SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7933
Aon Corporation
---------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-3051915
-------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
123 N. WACKER DR, CHICAGO, ILLINOIS 60606
- ----------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(312) 701-3000
-------------
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 3 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Number of shares of common stock outstanding:
No. Outstanding
Class as of 3-31-01
----- -------------
$1.00 par value Common 261,860,632
PART 1
FINANCIAL INFORMATION
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
(millions) AS OF AS OF
MARCH 31, 2001 DEC. 31, 2000
--------------------------------
ASSETS (Unaudited)
INVESTMENTS
Fixed maturities at fair value $ 2,342 $ 2,337
Equity securities at fair value 542 492
Short-term investments 2,420 2,325
Other investments 775 865
--------------- ---------------
TOTAL INVESTMENTS 6,079 6,019
CASH 886 1,118
RECEIVABLES
Insurance brokerage and consulting
services 6,887 6,952
Premiums and other 1,163 1,278
--------------- ---------------
TOTAL RECEIVABLES 8,050 8,230
EXCESS OF COST OVER NET ASSETS PURCHASED 3,380 3,427
OTHER INTANGIBLE ASSETS 485 489
OTHER ASSETS 3,157 2,968
--------------- ---------------
TOTAL ASSETS $ 22,037 $ 22,251
=============== ===============
AS OF AS OF
MARCH 31, 2001 DEC. 31, 2000
--------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
INSURANCE PREMIUMS PAYABLE $ 8,432 $ 8,212
POLICY LIABILITIES
Future policy benefits 1,054 1,054
Policy and contract claims 856 801
Unearned and advance premiums 1,960 1,935
Other policyholder funds 953 1,069
--------------- ---------------
TOTAL POLICY LIABILITIES 4,823 4,859
GENERAL LIABILITIES
General expenses 1,676 1,619
Short-term borrowings 60 309
Notes payable 1,804 1,798
Other liabilities 1,029 1,216
--------------- ---------------
TOTAL LIABILITIES 17,824 18,013
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 800 800
STOCKHOLDERS' EQUITY
Common stock - $1 par value 264 264
Paid-in additional capital 715 706
Accumulated other comprehensive loss (413) (377)
Retained earnings 3,087 3,127
Less - Treasury stock at cost (81) (118)
Deferred compensation (209) (214)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 3,363 3,388
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,037 $ 22,251
=============== ===============
See the accompanying notes to the condensed consolidated financial statements.
- 2 -
Aon CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)
FIRST QUARTER ENDED
--------------------------------
(millions except per share data) MARCH 31, 2001 MARCH 31, 2000
--------------- ---------------
REVENUE
Brokerage commissions and fees ........................................................... $ 1,281 $ 1,205
Premiums and other ....................................................................... 508 468
Investment income ........................................................................ 22 137
--------------- ---------------
TOTAL REVENUE ......................................................................... 1,811 1,810
--------------- ---------------
EXPENSES
General expenses . ....................................................................... 1,396 1,271
Benefits to policyholders ................................................................ 292 252
Interest expense ......................................................................... 36 31
Amortization of intangible assets ........................................................ 39 38
--------------- ---------------
TOTAL EXPENSES. ....................................................................... 1,763 1,592
--------------- ---------------
INCOME BEFORE INCOME TAX, MINORITY INTEREST AND ACCOUNTING CHANGE ........................... 48 218
Provision for income tax . ............................................................... 19 85
--------------- ---------------
INCOME BEFORE MINORITY INTEREST AND ACCOUNTING CHANGE ....................................... 29 133
Minority interest - 8.205% trust preferred capital securities ............................ (10) (10)
--------------- ---------------
INCOME BEFORE ACCOUNTING CHANGE ............................................................. 19 123
Cumulative effect of change in accounting principle, net of tax .......................... - (7)
--------------- ---------------
NET INCOME .................................................................................. $ 19 $ 116
=============== ===============
Preferred stock dividends ................................................................ (1) (1)
--------------- ---------------
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS ................................................ $ 18 $ 115
=============== ===============
BASIC NET INCOME PER SHARE:
Before accounting change ................................................................. $ 0.07 $ 0.47
Cumulative effect of change in accounting principle ...................................... - (0.03)
--------------- ---------------
Basic net income per share ................................................... $ 0.07 $ 0.44
=============== ===============
DILUTIVE NET INCOME PER SHARE:
Before accounting change ................................................................. $ 0.07 $ 0.47
Cumulative effect of change in accounting principle ...................................... - (0.03)
--------------- ---------------
Dilutive net income per share ................................................ $ 0.07 $ 0.44
=============== ===============
CASH DIVIDENDS PER SHARE PAID ON COMMON STOCK ............................................... $ 0.22 $ 0.21
=============== ===============
Dilutive average common and common equivalent shares outstanding ............................ 267.9 260.5
=============== ===============
See the accompanying notes to the condensed consolidated financial statements.
- 3 -
Aon CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
FIRST QUARTER ENDED
--------------------------------
MARCH 31, MARCH 31,
(millions) 2001 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 19 $ 116
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 .................. 48 87
Amortization of intangible assets .............................................. 39 38
Depreciation and amortization of property, equipment and software .............. 44 44
Income taxes ................................................................... (20) 17
Special charges and purchase accounting liabilities ............................ 23 (43)
Valuation changes on investments, income on disposals and impairments .......... 76 (25)
Other receivables and liabilities - net ........................................ 103 (95)
-------------- --------------
CASH PROVIDED BY OPERATING ACTIVITIES ....................................... 332 146
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of investments
Fixed maturities
Maturities .................................................................. 30 28
Calls and prepayments ....................................................... 16 32
Sales ....................................................................... 365 57
Equity securities .............................................................. 162 25
Other investments .............................................................. 135 57
Purchase of investments
Fixed maturities ............................................................... (385) (130)
Equity securities .............................................................. (196) (15)
Other investments .............................................................. (32) (128)
Sale (purchase) of short-term investments - net ..................................... (180) 100
Acquisition of subsidiaries ......................................................... (44) (35)
Property and equipment and other - net .............................................. (57) (59)
-------------- --------------
CASH USED BY INVESTING ACTIVITIES ........................................... (186) (68)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock transactions - net .................................................. 18 (23)
Issuance (payments) of short-term borrowings - net ................................. (252) 41
Issuance of long-term debt ......................................................... 15 -
Repayment of long-term debt ........................................................ - (16)
Interest sensitive, annuity and investment-type contracts
Deposits ....................................................................... 3 34
Withdrawals .................................................................... (102) (123)
Cash dividends to stockholders ..................................................... (58) (54)
-------------- --------------
CASH USED IN FINANCING ACTIVITIES ........................................... (376) (141)
-------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................................... (2) -
-------------- --------------
DECREASE IN CASH ...................................................................... (232) (63)
CASH AT BEGINNING OF PERIOD ........................................................... 1,118 837
-------------- --------------
CASH AT END OF PERIOD ................................................................. $ 886 $ 774
============== ==============
See the accompanying notes to condensed consolidated financial statements.
