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, 1998
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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Number of shares of common stock outstanding:
No. Outstanding
Class as of 3-31-98
----- -------------
$1.00 par value Common 168,651,179
Part 1
Financial Information
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
(millions) As of As of
March 31, March 31,
1998 1997
---------- ----------
ASSESTS (Unaudited)
Investments
Fixed maturities at fair value $ 3,044.5 $ 3,143.6
Equity securities at fair value 714.8 806.3
Short-term investments 2,075.0 1,697.7
Other investments 282.8 274.5
---------- ----------
Total investments 6,117.1 5,922.1
Cash 1,010.0 1,084.7
Receivables
Insurance brokerage and consulting
services 5,292.0 5,320.5
Premiums and other 993.5 862.6
Accrued investment income 68.8 66.8
---------- ----------
Total receivables 6,354.3 6,249.9
Intangible assets 3,141.9 3,094.5
Other assets 2,251.5 2,340.0
---------- ----------
Total Assets $ 18,874.8 $ 18,691.2
========== ==========
LIABILITIES AND EQUITY
Policy Liabilities
Future policy benefits $ 948.3 $ 942.6
Policy and contract claims 790.1 809.4
Unearned and advance premiums 1,853.8 1,869.7
Other policyholder funds 1,011.1 828.1
---------- ----------
Total policy liabilities 4,603.3 4,449.8
General Liabilities
Insurance premiums payable 6,538.1 6,379.8
Commissions and general expenses 1,382.3 1,488.8
Short-term borrowings 675.6 764.2
Notes payable 618.3 637.1
Other liabilities 1,323.5 1,299.4
---------- ----------
Total Liabilities 15,141.1 15,019.1
Commitments and Contingent Liabilities
Redeemable Preferred Stock 50.0 50.0
Company-obligated Mandatorily Redeemable
Preferred Capital Securities of Subsidiary
Trust holding solely the Company's Junior
Subordinated Debentures 800.0 800.0
Stockholders' Equity
Common stock - $1 par value 171.5 171.5
Paid-in additional capital 393.8 377.0
Net unrealized investment gains 182.4 189.0
Net foreign exchange losses (83.3) (85.6)
Retained earnings 2,506.9 2,463.4
Less - Treasury stock at cost (77.0) (93.2)
Deferred compensation (210.6) (200.0)
---------- ----------
Total Stockholders' Equity 2,883.7 2,822.1
---------- ----------
Total Liabilities and Equity $ 18,874.8 $ 18,691.2
========== ==========
See the accompanying notes to the condensed consolidated financial statements.
- 2 -
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
First Quarter Ended
----------------------------
March 31, March 31,
(millions except per share data) 1998 1997
------------ ------------
REVENUE
Brokerage commissions and fees .............................................. $ 996.2 $ 841.7
Premiums and other .......................................................... 416.8 394.4
Investment income ........................................................... 148.5 118.2
------------ ------------
Total revenue ............................................................ 1,561.5 1,354.3
------------ ------------
EXPENSES
General expenses ............................................................ 1,048.2 943.0
Benefits to policyholders ................................................... 225.9 205.2
Interest expense ............................................................ 20.1 14.6
Amortization of intangible assets ........................................... 29.5 31.3
Special charges ............................................................. -- 145.0
------------ ------------
Total expenses ........................................................... 1,323.7 1,339.1
------------ ------------
INCOME BEFORE INCOME TAX AND MINORITY INTEREST ................................. 237.8 15.2
Provision for income tax .................................................... 89.2 5.7
------------ ------------
INCOME BEFORE MINORITY INTEREST ................................................ 148.6 9.5
Minority interest - 8.205% mandatorily redeemable preferred capital securities (10.3) (8.8)
------------ ------------
NET INCOME ..................................................................... $ 138.3 $ 0.7
============ ============
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCKHOLDERS ............................ $ 137.7 $ (2.7)
============ ============
NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share ........................................... $ 0.82 $ (0.02)
============ ============
Dilutive net income (loss) per share ........................................ $ 0.80 $ (0.02)
============ ============
CASH DIVIDENDS PAID ON COMMON STOCK ............................................ $ 0.26 $ 0.24
============ ============
Average common and common equivalent shares outstanding ...................... 171.4 167.1
------------ ------------
<FN>
See the accompanying notes to the condensed consolidated financial statements.
