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 JUNE 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission file number 1-7933
Aon Corporation
---------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-3051915
-------- ------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
123 N. WACKER DR., CHICAGO, ILLINOIS 60606
- --------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(312) 701-3000
--------------
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Number of shares of common stock outstanding:
No. Outstanding
Class as of 6-30-96
----- ---------------
$1.00 par value Common 107,905,932
Part 1
Financial Information
Aon CORPORATION
Condensed Consolidated Statements of Financial Position
-------------------------------------------------------
(millions) As of As of
Assets June 30, 1996 Dec. 31, 1995
------------- -------------
(Unaudited)
Investments
Fixed maturities
Available for sale $ 2,558.9 $ 7,687.1
Equity securities at fair value
Common stocks 264.3 300.0
Preferred stocks 508.7 706.3
Mortgage loans on real estate 33.9 632.0
Real estate (net of accumulated depreciation) 22.9 36.5
Policy loans 58.4 226.3
Other long-term investments 102.0 112.6
Short-term investments 1,497.8 938.3
------------- -------------
Total investments 5,046.9 10,639.1
Cash 103.5 115.3
Receivables
Insurance brokerage and consulting services 2,812.8 2,264.1
Premiums and other 841.3 580.2
Accrued investment income 64.6 152.4
------------- -------------
Total receivables 3,718.7 2,996.7
Deferred Policy Acquisition Costs 629.7 1,261.5
Intangible Assets 1,383.8 1,597.7
Property and Equipment at Cost (net of accumulated depreciation) 275.2 307.8
Assets Held Under Special Contracts 301.3 2,307.2
Other Assets 539.9 510.5
------------- -------------
Total Assets $ 11,999.0 $ 19,735.8
============= =============
As of As of
Liabilities and Equity June 30, 1996 Dec. 31, 1995
------------- -------------
(Unaudited)
Policy Liabilities
Future policy benefits $ 876.5 $ 1,475.1
Policy and contract claims 870.2 970.9
Unearned and advance premiums 1,626.5 1,646.2
Other policyholder funds 360.6 5,464.2
------------- -------------
Total policy liabilities 3,733.8 9,556.4
General Liabilities
Insurance premiums payable 3,249.8 2,722.8
Commissions and general expenses 518.7 562.4
Accrued income taxes 230.4 332.6
Short-term borrowings 89.7 352.7
Notes payable 477.8 497.5
Debt guarantee of ESOP 56.8 56.8
Liabilities held under special contracts 301.3 2,307.2
Other liabilities 596.5 623.7
------------- -------------
Total Liabilities 9,254.8 17,012.1
Commitments and Contingent Liabilities
Redeemable Preferred Stock 50.0 50.0
Stockholders' Equity
Preferred stock - $1 par value 7.6 8.1
Common stock - $1 par value 111.5 111.4
Paid-in additional capital 445.6 431.8
Net unrealized investment gains 74.8 123.1
Net foreign exchange gains/(losses) (14.9) 1.8
Retained earnings 2,337.0 2,212.1
Less - Treasury stock at cost (130.1) (97.3)
Deferred compensation (137.3) (117.3)
------------- -------------
Total Stockholders' Equity 2,694.2 2,673.7
------------- -------------
Total Liabilities and Equity $ 11,999.0 $ 19,735.8
============= =============
See the accompanying notes to the condensed consolidated financial statements.
