Aon Reports First Quarter 2002 Results; Provides Updates on Spin-Off, Business Transformation and World Trade Center Issues

Transcription

1 Aon Reports First Quarter 2002 Results; Provides Updates on Spin-Off, Business Transformation and World Trade Center Issues CHICAGO, IL April 30, 2002 Aon Corporation (NYSE: AOC) today reported first quarter dilutive earnings per share of $0.37 compared with $0.07 in the year ago period. Excluding special charges, unusual World Trade Center (WTC) items, and a favorable one-time tax related item, first quarter earnings per share were $0.47 and $0.23 for 2002 and 2001, respectively. First quarter 2002 reported net income was $104 million compared with $19 million in the year ago period. As previously reported, first quarter 2002 earnings included the establishment of a $90 million pretax ($0.20 per share) allowance for a potentially uncollectible WTC reinsurance receivable that was partially offset by a favorable one-time tax related item of $48 million pretax, or $0.11 per share. Patrick G. Ryan, chairman and CEO of Aon Corporation, said, Our brokerage segment posted significantly improved organic revenue growth of 13% for the quarter due in part to better performance in U.S. retail new business production, and continued strong performance in international, reinsurance and wholesale brokerage. Most of our businesses are performing well and we are implementing steps to improve bottom line results in our U.S. retail and managing underwriting group within brokerage. Consolidated revenue of $2.088 billion in the first quarter increased 15% from $1.811 billion in the prior year. Operating segment revenue growth was principally driven by strong organic revenue growth in the Insurance Brokerage and Other Services segment. Improved equity investment results and the receipt of a one-time tax related item contributed to the year-over-year increase in non-operating Corporate and Other segment revenue. Operating Segments Aon s three operating segments Insurance Brokerage and Other Services, Consulting, and Insurance Underwriting recorded aggregate first quarter revenue of $2.0 billion, up 8% from the prior year. First quarter operating segment investment income decreased $43 million from the same period in 2001 to $64 million, due largely to declining interest rates. Excluding investment income, 2002 operating segment revenue increased 11% for the first quarter when compared to prior year. All operating segment comparisons exclude special charges and World Trade Center related items. 1

2 Total operating segment pretax income in first quarter 2002 was $283 million compared with $289 million in Excluding investment income, first quarter operating segment pretax income increased 20% versus the prior year. Operating segment pretax margins, excluding investment income, were 11.1% compared to 10.2% for first quarter 2002 and 2001, respectively. First quarter Insurance Brokerage and Other Services segment reported revenue grew 10% to $1.232 billion compared with $1.117 billion in Organic revenue growth improved to 13% in the quarter from 8% in fourth quarter International, reinsurance and wholesale brokerage showed strong revenue growth. Investment income, however, decreased $25 million to $21 million in the first quarter primarily due to declining interest rates. Excluding investment income, Insurance Brokerage and Other Services segment revenue increased 13% compared to prior year. U.S. retail brokerage operations posted significantly improved revenue growth for the quarter. Increased compensation expenses related to retaining certain employees and hiring new employees into specialized positions, and the need to maintain duplicate back office processing (four service centers and the regional offices) pressured pretax income. Net transition costs related to the implementation of the business transformation were $3 million. Transition costs consisted mostly of process conversion expenses, consulting fees and temporary help. As previously reported, first quarter 2002 brokerage results also reflected temporarily lower revenues from certain managing general underwriting programs due to a required change in an insurance carrier relationship that is expected to be corrected during second quarter Premium rates continued to increase across all major property and casualty lines and clients continued to utilize alternative risk transfer services including captive management, claims, loss control and actuarial services to minimize overall risk management costs. First quarter 2002 Insurance Brokerage and Other Services segment reported pretax income was $187 million compared with $196 million in first quarter The pretax margin in first quarter 2002 was 15.2% compared with 17.5% in the year ago period. A decline in investment income, due mostly to reduced interest rates, negatively affected margin comparisons. Excluding investment income, insurance brokerage pretax income increased 11%. International, reinsurance and wholesale brokerage all had good bottom line results for the quarter. Consulting segment reported revenue rose 10% to $233 million from $212 million in the year-ago first quarter. This increase partly reflects core growth in U.S. employee benefits business and the acquisition of ASI Solutions Incorporated (ASI) in May Consulting segment organic revenue growth for the quarter was 4%, partly reflecting slower economic conditions. Pretax income rose 8% to $27 million in first quarter The Consulting pretax margin was 11.6% in the first quarter, down from 11.8% in the year ago period. Margin 2

