Home
Jump to Risk Factors
Jump to Industries
Jump to Exposures
Jump to Event Codes
Jump to Wiki Summary

Industries
Food Distributors
Trading Companies and Distributors
Commercial and Professional Services
Technology Hardware Storage and Peripherals
Information Technology
Technology Hardware and Equipment
Diversified Financial Services
Investment Banking and Brokerage
Independent Power Producers and Energy Traders
Construction and Engineering
Construction Materials
Construction and Farm Machinery and Heavy Trucks
Asset Management and Custody Banks
Insurance Brokers
Health Care Facilities

Exposures
Intelligence
Regime
Express intent
Military
Political reform
Economic
Judicial
Provide
Leadership

Event Codes
Warn
Yield
Yield to order
Reward
Accident
Sanction
Pessimistic comment
Sports contest
Host meeting
Consult
Solicit support
Adjust
Reject
Natural disaster
Military blockade
Acknowledge responsibility
Promise
Agree
Endorse
Vote
Release or return
Assure
Propose
Ask for protection
Force
Complain
Demand
Bombings
Yield position

Wiki	Wiki Summary
Business	Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). It is also "any activity or enterprise entered into for profit."Having a business name does not separate the business entity from the owner, which means that the owner of the business is responsible and liable for debts incurred by the business.
Business administration	Business administration (also known as business management) is the administration of a commercial enterprise. It includes all aspects of overseeing and supervising business operations.
Business Insider	Insider – previously named Business Insider (BI) – is an American financial and business news website founded in 2007. Since 2015, a majority stake in Business Insider's parent company Insider Inc.
Small business	Small businesses are corporations, partnerships, or sole proprietorships which have fewer employees and/or less annual revenue than a regular-sized business or corporation. Businesses are defined as "small" in terms of being able to apply for government support and qualify for preferential tax policy varies depending on the country and industry.
Business Is Business	Business-to-business (B2B or, in some countries, BtoB) is a situation where one business makes a commercial transaction with another. This typically occurs when:\n\nA business is sourcing materials for their production process for output (e.g., a food manufacturer purchasing salt), i.e.
Family business	A family business is a commercial organization in which decision-making is influenced by multiple generations of a family, related by blood or marriage or adoption, who has both the ability to influence the vision of the business and the willingness to use this ability to pursue distinctive goals. They are closely identified with the firm through leadership or ownership.
Subsidiary	A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that belong to the same parent company are called sister companies.
Limited liability company	A limited liability company (LLC) is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
Legal liability	In law, liable means "responsible or answerable in law; legally obligated". Legal liability concerns both civil law and criminal law and can arise from various areas of law, such as contracts, torts, taxes, or fines given by government agencies.
Adverse	Adverse or adverse interest, in law, is anything that functions contrary to a party's interest. This word should not be confused with averse.
Adverse effect	An adverse effect is an undesired harmful effect resulting from a medication or other intervention, such as surgery. An adverse effect may be termed a "side effect", when judged to be secondary to a main or therapeutic effect.
Adverse party	An adverse party is an opposing party in a lawsuit under an adversary system of law. In general, an adverse party is a party against whom judgment is sought or "a party interested in sustaining a judgment or decree." For example, the adverse party for a defendant is the plaintiff.
Anthony Adverse	Anthony Adverse is a 1936 American epic historical drama film directed by Mervyn LeRoy and starring Fredric March and Olivia de Havilland. The screenplay by Sheridan Gibney draws elements of its plot from eight of the nine books in Hervey Allen's historical novel, Anthony Adverse.
Hostile witness	A hostile witness, also known as an adverse witness or an unfavorable witness, is a witness at trial whose testimony on direct examination is either openly antagonistic or appears to be contrary to the legal position of the party who called the witness. This concept is used in the legal proceedings in the United States, and analogues of it exist in other legal systems in Western countries.