2
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(millions except per share data)
Second Quarter Ended Six Months Ended
-------------------- -----------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
--------- --------- ----------- ----------
REVENUE
Brokerage commissions and fees........$ 445.5 $ 400.2 $ 913.5 $ 824.8
Premiums earned....................... 381.3 364.7 759.3 700.4
Net investment income................. 92.6 77.5 177.3 158.4
Realized investment gains (losses).... - (0.6) - 0.5
Other income.......................... 13.0 10.1 24.4 21.0
--------- --------- ----------- ---------
Total revenue....................... 932.4 851.9 1,874.5 1,705.1
--------- --------- ----------- ---------
BENEFITS AND EXPENSES
Commissions and general expenses...... 554.8 489.4 1,084.2 963.1
Benefits to policyholders............. 192.8 174.9 378.8 339.0
Interest expense...................... 10.1 9.5 19.3 17.9
Amortization of deferred policy
acquisition costs.................... 55.0 50.1 108.1 100.0
Amortization of intangible assets..... 18.4 20.0 37.2 40.4
--------- --------- ----------- ---------
Total benefits and expenses......... 831.1 743.9 1,627.6 1,460.4
--------- --------- ----------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX...................... 101.3 108.0 246.9 244.7
Provision for income tax.............. 36.0 36.3 85.1 82.5
--------- --------- ----------- ---------
INCOME FROM CONTINUING OPERATIONS.......$ 65.3 $ 71.7 $ 161.8 $ 162.2
DISCONTINUED OPERATIONS: (1)
Income from discontinued operations,
net of tax........................... - 27.0 22.4 47.7
Gain on disposal of discontinued
operations, net of tax............... 21.0 - 21.0 -
-------- --------- ----------- ---------
NET INCOME..............................$ 86.3 $ 98.7 $ 205.2 $ 209.9
======== ========= =========== =========
Net Income Available for Common
Stockholders...........................$ 81.2 $ 91.9 $ 195.0 $ 196.3
======== ========= =========== =========
PER SHARE
Income from continuing operations(2)....$ 0.55 $ 0.60 $ 1.39 $ 1.37
Income from discontinued operations(1).. - 0.25 0.20 0.44
Gain on disposal of discontinued
operations(1).......................... 0.19 - 0.19 -
-------- --------- ----------- ---------
Net income(2)...........................$ 0.74 $ 0.85 $ 1.78 $ 1.81
======== ========= =========== =========
Cash dividends paid on common stock.....$ 0.36 $ 0.34 $ 0.70 $ 0.66
======== ========= =========== =========
Average common and common equivalent
shares outstanding..................... 109.8 108.4 109.8 108.6
-------- --------- ----------- ---------
(1) In April, 1996, Aon completed the sales of two of its insurance
subsidiaries, Union Fidelity Life Insurance Company and The Life Insurance
Company of Virginia. Their results are classified as discontinued
operations.
(2) Includes the effect of $5.1 million and $10.2 million, and $6.8 million and
$13.6 million of dividends incurred on the 8%, 6.25% and Series C preferred
stock in second quarter and six months ended June 30, 1996 and 1995,
respectively.
See the accompanying notes to the condensed consolidated financial statements.
3
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(millions)
Six Months Ended
------------------------
June 30, June 30,
1996 1995
---------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES...................................... $ 297.4 $ 372.9
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short term investments-net................................... (634.6) (59.9)
Sale or maturity of fixed maturities
Held to maturity - Maturities........................................ - 0.7
Calls and prepayments............................. - 79.8
Sales............................................. - 3.0
Available for sale - Maturities........................................ 78.7 52.2
Calls and prepayments............................. 130.8 100.2
Sales............................................. 439.4 1,273.2
Sale or maturities of other investments................................ 342.3 501.3
Purchase of fixed maturities - available for sale........................ (984.6) (1,637.2)
Purchase of other investments............................................ (447.4) (537.2)
Disposition (acquisition) of subsidiaries - net.......................... 1,273.9 (66.7)
Property and equipment and other......................................... (35.1) (55.4)
---------- ----------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES...... 163.4 (346.0)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock transactions - net........................................ (27.9) (48.0)
Repayment of short-term borrowings - net................................. (262.9) (16.9)
Issuance of long-term debt............................................... - 18.6
Repayment of long-term debt.............................................. (2.4) (19.2)
Interest sensitive life, annuity and investment contract deposits........ 348.2 690.9
Interest sensitive life, annuity and investment contract withdrawals..... (427.1) (813.9)
Retirement of preferred stock............................................ (14.2) -
Cash dividends to stockholders........................................... (86.3) (84.3)
---------- ----------
CASH USED BY FINANCING ACTIVITIES................. (472.6) (272.8)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................... - 5.5
DECREASE IN CASH........................................................... (11.8) (240.4)
CASH AT BEGINNING OF PERIOD................................................ 115.3 508.8
---------- ----------
CASH AT END OF PERIOD...................................................... $ 103.5 $ 268.4
========== ==========
See the accompanying notes to condensed consolidated financial statements.
