Aon is a British company based in London that is active in the insurance and risk management industries.
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) - OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR _ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-7933 Aon Corporation --------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-3051915 -------- ---------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 123 N. WACKER DR, CHICAGO, ILLINOIS 60606 - ----------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) (312) 701-3000 ------------- (Registrant's Telephone Number) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 3 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of common stock outstanding: No. Outstanding Class as of 3-31-01 ----- ------------- $1.00 par value Common 261,860,632
<TABLE> <CAPTION> PART 1 FINANCIAL INFORMATION Aon CORPORATION Condensed Consolidated Statements of Financial Position (millions) AS OF AS OF MARCH 31, 2001 DEC. 31, 2000 -------------------------------- ASSETS (Unaudited) INVESTMENTS <S> <C> <C> Fixed maturities at fair value $ 2,342 $ 2,337 Equity securities at fair value 542 492 Short-term investments 2,420 2,325 Other investments 775 865 --------------- --------------- TOTAL INVESTMENTS 6,079 6,019 CASH 886 1,118 RECEIVABLES Insurance brokerage and consulting services 6,887 6,952 Premiums and other 1,163 1,278 --------------- --------------- TOTAL RECEIVABLES 8,050 8,230 EXCESS OF COST OVER NET ASSETS PURCHASED 3,380 3,427 OTHER INTANGIBLE ASSETS 485 489 OTHER ASSETS 3,157 2,968 --------------- --------------- TOTAL ASSETS $ 22,037 $ 22,251 =============== =============== AS OF AS OF MARCH 31, 2001 DEC. 31, 2000 -------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) INSURANCE PREMIUMS PAYABLE $ 8,432 $ 8,212 POLICY LIABILITIES Future policy benefits 1,054 1,054 Policy and contract claims 856 801 Unearned and advance premiums 1,960 1,935 Other policyholder funds 953 1,069 --------------- --------------- TOTAL POLICY LIABILITIES 4,823 4,859 GENERAL LIABILITIES General expenses 1,676 1,619 Short-term borrowings 60 309 Notes payable 1,804 1,798 Other liabilities 1,029 1,216 --------------- --------------- TOTAL LIABILITIES 17,824 18,013 COMMITMENTS AND CONTINGENT LIABILITIES REDEEMABLE PREFERRED STOCK 50 50 COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY THE COMPANY'S JUNIOR SUBORDINATED DEBENTURES 800 800 STOCKHOLDERS' EQUITY Common stock - $1 par value 264 264 Paid-in additional capital 715 706 Accumulated other comprehensive loss (413) (377) Retained earnings 3,087 3,127 Less - Treasury stock at cost (81) (118) Deferred compensation (209) (214) --------------- --------------- TOTAL STOCKHOLDERS' EQUITY 3,363 3,388 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,037 $ 22,251 =============== =============== </TABLE> See the accompanying notes to the condensed consolidated financial statements. - 2 -
<TABLE> <CAPTION> Aon CORPORATION Condensed Consolidated Statements of Income (Unaudited) FIRST QUARTER ENDED -------------------------------- (millions except per share data) MARCH 31, 2001 MARCH 31, 2000 --------------- --------------- <S> <C> <C> REVENUE Brokerage commissions and fees ........................................................... $ 1,281 $ 1,205 Premiums and other ....................................................................... 508 468 Investment income ........................................................................ 22 137 --------------- --------------- TOTAL REVENUE ......................................................................... 1,811 1,810 --------------- --------------- EXPENSES General expenses . ....................................................................... 1,396 1,271 Benefits to policyholders ................................................................ 292 252 Interest expense ......................................................................... 36 31 Amortization of intangible assets ........................................................ 39 38 --------------- --------------- TOTAL EXPENSES. ....................................................................... 1,763 1,592 --------------- --------------- INCOME BEFORE INCOME TAX, MINORITY INTEREST AND ACCOUNTING CHANGE ........................... 48 218 Provision for income tax . ............................................................... 19 85 --------------- --------------- INCOME BEFORE MINORITY INTEREST AND ACCOUNTING CHANGE ....................................... 29 133 Minority interest - 8.205% trust preferred capital securities ............................ (10) (10) --------------- --------------- INCOME BEFORE ACCOUNTING CHANGE ............................................................. 19 123 Cumulative effect of change in accounting principle, net of tax .......................... - (7) --------------- --------------- NET INCOME .................................................................................. $ 19 $ 116 =============== =============== Preferred stock dividends ................................................................ (1) (1) --------------- --------------- NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS ................................................ $ 18 $ 115 =============== =============== BASIC NET INCOME PER SHARE: Before accounting change ................................................................. $ 0.07 $ 0.47 Cumulative effect of change in accounting principle ...................................... - (0.03) --------------- --------------- Basic net income per share ................................................... $ 0.07 $ 0.44 =============== =============== DILUTIVE NET INCOME PER SHARE: Before accounting change ................................................................. $ 0.07 $ 0.47 Cumulative effect of change in accounting principle ...................................... - (0.03) --------------- --------------- Dilutive net income per share ................................................ $ 0.07 $ 0.44 =============== =============== CASH DIVIDENDS PER SHARE PAID ON COMMON STOCK ............................................... $ 0.22 $ 0.21 =============== =============== Dilutive average common and common equivalent shares outstanding ............................ 267.9 260.5 =============== =============== </TABLE> See the accompanying notes to the condensed consolidated financial statements. - 3 -
<TABLE> <CAPTION> Aon CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited) FIRST QUARTER ENDED -------------------------------- MARCH 31, MARCH 31, (millions) 2001 2000 -------------- -------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income .......................................................................... $ 19 $ 116 Adjustments to reconcile net income to cash provided by operating activities Cumulative effect of change in accounting principle, net of tax ................ - 7 Insurance operating assets and liabilities net of reinsurance .................. 48 87 Amortization of intangible assets .............................................. 39 38 Depreciation and amortization of property, equipment and software .............. 44 44 Income taxes ................................................................... (20) 17 Special charges and purchase accounting liabilities ............................ 23 (43) Valuation changes on investments, income on disposals and impairments .......... 76 (25) Other receivables and liabilities - net ........................................ 103 (95) -------------- -------------- CASH PROVIDED BY OPERATING ACTIVITIES ....................................... 332 146 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of investments Fixed maturities Maturities .................................................................. 