Aon Reports Second Quarter and Six Months 2002 Results; Provides Updates on Strategic Options for Combined Specialty, SEC Comments and Financial Outlook.Business Editors CHICAGO--(BUSINESS WIRE)--Aug. 7, 2002 Aon Corporation (NYSE NYSE See: New York Stock Exchange :AOC AOC, n an acronym for the Aromatherapy Organizations Council. ) today reported second quarter and six months 2002 results. Reported dilutive net income per share for second quarter 2002 was breakeven breakeven 1. The level of output or sales necessary to cover fixed expenses. Companies in industries that have high fixed costs and, consequently, high breakevens, such as automobile and steel manufacturing, are likely to exhibit large fluctuations compared with $0.11 in the year ago period. Comparable six months results were $0.37 for 2002 and $0.17 for 2001. The table below outlines some of the items that influenced the second quarter and six months results. It is followed by a description of the items and segment results.
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Earnings Per Share Second Quarter Six Months
(EPS) Analysis 2002 2001 2002 2001
------------------- ------------------ ----------------
Reported Dilutive EPS $ - $ 0.11 $ 0.37 $ 0.17
WTC charges - - (0.20) -
Special charges -
spin off expenses (0.01) - (0.02) -
Special (charges)
credits - Business
Transformation Plan 0.01 (0.33) 0.01 (0.49)
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EPS before WTC &
special charges $ - $ 0.44 $ 0.58 $ 0.66
One-time tax related item - - 0.11 -
Cumulative adjustment -
other than temporary
impairments (0.13) - (0.13) -
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EPS before WTC & special
charges, tax item, and
cumulative adjustment $ 0.13 $ 0.44 $ 0.60 $ 0.66
NPS related costs (0.08) - (0.08) -
Underwriting segment
non-claim litigation
reserves (0.03) - (0.03) -
Corporate & Other
segment revenue
excluding tax item
and cumulative
adjustment (0.09) (0.03) (0.09) (0.22)
Goodwill amortization - (0.09) - (0.18)
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EPS before WTC & special
charges, tax item,
cumulative adjustment,
NPS, underwriting
reserves, corporate &
other segment revenue
and goodwill
amortization $ 0.33 $ 0.56 $ 0.80 $ 1.06
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World Trade Center (WTC WTC World Trade Center, see there ) charges or special charges/credits related to the business transformation and spin off plans factored into the comparisons. Excluding these items, second quarter dilutive earnings per share were breakeven and $0.44, respectively, for 2002 and 2001. Similar six months earnings per share comparisons were $0.58 for 2002 and $0.66 for 2001. Comparisons were also impacted by a favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. $0.11 per share one-time one-time adj. 1. or one·time a. Occurring or undertaken only once: a one-time winner in 1995. b. tax item for six months 2002 and an unfavorable $0.13 per share cumulative adjustment in second quarter 2002 for other than temporary impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. investment losses related to prior periods. When further adjusting for these items, second quarter dilutive earnings per share were $0.13 and $0.44, respectively, for 2002 and 2001, and $0.60 and $0.66 for the comparable six-month periods. Patrick G. Ryan Ryan may refer to: Places
A ratio used to measure a company's pricing strategy and operating efficiency. Calculated by: and lower investment income." Ryan added, "We have been taking steps to improve underperforming units including management changes in U.S. retail brokerage BROKERAGE, contracts. The trade or occupation of a broker; the commissions paid to a broker for his services. and managing underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. . We must do a better job of controlling expenses and improving margins by leveraging our resources, scale and distribution." Mr. Ryan further commented, "Many individual operating units operating unit A type of operating company that engages in transactions with outsiders and that is owned by another business. For example, in 1995 the stockholders of Capital Cities/ABC approved a $19 billion merger with the Walt Disney Company, whereupon including international, reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. and wholesale brokerage, continued to perform well in the quarter - and their performance is indicative indicative: see mood. of the true potential of our organization. We believe their continued good results and our corrective action A corrective action is a change implemented to address a weakness identified in a management system. Normally corrective actions are instigated in response to a customer complaint, abnormal levels if internal nonconformity, nonconformities identified during an internal audit or plans should improve our financial performance in the second half of this year and into 2003." Second quarter and six months 2001 earnings included special charges related to the business transformation plan of $0.33 and $0.49 per share, respectively. A special business transformation credit of $0.01 per share was recorded in second quarter 2002. Special charges in 2002 related to spin off expenses were $0.01 per share in the second quarter and $0.02 per share for six months. As previously reported, six months 2002 earnings also included the establishment of a $90 million pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern ($0.20 per share) allowance for a potentially uncollectible Adj. 1. uncollectible - not capable of being collected; "a bad (or uncollectible) debt" bad invalid - having no cogency or legal force; "invalid reasoning"; "an invalid driver's license" WTC reinsurance receivable. On May 30th, Aon stated that it would incur To become subject to and liable for; to have liabilities imposed by act or operation of law. Expenses are incurred, for example, when the legal obligation to pay them arises. An individual incurs a liability when a money judgment is rendered against him or her by a court. an expense of approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $20 million to $30 million pretax in second quarter 2002 for an expected loss due to an alleged fraud and breach of contract by National Program Services, Inc. (NPS NPS National Park Service NPS Naval Postgraduate School NPS Net Promoter Score (customer management) NPS Non-Point Source pollution NPS Native Plant Society NPS Norfolk Public Schools (Virginia) ), an independent managing general agent. The estimated range was based upon information available at the time. After further review, the actual expense was determined to be $36 million pretax ($0.08 per share) recorded in second quarter 2002 in the Insurance Underwriting segment. Approximately $15 million of the expense is related to an allowance for potentially uncollectible receivables Receivables An asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Receivables are recorded by a company's accountants and reported on the balance sheet, and they and include all debts owed and other costs, and approximately $21 million is related to an increase in expected losses under the insurance program. The Company also incurred $15 million of pretax expenses related to non-claim litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. reserve items within the Insurance Underwriting segment, which were recorded as general expenses. As previously reported, the Company has been corresponding with the Securities and Exchange Commission (SEC) regarding both a Form 10 filing for the spin off of Combined Specialty Group, Inc. (CSG CSG - constructive solid geometry ) and a comment letter regarding Aon's 2001 Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. and first quarter 2002 Form 10-Q Form 10-Q See 10-Q. . Although the Company and the SEC have not reached agreement on all comments raised by the SEC, in second quarter 2002, Aon recorded an adjustment that captures the non-cash cumulative pretax earnings impact of other than temporary impairment losses for certain of its investments for the years ended 1999 and 2000 and for the first quarter ended March 31, 2002. The adjustment, equaling $56 million pretax or $0.13 per share, was recorded in non-operating Corporate and Other segment revenue. The cumulative adjustment does not affect Aon's aggregate stockholders' equity Stockholders' Equity The portion of the balance sheet that includes capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings. This is equal to total assets minus liabilities, preferred stock and intangible assets. since the amounts had previously been recorded as unrealized losses Unrealized Loss A loss that results from holding onto an asset rather than cashing it in and officially taking the loss. Notes: Let's say you own a stock that is down 50%, but you haven't sold it to realize the loss yet. This is said to be an unrealized loss. through other comprehensive losses in the statements of financial position. Based on discussions with the SEC, the Company has concluded that certain non-cash other than temporary losses should have been recorded in prior periods. However, the Company has determined that the impact on prior periods, as well as the impact on estimated earnings for 2002, would not be material. Accordingly, the Company has recorded the impact in the current interim period. The Company is continuing its discussions with the SEC and while the Company believes its approach to recording the other than temporary impairments is reasonable, the SEC's Division of Corporation Finance could challenge the Company's recording of the other than temporary impairments in the current quarter rather than in prior periods. If the SEC decides that Aon should amend prior period results, the reduction to prior period pretax earnings and related earnings per share would be: 1999 - ($27 million or $0.06 per share); 2000 - ($24 million or $0.06 per share); and first quarter 2002 - ($5 million or $0.01 per share). Amortization of intangibles Property that is a "right" such as a patent, Copyright, or trademark, or one that is lacking physical existence, such as good will. was $14 million in second quarter 2002 compared with $39 million one year ago due to the adoption of FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). 142 that eliminates the amortization of goodwill. Consolidated con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: revenue of $2.1 billion in the second quarter increased 11% from $1.9 billion in the prior year. Consolidated revenue for six months 2002 was $4.2 billion, up from $3.7 billion in 2001. Operating Segments Aon's three operating segments - Insurance Brokerage and Other Services, Consulting, and Insurance Underwriting - recorded aggregate second quarter revenue of $2.217 billion, up 15% from the prior year. Operating segment revenue growth was principally driven by strong organic growth, particularly in the Insurance Underwriting segment. Second quarter operating segment investment income decreased $23 million from the same period in 2001 to $69 million, due largely to declining interest rates. Total operating segment pretax income pretax income Reported income before the deduction of income taxes. Pretax income is sometimes considered a better measure of a firm's performance than aftertax income because taxes in one period may be influenced by activities in earlier periods. in second quarter 2002 before special charges and World Trade Center related items was $160 million compared with $304 million in 2001. Second quarter 2002 results were negatively affected by $36 million of NPS related costs and $15 million of non-claim litigation reserve items, as well as the decline in investment income and lower operating margins. Second quarter 2001 benefited from an $8 million one-time pension curtailment Curtailment The act of contracting or reducing operations of a company in the hope of bringing it financial or operational stability. This management technique is often used when a company has grown too fast and is unable to effectively manage its operations. gain. Second quarter and six month 2001 business transformation special charges were $146 million and $218 million, respectively, compared with a $6 million credit for the similar periods in 2002. Spin-off The situation that arises when a parent corporation organizes a subsidiary corporation, to which it transfers a portion of its assets in exchange for all of the subsidiary's capital stock, which is subsequently transferred to the parent corporation's shareholders. special charges were $3 million and $8 million, respectively, for second quarter and six months 2002, with no similar expenses in the year ago periods. The spin-off expenses are primarily for outside professional fees. WTC and special charges are addressed above in the aggregate operating segment period comparisons but are not included in the individual operating segment comparisons below. Second quarter Insurance Brokerage and Other Services segment reported revenue grew 12% to $1.292 billion compared with $1.154 billion in 2001. Organic revenue growth was 10% in the quarter driven by strong results from international, reinsurance and wholesale brokerage. U.S. retail brokerage organic revenue growth was 8% for the quarter. As reported in first quarter 2002, there was slower revenue growth from certain managing general underwriting programs due to a required change in an insurance carrier relationship that was resolved in the second quarter, and should improve in the latter half of the year. Claims services revenue was below internal targets. Investment income decreased $5 million to $30 million in the second quarter, primarily due to declining interest rates. Premium rates continued to increase across