</FN>
- 3 -
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
First Quarter Ended
--------------------------------
March 31, March 31,
(millions) 1998 1997
--------------- --------------
CASH PROVIDED BY OPERATING ACTIVITIES ................................... $ 256.2 $ 307.8
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of investments
Short-term - net ............................................... -- 92.2
Fixed maturities
Maturities ............................................... 27.2 20.6
Calls and prepayments .................................... 17.5 17.1
Sales .................................................... 1,310.3 395.7
Equity securities .............................................. 1,100.8 348.1
Other investments .............................................. 33.0 1.6
Purchase of investments
Short-term - net ............................................... (430.7) --
Fixed maturities ............................................... (1,233.1) (400.9)
Equity securities .............................................. (1,011.3) (185.0)
Other investments .............................................. (39.8) (13.7)
Acquisition of subsidiaries ............................................ (96.1) (1,289.8)
Acquired fiduciary funds from acquisitions ............................. -- 734.0
Property and equipment and other ....................................... (42.7) (28.6)
------------ ------------
CASH USED BY INVESTING ACTIVITIES ........................ (364.9) (308.7)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock transactions - net .................................... 12.3 10.9
Issuance (repayment) of short-term borrowings - net .................. (88.7) 124.0
Issuance of mandatorily redeemable preferred capital securities ...... -- 800.0
Repayment of long-term debt .......................................... (19.0) (51.1)
Interest sensitive life, annuity and investment contracts
Deposits ....................................................... 186.5 37.0
Withdrawals .................................................... (18.1) --
Cash dividends to stockholders ....................................... (44.0) (42.4)
------------ ------------
Cash Provided by Financing Activities .................... 29.0 878.4
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................. 5.0 (18.0)
INCREASE (DECREASE) IN CASH ............................................. (74.7) 859.5
CASH AT BEGINNING OF PERIOD ............................................. 1,084.7 410.1
------------ ------------
CASH AT END OF PERIOD ................................................... $ 1,010.0 $ 1,269.6
------------ ------------
<FN>
See the accompanying notes to condensed consolidated financial statements.
</FN>
- 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 generally accepted accounting principles and are unaudited but
include all normal recurring adjustments which the Registrant ("Aon")
considers necessary for a fair presentation of the results for such
periods. These interim figures are not necessarily indicative of
results for a full year as further discussed below.
Refer to the consolidated financial statements and notes in the Annual
Report to Stockholders for the year ended December 31, 1997 for
additional details of Aon's financial position, as well as a
description of the accounting policies which have been continued
without material change. The details included in the notes have not
changed except as a result of normal transactions in the interim and
the events mentioned in the footnotes below.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. Statements of Financial Accounting Standards (SFAS)
---------------------------------------------------
Comprehensive Income
--------------------
As of January 1, 1998, Aon adopted the interim reporting requirements
of Financial Accounting Standards Board (FASB) Statement No. 130
(Reporting Comprehensive Income) as presented below. Statement No. 130
establishes new rules for the reporting and display of comprehensive
income and its components; however the adoption of this Statement
had no impact on Aon's net income or stockholders' equity. Statement
No. 130 requires net unrealized investment gains or losses on Aon's
available-for-sale securities and net foreign exchange gains or losses,
which currently are reported in stockholders' equity, to be included
in accumulated other comprehensive income and the disclosure of
comprehensive income. When Aon adopts the fiscal year end reporting
requirements of Statement No. 130 in its December 31, 1998 financial
statements, the totals of other comprehensive income items and
comprehensive income (which includes net income), will be displayed
separately and prior year financial statements will be reclassified
to conform to the requirements of Statement No. 130.
The components of comprehensive income or loss, net of related tax, for
the first quarter ended March 31, 1998 and 1997 are as follows:
(millions) 1998 1997
---- ----
Net income $ 138.3 $ 0.7
Net unrealized investment losses (6.6) (34.1)
Net foreign exchange gains (losses) 2.3 (35.6)
=================== ==================
Comprehensive income (loss) $ 134.0 $ (69.0)
=================== ==================
- 5 -
The components of accumulated other comprehensive income, net of
related tax, at March 31, 1998 and December 31, 1997, are as follows:
(millions) 1998 1997
---- ----
Net unrealized investment gains $ 182.4 $ 189.0
Net foreign exchange losses (83.3) (85.6)
==================== ===================
Accumulated other comprehensive income $ 99.1 $ 103.4
==================== ===================
Segments Disclosure
-------------------
In 1997, the FASB issued Statement No. 131 (Disclosures about Segments
of an Enterprise and Related Information). Statement No. 131
establishes standards for providing disclosures related to products and
services, geographic areas, and major customers. Aon will adopt this
statement in its fourth quarter 1998 financial statements as required.