3 comparisons were positively influenced during the quarter by strong results in the U.S. employee benefits business but were pressured by the effects of a weaker economic environment. Insurance Underwriting segment reported revenue increased to $578 million in first quarter 2002, up from $567 million in first quarter 2001, reflecting the impact of organic growth and acquisitions. Insurance Underwriting segment organic revenue growth, based on written premium, was 18% for the quarter, up significantly from 10% in fourth quarter 2001, mostly related to new specialty property and casualty insurance business. First quarter investment income decreased $17 million from the prior year period. Excluding investment income, insurance underwriting segment reported revenue increased 6% compared to prior year. Insurance Underwriting pretax income was $69 million in the first quarter compared with $68 million in the prior year period. The Underwriting pretax margin was 11.9% for the quarter compared with 12.0% in first quarter 2001 and was negatively impacted by reduced interest rates. Corporate and Other segment revenue was $45 million for the quarter compared with a negative $85 million in first quarter Improved investment results and a $48 million pretax one-time tax related item accounted for most of the improvement. The Corporate and Other segment pretax loss for the quarter was $7 million, compared with a pretax loss of $169 million in the prior year quarter due to a significant improvement in Corporate and Other revenue, the elimination of goodwill amortization and a decrease in interest expense. After netting the effect of currency hedges, the impact of foreign currency translations on net income in first quarter 2002 was not material. In first quarter 2002, Aon adopted Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and Other Intangible Assets, effective January 1, The amortization of goodwill is no longer included in Aon s reported earnings per share. Goodwill amortization expense equaled $0.09 per share in the first quarter of 2001 with no comparable amount in As previously reported, no impairment charges resulted from the adoption of Statement No Goodwill amortization expense was $29 million in first quarter The exclusion of goodwill amortization in 2002 contributed to Aon s effective tax rate declining to 37% in first quarter 2002 from 39% in Spin-off related charges were $5 million for the quarter, or $0.01 per share. Business Transformation Update Outside of U.S. retail brokerage, the business transformation plan has delivered expected benefits of improved revenue growth and enhanced productivity. In U.S. retail brokerage, however, a more extensive business transformation plan involved the redesign of many processes and job roles, which resulted in delays implementing certain process 3

4 conversions, as previously reported. The destruction of the WTC, the location of our largest U.S. retail regional office, also directly impacted Aon and exacerbated the internal conversion delays that were being experienced. In addition, September 11 created new industry challenges while Aon was in the midst of its transformation phase. During the first quarter, Aon completed the conversion of all large account back office servicing in U.S. retail brokerage from our regional offices to four service centers. Small account back office servicing in the U.S. will be converted by the end of the second quarter. The completion of this major initiative will not only enhance service quality for many day-to-day processing functions, but also allow relationship managers and other field personnel to offer even more value-added solutions to clients during this challenging period in the insurance industry. Most clients now enjoy the benefits of enhanced local service coupled with advanced service centers that can process routine transactions more quickly and effectively, stated Mr. Ryan. The conversion also permits a renewed focus on new account generation in U.S. retail, which was evident in the improved organic revenue growth in the first quarter. As previously reported, the $150 million pretax annualized savings related to actions already taken will be partially offset by increased compensation for certain brokerage employees and the hiring of employees with specialized skills. Mr. Ryan added, We believe that operating margins in the second half of 2002 in the brokerage segment will increase year-over-year as we improve the alignment of the U.S. retail brokerage cost structure with new business growth opportunities. We have undertaken a significant amount of change in the U.S. and have been directly impacted by September 11, but our employees have done an outstanding job and I am confident that profitability will improve. Michael D. O Halleran, president and COO of Aon Corporation, said, Margin compression resulted from factors such as conversion delays that negatively impacted both the expense side and top line performance. As we have transitioned to the new operating model, U.S. retail brokerage has also incurred costs for underutilized production capacity, such as vacated office space as certain work functions moved from regional offices to the four service centers. Given the strong expansion phase within our industry and the near completion of our U.S. transformation, we believe that we will improve our capacity utilization as new business increases. September 11 Update As reported, the Company established a first quarter $90 million pretax ($56 million aftertax) allowance for a potentially uncollectible receivable related to a previously disclosed dispute with certain reinsurers at Lloyd s over a World Trade Center reinsurance claim. This reduced earnings per share by $0.20 in the quarter. 4