all major property and casualty lines and clients are increasingly using alternative risk transfer services, including captive captive said of naturally wild or feral animals kept in captivity for educational and scientific investigation with no attempt being made to domesticate them. management, to minimize In a graphical environment, to hide an application that is currently displayed on screen. For example, in Windows and Mac, the application's window is removed from the screen and represented by an icon on the Windows Taskbar. In the Mac, the icon is placed in the Dock. See Win Minimize windows. overall risk management costs. Second quarter 2002 Insurance Brokerage and Other Services segment reported pretax income was $136 million compared with $195 million in second quarter 2001. The pretax margin in second quarter 2002 was 10.5% compared with 16.9% in the year ago period. Net transition costs, consisting mostly of process conversion expenses, consulting fees and temporary help that were related to the implementation of the business transformation, were $7 million in the quarter and $2 million in the prior year period. Second quarter margin comparisons were also negatively impacted by a combined $34 million pretax income decline for U. S. retail brokerage and managing underwriting year-over-year. Increased pension costs and the decline in investment income also pressured margins. Also, as indicated above, second quarter 2001 benefited from a one-time pension curtailment gain of $8 million. International, reinsurance and wholesale brokerage had very favorable increases in operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. year-over-year and positively influenced the margin. Consulting segment reported revenue rose 8% to $248 million from $229 million in the year-ago second quarter. This increase reflects core growth, especially from European European emanating from or pertaining to Europe. European bat lyssavirus see lyssavirus. European beech tree fagussylvaticus. European blastomycosis see cryptococcosis. operations and new outsourcing (1) Contracting with outside consultants, software houses or service bureaus to perform systems analysis, programming and datacenter operations. Contrast with insourcing. See netsourcing, ASP, SSP and facilities management. business, as well as the impact of acquisitions. Despite more challenging economic conditions, consulting segment organic revenue growth was up from 4% in first quarter 2002 to 6%, due partly to increased outsourcing revenues. Pretax income was $23 million versus $30 million in second quarter 2001, and the consulting pretax margin was 9.3% in the second quarter compared with 13.1% in the year ago period. The effects of a weaker economic environment, the deferment deferment Delaying of an obligation. See Default, Medical student debt. Cf Forbearance. of discretionary projects by clients and an increasing mix of lower margin outsourcing revenues pressured margins. Insurance Underwriting segment reported revenue increased 24% to $677 million in second quarter 2002, up from $548 million in second quarter 2001, reflecting the impact of strong organic growth and acquisitions. Increased accident and health premium growth, especially in new initiatives, and the First Extended automobile automobile, self-propelled vehicle used for travel on land. The term is commonly applied to a four-wheeled vehicle designed to carry two to six passengers and a limited amount of cargo, as contrasted with a truck, which is designed primarily for the transportation of warranty An assurance, promise, or guaranty by one party that a particular statement of fact is true and may be relied upon by the other party. Warranties are used in a variety of commercial situations. In many instances a business may voluntarily make a warranty. acquisition factored into the reported revenue increase. Second quarter investment income decreased $17 million from the prior year period, mostly due to reduced interest rates. Insurance underwriting pretax income was $1 million in the second quarter compared with $79 million in the prior year period. The pretax margin was less than one percent for the quarter compared with 14.4% in second quarter 2001. The decline was largely caused by the $36 million one-time NPS costs ($12 million of which is included in benefits to policyholders), $15 million of non-claim litigation reserve items, a $17 million decline in investment income and an increased payout ratio Payout Ratio The percentage of earnings paid out in dividends. It is calculated by dividing dividends per share by earnings per share. Notes: The payout ratio indicates how well earnings support the dividend payments: the lower the ratio, the more secure the dividend. of benefits to policy and warranty holders versus net premiums earned. Mr. Ryan commented, "Certain insurance and warranty lines experienced claims beyond internal targets related to both one-time factors as well as fundamentally higher benefit payouts, and we are addressing these areas. For certain new initiative lines, we are reviewing premium rates for adequacy and will make adjustments." Corporate and Other segment revenue was negative $95 million in the quarter and negative $14 million a year ago. These revenues are derived de·rive v. de·rived, de·riv·ing, de·rives v.tr. 1. To obtain or receive from a source. 2. from investment results not directly tied to the Company's operating segments and primarily reflect equity investments. Second quarter 2002 investment results reflected derivative derivative: see calculus. derivative In mathematics, a fundamental concept of differential calculus representing the instantaneous rate of change of a function. losses of $13 million. It also included other than temporary impairment investment losses of $101 million (of which $32 million related to the preferred securities of PEPS PEPS See Participating Equity Preferred Shares (PEPS). I, a recently formed special purpose entity) and $56 million from a cumulative adjustment for other than temporary impairments pertaining per·tain intr.v. per·tained, per·tain·ing, per·tains 1. To have reference; relate: evidence that pertains to the accident. 2. to prior periods. The Corporate and Other segment pretax loss pretax loss A loss reported before tax benefits are considered. for the quarter was $147 million, compared with a pretax loss of $94 million in the prior year quarter, due primarily to the decline in Corporate and Other segment revenue and partially offset by the elimination of goodwill amortization. In first quarter 2002, Aon adopted Financial Accounting Standards Board Financial Accounting Standards Board (FASB) Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). (FASB) Statement No. 142, Goodwill and Other Intangible Assets Intangible Asset An asset that is not physical in nature. Notes: Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. , effective January January: see month. 