- 4 -
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Statement of Accounting Principles
----------------------------------
The financial results included in this report are stated in conformity
with accounting principles generally accepted in the United States and
are unaudited but include all normal recurring adjustments which the
Registrant ("Aon") considers necessary for a fair presentation of the
results for such periods. These interim figures are not necessarily
indicative of results for a full year as further discussed below.
Refer to the consolidated financial statements and notes in the Annual
Report to Stockholders for the year ended December 31, 2000 for
additional details of Aon's financial position, as well as a
description of the accounting policies which have been continued
without material change. The details included in the notes have not
changed except as a result of normal transactions in the interim and
the events mentioned in the footnotes below.
2. Accounting and Disclosure Changes
---------------------------------
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (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 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.
Aon has adopted Financial Accounting Standards Board (FASB) Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended as of October 1, 2000. Reference should be made to footnotes
1 and 13 in Aon's Annual Report as filed with Form 10-K for the year
2000 for further information.
In September 2000, the Financial Accounting Standards Board 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 is effective for
all transfers of financial assets occurring after March 31, 2001.
Implementation of Statement No. 140 will not have a material impact on
the consolidated financial statements.
3. Subsequent Event
----------------
On April 20, 2001, Aon's Board of Directors approved, in principle, a
plan to spin-off its underwriting businesses to Aon's common
stockholders, creating two independent, publicly traded companies. The
spin-off would take the form of a tax-free dividend of common stock of
the new company to Aon's common stockholders, pending a favorable
Internal Revenue Service (IRS) ruling. The transaction requires final
Board approval, subject to the favorable IRS ruling, and certain
insurance regulatory approvals.
- 5 -
4. Comprehensive Income (Loss)
---------------------------
The components of comprehensive income (loss), net of related tax, for
the first quarter ended March 31, 2001 and 2000 are as follows:
(millions) 2001 2000
------------ ------------
Net income $ 19 $ 116
Net derivative losses (12) -
Net unrealized investment gains 19 3
Net foreign exchange losses (43) (32)
------------- ------------
Comprehensive income (loss) $ (17) $ 87
============= ============
The components of accumulated other comprehensive loss, net of related
tax, at March 31, 2001 and December 31, 2000, are as follows:
(millions) 2001 2000
------------- -------------
Net derivative gains (losses) $ (6) $ 6
Net unrealized investment losses (53) (72)
Net foreign exchange losses (310) (267)
Net additional minimum pension liability (44) (44)
------------- --------------
Accumulated other comprehensive loss $ (413) $ (377)
============= ==============
5. Business Segments
-----------------
Aon classifies its businesses into three operating segments based on
the type of service or product, and a fourth nonoperating segment. The
Insurance Brokerage and Other Services segment consists primarily of
Aon's retail and reinsurance brokerage and related operations, which
include wholesale and claims services. The Consulting segment is Aon's
employee benefit and human capital consulting organization. The
Insurance Underwriting segment is comprised of life, accident and
health coverage and extended warranty and property and casualty
insurance products. The Corporate and Other segment is non-operating.
Revenues consist primarily of valuation changes for investments in
limited partnerships, income from certain other investments (which
include non-income producing equities) and income and losses on
disposals of all securities, including those pertaining to assets
maintained by the operating segments. Corporate and Other general
expenses include administrative and certain information technology
costs.
Amounts reported in the tables for the four segments, when aggregated,
total to the amounts in the accompanying condensed consolidated
financial statements. Revenues are attributed to geographic areas based
on the location of the resources producing the revenues. There are no
material inter-segment amounts to be eliminated.
- 6 -
Selected information reflecting Aon's operating segments follows:
- -------------------------------------------------------------------------------------------------------------------------------
First quarter ended March 31: Insurance Brokerage Insurance
(millions) and Other Services Consulting Underwriting
------------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Revenue
United States $ 541 $ 524 $ 135 $ 99 $ 406 $ 376
United Kingdom 205 204 36 39 80 78
Continent of Europe 240 226 22 22 28 26
Rest of World 131 120 19 16 53 50
- --------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 1,117 $ 1,074 $ 212 $ 176 $ 567 $ 530
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes
excluding special charges $ 196 $ 180 $ 25 $ 19 $ 68 $ 67
Special charges 70 - 1 - 1 -
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 126 $ 180 $ 24 $ 19 $ 67 $ 67
- --------------------------------------------------------------------------------------------------------------------------------
Selected information for Aon's non-operating segment follows:
- ----------------------------------------------------------------------------------------------------------------------
Corporate and Other
(millions) First quarter ended March 31 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Corporate and other revenue:
Change in valuation of private limited partnership
investments $ (56) $ 28
Income from marketable equity securities and other
investments 1 3
-----------------------------
Corporate and other revenue before loss on
disposals and related expenses (55) 31
Loss on disposals and related expenses* (30) (1)
-----------------------------
Corporate and other revenue $ (85) $ 30
-----------------------------
Non-operating expenses:
General expenses $ 19 $ 20
Interest expense 36 31
Amortization of goodwill 29 27
- ----------------------------------------------------------------------------------------------------------------------
Loss before income tax $ (169) $ (48)
- ----------------------------------------------------------------------------------------------------------------------
<FN>
* In 2001, includes impairment write-downs of $29 million.