5 Combined Insurance Company of America (CICA) underwrote a primary accident insurance policy for the benefit of Aon s employees that was reinsured by certain underwriters at Lloyd s. As previously announced, Aon believes its subsidiary, CICA, has valid reinsurance. Aon was compelled, however, to establish the allowance given accounting rules that require a reasonable estimate of the probable recovery under our reinsurance claim. A recent decision (in an unrelated case) by a Southern District of New York judge that may unfavorably impact the jurisdiction for Aon s litigation with reinsurers, prompted the accounting action. Nevertheless, Aon believes that the Airline Stabilization Act clearly delineates the federal court in the Fifth District of New York as the only proper jurisdiction for Aon s case. Aon will vigorously pursue its claim with reinsurers. Aon s litigation with reinsurers of CICA s primary policy in no way impacts Aon s other insurance claims related to the destruction of the WTC. Aon is currently in the normal process of presenting insurance claims to its property and other insurers for losses related to property, extra expense, business interruption and other coverages. Additional costs and recoveries remain to be identified and quantified, including business interruption claims. The ultimate financial impact of September 11 to Aon is not yet fully determinable. Insurance Underwriting Spin-off Update The Company has announced plans to spin-off its underwriting operations to stockholders through a new company to be named Combined Specialty Group, Inc. During first quarter 2002, Dennis B. Reding, chairman and CEO of Combined Specialty, appointed several new senior level executives. Management positions recently added include chief financial officer, chief underwriting officer, president of specialty property and casualty underwriting and general counsel. In March 2002, Combined Specialty filed a preliminary Form 10 with the Securities and Exchange Commission (SEC). The final Form 10 document, with complete details of the spin-off, will be sent to all stockholders after the SEC completes its review. In April 2002, Aon received a favorable private letter ruling from the IRS advising that Aon s U.S. common stockholders should not owe any U.S. tax related to the issuance of shares of Combined Specialty in the spin-off. The spin-off requires regulatory and final Board approval and is expected to be completed in second quarter We are very pleased to have Dennis and his executive management team leading Combined Specialty, said Mr. Ryan. They have developed business and financial plans and are prepared to take advantage of new specialty property and casualty underwriting opportunities in one of the most favorable premium rate environments in recent history. 5