1, 2002. The amortization of goodwill is no longer included in Aon's reported earnings per share. As previously reported, no impairment charges resulted from the adoption of Statement No. 142. Goodwill amortization expense was $29 million or $0.09 per share in second quarter 2001 with no comparable expense in 2002. Balance Sheet Stockholders' equity at June June: see month. 30, 2002 was $3.7 billion, up from $3.5 billion as of March 31, 2002. Total debt was $2.1 billion at the end of the second quarter, up slightly from $2.0 billion at the end of first quarter 2002. Business Transformation Update During the second quarter, Aon's U.S. retail brokerage operations completed the final transfer of necessary account information from all U.S. retail offices to the four regional service centers (client service business units-CSBUs). This conversion of routine task processing to the service centers is designed to increase relationship manager and producer time for enhanced local client interaction on more value added Value Added The enhancement a company gives its product or service before offering the product to customers. Notes: This can either increase the products price or value. initiatives, a critical step given the challenging risk environment our clients are facing. Outside of U.S. retail brokerage, the business transformation plan has been substantially implemented and has delivered expected benefits of improved revenue growth and enhanced productivity. Within U.S. retail brokerage, delays were experienced in implementing the plan and gross savings are being reduced by increased compensation for certain U.S. retail brokerage employees and the hiring of new employees with special skills at higher compensation levels. Transition costs related to the transformation were $7 million in the quarter. The Company does not expect any further transition costs. Mr. Ryan added, "We have staffed our brokerage operations to take advantage of increased demand. The completion of the transformation will now allow us to rededicate Verb 1. rededicate - dedicate anew; "They were asked to rededicate themselves to their country" dedicate, devote, commit, consecrate, give - give entirely to a specific person, activity, or cause; "She committed herself to the work of God"; "give one's talents to a our efforts to deepening deep·en tr. & intr.v. deep·ened, deep·en·ing, deep·ens To make or become deep or deeper. Noun 1. deepening - a process of becoming deeper and more profound client relationships and adding new clients. In addition, we believe we will become increasingly more productive on our improved operating model Operating Model is a term that is used in many contexts. In essence an operating model describes how an organization operates across both business and technology domains. The Operating Model describes what is important for the organization. in our brokerage operations as employees become even more experienced with the new processes. And, we believe that brokerage segment operating margins in the second half of 2002 will increase year-over-year as we improve the alignment Alignment is the adjustment of an object in relation with other objects, or a static orientation of some object or set of objects in relation to others.
In second quarter 2002, $6 million pretax ($0.01 per share) of costs previously incurred in connection with the business transformation plan in the U.S. were reversed and included as a credit to general expenses. September September: see month. 11 As previously noted, the Company established a $90 million pretax allowance for a potentially uncollectible receivable related to a disclosed dis·close tr.v. dis·closed, dis·clos·ing, dis·clos·es 1. To expose to view, as by removing a cover; uncover. 2. To make known (something heretofore kept secret). dispute with certain reinsurers at Lloyd's Lloyd's, London insurance underwriting corporation of many separate syndicates; often called Lloyd's of London. Founded in the late 17th cent. by a group of merchants, shipowners, and insurance brokers at the coffeehouse of Edward Lloyd, the association is now over a World Trade Center reinsurance claim, which Aon is continuing to vigorously vig·or·ous adj. 1. Strong, energetic, and active in mind or body; robust. See Synonyms at healthy. 2. Marked by or done with force and energy. See Synonyms at active. pursue with reinsurers. This reinsurance claim pertains to accidental accidental /ac·ci·den·tal/ (ak?si-den´t'l) 1. occurring by chance, unexpectedly, or unintentionally. 2. nonessential; not innate or intrinsic. death insurance coverage for Aon employees. Aon's litigation with reinsurers in no way impacts Aon's other insurance claims related to the destruction of the WTC. Aon is currently in the normal process of presenting insurance claims to its property and other insurers for losses related to property, extra expense, business interruption INTERRUPTION. The effect of some act or circumstance which stops the course of a prescription or act of limitation's. 2. Interruption of the use of a thing is natural or civil. and other coverages. Insurance Underwriting Update: Combined Specialty Group The Company had previously announced plans to spin-off its insurance underwriting operations to stockholders through a new company named Combined Specialty Group, Inc. In March 2002, Combined Specialty filed a Form 10 with the Securities and Exchange Commission (SEC) and in April 2002, Aon received a favorable private letter ruling from the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. . The Company had also previously stated its intention to raise common equity in connection with the proposed spin-off, subject to market conditions, regulatory reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. review, a favorable IRS ruling and final board approval. Mr. Ryan stated, "We have decided that current market conditions are simply not conducive con·du·cive adj. Tending to cause or bring about; contributive: working conditions not conducive to productivity. See Synonyms at favorable. to raising equity capital at this time. Doing so would be unfavorable to our stockholders. Nevertheless, the opportunities to write new specialty property and casualty insurance continue to be very favorable. Therefore, we are investigating alternative options for Combined Specialty, including a sale of all or part of Combined Specialty, and/or and/or conj. Used to indicate that either or both of the items connected by it are involved. Usage Note: And/or is widely used in legal and business writing. a spin-off of part of Combined Specialty." Ryan added, "We will provide an update when new plans have been finalized See finalization. ." In connection with earlier statements regarding spin off plans, Aon had reported that management would propose certain dividend actions. Given that Aon no longer