SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
_ OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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.)
200 E. RANDOLPH STREET, CHICAGO, ILLINOIS 60601
- ------------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
(312) 381-1000
--------------
(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 3-31-02
----- -------------
$1.00 par value Common 272,009,453
PART 1
FINANCIAL INFORMATION
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(MILLIONS) AS OF AS OF
MARCH 31, 2002 DEC. 31, 2001
----------------------------------
ASSETS (UNAUDITED)
INVESTMENTS
Fixed maturities at fair value $ 2,442 $ 2,149
Equity securities at fair value 303 382
Short-term investments 2,615 2,975
Other investments 635 640
---------------- ---------------
TOTAL INVESTMENTS 5,995 6,146
CASH 569 439
RECEIVABLES
Insurance brokerage and consulting
services 7,543 7,033
Other receivables 1,019 953
---------------- ---------------
TOTAL RECEIVABLES 8,562 7,986
GOODWILL (NET OF ACCUMULATED AMORTIZATION:
2002 - $ 698; 2001 - $ 698) 3,856 3,842
OTHER INTANGIBLE ASSETS (NET OF ACCUMULATED
AMORTIZATION: 2002 - $ 721; 2001- $ 710) 229 242
OTHER ASSETS 3,899 3,731
---------------- ---------------
TOTAL ASSETS $ 23,110 $ 22,386
================ ===============
AS OF AS OF
MARCH 31, 2002 DEC. 31, 2001
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
INSURANCE PREMIUMS PAYABLE $ 8,970 $ 8,233
POLICY LIABILITIES
Future policy benefits 1,249 1,266
Policy and contract claims 1,006 937
Unearned and advance premiums and contract fees 2,109 1,974
Other policyholder funds 766 813
---------------- ----------------
TOTAL POLICY LIABILITIES 5,130 4,990
GENERAL LIABILITIES
General expenses 1,624 1,770
Short-term borrowings 212 257
Notes payable 1,790 1,694
Other liabilities 1,005 1,071
---------------- ----------------
TOTAL LIABILITIES 18,731 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 800 800
STOCKHOLDERS' EQUITY
Common stock - $1 par value 294 293
Paid-in additional capital 1,655 1,654
Accumulated other comprehensive loss (577) (535)
Retained earnings 3,117 3,077
Less - Treasury stock at cost (785) (786)
Deferred compensation (175) (182)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 3,529 3,521
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,110 $ 22,386
================ ================
- 2 -
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FIRST QUARTER ENDED
--------------------------------------
(millions except per share data) MARCH 31, MARCH 31,
2002 2001
------------------ ------------------
Revenue
Brokerage commissions and fees ...................................... $ 1,444 $ 1,281
Premiums and other .................................................. 535 508
Investment income ................................................... 109 22
------------------ ------------------
TOTAL REVENUE .................................................... 2,088 1,811
------------------ ------------------
EXPENSES
General expenses . .................................................. 1,463 1,396
Benefits to policyholders . ......................................... 314 292
Interest expense .................................................... 29 36
Amortization of intangible assets (Note 7) .......................... 11 39
Unusual charges- World Trade Center (Note 4)......................... 90 -
------------------ ------------------
TOTAL EXPENSES. .................................................. 1,907 1,763
------------------ ------------------
INCOME BEFORE INCOME TAX AND MINORITY INTEREST ......................... 181 48
Provision for income tax . .......................................... 67 19
------------------ ------------------
INCOME BEFORE MINORITY INTEREST. ....................................... 114 29
Minority interest - 8.205% trust preferred capital securities ....... (10) (10)
------------------ ------------------
NET INCOME ............................................................. $ 104 $ 19
================== ==================
Preferred stock dividends . ......................................... (1) (1)
------------------ ------------------
NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS . ......................... $ 103 $ 18
================== ==================
BASIC NET INCOME PER SHARE ............................................. $ 0.38 $ 0.07
================== ==================
DILUTIVE NET INCOME PER SHARE. ......................................... $ 0.37 $ 0.07
================== ==================
CASH DIVIDENDS PER SHARE PAID ON COMMON STOCK . ........................ $ 0.225 $ 0.22
================== ==================
Dilutive average common and common equivalent shares outstanding ....... 276.6 267.9
================== ==================
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) 2002 2001
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................................. $ 104 $ 19
Adjustments to reconcile net income to cash provided by operating activities
Insurance operating assets and liabilities, net of reinsurance . ....................... (22) 48
Amortization of intangible assets ...................................................... 11 39
Depreciation and amortization of property, equipment and software ...................... 47 44
Income taxes ........................................................................... 4 (20)
Special and unusual charges and purchase accounting liabilities. ....................... 43 23
Valuation changes on investments, income on disposals and impairments .................. 10 76
Other receivables and liabilities - net ................................................ (6) 103
-------------- ---------------
CASH PROVIDED BY OPERATING ACTIVITIES .............................................. 191 332
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of investments
Fixed maturities
Maturities ......................................................................... 34 30
Calls and prepayments .............................................................. 33 16
Sales .............................................................................. 265 365
Equity securities ...................................................................... 65 162
Other investments ...................................................................... 14 135
Purchase of investments
Fixed maturities ....................................................................... (650) (385)
Equity securities ...................................................................... (3) (196)
Other investments ...................................................................... (9) (32)
Short-term investments - net ................................................................ 337 (180)
Acquisition of subsidiaries ................................................................. (35) (44)
Property and equipment and other - net ...................................................... (56) (57)
-------------- ---------------
CASH USED BY INVESTING ACTIVITIES .................................................. (5) (186)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury and common stock transactions - net ............................................... 13 18
Payments of short-term borrowings - net .................................................... (43) (252)
Issuance of long-term debt ................................................................. 96 15
Interest sensitive, annuity and investment-type contracts
Deposits. .............................................................................. - 3
Withdrawals ............................................................................ (59) (102)
Cash dividends to stockholders ............................................................. (62) (58)
-------------- ---------------
CASH USED IN FINANCING ACTIVITIES .................................................. (55) (376)
-------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ....................................................... (1) (2)
-------------- ---------------
INCREASE (DECREASE) IN CASH ................................................................... 130 (232)
CASH AT BEGINNING OF PERIOD ................................................................... 439 1,118
-------------- ---------------
CASH AT END OF PERIOD ......................................................................... $ 569 $ 886
============== ===============
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, 2001 for
additional details of Aon's financial position, as well as a
description of the accounting policies which have been continued
without material change, except for the adoption of Financial
Accounting Standard Board's (FASB) Statement No. 141. The details
included in the notes have not changed except as a result of normal
transactions in the interim and the events mentioned in the footnotes
below.