30 28 Calls and prepayments ....................................................... 16 32 Sales ....................................................................... 365 57 Equity securities .............................................................. 162 25 Other investments .............................................................. 135 57 Purchase of investments Fixed maturities ............................................................... (385) (130) Equity securities .............................................................. (196) (15) Other investments .............................................................. (32) (128) Sale (purchase) of short-term investments - net ..................................... (180) 100 Acquisition of subsidiaries ......................................................... (44) (35) Property and equipment and other - net .............................................. (57) (59) -------------- -------------- CASH USED BY INVESTING ACTIVITIES ........................................... (186) (68) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Treasury stock transactions - net .................................................. 18 (23) Issuance (payments) of short-term borrowings - net ................................. (252) 41 Issuance of long-term debt ......................................................... 15 - Repayment of long-term debt ........................................................ - (16) Interest sensitive, annuity and investment-type contracts Deposits ....................................................................... 3 34 Withdrawals .................................................................... (102) (123) Cash dividends to stockholders ..................................................... (58) (54) -------------- -------------- CASH USED IN FINANCING ACTIVITIES ........................................... (376) (141) -------------- -------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................................... (2) - -------------- -------------- DECREASE IN CASH ...................................................................... (232) (63) CASH AT BEGINNING OF PERIOD ........................................................... 1,118 837 -------------- -------------- CASH AT END OF PERIOD ................................................................. $ 886 $ 774 ============== ============== </TABLE> See the accompanying notes to condensed consolidated financial statements. - 4 -
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Statement of Accounting Principles ---------------------------------- The financial results included in this report are stated in conformity with accounting principles generally accepted in the United States and are unaudited but include all normal recurring adjustments which the Registrant ("Aon") considers necessary for a fair presentation of the results for such periods. These interim figures are not necessarily indicative of results for a full year as further discussed below. Refer to the consolidated financial statements and notes in the Annual Report to Stockholders for the year ended December 31, 2000 for additional details of Aon's financial position, as well as a description of the accounting policies which have been continued without material change. The details included in the notes have not changed except as a result of normal transactions in the interim and the events mentioned in the footnotes below. 2. Accounting and Disclosure Changes --------------------------------- In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, which provides guidance for applying generally accepted accounting principles relating to the timing of revenue recognition in financial statements filed with the SEC. Effective January 1, 2000, in accordance with the provisions of SAB 101, Aon established a provision for estimated returned commissions from policy cancellations. In 1999 and previous years, Aon recognized returned commissions when they occurred. The cumulative effect of this accounting change was an after-tax charge of $7 million or $0.03 per share in the first quarter of 2000. Aon has adopted Financial Accounting Standards Board (FASB) Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended as of October 1, 2000. Reference should be made to footnotes 1 and 13 in Aon's Annual Report as filed with Form 10-K for the year 2000 for further information. In September 2000, the Financial Accounting Standards Board issued Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Statement No. 140 replaces Statement No. 125 and revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. Statement No. 140 is effective for all transfers of financial assets occurring after March 31, 2001. Implementation of Statement No. 140 will not have a material impact on the consolidated financial statements. 3. Subsequent Event ---------------- On April 20, 2001, Aon's Board of Directors approved, in principle, a plan to spin-off its underwriting businesses to Aon's common stockholders, creating two independent, publicly traded companies. The spin-off would take the form of a tax-free dividend of common stock of the new company to Aon's common stockholders, pending a favorable Internal Revenue Service (IRS) ruling. The transaction requires final Board approval, subject to the favorable IRS ruling, and certain insurance regulatory approvals. - 5 -
4. Comprehensive Income (Loss) --------------------------- The components of comprehensive income (loss), net of related tax, for the first quarter ended March 31, 2001 and 2000 are as follows: <TABLE> <CAPTION> (millions) 2001 2000 ------------ ------------ <S> <C> <C> Net income $ 19 $ 116 Net derivative losses (12) - Net unrealized investment gains 19 3 Net foreign exchange losses (43) (32) ------------- ------------ Comprehensive income (loss) $ (17) $ 87 ============= ============ </TABLE> The components of accumulated other comprehensive loss, net of related tax, at March 31, 2001 and December 31, 2000, are as follows: <TABLE> <CAPTION> (millions) 2001 2000 ------------- ------------- <S> <C> <C> Net derivative gains (losses) $ (6) $ 6 Net unrealized investment losses (53) (72) Net foreign exchange losses (310) (267) Net additional minimum pension liability (44) (44) ------------- -------------- Accumulated other comprehensive loss $ (413) $ (377) ============= ============== </TABLE> 5. Business Segments ----------------- Aon classifies its businesses into three operating segments based on the type of service or product, and a fourth nonoperating segment. The Insurance Brokerage and Other Services segment consists primarily of Aon's retail and reinsurance brokerage and related operations, which include wholesale and claims services. The Consulting segment is Aon's employee benefit and human capital consulting organization. The Insurance Underwriting segment is comprised of life, accident and health coverage and extended warranty and property and casualty insurance products. The Corporate and Other segment is non-operating. Revenues consist primarily of valuation changes for investments in limited partnerships, income from certain other investments (which include non-income producing equities) and income and losses on disposals of all securities, including those pertaining to assets maintained by the operating segments. Corporate and Other general expenses include administrative and certain information technology costs. Amounts reported in the tables for the four segments, when aggregated, total to the amounts in the accompanying condensed consolidated financial statements. Revenues are attributed to geographic areas based on the location of the resources producing the revenues. There are no material inter-segment amounts to be eliminated. - 6 -