plans to complete a spin-off as previously described, Aon's Board of Directors will determine future dividends based on consideration of earnings, capital needed to support growth, debt obligations, regulatory constraints CONSTRAINTS - A language for solving constraints using value inference. ["CONSTRAINTS: A Language for Expressing Almost-Hierarchical Descriptions", G.J. Sussman et al, Artif Intell 14(1):1-39 (Aug 1980)]. , and other factors that may be deemed appropriate. Financial Outlook "We expect significantly improved results in the second half of 2002 and for 2003 as noted above," said Mr. Ryan. "Excluding the one-time tax gain in the first quarter, the cumulative adjustment for other than temporary impairments, and special and unusual WTC charges and credits, full year 2002 earnings per share are expected to exceed $1.80 based on the current Aon businesses before any strategic steps are taken with respect to Combined Specialty." "For 2003, we believe Aon's brokerage and consulting segments can achieve low double-digit dou·ble-dig·it adj. Being between 10 and 99 percent: double-digit inflation. revenue growth with pretax margins in the high-teen and mid-teen ranges, respectively. The insurance underwriting segment should achieve a minimum of low double-digit revenue growth. New specialty property and casualty insurance premiums are expected to grow nicely while business in certain underperforming insurance units is reduced. Underwriting segment pretax margins will be somewhat below the full year 2001 level of 13.7%." Ryan added, "Corporate and Other segment revenue is expected to be very modest in future periods due to the smaller portfolio of investments producing this income." The future outlook may be impacted by internal and external factors, including economic conditions, equity markets, premium rate developments, pension costs and the final plans for Combined Specialty. SEC Certification and Comments from SEC Mr. Ryan stated, "Harvey Harvey, city (1990 pop. 29,771), Cook co., NE Ill., a suburb S of Chicago; inc. 1895. Its manufactures include steel castings, metal products, chemicals, machinery, and electronic equipment. Harvey has an oil research center. The city was founded by Turlington W. Medvin, Aon's chief financial officer, and I plan to provide the required certification of Aon's recent SEC filings, along with other CEO's and CFO's in the U.S. We will of course respond to any SEC comments regarding our financials in an appropriate manner, the current status of which is outlined below." The Company has been corresponding with the SEC's Division of Corporation Finance regarding its comments on the Form 10 filing for the spin off of Combined Specialty Group, Inc. and a comment letter received on July July: see month. 3rd regarding Aon's 2001 Form 10-K and first quarter 2002 Form 10-Q. Aon has already replied to the SEC's July 3rd comment letter and the current status relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc Aon's correspondence with the SEC is provided at the end of this press release. The Company will host an audio webcast today at 10:00 a.m. (CDT CDT abbr. Central Daylight Time CDT Central Daylight Time CDT n abbr (US) (= Central Daylight Time) → hora de verano del centro; (BRIT ) that can be accessed at www.aon.com. Aon Corporation (www.aon.com) is a holding company that is comprised of a family of insurance brokerage, consulting and insurance underwriting subsidiaries. Status of SEC Comments Introduction Aon believes that its filings with the SEC have been in compliance with generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting (GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ). The SEC has commented on certain of Aon's filings and Aon has been corresponding with the SEC accordingly. At this time, given the Company's evaluation of the matters being addressed by the SEC, Aon does not believe that its aggregate stockholders' equity will change. Filings Commented On And Matters Addressed In connection with the Form 10 that was previously filed with the SEC relating to the spin off of Combined Specialty, the SEC has made certain comments regarding the financial statements of Combined Specialty. Although the Company's plans for the spin off may be modified mod·i·fy v. mod·i·fied, mod·i·fy·ing, mod·i·fies v.tr. 1. To change in form or character; alter. 2. , it intends to resolve the comments because of the possible effect on the consolidated financial statements Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge of the Company. In addition, as previously disclosed, the Company has received a comment letter from the SEC's Division of Corporation Finance in which, as part of the SEC's publicly announced plan of reviewing recent periodic reports of large public corporations, the SEC's staff has made various comments on Aon's 2001 Form 10-K and first quarter 2002 Form 10-Q. Set forth below is a description of the principal open comments relating to the Form 10 or contained in the separate Aon comment letter, and Aon's current position with respect thereto there·to adv. 1. To that, this, or it. 2. Archaic In addition to that; furthermore. thereto Adverb Formal 1. to that or it 2. : Reinsurance Claim for Benefits Paid to World Trade Center Employees. As of December December: see month. 31, 2001, Aon recognized a receivable of $90 million for reinsurance recoverables relating to insurance benefits paid to beneficiaries of Aon employees who perished in the September 11 tragedy. As previously disclosed, Aon subsequently established an allowance against the entire receivable balance due to an April 2002 court ruling (in an unrelated case) that may impact the venue for the litigation between the Company and its reinsurers. This ruling has impacted Aon's ability to reasonably estimate the probable recovery under the claim. The SEC has raised the question whether the receivable should have been recognized in 2001. If the SEC ultimately concludes that the receivable should not have been so recognized, Aon's financial statements for 2001 would have to be restated to reflect the elimination of such receivable, thereby reducing net income by $56 million (the after-tax af·ter-tax also af·ter·tax adj. Relating to or being that which remains after payment, especially of income taxes: after-tax profits. amount of the $90 million receivable). The financial statements for first quarter 2002 would also have to be restated to reverse the allowance established against the receivable, thereby increasing net income for the first quarter 2002 by $56 million. Other Than Temporary Impairment of Investments. Aon has always had a policy of reviewing the investment portfolio of its subsidiaries for potential impairments. In discussions with the SEC, their staff believed that, with respect to equity and certain below investment grade fixed maturity securities which have been trading below