Aon Group Inc.

123 N. Wacker Drive, Chicago, Ill

60606; 312-701-4000;

fax: 312-701-3080;

Internet: www.aon.com

1996 1995

Gross revenues $3.96 billion $1.73 billion**

Brokerage: Retail 58% 57%

Wholesale 13%* 14*%

Reinsurance 10%* 11*%

Services 13% 14%

Investment income 6% 4%

Employees 33,000 13,400

Rev./Employee $120,091 $126,940

Offices 550 350

*BI estimates ** Restated.

To many in the insurance industry, the word "consolidation" is synonymous with Aon Group Inc.

And why shouldn't it be? The Chicago-based broker purchased three of the world's largest insurance brokers within the last year, touching off a wave of consolidation in the industry and further segregating the world's largest brokers by size.

But if one points the finger at Patrick G. Ryan, Aon Group's chairman and CEO, as the instigator of the consolidation movement, he'll be the first to deny it.

"People say to me often, 'You've changed the brokerage world,' and I honestly say that I don't agree with that. The fact is, the commercial industrial organizations have changed the market, and we've responded to it. They've changed the market by saying: 'We want more and more resources. We want better and higher quality investment advice. We don't want you to just place our business, we want you to provide more services for us and we're not going to pay for redundant costs.' All we've done is recognize that and reacted to it," Mr. Ryan said. "The reason you get consolidation is because the end user demands it."

At the same time, the acquisitions of Bain Hogg Group P.L.C. in October for $253 million, Alexander & Alexander Services Inc. in January for $1.23 billion, and Minet Group in May of this year for an undisclosed amount, fulfills Aon's goal of becoming a dominant global player in the brokerage industry.

They also make Aon one of two giants in the industry.

On a pro-forma basis, Aon reported combined gross revenues in 1996 of $3.96 billion. That's a 129.5% gain over Aon's restated 1995 revenue figure of $1.73 billion. Pretax profits fell 14% to $182 million as a result of its acquisition activity.

Over the last year, Aon's employee base has nearly tripled to roughly 33,000 people, and the company has gained 200 new offices around the world. The acquisitions also catapult Aon to the top of the world's largest reinsurance brokers, wholesale brokers and captive managers and significantly expand benefit consulting.

Despite its new girth, Aon remains the world's second-largest broker behind Marsh & McLennan Cos. Inc., whose acquisition of Johnson & Higgins and CECAR earlier this year helped secure its spot at the top with $5.5 billion in pro-forma revenues.

M&M's gross revenues include $1.08 billion generated by investment management subsidiary Putnam Investments Inc. If BI included revenue from Aon's underwriting operations, its total revenue would be $5.8 billion.

The past 12 months have "clearly been the year of the most dynamic change in our company's history, and it was the result of a lot of planning over the prior two years," Mr. Ryan said.

The addition of Bain Hogg, A&A and Minet bring a new or enhanced presence for Aon in such locations as The Netherlands, France, Belgium, Australia, Hong Kong, China, Malaysia, Singapore, South Korea, Africa and Scandinavia.

And the expansion effort continues.

Last month, Aon announced plans to acquire Canadian broker Sodarcan Inc., for $28.9 million (BI, June 16). Sodarcan's retail brokerage unit, Dale-Parizeau Inc., will be integrated with Aon Reed Stenhouse Inc., the Canadian brokerage unit that Aon picked up with its purchase of A&A. Sodarcan's reinsurance brokerage and benefit consulting units will be merged into Aon's respective units. Prior to the acquisitions, Aon had no significant presence in Canada.

"We're making acquisitions conscious of the organization's capacity to absorb," Mr. Ryan said. "Sodarcan is a good example of how we can take it on concurrently because very little in Canada is consolidating."

In the meantime, Aon continues with its integration process around the world. While this is not an easy task, it is a familiar one to Aon. Five years ago, the broker assimilated then-No. 14 Hudig-Langeveldt B.V., No. 6 Frank B. Hall Cos. Inc., and No. 7 Rollins Burdick Hunter Group Inc. That integration marked Aon's first global expansion effort and one Mr. Ryan describes as very similar in scope to Aon's task at hand.

Executives say the physical integration of Bain Hogg and A&A is progressing as planned. The process of integrating Minet has not begun.

Overall, Aon has trimmed 2,600 redundant positions globally among Aon, Bain Hogg and A&A, through a combination of early retirement incentives, attrition and layoffs.

Mr. Ryan said more head count reductions are expected with Minet, but he expects much of that will come through attrition.

"A fair amount was identified by St. Paul before we made the transaction," he added.

"In the U.S., all the management teams are in place and all the decisions have been made on office space, systems, back rooms, etc.," said Michael D. O'Halleran, president and chief operating officer of Aon Group Inc., who is in charge of the integration efforts.

