant Fees and Services.
Information required by this Item is included under the caption "Agenda Item No. 2 — Ratification of Appointment of Independent Registered Public Accounting Firm" in the Proxy Statement and is hereby incorporated by reference.
Item 15. Exhibits and Financial Statement Schedules and Reports on Form 8-K.Schedules.
(a)(1) and (2).The following documents have been included in Part II, Item 8.
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Internal Control Over Financial Reporting
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Financial Statements
Consolidated Statements of Financial Position—As of December 31, 2005 and 2004
Consolidated Statements of Income—Years Ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows—Years Ended December 31, 2005, 2004 and 2003
Consolidated Statements of Stockholders' Equity—Years Ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Quarterly Financial Data
Financial statement schedules of the Registrant and consolidated subsidiaries filed herewith:
Consolidated Financial Statement Schedules—
| | Schedule | |
|---|---|---|
| Condensed Financial Information of Registrant | I | |
| Valuation and Qualifying Accounts | II |
All other schedules for the Registrant and consolidated subsidiaries have been omitted because the required information is not present in amounts sufficient to require submission of the schedules or because the information required is included in the respective financial statements or notes thereto.
The following supplementary schedules have been provided for the Registrant and consolidated subsidiaries as they relate to the insurance underwriting operations:
| | Schedule | |
|---|---|---|
| Summary of Investments Other than Investments in Related Parties | II.1 | |
| Reinsurance | II.2 | |
| Supplementary Insurance Information | II.3 |
(a)(3). List of Exhibits (numbered in accordance with Item 601 of Regulation S-K)
| 3(a)* | Second Restated Certificate of Incorporation of the Registrant—incorporated by reference to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (the "1991 Form 10-K"). | ||
3(b)* | Certificate of Amendment of the Registrant's Second Restated Certificate of Incorporation—incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (the "First Quarter 1994 Form 10-Q"). | ||
3(c)* | Certificate of Amendment of the Registrant's Second Restated Certificate of Incorporation—incorporated by reference to Exhibit 3 to the Registrant's Current Report on Form 8-K dated May 9, 2000. | ||
3(d)* | Amended Bylaws of the Registrant—incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated | ||
118
4(a)* | Indenture dated as of 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. | ||
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 to the Registrant's Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-21237) (the "Capital Securities Registration") filed on March 27, 1997. | |||
4(c)* | Indenture dated as of December 13, 2001, between the Registrant and The Bank of New York, as Trustee, for the Floating Rate Notes due 2003 and 6.2% Notes due 2007—incorporated by reference to Exhibits 4(g) and 4(h) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 Form 10-K"). | ||
4(d)* | Indenture dated as of December 31, 2001 between Private Equity Partnership Structures I, LLC, as issuer and The Bank of New York, as Trustee, Custodian, Calculation Agent, Note Registrar, Transfer Agent and Paying Agent—incorporated by reference to Exhibit 4(i) to the 2001 Form 10-K. | ||
4(e)* | 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 to the Capital Securities Registration. | ||
4(f)* | Certificate of Trust of Aon Capital A—incorporated by reference to Exhibit 4.3 to the Capital Securities Registration. | ||
4(g)* | 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 to the Capital Securities Registration. | ||
4(h)* | 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 to the Capital Securities Registration. | ||
4(i)* | Capital Securities Exchange and Registration Rights Agreement dated as of January 13, 1997 among the Registrant, Aon Capital A, Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co.—incorporated by reference to Exhibit 4.10 to the Capital Securities Registration. | ||
119
Debenture Exchange and Registration Rights Agreement dated as of January 13, 1997 among the Registrant, Aon Capital A, Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co.—incorporated by reference to Exhibit 4.11 to the Capital Securities Registration. | |||