cost, the Company should recognize other than temporary impairments through the income statement in a shorter time horizon. The Company has agreed to modify its policy prospectively and, as previously noted in this press release, Aon is recognizing in second quarter 2002 an other than temporary impairment loss of $56 million relating to this action. This adjustment recognizes the effect of other than temporary impairments that existed at prior financial reporting periods. Although Aon believes that the adjustment fully responds to the SEC's comment and can be appropriately recorded in the second quarter of 2002, if the SEC were to require a restatement Restatement A revision in a company's earlier financial statements. Notes: The need for restating financial figures can result from fraud, misrepresentation, or a simple clerical error. of all prior periods, the net income for the prior periods would be reduced as follows: 1999 - ($17 million); 2000 - ($15 million); and first quarter 2002 - ($3 million). A potential restatement for this issue would have no effect on Aon's previously reported aggregate stockholders' equity, total assets or total liabilities. Business Transformation Charges. The SEC has inquired whether Aon, at the time it recorded certain special charges for its Business Transformation Plan (the "Plan"), had sufficient details regarding its exit plans to allow for the recording of the special charges under accounting principles generally accepted in the U.S. Aon has supplied the SEC with a description of the details on which Aon relied in recording the charges. If the SEC ultimately concludes that such Plan details were insufficient, Aon may be required to restate re·state tr.v. re·stat·ed, re·stat·ing, re·states To state again or in a new form. See Synonyms at repeat. re·state the 2000 and 2001 financial statements to reflect a reduction in charges incurred and, in instances when the reduced charges 1. The smaller of the two propelling charges available for naval guns. 2. Charge employing a reduced amount of propellant to fire a gun at short ranges as compared to a normal charge. See also normal charge. were subsequently incurred based on actions taken thereafter, to increase expenses for the applicable later periods. Special Purpose Entities. The SEC has requested that Aon expand its disclosure, originally contained in the Company's 2001 Annual Report in Footnote Text that appears at the bottom of a page that adds explanation. It is often used to give credit to the source of information. When accumulated and printed at the end of a document, they are called "endnotes." #14, of certain special purpose entities and to explain the basis for not consolidating each such entity in Aon's financial statements. Aon has provided such information to the SEC and intends to include the information in future SEC filings. Aon believes that its treatment of the special purpose entities used by its wholly owned subsidiaries Wholly Owned Subsidiary A subsidiary whose parent company owns 100% of its common stock. Notes: In other words, the parent company owns the company outright and there are no minority owners. is in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with accounting principles generally accepted in the U.S. If the SEC were nevertheless to reach a different conclusion, Aon would be required to restate its prior period financial statements and consolidate Consolidate To combine the assets, liabilities, and other financial items of two or more entities into one. Notes: This term is generally used in the context of consolidated financial statements. the assets and liabilities of the special purpose entities. The assets are comprised principally of premium financing Premium Financing involves the lending of funds to a person or company to cover the cost of an insurance premium. Premium finance loans are often provided by third party finance entity known as a "Premium Financing Company"; however insurance companies and brokerages occasionally receivables and the liabilities principally include notes payable. At June 30, 2002, the total assets and total liabilities of the special purpose entities used by Aon's wholly owned subsidiaries were $1.3 billion and $1.3 billion, respectively, with $88 million subject to limited recourse Limited recourse A term describing a type of loan in which the lender has limited or no claim against the parent company if the collateral is insufficient to repay the debt. See:Nonrecourse. to the Company. The Company is also a general partner in a limited partnership ("LP") that purchased automobile installment contracts installment contract n. an agreement in which payments of money, delivery of goods or performance of services are to be made in a series of payments, deliveries or performances, usually on specific dates or upon certain happenings. from automobile dealers and subsequently securitized securitized Of, related to, or being debt securities that are secured with assets. For example, mortgage purchase bonds are secured by mortgages that have been purchased with the bond issue's proceeds. these contracts through securitization Securitization The process of creating a financial instrument by combining other financial assets and then marketing them to investors. Notes: Mortgage backed securities are a perfect example of securitization. May also be spelled as "securitisation. transactions in accordance with the requirements of SFAS SFAS Statement of Financial Accounting Standards SFAS Special Forces Assessment and Selection SFAS Student Financial Aid Services SFAS Sport Fishing Association of Singapore SFAS Safety Features Actuation System SFAS Statewide Fixed Assets System No. 140. Effective April 1, 2001, the LP ceased purchasing and securitizing new automobile installment contracts. The Company continues to service the LP's existing portfolio. The Company uses the equity method of accounting to record its share of the net income or loss of the LP, and as such would not be impacted by the potential for the LP consolidating its special purpose vehicles. As of June 30, 2002, the amount of financing outstanding in this LP was $720 million with $120 million subject to limited recourse to the Company. PEPS I. In fourth quarter 2001, Aon sold various limited partnership investments previously held by its insurance underwriting subsidiaries to a limited liability company (PEPS I). The SEC has asked Aon to support the sale accounting treatment afforded this transaction by supplying documentation and supplemental disclosure. One question remains open with the SEC related to this transaction. Aon believes that the accounting treatment was proper. However, if the SEC were to determine that the transaction was not a sale for accounting purposes, Aon would consolidate PEPS I at December 31, 2001 and all periods going forward. This consolidation would put the limited