Adverse event	An adverse event (AE) is any untoward medical occurrence in a patient or clinical investigation subject administered a pharmaceutical product and which does not necessarily have a causal relationship with this treatment. An adverse event (AE) can therefore be any unfavourable and unintended sign (including an abnormal laboratory finding), symptom, or disease temporally associated with the use of a medicinal (investigational) product, whether or not related to the medicinal (investigational) product.AEs in patients participating in clinical trials must be reported to the study sponsor and if required could be reported to local ethics committee.
Investment banking	Investment banking denotes certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of debt or equity securities.
Operations management	Operations management is an area of management concerned with designing and controlling the process of production and redesigning business operations in the production of goods or services. It involves the responsibility of ensuring that business operations are efficient in terms of using as few resources as needed and effective in meeting customer requirements.
Operation Mincemeat	Operation Mincemeat was a successful British deception operation of the Second World War to disguise the 1943 Allied invasion of Sicily. Two members of British intelligence obtained the body of Glyndwr Michael, a tramp who died from eating rat poison, dressed him as an officer of the Royal Marines and placed personal items on him identifying him as the fictitious Captain (Acting Major) William Martin.
Special Activities Center	The Special Activities Center (SAC) is a division of the Central Intelligence Agency responsible for covert operations and paramilitary operations. The unit was named Special Activities Division (SAD) prior to 2015.
Emergency operations center	An emergency operations center (EOC) is a central command and control facility responsible for carrying out the principles of emergency preparedness and emergency management, or disaster management functions at a strategic level during an emergency, and ensuring the continuity of operation of a company, political subdivision or other organization.\nAn EOC is responsible for strategic direction and operational decisions and does not normally directly control field assets, instead leaving tactical decisions to lower commands.
Operations research	Operations research (British English: operational research), often shortened to the initialism OR, is a discipline that deals with the development and application of advanced analytical methods to improve decision-making. It is sometimes considered to be a subfield of mathematical sciences.
Bitwise operation	In computer programming, a bitwise operation operates on a bit string, a bit array or a binary numeral (considered as a bit string) at the level of its individual bits. It is a fast and simple action, basic to the higher-level arithmetic operations and directly supported by the processor.
Operation (mathematics)	In mathematics, an operation is a function which takes zero or more input values (called operands) to a well-defined output value. The number of operands (also known as arguments) is the arity of the operation.
Subsidiary alliance	A subsidiary alliance, in South Asian history, was a tributary alliance between an Indian state and a European East India Company. The system of subsidiary alliances was pioneered by the French East India Company governor Joseph François Dupleix, who in the late 1740s established treaties with the Nizam of Hyderabad, India, and other Indian princes in the Carnatic.It stated that the Indian rulers who formed a treaty with the British would be provided with protection against any external attacks in place that the rulers were (a) required to keep the British army at the capitals of their states (b)they were either to give either money or some territory to the company for the maintenance of the British troops (c) they were to turn out from their states all non-english europeans whether they were employed in the army or in the civil service and (d)they had to keep a British official called 'resident' at the capital of their respective states who would oversee all the negotiations and talks with the other states which meant that the rulers were to have no direct correspondence or relations with the other states .
Operating subsidiary	An operating subsidiary is a subsidiary of a corporation through which the parent company (which may or may not be a holding company) indirectly conducts some portion of its business. Usually, an operating subsidiary can be distinguished in that even if its board of directors and officers overlap with those of other entities in the same corporate group, it has at least some officers and employees who conduct business operations primarily on behalf of the subsidiary alone (that is, they work directly for the subsidiary).
List of Gazprom subsidiaries	Russian energy company Gazprom has several hundred subsidiaries and affiliated companies owned and controlled directly or indirectly. The subsidiaries and affiliated companies are listed by country.
Subsidiary right	A subsidiary right (also called a subright or sub-lease) is the right to produce or publish a product in different formats based on the original material. Subsidiary rights are common in the publishing and entertainment industries, in which subsidiary rights are granted by the author to an agent, publisher, newspaper, or film studio.
