Aon Notes Q3 and Nine Months 2003 Results

November 5, 2003

Aon Corporation reported third quarter and nine months 2003 results this week.

Third quarter net income from continuing operations was $140 million or $0.44 per share compared with $121 million or $0.43 per share in 2002 before World Trade Center (WTC) items. Nine months net income from continuing operations before WTC items grew to $477 million or $1.50 per share from $289 million or $1.03 per share in 2002.

Reported net income per share for the third quarter was $0.36 compared with $0.46 in 2002. Nine months reported results increased to $1.30 per share from $1.03 per share in 2002.

Third quarter losses from discontinued operations were $0.08 and $0.01 per share in 2003 and 2002, respectively. Nine months comparable losses were $0.11 and $0.04 per share. The automobile finance service business that is being discontinued has been in run-off since first quarter 2001. WTC items were zero and a positive $0.04 per share, respectively, in third quarter 2003 and 2002. Similar nine months WTC comparisons were a negative $0.09 per share and a positive $0.04 per share.

Patrick Ryan, chairman and CEO of Aon Corporation, said, “Our international brokerage and U.S. reinsurance businesses drove organic revenue growth in the quarter, which was tempered by lower than expected revenue in claims services and Americas brokerage. Overall brokerage results did not achieve our internal targets, and we will be implementing additional and more aggressive actions to improve both top and bottom line performance.”

Ryan added, “Consulting results have been pressured by the challenging economic environment, but I believe we are poised to improve our profitability in this business, especially if the employment picture begins to improve. Operating income in our underwriting business was up from unusually low levels a year ago, and we are seeing the benefits of our back-to-basics strategy.”

Third Quarter Segment Review
Risk and Insurance Brokerage Services third quarter revenue grew 10 percent to $1.37 billion. Organic revenue growth for the total segment was 7 percent. Within the segment, International brokerage had the best organic revenue growth at 16 percent, followed by Reinsurance brokerage at 8 percent, driven mostly by good U.S. results. Americas brokerage grew 4 percent and Claims services revenues declined 10 percent on an organic basis.

Pretax income was $187 million compared to $209 million in third quarter 2002, and the pretax margin was 13.6 percent versus 16.8 percent a year ago. Excluding a favorable $18 million WTC item in third quarter 2002, prior year pretax income was $191 million and the pretax margin was 15.3 percent.

Third quarter margin comparisons versus the prior year were negatively affected by the following items: a $25 million increase in pension costs, a $22 million decline in investment income and a $10 million decrease in claims services pretax income. As previously reported, management is taking actions to improve the long-term financial performance of Claims services and is evaluating strategic options. Brokerage results were also negatively affected by a stock-based incentive adjustment ($7 million pretax). The adjustment did not have a material impact on prior results and will not affect future periods.

Consulting revenue rose 6 percent to $286 million. Benefits, compensation, management and communications consulting achieved 3 percent organic revenue growth in a challenging environment. Human resource outsourcing revenues declined 8 percent on an organic basis due mostly to reduced headcount at many client organizations. Third quarter human resource outsourcing comparisons included the large AT&T contract for the first time in both the current and prior year periods.

Pretax income was $20 million compared with $26 million one year ago, and the pretax margin was 7.0 percent versus 9.7 percent. The margin decline is primarily due to a previously reported change in the allocation method ($4 million pretax) for centrally controlled costs, which was implemented in first quarter 2003. The previously noted stock-based incentive adjustment also reduced consulting segment pretax income by $3 million.

Insurance Underwriting revenue increased 3 percent to $742 million in third quarter 2003. Total underwriting segment organic revenue growth, based on written premiums, was also 3 percent.

Accident and health (A&H) insurance revenues declined 4 percent on an organic basis, due in part to the previously reported exiting of Latin American and other non-core businesses. Warranty, credit and select property and casualty organic revenue growth was 11 percent.

Pretax income increased 41 percent to $58 million, compared with third quarter 2002. Pretax margins grew to 7.8 percent from 5.7 percent. The “back-to-basics” focus in A&H underwriting improved the benefits payout ratio, which contributed to the margin increase. The benefits ratio also improved in the warranty business, but worsened in the select property and casualty portfolio due to a $21 million pretax ($0.04 per share) loss from the run-off of National Program Services, Inc. (NPS) business (a matter previously reported in 2002). Third quarter 2002 results included costs from the previously planned spin-off of the underwriting businesses.

The pretax margin was negatively affected by the decline in investment income year-to-year. The decline was partially attributed to the run-off of deposit-type contracts, which also lowered benefits to policyholders.

The statutory capital and surplus of the underwriting group has improved substantially during the past year, and it is anticipated that dividend payments to the parent company will resume in 2004.

Corporate and Other segment revenue of $14 million improved from $8 million in third quarter 2002, due mostly to improved equity investment results.

The Corporate and Other segment pretax loss improved to $28 million from a pretax loss of $51 million a year ago, largely due to improved revenues and lower general expenses, which were negatively impacted in the prior year by spin-off plan costs. Revenues and expenses related to the run-off of the automobile finance service business have been reclassified from the Corporate and Other segment to discontinued operations, beginning with the third quarter 2003 presentation.

Other Items
Defined benefit pension costs increased by approximately $31 million pretax ($0.06 per share) in third quarter 2003 compared to a year ago on a consolidated basis. After netting the effect of currency hedges, the positive impact of foreign currency translations was approximately $0.02 per share in the quarter.

Discontinued Operations
Aon decided in third quarter 2003 that it will sell its automobile finance servicing business, which has been in run-off since first quarter 2001. Based on this decision, the operating results from prior periods attributable to this unit have been reclassified as discontinued operations. The loss recorded in third quarter 2003 for discontinued operations is comprised of operating losses ($0.03 per share) and a loss from the revaluation of the business ($0.05 per share).

As previously reported, operating losses from these operations were $16 million pretax ($0.03 per share) in the first half of 2003, and $12 million pretax ($0.03 per share) in the first half of 2002.

Financial Strength Highlights
Total debt decreased $227 million from June 30, 2003 to approximately $1.5 billion at Sept. 30, 2003. Stockholders’ equity increased to approximately $4.4 billion. Total debt and preferred securities as a percentage of total capital improved to 34 percent from 37 percent at June 30, 2003.

Approximately 90 percent of Aon’s investment portfolio at quarter end was in short-term and fixed maturities. More than 96 percent of the fixed income securities were investment grade.

WTC Property Insurance Claim
In November 2003, Aon reached a final settlement of approximately $200 million for its WTC property insurance claim. A cash payment of approximately $92 million is expected during fourth quarter 2003, in addition to the $108 million already collected. The final accounting treatment will be determined prior to the release of fourth quarter 2003 earnings.

Future Outlook
Ryan commented, “We had lower than expected revenue growth and income in the quarter in our brokerage business. Excluding WTC and special items, the nine months pretax brokerage margin declined slightly from a year ago (14.2 percent versus 14.3 percent), and the comparable full year margin may not exceed the 15.2 percent margin achieved in 2002.”

Ryan added, “Seasonally, the fourth quarter is Aon’s best, particularly in our brokerage and consulting businesses. A majority of analysts forecast fourth quarter earnings per share to be within a range of $0.54 to $0.58, and we are comfortable with that range, before any benefit from the WTC settlement, based on our current outlook of continuing operations. Nine months 2003 earnings per share from continuing operations were $1.50 before WTC charges ($0.09 per share).”

“We have an outstanding team of professionals, a tremendous client franchise and industry-leading resources. We intend to impose a dramatically increased level of discipline around our operations, with a clear goal of increasing financial returns for our stockholders.”

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