Certain amounts in prior year's condensed consolidated financial
statements have been reclassified to conform to the 2002 presentation.
2. Accounting and Disclosure Changes
---------------------------------
Effective January 1, 2002, Aon adopted FASB Statement No. 142, Goodwill
and Other Intangible Assets. As a result of adopting Statement No. 142,
the Company's goodwill is no longer amortized. Pursuant to Statement
No. 142, goodwill must be periodically tested for impairment and the
new standard provides six months to complete the impairment review.
During the quarter, Aon completed its impairment review which indicated
that there was no impairment as of January 1, 2002. See note 7.
Aon also has adopted FASB Statement No. 141, Business Combinations. In
accordance with Statement No. 141, other intangible assets that do not
meet the criteria for recognition apart from goodwill (as defined by
Statement No. 141) are to be classified as goodwill upon adoption of
the statement. Aon has reclassified $287 million of these intangibles,
net of accumulated amortization, to goodwill as of January 1, 2002. The
December 31, 2001 condensed consolidated statement of financial
position has been changed to reflect this reclass.
Aon also adopted FASB Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, effective January 1, 2002. The
adoption of Statement No. 144 did not have a material impact on Aon's
consolidated financial statements.
3. Spin-Off of Underwriting Business
---------------------------------
In April 2001, Aon's Board of Directors approved, in principle, a plan
to spin-off its current underwriting businesses to Aon's common
stockholders, creating two independent, publicly traded companies. The
transaction is subject to final Board approval and certain insurance
regulatory approvals. The spin-off company will be named Combined
Specialty Group, Inc., and the spin-off is currently expected to be
completed in second quarter 2002. On April 11, 2002, Aon received a
- 5 -
favorable private letter ruling from the U.S. Internal Revenue Service
that provides, among other things, that Aon's common stockholders
should not owe U.S. tax on a dividend of shares of Combined Specialty
common stock in the spin-off. In first quarter 2002, Aon incurred $5
million of expenses related to the spin-off. These expenses, recorded
in general expenses in the condensed consolidated statements of income,
are primarily for outside professional fees.
4. Unusual Charges
---------------
In the third and fourth quarter 2001, Aon recorded pretax unusual
charges of $68 million net of insurance and reinsurance recoveries
related to losses sustained as result of the destruction of the World
Trade Center on September 11, 2001 and the death of 175 employees. In
the first quarter 2002, Aon recorded a pretax $90 million allowance
($56 million after tax) for a potentially uncollectible receivable
related to a previously disclosed dispute with reinsurers over claims
related to the World Trade Center disaster. The allowance, which is
reported as an unusual charge in the condensed consolidated statements
of income, was established due to an April 2002 court ruling (in an
unrelated case) that may impact the venue for litigation between the
Company and its reinsurers. This ruling has impacted Aon's ability to
reasonably estimate the probable recovery under the claim, as of March
31, 2002. Aon continues to believe that its insurance underwriting
subsidiary, Combined Insurance Company of America (CICA), which
underwrote accident insurance for the benefit of Aon's employees, has
valid reinsurance.
5. Comprehensive Income (Loss)
----------------------------
The components of comprehensive income (loss), net of related tax, for
the first quarter ended March 31, 2002 and 2001 are as follows:
(millions) 2002 2001
---- ----
Net income $ 104 $ 19
Net derivative losses (7) (12)
Net unrealized investment gains (losses) (13) 19
Net foreign exchange losses (22) (43)
------------------- ------------------
Comprehensive income (loss) $ 62 $ (17)
=================== ==================
The components of accumulated other comprehensive loss, net of related
tax are as follows:
March 31, December 31,
(millions) 2002 2001
---- ----
Net derivative losses $ (7) $ -
Net unrealized investment losses (55) (42)
Net foreign exchange losses (347) (325)
Net additional minimum pension liability (168) (168)
-------------------- -------------------
Accumulated other comprehensive loss $ (577) $ (535)
==================== ===================
- 6 -
6. Business Segments
-----------------
Aon classifies its businesses into three operating segments based on
the types of services and/or products delivered. There is also a fourth
non-operating segment, Corporate and Other. The Insurance Brokerage and
Other Services segment consists primarily of Aon's retail, reinsurance
and wholesale brokerage operations, as well as related insurance
services, including claims services, underwriting management, captive
insurance company management services and premium financing. Certain
service businesses related to insurance underwriting operations are
also reflected in this segment. The Consulting segment is Aon's human
capital consulting organization which utilizes five major practices:
employee benefits, compensation, management consulting, outsourcing and
communications. The Insurance Underwriting segment provides specialty
insurance products including supplemental accident, health and life
insurance coverages, extended warranty and other specialty property and
casualty insurance products. Corporate and Other segment revenue
consists primarily of investment income from equity, fixed maturity and
short-term investments that are assets primarily of the insurance
underwriting subsidiaries that exceed policyholders liabilities.
Revenues are derived from investment income from certain investments
(which include non-income producing 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 expenses include general
expenses, administrative and certain information technology costs,
interest expense and, in 2001, goodwill amortization.
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.
Selected information reflecting Aon's operating segments follows.
