01—Abstract
Summary
Summary of the 10-K filed March 24, 2000. Cited figures are marked; the original filing is the authoritative source.
Aon Corporation's 10-K for fiscal 1999 shows a company in transition.
Revenue grew 9% to $7.07 billiona, driven by acquisitions in insurance brokerage and steady growth in extended warranty and direct-sales insurance. However, reported net income fell 35% to $352 million ($1.33 diluted EPS) from $541 million ($2.07) in 1998, as $313 million of pretax special charges weighed on results. The charges covered restructuring after the Alexander & Alexander integration, U.K. pension-selling compensation, and Unicover and other litigation.
Excluding these items, net income was $547 millionb, flat with 1998, indicating that underlying earnings growth was minimal despite acquisition activity. The balance sheet remains substantial, with total assets of $21.1 billion, stockholders' equity of $3.05 billion ($11.91 per share), and notes payable of $1.0 billion plus $800 million in capital securities. Operating cash flow dropped to $462 million from $864 million, mainly due to timing of brokerage receivables and payables, taxes, and a branding campaign.
The company paid $210 millionc in dividends ($0.82 per share, up from $0.73) and spent about $395 million on brokerage acquisitions during 1999. Management expects Year 2000 remediation costs of roughly $70 million to have been manageable, with no significant disruptions reported.
Key risks for investors include the unresolved Unicover litigation, a PIA-mandated U.K. pension compensation program with $107 milliond still outstanding, a $74 million-plus IRS dispute over extended warranty tax treatment, and sensitivity to softening commercial property and casualty premium pricing, which has been slowing commission growth. Investors should weigh the strategic 'One Aon' integration and global platform against lower underlying margins and ongoing special-charge exposure.
02—Key points
Key Highlights
- Total revenue rose 9% to $7.07 billion in 1999, led by brokerage commissions and fees up 11% to $4.64 billion from acquisitions and new business
- Reported net income fell to $352 million ($1.33 diluted EPS) from $541 million ($2.07) because of $313 million in pretax special charges
- Excluding special charges, net income was $547 million ($2.07 per share), essentially flat with 1998 and reflecting limited underlying earnings growth
- Four acquisitions in 1999 (Nikols Group, Presidium, Societe Generale d'Assurance et de Prevoyance, and others) cost about $395 million in cash, adding roughly $500 million of goodwill
- Combined Insurance and Virginia Surety/London General extended warranty businesses grew, with extended warranty premiums up 15%
- Stockholders' equity was $3.05 billion ($11.91 per share), with total assets of $21.1 billion
- Operating cash flow fell to $462 million from $864 million, and the dividend was raised to $0.82 per share from $0.73
03—Questions
Frequently Asked Questions
Why did Aon's reported earnings decline so sharply in 1999?
Net income dropped to $352 million from $541 million mainly because of $313 million in pretax special charges. These covered a $120 million brokerage restructuring after the Alexander & Alexander integration, $121 million for U.K. pension-selling compensation (with $43 million in Q1 and $78 million in Q4), and $72 million for Unicover and other litigation. Excluding these charges, net income was $547 million, roughly flat year over year.
What are the largest unresolved liabilities or legal risks?
The Unicover reinsurance litigation remains complex, and its timing cannot be determined. Aon has $107 million left in general expense liabilities for U.K. pension-selling compensation, and there is a $179 million total for contingencies, including Unicover and pension matters. The IRS has proposed about $74 million in additional tax (plus interest) relating to 1990 extended warranty deductions, which Aon is contesting. Management believes none of these will have a material adverse effect beyond amounts already provided, but future quarterly or annual results could be materially affected.
How is Aon's business structured and where does its revenue come from?
Aon operates three segments: Insurance Brokerage and Other Services (about $4.1 billion in revenue, led by Aon Re, the world's largest reinsurance broker), Consulting (about $656 million, employee benefits and HR services), and Insurance Underwriting (about $2.1 billion, through Combined Insurance and extended warranty providers). By geography, the United States generated $4.13 billion of consolidated revenue, the U.K. $1.35 billion, Continental Europe $841 million, and Rest of World $746 million.
Is Aon's balance sheet and cash flow sufficient to support its obligations?
Management says it expects adequate liquidity. Aon had $844 million of commercial paper outstanding against $1.1 billion of backup credit lines, along with a euro credit facility borrowing of $351 million. Notes payable totaled $1.0 billion, and $800 million of capital securities were outstanding. Operating cash flow of $462 million covered $210 million of dividends and acquisition spending, though operating cash fell sharply from 1998, and short-term borrowings rose to $903 million.
What drives future growth and what should investors watch?
Growth depends on acquisitions, new business, and continued integration of global operations under the 'One Aon' strategy. Management noted that slowing commercial property and casualty premium declines are benefiting brokerage commissions, but competitive pressure is limiting margin expansion, and pretax margins in the brokerage segment declined. Investors should watch whether underlying income growth can improve, the pace of special-charge recognition, and the impact of lower income from equity investments expected in 2000.
04—Continue