Selected information reflecting Aon's operating segments follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------- First quarter ended March 31: Insurance Brokerage Insurance (millions) and Other Services Consulting Underwriting ------------------------------------------------------------------------------------ 2001 2000 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Revenue United States $ 541 $ 524 $ 135 $ 99 $ 406 $ 376 United Kingdom 205 204 36 39 80 78 Continent of Europe 240 226 22 22 28 26 Rest of World 131 120 19 16 53 50 - -------------------------------------------------------------------------------------------------------------------------------- Total revenue $ 1,117 $ 1,074 $ 212 $ 176 $ 567 $ 530 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes excluding special charges $ 196 $ 180 $ 25 $ 19 $ 68 $ 67 Special charges 70 - 1 - 1 - - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 126 $ 180 $ 24 $ 19 $ 67 $ 67 - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> Selected information for Aon's non-operating segment follows: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------- Corporate and Other (millions) First quarter ended March 31 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Corporate and other revenue: Change in valuation of private limited partnership investments $ (56) $ 28 Income from marketable equity securities and other investments 1 3 ----------------------------- Corporate and other revenue before loss on disposals and related expenses (55) 31 Loss on disposals and related expenses* (30) (1) ----------------------------- Corporate and other revenue $ (85) $ 30 ----------------------------- Non-operating expenses: General expenses $ 19 $ 20 Interest expense 36 31 Amortization of goodwill 29 27 - ---------------------------------------------------------------------------------------------------------------------- Loss before income tax $ (169) $ (48) - ---------------------------------------------------------------------------------------------------------------------- <FN> * In 2001, includes impairment write-downs of $29 million. </FN> </TABLE> 6. Capital Stock ------------- During first quarter 2001, Aon reissued 1,138,000 shares of common stock from treasury for employee benefit plans and 146,500 shares in connection with the employee stock purchase plan. Aon purchased 98,900 shares of its common stock at a total cost of $3.5 million during first quarter 2001. There were 2.6 million shares of common stock held in treasury at March 31, 2001. - 7 -
7. Capital Securities ------------------ In 1997, Aon Capital A, a subsidiary trust of Aon, issued $800 million of 8.205% mandatorily redeemable preferred capital securities (capital securities). The sole asset of Aon Capital A is $824 million aggregate principal amount of Aon's 8.205% Junior Subordinated Deferrable Interest Debentures due January 1, 2027. 8. Business Combinations --------------------- In first quarter 2001, Aon made total payments of $4 million on restructuring charges and purchase accounting liabilities relating to business combinations. The following table demonstrates the activity related to the liability for termination benefits and abandoned leases recorded as expenses in 1999: <TABLE> <CAPTION> Termination Lease (millions) Benefits Abandonments Total ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Initial liability $ 67 $ 11 $ 78 Cash payments in 1999 (51) (6) (57) Cash payments in 2000 (9) - (9) Credit to expense in 2000 - (4) (4) Cash payments in 2001 (1) - (1) Foreign currency revaluation - (1) (1) ---------------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $ 6 $ - $ 6 ---------------------------------------------------------------------------------------------------------- </TABLE> The following table demonstrates the activity related to the liabilities established as a result of 1998 acquisitions: <TABLE> <CAPTION> Termination Lease (millions) Benefits Abandonments Total ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Initial liability $ 40 $ 30 $ 70 Cash payments in 1998 (16) (4) (20) Cash payments in 1999 (24) (6) (30) Cash payments in 2000 - (14) (14) Foreign currency revaluation - (2) (2) ---------------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $ - $ 4 $ 4 ---------------------------------------------------------------------------------------------------------- </TABLE> - 8 -
The following table demonstrates the activity related to the Aon Plan liabilities recorded as expenses in 1996 and 1997: <TABLE> <CAPTION> Lease Abandonments Termination and Other (millions) Benefits Exit Costs Total ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance at December 31, 1996 $ 12 $ 48 $ 60 Expense charged in 1997 40 68 108 Cash payments in 1997 and 1998 (52) (36) (88) Cash payments in 1999 - (24) (24) Credit to expense in 1999 - (11) (11) Cash payments in 2000 - (11) (11) Cash payments in 2001 - (1) (1) Foreign currency revaluation - (3) (3) ----------------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $ - $ 30 $ 30 ----------------------------------------------------------------------------------------------------------- </TABLE> The following table demonstrates the activity related to the A&A and Bain Hogg plan liabilities established as a result of 1996 and 1997 acquisitions: <TABLE> <CAPTION> Lease Abandonments Termination and Other (millions) Benefits Exit Costs Total ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Initial liability $ 100 $ 164 $ 264 Cash payments in 1997 and 1998 (100) (89) (189) Cash payments in 1999 - (28) (28) Charge to expense in 1999 - 13 13 Charge to expense in 2000 - 4 4 Cash payments in 2000 - (14) (14) Cash payments in 2001 - (2) (2) Foreign currency revaluation - (5) (5) ---------------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $ - $ 43 $ 43 ---------------------------------------------------------------------------------------------------------- </TABLE> All of Aon's unpaid liabilities relating to acquisitions are reflected in general expense liabilities in the condensed consolidated statements of financial position. 9. Business Transformation Plan ---------------------------- In fourth quarter 2000, Aon commenced a plan of restructuring its worldwide operations. This plan constitutes the "business transformation plan" to be implemented during the fourth quarter of 2000 and throughout 2001. A pretax special charge of $82 million was recorded in fourth quarter 2000 and $72 million was recorded in the first quarter 2001, which are included in general expenses in the condensed consolidated statement of income. The charge in the first quarter 2001 included costs related to termination benefits of $23 million, other costs to exit an activity of $3 million and asset impairments and other charges of $46 million. Since the beginning of the plan, approximately 2,000 employees have been notified that their positions have been or will be eliminated, the majority of which were related to the Insurance Brokerage and Other Services segment in the U.S. and the U.K. - 9 -