</FN>
6. Capital Stock
-------------
During first quarter 2001, Aon reissued 1,138,000 shares of common
stock from treasury for employee benefit plans and 146,500 shares in
connection with the employee stock purchase plan. Aon purchased 98,900
shares of its common stock at a total cost of $3.5 million during first
quarter 2001. There were 2.6 million shares of common stock held in
treasury at March 31, 2001.
- 7 -
7. Capital Securities
------------------
In 1997, Aon Capital A, a subsidiary trust of Aon, issued $800 million
of 8.205% mandatorily redeemable preferred capital securities (capital
securities). The sole asset of Aon Capital A is $824 million aggregate
principal amount of Aon's 8.205% Junior Subordinated Deferrable
Interest Debentures due January 1, 2027.
8. Business Combinations
---------------------
In first quarter 2001, Aon made total payments of $4 million on
restructuring charges and purchase accounting liabilities relating to
business combinations.
The following table demonstrates the activity related to the liability
for termination benefits and abandoned leases recorded as expenses in
1999:
Termination Lease
(millions) Benefits Abandonments Total
----------------------------------------------------------------------------------------------------------
Initial liability $ 67 $ 11 $ 78
Cash payments in 1999 (51) (6) (57)
Cash payments in 2000 (9) - (9)
Credit to expense in 2000 - (4) (4)
Cash payments in 2001 (1) - (1)
Foreign currency revaluation - (1) (1)
----------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $ 6 $ - $ 6
----------------------------------------------------------------------------------------------------------
The following table demonstrates the activity related to the
liabilities established as a result of 1998 acquisitions:
Termination Lease
(millions) Benefits Abandonments Total
----------------------------------------------------------------------------------------------------------
Initial liability $ 40 $ 30 $ 70
Cash payments in 1998 (16) (4) (20)
Cash payments in 1999 (24) (6) (30)
Cash payments in 2000 - (14) (14)
Foreign currency revaluation - (2) (2)
----------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $ - $ 4 $ 4
----------------------------------------------------------------------------------------------------------
- 8 -
The following table demonstrates the activity related to the Aon Plan
liabilities recorded as expenses in 1996 and 1997:
Lease
Abandonments
Termination and Other
(millions) Benefits Exit Costs Total
-----------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 12 $ 48 $ 60
Expense charged in 1997 40 68 108
Cash payments in 1997 and 1998 (52) (36) (88)
Cash payments in 1999 - (24) (24)
Credit to expense in 1999 - (11) (11)
Cash payments in 2000 - (11) (11)
Cash payments in 2001 - (1) (1)
Foreign currency revaluation - (3) (3)
-----------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $ - $ 30 $ 30
-----------------------------------------------------------------------------------------------------------
The following table demonstrates the activity related to the A&A and
Bain Hogg plan liabilities established as a result of 1996 and 1997
acquisitions:
Lease
Abandonments
Termination and Other
(millions) Benefits Exit Costs Total
-----------------------------------------------------------------------------------------------------------
Initial liability $ 100 $ 164 $ 264
Cash payments in 1997 and 1998 (100) (89) (189)
Cash payments in 1999 - (28) (28)
Charge to expense in 1999 - 13 13
Charge to expense in 2000 - 4 4
Cash payments in 2000 - (14) (14)
Cash payments in 2001 - (2) (2)
Foreign currency revaluation - (5) (5)
----------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $ - $ 43 $ 43
----------------------------------------------------------------------------------------------------------
All of Aon's unpaid liabilities relating to acquisitions are reflected in
general expense liabilities in the condensed consolidated statements of
financial position.
9. Business Transformation Plan
----------------------------
In fourth quarter 2000, Aon commenced a plan of restructuring its
worldwide operations. This plan constitutes the "business
transformation plan" to be implemented during the fourth quarter of
2000 and throughout 2001. A pretax special charge of $82 million was
recorded in fourth quarter 2000 and $72 million was recorded in the
first quarter 2001, which are included in general expenses in the
condensed consolidated statement of income. The charge in the first
quarter 2001 included costs related to termination benefits of $23
million, other costs to exit an activity of $3 million and asset
impairments and other charges of $46 million. Since the beginning of
the plan, approximately 2,000 employees have been notified that their
positions have been or will be eliminated, the majority of which were
related to the Insurance Brokerage and Other Services segment in the
U.S. and the U.K.
- 9 -
In the first quarter 2001, Aon made total payments of $22 million
related to the business transformation plan.
The following demonstrates the activity related to the liability for
termination benefits and costs to exit an activity.
Other Costs
Termination to Exit an
(millions) Benefits Activity Total
-----------------------------------------------------------------------------------------------------
Expense charged in 2000 $ 54 $ 6 $ 60
Cash payments in 2000 (13) (3) (16)
Expense charged in 2001 23 3 26
Cash payments in 2001 (19) (3) (22)
-----------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $ 45 $ 3 $ 48
-----------------------------------------------------------------------------------------------------
All of Aon's unpaid liabilities relating to the business transformation plan are
reflected in general expense liabilities in the condensed consolidated
statements of financial position.
10. Income Per Share
----------------
Income per share is calculated as follows:
First Quarter Ended March 31,
-----------------------------
(millions except per share data) 2001 2000
-----------------------------------------------------------------------------------
Net income $ 19 $ 116
Redeemable preferred stock dividends 1 1
----------------------------
Net income for dilutive and basic $ 18 $ 115
============================
Basic shares outstanding 265 259
Common stock equivalents 3 1
----------------------------
Dilutive potential common shares 268 260
-----------------------------------------------------------------------------------
Basic net income per share $ 0.07 $ 0.44
Dilutive net income per share $ 0.07 $ 0.44
-----------------------------------------------------------------------------------
11. Alexander & Alexander Services Inc. (A&A) Discontinued Operations
-----------------------------------------------------------------
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 purchasers for various estimated and
potential liabilities, including provisions to cover future losses
attributable to insurance pooling arrangements, a stop-loss reinsurance
agreement, and actions or omissions by various underwriting agencies
previously managed by an A&A subsidiary. As of March 31, 2001, the
liabilities associated with the foregoing
- 10 -
indemnities and liabilities of insurance underwriting subsidiaries that
are currently in run-off were included in other liabilities in the
accompanying condensed consolidated statements of financial position.