4(k)* | Guarantee Exchange and Registration Rights Agreement dated as of January 13, 1997 among the Registrant, Aon Capital A, Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co.—incorporated by reference to Exhibit 4.12 to the Capital Securities Registration. | ||
Registration Rights Agreement dated as of November 2, 1992 by and between the Registrant and Frank B. Hall & Co., Inc.—incorporated by reference to Exhibit 4(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992. | |||
4(m)* | Registration | ||
4(n)* | Indenture dated as of November 7, 2002 between the Registrant and The Bank of New York, as Trustee (including form of note)—incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the "Third Quarter 2002 Form 10-Q"). | ||
4(o)* | Registration Rights Agreement dated as of November 7, 2002 between the Registrant and Morgan Stanley & Co. Incorporated—incorporated by reference to Exhibit 4(b) to the Third Quarter 2002 Form 10-Q. | ||
4(p)* | Indenture dated as of December 16, 2002 between the Registrant and The Bank of New York, as Trustee (including form of note)—incorporated by reference to Exhibit 4(a) to the Registrant's Registration Statement on Form S-4 (File No. 333-103704) filed on March 10, 2003 (the "2003 Form S-4"). | ||
4(q)* | Registration Rights Agreement dated as of December 16, 2002 between the Registrant and Salomon Smith Barney Inc., Credit Suisse First Boston Corporation, BNY Capital Markets, Inc. and Wachovia Securities, Inc.—incorporated by reference to Exhibit 4(b) to the 2003 Form S-4. | ||
Material contracts: | |||
10(a)*# | Aon Corporation Outside Director Deferred Compensation Agreement by and among the Registrant and Registrant's directors who are not salaried employees of the Registrant or Registrant's affiliates—incorporated by reference to Exhibit 10(d) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. | ||
10(b)*# | 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. | ||
10(c)*# | 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. | ||
120
10(d)*# | Aon Stock Award Plan (as amended and restated through February 2000)—incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (the "Second Quarter 2000 Form 10-Q"). | ||
10(e)*# | Aon Stock Option Plan (as amended and restated through 1997)—incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (the "First Quarter 1997 Form 10-Q"). | ||
10(f)*# | First Amendment to the Aon Stock Option Plan (as amended and restated through 1997)—incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (the "First Quarter 1999 Form 10-Q"). | ||
10(g)*# | 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. | ||
10(h)*# | First Amendment to the Aon Stock Award Plan (as amended and restated through 1997)—incorporated by reference to Exhibit 10(b) to the First Quarter 1999 Form 10-Q. | ||
10(i)*# | Aon Corporation 1995 Senior Officer Incentive Compensation Plan—incorporated by reference to Exhibit 10(p) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"). | ||
10(j)*# | 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. | ||
10(k)*# | 1999 Aon Deferred Compensation Plan—incorporated by reference to Exhibit 10(1) to the 1999 Form 10-K. | ||
10(l)*# | Employment Agreement dated | ||
10(m)*# | Aon Severance Plan—incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. | ||
10(n)* | Asset Purchase Agreement dated as of 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 quarter ended June 30, 1992. | ||
10(o)* | Stock Purchase Agreement dated as of November 11, 1995 by and among the Registrant, Combined Insurance Company of America, Union Fidelity Life Insurance Company and General Electric Capital Corporation—incorporated by reference to Exhibit 10(s) to the 1995 Form 10-K. | ||
10(p)* | Stock Purchase Agreement dated as of December 22, | ||
10(q)* | Agreement and Plan of Merger dated as of December 11, 1996 among the Registrant, Subsidiary Corporation, Inc. ("Purchaser") | ||
10(r)* | 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 Amendment No. 2 to the Schedule 14D-1 filed on January 9, 1997. | ||
121
10(s)* | Agreement and Plan of Merger dated as of July 16, 2001 among the Registrant, Ryan Holding Corporation of Illinois, Ryan Enterprises Corporation of Illinois, Holdco #1, Inc., Holdco #2, Inc., Patrick G. Ryan, Shirley W. Ryan and the stockholders of Ryan Holding Corporation of Illinois and of Ryan Enterprises Corporation of Illinois set forth on the signature pages thereto—incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (the "Second Quarter 2001 Form 10-Q"). | ||