Implementation of this statement is not expected to have a material
effect on Aon's financial statements.
3. Capital Stock
-------------
In first quarter 1998, Aon reissued 436,500 shares of common stock from
treasury for employee benefit plans. Aon purchased 18,200 shares of its
common stock at a total cost of $1.1 million during first quarter 1998.
In addition, Aon reissued 210,900 shares of common stock from treasury
in connection with business combinations. There were 2.9 million shares
of common stock held in treasury at March 31, 1998.
4. 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.
5. Business Combinations
---------------------
In first quarter 1998, operating results were impacted by the insurance
brokerage acquisition of Gil y Carvajal. Gil y Carvajal is the largest
retail and reinsurance broker in Spain. This acquisition was accounted
for by the purchase method. The effect of the acquisition was not
material to Aon's consolidated financial statements.
In April 1998, Aon acquired LeBlanc de Nicolay (the largest reinsurance
broker in France), subject to regulatory approval. This acquisition
will be accounted for by the purchase method and its effect is not
anticipated to be material to Aon's consolidated financial statements.
- 6 -
6. Earnings Per Share
------------------
Earnings per share is computed in accordance with FASB Statement No.
128 (Earnings Per Share) and is calculated as follows:
First Quarter Ended
-------------------------------------------------
(millions except per share data) March 31, 1998 March 31, 1997
---------------------------------------------------------------------------------------------
Net income $ 138.3 $ 0.7
8% preferred stock dividends - 2.8
Redeemable preferred stock dividends 0.6 0.6
=============== ===============
Net income (loss) for dilutive and basic $ 137.7 $ (2.7)
=============== ===============
Basic shares outstanding 168.7 167.1
Common stock equivalents 2.7 -
------------------------------------------------
Dilutive potential common shares 171.4 167.1
---------------------------------------------------------------------------------------------
Basic earnings per share $0.82 ($0.02)
Dilutive earnings per share $0.80 ($0.02)
---------------------------------------------------------------------------------------------
7. Alexander & Alexander Services Inc. (A&A) Discontinued Operations
-----------------------------------------------------------------
A&A discontinued its insurance underwriting operations in 1985, some of
which were then placed into run-off, the remainder sold in 1987. In
connection with those sales, A&A provided indemnities to the purchaser
for various estimated and potential liabilities, including provisions
to cover future losses attributable to insurance pooling arrangements,
a stop-loss reinsurance agreement, and actions or omissions by various
underwriting agencies previously managed by an A&A subsidiary. As of
March 31, 1998, the liabilities associated with the foregoing
indemnities and liabilities of insurance underwriting subsidiaries that
are currently in run-off were included in other liabilities in the
accompanying condensed consolidated statement of financial position and
amount to $152 million. Such liabilities are net of reinsurance
recoverables and other assets of $176 million.
8. Contingencies
-------------
Aon and its subsidiaries are subject to numerous claims and lawsuits
that arise in the ordinary course of business. Some of these cases are
being litigated in jurisdictions which have judicial precedents and
evidentiary rules which are generally believed to favor individual
plaintiffs against corporate defendants. The damages that may be
claimed in these and other jurisdictions are substantial, including in
many instances claims for punitive or extraordinary damages. Accruals
for these lawsuits have been provided to the extent that losses are
deemed probable and are estimable.
- 7 -
At the time of Aon's acquisition of A&A in January 1997, A&A was facing
various legal claims, several of which remain ongoing. While the
possibility of substantial exposure remains, based on current facts and
circumstances, Aon believes the possibility of material loss resulting
from these exposures is remote.
Although the ultimate outcome of these suits cannot be ascertained and
liabilities in indeterminate amounts may be imposed on Aon or its
subsidiaries, on the basis of present information, availability of
insurance coverages and advice received from counsel, it is the opinion
of management that the disposition or ultimate determination of such
claims and lawsuits will not have a material adverse effect on the
consolidated financial position of Aon.