First Quarter ended March 31: Insurance Brokerage Insurance
(millions) and Other Services Consulting Underwriting
------------------- ---------- ------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Revenue
United States $ 592 $ 541 $ 149 $ 135 $ 412 $ 406
United Kingdom 229 205 37 36 79 80
Continent of Europe 261 240 27 22 33 28
Rest of World 150 131 20 19 54 53
- ----------------------------------------- ------------- --------------- -- ------------- ------------- -- ----------- ------------
Total Revenue $ 1,232 $ 1,117 $ 233 $ 212 $ 578 $ 567
- ----------------------------------------- ------------- --------------- -- ------------- ------------- -- ----------- ------------
Income before income taxes
excluding unusual and special
charges $ 187 $ 196 $ 27 $ 25 $ 69 $ 68
Unusual charges - World Trade
Center - - - - 90 -
Special charges - 70 - 1 5 1
- ----------------------------------------- ------------- --------------- -- ------------- ------------- -- ----------- ------------
Income before income taxes $ 187 $ 126 $ 27 $ 24 $ (26) $ 67
- ----------------------------------------- ------------- --------------- -- ------------- ------------- -- ----------- ------------
- 7 -
Selected information for Aon's non-operating segment follows:
-----------------------------------------------------------------------------------------------------------------------
Corporate and Other
(millions) First quarter ended March 31 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Corporate and Other revenue:
Limited partnership investments $ 9 $ (56)
Income from marketable equity securities and other
investments 3 1
--------------------------------------------
Corporate and Other revenue before one-time items
and loss on disposals and related expenses 12 (55)
Interest on tax refund 48 -
Loss on disposals and related expenses * (15) (30)
--------------------------------------------
Corporate and Other revenue 45 (85)
Non-operating expenses:
General expenses 23 19
Interest expense 29 36
Amortization of goodwill - 29
-----------------------------------------------------------------------------------------------------------------------
Loss before income tax $ (7) $ (169)
-----------------------------------------------------------------------------------------------------------------------
<FN>
* Includes impairment write-downs of $8 million and $29 million for
the first quarter ended March 31, 2002 and 2001, respectively.
</FN>
7. Goodwill and Other Intangible Assets
------------------------------------
In accordance with FASB Statement No. 142, all of Aon's goodwill will
no longer be amortized. Goodwill and other intangible assets are
allocated to various reporting units, which are either at its operating
segments or one reporting level below the operating segment. In prior
years, goodwill amortization has been expensed in the Corporate and
Other segment. Statement No. 142 requires Aon to compare the fair value
of the reporting unit to its carrying amount on an annual basis to
determine if there is potential impairment of goodwill. If the fair
value of the reporting unit is less than its carrying value, an
impairment loss would be recorded to the extent that the fair value of
the goodwill within the reporting unit is less than the carrying value.
Fair value is estimated based on revenue multiples, earnings before
interest taxes, depreciation and amortization (EBITDA) and discounted
cash flows.
- 8 -
A reconciliation of the prior year's quarter reported net income to
adjusted net income had Statement No. 142 and the reclassification
provisions of Statement No. 141 been applied as of January 1, 2001
follows:
(millions, except per share amounts) Three Months Ended March 31, 2001
------------------------------------------------------
Basic Net Dilutive Net
Income Income
Amount Per Share Per Share
--------------- --------------- ----------------
Reported net income $ 19 $ 0.07 $ 0.07
Add back amortization (net of tax):
Goodwill 25 0.09 0.09
Intangible assets reclassified to goodwill 3 0.01 0.01
Less amortization (net of tax):
Other intangible assets - change in amortization
periods 1 - -
--------------- --------------- ----------------
$ 46 $ 0.17 $ 0.17
=============== =============== ================
Reported net income and net income per share
for the three months ended March 31, 2002 $ 104 $ 0.38 $ 0.37
=============== =============== ================
The changes in the carrying amount of goodwill for the quarter ended March 31,
2002 are as follows:
Insurance
Brokerage
(millions) and Other Insurance
Services Consulting Underwriting Total
-------- ---------- ------------ -----
Balance as of December 31, 2001 (note 2) $ 3,239 $ 366 $ 237 $ 3,842
Goodwill acquired during quarter 16 1 - 17
Foreign currency revaluation (3) - - (3)
--------- --------- --------- ---------
Balance as of March 31, 2002 $ 3,252 $ 367 $ 237 $ 3,856
========= ========= ========= =========
Amortizable intangible assets by asset class follow:
Customer Present Value Marketing,
(millions) Related and of Future Technology
Contract Based Profits and Other Total
-------------- --------- ---------- -----
Balance as of December 31, 2001 $ 86 $ 80 $ 76 $ 242
====== ====== ====== =======
Balance at March 31, 2002 $ 82 $ 75 $ 72 $ 229
====== ====== ====== =======
Range of years amortized 3 - 29 4 - 13 3 - 25
====== ====== ======
Amortization expense for amortizable intangible assets for the years ended
December 31, 2002, 2003, 2004, 2005 and 2006 is estimated to be $46 million, $45
million, $42 million, $40 million and $38 million, respectively.
- 9 -
8. Capital Stock
-------------
During first quarter 2002, Aon issued or reissued 1,749,000 shares of
common stock for employee benefit plans and 144,000 shares in
connection with the employee stock purchase plan. Aon purchased 74,000
shares of its common stock at a total cost of $2.9 million during first
quarter 2002. There were 22.4 million shares of common stock held in
treasury at March 31, 2002, of which all but 67,000 shares are
restricted as to their reissuance.
9. 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.
10. Business Combinations
---------------------
For the first quarter 2002, Aon made payments of $2 million on
restructuring charges and purchase accounting liabilities relating to
business combinations.
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 of restructuring Aon's brokerage operations 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 and Bain Hogg 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. All termination benefits have been
paid. The remaining liability of $55 million is for lease abandonments
and other exit costs.