Paper railroad	In the United States, a paper railroad is a company in the railroad business that exists "on paper only": as a legal entity which does not own any track, locomotives, or rolling stock.\nIn the early days of railroad construction, paper railroads had to exist by necessity while in the financing stage.
List of Toshiba subsidiaries	Subsidiaries of Toshiba. Together, these companies form the Toshiba Group.
Investment	Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
Foreign direct investment	A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control.
Limited liability	Limited liability is a legal status where a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a corporation, company or partnership. If a company that provides limited liability to its investors is sued, then the claimants are generally entitled to collect only against the assets of the company, not the assets of its shareholders or other investors.
Liability insurance	Liability insurance (also called third-party insurance) is a part of the general insurance system of risk financing to protect the purchaser (the "insured") from the risks of liabilities imposed by lawsuits and similar claims and protects the insured if the purchaser is sued for claims that come within the coverage of the insurance policy.\nOriginally, individual companies that faced a common peril formed a group and created a self-help fund out of which to pay compensation should any member incur loss (in other words, a mutual insurance arrangement).
No liability	A no-liability company in Australia (suffix NL) is a company which, under the Corporations Act 2001 (Cth), must have as its stated objects that it is solely a mining company and that it is not entitled to calls on the unpaid issue price of shares. It is a company which is restricted to mining activities and is the only sort of corporation which is entitled to this form of liability, given the sometimes financially risky business of mining.
Product liability	Product liability is the area of law in which manufacturers, distributors, suppliers, retailers, and others who make products available to the public are held responsible for the injuries those products cause. Although the word "product" has broad connotations, product liability as an area of law is traditionally limited to products in the form of tangible personal property.

Risk Factors
AON CORP Item 1A Risk Factors
Our results may fluctuate due to many factors, including cyclical or permanent changes in the insurance and reinsurance industries
Our results historically have been subject to significant fluctuations arising from uncertainties and changes in the insurance industry
Changes in premium rates affect not only the potential profitability of our underwriting businesses but also generally affect the commissions and fees payable to our brokerage businesses
In addition, insurance industry developments that can significantly affect our financial performance include factors such as: • rising levels of actual costs that are not known by companies at the time they price their products; 8 _________________________________________________________________ • volatile and unpredictable developments, including weather-related and other natural and man-made catastrophes, including acts of terrorism; • changes in levels of capacity and demand, including reinsurance capacity; • changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers &apos liabilities develop; and • changes in business practices and business compensation models
Our results may be adversely affected by changes in the mode of compensation in the insurance industry
Since the Attorney General of New York brought charges against one of our competitors in October 2004, there has been a great deal of uncertainty concerning then-longstanding methods of compensating insurance brokers
Soon after the Attorney General brought those charges, Aon and certain other large insurance brokers announced that they would terminate contingent commission arrangements with underwriters
Most insurance brokers, however, currently continue to enter into such arrangements, regulators have not taken action to end such arrangements throughout the industry and thus it is unclear at this time whether other brokers will continue to accept contingent commissions
Because of this uncertainty, there is no assurance that we will be able to develop a new business compensation model that permits us to compete successfully against brokers who have not terminated contingent commission arrangements, nor can we assure that any new business compensation model we develop will generate revenues equivalent to those previously received from contingent commissions
We face significant competitive pressures in each of our businesses
We believe that competition in our lines of business is based on service, product features, price, commission structure, financial strength, claims-paying ability ratings and name recognition
In particular, we compete with a large number of national, regional and local insurance companies and other financial services providers, brokers and with respect to our extended warranty business, third-party administrators, manufacturers and distributors
Some of our underwriting competitors have penetrated more markets and offer a more extensive portfolio of products and services and have more competitive pricing than we do, which can adversely affect our ability to compete for business