Such liabilities amounted to $136 million, net of reinsurance
recoverables and other assets of $175 million, and would be
substantially reduced if a February, 2000 ruling from the Court of
Appeal in England favorable to A&A, in respect of which right to appeal
has been granted, were upheld in a decision expected in or around 2002.
12. Contingencies
-------------
Aon and its subsidiaries are subject to numerous claims, tax
assessments and lawsuits that arise in the ordinary course of business.
The damages that may be claimed are substantial, including in many
instances claims for punitive or extraordinary damages. Accruals for
these items have been provided to the extent that losses are deemed
probable and are estimable.
In 1998, the Internal Revenue Service (IRS) proposed adjustments to the
tax of certain Aon subsidiaries for the period of 1990 through 1993.
Most of these adjustments should be resolved through factual
substantiation of certain accounting matters. However, the IRS has
contended that retro-rated extended warranty contracts do not
constitute insurance for tax purposes. Accordingly, the IRS has
proposed a deferral of deductions for obligations under those
contracts. The effect of such deferral would be to increase the current
tax obligations of certain Aon subsidiaries by approximately $74
million, $3 million, $5 million and $12 million (plus interest) in
years 1990, 1991, 1992, and 1993, respectively. Aon believes that the
IRS's position is without merit and inconsistent with numerous previous
IRS private letter rulings. Aon has commenced an administrative appeal
and intends to contest vigorously such treatment. Aon believes that if
the contracts are deemed not to be insurance for tax purposes, they
would be recharacterized in such a way that the increased taxes for the
years in question would be far less than the proposed assessments.
In the second quarter of 1999, Allianz Life Insurance Company of North
America, Inc. ("Allianz") filed an amended complaint in Minnesota
adding a brokerage subsidiary of Aon as a defendant in an action which
Allianz 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. Aon
believes that the Aon subsidiary has meritorious defenses and the Aon
subsidiary intends to vigorously defend this claim.
Except for an action filed to compel Aon to produce documents to which
Aon is responding, the Allianz lawsuit is the only lawsuit or
arbitration relating to Unicover in which any Aon-related entity is
currently a party.
Certain U.K. 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
- 11 -
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.
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.
13. Acquisition
-----------
In February 2001, Aon announced that it had entered into a definitive
agreement to acquire ASI Solutions Incorporated (ASI), a worldwide
provider of human resources administration and compensation consulting
services. The transaction was approved by ASI's stockholders and
completed on May 9, 2001. The acquisition was financed by the issuance
of approximately 3.1 million shares of common stock and has been
accounted for as a purchase.
- 12 -
AON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER ENDED MARCH 31, 2001
GENERAL
- -------
Aon has three operating segments: Insurance Brokerage and Other Services,
Consulting and Insurance Underwriting. These segments are based on the type of
client and the services or products delivered. Aon has a fourth, non-operating
segment, Corporate and Other.
References to organic growth exclude the impact of acquisitions, dispositions,
transfers, investment income, foreign exchange and other unusual items. Written
premiums are the basis for the measurement of organic growth within the
Insurance Underwriting segment. References to income before income tax are
before minority interest related to the issuance of 8.205% mandatorily
redeemable preferred capital securities and the cumulative effect of a change in
accounting principle. For purposes of operating segment discussions, comparisons
against 2000 results exclude special charges.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
- -------------------------------------------------
This quarterly 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 historical results or those anticipated, depending on a
variety of factors such as general economic conditions in different countries
around the world, fluctuations in global equity and fixed income markets,
changes in commercial property and casualty premium rates, the competitive
environment, the actual cost of resolution of contingent liabilities, the final
form of the business transformation plan, the ultimate cost and timing of the
implementation thereof, the actual cost savings and other benefits resulting
therefrom, whether the Company ultimately implements the proposed spin-off of
its underwriting businesses, and the timing and terms associated therewith.
SPIN-OFF OF UNDERWRITING BUSINESSES
- -----------------------------------
As previously disclosed, on April 20, 2001, Aon's Board of Directors approved,
in principle, a plan to spin-off its underwriting businesses to Aon's common
stockholders, creating two independent, publicly traded companies. The spin-off
would take the form of a tax-free dividend of common stock of the new company to
Aon's common stockholders, pending a favorable Internal Revenue Service (IRS)
ruling. The transaction requires final Board approval, subject to the favorable
IRS ruling, and certain insurance regulatory approvals. The assets of the new
company, to be called Combined Specialty Corporation, would include a
substantial portion of the investment portfolio reported in the non-operating
segment. The purpose of the spin-off is to provide opportunities for accelerated
revenue and profit growth by providing clients additional products and services
through expanded distribution channels.
BUSINESS TRANSFORMATION PLAN
- ----------------------------
In November 2000, Aon's Board of Directors approved, in principle, a
comprehensive business transformation plan designed to enhance client service,
significantly improve the way Aon conducts business and improve profitability
primarily through utilization of technology and process redesign.
- 13 -
Implementation of the business transformation plan began in fourth quarter 2000.
Aon will incur costs estimated to be between $250 million and $325 million on a
pretax basis comprised of both special charges and transition costs. The
majority of the plan costs and savings are related to the Insurance Brokerage
and Other Services segment, principally in the U.S. and the United Kingdom,
where most of Aon's offices and employees are located. The majority of the
charges involve cash outlays primarily for severance payments for workforce
reductions relating to the elimination of about 6% of Aon's worldwide workforce
at the time of the announcement.
In connection with the plan, Aon recorded pretax special charges of $72 million
($44 million after tax or $0.16 per share) during first quarter 2001. In an
effort to improve profitability, Aon examined its marginal return non-core
business alliances and took a pretax charge in the quarter of $38 million to end
Aon's involvement in certain joint ventures and service partner relationships
that did not meet profitability hurdles. These business alliances in 2000
generated approximately $42 million in revenue with marginal profitability.