The following table sets forth recent activity relating to these
liabilities:
(millions)
Balance at December 31, 2000 $ 78
Cash payments in 2001 (19)
Cash payments in 2002 (2)
Foreign currency revaluation (2)
------------
Balance at March 31, 2002 $ 55
============
All of Aon's unpaid liabilities relating to acquisitions are reflected
in general expense liabilities in the condensed consolidated statements
of financial position.
- 10 -
11. Business Transformation Plan
----------------------------
In fourth quarter 2000, Aon announced a formal plan of restructuring
Aon's worldwide operations. This plan constitutes the "business
transformation plan" and will continue into 2002. Costs of the plan
include special charges and transition costs. Pretax charges of $300
million were recorded in 2001 and 2000, of which $72 million was
recorded in first quarter 2001, and are recorded in general expenses in
the condensed consolidated statements of income. The special charges in
the first quarter 2001 included costs related to termination benefits
of $23 million, other costs to exit an activity of $3 million and other
charges of $46 million primarily relating to costs for the abandonment
of systems and equipment, as well as to end Aon's involvement in
certain joint ventures and service partner relationships that did not
meet profitability hurdles.
Approximately 4,000 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.
For the first quarter 2002, Aon made payments of $9 million related to
the business transformation plan.
The following table sets forth 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 109 21 130
Cash payments in 2001 (73) (20) (93)
Cash payments in 2002 (8) (1) (9)
Foreign currency revaluation (2) - (2)
--------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 $ 67 $ 3 $ 70
--------------------------------------------------------------------------------------------------------------------
All of Aon's unpaid liabilities relating to business transformation
plan are reflected in general expense liabilities in the condensed
consolidated statements of financial position.
- 11 -
12. Income Per Share
----------------
Income per share is calculated as follows:
First Quarter Ended March 31,
---------------------------------------------------
(millions except per share data) 2002 2001
--------------------------------------------------------------------------------------------------------
Net income $ 104 $ 19
Redeemable preferred stock dividends (1) (1)
--------------------------------------------------
Net income for dilutive and basic $ 103 $ 18
==================================================
Basic shares outstanding 274 265
Common stock equivalents 3 3
--------------------------------------------------
Dilutive potential common shares 277 268
--------------------------------------------------------------------------------------------------------
Basic net income per share $ 0.38 $ 0.07
Dilutive net income per share $ 0.37 $ 0.07
--------------------------------------------------------------------------------------------------------
13. Alexander & Alexander Services Inc. (A&A) Discontinued Operations
-----------------------------------------------------------------
Prior 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
settlements had no material effect on the condensed consolidated
financial statements. As of March 31, 2002, the liabilities associated
with the foregoing indemnities were included in other liabilities in
the condensed consolidated statements of financial position. These A&A
related liabilities amounted to $73 million, net of reinsurance
recoverables and other assets of $86 million.
14. 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 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
- 12 -
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, which
has been settled, 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 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.
One of Aon's insurance subsidiaries is a defendant in twelve 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 1,800 other current or former
policyholders may file similar claims. The attorneys have furnished no
or only sparse details of these possible claims. Each lawsuit includes,
and each threatened claim could include, a request for punitive
damages. Each suit and any threatened claim that matures into a suit
will be most vigorously defended.
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 -
AON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER ENDED MARCH 31, 2002
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 revenue growth exclude the impact of acquisitions,
dispositions, transfers, investment income, foreign exchange and other unusual
items. Within the Insurance Underwriting segment, written premiums are the basis
for the measurement of organic growth. References to income before income tax
are before minority interest related to the issuance of 8.205% mandatorily
redeemable preferred capital securities. For purposes of operating segment
discussions, comparisons against 2001 results exclude unusual and special
charges.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
- -------------------------------------------------
This quarterly report may contain 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, changes in commercial
property and casualty premium rates, the competitive environment, the actual
cost of resolution of contingent liabilities, the final execution 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
operations, rating agency actions, and any proposed capital raising, and the
timing and terms associated therewith, and events surrounding terrorist attacks
of September 11, 2001, including the timing and resolution of related insurance
and reinsurance issues.
SPIN-OFF OF UNDERWRITING BUSINESS
- ---------------------------------
As previously disclosed, on April 20, 2001, Aon's Board of Directors approved,
in principle, a plan to spin-off its insurance underwriting businesses to Aon's
common stockholders, creating two independent, publicly traded companies. The
spin-off would take the form of a tax-free stock dividend of the outstanding
shares of common stock of Combined Specialty Group, Inc. (Combined Specialty), a
new company formed to hold the insurance underwriting businesses. The
transaction requires final Board approval and certain insurance regulatory
approvals and is currently expected to be completed in second quarter 2002. On
April 11, 2002, Aon received a favorable private letter ruling from the U.S.
Internal Revenue Service that provides, among other things, that Aon's common
stockholders should not owe U.S. tax on a dividend of shares of Combined
Specialty common stock in the spin-off.
In the first quarter 2002, Aon incurred $5 million of expenses related to the
spin-off. These expenses, recorded in general expenses in the condensed
consolidated statements of income, are primarily for outside professional fees.
- 14 -
BUSINESS TRANSFORMATION PLAN
- ----------------------------
In fourth quarter 2000, Aon began a comprehensive business transformation plan
designed to enhance client service, improve productivity through process
redesign, and accelerate organic revenue growth. The implementation of this plan
began in the fourth quarter of 2000 and, due to delays as discussed below, will
continue into 2002. 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.