Some underwriters also have higher claims-paying ability ratings and greater financial resources with which to compete and are subject to less government regulation than our underwriting operations
We encounter strong competition for both business and professional talent in our insurance brokerage and risk management services operations from other insurance brokerage firms which also operate on a nationwide or worldwide basis, from a large number of regional and local firms throughout the world, from insurance and reinsurance companies that market and service their insurance products without the assistance of brokers or agents and from other businesses, including commercial and investment banks, accounting firms and consultants that provide risk-related services and products
Our consulting operations compete with independent consulting firms and consulting organizations affiliated with accounting, information systems, technology and financial services firms around the world
In addition, the increase in competition due to new legislative or industry developments could adversely affect us
These developments include: • an increase in capital-raising by insurance underwriting companies, which could result in new entrants to our markets and an influx of capital into the industry; • the selling of insurance by insurance companies directly to insureds; 9 _________________________________________________________________ • changes in our business compensation model as a result of regulatory investigations; • the establishment of programs in which state-sponsored entities provide property insurance in catastrophe prone areas or other alternative markets types of coverage; and • additional regulations promulgated by the Financial Services Authority in the UK, or other regulatory bodies in jurisdictions in which we operate
New competition as a result of these developments could cause the supply of, and demand for, our products and services to change, which could adversely affect our results of operations and financial condition
We may not realize all of the expected benefits from our 2005 restructuring plan
In third quarter 2005, we announced that we were reviewing the revenue potential and cost structure of each of our businesses
As a result of this review, we have adopted restructuring initiatives that are expected to result in the elimination of approximately 1cmam800 employee positions, the closing of several offices, asset impairments and other expenses necessary to implement these initiatives
We currently expect that the restructuring plan will result in cumulative pretax charges of dlra262 million
The objective of the restructuring and other business reorganization initiatives is to improve our profitability through operational efficiency
Our savings net of restructuring expenses is expected to become positive in 2006, with a targeted annualized savings of approximately dlra180 million by 2008
We cannot assure you that we will achieve the targeted savings
A decline in the financial strength or claims-paying ability ratings of our insurance underwriting subsidiaries may increase policy cancellations and negatively impact new sales of insurance products
Financial strength and claims-paying ability ratings have become increasingly important factors in establishing the competitive position of insurance companies
These ratings are based upon criteria established by the rating agencies for the purpose of rendering an opinion as to an insurance companyapstas financial strength, operating performance, strategic position and ability to meet its obligations to policyholders
They are not evaluations directed toward the protection of investors, nor are they recommendations to buy, sell or hold specific securities
Periodically, the rating agencies evaluate our insurance underwriting subsidiaries to confirm that they continue to meet the criteria of the ratings previously assigned to them
A downgrade, or the potential for a downgrade, of these ratings could, among other things, increase the number of policy cancellations, adversely affect relationships with brokers, retailers and other distributors of our products and services, negatively impact new sales and adversely affect our ability to compete
Virginia Surety Company, Inc, our principal property and casualty insurance company subsidiary, is currently rated &quote A- &quote (excellent; fourth highest of 16 rating levels) by AM Best Company
Combined Insurance Company of America, the principal insurance subsidiary that underwrites our specialty accident and health insurance business, is currently rated &quote A &quote (excellent; third highest of 16 rating levels) by AM Best Company, &quote A- &quote (strong; third highest of nine rating levels) for financial strength by S&P and &quote A3 &quote (good; third highest of nine rating levels) for financial strength by Moodyapstas Investors Service
We cannot assure that one or more of the rating agencies will not downgrade or withdraw their financial strength or claims-paying ability ratings in the future
Changes in interest rates and investment prices could reduce the value of our investment portfolio and adversely affect our financial condition or results
Our insurance underwriting subsidiaries own a substantial investment portfolio of fixed-maturity and equity and other long-term investments
As of December 31, 2005, our fixed-maturity investments (approximately 98prca was investment grade) had a carrying value of dlra4dtta2 billion, our equity investments had a carrying value of dlra40 million and our other long-term investments and limited partnerships had a 10 _________________________________________________________________ carrying value of dlra515 million