Discontinuing these alliances will allow management to increase their focus and
capital on Aon's core businesses. Within the core businesses, special charges of
$23 million were incurred which related to termination benefits. Approximately
1,200 employees were notified that their positions have been or will be
terminated. For the quarter, this charge is somewhat less than had originally
been anticipated due to delays encountered. However, it is still anticipated
that the remaining special charges will be taken by the end of second quarter
2001. Special charges of $11 million were incurred for asset impairments and
other charges, primarily relating to the abandonment of systems and equipment.
Transition costs, primarily related to our core operating businesses, were
approximately $3 million in the first quarter and consisted of consultant fees
and limited retention bonuses and are included in operating expenses. Timing of
future transition costs will impact future periods.
Annualized pretax savings from the plan are on track and are estimated to be
approximately $150 million to $200 million. Full-annualized run rate savings are
expected to be achieved in fourth quarter 2001. Savings generated in first
quarter 2001 were offset by transition costs and temporary revenue declines
related to the transformation. As Aon progresses through the next several
quarters, more business process change and additional increase in position
eliminations will drive cost savings. As previously noted, temporary pressure on
revenue growth rates may continue to occur during the implementation of the
plan.
CONSOLIDATED RESULTS
- --------------------
Total revenue increased $1 million, essentially flat when compared to the first
quarter 2000. Excluding the effect of foreign exchange rates, revenues rose 4%
over the first quarter 2000, primarily attributable to growth in brokerage
commissions and fees and premiums earned, which more than offset a decline in
investment income. Consolidated revenue for the operating segments grew
approximately 7% on an organic basis over last year.
Brokerage commissions and fees increased $76 million or 6% in first quarter
2001, primarily reflecting growth from business combination activity, especially
Actuarial Sciences Associates, Inc. (ASA) which was acquired in the fourth
quarter 2000, internal growth, increased new business and the impact of improved
pricing.
Premiums and other is primarily related to insurance underwriting operations.
Premiums and other increased $40 million or 9% in first quarter 2001, compared
with the same period last year. Total premiums earned in the insurance
underwriting segment were $508 million, an increase of $45 million or 10% over
prior year. The increase in premiums earned primarily reflects new business
initiatives, continued organic growth and the impact of acquisitions.
- 14 -
Investment income, which includes related expenses and income or loss on
disposals and impairments, decreased $115 million in the first quarter 2001 when
compared to prior year, primarily reflecting reduced valuations from equity
investments in limited partnerships in the quarter, along with the recorded
impairment of certain directly owned equity investments. Revenues from private
equity investments fluctuate due to the inherent volatility of equity
investments. Investment income from insurance brokerage and other services, and
consulting operations, primarily relating to fiduciary funds, increased $3
million in first quarter 2001 compared to first quarter 2000 as a result of
increases in net cash flows provided from operations, as interest rates have
fallen, especially in the U.S. and the U.K.
Total expenses increased $171 million or 11% in first quarter 2001 when compared
to prior year due partially to the inclusion of special charges in 2001. Total
expenses, excluding these special charges, increased 6%. General expenses
increased $125 million or 10% in the quarter primarily reflecting special
charges of $72 million related to the business transformation plan, along with
investments in new business initiatives and technology. A $40 million or 16%
increase in benefits to policyholders was driven by new underwriting initiatives
along with an unusual increase in warranty claims during the first quarter 2001
related to an isolated program that will not affect future quarters. Interest
expense increased $5 million or 16% compared to prior year attributed to higher
average debt levels and the substitution of short-term debt with long-term debt
in second quarter 2000.
Income before income tax declined significantly from $218 million in 2000 to $48
million in 2001, due principally to non-cash investment results (a negative $115
million change on a period-to-period comparison) and the inclusion of 2001
special charges ($72 million) with no comparable amount in first quarter 2000,
which were partially offset by improved results in the operating segments.
As a result of these factors, first quarter 2001 net income declined to $19
million ($0.07 per dilutive share) compared to $116 million ($0.44 per dilutive
share) in 2000. In 2000, the company adopted the Securities and Exchange
Commission's Staff Accounting Bulletin 101, which resulted in a one-time
cumulative non-cash charge of $7 million after-tax ($0.03 per share). Basic net
income per share, including 2001 special charges, was $0.07 and $0.44 in first
quarter 2001 and 2000, respectively. Dividends on the redeemable preferred stock
have been deducted from net income to compute income per share. The effective
tax rate was 39% for both first quarter 2001 and 2000.
OPERATING SEGMENTS
- ------------------
INSURANCE BROKERAGE AND OTHER SERVICES
- --------------------------------------
The Insurance Brokerage and Other Services segment consists principally of Aon's
retail brokerage, reinsurance, wholesale and specialty brokerage and other
related services such as managing underwriting and claims services.
Approximately 62% of Aon's total revenues are generated from this segment.
First quarter 2001 Insurance Brokerage and Other Services revenue was $1.1
billion, up 4% over last year. Excluding foreign exchange, revenues rose 8%,
reflecting strong organic growth, especially in the international, wholesale and
reinsurance brokerage and claims services sectors. Investment income accounted
for $3 million of the improvement as a result of increases in net cash flows
provided from operations, as interest rates have fallen, especially in the U.S.
and the U.K.
U.S. revenue of $541 million in 2001 was up 3% from 2000 due to increased new
business, growth in U.S. specialty operations, improved pricing and
acquisitions, which more than offset the direct and indirect impact of the
business transformation plan. As anticipated, new account generation during the
quarter grew at a slower rate in certain retail brokerage units as operational
changes were implemented to achieve long-term
- 15 -
benefits of the plan. Premium rates increased across all major property and
casualty lines and clients continued to utilize alternative risk transfer
services to minimize price increases. U. K. and Continent of Europe revenue of
$445 million increased 4% from 2000, primarily due to internal growth and
acquisitions. The impact of foreign exchange rates partially offset this revenue
growth. Rest of world revenue increased $11 million or 9% due to strong organic
growth, new business, and to a lesser extent, the impact of acquisitions. In the
international retail brokerage operations, premium rate comparisons have
remained about the same as fourth quarter 2000 but are improved over last year's
first quarter.