Outside of U.S. retail brokerage, the business transformation plan has delivered
expected benefits of improved revenue growth and enhanced productivity. In the
U.S. retail brokerage, however, a more extensive plan involved the redesign of
many processes and job roles, which resulted in delays implementing certain
process conversions. The conversion of all large account back office servicing
in U.S. retail brokerage to the four regional services centers was completed
during the first quarter. Small account back office servicing in the U.S. will
be converted by the end of second quarter 2002. The delays have been due to
challenges in handling higher volumes of transfers between field operations and
the client service business units as well as the destruction of Aon's largest
and most advanced client service business unit, which was housed in the World
Trade Center. This delay also adversely affected new business production as
attention was diverted from generating new accounts to completing client
conversions. Expenses have been higher than expected, due in part to additional
temporary employee expense necessary to complete the account conversions to the
client service business units, as well as increased compensation for certain
brokerage employees and the hiring of employees with specialized skills. The
changing dynamics of the insurance marketplace have also increased the time
requirements for handling certain job functions.
In connection with the plan, Aon recorded pretax special charges of $72 million
($44 million after tax or $0.16 per share) in first quarter 2001. Pretax charges
of $23 million in first quarter 2001 related to termination benefits and
involved about 1,200 employees. As part of the business transformation, Aon
examined its marginal return non-core business alliances and took a pretax
charge of $38 million to end Aon's involvement in certain joint ventures and
service partner relationships that did not meet profitability hurdles. It also
allowed Aon to further reduce headcounts. Charges of $11 million were incurred
for asset impairments, primarily relating to the abandonment of systems and
equipment, and other charges.
Net transition costs, primarily related to our core operating businesses, were
approximately $3 million for both the first quarter 2002 and 2001, respectively,
and consisted of process conversion costs, consulting fees and temporary help.
Annualized pretax savings from the plan, which is not fully implemented, are
estimated to be approximately $150 million related to actions already taken.
These savings are expected to be achieved starting in 2002 on an annualized
basis as transition and other one-time costs related to the business
transformation plan are eliminated. These savings will be partially offset by
increased compensation for certain U.S. retail employees and the hiring of new
employees with special skills at higher compensation levels. Savings in both
2002 and 2001 in the U.S. were substantially offset by lower revenues and
transition costs related in part to longer than expected duplicate processing.
- 15 -
CONSOLIDATED RESULTS
- --------------------
Total revenue increased $277 million or 15% when compared to first quarter 2001.
Excluding the effect of foreign exchange rates, revenues rose 18% over first
quarter 2001, attributable principally to growth in brokerage commissions and
fees and an increase in reported investment income. Investment income improved
year over year due to a one-time tax related item of $48 million, a positive
valuation change in limited partnerships in 2002 versus reduced valuations last
year, and lower impairment writedowns this year. Consolidated revenue for the
operating segments grew approximately 14% on an organic basis over last year.
Brokerage commissions and fees increased $163 million or 13% in first quarter
2002. This improvement was primarily from organic growth, including the impact
of increased premium rates, increased new business, and 2001 business
combination activity, especially ASI Solutions Incorporated (ASI) and First
Extended, Inc.
Premiums and other is primarily related to insurance underwriting operations.
Premiums and other improved $27 million over first quarter 2001. In the first
quarter, growth in the accident and health lines and new specialty property and
casualty lines was somewhat offset by the impact of the prior loss of some
accounts in the warranty business.
Investment income, which includes related expenses and income or loss on
disposals and impairments, increased significantly in the first quarter 2002
when compared to prior year, of which $48 million of the increase was due to a
tax related settlement. In December 2001, Aon sold the vast majority of its
limited partnership (LP) portfolio. The remaining LP's posted a positive change
in valuation versus reduced valuations in 2001. Also, impairment writedowns for
certain directly owned equity investments were $21 million less than last year.
These improvements were somewhat offset by lower returns due to reductions in
short-term interest rates from 2001. Investment income from Insurance Brokerage
and Other Services and Consulting segments, primarily relating to fiduciary
funds, decreased $26 million in first quarter 2002 compared to 2001, primarily
as a result of declines in rates.
Total expenses increased $144 million or 8% over first quarter 2001. Expenses in
2002 include $5 million of costs related to the spin-off of Combined Specialty,
as well as an unusual charge of $90 million, to establish an allowance for a
potentially uncollectible receivable related to a dispute with reinsurers over
claims related to the World Trade Center. In 2001, $72 million of special
charges were recognized for the business transformation plan. Total expenses,
excluding these charges, rose 7%. General expenses increased $67 million or 5%
in the quarter reflecting growth of the businesses and higher costs in the U.S.
retail brokerage business. Benefits to policyholders rose $22 million or 8%.
Interest expense declined $7 million or 19%, driven by lower short-term interest
rates. Amortization of intangible assets declined $28 million as goodwill was
not amortized in 2002, in accordance with FAS 142 (see notes 1 and 7).
As a result of these factors, income before income tax improved significantly
from $48 million in 2001 to $181 million in 2002.
First quarter 2002 net income rose to $104 million ($0.37 per dilutive share)
compared to $19 million ($0.07 per dilutive share) in 2001. Basic net income per
share was $0.38 and $0.07 in first quarter 2002 and 2001, respectively.
Dividends on the redeemable preferred stock have been deducted from net income
to compute income per share. The exclusion of goodwill amortization in 2002
contributed to Aon's effective tax rate declining to 37% in the first quarter
2002 from 39% in 2001.
- 16 -
OPERATING SEGMENTS
- ------------------
INSURANCE BROKERAGE AND OTHER SERVICES
- --------------------------------------
The Insurance Brokerage and Other Services segment consists principally of Aon's
retail, reinsurance and wholesale brokerage operations as well as related
insurance services, including claims services, underwriting management, captive
insurance company management services and premium financing. This segment
represented 59% of Aon's total revenues for the first quarter of 2002.
First quarter 2002 Insurance Brokerage and Other Services revenue was $1.2
billion, up 10% over last year. Excluding foreign exchange, revenues rose 12%.
Organic revenue growth was 13% in the quarter, up from 8% in fourth quarter
2001. Claims services, domestic, international and wholesale brokerage all
posted solid revenue gains for the quarter. Reported revenues were impacted by a
decline in investment income of $25 million due to a drop in interest rates. In
addition, the managing underwriting business experienced a temporary decline in
revenue due to a required change in an insurance carrier relationship that is
expected to be corrected during the second quarter.