In the first quarter 2001, Aon made total payments of $22 million related to the business transformation plan. The following demonstrates the activity related to the liability for termination benefits and costs to exit an activity. <TABLE> <CAPTION> Other Costs Termination to Exit an (millions) Benefits Activity Total ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Expense charged in 2000 $ 54 $ 6 $ 60 Cash payments in 2000 (13) (3) (16) Expense charged in 2001 23 3 26 Cash payments in 2001 (19) (3) (22) ----------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $ 45 $ 3 $ 48 ----------------------------------------------------------------------------------------------------- </TABLE> All of Aon's unpaid liabilities relating to the business transformation plan are reflected in general expense liabilities in the condensed consolidated statements of financial position. 10. Income Per Share ---------------- Income per share is calculated as follows: <TABLE> <CAPTION> First Quarter Ended March 31, ----------------------------- (millions except per share data) 2001 2000 ----------------------------------------------------------------------------------- <S> <C> <C> Net income $ 19 $ 116 Redeemable preferred stock dividends 1 1 ---------------------------- Net income for dilutive and basic $ 18 $ 115 ============================ Basic shares outstanding 265 259 Common stock equivalents 3 1 ---------------------------- Dilutive potential common shares 268 260 ----------------------------------------------------------------------------------- Basic net income per share $ 0.07 $ 0.44 Dilutive net income per share $ 0.07 $ 0.44 ----------------------------------------------------------------------------------- </TABLE> 11. Alexander & Alexander Services Inc. (A&A) Discontinued Operations ----------------------------------------------------------------- A&A discontinued its property and casualty insurance underwriting operations in 1985, some of which were then placed into run-off, with the remainder sold in 1987. In connection with those sales, A&A provided indemnities to the purchasers for various estimated and potential liabilities, including provisions to cover future losses attributable to insurance pooling arrangements, a stop-loss reinsurance agreement, and actions or omissions by various underwriting agencies previously managed by an A&A subsidiary. As of March 31, 2001, the liabilities associated with the foregoing - 10 -
indemnities and liabilities of insurance underwriting subsidiaries that are currently in run-off were included in other liabilities in the accompanying condensed consolidated statements of financial position. Such liabilities amounted to $136 million, net of reinsurance recoverables and other assets of $175 million, and would be substantially reduced if a February, 2000 ruling from the Court of Appeal in England favorable to A&A, in respect of which right to appeal has been granted, were upheld in a decision expected in or around 2002. 12. Contingencies ------------- Aon and its subsidiaries are subject to numerous claims, tax assessments and lawsuits that arise in the ordinary course of business. The damages that may be claimed are substantial, including in many instances claims for punitive or extraordinary damages. Accruals for these items have been provided to the extent that losses are deemed probable and are estimable. In 1998, the Internal Revenue Service (IRS) proposed adjustments to the tax of certain Aon subsidiaries for the period of 1990 through 1993. Most of these adjustments should be resolved through factual substantiation of certain accounting matters. However, the IRS has contended that retro-rated extended warranty contracts do not constitute insurance for tax purposes. Accordingly, the IRS has proposed a deferral of deductions for obligations under those contracts. The effect of such deferral would be to increase the current tax obligations of certain Aon subsidiaries by approximately $74 million, $3 million, $5 million and $12 million (plus interest) in years 1990, 1991, 1992, and 1993, respectively. Aon believes that the IRS's position is without merit and inconsistent with numerous previous IRS private letter rulings. Aon has commenced an administrative appeal and intends to contest vigorously such treatment. Aon believes that if the contracts are deemed not to be insurance for tax purposes, they would be recharacterized in such a way that the increased taxes for the years in question would be far less than the proposed assessments. In the second quarter of 1999, Allianz Life Insurance Company of North America, Inc. ("Allianz") filed an amended complaint in Minnesota adding a brokerage subsidiary of Aon as a defendant in an action which Allianz brought against three insurance carriers reinsured by Allianz. These three carriers provided certain types of workers' compensation reinsurance to a pool of insurers and to certain facilities managed by Unicover Managers, Inc. ("Unicover"), a New Jersey corporation not affiliated with Aon. Allianz alleges that the Aon subsidiary acted as an agent of the three carriers when placing reinsurance coverage on their behalf. Allianz claims that the reinsurance it issued should be rescinded or that it should be awarded damages, based on alleged fraudulent, negligent and innocent misrepresentations by the carriers, through their agents, including the Aon subsidiary defendant. Aon believes that the Aon subsidiary has meritorious defenses and the Aon subsidiary intends to vigorously defend this claim. Except for an action filed to compel Aon to produce documents to which Aon is responding, the Allianz lawsuit is the only lawsuit or arbitration relating to Unicover in which any Aon-related entity is currently a party. Certain U.K. subsidiaries of Aon have been required by their regulatory body, the Personal Investment Authority (PIA), to review advice given by those subsidiaries to individuals who bought pension plans during the period from April 1988 to June 1994. These reviews have resulted in a requirement to pay compensation to clients based on guidelines issued by the PIA. Aon's ultimate exposure from the private pension plan review, as presently calculated, is subject - 11 -
to a number of variable factors including, among others, general level of pricing in the equity markets, the interest rate established quarterly for calculating compensation, and the precise scope, duration and methodology of the review, including whether recent regulatory guidance will have to be applied to previously settled claims. Although the ultimate outcome of all matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on Aon or its subsidiaries, on the basis of present information, amounts already provided, availability of insurance coverages and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the consolidated financial position of Aon. However, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by an unfavorable resolution of these matters. 13. Acquisition ----------- In February 2001, Aon announced that it had entered into a definitive agreement to acquire ASI Solutions Incorporated (ASI), a worldwide provider of human resources administration and compensation consulting services. The transaction was approved by ASI's stockholders and completed on May 9, 2001. The acquisition was financed by the issuance of approximately 3.1 million shares of common stock and has been accounted for as a purchase. - 12 -