"The biggest issue is physically moving the people together, and that has to do with when we can get the

real estate ready," Mr. O'Halleran said. While all issues regarding systems have been made, "we can't just flip a switch," he said.

Aon took a $60 million charge in the fourth quarter of 1996 to cover costs associated with the consolidation. About $12 million of the charge was associated with workforce reductions.

Since mid-January, when Aon officially took over A&A, it has been integrating the broker with Aon's other operations worldwide.

Aon took a $145 million charge in the first quarter of 1997 to cover the costs of integrating A&A. Of the amount, $40 million covers costs associated with workforce reductions.

In December, Ron W. Forrest, former chairman and CEO of Bain Hogg, was named chairman and CEO of Aon Risk Services Cos. Inc. of the Americas and was tapped to help integrate A&A's U.S retail brokerage operations into Aon's U.S. retail brokerage operations. In taking on that task, Mr. Forrest was working with a group he knew well, as he formerly had been chairman and CEO of A&A Inc., resigning that post in late 1993.

"Ron Forrest added tremendous presence and instantaneous trust in bringing the companies together," Mr. O'Halleran noted.

Mr. Forrest wanted to move back to London with his family, though, and now is assisting with the integration process in other parts of the world as vice chairman of Aon Risk Services Worldwide and chairman and CEO of Aon Risk Services Cos. Inc. of Europe, Asia, Africa and Australia.

Dirk P.M. Verbeek was named chairman and CEO of Aon Risk Services Worldwide and chairman of Aon Risk Services of Europe, Asia, Africa and Australia.

Richard A. Riley will oversee the U.S. retail operations as chairman and CEO of Aon Risk Services of the Americas. He also was named a vice chairman of Aon Risk Services Worldwide.

Peter Christie, former chairman and CEO of Minet, and Kenneth J. Davis, former executive vp of A&A, were named executive directors of Aon Risk Services Worldwide.

One Aon executive who would have played an integral part in the new company is Arthur F. Quern. Mr. Quern, former chairman and CEO of Aon Risk Services Cos. Inc., died in a plane crash last October (BI, Nov. 3, 1996).

Outside of North America, the integration of Aon, A&A and Bain Hogg's retail brokerage operations is "right in the middle of the execution stage," Mr. Verbeek said.

"Our goal is to create a very efficient organization that is client-accessible," he noted. To do this, the London retail operations are being segmented into five areas: major corporations; middle market; affinity business; personal lines; and commercial lines. Also, all the back-office operations are being consolidated into one office in Glasgow, Scotland.

Aon hopes all its retail brokerage operations will be integrated by the end of the year. The integration of Minet is currently being discussed. On July 1, Aon Risk Services moved into the former Bain Hogg building in London.

Also on July 1, Nicholson Jenner Leslie Group Ltd., Aon's London wholesale and reinsurance unit, was formally merged with Bain Hogg International Ltd. and Alexander Howden Group Ltd., creating Aon Group Ltd.

Alan H. Colls, former chairman of NJL, is chairman of the new operation and Dennis L. Mahoney, former chairman and CEO of Howden, is deputy chairman and CEO.

Aon Group Ltd. reports its reinsurance and wholesale revenues to Aon Re Worldwide and Aon Specialty Group, respectively.

As integration continues, Aon executives are looking at ways to bring more value to clients with all the company's new resources.

One way the broker is doing this is through a new global process called Strategic Account Management.

The process comprises roughly 60 senior client executives and account coordinators located all over the world that are known as strategic account managers, or SAMs. The SAMs work with all of Aon's resources, including local office professionals, specialized resources such as Aon Financial Services, and other Aon Group units, to bring seamless delivery of Aon's resources to clients.

"It is each SAM's job to ascertain the client's needs, then bring 100% of Aon to its clients," said Mr. O'Halleran, to whom the SAMs report.

SAMs focus solely on major sophisticated risk management business that requires organizing resources from many local facilities.

"As we look at the industry today, we're very pleased that we've had this expanded service approach as opposed to traditional brokering and placing of business," Mr. Ryan said.

In addition to its retail brokerage operations, Aon Group consists of three other units:

Aon Re Worldwide Inc.

The combination of Aon Re, Alexander Reinsurance Intermediaries Inc. and most recently Minet Re creates the world's largest reinsurance broker, based on estimated 1996 reinsurance brokerage revenues of $396 million.

BI estimates that J&H Marsh & McLennan Inc. generated reinsurance brokerage revenues of approximately $378 million in 1996.

Aon Re provides reinsurance placement, alternative risk services, captive management services and catastrophe information forecasting to clients worldwide.