partnerships on Aon's balance sheet, eliminate the notes and preferred stocks Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. that were obtained by Aon in the original transaction and establish non-recourse debt Non-Recourse Debt A loan that is secured by some sort of collateral, usually property. The issuer can seize the collateral if the borrower defaults. Notes: These types of projects are characterized by high capital expenditures, long loan periods, and uncertain revenue for the cash proceeds of $171 million received by Aon. The consolidation would have no effect on Aon's 2001 income statement or aggregate stockholders' equity at December 31, 2001. Other Matters The SEC has requested additional disclosure regarding several other items contained in Aon's 2001 and first quarter 2002 financial statements including contingencies Contingencies (ISSN 1048-9851) is the bimonthly magazine of the American Academy of Actuaries, providing a large and diverse readership with general interest and technical articles on a wide range of issues related to the actuarial profession. , World Trade Center losses, investments, and revenue recognition of brokerage commission and fees, life insurance commissions and amounts received directly from carriers. Aon believes that any such additional disclosure that the SEC ultimately determines to be appropriate will be provided in subsequent periodic reports filed with the SEC. In addition, the SEC has requested that the Company change the manner in which it reports fixed charges. The SEC has also requested that in its regulatory filings the Company not report "Income Before Taxes" on a with and without special charges/unusual charges basis. Finally, the SEC has requested that the Company no longer show EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become in its Financial Highlights. This press release may contain certain statements relating to future results, which are forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. as that term is defined in the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results, depending on a variety of factors. Potential factors that could impact results include the general economic conditions in different countries around the world, fluctuations in global equity and fixed income markets, changes in commercial property and casualty premium rates, the competitive environment, the actual cost of resolution of contingent liabilities Contingent Liability 1. The possibility of an obligation to pay certain sums dependent on future events. 2. Defined obligations by a company that must be met, but the probability of payment is minimal. Notes: 1. and other loss contingencies, the final execution of the business transformation plan, the ultimate cost and timing of the implementation thereof, the actual cost savings and other benefits resulting therefrom there·from adv. From that place, time, or thing. Adv. 1. therefrom - from that circumstance or source; "atomic formulas and all compounds thence constructible"- W.V. , whether the Company ultimately disposes of some or all of its underwriting operations, the terms and timing thereof, rating agency actions, the cost and availability of debt and other financing, and events surrounding sur·round tr.v. sur·round·ed, sur·round·ing, sur·rounds 1. To extend on all sides of simultaneously; encircle. 2. To enclose or confine on all sides so as to bar escape or outside communication. n. terrorists attacks of September 11, 2001, including the timing and resolution of related insurance and reinsurance issues. Further information concerning the Company and its business, including factors that potentially could materially affect the Company's financial results, are contained in the Company's filings with the Securities and Exchange Commission.
Aon Corporation
Consolidated Summary of Operations
Second Quarter Ended
---------------------------------------
June 30, June 30, Percent
2002 2001 Change
---------------------------------------
(millions except per share data)
Revenue
Brokerage commissions
and fees....................$ 1,510 $ 1,347 12 %
Premiums and other........... 638 492 30
Investment income............ (26) 78 N/A
--------- -------- -------
Total revenue.............. 2,122 1,917 11
--------- -------- -------
Expenses
General expenses............. 1,674 1,377 22
Benefits to policyholders.... 391 260 50
Interest expense............. 30 31 (3)
Amortization of intangible
assets...................... 14 39 (64)
--------- -------- -------
Total expenses............. 2,109 1,707 24
--------- -------- -------
Income Before Unusual and
Special Charges/Credits....... 13 210 (94)
Unusual charges - World
Trade Center................ - - -
Special charges - Spinoff
expenses.................... (3) - N/A
Special (charges)/credits -
Business Transformation Plan 6 (146) N/A
--------- -------- -------
Income Before Income Tax and
Minority Interest 16 64 (75)
Provision for income tax
(37% in 2002 and 39%
in 2001).................... 6 25 (76)
--------- -------- -------
Income Before Minority Interest 10 39 (74)
Minority interest - 8.205%
trust preferred capital
securities.................. (10) (10) -
--------- -------- -------
Net Income..................... $ - $ 29 N/A %
========= ======== =======
Preferred stock dividends.... - - -
--------- -------- -------
Net Income Available for
Common Stockholders........... $ - $ 29 N/A %
========= ======== =======
Net Income Per Share:
Basic net income per share... $ - $ 0.11 N/A %
========= ======== =======
Dilutive net income per share:
Net income before unusual
and special charges....... $ - $ 0.44 N/A %
Unusual charges - World
Trade Center.............. - - -
Special charges - Spinoff
expenses.................. (0.01) - N/A
Special (charges)/credits -
Business Transformation
Plan...................... 0.01 (0.33) N/A
--------- -------- -------
Dilutive net income
per share............... $ - $ 0.11 N/A %
========= ======== =======
Dilutive average common and
common equivalent shares
outstanding................. 278.0 270.2
========= ========
Six Months Ended
---------------------------------------
June 30, June 30, Percent
2002 2001 Change
---------------------------------------
(millions except per share data)
Revenue
Brokerage commissions
and fees....................$ 2,954 $ 2,628 12 %
Premiums and other........... 1,173 1,000 17
Investment income............ 83 100 (17)
--------- -------- -------
Total revenue.............. 4,210 3,728 13
--------- -------- -------
Expenses
General expenses............. 3,132 2,701 16
Benefits to policyholders.... 705 552 28
Interest expense............. 59 67 (12)
Amortization of intangible
assets...................... 25 78 (68)
--------- -------- -------
Total expenses............. 3,921 3,398 15
--------- -------- -------
Income Before Unusual and
Special Charges/Credits....... 289 330 (12)
Unusual charges - World