Accordingly, changes in interest rates and investment prices could reduce the value of our investment portfolio and adversely affect our financial condition or results
For example, changes in domestic and international interest rates directly affect our income from, and the market value of, fixed-maturity investments
Similarly, general economic conditions, stock market conditions and other factors beyond our control affect the value of our equity investments
For securities judged to have an other-than-temporary impairment, we recognize a realized loss through the statement of income to write down the value of those securities
In 2005, we recognized impairment losses of dlra11 million
We cannot assure that we will not have to recognize additional impairment losses in the future, which would negatively affect our financial results
In 2001, our two major insurance companies sold the vast majority of their limited partnership portfolio, valued at dlra450 million, to Private Equity Partnership Structures I, LLC (PEPS I) a qualifying special purpose entity (QSPE)
The common stock interest in PEPS I is held by a limited liability company which is owned by one of our subsidiaries (49prca) and by a charitable trust, which is not controlled by us, established for victims of the September 11 attacks (51prca)
Approximately dlra171 million of investment grade fixed-maturity securities were sold by PEPS I to unaffiliated third parties
PEPS I then paid our insurance underwriting companies the dlra171 million in cash and issued to them an additional dlra279 million in fixed-maturity and preferred stock securities
The fixed-maturity securities our insurance underwriting companies received from PEPS I are rated as investment grade by S&P As part of this transaction, Aon is required to purchase from PEPS I additional fixed-maturity securities in an amount equal to the unfunded limited partnership commitments, as they are requested
As of December 31, 2005, these unfunded commitments amounted to dlra48 million
Although the PEPS I transaction has reduced the reported earnings volatility historically associated with directly owning limited partnership investments, it will not eliminate our risk of future losses
For instance, we must analyze our preferred stock and fixed-maturity interests in PEPS I for other-than-temporary impairment, based on the valuation of the limited partnership interests held by PEPS I and recognize an impairment loss if necessary
We cannot assure that we will not have to recognize impairment losses with respect to our PEPS I interests in the future
The FASB has a current project on its agenda that is expected to result in a change to US generally accepted accounting principles with respect to financial asset transfers such as the PEPS I transaction
We cannot assure that the current accounting for our PEPS I investments will be unaffected by these possible changes
Our net pension liabilities may continue to grow, which could adversely affect our stockholders &apos equity, net income, cash flow and liquidity and require us to make additional cash contributions to the pension plans
To the extent that the present value of the benefits incurred to date for pension obligations in the major countries in which we operate continue to exceed the market value of the assets supporting these obligations, our financial position and results of operations may be adversely affected
As a result of the decline in the equity markets over the past several years as well as declines in interest rates, some of our defined benefit pension plans, particularly in the UK, have suffered significant valuation losses in the assets backing the related pension obligation
Current projections indicate that our 2006 defined benefit pension expense for our major pension plans will increase by approximately dlra4 million compared with 2005 and that cash contributions of approximately dlra186 million will be required in 2006, although we may elect to contribute more
Total cash contributions to these major defined benefit pension plans in 2005 were dlra463 million, an increase 11 _________________________________________________________________ of dlra274 million over 2004
Future estimates are based on certain assumptions, including discount rates, interest rates, fair value of assets for some of our plans and expected return on plan assets
We are currently taking actions to manage our pension liabilities, including closing certain plans to new participants
However, changes in our pension benefit obligations and the related net periodic costs or credits may occur in the future due to any variance of actual results from our assumptions and changes in the number of participating employees
As a result, there can be no assurance that we will not experience future decreases in stockholders &apos equity, net income, cash flow and liquidity or that we will not be required to make additional cash contributions in the future beyond those which have been announced
We are subject to a number of contingencies and legal proceedings which, if determined unfavorably to us, would adversely affect our financial results
We are subject to numerous claims, tax assessments, lawsuits and proceedings that arise in the ordinary course of business