4
Aon CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Statement of Accounting Principles
----------------------------------
The financial results included in this report are stated in conformity with
generally accepted accounting principles and are unaudited but include all
normal recurring adjustments which the Registrant (Aon) considers necessary
for a fair presentation of the results for such periods. These interim
figures are not necessarily indicative of results for a full year as
further discussed below.
Refer to the consolidated financial statements and notes in the Annual
Report to Stockholders (Annual Report) for the year ended December 31, 1995
for additional details of Aon's financial position, as well as a
description of the accounting policies which have been continued without
material change. The details included in the notes have not changed except
as a result of normal transactions in the interim and the events mentioned
in the footnotes below.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. Statements of Financial Accounting Standards (SFAS)
---------------------------------------------------
As required, in first quarter 1996, Aon adopted SFAS Statement No. 121
(Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of). This Statement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Implementation of this Statement did not have an effect on Aon's financial
statements.
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement No. 125 (Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities). This Statement provides
accounting and reporting standards for sales, securitization, and servicing
of receivables and other financial assets and extinguishments of
liabilities. The provisions of this Statement are to be applied to
transactions occurring after December 31, 1996. Aon anticipates adopting
this Statement in its 1997 financial statements as required.
Implementation of this Statement is not expected to have a material effect
on Aon's financial statements.
3. Capital Stock
-------------
During first half 1996, Aon purchased 944,000 shares of its common stock,
at a total cost of $48 million. Aon reissued 503,000 shares of common
stock from treasury for employee benefit plans during the first half 1996.
There were 3.6 million shares of common stock held in treasury at June 30,
1996.
In first half 1996, Aon purchased and retired 553,000 shares of its 8%
Cumulative Perpetual Preferred stock at a total cost of $14.2 million.
5
4. Discontinued Operations
-----------------------
On April 1, 1996, Aon completed the sales of Union Fidelity Life Insurance
Company (UFLIC) and The Life Insurance Company of Virginia (LOV) and
received after tax sales proceeds of approximately $1.2 billion. The gain
on disposal of discontinued operations was $21 million after taxes incurred
on the sale of approximately $175 million.
5. Special Charges
---------------
Between April 2, 1996 and June 30, 1996, a voluntary early retirement
program was in effect for all eligible employees of Aon's US domestic
operating subsidiaries. In addition, programs similar in nature were
introduced in parts of Europe. Approximately 450 people took advantage
of these programs. In second quarter 1996, Aon recorded pretax special
charges of $30.2 million related to the cost of these programs.
6
AON CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR SECOND QUARTER AND FIRST HALF 1996
GENERAL
- -------
In fourth quarter 1995, Aon and its wholly owned subsidiary Combined Insurance
Company of America (CICA) reached definitive agreements to sell two of its
domestic insurance subsidiaries, UFLIC and LOV. The sales of UFLIC and LOV
were completed in April, 1996, and resulted in a $21 million after tax gain
on disposal. The results of UFLIC and LOV are classified in the consolidated
statements of operations as discontinued operations. For purposes of the
following discussions, comparisons against prior years' results are based on
continuing operations.
The after tax proceeds from the sales of UFLIC and LOV were $1.2 billion. The
majority of the proceeds was used for both debt reductions and investment in
highly liquid securities, yielding for this quarter, approximately 3% - 3.5%
after tax. The potential long-term uses of the proceeds are the additional pay
down of borrowings and the buy back of capital stock, and other general
corporate purposes, including acquisitions. In the short-term, some of these
uses are yielding returns that are lower than could have been generated from the
operations of the subsidiaries sold.