10(t)* | Stock Restriction Agreement dated as of July 16, 2001 among the Registrant, Patrick G. Ryan, Shirley W. Ryan, Patrick G. Ryan Jr., Robert J.W. Ryan, the Corbett M.W. Ryan Living Trust dated July 13, 2001, the Patrick G. Ryan Living Trust dated July 10, 2001, the Shirley W. Ryan Living Trust dated July 10, 2001, the 2001 Ryan Annuity Trust dated April 20, 2001 and the Family GST Trust under the PGR 2000 Trust dated November 22, 2000—incorporated by reference to Exhibit 10.2 to the Second Quarter 2001 Form 10-Q. | ||
10(u)* | Escrow Agreement dated as of July 16, 2001 among the Registrant, Patrick G. Ryan, Shirley W. Ryan, Patrick G. Ryan, Jr., Robert J.W. Ryan, the Corbett M. W. Ryan Living Trust dated July 13, 2001, the Patrick G. Ryan Living Trust dated July 10, 2001, the Shirley W. Ryan Living Trust dated July 10, 2001, the 2001 Ryan Annuity Trust dated April 20, 2001 and the Family GST Trust under the PGR 2000 Trust dated November 22, 2000 and American National Bank and Trust Company of Chicago, as Escrow Agent—incorporated by reference to Exhibit 10.3 to the Second Quarter 2001 Form 10-Q. | ||
Employment Agreement dated January 1, 2003 between | |||
10(w)*# | |||
10(x)* | $600 million three-year Credit Agreement dated as of February 3, 2005 among the Registrant, Citibank, N.A., as Administrative Agent and the lenders listed therein—incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated February 3, 2005 (the "February 3, 2005 Form 8-K"). | ||
10(y)* | €650 million Facility Agreement dated February 7, | ||
10(z)*# | Form of Severance Agreement—incorporated by reference to Exhibit 10(z) to the 2004 Form 10-K. | ||
10(aa)*# | Aon Corporation Executive Special Severance Plan—incorporated by reference to Exhibit 10(aa) to the 2004 Form 10-K. | ||
10(ab)* | Agreement between the Attorney General of the State of New York, the Superintendent of Insurance of the State of New York, the Attorney General of the State of Connecticut, the Illinois Attorney General, the Director of the Division of Insurance, Illinois Department of Financial and Professional Regulation and Aon Corporation and its subsidiaries and affiliates dated March 4, 2005—incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated March 7, 2005. | ||
10(ac)*# | Employment Agreement dated April 4, 2005 between the Registrant and Gregory C. Case—incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (the "First Quarter 2005 Form 10-Q"). | ||
10(ad)*# | Employment Agreement dated May 2, 2005—between the Registrant and Ted T. Devine—incorporated by reference to Exhibit 10.2 to the First Quarter 2005 Form 10-Q. | ||
10(ae)*# | Employment Agreement dated November 30, 1998 between Aon Group, Inc., Aon Group Limited and Dennis L. Mahoney—incorporated by reference to Exhibit 10.3 to the First Quarter 2005 Form 10-Q. | ||
10(af)*# | Employment Agreement dated October 31, 1998 between Aon Holdings b.v. and Dirk P.M. Verbeek—incorporated by reference to Exhibit 10.4 to the First Quarter 2005 Form 10-Q. | ||
10(ag)*# | Employment Agreement dated as of July 15, 2005 between Aon Corporation and Andrew M. Appel—incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. | ||
10(ah)* | Amendment No. | ||
10(ai)* | Transfer and Amendment Agreement dated October 24, 2005 to €650 million Facility Agreement dated February 7, | ||
10(aj)*# | Letter Agreement dated as of December 9, 2005 between Aon Corporation and Patrick G. Ryan—incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated December 9, 2005. | ||
10(ak)# | Employment Agreement dated August 1, 2005 between Combined Insurance Company of America and Richard M. Ravin. | ||
10(al)# | Sixth Amendment to the Aon Corporation Excess Benefit Plan | ||
12(a) | Statement regarding Computation of Ratio of Earnings to Fixed Charges. | ||
12(b) | Statement regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. | ||
21 | List of Subsidiaries of the Registrant. | ||
122
23 | Consent of Ernst & Young | ||
31.1 | Rule 13a-14(a) Certification of Chief Executive Officer of the Registrant in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Rule 13a-14(a) Certification of Chief Financial Officer of the Registrant in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Section 1350 Certification of Chief Executive Officer of the Registrant in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Section 1350 Certification of Chief Financial Officer of the Registrant in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. | ||
99 | Annual Report on Form 11-K for the Aon Savings Plan for the year ended December 31, | ||
- *
- Document has heretofore been filed with the Securities and Exchange Commission and is incorporated by reference and made a part hereof.
