UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
OR
o
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
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36-3051915
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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200 E. RANDOLPH STREET, CHICAGO, ILLINOIS
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60601
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(Address of Principal Executive Offices)
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(Zip Code)
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(312) 381-1000
(Registrants
Telephone Number,
Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES
x
NO
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
x
|
Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
reporting company
o
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|
(Do not check if a smaller
reporting company)
|
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
o
NO
x
Number of shares of common stock, $1.00 par value, outstanding as of June 30,
2008: 277,670,176
Part I.
Financial Information
ITEM 1.
FINANCIAL STATEMENTS
Aon Corporation
Condensed Consolidated Statements of
Financial Position
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As of
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(millions)
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June 30, 2008
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Dec. 31, 2007
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(Unaudited)
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ASSETS
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CURRENT ASSETS
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Cash
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$
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466
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$
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584
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Short-term investments
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2,566
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1,209
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Receivables
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2,012
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2,002
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Fiduciary assets
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11,358
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9,498
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Other current assets
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229
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221
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Assets held for sale
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4,388
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Total Current Assets
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16,631
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17,902
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Goodwill
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5,137
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4,935
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Other intangible assets
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245
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204
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Fixed assets, net
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483
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498
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Long-term investments
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414
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417
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Other non-current assets
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1,165
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921
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TOTAL ASSETS
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$
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24,075
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$
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24,877
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITIES
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Fiduciary liabilities
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$
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11,358
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$
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9,498
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Short-term debt
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252
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Accounts payable and accrued liabilities
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1,207
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1,418
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Other current liabilities
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694
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289
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Liabilities held for sale
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3,025
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Total Current Liabilities
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13,259
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14,482
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Long-term debt
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2,022
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1,893
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Pension, post employment and post
retirement liabilities
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1,296
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1,251
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Other non-current liabilities
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1,043
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1,030
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TOTAL LIABILITIES
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17,620
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18,656
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STOCKHOLDERS EQUITY
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Common stock-$1 par value
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361
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361
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Additional paid-in capital
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3,107
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3,064
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Retained earnings
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6,807
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5,607
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Accumulated other comprehensive loss
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(490
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)
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(726
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)
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Treasury stock at cost
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(3,330
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)
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(2,085
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)
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TOTAL STOCKHOLDERS EQUITY
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6,455
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6,221
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$
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24,075
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$
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24,877
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|
See the accompanying notes to the condensed
consolidated financial statements.
2
Aon Corporation
Condensed Consolidated Statements of Income
(Unaudited)
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Three Months Ended
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Six Months Ended
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(millions, except per share data)
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June 30,
2008
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June 30,
2007
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June 30,
2008
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June 30,
2007
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Revenue
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Commissions, fees and other
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$
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1,912
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$
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1,776
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$
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3,785
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$
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3,505
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Investment income
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68
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|
90
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127
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159
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Total revenue
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1,980
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1,866
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3,912
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3,664
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Expenses
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Compensation and benefits
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1,155
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1,109
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2,321
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2,162
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Other general expenses
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512
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425
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943
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848
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Depreciation and amortization
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58
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46
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108
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93
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Total operating expenses
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1,725
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1,580
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3,372
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3,103
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255
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286
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540
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561
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Interest expense
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31
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34
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64
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69
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Other income
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(2
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)
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(29
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)
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(6
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)
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(29
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)
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Income from continuing operations before
provision for income tax
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226
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281
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|
482
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521
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Provision for income tax
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58
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98
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135
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173
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Income from continuing operations
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168
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183
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347
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348
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Income from discontinued operations
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1,428
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87
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1,491
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160
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Provision for income tax
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463
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30
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487
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55
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Income from discontinued operations, net of
tax
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965
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57
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1,004
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105
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Net income
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$
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1,133
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$
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240
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$
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1,351
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$
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453
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Basic net income per share
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Continuing operations
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$
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0.58
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$
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0.62
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$
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1.17
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$
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1.18
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Discontinued operations
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3.33
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0.19
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3.38
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0.35
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Net income
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$
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3.91
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$
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0.81
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$
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4.55
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$
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1.53
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Diluted net income per share
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Continuing operations
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$
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0.55
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$
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0.57
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$
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1.11
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$
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1.09
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Discontinued operations
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3.16
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0.18
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3.21
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0.32
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Net income
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$
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3.71
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$
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0.75
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$
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4.32
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$
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1.41
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Cash dividends per share paid on common
stock
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$
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0.15
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$
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0.15
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$
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0.30
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$
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0.30
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Weighted average common shares outstanding
- diluted
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305.3
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321.9
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312.5
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323.1
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See the accompanying notes to the condensed
consolidated financial statements.
3
Aon Corporation
Condensed Consolidated Statements of Cash
Flows
(Unaudited)
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Six Months Ended
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June 30,
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June 30,
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(millions)
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2008
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2007
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|
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Cash Flows - Operating Activities:
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Net income
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$
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1,351
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$
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453
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Gain from disposal of operations
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(1,430
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)
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(4
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)
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Adjustments to reconcile net income to cash
provided by operating activities
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Depreciation and amortization of property,
equipment and software
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83
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80
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Stock compensation expense
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142
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107
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Amortization of intangible assets
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25
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19
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Valuation changes on investments, income on
disposals and net bond amortization
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6
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(14
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)
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Income taxes
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360
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|
134
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|
Contribution to major defined benefit
pension plans in excess of expense
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(66
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)
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(45
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)
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Cash paid (in excess of) less than expense
for restructuring plans
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32
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(20
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)
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Change in funds held on behalf of brokerage
and consulting clients
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300
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450
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|
Change in insurance underwriting assets and
liabilities
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|
|
|
|
|
Net reinsurance and net due &
deferred premium
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|
8
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|
59
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|
Prepaid premiums
|
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6
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|
39
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|
Deferred policy acquisition costs
|
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(3
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)
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(11
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)
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Policy liabilities
|
|
3
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|
45
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|
Net due reinsurance
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|
|
|
(11
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)
|
Change in other assets and liabilities
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|
|
|
|
|
Accounts payable and accrued liabilities
|
|
(350
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)
|
(461
|
)
|
Other assets and liabilities - net
|
|
(199
|
)
|
13
|
|
Cash Provided (used) by Operating
Activities
|
|
268
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|
833
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|
|
|
|
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Cash Flows - Investing Activities:
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|
|
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Sale of investments
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Fixed maturities
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|
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Maturities
|
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53
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|
51
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Calls and prepayments
|
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29
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|
48
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|
Sales
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196
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|
337
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|
Equity securities and other investments
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|
1
|
|
53
|
|
Purchase of investments
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|
|
|
|
|
Fixed maturities
|
|
(274
|
)
|
(554
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)
|
Other investments
|
|
(8
|
)
|
(6
|
)
|
Short-term investments - net
|
|
(1,704
|
)
|
209
|
|
Acquisition of subsidiaries
|
|
(63
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)
|
(206
|
)
|
Proceeds from sale of operations
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|
2,915
|
|
39
|
|
Property and equipment and other - net
|
|
(58
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)
|
(82
|
)
|
Cash Provided (Used) by Investing
Activities
|
|
1,087
|
|
(111
|
)
|
|
|
|
|
|
|
Cash Flows - Financing Activities:
|
|
|
|
|
|
Issuance of common stock
|
|
35
|
|
37
|
|
Treasury stock transactions - net
|
|
(1,281
|
)
|
(492
|
)
|
Repayments of short-term borrowings - net
|
|
(231
|
)
|
(38
|
)
|
Issuance of long-term debt
|
|
363
|
|
660
|
|
Repayments of long-term debt
|
|
(297
|
)
|
(696
|
)
|
Cash dividends to stockholders
|
|
(89
|
)
|
(88
|
)
|
Cash Used by Financing Activities
|
|
(1,500
|
)
|
(617
|
)
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash
|
|
27
|
|
20
|
|
Increase (Decrease) in Cash
|
|
(118
|
)
|
125
|
|
Cash at Beginning of Period
|
|
584
|
|
281
|
|
Cash at End of Period
|
|
$
|
466
|
|
$
|
406
|
|
See the accompanying notes to the condensed
consolidated financial statements.
4
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
Statement
of Accounting Principles
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles and include all normal
recurring adjustments which Aon Corporation (Aon or the Company) considers
necessary for a fair presentation.
Operating results for the second quarter and six months ended June 30,
2008 are not necessarily indicative of results that may be expected for the
year ending December 31, 2008.
Refer to the consolidated financial statements and notes in the Annual
Report on Form 10-K for the year ended December 31, 2007 for
additional details of Aons financial position, as well as a description of Aons
accounting policies, which have been continued without material change, except
as described in Note 12.
The Companys operations include collecting premiums and claims amounts
from clients and insurers. Effective first quarter 2008, unremitted amounts are
reported as fiduciary assets and liabilities. Previously, assets were reported
in short-term investments and receivables.
2007 amounts have been reclassified to conform to this presentation. At June 30, 2008, short-term investments
of $3.5 billion and receivables of $7.9 billion are included in the Companys
fiduciary assets. At December 31, 2007, short-term investments of $3.1
billion and receivables of $6.4 billion are included in the Companys fiduciary
assets.
2.
New
Accounting Pronouncement
In December 2007, the FASB issued
Statement No. 141 (revised 2007),
Business Combinations
(Statement
No. 141(R)) and Statement No. 160,
Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51.
Statement No. 141(R) replaces Statement
No. 141 and applies to all transactions or other events in which an entity
obtains control over one or more businesses.
This Statement requires an acquirer to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date. Business combinations achieved in stages
require recognition of the identifiable assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of their fair
values. Statement No. 141(R) also
changes the requirements for recognizing assets acquired and liabilities
assumed arising from contingencies, and requires direct acquisition costs to be
expensed.
Statement No. 160 amends ARB No. 51 to establish accounting
and reporting standards for the noncontrolling interests in a subsidiary and
for the deconsolidation of a subsidiary.
It clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. This
Statement also requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. Statement No. 160 requires retrospective adjustments, for all
periods presented, of stockholders equity and net income for noncontrolling
interests.
Both Statements are effective for Aon as of January 1, 2009. Early adoption is prohibited. Aon is currently evaluating these Statements
to determine what impact, if any, they will have on its consolidated financial
statements.
In March 2008, the Financial Accounting Standards Board issued
Statement No. 161,
Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.
This Statement changes disclosure requirements for derivative
instruments and hedging activities.
5
Companies are required to provide enhanced disclosures about (i) how
and why a company uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for under Statement No. 133
and its related interpretations, and (iii) how derivative instruments and
related hedged items affect a Companys financial position, financial
performance and cash flows. This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2008.
Aon is currently evaluating this Statement to determine the extent of
disclosures that will be necessary.
In June 2008, the FASB issued Staff Position No. EITF 03-6-1
(FSP EITF 03-6-1),
Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities.
The staff
position holds that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents are participating
securities as defined in EITF 03-6,
Participating Securities
and the Two-Class Method under FASB Statement No. 128,
and
therefore should be included in computing earnings per share using the two
class method. Certain of Aons
restricted stock awards allow the holder to receive a nonforfeitable dividend
equivalent.
FSP EITF 03-6-1 is effective for Aon as of January 1, 2009. All prior periods earnings per share data
that are disclosed must be adjusted to conform to the current
presentation. Early application is not
permitted. Aon is currently evaluating
the FSP to determine what impact it will
have on its consolidated financial statements.
3.
Stock Compensation Plans
Aons Stock Incentive Plan (as amended and restated) provides for the
grant of non-qualified and incentive stock options, stock appreciation rights,
restricted stock and restricted stock units (RSUs). The annual rate at which awards are granted
each year is based upon financial and competitive business conditions.
Compensation expense
Stock based compensation expense recognized during 2008 and 2007, which
includes RSUs, stock options, performance plan awards and stock purchases
related to the Employee Stock Purchase Plan, are based on the value of the
portion of stock-based payment awards that is ultimately expected to vest
during the period. Stock-based
compensation expense recognized in Aons condensed consolidated statements of
income includes compensation expense for stock-based payment awards granted
prior to, but not yet vested as of December 31, 2005 based on the grant
date fair value estimated in accordance with the pro forma provisions of FASB
Statement No. 123, and compensation expense for the stock-based payment
awards granted subsequent to December 31, 2005 based on the grant date
fair value estimated in accordance with the provisions of FASB Statement No. 123(R). Because stock-based compensation expense
recognized is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. Forfeitures
are estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
The following table summarizes stock-based compensation expense related
to all stock-based payments recognized in continuing operations in the
condensed consolidated statements of income in compensation and benefits (in
millions):
6
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
RSUs
|
|
$
|
30
|
|
$
|
25
|
|
$
|
75
|
|
$
|
58
|
|
Performance plans
|
|
17
|
|
22
|
|
31
|
|
30
|
|
Stock options
|
|
7
|
|
5
|
|
13
|
|
11
|
|
Employee stock purchase plan
|
|
1
|
|
1
|
|
2
|
|
2
|
|
Total
|
|
$
|
55
|
|
$
|
53
|
|
$
|
121
|
|
$
|
101
|
|
Stock Awards
Stock awards, in the form of RSUs, are granted to certain executives
and key employees of Aon. Prior to 2006,
RSUs granted to employees were service-based.
Beginning with awards granted in 2006, awards to employees may consist
of performance-based RSUs and service-based RSUs. Service-based awards generally vest between
five and ten years from the date of grant.
For most employees, individuals whose incentive compensation is over
$50,000 are partially paid in RSUs, which vest ratably over three years. Stock awards are issued as they vest. With certain limited exceptions, any break in
continuous employment will cause forfeiture of all unvested awards. The compensation cost associated with each
stock award is amortized over the service period using the straight-line
method. Dividend equivalents are paid on
certain service-based RSUs, based on the initial grant amount.
Performance-based RSUs are granted to certain executives and key
employees. Vesting of performance-based
RSUs is contingent upon meeting various individual, divisional or company-wide
performance conditions, including revenue generation or growth in revenue,
pretax income or earnings per share over a three- to five-year period. The performance condition is not considered
in the determination of grant date fair value of these awards. Compensation cost is recognized over the
performance period, and in certain cases an additional vesting period, based on
managements estimate of the number of units expected to vest. Compensation cost will be adjusted to reflect
the actual number of shares earned at the end of the programs. The issuance of shares under these
performance-based plans may range from 0-200% of the number of units granted,
based on the plan. Dividend equivalents
are generally not paid on performance-based RSUs.
Information regarding Aons performance-based plans follows (shares in
thousands, dollars in millions):
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
Potential RSUs to be issued based on
current performance levels
|
|
5,708
|
|
4,971
|
|
Shares forfeited during the period
|
|
295
|
|
|
|
RSUs awarded during the period
|
|
|
|
9
|
|
Unamortized expense, based on current
performance levels
|
|
$
|
100
|
|
$
|
128
|
|
|
|
|
|
|
|
|
|
7
A summary of Aons non-vested stock awards is as follows (shares in
thousands):
|
|
2008
|
|
2007
|
|
Six months ended June 30,
|
|
Shares
|
|
Fair
Value
|
|
Shares
|
|
Fair
Value
|
|
Non-vested at beginning of period
|
|
14,150
|
|
$
|
31
|
|
12,870
|
|
$
|
28
|
|
Granted
|
|
2,967
|
|
42
|
|
3,625
|
|
38
|
|
Vested
|
|
(3,315
|
)
|
28
|
|
(1,702
|
)
|
28
|
|
Forfeited
|
|
(285
|
)
|
32
|
|
(233
|
)
|
30
|
|
Non-vested at end of period
|
|
13,517
|
|
34
|
|
14,560
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
Options to purchase common stock
are granted to certain executives and key employees of Aon and its
subsidiaries, generally at 100% of market value on the date of grant. Generally, employees are required to complete
two continuous years of service before the options begin to vest in increments
until the completion of a 4-year period of continuous employment, although a
number of options were granted that require five continuous years of service
before all options would vest. The
maximum contractual term on stock options is generally ten years from the date
of grant.