AON CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER ENDED MARCH 31, 2001 GENERAL - ------- Aon has three operating segments: Insurance Brokerage and Other Services, Consulting and Insurance Underwriting. These segments are based on the type of client and the services or products delivered. Aon has a fourth, non-operating segment, Corporate and Other. References to organic growth exclude the impact of acquisitions, dispositions, transfers, investment income, foreign exchange and other unusual items. Written premiums are the basis for the measurement of organic growth within the Insurance Underwriting segment. References to income before income tax are before minority interest related to the issuance of 8.205% mandatorily redeemable preferred capital securities and the cumulative effect of a change in accounting principle. For purposes of operating segment discussions, comparisons against 2000 results exclude special charges. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS - ------------------------------------------------- This quarterly report contains certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors such as general economic conditions in different countries around the world, fluctuations in global equity and fixed income markets, changes in commercial property and casualty premium rates, the competitive environment, the actual cost of resolution of contingent liabilities, the final form of the business transformation plan, the ultimate cost and timing of the implementation thereof, the actual cost savings and other benefits resulting therefrom, whether the Company ultimately implements the proposed spin-off of its underwriting businesses, and the timing and terms associated therewith. SPIN-OFF OF UNDERWRITING BUSINESSES - ----------------------------------- As previously disclosed, on April 20, 2001, Aon's Board of Directors approved, in principle, a plan to spin-off its underwriting businesses to Aon's common stockholders, creating two independent, publicly traded companies. The spin-off would take the form of a tax-free dividend of common stock of the new company to Aon's common stockholders, pending a favorable Internal Revenue Service (IRS) ruling. The transaction requires final Board approval, subject to the favorable IRS ruling, and certain insurance regulatory approvals. The assets of the new company, to be called Combined Specialty Corporation, would include a substantial portion of the investment portfolio reported in the non-operating segment. The purpose of the spin-off is to provide opportunities for accelerated revenue and profit growth by providing clients additional products and services through expanded distribution channels. BUSINESS TRANSFORMATION PLAN - ---------------------------- In November 2000, Aon's Board of Directors approved, in principle, a comprehensive business transformation plan designed to enhance client service, significantly improve the way Aon conducts business and improve profitability primarily through utilization of technology and process redesign. - 13 -
Implementation of the business transformation plan began in fourth quarter 2000. Aon will incur costs estimated to be between $250 million and $325 million on a pretax basis comprised of both special charges and transition costs. The majority of the plan costs and savings are related to the Insurance Brokerage and Other Services segment, principally in the U.S. and the United Kingdom, where most of Aon's offices and employees are located. The majority of the charges involve cash outlays primarily for severance payments for workforce reductions relating to the elimination of about 6% of Aon's worldwide workforce at the time of the announcement. In connection with the plan, Aon recorded pretax special charges of $72 million ($44 million after tax or $0.16 per share) during first quarter 2001. In an effort to improve profitability, Aon examined its marginal return non-core business alliances and took a pretax charge in the quarter of $38 million to end Aon's involvement in certain joint ventures and service partner relationships that did not meet profitability hurdles. These business alliances in 2000 generated approximately $42 million in revenue with marginal profitability. Discontinuing these alliances will allow management to increase their focus and capital on Aon's core businesses. Within the core businesses, special charges of $23 million were incurred which related to termination benefits. Approximately 1,200 employees were notified that their positions have been or will be terminated. For the quarter, this charge is somewhat less than had originally been anticipated due to delays encountered. However, it is still anticipated that the remaining special charges will be taken by the end of second quarter 2001. Special charges of $11 million were incurred for asset impairments and other charges, primarily relating to the abandonment of systems and equipment. Transition costs, primarily related to our core operating businesses, were approximately $3 million in the first quarter and consisted of consultant fees and limited retention bonuses and are included in operating expenses. Timing of future transition costs will impact future periods. Annualized pretax savings from the plan are on track and are estimated to be approximately $150 million to $200 million. Full-annualized run rate savings are expected to be achieved in fourth quarter 2001. Savings generated in first quarter 2001 were offset by transition costs and temporary revenue declines related to the transformation. As Aon progresses through the next several quarters, more business process change and additional increase in position eliminations will drive cost savings. As previously noted, temporary pressure on revenue growth rates may continue to occur during the implementation of the plan. CONSOLIDATED RESULTS - -------------------- Total revenue increased $1 million, essentially flat when compared to the first quarter 2000. Excluding the effect of foreign exchange rates, revenues rose 4% over the first quarter 2000, primarily attributable to growth in brokerage commissions and fees and premiums earned, which more than offset a decline in investment income. Consolidated revenue for the operating segments grew approximately 7% on an organic basis over last year. Brokerage commissions and fees increased $76 million or 6% in first quarter 2001, primarily reflecting growth from business combination activity, especially Actuarial Sciences Associates, Inc. (ASA) which was acquired in the fourth quarter 2000, internal growth, increased new business and the impact of improved pricing. Premiums and other is primarily related to insurance underwriting operations. Premiums and other increased $40 million or 9% in first quarter 2001, compared with the same period last year. Total premiums earned in the insurance underwriting segment were $508 million, an increase of $45 million or 10% over prior year. The increase in premiums earned primarily reflects new business initiatives, continued organic growth and the impact of acquisitions. - 14 -
Investment income, which includes related expenses and income or loss on disposals and impairments, decreased $115 million in the first quarter 2001 when compared to prior year, primarily reflecting reduced valuations from equity investments in limited partnerships in the quarter, along with the recorded impairment of certain directly owned equity investments. Revenues from private equity investments fluctuate due to the inherent volatility of equity investments. Investment income from insurance brokerage and other services, and consulting operations, primarily relating to fiduciary funds, increased $3 million in first quarter 2001 compared to first quarter 2000 as a result of increases in net cash flows provided from operations, as interest rates have fallen, especially in the U.S. and the U.K. Total expenses increased $171 million or 11% in first quarter 2001 when compared to prior year due partially to the inclusion of special charges in 2001. Total expenses, excluding these special charges, increased 6%. General expenses increased $125 million or 10% in the quarter primarily reflecting special charges of $72 million related to the business transformation plan, along with investments in new business initiatives and technology. A $40 million or 16% increase in benefits to policyholders was driven by new underwriting initiatives along with an unusual increase in warranty claims during the first quarter 2001 related to an isolated program that will not affect future quarters. Interest expense increased $5 million or 16% compared to prior year attributed to higher average debt levels and the substitution of short-term debt with long-term debt in second quarter 2000. Income before income tax declined significantly from $218 million in 2000 to $48 million in 2001, due principally to