CONSOLIDATED RESULTS
- --------------------
Brokerage commissions and fees increased $45.3 million or 11.3% in second
quarter 1996, primarily reflecting internal growth, while the first half 1996
improvement of $88.7 million or 10.8% reflected internal growth, as well as
business combination activity.
Premiums earned increased $16.6 million or 4.6% and $58.9 million or 8.4% in
second quarter and first half 1996, respectively, compared with the same periods
last year. Extended warranty premiums earned increased $19.7 million or 25.9%
in the quarter primarily reflecting a continuing higher volume of new business
in the appliance and electronic equipment line. Direct Sales earned premium
grew 1% from second quarter 1995 of which the strongest growth was in the
international segment.
Net investment income increased $15.1 million or 19.5% and $18.9 million or
11.9% in second quarter and first half 1996, respectively, when compared to
prior year. Growth in second quarter 1996 was primarily attributable to
investment income associated with the proceeds from the sales of UFLIC and LOV.
The majority of the proceeds were invested in highly liquid securities yielding,
for this quarter, approximately 3% - 3.5% after tax. For the first half 1996,
investment income growth primarily reflected investment income on the sales
proceeds.
7
Total revenue increased $80.5 million or 9.4% and $169.4 million or 9.9% in the
second quarter and first half 1996, respectively. Total benefits and expenses
increased $87.2 million or 11.7% and $167.2 million or 11.4% in the same
periods. The increases in the second quarter and first half expenses reflect
the inclusion of pretax special charges of $30.2 million related to the
completion of a voluntary early retirement program introduced domestically this
quarter as well as similar programs internationally. Total benefits and
expenses, excluding the 1996 special charges, increased 7.7% and 9.4% for the
second quarter and first half 1996, respectively. Income before income tax
decreased $6.7 million or 6.2% in second quarter and increased $2.2 million or
0.9% in first half 1996, respectively. The decrease in second quarter pretax
earnings reflects $30.2 million of special charges. Excluding these special
charges, pretax earnings increased 21.8% when compared to second quarter 1995,
primarily due to the inclusion of investment income associated with the proceeds
from the sale of discontinued operations.
MAJOR LINES OF BUSINESS
- -----------------------
GENERAL
- -------
Beginning with the 1995 Annual Report, Aon reclassified its operating segments
to reflect the focus of its continuing operations. Insurance underwriting
operations were presented as one segment based on the related nature,
distribution channels and markets of the continuing products. Insurance
underwriting primarily includes life, accident and health insurance and extended
warranty products. In this report, 1995 quarterly segments have been
reclassified to conform to the 1996 presentation.
In second quarter 1996, Aon reported a gain on disposal of discontinued
operations, net of tax, of $21 million related to the sales of UFLIC and LOV.
In addition, investment income associated with the sales proceeds was included
in the corporate and other segment in the quarter. Aon also reported second
quarter pretax special charges of $30.2 million related to early retirement
programs. The special charges were allocated to each of the major lines of
business. For the purposes of the following line of business discussions,
comparisons against last year's results exclude the gain on sale of discontinued
operations and the special charges.
INSURANCE BROKERAGE AND CONSULTING SERVICES
- -------------------------------------------
Beginning in first quarter 1996, Aon combined the retail brokerage and
reinsurance and wholesale subsegments of Insurance Brokerage and Consulting
Services into one subsegment called "Insurance and other services". Also
included in this subsegment is revenue from financing services operations which
includes service fees received from the placement of insurance premiums and
retail auto financing receivables to unaffiliated parties. This operation was
previously in the corporate and other segment. All prior period data has been
reclassified to conform to the 1996 presentation. Insurance and other services
revenue increased $37 million or 10.4% for the second quarter 1996 when compared
with the same period last year. Insurance and other services continued to
reflect highly competitive property and casualty pricing in the domestic market
and increased revenues due primarily to internal growth and, to a lesser extent,
acquisition activity.