Aon uses a lattice-binomial
option-pricing model to value stock options.
Lattice-based option valuation models utilize a range of assumptions
over the expected term of the options.
Expected volatilities are based on the average of the historical
volatility of Aons stock price and the implied volatility of traded options
and Aons stock. Aon uses historical
data to estimate option exercise and employee terminations within the valuation
model, stratifying between executives and key employees. The expected dividend yield assumption is
based on the Companys historical and expected future dividend rate. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
The weighted average assumptions,
the weighted average expected life and estimated fair value of employee stock
options are summarized as follows:
|
|
Three months ended June 30,
|
|
Key employees
|
|
2008
|
|
2007
|
|
Weighted average volatility
|
|
30.2
|
%
|
27.1
|
%
|
Expected dividend yield
|
|
1.5
|
%
|
1.6
|
%
|
Risk-free rate
|
|
2.8
|
%
|
4.6
|
%
|
|
|
|
|
|
|
Weighted average expected life, in years
|
|
5.7
|
|
5.8
|
|
Weighted average estimated fair value per
share
|
|
$
|
13.32
|
|
$
|
12.54
|
|
|
|
|
|
|
|
|
|
8
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Executives
|
|
Key
Employees
|
|
Executives
|
|
Key
Employees
|
|
Weighted average volatility
|
|
29.3
|
%
|
29.8
|
%
|
26.2
|
%
|
26.8
|
%
|
Expected dividend yield
|
|
1.3
|
%
|
1.4
|
%
|
1.7
|
%
|
1.6
|
%
|
Risk-free rate
|
|
3.3
|
%
|
3.1
|
%
|
4.7
|
%
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Weighted average expected life, in years
|
|
5.1
|
|
5.7
|
|
4.6
|
|
5.8
|
|
Weighted average estimated fair value per
share
|
|
$
|
11.26
|
|
$
|
12.81
|
|
$
|
9.58
|
|
$
|
11.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of Aons stock options is as follows (shares in thousands):
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Beginning outstanding
|
|
26,479
|
|
$
|
31
|
|
32,889
|
|
$
|
30
|
|
Granted
|
|
1,497
|
|
44
|
|
1,809
|
|
40
|
|
Excercised
|
|
(3,881
|
)
|
29
|
|
(4,771
|
)
|
28
|
|
Forfeited and expired
|
|
(1,389
|
)
|
41
|
|
(396
|
)
|
32
|
|
Outstanding at end of period
|
|
22,706
|
|
31
|
|
29,531
|
|
31
|
|
Excercisable at end of period
|
|
12,827
|
|
30
|
|
17,374
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life, in years, of
outstanding options was 5.0 years and 5.4 years at June 30, 2008 and 2007,
respectively.
The aggregate intrinsic value represents the total pretax intrinsic
value, based on options with an exercise price less than the Companys closing
stock price of $45.94 as of June 30, 2008, which would have been received
by the option holders had those option holders exercised their options as of
that date. At June 30, 2008, the
aggregate intrinsic value of options outstanding was $334 million, of which
$200 million was exercisable. The
aggregate intrinsic value of options exercised during the second quarter and
six months ended June 30, 2008 were $49 million and $63 million,
respectively, and for the second quarter and six months ended June 30,
2007 were $40 million and $59 million, respectively.
Unamortized deferred compensation expense, which includes both options
and awards, amounted to $348 million as of June 30, 2008, with a remaining
weighted-average amortization period of approximately 2.1 years.
Cash received from the exercise of stock options was $178 million and
$139 million during the six months ended June 30, 2008 and 2007,
respectively. The tax benefit realized
from stock options exercised in the first six months of 2008 and 2007 was $16
million and $25 million, respectively.
During the first six months ended June 30, 2008, a majority of
option exercises and award vestings were satisfied through the reissuance of
treasury shares.
9
4.
Income Per Share
Income per share is calculated as
follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
(millions, except per share data)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Income from continuing operations
|
|
$
|
168
|
|
$
|
183
|
|
$
|
347
|
|
$
|
348
|
|
Income from discontinued operations, net of
tax
|
|
965
|
|
57
|
|
1,004
|
|
105
|
|
Net income for basic per share calculation
|
|
1,133
|
|
240
|
|
1,351
|
|
453
|
|
Interest expense on convertible debt
securities, net of tax
|
|
|
|
2
|
|
|
|
3
|
|
Net income for diluted per share calculation
|
|
$
|
1,133
|
|
$
|
242
|
|
$
|
1,351
|
|
$
|
456
|
|
Basic shares outstanding
|
|
289
|
|
296
|
|
297
|
|
297
|
|
Effect of convertible debt securities
|
|
|
|
12
|
|
|
|
13
|
|
Common stock equivalents
|
|
16
|
|
14
|
|
16
|
|
13
|
|
Diluted potential common shares
|
|
305
|
|
322
|
|
313
|
|
323
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.58
|
|
$
|
0.62
|
|
$
|
1.17
|
|
$
|
1.18
|
|
Discontinued operations
|
|
3.33
|
|
0.19
|
|
3.38
|
|
0.35
|
|
Net income
|
|
$
|
3.91
|
|
$
|
0.81
|
|
$
|
4.55
|
|
$
|
1.53
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.55
|
|
$
|
0.57
|
|
$
|
1.11
|
|
$
|
1.09
|
|
Discontinued operations
|
|
3.16
|
|
0.18
|
|
3.21
|
|
0.32
|
|
Net income
|
|
$
|
3.71
|
|
$
|
0.75
|
|
$
|
4.32
|
|
$
|
1.41
|
|
Certain common stock equivalents related to
options were not included in the computation of diluted net income per share
because those options exercise price was greater than the average market price
of the common shares. The number of
options excluded from the quarterly calculation was 2 million and 7 million at June 30,
2008 and 2007, respectively. For six
months ended June 30, 2008 and 2007, the number of options excluded was 3
million and 7 million, respectively.
5.
Comprehensive
Income
The components of comprehensive
income, net of tax, are as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net income
|
|
$
|
1,133
|
|
$
|
240
|
|
$
|
1,351
|
|
$
|
453
|
|
Net derivative losses
|
|
(22
|
)
|
|
|
(19
|
)
|
(2
|
)
|
Net unrealized investment gains (losses)
|
|
7
|
|
(37
|
)
|
20
|
|
(28
|
)
|
Net foreign exchange translation
|
|
(60
|
)
|
18
|
|
246
|
|
62
|
|
Change in postretirement plans
|
|
(19
|
)
|
12
|
|
(11
|
)
|
50
|
|
|
|
$
|
1,039
|
|
$
|
233
|
|
$
|
1,587
|
|
$
|
535
|
|
10
The components of accumulated other
comprehensive loss, net of tax, are as follows:
(millions)
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Net derivative gains
|
|
5
|
|
$
|
24
|
|
Net unrealized investment gains
|
|
96
|
|
76
|
|
Net foreign exchange translation
|
|
530
|
|
284
|
|
Postretirement plans
|
|
(1,121
|
)
|
(1,110
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(490
|
)
|
$
|
(726
|
)
|
|
|
|
|
|
|
|
|
6.
Business
Segments
Aon classifies its businesses into
two operating segments: Risk and Insurance Brokerage Services and
Consulting. Unallocated income and
expense, when combined with the operating segments and after the elimination of
intersegment revenues, totals to the amounts in the accompanying condensed
consolidated financial statements.
The Risk and Insurance Brokerage
Services segment consists primarily of Aons retail and reinsurance brokerage
operations, as well as related insurance services, including underwriting
management, captive insurance company management services, and premium
financing. The Consulting segment
provides a broad range of consulting services.
These services are delivered predominantly to corporate clientele
utilizing two subsegments (Consulting Services and Outsourcing) that operate in
the following practice areas: Consulting Services - employee benefits,
compensation, management consulting, communications, strategic human resource
consulting and financial advisory and litigation consulting, and Outsourcing -
human resource outsourcing. Results
relating to Aons accident, health and life operations, which were previously
reported in a separate Insurance Underwriting segment, have been reclassified
to discontinued operations for all periods presented. The remaining operations that were previously
reported in the Insurance Underwriting segment, which relate to property and
casualty insurance that is in runoff, are now included in unallocated income
and expense for all periods presented.
Unallocated income consists of investment income from equity,
fixed-maturity and short-term investments.
These assets include non-income producing equities. Unallocated expenses include administrative
costs not attributable to the operating segments, such as corporate governance
costs. Interest expense represents the
cost of worldwide debt obligations.
The accounting policies of the operating
segments are the same as those described in this Form 10-Q and Aons
Annual Report on Form 10-K for the year ended December 31, 2007,
except that the disaggregated financial results have been prepared using a
management approach, which is consistent with the basis and manner in which Aon
senior management internally disaggregates financial information for the
purposes of assisting in making internal operating decisions. Aon evaluates performance based on
stand-alone operating segment income before income taxes and generally accounts
for intersegment revenue as if the revenue were from third parties, that is,
considered by management to be at current market prices.
Revenues are generally attributed
to geographic areas based on the location of the resources producing the
revenues. Intercompany revenues and
expenses are eliminated in computing consolidated revenues and operating
expenses.
11
Revenue by subsegment is as follows:
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Risk management and insurance brokerage:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
625
|
|
$
|
618
|
|
$
|
1,156
|
|
$
|
1,137
|
|
United Kingdom
|
|
223
|
|
218
|
|
384
|
|
374
|
|
Europe, Middle East & Africa
|
|
382
|
|
307
|
|
907
|
|
741
|
|
Asia Pacific
|
|
152
|
|
138
|
|
262
|
|
238
|
|
Reinsurance brokerage and related services
|
|
251
|
|
234
|
|
515
|
|
481
|
|
Total Risk and Insurance Brokerage Services
|
|
1,633
|
|
1,515
|
|
3,224
|
|
2,971
|
|
|
|
|
|
|
|
|
|
|
|
Consulting services
|
|
279
|
|
269
|
|
568
|
|
533
|
|
Outsourcing
|
|
57
|
|
56
|
|
111
|
|
121
|
|
Total Consulting
|
|
336
|
|
325
|
|
679
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
(7
|
)
|
(6
|
)
|
(16
|
)
|
(16
|
)
|
Total operating segments
|
|
1,962
|
|
1,834
|
|
3,887
|
|
3,609
|
|
Unallocated income
|
|
18
|
|
32
|
|
25
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,980
|
|
$
|
1,866
|
|
$
|
3,912
|
|
$
|
3,664
|
|
12
Aons operating segments
geographic revenue and income before income tax is as follows:
Three months ended June 30:
|
|
Risk and Insurance
Brokerage Services
|
|
Consulting
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
531
|
|
$
|
545
|
|
$
|
149
|
|
$
|
165
|
|
Americas, other than U.S.
|
|
206
|
|
176
|
|
37
|
|
31
|
|
United Kingdom
|
|
272
|
|
266
|
|
70
|
|
67
|
|
Europe, Middle East & Africa
|
|
452
|
|
373
|
|
62
|
|
50
|
|
Asia Pacific
|
|
172
|
|
155
|
|
18
|
|
12
|
|
Total revenue
|
|
$
|
1,633
|
|
$
|
1,515
|
|
$
|
336
|
|
$
|
325
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
235
|
|
$
|
278
|
|
$
|
43
|
|
$
|
44
|
|
Six months ended June 30:
|
|
Risk and Insurance
Brokerage Services
|
|
Consulting
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,010
|
|
$
|
1,033
|
|
$
|
301
|
|
$
|
328
|
|
Americas, other than U.S.
|
|
364
|
|
306
|
|
70
|
|
61
|
|
United Kingdom
|
|
492
|
|
483
|
|
134
|
|
128
|
|
Europe, Middle East & Africa
|
|
1,060
|
|
885
|
|
138
|
|
112
|
|
Asia Pacific
|
|
298
|
|
264
|
|
36
|
|
25
|
|
Total revenue
|
|
$
|
3,224
|
|
$
|
2,971
|
|
$
|
679
|
|
$
|
654
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
479
|
|
$
|
520
|
|
$
|
106
|
|
$
|
91
|
|
A reconciliation of segment income before
income tax to income from continuing operations before provision for income tax
is as follows:
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Risk and Insurance Brokerage Services
|
|
$
|
235
|
|
$
|
278
|
|
$
|
479
|
|
$
|
520
|
|
Consulting
|
|
43
|
|
44
|
|
106
|
|
91
|
|
Segment income before income tax
|
|
278
|
|
322
|
|
585
|
|
611
|
|
Unallocated investment income
|
|
17
|
|
29
|
|
22
|
|
51
|
|
Unallocated expenses
|
|
(37
|
)
|
(34
|
)
|
(58
|
)
|
(68
|
)
|
Property & Casualty - revenues
|
|
1
|
|
3
|
|
3
|
|
4
|
|
Property & Casualty - expenses
|
|
(2
|
)
|
(5
|
)
|
(6
|
)
|
(8
|
)
|
Interest expense
|
|
(31
|
)
|
(34
|
)
|
(64
|
)
|
(69
|
)
|
Income from continuing operations before provision
for income tax
|
|
$
|
226
|
|
$
|
281
|
|
$
|
482
|
|
$
|
521
|
|
13
7.
Goodwill
and Other Intangible Assets
Goodwill represents the excess of
cost over the fair market value of net assets acquired. Goodwill is allocated to Aons various
reporting units, which are either its operating segments or one reporting level
below the operating segments. Goodwill
is not amortized but is instead subject to impairment testing at least
annually. When a business entity is
sold, goodwill is allocated to the disposed entity based on the fair value of
that entity compared to the fair value of the reporting unit in which it was
included.
The changes in the net carrying amount of
goodwill by operating segment for the six months ended June 30, 2008 are
as follows:
(millions)
|
|
Risk and
Insurance
Brokerage
Services
|
|
Consulting
|
|
Total
|
|
Balance as of December 31, 2007
|
|
$
|
4,547
|
|
$
|
388
|
|
$
|
4,935
|
|
Goodwill acquired
|
|
11
|
|
|
|
11
|
|
Foreign currency revaluation and other
|
|
193
|
|
(2
|
)
|
191
|
|
Balance as of June 30, 2008
|
|
$
|
4,751
|
|
$
|
386
|
|
$
|
5,137
|
|
Other
intangible assets are classified into two categories:
·
Customer
Related and Contract Based include client lists as well as non-compete
covenants, and
·
Marketing,
Technology and Other are all other purchased intangibles.
Other intangible assets by asset
class are as follows:
(millions)
|
|
Customer
Related and
Contract
Based
|
|
Marketing,
Technology
and Other
|
|
Total
|
|
As of June 30, 2008
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
244
|
|
$
|
363
|
|
$
|
607
|
|
Accumulated amortization
|
|
173
|
|
189
|
|
362
|
|
Net carrying amount
|
|
$
|
71
|
|
$
|
174
|
|
$
|
245
|
|
(millions)
|
|
Customer
Related and
Contract
Based
|
|
Marketing,
Technology
and Other
|
|
Total
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
206
|
|
$
|
332
|
|
$
|
538
|
|
Accumulated amortization
|
|
168
|
|
166
|
|
334
|
|
Net carrying
amount
|
|
$
|
38
|
|
$
|
166
|
|
$
|
204
|
|
Amortization
expense for intangible assets for the years ended December 31, 2008, 2009,
2010, 2011 and 2012 is estimated to be $59 million, $45 million, $39 million,
$33 million and $25 million, respectively.