non-cash investment results (a negative $115 million change on a period-to-period comparison) and the inclusion of 2001 special charges ($72 million) with no comparable amount in first quarter 2000, which were partially offset by improved results in the operating segments. As a result of these factors, first quarter 2001 net income declined to $19 million ($0.07 per dilutive share) compared to $116 million ($0.44 per dilutive share) in 2000. In 2000, the company adopted the Securities and Exchange Commission's Staff Accounting Bulletin 101, which resulted in a one-time cumulative non-cash charge of $7 million after-tax ($0.03 per share). Basic net income per share, including 2001 special charges, was $0.07 and $0.44 in first quarter 2001 and 2000, respectively. Dividends on the redeemable preferred stock have been deducted from net income to compute income per share. The effective tax rate was 39% for both first quarter 2001 and 2000. OPERATING SEGMENTS - ------------------ INSURANCE BROKERAGE AND OTHER SERVICES - -------------------------------------- The Insurance Brokerage and Other Services segment consists principally of Aon's retail brokerage, reinsurance, wholesale and specialty brokerage and other related services such as managing underwriting and claims services. Approximately 62% of Aon's total revenues are generated from this segment. First quarter 2001 Insurance Brokerage and Other Services revenue was $1.1 billion, up 4% over last year. Excluding foreign exchange, revenues rose 8%, reflecting strong organic growth, especially in the international, wholesale and reinsurance brokerage and claims services sectors. Investment income accounted for $3 million of the improvement as a result of increases in net cash flows provided from operations, as interest rates have fallen, especially in the U.S. and the U.K. U.S. revenue of $541 million in 2001 was up 3% from 2000 due to increased new business, growth in U.S. specialty operations, improved pricing and acquisitions, which more than offset the direct and indirect impact of the business transformation plan. As anticipated, new account generation during the quarter grew at a slower rate in certain retail brokerage units as operational changes were implemented to achieve long-term - 15 -
benefits of the plan. Premium rates increased across all major property and casualty lines and clients continued to utilize alternative risk transfer services to minimize price increases. U. K. and Continent of Europe revenue of $445 million increased 4% from 2000, primarily due to internal growth and acquisitions. The impact of foreign exchange rates partially offset this revenue growth. Rest of world revenue increased $11 million or 9% due to strong organic growth, new business, and to a lesser extent, the impact of acquisitions. In the international retail brokerage operations, premium rate comparisons have remained about the same as fourth quarter 2000 but are improved over last year's first quarter. Pretax income was $126 million for the first quarter 2001. Excluding this year's special charges, pretax income of $196 million rose 9% over 2000. Pretax margins before special charges in this segment were 17.6% in the quarter compared to 16.8% in 2000. The margin improvement year over year was driven in part from business transformation savings, but was negatively impacted by a temporary reduction in the rate of new account growth, transition costs and an increasing percentage of lower margin claims service business. CONSULTING - ---------- The consulting segment provides a full range of services related to the management of human capital, benefits and business processes. These services are delivered to a predominately corporate clientele utilizing four practice groups: employee benefits, compensation, management consulting and employment practices outsourcing. Approximately 12% of Aon's total revenues are generated from this segment. First quarter 2001 revenue increased 20% to $212 million. Excluding the impact of a strong U.S. dollar, revenues grew 24%. Revenue grew 8% in 2001 on an organic basis. On a global basis, the improvement in revenue was influenced by acquisition activity, especially the inclusion of ASA, acquired in fourth quarter 2000, along with organic growth, as client demand for solutions that enhance workforce productivity continued. U.S. revenue of $135 million in 2001 was up 36% from 2000 reflecting the acquisition of ASA and growth in compensation consulting. U.K. and European revenue of $58 million fell 5% from 2000. U.K. revenue declined 8% from the prior period reflecting the sale of the financial planning consulting business last year, along with unfavorable foreign exchange rates. Continent of Europe revenue was flat compared to the first quarter of 2000. Pretax income was $24 million, a 26% increase over last year's results. Excluding this year's special charges, pretax income improved 32% to $25 million from $19 million in first quarter 2000 as revenue growth outpaced higher staffing costs, driven by the inclusion of the ASA acquisition as well as the growth of the business, and higher technology costs. Pretax margins in this segment before special charges were 11.8% in the quarter compared to 10.8% in 2000. INSURANCE UNDERWRITING - ---------------------- The Insurance Underwriting segment provides life, accident and health insurance coverage through distribution networks, most of which are directly owned by Aon's subsidiaries, and extended warranty and property and casualty insurance products. Approximately 31% of Aon's total revenues are generated from this segment. Revenue was $567 million in first quarter 2001, up 7% from 2000. Excluding the impact of foreign exchange, revenue growth was 11%. Improvement over last year was driven by the development of new product initiatives, higher volume of business in the electronics extended warranty and specialty casualty areas and accident and health products, which continued to expand distribution through worksite marketing - 16 -
programs. This growth more than offset the loss of certain accounts in the mechanical and special warranty businesses. U.S. revenue of $406 million was up 8% in first quarter 2001 due to growth in revenues for accident and health, due in part to acquired business, new product initiatives, and electronics extended warranty products. United Kingdom and Continent of Europe revenue of $108 million rose 4%, as organic growth in the accident and health sector was partially offset by unfavorable foreign exchange rates. Rest of world revenue was $53 million, up 6% from prior year reflecting growth in Latin America. Pretax income before special charges was $68 million in first quarter 2001, up 2% from $67 million last year. Margins declined slightly from 12.6% in 2000 to 12% this year. New underwriting initiatives drove premium growth but also resulted in increased benefits to policyholders. Also, an unusual increase in warranty claims occurred during the first quarter 2001 related to an isolated program that will not affect future quarters. NON-OPERATING SEGMENT - --------------------- CORPORATE AND OTHER - ------------------- Revenue in this category consists primarily of investment income (including income or loss on disposals, along with impairment losses) which is not otherwise reflected in the results of the operating segments. Invested assets and related investment income not directly required to support the insurance brokerage and consulting businesses, together with the assets in excess of net policyholder liabilities of the underwriting businesses and related income, are allocated to the Corporate and Other segment. Corporate operating expenses include administrative and certain information technology costs. Corporate and Other revenue was a negative $85 million in 2001, versus positive revenue of $30 million in the first quarter 2000, primarily reflecting reduced valuations for equity investments in limited partnerships in the quarter, along with the write-down of certain directly-owned equity investments. Limited partnership investments have historically provided higher returns over a longer time horizon than broad market common stock returns. However, in the short run, the returns are inherently more variable. Corporate and Other expenses for the quarter were $84 million, up $6 million from the same period last year. Expenses in this segment are composed of interest expense, goodwill amortization and general expenses. Interest expense rose $5 million or 16% compared to prior year, reflecting higher average debt levels and an extension of debt duration in second quarter 2000. Goodwill amortization rose $2 million as a result of new acquisitions, while general expenses fell $1 million, resulting from lower technology costs. The revenue and expense comparisons discussed above contributed to the overall corporate and other pretax loss of $169 million in the quarter versus a loss of $48 million last year. - 17 -