- 8 -
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR FIRST QUARTER 1998
CONSOLIDATED RESULTS
- - - - - - - - - - - - - - - - - --------------------
GENERAL
- - - - - - - - - - - - - - - - - -------
Certain amounts in the prior years' condensed consolidated financial statements
have been reclassified to conform to the 1998 presentation.
Brokerage commissions and fees increased $154.5 million or 18.4% in first
quarter 1998, primarily reflecting business combination activity related to the
acquisitions of Gil y Carvajal in first quarter 1998, Jauch & Hubener in fourth
quarter 1997 and, to a lesser extent, Minet and certain other 1997 brokerage
acquisitions.
Premiums and other is primarily related to insurance underwriting operations.
Premiums and other increased $22.4 million or 5.7% in first quarter compared
with the same period last year. Extended warranty premiums earned increased
$28.7 million or 24.4% in the quarter reflecting continued growth, primarily in
the appliance and electronic lines. There was modest growth in direct sales
business as a result of changes in the consumer insurance market. The runoff of
North American auto credit business partially offset this growth in premiums
earned.
Investment income, which includes related expenses and realized investment
gains, increased $30.3 million or 25.6% in the first quarter 1998 when compared
to prior year. Investment income growth was primarily related to income received
on private equity and other investment holdings. Investment income from
insurance brokerage and consulting operations, primarily relating to fiduciary
funds, increased to $44 million in first quarter 1998 from $39 million in 1997,
due to brokerage acquisition activity and internal growth.
Total revenue increased $207.2 million or 15.3% in the first quarter 1998,
primarily attributable to brokerage acquisition activity and to income received
on private equity and other investment holdings.
Benefits to policyholders increased 10.1% or $20.7 million in first quarter
1998, reflecting a higher volume of new extended warranty business. This growth
was partially offset by the run-off of auto credit business as planned.
In first quarter 1997, Aon reported special charges of $145 million ($90.6
million after-tax) related to the restructuring of Aon's brokerage operations as
a result of the acquisition of Alexander & Alexander Services Inc. (A&A). The
special charges included costs related to severance and other costs and the
consolidation of real estate space. The 1997 special charges were reflected as a
separate component of total expenses in the condensed consolidated statements of
operations.
Total expenses decreased $15.4 million or 1.2% in first quarter 1998 when
compared to prior year. The decrease reflects the inclusion of 1997 pretax
special charges. In first quarter 1998, restructuring liabilities related to
1997 special charges have been reduced as planned, and reflect payments on those
special charges and valuation adjustments related to recent acquisitions. Total
expenses, excluding the 1997 special charges, increased 10.9% for the first
quarter 1998. Income before income tax increased $222.6 million or over
- 9 -
500% in first quarter 1998, when compared to prior year, primarily due to the
inclusion of special charges in first quarter 1997. Excluding special charges,
income before income tax increased 48.4% when compared to first quarter 1997,
largely due to growth in the insurance brokerage and consulting services
segment and to the achievement of cost savings resulting from the consolidation
of brokerage operations.
MAJOR LINES OF BUSINESS
- - - - - - - - - - - - - - - - - -----------------------
GENERAL
- - - - - - - - - - - - - - - - - -------
For purposes of the following line of business discussions, comparisons against
last year's results exclude special charges. Management anticipates that the
full benefit of cost savings on brokerage operations will continue to be
achieved throughout the remainder of 1998. In addition, references to income
before income tax exclude minority interest related to the capital securities.
INSURANCE BROKERAGE AND CONSULTING SERVICES
- - - - - - - - - - - - - - - - - -------------------------------------------
First quarter 1998 revenue and income before income tax have been impacted by
the acquisition of Gil y Carvajal in first quarter 1998, and the acquisitions of
Jauch & Hubener, Minet and certain other brokerage acquisitions in third and
fourth quarter 1997.
Insurance and other services (retail, reinsurance and wholesale brokerage)
revenue increased $138.5 million or 18.4% in the first quarter 1998 when
compared with the same period last year, largely due to acquisition activity.
Insurance and other services continued to reflect highly competitive property
and casualty pricing in the domestic market.