14
8.
Restructuring Charges
2007 Restructuring Plan
In 2007, the Company announced a
global restructuring plan intended to create a more streamlined organization
and reduce future expense growth to better serve clients (2007 Plan). The Company estimates that the 2007 Plan will
result in cumulative pretax charges totaling approximately $360 million. Expenses will include workforce reduction and
lease consolidation costs, asset impairments, as well as other expenses
necessary to implement the restructuring initiative. Costs related to the restructuring are
included in compensation and benefits, other general expenses, and depreciation
and amortization in the accompanying condensed consolidated statements of
income. The Company expects the
restructuring and related expenses to affect continuing operations through the
end of 2009.
Below is a summary of the 2007
Plan restructuring and related expenses by type incurred and estimated to be
incurred through the end of the restructuring initiative.
|
|
Actual
|
|
Estimated
|
|
|
|
|
|
2008
|
|
Total
|
|
Total for
|
|
(millions)
|
|
2007
|
|
First
Quarter
|
|
Second
Quarter
|
|
Six
Months
|
|
Incurred
to Date
|
|
Restructuring
Period (1)
|
|
Workforce reduction
|
|
$
|
17
|
|
$
|
51
|
|
$
|
25
|
|
$
|
76
|
|
$
|
93
|
|
$
|
185
|
|
Lease consolidation
|
|
22
|
|
5
|
|
13
|
|
18
|
|
40
|
|
95
|
|
Asset impairments
|
|
4
|
|
2
|
|
12
|
|
14
|
|
18
|
|
52
|
|
Other costs associated with restructuring
|
|
3
|
|
2
|
|
3
|
|
5
|
|
8
|
|
28
|
|
Total restructuring and related expenses
|
|
$
|
46
|
|
$
|
60
|
|
$
|
53
|
|
$
|
113
|
|
$
|
159
|
|
$
|
360
|
|
(1)
Actual costs, when
incurred, will vary due to changes in the assumptions built into this
plan. Significant assumptions likely to
change when plans are finalized and approved include, but are not limited to,
changes in severance calculations, changes in the assumptions underlying
sublease loss calculations due to changing market conditions, and changes in
the overall analysis that might cause the Company to add or cancel component
initiatives.
The following is a summary of
actual restructuring and related expenses incurred and estimated to be incurred
through the end of the restructuring initiative, by segment.
|
|
Actual
|
|
Estimated
|
|
|
|
|
|
2008
|
|
Total
|
|
Total for
|
|
(millions)
|
|
2007
|
|
First
Quarter
|
|
Second
Quarter
|
|
Six
Months
|
|
Incurred
to Date
|
|
Restructuring
Period
|
|
Risk and Insurance Brokerage Services
|
|
$
|
41
|
|
$
|
57
|
|
$
|
49
|
|
$
|
106
|
|
$
|
147
|
|
$
|
307
|
|
Consulting
|
|
5
|
|
3
|
|
4
|
|
7
|
|
12
|
|
53
|
|
Total restructuring and related expenses
|
|
$
|
46
|
|
$
|
60
|
|
$
|
53
|
|
$
|
113
|
|
$
|
159
|
|
$
|
360
|
|
As of June 30, 2008, the
Companys liabilities for the 2007 plan are as follows:
15
(millions)
|
|
|
|
Balance at January 1, 2007
|
|
$
|
|
|
Expensed in 2007
|
|
42
|
|
Cash payments in 2007
|
|
(17
|
)
|
Balance at December 31, 2007
|
|
25
|
|
Expensed in 2008
|
|
99
|
|
Cash payments in 2008
|
|
(47
|
)
|
Balance at June 30, 2008
|
|
$
|
77
|
|
2005 Restructuring Plan
In 2005,
the Company commenced a restructuring plan that resulted in cumulative pretax
charges totaling $366 million, of which $25 million and $1 million was recorded
in continuing and discontinued operations, respectively, in second quarter
2007. $34 million and $2 million was
recorded in continuing and discontinued operations, respectively, for the six
months ended June 30, 2007.
Restructuring costs included $15 million and $18 million in workforce
reductions, $8 million and $11 million in lease consolidation costs, $1 million
and $3 million of asset impairments and $2 million and $4 million of other
expenses for the second quarter and six months ended June 30, 2007,
respectively. These costs are included
in compensation and benefits, other general expenses and depreciation and
amortization in the accompanying condensed consolidated statements of income.
Restructuring and related expenses incurred
by segment were as follows for the second quarter and six months ended June 30,
2007, respectively: Risk and Insurance
Brokerage Services - $21 million and $28 million and Consulting - $4 million
and $6 million.
The following table sets forth the activity
related to the 2005 restructuring plan liabilities:
(millions)
|
|
|
|
Balance at December 31, 2006
|
|
$
|
134
|
|
Expensed in 2007
|
|
38
|
|
Cash payments in 2007
|
|
(110
|
)
|
Foreign currency revaluation
|
|
1
|
|
Balance at December 31, 2007
|
|
63
|
|
Cash payments in 2008
|
|
(22
|
)
|
Foreign exchange translation
|
|
1
|
|
Balance at June 30, 2008
|
|
$
|
42
|
|
Aons unpaid restructuring liabilities are
included in accounts payable and accrued liabilities as well as other
non-current liabilities in the condensed consolidated statements of financial
position.
16
9.
Capital
Stock
During the first six months of 2008, Aon
issued 47,000 new shares of common stock for employee benefit plans. In addition, Aon reissued approximately 6.2
million shares of treasury stock for employee benefit programs and 183,000
shares in connection with the employee stock purchase plans.
In 2007, Aon announced that its
Board of Directors had increased the authorized repurchase program to $4.6
billion. Shares may be repurchased
through the open market or in privately negotiated transactions from time to
time, based on prevailing market conditions and will be funded from available
capital. Any repurchased shares will be
available for employee stock plans and for other corporate purposes. The Company repurchased approximately 24.5
million shares at a cost of $1.1 billion in second quarter 2008. For the first six months of 2008, the Company
repurchased approximately 33.4 million shares at a cost of $1.5 billion. In the third quarter 2008 through August 4,
the Company had repurchased 7.3 million shares at a cost of $333 million.
There are also 22.4 million shares
of common stock held in treasury at June 30, 2008 which are restricted as
to their reissuance.
10.
Disposal
of Operations
In fourth quarter 2007, the Company announced
that it had signed separate definitive agreements to sell its Combined
Insurance Company of America (CICA) and Sterling Life Insurance Company (Sterling)
subsidiaries. These two subsidiaries
were previously included in the Insurance Underwriting segment. On April 1, 2008, the CICA business was
sold to ACE Limited for cash consideration of $2.56 billion, and Sterling was
sold to Munich Re Group for cash consideration of $352 million. Additionally, CICA paid a $325 million
dividend to Aon before the sale transaction was completed. A pretax gain of $1.4 billion was recognized
on the sale of these businesses in the second quarter of 2008. The final purchase price is subject to
adjustment based on, among other things, agreed-to net worth calculations.
Aons insurance subsidiaries have been involved in both the cession and
assumption of reinsurance with other companies.
Aons reinsurance consists primarily of certain property and casualty
lines that are in runoff. Aons
insurance subsidiaries remain liable to the extent that the reinsurers are
unable to meet their obligations. In
connection with the sale of Aon Warranty Group (AWG) in 2006, Aon sold
Virginia Surety Company (VSC). VSC
remains liable to policyholders to the extent reinsurers of the property and
casualty business do not meet their obligations. Aon has provided a corporate guarantee with
respect to these reinsurance recoverables, which total $719 million at June 30,
2008. The estimated fair value of the
guarantee was $10 million at June 30, 2008.
A&A Discontinued Operations
Prior to its acquisition by Aon, Alexander &
Alexander Services, Inc. (A&A) discontinued its property and
casualty insurance underwriting operations in 1985, some of which were then
placed into run-off, with the remainder sold in 1987. In connection with those sales, A&A
provided indemnities to the purchaser for various estimated and potential
liabilities, including provisions to cover future losses attributable to
insurance pooling arrangements, a stop-loss reinsurance agreement, and actions
or omissions by various underwriting agencies previously managed by an A&A
subsidiary.
As of June 30, 2008, the liabilities
associated with the foregoing indemnities were included in other non-current
liabilities in the condensed consolidated statements of financial
position. Such liabilities amounted to
$66 million. Reinsurance recoverables
and other assets related to these liabilities are $83 million. The remaining insurance liabilities represent
estimates of known and future claims expected to be settled over the next 20 to
30 years, principally with regard to asbestos, pollution and other health
exposures. Although these insurance
liabilities represent a best estimate of the probable liabilities, adverse
17
developments may occur given the nature of
the information available and the variables inherent in the estimation
processes.
The operating results of the businesses that are
classified as discontinued operations are as follows:
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenues: CICA and Sterling
|
|
$
|
|
|
$
|
622
|
|
$
|
677
|
|
$
|
1,205
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income:
|
|
|
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
CICA and Sterling
|
|
$
|
|
|
$
|
84
|
|
$
|
66
|
|
$
|
155
|
|
Other
|
|
(1
|
)
|
|
|
(1
|
)
|
1
|
|
|
|
(1
|
)
|
84
|
|
65
|
|
156
|
|
Gain on sale
|
|
1,429
|
|
3
|
|
1,426
|
|
4
|
|
Total
|
|
$
|
1,428
|
|
$
|
87
|
|
$
|
1,491
|
|
$
|
160
|
|
|
|
|
|
|
|
|
|
|
|
After-tax income:
|
|
|
|
|
|
|
|
|
|
Operations
|
|
$
|
(6
|
)
|
$
|
55
|
|
$
|
35
|
|
$
|
102
|
|
Sale
|
|
971
|
|
2
|
|
969
|
|
3
|
|
Total
|
|
$
|
965
|
|
$
|
57
|
|
$
|
1,004
|
|
$
|
105
|
|
11.
Net
Periodic Benefit Cost
The following table provides the components
of the net periodic benefit cost for Aons U.S. pension plans, along with the
material international plans, which are located in the U.K., The Netherlands,
and Canada.
|
|
U.S.
|
|
International
|
|
(millions) Three months ended June 30,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Service cost
|
|
$
|
10
|
|
$
|
14
|
|
$
|
7
|
|
$
|
6
|
|
Interest cost
|
|
27
|
|
24
|
|
73
|
|
68
|
|
Expected return on plan assets
|
|
(32
|
)
|
(30
|
)
|
(78
|
)
|
(78
|
)
|
Amortization of prior service costs
|
|
(3
|
)
|
(3
|
)
|
|
|
|
|
Amortization of net loss
|
|
5
|
|
11
|
|
10
|
|
10
|
|
Net periodic benefit cost
|
|
$
|
7
|
|
$
|
16
|
|
$
|
12
|
|
$
|
6
|
|
|
|
U.S.
|
|
International
|
|
(millions) Six months ended June 30,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Service cost
|
|
$
|
22
|
|
$
|
28
|
|
$
|
13
|
|
$
|
22
|
|
Interest cost
|
|
53
|
|
49
|
|
148
|
|
134
|
|
Expected return on plan assets
|
|
(64
|
)
|
(60
|
)
|
(158
|
)
|
(154
|
)
|
Amortization of prior service cost
|
|
(7
|
)
|
(7
|
)
|
|
|
|
|
Amortization of net loss
|
|
11
|
|
22
|
|
20
|
|
30
|
|
Net periodic benefit costs
|
|
$
|
15
|
|
$
|
32
|
|
$
|
23
|
|
$
|
32
|
|
In connection with the sale of CICA in the
second quarter of 2008, a curtailment gain of $12 million was recognized in
discontinued operations.
18
Aon previously disclosed in its 2007
financial statements that it expected to contribute $8 million and $187 million
in 2008 to its U.S. and material international defined benefit pension plans,
respectively. Based on current rules and
assumptions, Aon now plans to contribute $181 million to its material
international defined benefit pension plans.
As of June 30, 2008, contributions of $4 million have been made to
the U.S. pension plans and $100 million to its material international pension
plans.
12.
Fair
Value
Aon adopted the provisions of FASB Statement No. 157,
Fair Value Measurements
and Statement No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
as
of January 1, 2008. Both standards
address aspects of fair-value accounting.
Statement No. 157 defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure requirements about
fair-value measurements. Under Statement No. 159, the Company has the
ability to elect to report most financial instruments and certain other items
at fair value on an instrument-by-instrument basis with changes in fair value
reported in earnings. After the initial
adoption, the election is made at the acquisition of an eligible financial
asset, financial liability, or firm commitment or when certain specified
reconsideration events occur. The fair
value election may not be revoked once an election is made. The implementation
of Statement No. 157 did not have a material impact on the condensed
consolidated financial statements. When
adopting Statement No. 159, the Company did not elect to report any
additional financial instruments at fair value.
Statement No. 157 establishes a hierarchy of fair value
measurements based on whether the inputs to those measurements are observable
or unobservable. Observable inputs
reflect market data obtained from independent sources, while unobservable
inputs reflect the Companys market assumptions.
The fair-value hierarchy consists of three levels:
·
Level 1 Quoted prices for
identical instruments in active markets.
·
Level 2 Quoted prices for
similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which
all significant inputs are observable in active markets.
·
Level 3 Valuations derived
from valuation techniques in which one or more significant inputs are
unobservable.
This hierarchy requires the use of observable market data when
available.
Aon measures fair value using the procedures set forth below for all
assets and liabilities measured at fair value, irrespective of whether they are
carried at fair value.
When available, the Company generally uses quoted market prices to
determine fair value, and classifies such items in Level 1. In some cases where a market price is
available, the Company will make use of acceptable practical expedients (such
as matrix pricing) to estimate fair value, in which case the items are
classified in Level 2.
If quoted market prices are not available, fair value is based upon
internally developed valuation techniques that use, where possible, current
market-based or independently sourced market parameters, such as interest
rates, currency rates, option volatilities, etc. Items valued using such internally generated
valuation techniques are classified according to the lowest level input that is
significant to the
19
valuation. Thus, an item may be
classified in Level 3 even though there may be some significant inputs that are
observable.
The following table presents, for each of the fair-value hierarchy
levels, the Companys assets and liabilities that are measured at fair value on
a recurring basis at June 30, 2008.