- #
- Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2002, the Registrant filed five Current Reports on Form 8-K and two additional Current Reports on Form 8-K thereafter.
(i)On October 4, 2002, the Registrant filed a Current Report on Form 8-K dated September 20, 2002 announcing an amendment to its By-laws. The following exhibit was included in the report: Exhibit 3.2—By-laws.(ii)On October 31, 2002, the Registrant filed a Current Report on Form 8-K dated October 31, 2002 announcing its results of operations for the quarter and nine months ended September 30, 2002 and other matters. The following exhibit was included in the report: Exhibit 99—Press release issued on October 31, 2002.(iii)On November 4, 2002, the Registrant filed a Current Report on Form 8-K dated November 4, 2002 announcing its intention to offer convertible debt in a private placement. The following exhibit was included in the report: Exhibit 99—Press Release issued on November 4, 2002.(iv)On November 7, 2002, the Registrant filed a Current Report on Form 8-K dated November 7, 2002 announcing the completion of its common stock offering and separate private offering of convertible debentures. The following exhibit was included in the report: Exhibit 99—Press Release issued November 7, 2002.(v)On December 11, 2002, the Registrant filed a Current Report on Form 8-K dated December 11, 2002 announcing the pricing of $225 million in aggregate principal amount of its 7.375% senior notes due 2012 in a private offering to qualified institutional buyers. The following exhibit was included in the report: Exhibit 99—Press Release issued December 11, 2002.(vi)On January 9, 2003, the Registrant filed a Current Report on Form 8-K dated January 9, 2003 announcing that David P. Bolger has joined the Company as Executive Vice President—Finance and Administration. The following exhibit was included in the report: Exhibit 99—Press Release issued January 9, 2003.(vii)On February 20, 2003, the Registrant filed a Current Report on Form 8-K dated February 12, 2003 announcing its results of operations for the quarter and twelve months ended December 31, 2002 and other matters. The following exhibit was included in the report: Exhibit 99—Portions of Press Release issued February 12, 2003.123Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.Aon Corporation
By:
/s/ GREGORY C. CASE
Gregory C. Case, President
and Chief Executive Officer
Date: March 8, 2006
By:/s/PATRICK G. RYANPatrick G. Ryan,Chairmanand Chief Executive OfficerDate: March 21, 2003Pursuant to the requirements of the Securities Exchange Act of 1934, this
Reportreport has been signed below by the following persons on behalf of theRegistrantregistrant and in the capacities and on the dates indicated.Signature Title Date
/s/ GREGORY C. CASE
Gregory C. CasePresident, Chief Executive Officer and Director (Principal Executive Officer) March 8, 2006
/s/ PATRICK G. RYAN
Patrick G. Ryan
Executive ChairmanChief ExecutiveOfficerand Director(Principal Executive Officer)
March21, 20038, 2006
/s/ EDGAR D. JANNOTTA
Edgar D. Jannotta
Director
March 8, 2006
/s/ JAN KALFF
Jan Kalff
Director
March21, 20038, 2006
/s/ LESTER B. KNIGHT
Lester B. Knight
Director
March21, 20038, 2006
/s/PERRYJ.LEWISMICHAEL LOSHPerryJ.LewisMichael Losh
Director
March21, 20038, 2006
/s/ R. EDEN MARTIN
R. Eden Martin
Director
March21, 20038, 2006
/s/ ANDREW J. MCKENNA
Andrew J. McKenna
Director
March21, 20038, 2006
/s/ ROBERT S. MORRISON
Robert S. Morrison
Director
March21, 20038, 2006124
/s/ RICHARD C. NOTEBAERT
Richard C. Notebaert
Director
March21, 2003/s/MICHAEL D. O'HALLERANMichael D. O'HalleranDirectorMarch 21, 20038, 2006
/s/ JOHN W. ROGERS, JR.