6 Capital Raising As previously reported, Aon has filed with the SEC a universal shelf registration statement for the issuance and sale by Aon, of up to $750 million of equity and debt securities. The Company anticipates that a substantial portion of the securities to be registered will be for common equity. Based on a review of capital raising options, and subject to market conditions, we expect to announce capital raising initiatives in the near term, primarily to take advantage of new insurance underwriting growth opportunities and to strengthen our capital base, said Mr. Ryan. Also as previously reported, Combined Specialty may conduct its own capital raising to fund growth opportunities. The Company will host an audio webcast today at 10:00 a.m. (CDT) that can be accessed at as previously reported. Aon Corporation ( is a holding company that is comprised of a family of insurance brokerage, consulting and insurance underwriting subsidiaries. This press release may contain certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors such as general economic conditions in different countries around the world, fluctuations in global equity and fixed income markets, changes in commercial property and casualty premium rates, the competitive environment, the actual cost of resolution of contingent liabilities, the final form of the business transformation plan, the ultimate cost and timing of the implementation thereof, the actual cost savings and other benefits resulting therefrom, whether the Company ultimately implements the proposed spin-off of its underwriting operations, and the timing and terms associated therewith, and events surrounding terrorists attacks of September 11, 2001, including the timing and resolution of related insurance and reinsurance issues. Further information concerning the Company and its business, including factors that potentially could materially affect the Company s financial results, are contained in the Company s filings with the Securities and Exchange Commission. ### Contact: Sean P. O Neill Vice President, Financial Relations

7 Aon Corporation Consolidated Summary of Operations (millions except per share data) 2002 First Quarter Ended 2001 Percent Change Revenue Brokerage commissions and fees $ 1,444 $ 1, % Premiums and other Investment income Total revenue 2,088 1, Expenses General expenses 1,458 1, Benefits to policyholders Interest expense (19) Amortization of intangible assets (72) Total expenses 1,812 1,691 7 Income Before Unusual and Special Charges Unusual charges - World Trade Center (90) - N/A Special charges (5) (72) N/A Income Before Income Tax and Minority Interest Provision for income tax (37% in 2002 and 39% in 2001) Income Before Minority Interest Minority interest % trust preferred capital securities (10) (10) - Net Income $ 104 $ % Preferred stock dividends (1) (1) - Net Income Available for Common Stockholders $ 103 $ % Net Income Per Share: Basic net income per share $ 0.38 $ % Dilutive net income per share: Net income before unusual and special charges $ 0.58 $ % Unusual charges - World Trade Center (0.20) - N/A Special charges - Spin-off expenses (0.01) - N/A Special charges - Business Transformation plan - (0.16) N/A Dilutive net income per share $ 0.37 $ % Dilutive average common and common equivalent shares outstanding

8 Aon Corporation Operating Segments (millions) 2002 First Quarter Ended 2001 Percent Change Revenue Insurance brokerage and other services (1) $ 1,232 $ 1, % Consulting (2) Insurance underwriting Total revenue $ 2,043 $ 1,896 8 % Income Before Income Tax Insurance brokerage and other services $ 187 $ 196 (5) % Consulting Insurance underwriting Total income before income tax excluding unusual and special charges (2) Unusual charges - World Trade Center (90) - N/A Special charges - Spin-off costs.. (5) - N/A Special charges - Business Transformation plan - (72) N/A Total income before income tax. $ 188 $ 217 (13) % (1) Includes investment income of $21 million and $46 million for the first quarter ended March 31, 2002 and 2001, respectively. (2) Includes investment income of $1 million and $2 million for the first quarter ended March 31, 2002 and 2001, respectively.

9 Aon Corporation Corporate and Other (millions) 2002 First Quarter Ended 2001 Percent Change Corporate and other revenue (1) $ 45 $ (85) N/A % Non operating expenses General expenses. $ 23 $ % Interest expense (19) Amortization of goodwill - 29 (100) Loss before income tax $ (7) $ (169) N/A % (millions) 2002 First Quarter Ended 2001 Percent Change (1) Components of corporate and other revenue Limited partnership investments.. $ 9 $ (56) N/A % Income from marketable equity securities and other investments Corporate and other revenue before one-time items and loss on disposals and related expenses 12 (55) N/A Interest on tax refund 48 - N/A Loss on disposals and related expenses (A) (15) (30) N/A Corporate and other revenue $ 45 $ (85) N/A % (A) Includes impairment writedowns of $8 million and $29 million for the first quarter ended March 31, 2002 and 2001, respectively.