Consulting provides a full range of employee benefits and compensation
consulting, specialized employee assessment and training programs, and
administrative services. This business showed revenue growth of $21 million or
16.3% for the first quarter 1998 when compared to prior year, primarily due to
post-first quarter 1997 acquisitions and, to a lesser extent, expanding
integrated human resources consulting programs.
Overall, revenue for the insurance brokerage and consulting services segment
increased $159.5 million or 18.1% in the first quarter 1998. Acquisitions made
in 1998 and post-first quarter 1997 accounted for a majority of the above
mentioned revenue growth in the quarter. Excluding the impact of acquisitions,
revenue related to brokerage core businesses grew approximately 4% in a very
competitive environment. Income before income tax increased $74.7 million or
68.8% when compared to first quarter 1997. The brokerage segment continues to be
impacted by a soft property and casualty market, particularly in the reinsurance
brokerage business. Pretax margins in this segment improved for the quarter
reflecting cost savings resulting from the consolidation of businesses acquired
in 1997.
U.S./INTERNATIONAL RESULTS
- - - - - - - - - - - - - - - - - --------------------------
First quarter international insurance brokerage and consulting services revenue
represents 52% of the worldwide total, and international income before income
tax represents 71% of the worldwide total. International brokerage revenue of
$539.8 million increased 24.2% for the first quarter, primarily reflecting the
- 10 -
acquisition of Jauch & Hubener in late 1997 and post-first quarter 1997
acquisitions. International brokerage income before income tax increased 69.8%
for the first quarter reflecting the above mentioned acquisition activity.
International brokerage revenues for retail brokerage services generally are
strongest during the first quarter of the year, particularly for continental
Europe, while expenses are incurred on a more even basis throughout the year.
INSURANCE UNDERWRITING
- - - - - - - - - - - - - - - - - ----------------------
The insurance underwriting line of business primarily provides direct sales life
and accident and health products, and extended warranty products to individuals.
Revenue increased $29.6 million or 6.6% for the first quarter 1998 when compared
to prior year, primarily due to growth in the U.S. extended warranty lines.
Direct sales business also continued to grow modestly.
Pretax income from insurance underwriting decreased $0.3 million or 0.5% in the
first quarter 1998 when compared with last year reflecting start-up costs in the
worksite marketing initiative and the run-off of auto credit business and
specialty liability programs. Overall, benefit and expense margins in first
quarter 1998 did not suggest any significant shift in operating trends. Direct
sales accident & health business improved its pretax margin in part due to good
domestic and international health product sales. Extended warranty profits
improved in the quarter, primarily due to a higher volume of new business in the
extended warranty mechanical line.
U.S./INTERNATIONAL RESULTS
- - - - - - - - - - - - - - - - - --------------------------
First quarter U.S. insurance underwriting revenue represents 71% of the
worldwide total and U.S. income before income tax represents 75% of the
worldwide total. U.S. insurance underwriting income before income tax increased
2.3% in the quarter when compared to its 1997 level. Results reflect the runoff
of the auto credit business and specialty liability programs. International
insurance underwriting revenue of $138.1 million increased 5.8% in the quarter
principally due to growth in premiums earned, primarily in the mechanical
extended warranty line. International pretax income decreased 7.9% in the
quarter, primarily due to unfavorable expense comparisons in the extended
warranty appliance and electronics lines. Measures are being
taken to reduce costs in these lines.
CORPORATE AND OTHER
- - - - - - - - - - - - - - - - - -------------------
Revenue in this category consists primarily of investment income (including
realized investment gains) on capital. Insurance company investment income is
allocated to the underwriting segment based on the invested assets which
underlie policyholder liabilities. Excess invested assets and related investment
income, which do not underlie these liabilities, are reported in this segment.
Expenses include interest and other financing expenses, goodwill amortization
associated with insurance brokerage and consulting acquisitions, and corporate
administrative costs.
Revenue increased 64.2% or $18.1 million for the first quarter 1998, primarily
due to higher levels of investment income received on private equity and other
investment holdings. The loss before income tax decreased $3.2 million in the
quarter over the same period last year. Revenue growth was partially offset by
goodwill amortization related to acquisitions and interest expense on short-term
and long-term debt associated with acquisition financing.