"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 $6.5 million or
10% for the second quarter when compared to prior year, primarily due to the
expanding integrated human resources consulting practice.
8
Overall, revenue for the insurance brokerage and consulting services segment
increased $43.5 million or 10.4% in the second quarter and $86.6 million or
10.1% for first half 1996. Limiting this revenue increase, the brokerage
segment continues to be impacted by a soft property and casualty market. Income
before income tax increased $6.6 million or 13% and $15.3 million or 12% when
compared to second quarter and first half 1995, respectively, primarily
reflecting internal growth and, to a lesser extent, acquisition activity.
Domestic/International Results
- ------------------------------
Second quarter domestic insurance brokerage and consulting services revenue and
income before income tax represent 70% and 77%, respectively, of the total
segment. International brokerage revenue of $137.2 million increased 12.5% for
the second quarter. International brokerage income before income tax increased
15.7% for the quarter. In the international insurance and other services
subsegment, revenues continue the trend of being highest in the first quarter of
the year, while expenses are incurred on a more even basis throughout the year.
INSURANCE UNDERWRITING
- ----------------------
The insurance underwriting line of business provides direct sales life and
accident and health products, credit insurance and extended warranty products to
individuals. On June 30, 1996, Aon completed the sale of North American auto
credit underwriting and distribution. The sale also included distribution of
extended warranties throughout North America. The extended warranty products
will continue to be underwritten by Aon's subsidiary, Virginia Surety Company.
Total North American auto credit insurance underwriting revenues included in
Aon's consolidated statement of income for the second quarter and first half
ended June 30, 1996 were approximately $30 million and $60 million,
respectively.
Revenue increased 6.7% or $28 million and 9.8% or $78.3 million for the second
quarter and first half 1996, respectively, when compared to prior year primarily
due to the continued expansion both domestically and internationally in the
extended warranty appliance and electronic line. In addition, life business in
Europe and the Pacific is being run off as planned.
Pretax income from insurance underwriting increased $2.9 million or 4.5% and
$6.2 million or 5.2% in second quarter and first half 1996, respectively,
compared with last year. In general, expense margins in the second quarter 1996
remained stable while benefit levels increased slightly. Overall, benefit and
expense margins in second quarter 1996 did not suggest any significant shift in
operating trends.
Domestic/International Results
- ------------------------------
Second quarter domestic insurance underwriting revenue and income before income
tax represent 73% and 68%, respectively, of the total segment. International
insurance underwriting revenue of $120.2 million increased 6.6%, principally due
to improved premiums earned in the extended warranty lines. International
pretax income improved 18.2% primarily due to expansion in the appliance and
electronic extended warranty line.
9
CORPORATE AND OTHER
- -------------------
Revenue in this category consists primarily of investment income on capital and
realized investment gains and losses. Allocation of investment income to the
insurance underwriting segment is based on the invested assets which underlie
policyholder liabilities. Excess invested assets and related investment income,
which do not underlie underwriting liabilities, are reported in this segment.
Expenses include interest and other financing expenses, corporate administrative
costs, and goodwill amortization associated with acquisitions.
Revenue increased 52.6% and 10.6% for the second quarter and first half 1996,
respectively, due largely to the level of investment income associated with the
proceeds from the sales of UFLIC and LOV in the second quarter. Revenue growth
was limited by alternative uses of corporate capital and returns received from
private placement equity securities whose income flows fluctuate somewhat by
nature. There were no realized investment gains or losses in either second
quarter or first half 1996. In second quarter and first half 1995, however,
there were realized losses of $0.6 million and realized gains of $0.5 million,
respectively. Income before income tax, excluding realized investment gains and
losses, increased $13.4 million over the same quarter last year.