The damages claimed in these matters are or may be substantial, including, in many instances, claims for punitive, treble or extraordinary damages
The litigation naming us as a defendant ordinarily involves our activities as a broker or provider of insurance products or as an employer
It is possible that, if the outcomes of these contingencies and legal proceedings were not favorable to us, it could materially adversely affect our future financial results
In addition, our results of operations, financial condition or liquidity may be adversely affected if in the future our insurance coverage proves to be inadequate or unavailable or there is an increase in liabilities for which we self-insure
Aon has purchased errors and omissions ( &quote E&O &quote ) insurance and other insurance to provide protection against losses that arise in such matters
Accruals for these items, net of insurance receivables, when applicable, have been provided to the extent that losses are deemed probable and are reasonably estimable
These accruals and receivables are adjusted from time to time as developments warrant
In 2004, Aon, other insurance brokers, insurers and numerous other industry participants received subpoenas and other requests for information from the office of the Attorney General of the State of New York and from other states relating to certain practices in the insurance industry
On March 4, 2005, Aon entered into an agreement (the &quote Settlement Agreement &quote ) with the Attorney General of the State of New York, the Superintendent of Insurance of the State of New York, the Attorney General of the State of Connecticut, the Illinois Attorney General and the Director of the Division of Insurance, Illinois Department of Financial and Professional Regulation (collectively, the &quote State Agencies &quote ) to resolve all the issues related to investigations conducted by the State Agencies
As has been described in detail in Aonapstas previous financial filings, the Settlement Agreement requires Aon to pay between 2005-2007 a total of dlra190 million into a fund (the &quote Fund &quote ) to be distributed to certain Eligible Policyholder clients
The Settlement Agreement sets forth the procedures under which Aon mailed notices to its Eligible Policyholder clients and distributes the Fund to Participating Policyholder clients
In order to obtain a payment from the Fund, Participating Policyholders were required to tender a release of claims against the Company arising from acts, omissions, transactions or conduct that are the subject of the lawsuits
As required by the Settlement Agreement, within 60 days of the effective date of that agreement, the Company commenced the implementation of certain business reforms, including agreeing not to accept contingent compensation as defined in the Settlement Agreement
Purported clients have also filed civil litigation against Aon and other companies under a variety of laws and legal theories relating to broker compensation practices and other issues under investigation by New York and other states
As previously reported, a putative class action styled Daniel v
Aon (Affinity) has been pending in the Circuit Court of Cook County, Illinois since August 1999
On March 9, 2005, the Court gave preliminary approval to a nationwide class action settlement within the 12 _________________________________________________________________ dlra40 million reserve established in the fourth quarter of 2004
The Court held hearings in the fourth quarter of 2005 to consider whether to grant final approval to the settlement and is expected to issue a decision in first quarter 2006
Beginning in June 2004, a number of other putative class actions have been filed against Aon and other companies by purported clients under a variety of legal theories, including state tort, contract, fiduciary duty, antitrust and statutory theories and federal antitrust and the Racketeer Influenced and Corrupt Organizations Act theories
These actions are currently pending at early stages in state court in California and Illinois and in federal court in New Jersey
Aon believes it has meritorious defenses in all of these cases and intends to vigorously defend itself against these claims
The outcome of these lawsuits, and any losses or other payments that may occur as a result, cannot be predicted at this time
Beginning in late October 2004, several putative securities class actions have been filed against Aon in the US District Court for the Northern District of Illinois
Also beginning in late October 2004, several putative ERISA class actions were filed against Aon in the US District Court for the Northern District of Illinois
Aon believes it has meritorious defenses in all of these cases and intends to vigorously defend itself against these claims
The outcome of these lawsuits, and any losses or other payments that may occur as a result, cannot be predicted at this time
In May 2005, the Office of the US Attorney for the Southern District of New York and the Securities and Exchange Commission sent to Aon subpoenas seeking information relevant to these agencies &apos industry-wide investigations of finite risk insurance
Aon is fully cooperating with these investigations
In July 2004, several subsidiaries of Aon were joined as defendants in an action in a UK court between British Petroleum ( &quote BP &quote ) and underwriters who subscribed to policies of insurance covering various offshore energy projects on which BP and its co-venturers have incurred losses