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
June 30, 2008 Using
|
|
|
|
|
|
Quoted Prices in
|
|
Significant
|
|
Significant
|
|
|
|
|
|
Active Markets
|
|
Other
|
|
Unobservable
|
|
|
|
Balance at
|
|
for Identical
|
|
Observable
|
|
Inputs
|
|
(millions)
|
|
June 30, 2008
|
|
Assets (Level 1)
|
|
Inputs (Level 2)
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Short-term investments including money market funds and highly liquid
debt securities
|
|
$
|
3,158
|
|
$
|
|
|
$
|
3,158
|
|
$
|
|
|
Other investments
|
|
291
|
|
|
|
129
|
|
162
|
|
Derivatives
|
|
80
|
|
|
|
76
|
|
4
|
|
Retained interests
|
|
106
|
|
|
|
|
|
106
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
14
|
|
|
|
14
|
|
|
|
Guarantees
|
|
10
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the changes in the Level 3 fair-value
category for the three months ended June 30, 2008.
|
|
Fair Value Measurements Using
|
|
|
|
Level 3 Inputs
|
|
|
|
Other
|
|
|
|
Retained
|
|
|
|
(millions)
|
|
Investments
|
|
Derivatives
|
|
Interests
|
|
Guarantees
|
|
Balance at March 31, 2008
|
|
$
|
163
|
|
$
|
1
|
|
$
|
63
|
|
$
|
(14
|
)
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
|
(1
|
)
|
16
|
|
4
|
|
Included in other comprehensive income
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
Purchases, issuances and settlements
|
|
|
|
4
|
|
30
|
|
|
|
Balance at June 30, 2008
|
|
$
|
162
|
|
$
|
4
|
|
$
|
106
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains (losses) for the period included in earnings
attributable to the change in unrealized losses relating to assets or
liabilities held at June 30, 2008
|
|
$
|
|
|
$
|
(1
|
)
|
$
|
16
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses), both realized and unrealized,
included in earnings for the three months ended June 30, 2008 are as
follows:
|
|
|
|
|
|
Income from
|
|
|
|
Other general
|
|
Commissions,
|
|
Discontinued
|
|
(millions)
|
|
expenses
|
|
fees and other
|
|
Operations
|
|
Total gains (losses) included in earnings
|
|
$
|
(1
|
)
|
$
|
16
|
|
$
|
4
|
|
Change in unrealized gains (losses)
relating to assets or liabilities held at June 30, 2008
|
|
(1
|
)
|
16
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
20
The following table presents the changes in the Level 3 fair-value
category for the six months ended June 30, 2008.
|
|
Fair Value Measurements Using
|
|
|
|
Level 3 Inputs
|
|
|
|
Other
|
|
|
|
Retained
|
|
|
|
(millions)
|
|
Investments
|
|
Derivatives
|
|
Interests
|
|
Guarantees
|
|
Balance at December 31, 2007
|
|
$
|
168
|
|
$
|
1
|
|
$
|
103
|
|
$
|
(12
|
)
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
|
(3
|
)
|
33
|
|
2
|
|
Included in other comprehensive income
|
|
(6
|
)
|
|
|
2
|
|
|
|
Purchases, issuances and settlements
|
|
|
|
6
|
|
(32
|
)
|
|
|
Balance at June 30, 2008
|
|
$
|
162
|
|
$
|
4
|
|
$
|
106
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains (losses) for the period included in
earnings attributable to the change in unrealized losses relating to assets
or liabilities held at June 30, 2008
|
|
$
|
|
|
$
|
(3
|
)
|
$
|
33
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses), both realized and unrealized,
included in earnings for the six months ended June 30, 2008 are as
follows:
|
|
|
|
|
|
Income from
|
|
|
|
Other general
|
|
Commissions,
|
|
Discontinued
|
|
(millions)
|
|
expenses
|
|
fees and other
|
|
Operations
|
|
Total gains (losses) included in earnings
|
|
$
|
(3
|
)
|
$
|
33
|
|
$
|
2
|
|
Change in unrealized gains (losses)
relating to assets or liabilities held at June 30, 2008
|
|
(3
|
)
|
33
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
Contingencies
Aon and its subsidiaries are subject to numerous claims, tax
assessments, lawsuits and proceedings that arise in the ordinary course of
business. The damages claimed in these
matters are or may be substantial, including, in many instances, claims for
punitive, treble or extraordinary damages.
Aon has purchased errors and omissions (E&O) insurance and other
appropriate insurance to provide protection against losses that arise in such
matters. Accruals for these items, and
related insurance receivables, when applicable, have been provided to the
extent that losses are deemed probable and are reasonably estimable. These accruals and receivables are adjusted
from time to time as developments warrant.
Amounts related to settlement provisions are recorded in other general
expenses in the condensed consolidated statements of income.
In 2004, Aon, other insurance brokers, insurers and numerous other
industry participants received subpoenas and other requests for information
from the office of the Attorney General of the State of New York and from other
states relating to certain practices in the insurance industry. On March 4, 2005, Aon entered into an
agreement (the Settlement Agreement) with the Attorney General of the State
of New York, the Superintendent of Insurance of the State of New York, the
Attorney General of the State of Connecticut, the Illinois Attorney General and
the Director of the Division of Insurance, Illinois Department of Financial and
Professional Regulation (collectively, the State Agencies) to resolve all the
issues related to investigations conducted by the State Agencies. The 2005 Settlement Agreement, under which
Aon distributed funds to certain clients and implemented business reforms, has
been described in detail in Aons previous financial filings. Aon has also entered into a comprehensive
settlement agreement, under the auspices of the NAIC, with numerous other
states that incorporates these same business reforms.
21
Purported clients have also filed civil litigation against Aon and
other companies under a variety of laws and legal theories relating to broker
compensation practices and other issues under investigation by New York and
other states. As previously reported, a
putative class action styled
Daniel v. Aon (Affinity)
has been pending in the Circuit Court of Cook County, Illinois since August 1999. In March 2005, the Court gave
preliminary approval to a nationwide class action settlement under which Aon
agreed to pay a total of $38 million to its policyholders. The Court granted final approval to the
settlement in March 2006. Parties that
objected to the settlement appealed, and in June 2008 the Illinois
Appellate Court affirmed the approval of the settlement.
Beginning in June 2004, a number of other putative class actions
were filed against Aon and other companies by purported classes of clients
under a variety of legal theories, including state tort, contract, fiduciary
duty, antitrust and statutory theories and federal antitrust and Racketeer
Influenced and Corrupt Organizations Act (RICO) theories. The federal actions were consolidated in the
U.S. District Court for the District of New Jersey, and a state court
collective action was filed in California.
In the New Jersey actions, the Court dismissed plaintiffs federal
antitrust and RICO claims in separate orders in August and October 2007,
respectively. Plaintiffs have appealed
these dismissals. Aon believes it has
meritorious defenses in all of these cases and intends to vigorously defend
itself against these claims. The outcome
of these lawsuits, and any losses or other payments that may occur as a result,
cannot be predicted at this time.
Beginning in late October 2004, several putative securities class
actions were filed against Aon in the U.S. District Court for the Northern
District of Illinois. Also beginning in
late October 2004, several putative ERISA class actions were filed against
Aon in the U.S. District Court for the Northern District of Illinois. Aon believes it has meritorious defenses in
all of these cases and intends to vigorously defend itself against these
claims. The outcome of these lawsuits,
and any losses or other payments that may occur as a result, cannot be
predicted at this time. With respect to
the various securities and ERISA class actions, we are unable to estimate a
range of possible losses, as these actions have not yet progressed to the
stages where damages, if any, can be estimated.
Following inquiries from regulators, the Company commenced an internal
review of its compliance with certain U.S. and non-U.S. anti-bribery laws,
including the U.S. Foreign Corrupt Practices Act (FCPA). An outside law firm with significant
experience in the area is overseeing the review. Certain governmental agencies, including the
U.K. Financial Services Authority, the City of London police, the U.S.
Securities and Exchange Commission, and the U.S. Department of Justice, are
also investigating these matters. Aon is
fully cooperating with these investigations, and has agreed with the U.S.
agencies to toll any applicable statute of limitations pending completion of
the investigations. Based on current
information, the Company is unable to predict at this time when these matters
will be concluded, or what regulatory or other outcomes may result.
A financial institution in the U.K. called Standard Life Assurance Ltd.
brought an action in London Commercial Court against Aon seeking more than £50
million ($99 million at June 30, 2008 exchange rates) for alleged errors
or omissions in the placement of a professional indemnity policy with certain
underwriters. In a preliminary decision
issued on February 13, 2008, the court construed the relevant policy
language to excuse underwriters from paying Standard Life and concluded that
Aon was negligent in not seeking changes to the language. Aon filed an interlocutory appeal of this
preliminary decision. In July 2008,
Aon reached a settlement with underwriters under which underwriters agreed to
pay a portion of the ultimate recovery by Standard Life in exchange for Aon
dropping its appeal of the preliminary decision. In subsequent proceedings in the Commercial
Court, Aon will vigorously contest Standard Lifes claims based on a variety of
legal and factual arguments. Aon has a
potential negligence claim against a different third party which provided
advice with respect of the relevant policy language, and Aon further believes
that, as a
22
result of an indemnity given to Aon by a third party, Aon is entitled
to indemnification in whole or part for its losses in this matter.
A putative class action,
Buckner v. Resource Life
,
is pending in state court in Columbus, Georgia against a former subsidiary of
Aon, Resource Life Insurance Company.
The complaint alleges that Resource Life, which wrote policies insuring
repayment of auto loans, was obligated to identify and return unearned premium
to policyholders whose loans terminated before the end of their scheduled
terms. In connection with the sale of
Resource Life in 2006, Aon agreed to indemnify Resource Lifes buyer in certain
respects relating to this action. Aon
believes that Resource Life has meritorious defenses and is vigorously
defending this action. The outcome of
the action, and the amount of any losses or other payments that may result,
cannot be predicted at this time.
VSC, a former property and casualty underwriting subsidiary of Aon, is
engaged in arbitration and litigation proceedings with Applied Underwriters, Inc.
(Applied), a managing general agent (MGA).
In these proceedings, Applied seeks approximately $190 million for,
inter alia
, an alleged diminution in Applieds value following
VSCs termination of an MGA contract between the parties. In connection with the sale of AWG (which
includes VSC) in 2006, Aon agreed to retain certain obligations related to VSCs
property and casualty underwriting business, now in runoff, including this
matter. Aon believes that VSC has
meritorious defenses and is vigorously defending the arbitration and
litigation. The outcome of the action,
and the amount of any losses or other payments that may result, cannot be
predicted at this time.
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.
14.
Premium Financing
Operations
Some of Aons U.S., U.K., Canadian, and Australian subsidiaries originate
short-term loans (generally with terms of 12 months or less) to businesses to
finance their insurance premium obligations, and then sell these premium
finance agreements in securitization transactions that meet the criteria for
sale accounting under FASB Statement No. 140,
Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities.
In the U.S. and
U.K., premium finance agreements are sold to special purpose entities (SPEs),
which are considered qualified special purpose entities (QSPEs), as defined
by Statement No. 140. The QSPEs fund their purchases of premium finance
agreements by selling undivided beneficial interests in the agreements to
multi-seller commercial paper conduit SPEs sponsored by unaffiliated banks (Bank
SPEs). In Canada and Australia, undivided interests in the premium finance
agreements are sold directly to Bank SPEs.
The Bank SPEs are variable interest entities as defined by FIN 46R.
The QSPEs used in the U.S. and U.K are not
consolidated in Aons financial statements because the criteria for sale
accounting have been met under Statement No. 140.
For the Canadian and Australian sales, the Company has analyzed
qualitative and quantitative factors related to the transactions with the Bank
SPEs and have determined that non-consolidation of the Bank SPEs is appropriate
in accordance with FIN 46R because Aon is not their primary beneficiary. Specific factors considered include the fact
that Aon is not the sponsor of any of the Bank SPEs, various other unaffiliated
companies sell receivables to the Bank SPEs, and unaffiliated third parties
have either made
23
substantial equity investments in the Bank SPEs, hold voting control of
the Bank SPEs, or generally have the risks and rewards of ownership of the
assets of the Bank SPEs through liquidity support agreements or other
arrangements involving significant variable interests.
Aons variable interest in the Bank SPEs in these jurisdictions is limited
to the retained interests in premium finance agreements sold to the Bank
SPEs. The Company reviews all material
off-balance sheet transactions annually or whenever a reconsideration event
occurs for the continued propriety of its accounting.
Pursuant to the sale agreements, the total amount advanced by the Bank
SPEs on premium finance agreements sold to them at any one time is limited by
the sale agreements to $1.8 billion. The
Bank SPEs had advanced $1.3 billion and $1.4 billion at June 30, 2008 and December 31,
2007, respectively, on portfolios sold to the Bank SPEs of $1.4 billion and
$1.5 billion at June 30, 2008 and December 31, 2007, respectively.
Aon records gains on the sale of premium finance agreements. When Aon calculates the gain, all costs
expected to be incurred for the relevant Bank SPEs are included. The gains, which are included in commissions,
fees and other revenue in the condensed consolidated statements of income, were
$15 million and $16 million for the three months ended June 30, 2008 and
2007, respectively, and $32 million and $31 million for the six months ended June 30,
2008 and 2007, respectively.
Aon records its retained interest in the sold
premium finance agreements at fair value, and reports it in receivables in the
condensed consolidated statements of financial position. Aon estimates fair value by discounting
estimated future cash flows using discount rates that are commensurate with the
underlying risk, expected future prepayment rates, and credit loss estimates.
Aon also retains servicing rights for sold
agreements, and earns servicing fee income over the servicing period. Because the servicing fees represent adequate
compensation for the servicing of the receivables, the Company has not recorded
any servicing assets or liabilities.
The third-party bank sponsors or other
participants in the Bank SPEs provide the liquidity support and bear the credit
risks on the receivables, subject to limited recourse, principally in the form
of over-collateralization provided by Aon (and other sellers) as required by
the sales agreements. The retained
interest in the sold receivables represents Aons maximum exposure to
illiquidity and credit-related losses, and was approximately $142 million at June 30,
2008. The Company continually reviews
the retained interest in the sold portfolio, taking into consideration credit
loss trends in the sold portfolio, conditions in the credit markets and other
factors, and adjusts its carrying value accordingly.
With the exception of the Australian sales
agreements, all the other sales agreements require Aon to meet the following
covenants:
·
consolidated net worth, as
defined, of at least $2.5 billion,
·
consolidated EBITDA to
consolidated net interest of at least 4 to 1, and
·
consolidated indebtedness to
consolidated EBITDA of no more than 3 to 1.
Aon intends to renew these sales agreements
as they expire. The Company faces the
risk that pricing for liquidity or other program costs from the Bank SPEs will
increase upon renewal. Moreover, as Aons
ability to originate and fund new premium finance agreements is dependent on
the pass-through funding costs of the Bank SPEs, disruptions in the markets
through which the Bank SPEs obtain funds could have a significant impact on Aons
premium finance results of operations and cash flows. The
24
Company also faces the risk the Bank SPEs
will be unable to provide the liquidity or will become an unreliable source of
the liquidity necessary to fund new premium finance agreements. Such an occurrence would require the Company
to consider alternate sources of funding, including other forms of off-balance
sheet as well as on-balance sheet financing, or discontinue the origination of
premium finance agreements.
Additionally, if there were adverse bank, regulatory, tax, or accounting
rule changes, Aons access to the conduit facilities and special purpose
vehicles could be affected.
25
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
Overview
This Managements Discussion and Analysis is divided into six
sections. First, key recent events are
described that have affected or will affect our financial results during
2008. We then review our consolidated
results and segments with comparisons for the second quarter 2008 to the
corresponding period in 2007. We then
discuss our financial condition and liquidity as well as information on our off
balance sheet arrangements. The final
section addresses certain factors that can influence future results.
The outline for our Managements Discussion and Analysis is as follows:
KEY RECENT EVENTS
Acquisitions and Divestitures
Restructuring Initiatives
Share Repurchase Program
Change in Chairman of Aons Board
of Directors
CRITICAL ACCOUNTING POLICIES
REVIEW OF CONSOLIDATED RESULTS
General
Consolidated Results
REVIEW BY SEGMENT
General
Risk and Insurance Brokerage Services
Consulting
Unallocated Income and Expense
FINANCIAL CONDITION AND LIQUIDITY
Cash Flows
Financial Condition
Borrowings
Stockholders Equity
Off Balance Sheet Arrangements
INFORMATION CONCERNING FORWARD-LOOKING
STATEMENTS
26
KEY RECENT EVENTS
Acquisitions and Divestitures
In December 2007, we announced that we signed definitive
agreements to sell our CICA and Sterling subsidiaries. These two subsidiaries were previously
included in an Insurance Underwriting segment.