Pretax income was $126 million for the first quarter 2001. Excluding this year's
special charges, pretax income of $196 million rose 9% over 2000. Pretax margins
before special charges in this segment were 17.6% in the quarter compared to
16.8% in 2000. The margin improvement year over year was driven in part from
business transformation savings, but was negatively impacted by a temporary
reduction in the rate of new account growth, transition costs and an increasing
percentage of lower margin claims service business.
CONSULTING
- ----------
The consulting segment provides a full range of services related to the
management of human capital, benefits and business processes. These services are
delivered to a predominately corporate clientele utilizing four practice groups:
employee benefits, compensation, management consulting and employment practices
outsourcing. Approximately 12% of Aon's total revenues are generated from this
segment.
First quarter 2001 revenue increased 20% to $212 million. Excluding the impact
of a strong U.S. dollar, revenues grew 24%. Revenue grew 8% in 2001 on an
organic basis. On a global basis, the improvement in revenue was influenced by
acquisition activity, especially the inclusion of ASA, acquired in fourth
quarter 2000, along with organic growth, as client demand for solutions that
enhance workforce productivity continued.
U.S. revenue of $135 million in 2001 was up 36% from 2000 reflecting the
acquisition of ASA and growth in compensation consulting. U.K. and European
revenue of $58 million fell 5% from 2000. U.K. revenue declined 8% from the
prior period reflecting the sale of the financial planning consulting business
last year, along with unfavorable foreign exchange rates. Continent of Europe
revenue was flat compared to the first quarter of 2000.
Pretax income was $24 million, a 26% increase over last year's results.
Excluding this year's special charges, pretax income improved 32% to $25 million
from $19 million in first quarter 2000 as revenue growth outpaced higher
staffing costs, driven by the inclusion of the ASA acquisition as well as the
growth of the business, and higher technology costs. Pretax margins in this
segment before special charges were 11.8% in the quarter compared to 10.8% in
2000.
INSURANCE UNDERWRITING
- ----------------------
The Insurance Underwriting segment provides life, accident and health insurance
coverage through distribution networks, most of which are directly owned by
Aon's subsidiaries, and extended warranty and property and casualty insurance
products. Approximately 31% of Aon's total revenues are generated from this
segment.
Revenue was $567 million in first quarter 2001, up 7% from 2000. Excluding the
impact of foreign exchange, revenue growth was 11%. Improvement over last year
was driven by the development of new product initiatives, higher volume of
business in the electronics extended warranty and specialty casualty areas and
accident and health products, which continued to expand distribution through
worksite marketing
- 16 -
programs. This growth more than offset the loss of certain accounts in the
mechanical and special warranty businesses.
U.S. revenue of $406 million was up 8% in first quarter 2001 due to growth in
revenues for accident and health, due in part to acquired business, new product
initiatives, and electronics extended warranty products. United Kingdom and
Continent of Europe revenue of $108 million rose 4%, as organic growth in the
accident and health sector was partially offset by unfavorable foreign exchange
rates. Rest of world revenue was $53 million, up 6% from prior year reflecting
growth in Latin America.
Pretax income before special charges was $68 million in first quarter 2001, up
2% from $67 million last year. Margins declined slightly from 12.6% in 2000 to
12% this year. New underwriting initiatives drove premium growth but also
resulted in increased benefits to policyholders. Also, an unusual increase in
warranty claims occurred during the first quarter 2001 related to an isolated
program that will not affect future quarters.
NON-OPERATING SEGMENT
- ---------------------
CORPORATE AND OTHER
- -------------------
Revenue in this category consists primarily of investment income (including
income or loss on disposals, along with impairment losses) which is not
otherwise reflected in the results of the operating segments. Invested assets
and related investment income not directly required to support the insurance
brokerage and consulting businesses, together with the assets in excess of net
policyholder liabilities of the underwriting businesses and related income, are
allocated to the Corporate and Other segment. Corporate operating expenses
include administrative and certain information technology costs.
Corporate and Other revenue was a negative $85 million in 2001, versus positive
revenue of $30 million in the first quarter 2000, primarily reflecting reduced
valuations for equity investments in limited partnerships in the quarter, along
with the write-down of certain directly-owned equity investments. Limited
partnership investments have historically provided higher returns over a longer
time horizon than broad market common stock returns. However, in the short run,
the returns are inherently more variable.
Corporate and Other expenses for the quarter were $84 million, up $6 million
from the same period last year. Expenses in this segment are composed of
interest expense, goodwill amortization and general expenses. Interest expense
rose $5 million or 16% compared to prior year, reflecting higher average debt
levels and an extension of debt duration in second quarter 2000. Goodwill
amortization rose $2 million as a result of new acquisitions, while general
expenses fell $1 million, resulting from lower technology costs.
The revenue and expense comparisons discussed above contributed to the overall
corporate and other pretax loss of $169 million in the quarter versus a loss of
$48 million last year.
- 17 -
CASH FLOW AND FINANCIAL POSITION
AT THE END OF FIRST QUARTER 2001
Cash flows from operating activities represent the net income earned by Aon in
the reported periods adjusted for non-cash charges and changes in assets and
liabilities. Cash flows provided by operating activities in first quarter 2001
were $332 million, a $186 million increase over the same period in 2000. The
increase represents, in part, the timing of payment for incentive compensation.
Also, working capital improved due to fiduciary funds availability. In addition,
the non-cash effect of lower valuations on the company's limited partnership
portfolio, coupled with impairments on investments and losses on disposals,
contributed to lower net income. The cash impact of special charges and purchase
accounting liabilities in 2001 was similar to what was spent last year. First
quarter 2001 reflects the pretax special charges of $72 million, less cash
expended. First quarter 2000 reflects only actual payments on special charge and
purchase accounting liabilities previously established.