- 11 -
Aon Corporation
MAJOR LINES OF BUSINESS
First Quarter Ended
---------------------------------------------
March 31, March 31, Percent
(millions) 1998 1997 Change
------------ ------------ ------------
REVENUE
- - - - - - - - - - - - - - - - - -------
Insurance brokerage and consulting services:
Insurance and other services ................. $ 890.1 $ 751.6 18.4 %
Consulting ................................... 150.1 129.1 16.3
------------ ------------ ------------
Total revenue .............................. 1,040.2 880.7 18.1
------------ ------------ ------------
Insurance underwriting:
Direct sales - life, accident and health .... 257.7 254.7 1.2
Extended warranty ........................... 159.4 129.4 23.2
Other ....................................... 57.9 61.3 (5.5)
------------ ------------ ------------
Total revenue .............................. 475.0 445.4 6.6
------------ ------------ ------------
Corporate and other .............................. 46.3 28.2 64.2
------------ ------------ ------------
Total revenue .............................. $ 1,561.5 $ 1,354.3 15.3 %
============ ============ ============
INCOME BEFORE INCOME TAX
- - - - - - - - - - - - - - - - - ------------------------
Insurance brokerage and consulting services ...... $ 183.3 $ 108.6 68.8 %
Special charges ............................ -- (145.0) --
------------ ------------ ------------
Including special charges .................. 183.3 (36.4) N/A
Insurance underwriting ........................... 64.5 64.8 (0.5)
Corporate and other .............................. (10.0) (13.2) N/A
------------ ------------ ------------
Total income before income tax ............. $ 237.8 $ 15.2 +500 %
============ ============ ============
- 12 -
NET INCOME FOR FIRST QUARTER 1998
First quarter 1998 net income was $138.3 million ($0.80 dilutive per share)
compared to $0.7 million ($0.02 loss per share) in 1997. First quarter 1997 net
income and the related loss per share amount were primarily influenced by
after-tax 1997 special charges of $90.6 million ($0.54 per share) with no
comparable amount in first quarter 1998. Basic net income per share was $0.82
and a loss of $0.02 in 1998 and 1997, respectively.
The effective tax rate was 37.5% for both 1998 and 1997. Dilutive average shares
outstanding for first quarter 1998 increased 2.6% when compared to 1997
primarily due to the reissuance of common shares from treasury for employee
benefits.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF FIRST QUARTER 1998
GENERAL
- - - - - - - - - - - - - - - - - -------
Cash flows from operating activities in first quarter 1998 were $256.2 million,
a decrease of $51.6 million from first quarter 1997. This decrease primarily
reflects the timing of the settlement of insurance segment receivables and
payables, and payments on special charges and valuation adjustments relating to
recent acquisitions.
Investing activities used cash of $364.9 million which was made available from
financing and operating activities. Cash used for acquisition activity during
first quarter 1998 was $96.1 million, primarily reflecting the Gil y Carvajal
acquisition.
Cash totaling $29 million was provided during first quarter 1998 from financing
activities. The decrease of $849.4 million from first quarter 1997 is primarily
a result of the 1997 issuance of capital securities. Cash was used to pay
dividends of $43.4 million on common stock and $0.6 million on redeemable
preferred stock.
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 acquisition financing. Aon anticipates continuation of the
company's positive cash flow, the ability of the parent company to access
adequate short-term lines of credit, and sufficient cash flow in the long-term.
Due to the contractual nature of its insurance policyholder liabilities which
are intermediate to long-term in nature, Aon has invested primarily in fixed
maturities. With a carrying value of $3 billion, Aon's total fixed maturity
portfolio is invested primarily in investment grade holdings (96.6%) and has a
fair value which is 104.6% of amortized cost.
- 13 -
Total assets increased $183.6 million to $18.9 billion since year-end 1997.
Invested assets at March 31, 1998 increased $195 million from year-end levels,
primarily due to higher levels of short-term investments. The amortized cost and
fair value of less than investment grade fixed maturity investments, at March
31, 1998, were $93.4 million and $97.1 million, respectively. The carrying value
of non-income producing investments in Aon's portfolio at March 31, 1998 was
$81.5 million, or 1.3% of total invested assets.
Aon uses derivative financial instruments (primarily financial futures, swaps,
options and foreign exchange forwards) to: (a) hedge foreign currency
translation risk and other business risks (i.e. interest rate and credit risk);
(b) hedge asset price risk associated with financial instruments whose change in
value is reported under SFAS 115; and (c) manage its overall asset/liability
duration match. As of March 31, 1998, Aon had open contracts, related to
the above, which had unrealized gains of approximately $4.9 million.