Both of these transactions were completed on April 1, 2008. In more detail:
·
CICA was sold to ACE Limited
for cash consideration of $2.56 billion.
We also received a one-time dividend of $325 million from CICA prior to
the close of the transaction.
·
Sterling was sold to Munich
Re Group for cash consideration of $352 million.
The final purchase price is subject to adjustment based on, among other
things, agreed-to net worth calculations.
We have included CICA and Sterlings operating results through the date
of sale in discontinued operations. We
recorded a pretax gain on these sales of approximately $1.4 billion in the
second quarter 2008.
In first quarter 2008, we agreed to buy substantially all of A. J.
Gallaghers U.S. and U.K. reinsurance brokerage business for $30 million in
cash, plus the revenue produced by the acquired businesses in the first year
after the deal closes. This transaction
will give us a larger presence as a reinsurance broker for accident, health and
life insurance in the U.S., and for accident and specialty casualty and
financial institutions insurance in the U.K.
Restructuring
Initiatives
In 2007 we announced a global restructuring
plan intended to create a more streamlined organization and reduce expense
growth to better serve clients. We
estimate this restructuring plan will result in cumulative pretax charges
totaling approximately $360 million.
Expenses will include workforce reduction and lease consolidation costs,
asset impairments, and other expenses necessary to implement the restructuring
initiative. We recorded approximately
$159 million of restructuring and related expenses through June 30, 2008,
including $53 million and $113 million in the second quarter and six months of
2008, respectively. We expect the
remaining restructuring and related expenses to affect continuing operations
through the end of 2009. We anticipate
that these initiatives will lead to annualized cost-savings of approximately
$50-$70 million in 2008, $175-$200 million in 2009, and $240 million by
2010. However, there can be no
assurances that we will achieve the targeted savings.
Based on our current projections, the 2007 restructuring
plan eliminates an estimated 2,400 jobs, 300 fewer jobs than previously
disclosed, beginning in the third quarter of 2007 and continuing into
2009. To date, approximately 600 jobs
have been eliminated. We also expect to
close or consolidate several offices resulting in sublease losses or lease
buy-outs. These efforts will also
trigger asset impairments in the form of accelerated amortization of the
remaining leasehold improvements.
27
The following table summarizes 2007
restructuring and related expenses by type incurred and estimated to be
incurred through the end of the restructuring initiative.
|
|
Actual
|
|
Estimated
|
|
|
|
|
|
2008
|
|
Total
|
|
Total for
|
|
|
|
|
|
First
|
|
Second
|
|
Six
|
|
Incurred
|
|
Restructuring
|
|
(millions)
|
|
2007
|
|
Quarter
|
|
Quarter
|
|
Months
|
|
to Date
|
|
Period (1)
|
|
Workforce reduction
|
|
$
|
17
|
|
$
|
51
|
|
$
|
25
|
|
$
|
76
|
|
$
|
93
|
|
$
|
185
|
|
Lease consolidation
|
|
22
|
|
5
|
|
13
|
|
18
|
|
40
|
|
95
|
|
Asset impairments
|
|
4
|
|
2
|
|
12
|
|
14
|
|
18
|
|
52
|
|
Other costs associated with restructuring
|
|
3
|
|
2
|
|
3
|
|
5
|
|
8
|
|
28
|
|
Total restructuring and related expenses
|
|
$
|
46
|
|
$
|
60
|
|
$
|
53
|
|
$
|
113
|
|
$
|
159
|
|
$
|
360
|
|
(1)
Actual costs, when incurred, will vary due to changes
in the assumptions built into this plan. Significant assumptions likely to
change when plans are finalized and approved include, but are not limited to,
changes in severance calculations, changes in the assumptions underlying our
sublease loss calculations due to changing market conditions, and changes in
our overall analysis that might cause us to add or cancel component
initiatives.
Workforce reductions reflect a cash expense,
though we may recognize the expense prior to paying for the expenditure. Asset impairments are non-cash expenses. Lease consolidation accruals reflect the
present value of future cash flows.
Other costs are cash expenses, which are expensed in the period in which
they are incurred.
The following table summarizes actual
restructuring and related costs incurred and estimated to be incurred through
the end of the restructuring initiative, by segment.
|
|
Actual
|
|
Estimated
|
|
|
|
|
|
2008
|
|
Total
|
|
Total for
|
|
|
|
|
|
First
|
|
Second
|
|
Six
|
|
Incurred
|
|
Restructuring
|
|
(millions)
|
|
2007
|
|
Quarter
|
|
Quarter
|
|
Months
|
|
to Date
|
|
Period
|
|
Risk and Insurance Brokerage Services
|
|
$
|
41
|
|
$
|
57
|
|
$
|
49
|
|
$
|
106
|
|
$
|
147
|
|
$
|
307
|
|
Consulting
|
|
5
|
|
3
|
|
4
|
|
7
|
|
12
|
|
53
|
|
Total restructuring and related expenses
|
|
$
|
46
|
|
$
|
60
|
|
$
|
53
|
|
$
|
113
|
|
$
|
159
|
|
$
|
360
|
|
Share Repurchase Program
We are currently authorized to repurchase $4.6 billion of Aons common
stock. Pursuant to this program, during
the first six months of 2008, we repurchased approximately 33.4 million shares
at a cost of $1.5 billion. The volume of
share repurchases increased in the second quarter, as we used the proceeds
received from the sales of CICA and Sterling to repurchase shares. Since the
program began, through June 30, 2008, we have now repurchased 81.5 million
shares at a cost of $3.3 billion.
Any repurchased shares are available for issuance through employee
stock plans and for other corporate purposes.
Of the shares repurchased since the programs inception, we have
reissued approximately 20.2 million shares for stock options, stock awards and
other benefit plans.
Change in Chairman of Aons Board of Directors
Patrick Ryan, the Executive Chairman of Aons Board of Directors,
retired from Aon on August 1, 2008.
Mr. Ryan founded Aon, which had its origin in a small insurance
agency he started in 1964.
Mr. Ryan is succeeded by Lester B. Knight, an independent director
since 1999. Mr. Knight was elected Non-Executive
Chairman of Aons Board of Directors on July 18, 2008.
28
CRITICAL ACCOUNTING POLICIES
There have been no changes in our critical accounting policies, which
include restructuring, pensions, contingencies, policy liabilities, valuation
of investments, intangible assets, share-based payments and income taxes, as discussed
in our 2007 Annual Report on Form 10-K.
REVIEW OF CONSOLIDATED RESULTS
General
In our discussion of operating results, we sometimes refer to
supplemental information derived from our consolidated financial information.
We use supplemental information related to organic revenue growth to
help us and our investors evaluate business growth from existing
operations. Organic revenue growth
excludes the impact of foreign exchange rate changes, acquisitions, divestitures,
transfers between business units, investment income, reimbursable expenses, and
unusual items. Supplemental organic
revenue growth information should be viewed in addition to, not instead of, our
condensed consolidated statements of income.
Industry peers provide similar supplemental information about their
revenue performance, although they may not make identical adjustments.
Because we conduct business in over 120 countries, foreign exchange
rate fluctuations have an impact on our business. In comparison to the U.S. dollar, foreign
exchange rate movements may be significant and may distort true
period-to-period comparisons of changes in revenue or pretax income. Therefore, we have isolated the impact of the
change in currencies between periods by providing percentage changes on a
comparable currency basis for revenue, and have disclosed the effect on
earnings per share. We have also
provided this form of reporting to give financial statement users more
meaningful information about our operations.
Some tables in the segment discussions
reconcile organic revenue growth percentages to the reported revenue growth
percentages for the segments and sub-segments.
We separately disclose the impact of foreign currency as well as the
impact from acquisitions, divestitures, and transfers of business units, which
represent the most significant reconciling items. In an all other category, we total other
reconciling items that are not generally significant individually or in the
aggregate. If there is a significant
individual reconciling item within the all other category, we provide
additional disclosure in a footnote.
29
Consolidated Results
The following table and commentary provide
selected consolidated financial information.
|
|
Second Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Commissions, fees and other
|
|
$
|
1,912
|
|
$
|
1,776
|
|
$
|
3,785
|
|
$
|
3,505
|
|
Investment income
|
|
68
|
|
90
|
|
127
|
|
159
|
|
Total revenue
|
|
1,980
|
|
1,866
|
|
3,912
|
|
3,664
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
1,155
|
|
1,109
|
|
2,321
|
|
2,162
|
|
Other general expenses
|
|
512
|
|
425
|
|
943
|
|
848
|
|
Depreciation and amortization
|
|
58
|
|
46
|
|
108
|
|
93
|
|
Total operating expenses
|
|
1,725
|
|
1,580
|
|
3,372
|
|
3,103
|
|
Operating income
|
|
255
|
|
286
|
|
540
|
|
561
|
|
Interest expense
|
|
31
|
|
34
|
|
64
|
|
69
|
|
Other income
|
|
(2
|
)
|
(29
|
)
|
(6
|
)
|
(29
|
)
|
Income from continuing operations before
provision for income tax
|
|
$
|
226
|
|
$
|
281
|
|
$
|
482
|
|
$
|
521
|
|
Pretax margin - continuing operations
|
|
11.4
|
%
|
15.1
|
%
|
12.3
|
%
|
14.2
|
%
|
Revenue
Commissions, fees and other
increased by $136 million or 8% on a quarterly
basis and $280 million or 8% on a year-to-date basis. The impact of foreign currency translation
and organic growth in the Risk and Insurance Brokerage Services and Consulting
segments primarily drove the increases in both periods. A decline in outsourcing revenue in our
Consulting segment partially offset our year-to-date growth.
Investment income
decreased $22 million or 24%
on a quarterly basis and $32 million or 20% on a year-to-date basis as a result
of lower non-liquidating distributions from our Private Equity Partnership Structures
I, LLC (PEPS I) investment, which declined $26 million and $37 million from
2007 on a quarterly and year-to-date basis, respectively. Partially offsetting the lower distributions
from PEPS I is increased interest income in the second quarter resulting from
investing the proceeds from the sales of CICA and Sterling.
Expenses
Compensation and benefits
increased $46 million or 4% on a quarterly basis and $159 million and 7% on a
year-to-date basis. Driving the
increases in both periods were the impact of foreign currency translation and
higher restructuring charges. Partially
offsetting these increases are benefits from our 2007 and 2005 restructuring
programs, and on a year-to-date basis, lower pension expense from the 2007
changes to our U.K. defined benefit pension plans.
Other general expenses
increased $87 million or 20% on a quarterly basis and $95 million or 11% on a
year-to-date basis. The increases were
driven by the impact of foreign currency translation, higher E&O and
restructuring expenses, and costs related to anti-bribery investigations and
related compliance initiatives. On a
year-to-date
30
basis, last years expenses included $21 million for the settlement of
litigation in early 2007 for acquired employees in our U.K. reinsurance
business.
Depreciation and amortization expense
increased $12 million or 26% on a quarterly basis and $15 million or 16% on a
year-to-date basis due to restructuring-related impairments and foreign
exchange translations, partially offset by lower software amortization.
Interest expense
decreased $3 million on a quarterly basis and $5
million on a year-to-date basis, due primarily to the redemption of our 3.5%
Senior Convertible Debentures during 2007.
Other income
decreased $27 million on a quarterly basis and $23
million on a year-to-date basis primarily due to larger gains on the sales of
businesses in 2007 versus 2008.
Income from Continuing Operations Before
Provision for Income Tax
Income from continuing operations before provision for income tax
decreased $55 million or 20% to $226 million on a quarterly basis and $39
million or 7% for the six months ended June 30, 2008. The decrease is mainly attributable to higher
restructuring costs and higher gains on the sale of businesses in 2007, which
more than offset the favorable impacts of foreign currency translation and
organic revenue growth.
Income Taxes
The
effective
tax rate
for continuing operations was 25.7% for second quarter
2008 compared to 34.9% for second quarter 2007. The effective tax rate for
continuing operations was 28.0% and 33.2% for the six month periods ended June 30,
2008 and 2007, respectively. The rates
for all reported periods except second quarter 2007 were favorably impacted by
the resolution of prior year tax items. In
the second quarter 2008, the FIN 48 unrecognized tax position balance was
reduced by $7 million due to the favorable settlement of prior year tax issues
in the U.K. Our 2008 tax rate also reflects
the benefit of statutory rate reductions in key operating jurisdictions,
particularly the U.K., and the projected geographic distribution of earnings.
Income from Continuing Operations
Income from continuing operations for second quarter 2008 and 2007 was
$168 million and $183 million, respectively.
Basic and diluted income per share in the second quarter 2008 was $0.58
and $0.55, respectively, versus $0.62 and $0.57 for basic and diluted income
per share in 2007, respectively. Income from continuing operations for six
months 2008 and 2007 was $347 million and $348 million, respectively. Basic and diluted income per share for six
months 2008 was $1.17 and $1.11, respectively, versus $1.18 and $1.09 for basic
and diluted income per share in 2007, respectively. Income from continuing operations in 2008
included $0.06 and $0.13 per share for foreign currency translation gains for
the second quarter and six months, respectively. Our basic and diluted per share calculation
for both the quarter and six months 2008 was favorably impacted by lower shares
outstanding as a result of our share repurchase program.
Discontinued Operations
Second quarter income from discontinued operations was $965 million
($3.33 and $3.16 per basic and diluted share, respectively) for 2008 versus $57
million for 2007 ($0.19 and $0.18 per basic and diluted share,
respectively). Six months income from
discontinued operations was $1,004 million ($3.38 and $3.21 per basic and
diluted share, respectively) for 2008 versus $105 million for 2007 ($0.35 and
$0.32 per basic and diluted share, respectively). Results for 2007 principally reflect
operating results from our CICA and Sterling businesses, while results for 2008
primarily reflect first quarter operating results from our CICA and Sterling
businesses and a $1.0 billion after-tax gain from the sales of these operations
on April 1, 2008.
31
REVIEW BY SEGMENT
General
We classify our businesses into two operating
segments: Risk and Insurance Brokerage Services and Consulting. Our operating segments are identified as
those that:
·
report separate financial information, and
·
are evaluated regularly when we are deciding how
to allocate resources and assess performance.
Segment revenue includes investment income generated by invested assets
of that segment, as well as the impact of related derivatives
. Our Risk and Insurance
Brokerage Services and Consulting businesses invest funds held on behalf of
clients and operating funds in short-term obligations.
The following table and commentary provide selected financial information
on the operating segments.
|
|
Second Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Operating segment revenue:
(1) (2)
|
|
|
|
|
|
|
|
|
|
Risk and Insurance Brokerage Services
|
|
$
|
1,633
|
|
$
|
1,515
|
|
$
|
3,224
|
|
$
|
2,971
|
|
Consulting
|
|
336
|
|
325
|
|
679
|
|
654
|
|
Income before income tax:
|
|
|
|
|
|
|
|
|
|
Risk and Insurance Brokerage Services
|
|
$
|
235
|
|
$
|
278
|
|
$
|
479
|
|
$
|
520
|
|
Consulting
|
|
43
|
|
44
|
|
106
|
|
91
|
|
Pretax Margins:
|
|
|
|
|
|
|
|
|
|
Risk and Insurance Brokerage Services
|
|
14.4
|
%
|
18.3
|
%
|
14.9
|
%
|
17.5
|
%
|
Consulting
|
|
12.8
|
%
|
13.5
|
%
|
15.6
|
%
|
13.9
|
%
|
(1) Intersegment revenues of $7
million and $6 million were included in second quarter 2008 and 2007,
respectively.