Investing activities used cash of $186 million. Cash of $103 million was
provided during first quarter 2001 from the net sale of other investments. This
was offset by the net purchase of short-term investments of $180 million. Cash
used for acquisition activity during first quarter 2001 was $44 million,
primarily reflecting brokerage acquisitions.
Cash of $376 million was used during first quarter 2001 from financing
activities, which was $235 million more than was utilized in 2000. The higher
usage of cash from prior year is primarily due to a reduction of short-term
borrowings in 2001 versus an increase in short-term debt during first quarter
2000. Cash was used to pay dividends of $57 million on common stock and $1
million on redeemable preferred stock during first quarter 2001. Various
regulatory requirements applied to Aon's underwriting and overseas operations
limit availability of operating cash flows for general corporate purposes.
Aon's operating subsidiaries anticipate that there will be adequate liquidity to
meet their needs in the foreseeable future. Aon's liquidity needs are primarily
for servicing its debt and for the payment of dividends on stock issues and
capital securities. The businesses of Aon's operating subsidiaries continue to
provide substantial positive cash flow. Brokerage cash flow has been used
primarily for business reinvestment, acquisition financing and payments of
special charge and purchase accounting liabilities. Aon anticipates continuation
of the company's positive cash flow and the ability of the parent company to
access adequate short-term lines of credit. Aon anticipates a sufficient level
of future operating cash flows to offset cash payments related to both
restructuring charges and transition costs associated with the business
transformation plan.
Due to the contractual nature of its insurance policyholder liabilities, which
are primarily intermediate to long-term in nature, Aon has invested primarily in
fixed maturities. With a carrying value of $2.3 billion, Aon's total fixed
maturity portfolio is invested primarily in investment grade holdings (95%) and
has a fair value which is 99.9% of amortized cost at March 31, 2001.
Total assets decreased $214 million since year-end 2000 to $22 billion. Invested
assets at March 31, 2001 increased $60 million from year-end levels primarily
from higher levels of short-term investments and equity securities which were
offset in part by lower valuations and impairment charges in other investments.
The amortized cost and fair value of less than investment grade fixed maturity
investments at March 31, 2001 were $129 million and $115 million, respectively.
The carrying value of non-income producing investments in Aon's portfolio at
March 31, 2001 was $65 million, or 1.1% of total invested assets.
- 18 -
Short-term borrowings decreased at the end of first quarter 2001 by $249 million
when compared to year-end 2000. Notes payable increased at the end of first
quarter 2001 by $6 million when compared to year-end 2000, reflecting the
issuance of additional debt. Approximately $12 million of notes payable is
scheduled to be paid within one year.
Stockholders' equity decreased $25 million in first quarter 2001, reflecting net
foreign exchange losses of $43 million and dividends paid to stockholders of $58
million. Partially offsetting this decline was the net decrease in treasury
stock of $37 million and net income of $19 million. Unrealized investment gains
and losses and foreign exchange gains and losses fluctuations from period to
period are largely based on market conditions.
Stockholders' equity per share declined from $13.02 at December 31, 2000 to
$12.84 at March 31, 2001, reflecting both the decline in the equity balance as
well as an increase in the number of common shares outstanding.
REVIEW BY INDEPENDENT AUDITORS
- ------------------------------
The condensed consolidated financial statements at March 31, 2001 and for the
first quarter then ended have been reviewed, prior to filing, by Ernst & Young
LLP, Aon's independent auditors, and their report is included herein.
- 19 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Aon Corporation
We have reviewed the accompanying condensed consolidated statement of financial
position of Aon Corporation as of March 31, 2001, and the related condensed
consolidated statements of income and cash flows for the three-month periods
ended March 31, 2001 and 2000. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated statement of financial position
of Aon Corporation as of December 31, 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended, not presented herein, and in our report dated February 8, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated statement of financial position as of December 31, 2000, is fairly
stated, in all material respects, in relation to the consolidated statement of
financial position from which it has been derived.
ERNST & YOUNG LLP
Chicago, Illinois
May 9, 2001
- 20 -
PART II
-------
OTHER INFORMATION
-----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Registrant
was held on April 20, 2001 (the "2001 Annual Meeting").
(b) Not applicable.
(c)(i) Name For Against
---- --- -------
Franklin A. Cole 230,333,000 2,173,981
Edgar D. Jannotta 230,374,240 2,132,741
Lester B. Knight 230,418,603 2,088,378
Perry J. Lewis 230,407,554 2,099,427
Andrew J. McKenna 230,351,122 2,155,859
Robert S. Morrison 230,398,763 2,108,218
Richard C. Notebaert 230,392,437 2,114,544
Michael D. O'Halleran 230,333,517 2,173,464
Donald S. Perkins 230,334,358 2,172,623
John W. Rogers, Jr. 230,448,048 2,058,933
Patrick G. Ryan 230,399,284 2,107,697
George A. Schaefer 230,346,608 2,160,373
Raymond I. Skilling 230,378,717 2,128,264
Fred L. Turner 230,394,229 2,112,752
Arnold R. Weber 230,335,897 2,171,084
Carolyn Y. Woo 209,812,702 22,694,279
(ii) Set forth below is the tabulation of the vote on the
approval of the Aon Stock Incentive Plan, which
includes provisions qualifying the plan for favorable
treatment under Section 162(m) of the Internal Revenue
Code.
For Against Abstain Non-Vote
--- ------- ------- --------
133,593,506 78,059,665 1,963,719 18,890,091
(iii) Set forth below is the tabulation of the vote on the
adoption of the amendment of the Senior Officer
Incentive Compensation Plan which includes provisions
qualifying that plan for favorable treatment under
Section 162(m) of the Internal Revenue Code.
For Against Abstain
--- ------- -------
223,697,019 6,557,479 2,252,483
- 21 -
(iv) Set forth below is the tabulation of the vote on the
selection of Ernst & Young LLP as auditors for the
Registrant for the 2001 fiscal year.
For Against Abstain
--- ------- -------
230,530,164 1,009,525 967,292
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits filed with this report are listed on
--------
the attached Exhibit Index.