DISCONTINUED OPERATIONS
- -----------------------
Discontinued operations are composed principally of capital accumulation
products and direct response products. Substantially all of the revenue and
income before income tax generated from discontinued operations is domestic.
These amounts have been segregated as "Income From Discontinued Operations"
in the consolidated statements of operations.
With the completion of the sales of UFLIC and LOV on April 1, 1996, there are
no operating results from these discontinued operations going forward. The
effective operating income tax rate on discontinued operations was 35% in 1996
and 1995. In addition, in second quarter 1996, a $21 million gain on disposal
of discontinued operations, net of taxes incurred on the sale of approximately
$175 million, was recorded.
10
Aon CORPORATION
MAJOR LINES OF BUSINESS
-----------------------
(millions)
Second Quarter Ended Six Months
--------------------- --------------------
June 30 Percent June 30 Percent
1996 Change (1) 1996 Change (1)
------- ---------- ------- ----------
Revenue
- -------
Insurance brokerage and consulting
services.............................. $462.3 10.4% $ 947.3 10.1%
Insurance underwriting.................. 444.0 6.7 880.1 9.8
Corporate and other..................... 26.1 52.6 47.1 10.6
------- ---------- --------- ----------
Total revenue...................... $932.4 9.4% $1,874.5 9.9%
======= ========== ========= ==========
Income Before Income Tax
- ------------------------
Insurance brokerage and consulting
services.............................. $ 57.2 13.0% $ 142.4 12.0%
Special charges....................... (22.4) - (22.4) -
------- ---------- --------- ----------
Including special charges............. 34.8 (31.2) 120.0 (5.6)
Insurance underwriting.................. 66.7 4.5 125.2 5.2
Special charges....................... (6.4) - (6.4) -
------- ---------- --------- ----------
Including special charges............. 60.3 (5.5) 118.8 (0.2)
Corporate and other..................... 7.6 N/A 9.5 N/A
Special charges....................... (1.4) - (1.4) -
------- ---------- --------- ----------
Including special charges............. 6.2 N/A 8.1 N/A
------- ---------- --------- ----------
Total income before income tax..... $101.3 (6.2)% $ 246.9 0.9%
======= ========== ========= ==========
(1) Prior Period amounts have been reclassified to conform to the 1996
presentation.
11
Aon CORPORATION
REVENUE BY MAJOR PRODUCT LINE
-----------------------------
(millions)
Second Quarter Ended Six Months Ended
--------------------- -----------------------
June 30, Percent June 30, Percent
1996 Change (1) 1996 Change (1)
-------- ---------- -------- ----------
INSURANCE BROKERAGE AND CONSULTING SERVICES
Insurance and other services................ $391.1 10.4% $804.8 9.4%
Consulting ................................. 71.2 10.0 142.5 14.0
-------- ---------- -------- ----------
TOTAL REVENUE.......................... $462.3 10.4% $947.3 10.1%
======== ========== ======== ==========
INSURANCE UNDERWRITING
Direct sales - life, accident and health.... $257.2 1.5% $510.8 1.8%
Warranty and other ......................... 186.8 14.8 369.3 23.1
-------- ---------- -------- ----------
TOTAL REVENUE.......................... $444.0 6.7% $880.1 9.8%
======== ========== ======== ==========
CORPORATE AND OTHER
Investment income on capital and other...... $ 26.1 47.5% $ 47.1 11.9%
Realized investment gains/losses............ - N/A - N/A
-------- ---------- -------- ----------
TOTAL REVENUE.......................... $ 26.1 52.6% $ 47.1 10.6%
======== ========== ======== ==========
(1) Prior period amounts have been reclassified to conform to the 1996
presentation.
12
NET INCOME FOR SECOND QUARTER AND FIRST HALF 1996
Second quarter net income was $86.3 million ($0.74 per share) compared to $98.7
million ($0.85 per share) in 1995. Net income for the first half was $205.2
million ($1.78 per share) compared to $209.9 million ($1.81 per share) in 1995.