Ronald A. Iles, former chairman of Alexander Howden Group Ltd., is now chairman of Aon Re. H. Rocker Channell Jr. remains president.

Alexander Howden "brings incredible strength to our reinsurance strategy of expanding our global reach," Mr. O'Halleran said. "Combined with Aon Re, we've got every part of the world covered."

And with the recent addition of Sodarcan's reinsurance operations-BEP International Holding Inc.-Aon Re further strengthens its presence in the United States, Canada, Australia, the United Kingdom and the Far East, Mr. O'Halleran said.

Aon Re's captive management services have also expanded.

Combining A&A's captive business with Aon's, Aon Group has become the world's second-largest captive manager, with roughly 355 captives under management.

And as the soft property/casualty market continues to depress reinsurance rates, Aon Re continues to develop creative alternatives for clients, including capital market solutions.

Earlier this year, for instance, Aon and Centre Reinsurance (U.S.) sealed a $100 million catastrophe equity put program with Horace Mann Educators Corp. that will help recapitalize the Springfield, Ill-based insurer in the event of a large catastrophic loss (BI, April 7).

Aon Consulting Worldwide Inc.

The combination of Aon Consulting Worldwide and The Alexander Consulting Group Inc. creates the world's fifth-largest benefit consulting company, with estimated 1996 revenues exceeding $400 million.

Aon Consulting offers clients employee benefits, human resources, compensation and change management services.

The addition of A&A's consulting arm, which has been merged with Aon Consulting Worldwide, not only doubles its size in terms of revenues, but also enhances compensation and human resources consulting practices in the United States and expands its global market position in the United Kingdom and Australia.

While Bain Hogg sold most of its benefits operations with the previous sale of Hogg Robinson Inc., Aon did pick up small benefits consulting operations in Hong Kong, Belgium and Australia, said Daniel T. Cox, chairman of Aon Consulting.

Further quenching its global desires, Aon Consulting is now a dominant force in Canada as a result of the January acquisition of Martineau, Provencher & Associates Ltd., the largest independently owned actuarial, benefits and human resources consulting firm in Canada. Martineau has offices in Montreal, Toronto and Quebec City. The recent addition of Sodarcan's benefit consulting unit, MLH+A Inc., will further enhance Aon's presence in Canada.

Aon Group's 1995 acquisition of HHL (Holdings) Ltd. gave Aon Consulting a presence last year in Singapore; Bangkok, Thailand; and Hong Kong. Aon Consulting also increased its presence in South America with offices in Bogota, Columbia; and Sao Paulo, Brazil. It hopes to soon open an office in Santiago, Chile.

"Globalization still remains a very high priority for us," Mr. Cox said.

Aon Specialty Group Inc.

Aon's acquisition of A&A and Minet also creates the world's largest insurance wholesale brokerage.

The combined 1995 volume of premiums placed by Minet's Swett & Crawford Group subsidiary, Alexander Howden North America and Aon's Sherwood Insurance Services unit totals more than $1.3 billion (BI, Sept. 16, 1996).

However, Aon's plans are not to integrate all of the wholesale operations into one behemoth. Instead, the unit is building on its existing three wholesale brokers and will create four equally strong wholesale operations that will compete against each other, explained Michael D. Rice, chairman of Aon Specialty.

He said the acquisition of Minet, while "significantly catapulting" Aon's wholesale operations to the top, "also presented a problem."

"We had three strong regional wholesale brokers, and (Swett & Crawford) was national in scope."

Aon Specialty is in the process of consolidating some of the offices of Swett & Crawford, Sherwood, Bryson Associates Inc. and Insurance Brokers Services Inc. The consolidation sometimes is determined by office location and other times by specialty. The process is expected to be complete by the end of the third quarter.

In addition to wholesale brokerage and managing general underwriting, Aon Specialty develops and provides highly specialized insurance products and services for professional groups, service businesses, governments, health care providers and commercial organizations.

Aon Specialty also is in the process of developing a new Washington-based company that will "develop new strategies for the benefit of national associations," Mr. Rice said.

The unit also is looking at expanding its program administration business into Western Europe and South America; its health care business into Western Europe and Southeast Asia; and its underwriting management business into a various international locations, Mr. Rice said.

During 1996, Aon's stock price ranged from a high of $50.875 to a low of $31.375. In March, the company approved a three-for-two stock split, payable May 14 in the form of a stock dividend of one common share for every two shares held. Aon stock was trading at $54.50 on July 11.

The cash compensation, including salary and bonuses, of the top five officers of Aon Corp. in 1996, as reported to the Securities and Exchange Commission, follows:

Patrick G. Ryan $2,577,692

Michael D. O'Halleran $1,600,000

Harvey N. Medvin $1,100,962

Daniel T. Cox $943,385

Michael A. Conway $575,385