(b) Reports on Form 8-K -
----------------------
(i) No Current Reports on Form 8-K were filed for the
quarter ended March 31, 2001.
(ii) The Registrant filed one current report on Form 8-K
dated April 20, 2001. The following exhibit was
included in the report: Exhibit 99 - Press Release
issued on April 20, 2001.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aon Corporation
---------------
(Registrant)
May 14, 2001 /s/ Harvey N. Medvin
---------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer)
- 22 -
Aon CORPORATION
- ---------------
Exhibit Number
In Regulation S-K
Item 601 Exhibit Table
- ----------------------
(12) Statements regarding Computation of Ratios.
(a) Statement regarding Computation of Ratio of Earnings to Fixed
Charges.
(b) Statement regarding Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
(15) Letter re: Unaudited Interim Financial Information
- 23 -
EXHIBIT 12(a)
Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
--------------------- --------------------------------------------------------
(millions except ratios) 2001 2000 2000 1999 1998 1997 1996
--------- ---------- ---------- --------- ---------- --------- ----------
Income from continuing operations
before provision for income taxes (1) $ 48 $ 218 $ 854 $ 635 $ 931 $ 542 $ 446
ADD BACK FIXED CHARGES:
Interest on indebtedness 36 31 140 105 87 70 45
Interest on ESOP - - - 1 2 3 4
Portion of rents representative of
interest factor 14 12 54 49 51 44 29
--------- ---------- ---------- --------- ---------- --------- ----------
INCOME AS ADJUSTED $ 98 $ 261 $ 1,048 $ 790 $ 1,071 $ 659 $ 524
========= ========== ========== ========= ========== ========= ==========
FIXED CHARGES:
Interest on indebtedness $ 36 $ 31 $ 140 $ 105 $ 87 $ 70 $ 45
Interest on ESOP - - - 1 2 3 4
Portion of rents representative of
interest factor 14 12 54 49 51 44 29
--------- ---------- ---------- --------- ---------- --------- ----------
TOTAL FIXED CHARGES $ 50 $ 43 $ 194 $ 155 $ 140 $ 117 $ 78
========= ========== ========== ========= ========== ========= ==========
RATIO OF EARNINGS TO FIXED CHARGES 2.0 6.1 5.4 5.1 7.6 5.6 6.7
========= ========== ========== ========= ========== ========= ==========
<FN>
(1) Income from continuing operations before provision for income taxes and
minority interest includes special charges of $72 million for the three
months ended March 31, 2001 and $82 million, $313 million, $172 million and
$90 million for the years ended December 31, 2000, 1999, 1997 and 1996,
respectively.
</FN>
EXHIBIT 12(b)
Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
(millions except ratios) 2001 2000 2000 1999 1998 1997 1996
---------- ---------- ----------- ---------- ---------- ---------- -----------
Income from continuing operations
before provision for income taxes (1) $ 48 $ 218 $ 854 $ 635 $ 931 $ 542 $ 446
ADD BACK FIXED CHARGES:
Interest on indebtedness 36 31 140 105 87 70 45
Interest on ESOP - - - 1 2 3 4
Portion of rents representative of
interest factor 14 12 54 49 51 44 29
---------- ---------- ----------- ---------- ---------- ---------- -----------
INCOME AS ADJUSTED $ 98 $ 261 $ 1,048 $ 790 $ 1,071 $ 659 $ 524
========== ========== =========== ========== ========== ========== ===========
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS:
Interest on indebtedness $ 36 $ 31 $ 140 $ 105 $ 87 $ 70 $ 45
Preferred stock dividends 17 17 70 70 70 82 29
---------- ---------- ----------- ---------- ---------- ---------- -----------
INTEREST AND DIVIDENDS 53 48 210 175 157 152 74
Interest on ESOP - - - 1 2 3 4
Portion of rents representative of
interest factor 14 12 54 49 51 44 29
---------- ---------- ----------- ---------- ---------- ---------- -----------
TOTAL FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS $ 67 $ 60 $ 264 $ 225 $ 210 $ 199 $ 107
========== ========== =========== ========== ========== ========== ===========
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS (2) 1.5 4.4 4.0 3.5 5.1 3.3 4.9
========== ========== =========== ========== ========== ========== ===========
<FN>
(1) Income from continuing operations before provision for income taxes and
minority interest includes special charges of $72 million for the three
months ended March 31, 2001 and $82 million, $313 million, $172 million and
$90 million for the years ended December 31, 2000, 1999, 1997 and 1996,
respectively.
(2) Included in total fixed charges and preferred stock dividends are $16
million for the three months ended March 31, 2001 and 2000, $66 million for
the years ended December 31, 2000, 1999 and 1998, and $64 million for the
year ended December 31, 1997, of pretax distributions on the 8.205%
mandatorily redeemable preferred capital securities which are classified as
"minority interest" on the condensed consolidated statements of income.
</FN>
Exhibit 15
Board of Directors and Stockholders
Aon Corporation
We are aware of the incorporation by reference in the Registration Statements of
Aon Corporation ("Aon") described in the following table of our report dated May
9, 2001 relating to the unaudited condensed consolidated interim financial
statements of Aon Corporation that are included in its Form 10-Q for the quarter
ended March 31, 2001:
Registration Statement
----------------------
Form Number Purpose
---- ------ -------
S-8 33-27984 Pertaining to Aon's savings plan
S-8 33-42575 Pertaining to Aon's stock award plan and
stock option plan
S-8 33-59037 Pertaining to Aon's stock award plan and
stock option plan
S-4 333-21237 Offer to exchange Capital Securities of Aon
Capital A
S-3 333-50607 Pertaining to the registration of 369,000
shares of common stock
S-8 333-55773 Pertaining to Aon's stock award plan, stock
option plan and employee stock
purchase plan
S-3 333-78723 Pertaining to the registration of debt
securities, preferred stock and common
stock
S-3 333-49300 Pertaining to the registration of 3,864,824
shares of common stock
S-4 333-57706 Pertaining to the registration of a
proposed issuance of up to 3,852,184
shares of common stock to the
stockholders of ASI Solutions, Inc.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Chicago, Illinois
May 9, 2001