U.S. revenue of $592 million for the quarter was up 9% from 2001, despite a fall
off of investment income due to lower interest rates. The increase reflects
fundamental growth, improved pricing and the impact of acquisitions, all of
which more than offset the direct and indirect impact of the business
transformation plan on the U.S. retail operation and the World Trade Center
disaster. International, reinsurance and wholesale brokerage performed well.
U.S. retail's new to lost business ratio improved over the fourth quarter 2001
in certain U.S. retail brokerage units as operational changes were implemented
to achieve long-term benefits of the business transformation plan. Commercial
property and casualty premium rate increases were evident for most lines of
coverage and client demand for risk retention programs and services has risen
along with the upward trend in premium rates. U. K. and Continent of Europe
revenues of $490 million for the first quarter increased 10% from 2001,
primarily due to organic growth driven by higher insurance premium rates and new
business. The reported revenue growth was unfavorably impacted by the effect of
foreign exchange rates. Rest of world revenue increased $19 million or 15% over
first quarter 2001 reflecting solid organic growth resulting from new business,
good renewal rates and the positive impact of hardening insurance markets.
Pretax income was $187 million for the first quarter 2002. Excluding special
charges last year pertaining to the business transformation plan, pretax income
fell 5% from 2001. Pretax margins, excluding the special charges, were 15.2% in
the quarter compared to 17.5% in 2001. The margin decline was principally driven
by the significant decrease in investment income from last year. In addition,
higher costs in certain parts of the U.S. retail business, due to delays in the
business transformation process, including expense to run parallel systems
longer than expected, along with increased compensation costs, including higher
pension costs, contributed to the margin decline. These items more than offset
strong organic growth and business transformation savings.
CONSULTING
- ----------
The consulting segment provides a full range of human capital management
services. These services are delivered to a predominately corporate clientele
utilizing five practices: employee benefits, compensation, management
consulting, outsourcing and communications. This segment accounted for 11% of
Aon's total revenues for the first quarter 2002.
- 17 -
First quarter 2002 revenue increased 10% to $233 million. Excluding the foreign
exchange rate impact, revenues grew 11%. For the first quarter 2002, revenue
grew 4% on an organic basis reflecting slower economic conditions. On a global
basis, the improvement in revenue was influenced by acquisition activity,
especially the inclusion of ASI, acquired in the second quarter 2001, as well as
organic growth. Client demand for solutions that enhance workforce productivity
continued. However, the worsening economy has put some pressure on organic
revenue growth.
For the quarter, U.S. revenue of $149 million was up 10% from 2001. The
improvement primarily reflects the impact of the ASI acquisition. U.K. and
Continent of Europe revenue rose $6 million for the quarter compared to 2001.
Organic revenue growth and acquisitions were somewhat offset by unfavorable
foreign exchange rates. Rest of World revenue rose $1 million from 2001 to $20
million.
Pretax income was $27 million for the quarter, a 13% increase over last year.
Excluding 2001 special charges, pretax income improved 8% over 2001. Pretax
margins in this segment, excluding the special charges, were 11.6% in the
quarter compared to 11.8% in 2001. Margin comparisons were positively influenced
during the quarter by strong results in the U.S. employee benefits business but
were pressured by the effects of a weak economy.
INSURANCE UNDERWRITING
- ----------------------
The Insurance Underwriting segment provides supplemental accident and health and
life insurance coverage through several distribution networks, most of which are
directly owned by Aon's subsidiaries, and specialty property and casualty
insurance, including extended warranty products. This segment represented 28% of
Aon's total revenues for the first quarter 2002.
Revenue was $578 million in the first quarter 2002, an increase of 2% from 2001.
Excluding the impact of exchange rates, revenues rose 5% for the quarter.
Improvement over last year reflects the impact of organic growth and
acquisitions. Organic revenue growth, based on written premiums, was 18% for the
quarter, due in part to new specialty property and casualty and accident and
health insurance business. Partially offsetting core business growth was the
prior loss of several accounts in the extended warranty business, as well as
lower investment income.
U.S. revenue increased $6 million in the first quarter 2002 to $412 million.
Higher revenues reflect new product initiatives and increased revenues for
accident and health products, which more than offset a decline in electronic
warranty products. U.K. and Continent of Europe revenue of $112 million
increased 4% during the quarter due to increased electronic warranty business.
Rest of World revenue was $54 million for the first quarter, up $1 million from
2001.
The pretax loss was $26 million for the quarter. Excluding this quarter's
establishment of a $90 million allowance for a potentially uncollectible
receivable related to a dispute with reinsurers over claims related to the World
Trade Center and spin-off related expenses of $5 million, and 2001's special
charge, pretax income rose 1% over last year. Before unusual and special
charges, pretax margins in this segment were 11.9% in the quarter compared to
12.0% in 2001. A decline in investment income, due mainly to lower interest
rates, affected margin comparisons in the quarter. New underwriting initiatives
drove premium growth but also resulted in increased benefits to policyholders,
which offset an unusual increase in warranty claims during the first quarter
2001 related to an isolated program that did not affect subsequent quarters.
- 18 -
NON-OPERATING SEGMENT
- ---------------------
CORPORATE AND OTHER
- -------------------
Revenue in this category consists primarily of investment income (including
income or loss on disposals, including 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 and Other expenses encompass general
expenses, which include administrative and certain information technology costs,
interest expense and, in 2001, goodwill amortization.
Corporate and Other revenue for the first quarter 2002 was $45 million, versus a
negative $85 million in the first quarter 2001. In December 2001, Aon sold the
vast majority of its limited partnership (LP) portfolio to a special purpose
entity (PEPS I). The remaining LP's provided a positive change in valuation
versus reduced valuations in 2001. Also in 2002, Aon recognized $48 million of
interest income due to settlement of a prior year tax related issue. The
year-to-year comparison is also impacted by lower write-downs of certain
directly-owned equity investments compared to first quarter 2001.