Trade Center................ (90) - N/A
Special charges - Spinoff
expenses.................... (8) - N/A
Special (charges)/credits -
Business Transformation Plan 6 (218) N/A
--------- -------- -------
Income Before Income Tax and
Minority Interest 197 112 76
Provision for income tax
(37% in 2002 and 39%
in 2001).................... 73 44 66
--------- -------- -------
Income Before Minority Interest 124 68 82
Minority interest - 8.205%
trust preferred capital
securities.................. (20) (20) -
--------- -------- -------
Net Income..................... $ 104 $ 48 117 %
========= ======== =======
Preferred stock dividends.... (1) (1) -
--------- -------- -------
Net Income Available for
Common Stockholders........... $ 103 $ 47 119 %
========= ======== =======
Net Income Per Share:
Basic net income per share... $ 0.37 $ 0.18 106 %
========= ======== =======
Dilutive net income per share
Net income before unusual
and special charges....... $ 0.58 $ 0.66 (12)%
Unusual charges - World
Trade Center.............. (0.20) - N/A
Special charges - Spinoff
expenses.................. (0.02) - N/A
Special (charges)/credits -
Business Transformation
Plan...................... 0.01 (0.49) N/A
--------- -------- -------
Dilutive net income
per share............... $ 0.37 $ 0.17 118 %
========= ======== =======
Dilutive average common and
common equivalent shares
outstanding................. 277.3 268.7
========= ========
Aon Corporation
Operating Segments
Second Quarter Ended
------------------------------------
(millions) June 30, June 30, Percent
2002 2001 Change
-------- --------- ---------
Revenue
Insurance brokerage and
other services (1)...........$ 1,292 $ 1,154 12 %
Consulting (2)................ 248 229 8
Insurance underwriting........ 677 548 24
-------- --------- ---------
Total revenue................$ 2,217 $ 1,931 15 %
======== ========= =========
Income Before Income Tax
Insurance brokerage and
other services...............$ 136 $ 195 (30)%
Consulting.................... 23 30 (23)
Insurance underwriting........ 1 79 (99)
-------- --------- ---------
Total income before income
tax excluding unusual and
special charges.............. 160 304 (47)
Unusual charges -
World Trade Center........... - - -
Special charges -
Spinoff expenses............. (3) - N/A
Special (charges)/credits -
Business Transformation Plan. 6 (146) N/A
-------- --------- ---------
Total income before
income tax..................$ 163 $ 158 3 %
======== ========= =========
Six Months Ended
------------------------------------
(millions) June 30, June 30, Percent
2002 2001 Change
-------- --------- ---------
Revenue
Insurance brokerage and
other services (1)...........$ 2,524 $ 2,271 11 %
Consulting (2)................ 481 441 9
Insurance underwriting........ 1,255 1,115 13
-------- --------- ---------
Total revenue................$ 4,260 $ 3,827 11 %
======== ========= =========
Income Before Income Tax
Insurance brokerage and
other services...............$ 323 $ 391 (17)%
Consulting.................... 50 55 (9)
Insurance underwriting........ 70 147 (52)
-------- --------- ---------
Total income before income
tax excluding unusual and
special charges.............. 443 593 (25)
Unusual charges -
World Trade Center........... (90) - N/A
Special charges -
Spinoff expenses............. (8) - N/A
Special (charges)/credits -
Business Transformation Plan. 6 (218) N/A
-------- --------- ---------
Total income before
income tax..................$ 351 $ 375 (6)%
======== ========= =========
(1) Includes investment income of $30 million and $35 million for the
second quarter ended June 30, 2002 and 2001, respectively, and $51
million and $81 million for the six months ended June 30, 2002 and
2001, respectively.
(2) Includes investment income of $0 million and $1 million for the
second quarter ended June 30, 2002 and 2001, respectively, and $1
million and $3 million for the six months ended June 30, 2002 and
2001, respectively.
Aon Corporation
Corporate and Other
Second Quarter Ended
--------------------------------------
(millions) June 30, June 30, Percent
2002 2001 Change
-------- -------- -------
Corporate and other revenue (1) $ (95) $ (14) N/A %
------------------------------
Expenses
--------
General expenses...............$ 22 $ 20 10%
Interest expense............... 30 31 (3)
Amortization of goodwill....... - 29 N/A
-------- -------- -------
Loss before income tax........$ (147) $ (94) N/A %
======== ======== =======
Second Quarter Ended
--------------------------------------
(millions) June 30, June 30, Percent
2002 2001 Change
-------- -------- -------
(1) Components of corporate and other revenue
---------------------------------------------
Limited partnership
investments...................$ 5 $ (7) N/A %
Income from marketable equity
securities and other
investments................... 3 3 -
-------- -------- -------
Corporate and other revenue
before one time items and loss
on disposals and related
expenses...................... 8 (4) N/A
Interest on tax refund........ - - -
Loss on disposals and related
expenses (A).................. (103) (10) N/A
-------- -------- -------
Corporate and other revenue...$ (95) $ (14) N/A %
======== ======== =======
Aon Corporation
Corporate and Other
Six Months Ended
--------------------------------------
(millions) June 30, June 30, Percent
2002 2001 Change
-------- -------- -------
Corporate and other revenue (1) $ (50) $ (99) N/A %
------------------------------
Expenses
--------
General expenses...............$ 45 $ 39 15 %
Interest expense............... 59 67 (12)
Amortization of goodwill....... - 58 N/A
-------- -------- -------
Loss before income tax........$ (154) $ (263) N/A %
======== ======== =======
Six Months Ended
--------------------------------------
(millions) June 30, June 30, Percent
2002 2001 Change
-------- -------- -------
(1) Components of corporate and other revenue
---------------------------------------------
Limited partnership
investments...................$ 14 $ (63) N/A %
Income from marketable equity
securities and other
investments................... 6 4 50
-------- -------- -------
Corporate and other revenue
before one time items and loss
on disposals and related
expenses...................... 20 (59) N/A
Interest on tax refund........ 48 - N/A
Loss on disposals and related
expenses (A).................. (118) (40) N/A
-------- -------- -------
Corporate and other revenue...$ (50) $ (99) N/A %
======== ======== =======
(A) Includes impairment writedowns of $101 million (including $56
million for the cumulative effect of the change in the policy
for recognizing other than temporary impairments) and $4
million for the second quarter ended June 30, 2002 and 2001,
respectively, and $109 million (including the $56 million
cumulative effect) and $33 million for the six months
ended June 30, 2002 and 2001, respectively.
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