CASH FLOW AND FINANCIAL POSITION AT THE END OF FIRST QUARTER 2001 Cash flows from operating activities represent the net income earned by Aon in the reported periods adjusted for non-cash charges and changes in assets and liabilities. Cash flows provided by operating activities in first quarter 2001 were $332 million, a $186 million increase over the same period in 2000. The increase represents, in part, the timing of payment for incentive compensation. Also, working capital improved due to fiduciary funds availability. In addition, the non-cash effect of lower valuations on the company's limited partnership portfolio, coupled with impairments on investments and losses on disposals, contributed to lower net income. The cash impact of special charges and purchase accounting liabilities in 2001 was similar to what was spent last year. First quarter 2001 reflects the pretax special charges of $72 million, less cash expended. First quarter 2000 reflects only actual payments on special charge and purchase accounting liabilities previously established. Investing activities used cash of $186 million. Cash of $103 million was provided during first quarter 2001 from the net sale of other investments. This was offset by the net purchase of short-term investments of $180 million. Cash used for acquisition activity during first quarter 2001 was $44 million, primarily reflecting brokerage acquisitions. Cash of $376 million was used during first quarter 2001 from financing activities, which was $235 million more than was utilized in 2000. The higher usage of cash from prior year is primarily due to a reduction of short-term borrowings in 2001 versus an increase in short-term debt during first quarter 2000. Cash was used to pay dividends of $57 million on common stock and $1 million on redeemable preferred stock during first quarter 2001. Various regulatory requirements applied to Aon's underwriting and overseas operations limit availability of operating cash flows for general corporate purposes. Aon's operating subsidiaries anticipate that there will be adequate liquidity to meet their needs in the foreseeable future. Aon's liquidity needs are primarily for servicing its debt and for the payment of dividends on stock issues and capital securities. The businesses of Aon's operating subsidiaries continue to provide substantial positive cash flow. Brokerage cash flow has been used primarily for business reinvestment, acquisition financing and payments of special charge and purchase accounting liabilities. Aon anticipates continuation of the company's positive cash flow and the ability of the parent company to access adequate short-term lines of credit. Aon anticipates a sufficient level of future operating cash flows to offset cash payments related to both restructuring charges and transition costs associated with the business transformation plan. Due to the contractual nature of its insurance policyholder liabilities, which are primarily intermediate to long-term in nature, Aon has invested primarily in fixed maturities. With a carrying value of $2.3 billion, Aon's total fixed maturity portfolio is invested primarily in investment grade holdings (95%) and has a fair value which is 99.9% of amortized cost at March 31, 2001. Total assets decreased $214 million since year-end 2000 to $22 billion. Invested assets at March 31, 2001 increased $60 million from year-end levels primarily from higher levels of short-term investments and equity securities which were offset in part by lower valuations and impairment charges in other investments. The amortized cost and fair value of less than investment grade fixed maturity investments at March 31, 2001 were $129 million and $115 million, respectively. The carrying value of non-income producing investments in Aon's portfolio at March 31, 2001 was $65 million, or 1.1% of total invested assets. - 18 -
Short-term borrowings decreased at the end of first quarter 2001 by $249 million when compared to year-end 2000. Notes payable increased at the end of first quarter 2001 by $6 million when compared to year-end 2000, reflecting the issuance of additional debt. Approximately $12 million of notes payable is scheduled to be paid within one year. Stockholders' equity decreased $25 million in first quarter 2001, reflecting net foreign exchange losses of $43 million and dividends paid to stockholders of $58 million. Partially offsetting this decline was the net decrease in treasury stock of $37 million and net income of $19 million. Unrealized investment gains and losses and foreign exchange gains and losses fluctuations from period to period are largely based on market conditions. Stockholders' equity per share declined from $13.02 at December 31, 2000 to $12.84 at March 31, 2001, reflecting both the decline in the equity balance as well as an increase in the number of common shares outstanding. REVIEW BY INDEPENDENT AUDITORS - ------------------------------ The condensed consolidated financial statements at March 31, 2001 and for the first quarter then ended have been reviewed, prior to filing, by Ernst & Young LLP, Aon's independent auditors, and their report is included herein. - 19 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Stockholders Aon Corporation We have reviewed the accompanying condensed consolidated statement of financial position of Aon Corporation as of March 31, 2001, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated statement of financial position of Aon Corporation as of December 31, 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended, not presented herein, and in our report dated February 8, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2000, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived. ERNST & YOUNG LLP Chicago, Illinois May 9, 2001 - 20 -
PART II ------- OTHER INFORMATION ----------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Stockholders of the Registrant was held on April 20, 2001 (the "2001 Annual Meeting"). (b) Not applicable. <TABLE> <CAPTION> (c)(i) Name For Against ---- --- ------- <S> <C> <C> Franklin A. Cole 230,333,000 2,173,981 Edgar D. Jannotta 230,374,240 2,132,741 Lester B. Knight 230,418,603 2,088,378 Perry J. Lewis 230,407,554 2,099,427 Andrew J. McKenna 230,351,122 2,155,859 Robert S. Morrison 230,398,763 2,108,218 Richard C. Notebaert 230,392,437 2,114,544 Michael D. O'Halleran 230,333,517 2,173,464 Donald S. Perkins 230,334,358 2,172,623 John W. Rogers, Jr. 230,448,048 2,058,933 Patrick G. Ryan 230,399,284 2,107,697 George A. Schaefer 230,346,608 2,160,373 Raymond I. Skilling 230,378,717 2,128,264 Fred L. Turner 230,394,229 2,112,752 Arnold R. Weber 230,335,897 2,171,084 Carolyn Y. Woo 209,812,702 22,694,279 </TABLE> (ii) Set forth below is the tabulation of the vote on the approval of the Aon Stock Incentive Plan, which includes provisions qualifying the plan for favorable treatment under Section 162(m) of the Internal Revenue Code. <TABLE> <CAPTION> For Against Abstain Non-Vote --- ------- ------- -------- <S> <C> <C> <C> <C> 133,593,506 78,059,665 1,963,719 18,890,091 </TABLE> (iii) Set forth below is the tabulation of the vote on the adoption of the amendment of the Senior Officer Incentive Compensation Plan which includes provisions qualifying that plan for favorable treatment under Section 162(m) of the Internal Revenue Code. <TABLE> <CAPTION> For Against Abstain --- ------- ------- <S> <C> <C> <C> 223,697,019 6,557,479 2,252,483 </TABLE> - 21 -