(2) Intersegment revenues of $16
million were included in both six months ending June 30, 2008 and 2007.
The following table reflects investment
income earned by the operating segments, which is included in the foregoing
results.
|
|
Second Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Risk and Insurance Brokerage Services
|
|
$
|
49
|
|
$
|
53
|
|
$
|
100
|
|
$
|
98
|
|
Consulting
|
|
1
|
|
6
|
|
2
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk and Insurance Brokerage Services investment income decreased $4
million from second quarter 2007 and increased $2 million on a year-to-date
basis. The quarterly decrease is due to
a 2007 gain from the sale of an investment and lower interest rates, partially
offset by a weaker dollar and higher invested balances. On a year-to-date basis
the weaker dollar and higher invested balances more than offset the 2007 gain
from the sale of an investment and lower interest rates. The $5 million quarterly and year-to-date
decrease in Consulting investment income is attributable to a 2007 gain from
the sale of an investment.
32
Risk and
Insurance Brokerage Services
Aon is a leader in many sectors
of the insurance industry. Aon was
ranked in 2008 by
Business Insurance
as the worlds
largest insurance broker, by
A.M. Best
as
the number one global insurance brokerage in 2008 and 2007 based on brokerage
revenues, and voted the best insurance intermediary and best reinsurance
intermediary in 2007 by the readers of
Business Insurance
.
Changes in premiums have a direct and potentially material impact on
the insurance brokerage industry, as commission revenues are generally based on
a percentage of the premiums paid by insureds.
Insurance premiums are cyclical, and may vary widely based on market
conditions. Premium rates usually increase
when the industry has heavier than expected losses or capital shortages; this
situation is referred to as a hard market.
A hard market tends to increase commission revenues. Conversely, a soft market, characterized by
flat or reduced premium rates, results from increased competition for market
share among insurance carriers or increased underwriting capacity. A soft market tends to reduce commission
revenues. Hard and soft markets may be
broad-based or more narrowly focused across certain product lines or geographic
areas. We experienced a soft market in
many business lines/segments and in many geographic areas in 2007. Prices fell throughout the year, with the
greatest declines seen in large and middle-market accounts. Prices have continued to decline in the first
half of 2008, and we expect the soft market to continue through the remainder
of 2008.
Risk and Insurance Brokerage Services generated approximately 83% of
Aons total operating segment revenues for both the second quarter and the first
half of 2008. Revenues are generated
primarily through:
·
fees
paid by clients,
·
commissions
and fees paid by insurance and reinsurance companies, and
·
interest
income on funds held on behalf of clients.
Our revenues
vary from quarter to quarter throughout the year as a result of:
·
the
timing of our clients policy renewals,
·
the
net effect of new and lost business,
·
the
timing of services provided to our clients, and
·
the
income we earn on investments, which is heavily influenced by short-term
interest rates.
Our brokerage companies operate
in a highly competitive industry and compete with many retail insurance
brokerage and agency firms, as well as individual brokers, agents, and direct
writers of insurance coverage.
Specifically, this segment:
·
addresses the highly specialized product
development and risk management needs of commercial enterprises, professional
groups, insurance companies, governments, healthcare providers, and non-profit
groups, among others;
·
provides affinity products for professional
liability, life, disability income and personal lines for individuals,
associations and businesses;
·
provides reinsurance services to insurance and
reinsurance companies and other risk assumption entities by acting as brokers
or intermediaries on all classes of reinsurance;
·
provides investment banking products and
services, including mergers and acquisitions and other financial advisory
services, capital raising, contingent capital financing, insurance-linked
securitizations and derivative applications;
·
provides managing underwriting and premium
finance services to independent agents and brokers as well as corporate
clients;
·
provides actuarial, loss prevention and
administrative services to businesses and consumers; and
·
manages captive insurance companies.
33
We review our revenue results using the following sub-segments:
·
Risk Management and Insurance Brokerage
encompasses our
retail brokerage services, affinity products, managing general underwriting,
placement and captive management services, and premium finance services in the
following geographic areas: Americas;
United Kingdom; Europe, Middle East & Africa; and Asia Pacific.
·
Reinsurance Brokerage and Related Services (Reinsurance)
offers sophisticated advisory services in program design
and claim recoveries that enhance the risk/return characteristics of insurance
policy portfolios, improve capital utilization and evaluate and mitigate
catastrophic loss exposures worldwide along with investment banking products
and services.
Revenue
This table shows Risk and
Insurance Brokerage Services revenue by sub-segment.
|
|
Second Quarter Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
Acquisitions,
|
|
Less:
|
|
Organic
|
|
|
|
|
|
|
|
Percent
|
|
Currency
|
|
Divestitures,
|
|
All
|
|
Revenue
|
|
(millions)
|
|
2008
|
|
2007
|
|
Change
|
|
Impact
|
|
& Transfers
|
|
Other
|
|
Growth
|
|
Americas
|
|
$
|
625
|
|
$
|
618
|
|
1
|
%
|
2
|
%
|
|
%
|
|
%
|
(1
|
)%
|
United Kingdom
|
|
223
|
|
218
|
|
2
|
|
2
|
|
1
|
|
(2
|
)
|
1
|
|
Europe, Middle East & Africa
|
|
382
|
|
307
|
|
24
|
|
15
|
|
|
|
2
|
|
7
|
|
Asia Pacific
|
|
152
|
|
138
|
|
10
|
|
10
|
|
(2
|
)
|
1
|
|
1
|
|
Reinsurance
|
|
251
|
|
234
|
|
7
|
|
6
|
|
6
|
|
(7
|
)
|
2
|
|
Total revenue
|
|
$
|
1,633
|
|
$
|
1,515
|
|
8
|
%
|
6
|
%
|
1
|
%
|
(1
|
)%
|
2
|
%
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
Acquisitions,
|
|
Less:
|
|
Organic
|
|
|
|
|
|
|
|
Percent
|
|
Currency
|
|
Divestitures,
|
|
All
|
|
Revenue
|
|
(millions)
|
|
2008
|
|
2007
|
|
Change
|
|
Impact
|
|
& Transfers
|
|
Other
|
|
Growth
|
|
Americas
|
|
$
|
1,156
|
|
$
|
1,137
|
|
2
|
%
|
2
|
%
|
|
%
|
|
%
|
|
%
|
United Kingdom
|
|
384
|
|
374
|
|
3
|
|
2
|
|
1
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
907
|
|
741
|
|
22
|
|
14
|
|
1
|
|
2
|
|
5
|
|
Asia Pacific
|
|
262
|
|
238
|
|
10
|
|
10
|
|
(1
|
)
|
(1
|
)
|
2
|
|
Reinsurance
|
|
515
|
|
481
|
|
7
|
|
6
|
|
3
|
|
(3
|
)
|
1
|
|
Total revenue
|
|
$
|
3,224
|
|
$
|
2,971
|
|
9
|
%
|
6
|
%
|
|
%
|
1
|
%
|
2
|
%
|
·
Americas revenue grew 1% and 2% on a quarterly
and year-to-date basis, respectively, driven by the positive impact of the weak
U.S. dollar and strong growth in our Latin America and affinity operations,
partially offset by soft market conditions and a slowdown in private equity and
commercial construction activity in U.S. Retail.
·
U.K. revenue rose 2% and 3% on a quarterly and
year-to-date basis, driven by favorable foreign exchange, acquisitions and
growth in our affinity operations. Organic revenue, impacted by soft market
conditions, grew 1% for the quarter and was unchanged on a year-to-date basis.
·
Europe, Middle East & Africa revenue
increased 24% and 22% on a quarterly and year-to-date basis, respectively,
reflecting favorable foreign currency translation and organic revenue
growth. Organic growth of 7% and 5% for
the quarter and year-to-date, respectively, was primarily due to new business
in Europe and emerging markets in Africa and the Middle East.
34
·
Asia Pacifics 10% revenue growth on a quarterly
and year-to-date basis was driven by positive foreign currency translation and
organic growth reflecting strong growth in most markets in Asia, partially
offset by the impact of certain regulatory changes in Japan. Organic growth was
1% and 2% for the second quarter and six months, respectively.
·
Reinsurance revenue grew 7% on a quarterly and
year-to-date basis driven by the favorable impact of foreign currency
translation, the acquisition of Gallagher Re and organic revenue growth,
partially offset by lower investment income. Growth in global facultative
placements and capital markets transactions more than offset overall soft
market conditions. Organic growth was 2% and 1% for the second quarter and six months,
respectively.
This table shows Risk and Insurance Brokerage
Services revenue by geographic area.
|
|
Second Quarter
|
|
Six Months
|
|
(millions)
|
|
June 30,
2008
|
|
June 30,
2007
|
|
Percent
Change
|
|
June 30,
2008
|
|
June 30,
2007
|
|
Percent
Change
|
|
United States
|
|
$
|
531
|
|
$
|
545
|
|
(3
|
)%
|
$
|
1,010
|
|
$
|
1,033
|
|
(2
|
)%
|
Americas, other than U.S.
|
|
206
|
|
176
|
|
17
|
|
364
|
|
306
|
|
19
|
|
United Kingdom
|
|
272
|
|
266
|
|
2
|
|
492
|
|
483
|
|
2
|
|
Europe, Middle East & Africa
|
|
452
|
|
373
|
|
21
|
|
1,060
|
|
885
|
|
20
|
|
Asia Pacific
|
|
172
|
|
155
|
|
11
|
|
298
|
|
264
|
|
13
|
|
Total revenue
|
|
$
|
1,633
|
|
$
|
1,515
|
|
8
|
%
|
$
|
3,224
|
|
$
|
2,971
|
|
9
|
%
|
·
U.S. revenues declined 3% and 2% on a quarterly
and year-to-date basis, respectively, due to soft market conditions in our
retail and reinsurance businesses. We
experienced slowdowns in private equity and commercial construction activity,
which impacted our retail business.
·
Americas other than U.S. revenue rose 17% and 19%
for the quarter and six months, respectively, reflecting strong organic growth
in Latin America and the favorable impact of foreign currency translation.
·
U.K. revenue rose 2% for both the quarter and six
months, driven by favorable foreign currency translation, partially offset by
the impact of soft market conditions in our retail and reinsurance businesses.
·
Europe, Middle East & Africa increased
21% and 20% on a quarterly and year-to-date basis, respectively, driven by
favorable foreign currency translation as well as solid organic growth in
Europe and strong results in our emerging markets.
·
Asia Pacific revenue rose 11% and 13% for the
quarter and six months, respectively, due to favorable foreign currency
translation and organic growth.
Income Before Income Tax
Second quarter 2008 pretax income declined
$43 million to $235 million, and six months 2008 pretax income fell $41 million
to $479 million. Pretax margins in 2008
were 14.4% and 14.9% on a quarterly and year-to-date basis, respectively,
compared to 18.3% and 17.5% on a quarterly and year-to-date basis,
respectively, in 2007. Higher
restructuring charges, E&O expense, costs related to our anti-bribery
investigations and related compliance initiatives and higher gains on the sale
of businesses in 2007 more than offset the positive impact of foreign currency
translation, savings realized from the 2007 and 2005 restructuring plans,
organic revenue growth, and on a year-to-date basis, the inclusion in 2007 of
$21 million of expense related to the settlement of litigation.
35
Consulting
Aon Consulting is one of the worlds
largest integrated human capital consulting organizations. Our Consulting segment:
·
provides a broad range of
consulting services, and
·
generated 17% of Aons total
operating segment revenue for both second quarter and six months 2008.
We review our revenue results using the
following sub-segments:
·
Consulting
services
, which provide consulting services in six major practice
areas:
1.
Employee
Benefits
advises clients about how to structure, fund and administer
employee benefit programs that attract, retain and motivate employees. Benefits consulting includes health and
welfare, retirement, executive benefits, absence management, compliance,
employer commitment, investment advisory and elective benefit services.
2.
Compensation
focuses on designing salary, bonus, commission, stock option and other pay
structures, with special expertise in the financial services and technology
industries.
3.
Management
Consulting
helps clients in process improvement and design,
leadership, organization and human capital development, and change management.
4.
Communications
advises clients on how to communicate initiatives that support their corporate
vision.
5.
Strategic
Human Resource Consulting
advises complex global organizations on
talent, change and organization effectiveness issues including assessment,
selection performance management, succession planning, organization design and
related people-management programs.
6.
Financial
Advisory and Litigation Consulting
provides consulting services,
including white-collar and financial statement investigation, securities litigation,
financial due diligence, financial valuation services and other related
specialties.
·
Outsourcing
,
which offers employment processing, performance improvement, benefits
administration and other employment-related services.
36
Revenue
This table shows Consulting revenue by sub-segment.
|
|
Second Quarter Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
Acquisitions,
|
|
Less:
|
|
Organic
|
|
|
|
|
|
|
|
Percent
|
|
Currency
|
|
Divestitures,
|
|
All
|
|
Revenue
|
|
(millions)
|
|
2008
|
|
2007
|
|
Change
|
|
Impact
|
|
& Transfers
|
|
Other
|
|
Growth
|
|
Consulting services
|
|
$
|
279
|
|
$
|
269
|
|
4
|
%
|
4
|
%
|
(1
|
)%
|
(2
|
)%
|
3
|
%
|
Outsourcing
|
|
57
|
|
56
|
|
2
|
|
1
|
|
(1
|
)
|
2
|
|
|
|
Total revenue
|
|
$
|
336
|
|
$
|
325
|
|
3
|
%
|
4
|
%
|
(1
|
)%
|
(2
|
)%
|
2
|
%
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
Acquisitions,
|
|
Less:
|
|
Organic
|
|
|
|
|
|
|
|
Percent
|
|
Currency
|
|
Divestitures,
|
|
All
|
|
Revenue
|
|
(millions)
|
|
2008
|
|
2007
|
|
Change
|
|
Impact
|
|
& Transfers
|
|
Other
|
|
Growth
|
|
Consulting services
|
|
$
|
568
|
|
$
|
533
|
|
7
|
%
|
5
|
%
|
|
%
|
(2
|
)%
|
4
|
%
|
Outsourcing
|
|
111
|
|
121
|
|
(8
|
)
|
2
|
|
(1
|
)
|
|
|
(9
|
)
|
Total revenue
|
|
$
|
679
|
|
$
|
654
|
|
4
|
%
|
4
|
%
|
(1
|
)%
|
|
%
|
1
|
%
|
·
Consulting Services revenue increased $10
million or 4% and $35 million or 7% on a quarterly and year-to-date basis,
respectively. Organic revenue growth was
3% and 4% for second quarter and six months 2008, respectively, reflecting the
impact of favorable foreign currency translation and growth in our
international retirement and health and benefit consulting practices on a
quarterly and year-to-date basis.
·
Outsourcing revenue increased $1 million for
the quarter but declined $10 million for six months. Organic revenue was unchanged for the quarter
but declined 9% on a year-to-date basis driven by the termination of our
contract with AT&T in 2007.