John W. Rogers, Jr.
Director
March21, 20038, 2006
/s/PATRICK G. RYAN, JR.GLORIA SANTONAPatrick G. Ryan, Jr.Gloria Santona
Director
March21, 2003/s/GEORGE A. SCHAEFERGeorge A. SchaeferDirectorMarch 21, 2003/s/RAYMOND I. SKILLINGRaymond I. SkillingDirectorMarch 21, 20038, 2006
/s/ CAROLYN Y. WOO
Carolyn Y. Woo
Director
March21, 20038, 2006
/s/HARVEY N. MEDVINDAVID P. BOLGERHarvey N. MedvinDavid P. Bolger
Executive Vice President,andChief Financial Officer and
Chief Administrative Officer
(Principal Financial and Accounting Officer)
March21, 2003125I, Patrick G. Ryan, the Chief Executive Officer of Aon Corporation, certify that:1. I have reviewed this annual report on Form 10-K of Aon Corporation;2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); andc) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: March 26, 2003/s/ PATRICK G. RYANPatrick G. RyanChief Executive Officer126I, Harvey N. Medvin, the Chief Financial Officer of Aon Corporation, certify that:1. I have reviewed this annual report on Form 10-K of Aon Corporation;2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); andc) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: March 26, 2003/s/ HARVEY N. MEDVINHarvey N. MedvinChief Financial Officer8, 2006Documents From Which Information is Incorporated By Reference
PART I- Item 1. Business.
Item 1A. Risk Factors.- Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.- Item 5. Market for
theRegistrant's Common Equity,andRelated StockholderMatters.Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.- Item 7A. Quantitative and Qualitative Disclosures
aboutAbout Market Risk.- Item 8. Financial Statements and Supplementary Data.
Report of Ernst & Young LLP, Independent AuditorsConsolidated Statements of IncomeConsolidated Statements of Financial PositionConsolidated Statements of Cash FlowsConsolidated Statements of Stockholders' EquityNotes to Consolidated Financial Statements- SCHEDULE I
Aon Corporation (Parent Company) CONDENSED STATEMENTS OF FINANCIAL POSITIONAon Corporation (Parent Company) CONDENSED STATEMENTS OF INCOMEAon Corporation (Parent Company) CONDENSED STATEMENTS OF CASH FLOWSAon Corporation (Parent Company) NOTES TO CONDENSED FINANCIAL STATEMENTS- SCHEDULE II
Aon CORPORATION and Subsidiaries VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2002, 2001, and 2000SCHEDULE II.1Aon Corporation and Subsidiaries CONSOLIDATED SUMMARY OF INVESTMENTS— OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 2002- SCHEDULE II.2
Aon Corporation and Subsidiaries REINSURANCE- Item 9. Changes in and Disagreements
withWith Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.- Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions.
Item 14.ControlsPrincipal Accountant Fees andProcedures.Services.- Item 15. Exhibits and Financial Statement
Schedules and Reports on Form 8-K.Schedules.CERTIFICATIONSCERTIFICATIONS