AON

Aon Corporation 10-Q Summary: Period Ended September 30, 2002

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Aon Corporation for the period ended September 30, 2002. Aon operates through three primary segments: Insurance Brokerage and Other Services, Consulting, and Insurance Underwriting, along with a Corporate and Other segment. The company is navigating the aftermath of the September 11, 2001 attacks, a comprehensive business transformation plan, and a strategic review of its underwriting business divestiture.

Key Financial Metrics

Third Quarter 2002 Specifics: Revenue was $2,246 million with Net Income of $128 million ($0.46 per share). Pretax margin improved to 9.7% compared to 7.0% in the prior year quarter.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 14% year-over-year for the nine months, driven by a 15% increase in brokerage commissions and fees and an 18% increase in premiums and other (underwriting). Investment income declined 16% due to lower interest rates and higher impairment write-downs.
• Profitability: Net income more than doubled year-over-year. This improvement is significantly influenced by the absence of $218 million in business transformation expenses recorded in 2001 and a $18 million credit in 2002 related to World Trade Center insurance settlements.
• Accounting Changes: Adoption of FASB Statement No. 142 eliminated goodwill amortization, which previously reduced earnings. Goodwill is now tested for impairment annually.
• World Trade Center Impact: In Q3 2002, the company recorded an $18 million unusual credit from a partial settlement regarding destroyed assets. This contrasts with $53 million in unusual charges recorded in Q3 2001.

Guidance, Outlook, Risks, and Unusual Items

• Divestiture Strategy: On October 31, 2002, Aon announced it would not sell or spin-off its major underwriting subsidiaries due to adverse market conditions. The company expects to incur wind-down costs in Q4 2002 related to staff added in contemplation of the spin-off.
• Dividend Reduction: On October 31, 2002, the Board declared a quarterly dividend of $0.15 per share, a reduction from the previous $0.225 per share.
• Capital Markets Activity: In November 2002, Aon completed a public offering of common stock raising approximately $607 million and a private offering of $300 million in convertible debentures. Proceeds were used to repay short-term debt.
• Rating Agency Actions: Moody's lowered Aon's senior debt rating to Baa2 and placed it under review for further downgrade. A further downgrade could trigger funding obligations of up to $265 million related to securitizations and increase borrowing costs.
• Pension Liability: Market declines are expected to increase the minimum pension liability, potentially reducing stockholders' equity by $450 million to $550 million by year-end 2002. Pension expense for 2003 is projected to increase by $130 million to $160 million.
• Legal Contingencies: Significant litigation remains regarding the World Trade Center reinsurance dispute (approx. $90 million disputed), U.K. pension plan reviews, and Mississippi insurance lawsuits. A class action lawsuit regarding financial disclosures was filed in August 2002.

Investor Verification Checklist

• Divestiture Costs: Verify the magnitude of Q4 2002 wind-down costs associated with the abandoned underwriting spin-off.
• Reinsurance Recovery: Monitor the status of the $90 million disputed reinsurance recovery related to the World Trade Center Business Travel Accident policy.
• Rating Downgrade Triggers: Assess the impact of potential further credit rating downgrades on the $265 million potential funding obligation for securitizations.
• Pension Funding: Confirm the actual cash contributions required for 2003 defined benefit plans and the final impact on 2002 equity.
• Investment Impairments: Review the policy change regarding "other than temporary" impairments and the $56 million charge taken in Q2 2002.