This
table shows Consulting revenue by geographic area.
|
|
Second Quarter
|
|
Six Months
|
|
(millions)
|
|
June 30,
2008
|
|
June 30,
2007
|
|
Percent
Change
|
|
June 30,
2008
|
|
June 30,
2007
|
|
Percent
Change
|
|
United States
|
|
$
|
149
|
|
$
|
165
|
|
(10
|
)%
|
$
|
301
|
|
$
|
328
|
|
(8
|
)%
|
Americas, other than U.S.
|
|
37
|
|
31
|
|
19
|
|
70
|
|
61
|
|
15
|
|
United Kingdom
|
|
70
|
|
67
|
|
4
|
|
134
|
|
128
|
|
5
|
|
Europe, Middle East & Africa
|
|
62
|
|
50
|
|
24
|
|
138
|
|
112
|
|
23
|
|
Asia Pacific
|
|
18
|
|
12
|
|
50
|
|
36
|
|
25
|
|
44
|
|
Total revenue
|
|
$
|
336
|
|
$
|
325
|
|
3
|
%
|
$
|
679
|
|
$
|
654
|
|
4
|
%
|
·
U.S. revenue
declined 10% and 8% on a quarterly and year-to-date basis, respectively, primarily
reflecting lower investment income and the loss of outsourcing revenue related
to the AT&T contract termination.
37
·
Americas other
than the U.S. revenue grew 19% and 15% for the quarter and six months,
respectively, driven by favorable foreign currency translation and organic
growth.
·
United Kingdom
revenue rose 4% for the quarter and 5% for six months driven by both organic
growth and favorable foreign currency translation.
·
Europe, Middle East &
Africa revenue increased 24% and 23% on a quarterly and year-to-date basis,
respectively, driven by favorable foreign currency translation, acquisitions
and organic revenue growth.
·
Asia Pacific
revenues grew 50% and 44% for the second quarter and six months, respectively,
reflecting the impact of favorable foreign currency translation and organic
revenue growth.
Income Before Income Tax
Second quarter 2008 pretax income decreased 2% to $43
million, compared to $44 million in 2007.
On a year-to-date basis, 2008 pretax income increased $15 million or 16%
to $106 million. Pretax margins for the
quarter were 12.8% and 13.5% for 2008 and 2007, respectively, and for six
months were 15.6% and 13.9% for 2008 and 2007, respectively. The quarterly
pretax income and margin decline was primarily driven by the gain on sale of an
investment in 2007, partially offset by organic revenue growth. The six months
pretax income and margin improvement was principally driven by benefits related
to the 2005 restructuring plan, other operational improvements and favorable
foreign currency translation, partially offset by the gain on sale of an
investment in 2007.
Unallocated Income and Expense
Unallocated
income consists primarily of investment income (including income or loss on
investment disposals and other-than-temporary impairment losses), which is not
otherwise reflected in the operating segments.
Private
equities are principally carried at cost; however, where we have significant
influence, they are reported under the equity method of accounting. These investments usually do not pay
dividends. Limited partnerships (LP)
are accounted for using the equity method and changes in the value of the
underlying LP investments flow through unallocated investment income.
Unallocated income also includes the operations of our Property and
Casualty runoff business. We previously
included results related to this business in our former Insurance Underwriting
segment.
Unallocated investment income
was $17
million and $29 million for the second quarter 2008 and 2007, respectively, and
$22 million and $51 million for six months 2008 and 2007, respectively. The decrease was principally driven by lower
income from our PEPS I investment, partially offset by higher interest income
from increased balances, reflecting the investment of proceeds from the sales
of CICA and Sterling.
Unallocated expenses
include corporate governance costs not
allocated to the operating segments.
Second quarter 2008 and 2007 expenses were $37 million and $34 million,
respectively, and for six months 2008 and 2007 were $58 million and $68
million, respectively. The quarterly
increase reflects higher absorbed costs previously allocated to the
underwriting businesses. Year-to-date
expenses declined $10 million as a result of lower corporate staff costs and
2007 non-recurring accounting and legal expenses related to the review of
historical equity compensation practices.
Property and Casualty
revenues were $1 million for
second quarter 2008 compared to $3 million in 2007 and were $3 million and
$4 million for six months 2008 and 2007, respectively. Associated expenses were $2 million and $5
million for second
38
quarter 2008 and 2007, respectively, and were $6 million and $8 million
for six months 2008 and 2007, respectively.
Interest expense
, which represents the cost of our worldwide debt obligations, totaled $31
million and $34 million for second quarter 2008 and 2007, respectively, and
were $64 million and $69 million for six months 2008 and 2007,
respectively. The decreases for both
periods primarily reflect the impact of the redemption of our 3.5% Senior
Convertible Debentures in 2007.
FINANCIAL CONDITION AND LIQUIDITY
Cash Flows
Cash flows from operations
represent the net income we earned in the reported periods adjusted for
non-cash charges and changes in operating assets and liabilities.
Cash flows provided by operating activities for the six
months ended June 30, 2008 and 2007 are as follows:
(millions) Six months ended June 30,
|
|
2008
|
|
2007
|
|
Insurance Underwriting operating cash flows
|
|
$
|
(7
|
)
|
$
|
216
|
|
All other operating cash flows
|
|
(25
|
)
|
167
|
|
|
|
(32
|
)
|
383
|
|
Change in funds held on behalf of brokerage and consulting clients
|
|
300
|
|
450
|
|
Cash provided by operating activities
|
|
$
|
268
|
|
$
|
833
|
|
Insurance Underwriting
operating cash flows
Our insurance underwriting
operations include accident & health and life and certain property &
casualty businesses in run-off. These
insurance products have distinct differences in the timing of premiums earned
and payment of future liabilities. As noted earlier, we sold our CICA and
Sterling businesses on April 1, 2008.
Our operating cash flow from
our insurance subsidiaries was $(7) million for 2008, a decrease of $223
million compared to 2007. Due to the
sales of CICA and Sterling, cash flows for 2008 include only activity through
the date of sale. For 2008, operating
cash flows, analyzed by major income statement component, indicated that
premium and other fees collected, net of reinsurance, were $624 million
compared to $1,160 million in 2007.
Investment and other miscellaneous income received were $49 million and
$89 million in 2008 and 2007, respectively.
The insurance underwriting
subsidiaries used revenues generated from premiums, investments and other
miscellaneous income to pay claims and other cash benefits, commissions,
general expenses and taxes. Claims and
other cash benefits paid were $363 million in 2008 versus $645 million in 2007.
Commissions and general expenses paid
were $254 million for 2008, compared to $368 million in 2007. Tax payments for 2008 were $63 million
compared to $20 million last year.
39
Funds held on behalf of
clients
In our Risk and Insurance
Brokerage Services and Consulting segments, we typically hold funds on behalf
of clients as a result of:
·
premiums received from
clients that are in transit to insurers.
These premiums held on behalf of, or due from, clients are reported as
assets with a corresponding liability due to the insurer.
·
claims due to clients that
are in transit from insurers. Claims
held by, or due to us and which are due to clients, are also shown as both
assets and liabilities.
These funds held on behalf
of clients are generally invested in interest bearing trust accounts and can
fluctuate significantly depending on when we collect cash from our clients and
when premiums are remitted to the insurance carriers.
All other operating cash
flows
Our operating cash flows
from our Risk and Insurance Brokerage Services and Consulting segments, as well
as related corporate items, was a use of $25 million in 2008 compared to a
source of $167 million in 2007. These
amounts exclude the change in funds held on behalf of clients as described
above. The operating cash flows depend
on the timing of receipts and payments related to revenues, incentive
compensation, other operating expenses and income taxes.
Aon uses the excess cash
generated by our brokerage and consulting businesses as well as dividends
received from CICA prior to its sale to meet its liquidity needs, which consist
of servicing its debt, paying dividends to its stockholders and repurchasing
outstanding shares.
Investing and Financing Activities
Investing activities generated cash of
$1.1 billion. We received $2.9 billion
in cash from the sales of our CICA and Sterling subsidiaries. Cash flows used by investing activities
included purchases, net of sales of investments, of $1.7 billion, principally
reflecting the investment of the proceeds of the CICA and Sterling sales. In addition, $58 million of cash was used for
capital expenditures, net of disposals. We spent $63 million for various
acquisitions of subsidiaries.
Our financing needs were $1.5
billion. Financing uses primarily
included share repurchase activity, net of reissuance for our employee benefit
plans of $1.2 billion, cash dividends paid to shareholders of $89 million, and
debt repayments, net of issuance, of $165 million.
Financial Condition
In
our capacity as an insurance broker or agent, we collect premiums from insureds
and, after deducting our commission, remit the premiums to the respective
insurance underwriter. We also collect
claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims are
held by us in a fiduciary capacity as short-term investments.
40
In
our condensed consolidated statements of financial position, we report
fiduciary assets equal to our fiduciary liabilities. Our fiduciary assets include short-term
investments of $3,521 million and $3,122 million at June 30, 2008 and December 31,
2007, respectively.
Since year-end 2007, total
assets decreased $802 million to $24.1 billion.
·
Working capital, excluding
assets and liabilities held-for-sale, increased $1,315 million to $3.4
billion. The increase is primarily
attributed to an increase in short-term investments from the sales of CICA and
Sterling. We spent $1.1 billion in cash
during the second quarter to repurchase common stock.
·
Short-term debt decreased by
$252 million as a result of paying down all of our short-term Euro facility
borrowings.
·
Accounts payable and accrued
liabilities decreased $211 million due primarily to the payment of incentive
compensation in March.
·
Goodwill increased $202 million primarily due
to the impact of foreign currency translation.
·
Long-term debt increased by
$129 million, reflecting higher long-term Euro facility borrowings and the
impact of foreign currency translation.
Borrowings
Total
debt at June 30, 2008 was $2,022 million, a decrease of $123 million from December 31,
2007, which is the net result of our Euro facility repayments and borrowings.
At
June 30, 2008, we had a $600 million U.S. bank credit facility, which
expires in February 2010, to support commercial paper and other short-term
borrowings. The facility allows us to
issue up to $150 million in letters of credit.
At June 30, 2008, we have issued $20 million in letters of credit.
We also have several foreign credit facilities
available. At June 30, 2008, we had
available to us:
·
a five-year 650 million
($1,024 million at June 30, 2008 exchange rates) multi-currency facility
of which $685 million was outstanding at June 30, 2008. See Note 7 to the consolidated financial
statements in our 2007 Form 10-K for further discussion of both the U.S.
and Euro facilities;
·
a £37.5 million ($75 million) facility,
·
a 364-day 25 million ($39 million) facility, and
·
a 20 million ($32 million) open-ended facility.
The
major rating agencies ratings of our debt at August 4, 2008 appear in the
table below.
|
|
Senior long-term debt
|
|
Commercial paper
|
|
|
|
Rating
|
|
Outlook
|
|
Rating
|
|
Outlook
|
|
Standard & Poors
|
|
BBB+
|
|
Stable
|
|
A-2
|
|
Stable
|
|
Moodys Investor Services
|
|
Baa2
|
|
Positive
|
|
P-2
|
|
Positive
|
|
Fitch, Inc.
|
|
BBB+
|
|
Stable
|
|
F-2
|
|
Stable
|
|
A
downgrade in the credit ratings of our senior debt and commercial paper would:
41
·
increase our borrowing costs
and reduce our financial flexibility, and
·
increase our commercial
paper interest rates or possibly restrict our access to the commercial paper
market altogether. Although we have
committed backup lines, we cannot ensure that our financial position will not
be hurt if we can no longer access the commercial paper market.
Stockholders Equity
Stockholders equity increased $234 million from December 31,
2007 to $6,455 million, driven primarily by an increase in net income of $1,351
million and foreign currency translation gains, mostly offset by net treasury
stock transactions of $1,246 million.
Accumulated other comprehensive loss decreased $236 million
since December 31, 2007. Compared
to year end 2007:
·
net
foreign currency translation increased by $246 million because of the weakening
of the U.S. dollar against foreign currencies and the impact of CICA. CICAs foreign exchange translation balance
is no longer included in our accumulated other comprehensive loss due to its
sale on April 1, 2008;
·
net unrealized investment gains rose $20 million,
·
net derivative losses increased $19 million, and
·
our net unrecognized losses and unrecognized prior service credits
increased by $11 million.
Off
Balance Sheet Arrangements
We
record various contractual obligations as liabilities in our consolidated
financial statements. Other items, such
as certain purchase commitments and other executory contracts, are not
recognized as liabilities in our consolidated financial statements, but we are
required to disclose them.
Aon and its subsidiaries have issued letters of credit to cover
contingent payments for taxes and other business obligations to third
parties. We accrue amounts in our
consolidated financial statements for these letters of credit to the extent
that a loss is probable and estimable.
Following
the guidance of Statement No. 140 and other relevant accounting guidance,
we use SPEs and QSPEs, also known as special purpose vehicles, in some of our
operations.
Reinsurance Guarantee
In connection with the AWG
disposal, we issued an indemnification that protects the purchaser from credit
exposure relating to the property and casualty reserves that have been
reinsured. These reinsurance
recoverables amount to $719 million at June 30, 2008. Trust balances and letters of credit
offsetting these reinsurance recoverables total approximately $161 million. At December 31,
2007, we had recorded a $12 million liability, reflecting the fair value of
this indemnification. The value
decreased to approximately $10 million as of June 30, 2008. The indemnification represents the present
value of the indemnification on the credit risk of the reinsurers.
Premium Financing Operations
Some
of our U.S., U.K., Canadian, and Australian subsidiaries originate short-term
loans (generally with terms of 12 months or less) to businesses to finance
their insurance premium obligations, and then sell these premium finance
agreements in securitization transactions that meet the criteria for sale
accounting under Statement No. 140.
42
·
In the U.S. and U.K.,
premium finance agreements are sold to SPEs, which are considered QSPEs as
defined by Statement No. 140. The QSPEs fund their purchases of premium
finance agreements by selling undivided beneficial interests in the agreements
to Bank SPEs.
·
In Canada and Australia,
undivided interests in the premium finance agreements are sold directly to Bank
SPEs. The Bank SPEs are variable
interest entities as defined by FIN 46R.
The QSPEs used in the U.S. and U.K. are not consolidated in our
financial statements because the criteria for sale accounting have been met
under Statement No. 140.
For
the Canadian and Australian sales, we have analyzed qualitative and
quantitative factors related to our transactions with the Bank SPEs and have
determined that non-consolidation of the Bank SPEs is appropriate in accordance
with FIN 46R because we are not their primary beneficiary. Specific factors we considered include:
·
the fact that we are not the
sponsor of any of the Bank SPEs,
·
various other unaffiliated
companies sell receivables to the Bank SPEs, and
·
unaffiliated third parties
have either made substantial equity investments in the Bank SPEs, hold voting
control of the Bank SPEs, or generally have the risks and rewards of ownership
of the assets of the Bank SPEs through liquidity support agreements or other
arrangements involving significant variable interests.
Our
variable interest in the Bank SPEs in these jurisdictions is limited to our
retained interests in premium finance agreements sold to the Bank SPEs. We review all material off-balance sheet
transactions annually or whenever a reconsideration event occurs for the
continued propriety of our accounting.
Pursuant
to the sale agreements, the total amount advanced by the Bank SPEs on premium
finance agreements sold to them at any one time is limited by the sale
agreements to $1.8 billion. The Bank
SPEs had advanced to us $1.3 billion and $1.4 billion at June 30, 2008 and
December 31, 2007, respectively, on portfolios sold to the Bank SPEs of
$1.4 billion and $1.5 billion at June 30, 2008 and December 31, 2007,
respectively.
We
record gains on the sale of premium finance agreements. When we calculate the gain, we include all
costs we expect to incur for the relevant Bank SPEs. The gains, which are included in commissions,
fees and other revenue in the condensed consolidated statements of income, were
$15 million and $16 million for the three months ended June 30, 2008 and
2007, respectively, and $32 million and $31 million for the six months ended June 30,
2008 and 2007, respectively.
·
We record our retained
interest in the sold premium finance agreements at fair value, and report it in
receivables in the condensed consolidated statements of financial
position. We estimate fair value by
discounting estimated future cash flows using discount rates that are
commensurate with the underlying risk, expected future prepayment rates, and
credit loss estimates.