The decrease in second quarter net income compared to 1995 reflects after tax
special charges of $19.5 million or $0.18 per share and no comparable operating
results from discontinued operations due to the completion of the sales of UFLIC
and LOV ($0.25 per share in 1995). The principal factors that partially offset
this second quarter 1996 decrease are the inclusion of the after tax gain on
disposal of discontinued operations of $21 million or $0.19 per share and
investment income associated with the sales proceeds. Second quarter and first
half operating income from continuing operations before special charges was
$84.8 million ($0.73 per share) and $181.3 million ($1.57 per share) in 1996,
respectively, compared to $72.1 million ($0.60 per share) and $161.9 million
($1.36 per share) in 1995, respectively. Included in first half 1995 net income
is after-tax realized investment gains of $0.01 per share. The effective tax
rate on operating income from continuing operations, which excludes after-tax
realized investment gains and losses, was 34.5% and 33.7% for first half 1996
and 1995, respectively. The effective tax rate for realized gains and losses was
36% for 1995. Average shares outstanding for second quarter increased 1.3% when
compared to 1995.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF FIRST HALF 1996
GENERAL
- -------
Consistent with financial statement presentation, the following cash flow and
financial position discussion reflects the completion of the sales of UFLIC and
LOV in April, 1996. As a result of the sales, the condensed consolidated
statement of financial position at June 30, 1996 has been significantly impacted
when compared to year end 1995. Amounts contained in the condensed consolidated
statement of cash flows for the first half ended June 30, 1996 compared to the
same period in 1995 also reflect the impact of the sales of UFLIC and LOV.
Cash flows from operating activities (including discontinued operations) in
first half 1996 were $297.4 million, a decrease of $75.5 million from first half
1995. This decrease primarily reflects the timing of settlement of brokerage
segment receivables and payables.
Investing activities provided cash of $163.4 million which was made available
from the completed sales of UFLIC and LOV, and offset in part, by net purchases
of investments. Cash used for acquisition activity during the first half 1996
was $37.7 million.
Cash totaling $472.6 million was used during first half 1996 for financing
activities. Net cash used from capital accumulation product deposits and
withdrawals was $78.9 million in first half 1996. Cash was used to pay dividends
of $76 million on common stock, $5.7 million on 8% cumulative perpetual
preferred stock, $3.3 million on 6.25% cumulative convertible exchangeable
preferred stock and $1.3 million on Series C preferred stock.
13
Included in notes payable at June 30, 1996 is approximately $4 million which
represents the principal amount of notes due within one year. Aon's operating
subsidiaries anticipate that there will be adequate liquidity to meet their
needs in the foreseeable future. Aon anticipates continuation of the company's
positive cash flow, the ability of the parent company to access adequate short-
term lines of credit, and sufficient cash flow in the long-term.
The businesses of Aon's operating subsidiaries continue to provide substantial
positive cash flow. Brokerage cash flow has been used primarily for servicing
acquisition-related debt. Due to the contractual nature of its insurance
policyholder liabilities which are intermediate to long-term in nature, Aon has
invested primarily in fixed maturities. With a carrying value of $2.6 billion,
Aon's total fixed maturity portfolio is invested primarily in investment grade
holdings (94.9%) and has a market value which is 102.6% of amortized cost.
Mortgage-backed securities, primarily collateralized mortgage obligations
(CMO's), included in the fixed maturities portfolio, totaled $50.1 million, down
approximately $1.9 billion from year end 1995 with the difference attributed to
discontinued operations.