(iv) Set forth below is the tabulation of the vote on the selection of Ernst & Young LLP as auditors for the Registrant for the 2001 fiscal year. <TABLE> <CAPTION> For Against Abstain --- ------- ------- <S> <C> <C> <C> 230,530,164 1,009,525 967,292 </TABLE> (d) Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The exhibits filed with this report are listed on -------- the attached Exhibit Index. (b) Reports on Form 8-K - ---------------------- (i) No Current Reports on Form 8-K were filed for the quarter ended March 31, 2001. (ii) The Registrant filed one current report on Form 8-K dated April 20, 2001. The following exhibit was included in the report: Exhibit 99 - Press Release issued on April 20, 2001. SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Aon Corporation --------------- (Registrant) May 14, 2001 /s/ Harvey N. Medvin --------------------- HARVEY N. MEDVIN EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (Principal Financial and Accounting Officer) - 22 -
Aon CORPORATION - --------------- Exhibit Number In Regulation S-K Item 601 Exhibit Table - ---------------------- (12) Statements regarding Computation of Ratios. (a) Statement regarding Computation of Ratio of Earnings to Fixed Charges. (b) Statement regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (15) Letter re: Unaudited Interim Financial Information - 23 -
<TABLE> <CAPTION> EXHIBIT 12(a) Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES COMBINED WITH UNCONSOLIDATED SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, --------------------- -------------------------------------------------------- (millions except ratios) 2001 2000 2000 1999 1998 1997 1996 --------- ---------- ---------- --------- ---------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> Income from continuing operations before provision for income taxes (1) $ 48 $ 218 $ 854 $ 635 $ 931 $ 542 $ 446 ADD BACK FIXED CHARGES: Interest on indebtedness 36 31 140 105 87 70 45 Interest on ESOP - - - 1 2 3 4 Portion of rents representative of interest factor 14 12 54 49 51 44 29 --------- ---------- ---------- --------- ---------- --------- ---------- INCOME AS ADJUSTED $ 98 $ 261 $ 1,048 $ 790 $ 1,071 $ 659 $ 524 ========= ========== ========== ========= ========== ========= ========== FIXED CHARGES: Interest on indebtedness $ 36 $ 31 $ 140 $ 105 $ 87 $ 70 $ 45 Interest on ESOP - - - 1 2 3 4 Portion of rents representative of interest factor 14 12 54 49 51 44 29 --------- ---------- ---------- --------- ---------- --------- ---------- TOTAL FIXED CHARGES $ 50 $ 43 $ 194 $ 155 $ 140 $ 117 $ 78 ========= ========== ========== ========= ========== ========= ========== RATIO OF EARNINGS TO FIXED CHARGES 2.0 6.1 5.4 5.1 7.6 5.6 6.7 ========= ========== ========== ========= ========== ========= ========== <FN> (1) Income from continuing operations before provision for income taxes and minority interest includes special charges of $72 million for the three months ended March 31, 2001 and $82 million, $313 million, $172 million and $90 million for the years ended December 31, 2000, 1999, 1997 and 1996, respectively. </FN> </TABLE>
<TABLE> <CAPTION> EXHIBIT 12(b) Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES COMBINED WITH UNCONSOLIDATED SUBSIDIARIES Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ---------------------- ---------------------------------------------------------- (millions except ratios) 2001 2000 2000 1999 1998 1997 1996 ---------- ---------- ----------- ---------- ---------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> Income from continuing operations before provision for income taxes (1) $ 48 $ 218 $ 854 $ 635 $ 931 $ 542 $ 446 ADD BACK FIXED CHARGES: Interest on indebtedness 36 31 140 105 87 70 45 Interest on ESOP - - - 1 2 3 4 Portion of rents representative of interest factor 14 12 54 49 51 44 29 ---------- ---------- ----------- ---------- ---------- ---------- ----------- INCOME AS ADJUSTED $ 98 $ 261 $ 1,048 $ 790 $ 1,071 $ 659 $ 524 ========== ========== =========== ========== ========== ========== =========== FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Interest on indebtedness $ 36 $ 31 $ 140 $ 105 $ 87 $ 70 $ 45 Preferred stock dividends 17 17 70 70 70 82 29 ---------- ---------- ----------- ---------- ---------- ---------- ----------- INTEREST AND DIVIDENDS 53 48 210 175 157 152 74 Interest on ESOP - - - 1 2 3 4 Portion of rents representative of interest factor 14 12 54 49 51 44 29 ---------- ---------- ----------- ---------- ---------- ---------- ----------- TOTAL FIXED CHARGES AND PREFERRED STOCK DIVIDENDS $ 67 $ 60 $ 264 $ 225 $ 210 $ 199 $ 107 ========== ========== =========== ========== ========== ========== =========== RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (2) 1.5 4.4 4.0 3.5 5.1 3.3 4.9 ========== ========== =========== ========== ========== ========== =========== <FN> (1) Income from continuing operations before provision for income taxes and minority interest includes special charges of $72 million for the three months ended March 31, 2001 and $82 million, $313 million, $172 million and $90 million for the years ended December 31, 2000, 1999, 1997 and 1996, respectively. (2) Included in total fixed charges and preferred stock dividends are $16 million for the three months ended March 31, 2001 and 2000, $66 million for the years ended December 31, 2000, 1999 and 1998, and $64 million for the year ended December 31, 1997, of pretax distributions on the 8.205% mandatorily redeemable preferred capital securities which are classified as "minority interest" on the condensed consolidated statements of income. </FN> </TABLE>
Exhibit 15 Board of Directors and Stockholders Aon Corporation We are aware of the incorporation by reference in the Registration Statements of Aon Corporation ("Aon") described in the following table of our report dated May 9, 2001 relating to the unaudited condensed consolidated interim financial statements of Aon Corporation that are included in its Form 10-Q for the quarter ended March 31, 2001: Registration Statement ---------------------- Form Number Purpose ---- ------ ------- S-8 33-27984 Pertaining to Aon's savings plan S-8 33-42575 Pertaining to Aon's stock award plan and stock option plan S-8 33-59037 Pertaining to Aon's stock award plan and stock option plan S-4 333-21237 Offer to exchange Capital Securities of Aon Capital A S-3 333-50607 Pertaining to the registration of 369,000 shares of common stock S-8 333-55773 Pertaining to Aon's stock award plan, stock option plan and employee stock purchase plan S-3 333-78723 Pertaining to the registration of debt securities, preferred stock and common stock S-3 333-49300 Pertaining to the registration of 3,864,824 shares of common stock S-4 333-57706 Pertaining to the registration of a proposed issuance of up to 3,852,184 shares of common stock to the stockholders of ASI Solutions, Inc. Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statements prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. ERNST & YOUNG LLP Chicago, Illinois May 9, 2001