·
We also retain servicing
rights for sold agreements, and earn servicing fee income over the servicing
period. Because the servicing fees
represent adequate compensation for the servicing of the receivables, we have
not recorded any servicing assets or liabilities.
The
third-party bank sponsors or other participants in the Bank SPEs provide the
liquidity support and bear the credit risks on the receivables, subject to
limited recourse, principally in the form of over-collateralization provided by
us (and other sellers) as required by the sales agreements. The retained interest in our sold receivables
represents our maximum exposure to illiquidity and credit-related losses, and
was approximately $142 million at June 30, 2008. We continually review our retained interest
in the sold portfolio, taking into consideration credit loss trends in the sold
portfolio, conditions in the credit markets and other factors, and adjust its
carrying value accordingly.
43
With
the exception of our Australian sales agreements, all our other sales
agreements require us to meet the following covenants:
·
consolidated net worth, as
defined, of at least $2.5 billion,
·
consolidated EBITDA
(earnings before interest, taxes, depreciation and amortization) to
consolidated net interest of at least 4 to 1, and
·
consolidated indebtedness to
consolidated EBITDA of no more than 3 to 1.
We
intend to renew these conduit facilities as they expire. We recently renewed the Australian sales
agreement, and the U.S., Canadian and European agreements are set for renewal
in October 2008. Given the current
environment in the credit markets, it is likely that our pricing for liquidity
and other program costs from the Bank SPEs will rise upon renewal. Moreover, as our ability to originate and
fund new premium finance agreements is dependent on the pass-through funding
costs of the Bank SPEs, disruptions in the markets through which the Bank SPEs
obtain funds could have a significant impact on our premium finance results of
operations and cash flows. We also face
the risk the Bank SPEs will be unable to provide the liquidity or will become
an unreliable source of the liquidity necessary to fund new premium finance
agreements. Such an occurrence would
require us to consider alternate sources of funding, including other forms of
off-balance sheet as well as on-balance sheet financing, or discontinue the
origination of premium finance agreements.
Additionally, if there were adverse bank, regulatory, tax, or accounting
rule changes, our access to the conduit facilities and special purpose vehicles
could be affected.
PEPS I
In 2001, we sold the vast majority of our LP portfolio,
valued at $450 million, to PEPS I, a QSPE.
The common stock interest in PEPS I is held by a limited liability
company, owned by us (49%) and by a charitable trust, which we do not control,
established for victims of the September 11th attacks (51%). We do not include the assets and liabilities
and operations of PEPS I in our consolidated financial statements.
In 2001, PEPS I sold approximately $171 million of investment
grade fixed-maturity securities to unaffiliated third parties. PEPS I then paid our insurance underwriting
subsidiaries the $171 million in cash and issued them an additional $279
million in fixed-maturity and preferred stock securities.
As part of this transaction, Aon is required to purchase
additional fixed-maturity securities from PEPS I in an amount equal to the
unfunded LP commitments as they are requested.
These fixed-maturity securities are rated below investment grade. Commitments of $1 million were funded by us
in 2008. As of June 30, 2008,
unfunded commitments amounted to $43 million.
These commitments have specific expiration dates and the general
partners may decide not to draw on these commitments.
We
received income distributions from our preferred investment in PEPS I of $0
million and $26 million in the second quarter of 2008 and 2007, respectively,
and $2 million and $39 million in the first six months of 2008 and 2007,
respectively, which are included in investment income. Prior to 2007, income distributions received
from PEPS I were limited to interest payments on various PEPS I debt
instruments. Beginning in 2007, PEPS I
had redeemed or collateralized all of its debt, and as a result, began to pay
preferred income distributions. Whether
we receive additional preferred returns will depend on the performance of the
LP interests underlying PEPS I, which we expect to vary from period to
period. We do not control the timing of
the distributions.
Aon
derives the estimated fair value of its preferred investments in PEPS I
primarily from valuations received from the general partners of the LP
interests held by PEPS I.
44
INFORMATION
CONCERNING FORWARD-LOOKING STATEMENTS
This report contains certain statements related to future results, or
states our intentions, beliefs and expectations or predictions for the future
which are forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from either historical or anticipated results depending on a variety
of factors. Potential factors that could impact results include: general
economic conditions in different countries in which we do business around the
world, changes in global equity and fixed income markets that could affect the
return on invested assets, fluctuations in exchange and interest rates that
could influence revenue and expense, rating agency actions that could affect
our ability to borrow funds, funding of our various pension plans, changes in
the competitive environment, our ability
to implement restructuring initiatives and other initiatives intended to yield
cost savings, changes in commercial property and casualty markets and
commercial premium rates that could impact revenues, the outcome of inquiries
from regulators and investigations related to compliance with U.S. Foreign
Corrupt Practices Act and non-U.S. anti-corruption laws, the impact of
investigations brought by U.S. state attorneys general, U.S. state insurance
regulators, U.S. federal prosecutors, U.S. federal regulators, and regulatory
authorities in the U.K. and other countries, the impact of class actions and
individual lawsuits including client class actions, securities class actions,
derivative actions and ERISA class actions, and the cost of resolution of other
contingent liabilities and loss contingencies.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or otherwise.
45
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are exposed
to potential fluctuations in earnings, cash flows and the fair value of certain
of our assets and liabilities due to changes in interest rates, foreign
exchange rates and equity prices. To
manage the risk from these exposures, we enter into a variety of derivative
instruments. We do not enter into
derivatives or financial instruments for trading purposes.
We are subject
to foreign exchange rate risk from translating the financial statements of our
foreign subsidiaries into U.S. dollars. Our primary exposures are to the
British pound, the Euro, the Canadian dollar, and the Australian dollar. We use over-the-counter (OTC) options and
forward contracts to reduce the impact of foreign currency fluctuations on the
translation of our foreign operations financial statements.
Additionally,
some of our foreign brokerage subsidiaries receive revenues in currencies that
differ from their functional currencies.
Our U.K. subsidiary earns a portion of its revenue in U.S. dollars and
Euros but most of its expenses are incurred in pounds sterling. Our policy is to convert into pounds sterling
sufficient U.S. dollar and Euro revenue to fund the subsidiarys pound sterling
expenses using OTC options and forward exchange contracts. At June 30, 2008, we have hedged
approximately 48% and 72% of our
U.K. subsidiaries expected U.S. dollar and Euro transaction exposures for the
next twelve months, respectively. We do
not generally hedge these exposures beyond three years.
The translated
value of revenue and expense from our international brokerage operations are
subject to fluctuations in foreign exchange rates. Second quarter 2008 diluted earnings per
share were positively impacted
by $0.06 related to translation
gains.
We also use
forward contracts to offset foreign exchange risk associated with foreign
denominated inter-company notes.
Our businesses
income is affected by changes in international and domestic short-term interest
rates. We monitor our net exposure to
short-term interest rates and, as appropriate, hedge our exposure with various
derivative financial instruments. A
decrease in global short-term interest rates adversely affects our income. This activity primarily relates to brokerage
funds held on behalf of clients in the U.S. and on the Continent of Europe.
46
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures.
Based on Aon managements evaluation (with
the participation of the chief executive officer and chief financial officer),
as of the end of the period covered by this report, Aons chief executive
officer and chief financial officer have concluded that the disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15(d)15(e) under
the Securities Exchange Act of 1934, as amended, (the Exchange Act)) are
effective to ensure that information required to be disclosed by Aon in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.
Changes in
internal control over financial reporting.
There were no changes in Aons internal
control over financial reporting (as defined in Rules 13a-15(f) and
15(d)15(f) under the Exchange Act) during second quarter 2008 that have
materially affected, or are reasonably likely to materially affect, Aons
internal control over financial reporting.
47
PART II
OTHER INFORMATION
ITEM 1.
|
|
LEGAL
PROCEEDINGS
|
|
|
|
|
|
See Note 13
(Contingencies) to the condensed consolidated financial statements contained
in Part I, Item 1, which is incorporated by reference herein.
|
ITEM 2.
|
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
|
|
|
|
(a)
None.
|
|
|
(b)
None.
|
|
|
(c)
Issuer Purchases of Equity Securities.
|
The following information relates to the
repurchase of equity securities by Aon or any affiliated purchaser during each
month within the second quarter of 2008:
Period
|
|
Total Number of
Shares Purchased
|
|
Average Price
Paid per Share (1)
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
|
|
Maximum Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs (1) (2)
|
|
4/1/08 4/30/08
|
|
10,915,800
|
|
$
|
44.46
|
|
10,915,800
|
|
$
|
1,917,066,076
|
|
5/1/08 5/31/08
|
|
7,076,000
|
|
$
|
46.77
|
|
7,076,000
|
|
$
|
1,586,130,013
|
|
6/1/08 6/30/08
|
|
6,500,629
|
|
$
|
47.07
|
|
6,500,629
|
|
$
|
1,280,150,478
|
|
Total
|
|
24,492,429
|
|
$
|
45.82
|
|
24,492,429
|
|
|
|
(1)
Does not include
commissions paid to repurchase shares.
(2)
In 2005, the Company
announced that its Board of Directors had authorized the repurchase of up to $1
billion of Aons common stock. In 2006,
the Company announced that its Board of Directors had increased the authorized
share repurchase program to $2 billion.
In fourth quarter 2007, the Company announced that its Board of
Directors had increased the authorized share repurchase program to $4.6
billion. Shares may be repurchased
through the open market or in privately negotiated transactions. Through June 30, 2008, the Company has
repurchased 81.5 million shares of common stock at an average price (excluding
commissions) of $40.73 per share for an aggregate purchase price of $3,230
million since inception of the stock repurchase program, and the remaining
authorized amount for stock repurchases under this program is $1,280 million,
with no termination date.
ITEM 4.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
|
|
(a)
|
The 2008 Annual
Meeting of Stockholders of the Registrant was held on May 16, 2008 (the
Annual Meeting).
|
|
|
|
|
(b)
|
See Item 4(c)
below.
|
|
|
|
|
(c)
|
At the
Annual Meeting, Aons stockholders voted on the following matters: the election of fifteen directors to serve
until the 2009 Annual Meeting of Stockholders and the ratification of the
appointment of Aons independent registered public accounting firm for
2008. The voting results were as
follows:
|
|
|
|
|
|
48
(i)
In the election of
directors, each nominee was elected by the following vote:
Name
|
|
For
|
|
Withheld
|
|
Patrick G. Ryan*
|
|
258,567,205
|
|
13,679,104
|
|
Gregory C. Case
|
|
267,653,886
|
|
4,592,423
|
|
Fulvio Conti
|
|
266,926,121
|
|
5,320,188
|
|
Edgar D. Jannotta
|
|
258,122,251
|
|
14,124,058
|
|
Jan Kalff
|
|
174,091,897
|
|
98,154,412
|
|
Lester B. Knight
|
|
267,762,272
|
|
4,484,037
|
|
J. Michael Losh
|
|
262,611,338
|
|
9,634,971
|
|
R. Eden Martin
|
|
259,752,362
|
|
12,493,946
|
|
Andrew J. McKenna
|
|
256,156,115
|
|
16,090,194
|
|
Robert S. Morrison
|
|
267,198,085
|
|
5,048,224
|
|
Richard B. Myers
|
|
261,795,055
|
|
10,451,254
|
|
Richard C. Notebaert
|
|
261,225,009
|
|
11,021,300
|
|
John W. Rogers, Jr.
|
|
249,776,034
|
|
22,470,275
|
|
Gloria Santona
|
|
267,631,533
|
|
4,614,776
|
|
Carolyn Y. Woo
|
|
266,757,270
|
|
5,489,039
|
|
* Patrick G. Ryan retired as a Director and
Aons Executive Chairman on August 1, 2008.
(ii)
The
proposal to ratify the appointment of Ernst & Young LLP as Aons
independent registered public accounting firm for the 2008 fiscal year was
approved by the following vote:
For
|
|
Against
|
|
Abstain
|
|
254,742,505
|
|
14,897,320
|
|
2,606,485
|
|
ITEM 6.
|
|
EXHIBITS
|
|
|
|
|
|
Exhibits
The exhibits filed with this report are listed on the attached
Exhibit Index.
|
49
SIGNATURE
Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Aon
Corporation
|
|
(Registrant)
|
|
|
August 8,
2008
|
/s/
Christa Davies
|
|
CHRISTA
DAVIES
|
|
EXECUTIVE
VICE PRESIDENT AND
|
|
CHIEF
FINANCIAL OFFICER
|
|
(Principal
Financial and Accounting Officer and
duly authorized officer of Registrant)
|
50
Aon CORPORATION
Exhibit Index
Exhibit
Number
|
|
Description
of Exhibit
|
10.1
|
|
Amendment
No. 1 to Agreement among the Attorney General of the State of New York,
the Superintendent of Insurance of the State of New York, the Attorney
General of the State of Connecticut, the Illinois Attorney General, the
Director of the Division of Insurance, Illinois Department of Financial and
Professional Regulation and Aon Corporation and its subsidiaries and
affiliates dated March 4, 2005.
|
|
|
|
10.2
|
|
Amendment
No. 2 to Agreement among the Attorney General of the State of New York,
the Superintendent of Insurance of the State of New York, the Attorney
General of the State of Connecticut, the Illinois Attorney General, the
Director of the Division of Insurance, Illinois Department of Financial and
Professional Regulation and Aon Corporation and its subsidiaries and
affiliates dated March 4, 2005.
|
|
|
|
10.3
|
|
Amendment
No. 3 to Agreement among the Attorney General of the State of New York,
the Superintendent of Insurance of the State of New York, the Attorney
General of the State of Connecticut, the Illinois Attorney General, the
Director of the Division of Insurance, Illinois Department of Financial and
Professional Regulation and Aon Corporation and its subsidiaries and
affiliates dated March 4, 2005.
|
|
|
|
10.4
|
|
Amendment
No. 4 to Agreement among the Attorney General of the State of New York,
the Superintendent of Insurance of the State of New York, the Attorney
General of the State of Connecticut, the Illinois Attorney General, the Director
of the Division of Insurance, Illinois Department of Financial and
Professional Regulation and Aon Corporation and its subsidiaries and
affiliates dated March 4, 2005.
|
|
|
|
10.5
|
|
Amendment
No. 5 to Agreement among the Attorney General of the State of New York,
the Superintendent of Insurance of the State of New York, the Attorney
General of the State of Connecticut, the Illinois Attorney General, the
Director of the Division of Insurance, Illinois Department of Financial and
Professional Regulation and Aon Corporation and its subsidiaries and
affiliates dated March 4, 2005.
|
|
|
|
10.6
|
|
Amendment
No. 6 to Agreement among the Attorney General of the State of New York,
the Superintendent of Insurance of the State of New York, the Attorney
General of the State of Connecticut, the Illinois Attorney General, the
Director of the Division of Insurance, Illinois Department of Financial and
Professional Regulation and Aon Corporation and its subsidiaries and
affiliates dated March 4, 2005 incorporated by reference to
Exhibit 10.1 to Aon Corporations Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 6, 2008.
|
|
|
|
12.1
|
|
Statement
regarding Computation of Ratio of Earnings to Fixed Charges
|
|
|
|
12.2
|
|
Statement
regarding Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends
|
|
|
|
31.1
|
|
Certification
of CEO
|
|
|
|
31.2
|
|
Certification
of CFO
|
|
|
|
32.1
|
|
Certification
of CEO Pursuant to section 1350 of Title 18 of the United States Code
|
|
|
|
32.2
|
|
Certification
of CFO Pursuant to section 1350 of Title 18 of the United States Code
|
51
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