As of April 1, 1996, the assets and liabilities of discontinued operations,
after reinvestment of net sales proceeds, (not included in the consolidated
statement of financial position at June 30, 1996) are as follows:
(millions)
- --------------------------------------------------------------------------------
Investments (net of proceeds) $ 5,102
Deferred policy acquisition costs 653
Intangible assets 149
Assets held under special contracts 2,047
Receivables and other assets 329
- --------------------------------------------------------------------------------
Total assets $ 8,280
================================================================================
Policy liabilities $ 6,065
Liabilities held under special contracts 2,047
General and other liabilities 189
- --------------------------------------------------------------------------------
Total liabilities $ 8,301
- --------------------------------------------------------------------------------
Net gain on sale of discontinued operations $ 21
================================================================================
Total assets decreased $7.7 billion to $12 billion, while invested assets at
June 30, 1996 decreased $5.6 billion from year-end levels, primarily due to the
sales of UFLIC and LOV. The amortized cost and fair value of less than
investment grade fixed maturity investments, at June 30, 1996, were $119.4
million and $120.5 million, respectively. The carrying value of non-income
producing investments in Aon's portfolio at June 30, 1996 was $5 million, or
0.9% of total invested assets.
Mortgage loans totaled $33.9 million or 0.7% of total invested assets. Aon
maintains investment reserves related to mortgage loan losses on real estate
holdings, which include real estate ventures and limited partnerships, totaling
$5.5 million at the end of second quarter 1996, down $25.3 million from the year
end 1995 level of $30.8 million. Substantially all of the decrease in reserves
relates to discontinued operations.
14
Aon uses derivative financial instruments (primarily financial futures, swaps
and options) to: (a) manage its overall asset/liability duration match; (b)
hedge asset price risk associated with financial instruments whose change in
value is reported under SFAS 115; and (c) hedge other business risks. As of
June 30, 1996, Aon had open contracts which had unrealized losses of
approximately $0.1 million.
Short-term borrowings decreased at the end of second quarter 1996 by $263
million when compared to year end 1995 primarily due to the use of sales
proceeds to pay down debt.
Stockholders' equity increased $20.5 million in second quarter 1996 to $23.15
per share, an increase of $0.38 per share since year-end 1995. The principal
factors influencing this increase were net income which includes the after tax
gain on the sale of discontinued operations of $21 million. Partially
offsetting this increase were net unrealized investment losses of $48.3 million,
net foreign exchange losses of $16.7 million, dividends to stockholders of $75.5
million, and $32.7 million for the repurchase of common stock for treasury.
Review by Independent Auditors
- ------------------------------
The condensed consolidated financial statements at June 30, 1996, and for the
second quarter and first half then ended have been reviewed, prior to filing, by
Ernst & Young LLP, Aon's independent auditors, and their report is included
herein.
15
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 June 30, 1996, and the related condensed
consolidated statements of income for the three-month and six-month periods
ended June 30, 1996 and 1995, and the condensed consolidated statements of cash
flows for the six-month periods ended June 30, 1996 and 1995. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of Aon Corporation
as of December 31, 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended, not presented
herein, and in our report dated February 8, 1996, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated statement of
financial position as of December 31, 1995, is fairly stated, in all material
respects, in relation to the consolidated statement of financial position from
which it has been derived.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Chicago, Illinois
August 1, 1996
16
PART II
-------
OTHER INFORMATION
-----------------
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 June 30, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aon Corporation
---------------
(Registrant)
August 14, 1996 /s/ Harvey N. Medvin
-----------------------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER
(Principal Financial and Accounting
Officer)
17
Aon CORPORATION
---------------
EXHIBIT INDEX
-------------
Exhibit Number
In Regulation S-K, Page
Item 601 Exhibit Table No.
- ---------------------- ----
(10)(a) Second Amendment to Aon Employee Stock Ownership Plan 19
(10)(b) Fifth Amendment to Aon Pension Plan 22
(10)(c) Third Amendment to Aon Savings Plan 24
(10)(d) Third Amendment to Aon Pension Plan 27
(11) Statement regarding Computation of Per Share Earnings. 31
(12) Statements regarding Computation of Ratios.
(a) Statement regarding Computation of Ratio of Earnings to Fixed Charges. 32
(b) Statement regarding Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends. 33
(15) Letter re: Unaudited Interim Financial Information. 34
(27) Financial Data Schedule
18