BP settled on confidential terms with underwriters, but asserted a claim against Aon for approximately dlra96 million, which BP claims is a shortfall between its total losses and what it recovered in the settlements with underwriters, plus interest and costs
The trial in this matter concluded in December 2005, and judgment is expected to be issued sometime in the first half of 2006
Aon believes it has meritorious defenses and has vigorously defended itself against these claims
The ultimate outcome of this matter, and any losses or other payments that may occur as a result, cannot be predicted at this time
In February 2006, Lloyds announced that it had brought suit in London against Benfield and a subsidiary of Aon to recover alleged losses relating to these brokers &apos placement of insurance for Lloydsapstas New Central Fund
Lloyds alleges that its brokers did not fairly present the risk to reinsurers and thus that the brokers should be held liable for reinsurers &apos failure to pay approximately £325 million (dlra563 million based on the December 31, 2005 exchange rate) in claims
Aon disputes Lloydsapstas allegations, believes that it has meritorious defenses and intends to vigorously defend itself against Lloydapstas claims
Fiduciary Counselors, Inc, a former Aon subsidiary, has asked Aon Consulting, Inc
of New Jersey to defend and indemnify it with regard to claims that may be asserted in an arbitration relating to the former subsidiaryapstas service from November 1999 to November 2000 as an independent fiduciary for the development and construction of the Diplomat Resort and Country Club in Hollywood and Hallendale, Florida (the &quote Project &quote )
Aon has conditionally agreed to defend and indemnify Fiduciary Counselors with respect to the potential arbitration demand
The prospective claimants, a labor union pension fund that owns the Project and its current independent fiduciary, allege that Fiduciary Counselors breached fiduciary duties and other obligations under ERISA The prospective claimants have asserted that their claims are valued at over dlra100 million
Aon believes that there are meritorious defenses both as to liability and damages and continues to evaluate whether the matter may be resolved without formal arbitration
13 _________________________________________________________________ Although the ultimate outcome of all matters referred to above cannot be ascertained, and liabilities in indeterminate amounts may be imposed on us, on the basis of present information, amounts already provided, availability of insurance coverages and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the consolidated financial position of Aon
However, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by an unfavorable resolution of these matters
Our success depends, in part, on our ability to attract and retain experienced and qualified personnel
Our future success depends on our ability to attract and retain experienced personnel, including underwriters, brokers and other professional personnel
Competition for such experienced professional personnel is intense
If we cannot hire and retain talented personnel, our business, operating results and financial condition could be adversely affected
We are subject to increasing costs arising from errors and omissions claims against us
In our insurance brokerage and consulting businesses, we often assist our clients with matters which include the placement of insurance coverage or employee benefit plans and the handling of related claims
Errors and omissions claims against us may allege our potential liability for all or part of the amounts in question
Errors and omissions claims could include, for example, the failure of our employees or sub-agents, whether negligently or intentionally, to place coverage correctly or notify carriers of claims on behalf of clients or to provide insurance carriers with complete and accurate information relating to the risks being insured
It is not always possible to prevent and detect errors and omissions and the precautions we take may not be effective in all cases
In addition, errors and omissions claims may harm our reputation or divert management resources away from operating our business
Our businesses are subject to extensive governmental regulation which could reduce our profitability or limit our growth
Our businesses are subject to extensive federal, state and foreign governmental regulation and supervision, which could reduce our profitability or limit our growth by increasing the costs of regulatory compliance, limiting or restricting the products or services we sell or the methods by which we sell our products and services or subjecting our businesses to the possibility of regulatory actions or proceedings
With respect to our insurance brokerage businesses, this supervision generally includes the licensing of insurance brokers and agents and third-party administrators and the regulation of the handling and investment of client funds held in a fiduciary capacity
Our continuing ability to provide insurance brokering and third-party administration in the jurisdictions in which we currently operate depends on our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in each of these jurisdictions
Also, we can be affected indirectly by the governmental regulation and supervision of other insurance companies
For instance, if we are providing managing general underwriting services for an insurer, we may have to contend with regulations affecting our client