Corporate and Other expenses for the quarter were $52 million, down $32 million
from the same period last year. Goodwill amortization was $29 million for the
first quarter 2001. In accordance with Statement No. 142, which Aon adopted on
January 1, 2002, Aon will no longer amortize goodwill. However, it will test
annually for impairments. Interest expense declined $7 million for the quarter,
reflecting lower interest rates. General expenses rose $4 million over first
quarter 2001 due in part to expenses to establish new management personnel for
Combined Specialty.
The revenue and expense comparisons discussed above contributed to the overall
Corporate and Other pretax loss of $7 million in the quarter versus a loss of
$169 million last year.
- 19 -
CASH FLOW AND FINANCIAL POSITION
AT THE END OF FIRST QUARTER 2002
Cash flows from operating activities represent the net income earned by Aon in
the reported periods adjusted for non-cash charges as well as changes in assets
and liabilities. Cash flows provided by operating activities for the first three
months 2002 were $191 million, a $141 million decrease over the same period in
2001. Other receivables and liabilities decreased $109 million during the year,
driven by incentive compensation payments of $42 million and a tax related
refund receivable of $48 million. The year-over-year difference in valuation
changes on investments, income on disposals and impairments represents lower
valuations on the company's LP portfolio and higher impairment loss on
investments that occurred in 2001. These items were somewhat offset by higher
net income and the timing of income tax payments and refunds.
Investing activities used cash of $5 million, versus cash usage of $186 million
in 2001. The net purchase of investments used cash of $251 million during the
first three months of 2002. This was offset by the net sale of short-term
investments of $337 million. In 2001, purchases of short-term investments used
$180 million, while net sales of investments generated cash of $99 million.
Cash of $55 million was used during the first three months of 2002 for financing
activities, which was $321 million less than was utilized in 2001. The lower
usage of cash from last year is primarily due to a smaller decrease in the
amount of short-term debt paid down, coupled with a larger increase in long-term
debt issued. In 2001, a significant amount of U.S. commercial paper was repaid,
in part due to utilizing cash from a dividend received from one of Aon's
insurance company subsidiaries.
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. 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.
Upon the completion of the spin-off of Combined Specialty, the "new" Aon and
Combined Specialty Boards of Directors will each determine their own post-spin
dividend policy based on consideration of earnings, cash flow, capital needed to
support growth, regulatory requirements and other factors. Aon's management has
recommended that the quarterly cash dividend for "new" Aon be $0.15 per share.
Combined Specialty plans to reinvest a significant portion of its cash flows in
order to accelerate earnings growth and improve total returns on capital. As
such, the proposed quarterly dividend rate for Combined Specialty is expected to
be $0.11 per share, based upon the post-distribution share allocation.
Aon intends to distribute in the spin-off one share of Combined Specialty common
stock for every three shares of Aon common stock. Accordingly, it is expected
that Aon stockholders who continue to hold their shares of Combined Specialty
stock will initially receive total quarterly cash dividends with respect to each
of their shares of Aon stock, taken together with the dividends on the Combined
Specialty stock distributed in respect of that share, of approximately $0.186,
compared with Aon's most recent quarterly dividend of $0.225 per share.
- 20 -
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 $2.4 billion, Aon's total fixed
maturity portfolio is invested primarily in investment grade holdings (95%) and
has a fair value that is 98% of amortized cost at March 31, 2002.
Total assets increased $724 million to $23.1 billion since year-end 2001.
Invested assets at March 31, 2002 decreased $151 million from year-end levels
due in part to lower guaranteed investment contracts and unrealized losses. The
amortized cost and fair value of less than investment grade fixed maturity
investments at March 31, 2002 were $123 million and $115 million, respectively.
The carrying value of non-income producing investments in Aon's portfolio at
March 31, 2002 was $25 million, or 0.4% of total invested assets.
Short-term borrowings decreased at the end of first quarter 2002 by $45 million
when compared to year-end 2001 due to lower international borrowings. At the end
of first quarter 2002, notes payable increased by $96 million when compared to
year-end 2001. The increase was due to higher U.S. commercial paper borrowings
of $183 million partially offset by the repayment of foreign debt of $86
million. Commercial paper borrowings have been included in notes payable based
on Aon's intent and ability to maintain or refinance these obligations on a
long-term basis through 2005.
Stockholders' equity increased $8 million during the first three months of 2002,
reflecting an increase in net income before preferred dividends of $104 million.
Partially offsetting the increase were dividends paid to stockholders of $62
million. Unrealized investment gains and losses and foreign exchange gains and
losses fluctuations from period to period are largely based on market
conditions.
At March 31, 2002, stockholders' equity per share was $12.97, down from $13.03
at December 31, 2001 as the slightly higher equity balance was more than offset
by the increased number of shares outstanding since year-end.
REVIEW BY INDEPENDENT AUDITORS
- ------------------------------
The condensed consolidated financial statements at March 31, 2002, and for the
three months then ended have been reviewed, prior to filing, by Ernst & Young
LLP, Aon's independent auditors, and their report is included herein.
- 21 -
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, 2002, and the related condensed
consolidated statements of income and cash flows for the three-month periods
ended March 31, 2002 and 2001. 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, 2001, 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 12, 2002, 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, 2001, 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
April 29, 2002
- 22 -
PART II
-------
OTHER INFORMATION
-----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Registrant was held on
April 19, 2002 (the "2002 Annual Meeting").
(b) Not applicable.