Insurance brokerage and consulting services receivables decreased $28.5 million
and insurance premiums payable increased $158.3 million in first quarter 1998
when compared to year-end 1997.
Short-term borrowings decreased at the end of first quarter 1998 by $88.6
million when compared to year-end 1997. Generally, in the first quarter of the
year, cash flows to the parent company are larger due to the timing of dividends
received from the operating units. As a result, short-term borrowing levels tend
to decrease in the first quarter when compared to the remaining periods in the
year. Notes payable decreased at the end of first quarter 1998 by $18.8 million
when compared to year-end 1997. Included in notes payable at March 31, 1998 is
approximately $31 million which represents the principal amount of notes due
within one year.
Stockholders' equity increased $61.6 million in first quarter 1998 to $17.10 per
share, an increase of $0.30 per share since year-end 1997. This increase
consisted of net income partially offset by net unrealized investment losses of
$6.6 million and dividends to common stockholders of $90.4 million. Included
in the reduction for dividends is an accrual for the second quarter 1998
common stock dividend.
REVIEW BY INDEPENDENT AUDITORS
- - - - - - - - - - - - - - - - - ------------------------------
The condensed consolidated financial statements at March 31, 1998, and for the
first quarter then ended have been reviewed, prior to filing, by Ernst & Young
LLP, Aon's independent auditors, and their report is included herein.
- 14 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Aon Corporation
We have reviewed the accompanying condensed consolidated statement of financial
position of Aon Corporation as of March 31, 1998, and the related condensed
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 1998 and 1997. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of Aon Corporation
as of December 31, 1997, 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 10, 1998, 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, 1997, 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 5, 1998
- 15 -
PART II
-------
OTHER INFORMATION
-----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Registrant was held
on April 17, 1998 (the "1998 Annual Meeting").
(b) Not applicable.
(c)(i) Set forth below is the tabulation of the votes on each nominee
for election as a director:
Withheld
Name For Authority
---- --- ---------
Daniel T. Carroll 150,119,262 544,390
Franklin A. Cole 150,208,040 455,612
Edgar D. Jannotta 150,171,091 492,561
Perry J. Lewis 150,184,822 478,830
Andrew J. McKenna 150,225,279 438,373
Newton N. Minow 148,700,286 1,963,366
Richard C. Notebaert 150,191,489 472,163
Donald S. Perkins 150,152,159 511,493
John W. Rogers, Jr. 150,244,847 418,805
Patrick G. Ryan 150,197,173 466,479
George A. Schaefer 150,229,715 433,937
Raymond I. Skilling 150,243,100 420,552
Fred L. Turner 150,244,969 418,683
Arnold R. Weber 150,229,422 434,230
Carolyn Y. Woo 150,166,879 496,773
(ii) Set forth below is the tabulation of the vote on the adoption
of the Aon 1998 Employee Stock Purchase Plan.
For Against Abstain Nonvote
--- ------- ------- -------
144,677,432 5,722,501 263,719 0
- 16 -
PART II
-------
OTHER INFORMATION
-----------------
(iii) Set forth below is the tabulation of the vote on the selection
of Ernst & Young LLP as auditors for the Registrant for the
1998 fiscal year.
For Against Abstain Nonvote
--- ------- ------- -------
150,236,810 194,555 232,287 0
(iv) Set forth below is the tabulation of the vote on a proposal
made by a stockholder relating to certain investments by the
Registrant as set forth beginning on page 25 of the
Registrant's Notice of Annual Meeting of Holders of Common
Stock and Series C Preferred Stock and Proxy Statement for the
1998 Annual Meeting.
For Against Abstain Nonvote
--- ------- ------- -------
4,031,306 132,565,771 4,317,527 9,749,048
(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 - The Registrant filed no Current Reports
-------------------
on Form 8-K during the quarter ended March 31, 1998.
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 15, 1998 /s/ Harvey N. Medvin
--------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER
(Principal Financial and Accounting Officer)
- 17 -
Aon CORPORATION
EXHIBIT INDEX
Exhibit Number
In Regulation S-K
Page
Item 601 Exhibit Table No.
(10) Aon 1998 Employee Stock Purchase Plan
(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
(27) Financial Data Schedule
- 18 -