(c)(i) Name For Against
---- --- -------
Edgar D. Jannotta 242,634,156 3,176,884
Lester B. Knight 243,758,835 2,052,205
Perry J. Lewis 242,694,240 3,116,800
R. Eden Martin 242,690,666 3,120,374
Andrew J. McKenna 242,659,963 3,151,077
Robert S. Morrison 243,751,788 2,059,252
Richard C. Notebaert 243,734,656 2,076,384
Michael D. O'Halleran 243,352,771 2,458,269
John W. Rogers, Jr. 242,700,482 3,110,558
Patrick G. Ryan 243,756,180 2,054,860
Patrick G. Ryan, Jr. 241,426,894 4,384,146
George A. Schaefer 242,669,800 3,141,240
Raymond I. Skilling 243,715,937 2,095,103
Carolyn Y. Woo 242,691,926 3,119,114
(ii) Set forth below is the tabulation of the vote on the selection
of Ernst & Young LLP as auditors for the Registrant for the
2002 fiscal year.
For Against Abstain
--- ------- -------
239,220,162 5,578,198 1,012,680
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits filed with this report are listed on the
--------
attached Exhibit Index.
(b) Reports on Form 8-K - No Current Reports on Form 8-K were filed for
-------------------
the quarter ended March 31, 2002.
- 23 -
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 2, 2002 /s/ Harvey N. Medvin
--------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer)
- 24 -
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
- 25 -
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) 2002 2001 2001 2000 1999 1998 1997
--------- --------- --------- ---------- ---------- ---------- ----------
Income before provision for income taxes
and minority interest (1) $ 181 $ 48 $ 399 $ 854 $ 635 $ 931 $ 542
ADD BACK FIXED CHARGES:
Interest on indebtedness 29 36 127 140 105 87 70
Interest on ESOP - - - - 1 2 3
Portion of rents representative of interest factor 15 14 57 54 49 51 44
--------- --------- --------- ---------- ---------- ---------- ----------
INCOME AS ADJUSTED $ 225 $ 98 $ 583 $1,048 $ 790 $1,071 $ 659
========= ========= ========= ========== ========== ========== ==========
FIXED CHARGES:
Interest on indebtedness $ 29 $ 36 $ 127 $ 140 $ 105 $ 87 $ 70
Interest on ESOP - - - - 1 2 3
Portion of rents representative of interest factor 15 14 57 54 49 51 44
--------- --------- --------- ---------- ---------- ---------- ----------
TOTAL FIXED CHARGES $ 44 $ 50 $ 184 $ 194 $ 155 $ 140 $ 117
========= ========= ========= ========== ========== ========== ==========
RATIO OF EARNINGS TO FIXED CHARGES 5.1 2.0 3.2 5.4 5.1 7.6 5.6
========= ========= ========= ========== ========== ========== ==========
<FN>
(1) Income before provision from income taxes and minority interest includes an
unusual charge of $90 million established as an allowance for a potentially
uncollectible receivable related to a dispute with reinsurers over claims
related to the World Trade Center, as well as a special charge of $5
million pertaining to the spin-off of Combined Specialty Group, Inc., for
the three months ended March 31, 2002, and $72 million related to the
business transformation plan for the three months ended March 31, 2001,
respectively.
Income before provision for income taxes and minority interest includes
unusual charges of $68 million related to the World Trade Center attacks
for the year ended December 31, 2001 and special charges of $218 million,
$82 million, $313 million, and $172 million for the years ended December
31, 2001, 2000, 1999, and 1997, 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) 2002 2001 2001 2000 1999 1998 1997
--------- ---------- ---------- --------- ---------- --------- ---------
Income before provision for income taxes
and minority interest (1) $ 181 $ 48 $ 399 $ 854 $ 635 $ 931 $ 542
ADD BACK FIXED CHARGES:
Interest on indebtedness 29 36 127 140 105 87 70
Interest on ESOP - - - - 1 2 3
Portion of rents representative of interest factor 15 14 57 54 49 51 44
--------- ---------- ---------- --------- ---------- --------- ---------
INCOME AS ADJUSTED $ 225 $ 98 $ 583 $1,048 $ 790 $1,071 $ 659
========= ========== ========== ========= ========== ========= =========
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS:
Interest on indebtedness $ 29 $ 36 $ 127 $ 140 $ 105 $ 87 $ 70
Preferred stock dividends 17 17 70 70 70 70 82
--------- ---------- ---------- --------- ---------- --------- ---------
INTEREST AND DIVIDENDS 46 53 197 210 175 157 152
Interest on ESOP - - - - 1 2 3
Portion of rents representative of interest factor 15 14 57 54 49 51 44
--------- ---------- ---------- --------- ---------- --------- ---------
TOTAL FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS $ 61 $ 67 $ 254 $ 264 $ 225 $ 210 $ 199
========= ========== ========== ========= ========== ========= =========
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS (2) 3.7 1.5 2.3 4.0 3.5 5.1 3.3
========= ========== ========== ========= ========== ========= =========
<FN>
(1) Income before provision from income taxes and minority interest includes an
unusual charge of $90 million established as an allowance for a potentially
uncollectible receivable related to a dispute with reinsurers over claims
related to the World Trade Center, as well as a special charge of $5
million pertaining to the spin-off of Combined Specialty Group, Inc., for
the three months ended March 31, 2002, and $72 million related to the
business transformation plan for the three months ended March 31, 2001,
respectively.
Income before provision for income taxes and minority interest includes
unusual charges of $68 million related to the World Trade Center attacks
for the year ended December 31, 2001 and special charges of $218 million,
$82 million, $313 million, and $172 million for the years ended December
31, 2001, 2000, 1999, and 1997, respectively.
(2) Included in total fixed charges and preferred stock dividends are $16
million for the three months ended March 31, 2002 and 2001, $66 million for
the years ended December 31, 2001, 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
April 29, 2002 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, 2002:
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.
S-3 333-65624 Pertaining to the registration of
2,000,000 shares of common stock
S-3 333-74364 Pertaining to the registration of debt
securities, preferred stock, common
stock, share purchase contracts, and
share purchase units
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
April 29, 2002