Further, regulation affecting the insurance companies with whom our brokers place business can affect how we conduct those operations
Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors
In the US, this system of regulation, generally administered by a department of insurance in each state in which we do business, affects the way we can conduct our insurance underwriting business
Furthermore, state insurance departments conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters
14 _________________________________________________________________ Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies in several areas, including employee benefit plan regulation, age, race, disability and sex discrimination, investment company regulation, financial services regulation, securities laws and federal taxation, do affect the insurance industry generally and our insurance underwriting subsidiaries in particular
With respect to our international operations, we are subject to various regulations relating to, among other things, licensing, currency, policy language and terms, reserves and the amount of local investment
These various regulations also add to our cost of doing business through increased compliance expenses, the financial impact of use of capital restrictions and increased training and employee expenses
Furthermore, the loss of a license in a particular jurisdiction could restrict or eliminate our ability to conduct business in that jurisdiction
In all jurisdictions the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities
Generally, such authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations
Accordingly, we may be precluded or temporarily suspended from carrying on some or all of our activities or otherwise fined or penalized in a given jurisdiction
No assurances can be given that our businesses can continue to be conducted in any given jurisdiction as they have been in the past
Our significant global operations expose us to various international risks that could adversely affect our business
A significant portion of our operations is conducted outside the US Accordingly, we are subject to legal, economic and market risks associated with operating in foreign countries, including: • the general economic and political conditions existing in those countries; • imposition of limitations on conversion of foreign currencies or remittance of dividends and other payments by foreign subsidiaries; • imposition or increase of withholding and other taxes on remittances and other payments by subsidiaries; • hyperinflation in certain foreign countries; • imposition or increase of investment and other restrictions by foreign governments; • longer payment cycles; • greater difficulties in accounts receivables collection; and • the requirement of complying with a wide variety of foreign laws
Some of our foreign brokerage subsidiaries receive revenues in currencies that differ from their functional currencies
We must also translate the financial results of our foreign subsidiaries into US dollars
Although we use various derivative financial instruments to help protect against adverse transaction and translation effects due to exchange rate fluctuations, we cannot eliminate such risks and significant changes in exchange rates may adversely affect our results
Our financial results could be adversely affected if assumptions used in establishing our underwriting reserves differ from actual experience
We maintain reserves as an estimate of our liability under insurance policies issued by our insurance underwriting subsidiaries
The reserves that we maintain that could cause variability in our financial results consist of (1) unearned premium reserves, (2) policy and contract claim reserves and (3) future policy benefit reserves
Unearned premium reserves generally reflect our liability to return premiums we have collected under policies in the event of the lapse or cancellation of those policies
Under US generally accepted accounting principles, premiums we have collected generally become &quote earned &quote over the life of a policy by means of a reduction in the amount of the unearned premium reserve associated with the policy
Unearned premium reserves are particularly significant with respect 15 _________________________________________________________________ to our warranty business, given that the premiums we receive for warranty products generally cover an extended period of time
If there are significant lapses or cancellations of these types of policies, or expected losses for existing policies develop adversely and therefore premiums are not earned as expected, it may be necessary to accelerate the amortization of deferred policy acquisition expenses associated with the policies, because these deferred expenses are amortized over the projected life of the policies, or establish additional reserves to cover premium deficiencies
Policy and contract claim reserves reflect our estimated liability for unpaid claims and claims adjustment expenses, including legal and other fees and general expenses for administering the claims adjustment process and for reported and unreported losses incurred as of the end of each accounting period
If the reserves originally established for future claims prove inadequate, we would be required to increase our liabilities, which could have an adverse effect on our business, results of operations and financial condition
The obligation for policy and contract claims does not represent an exact calculation of liability
Rather, reserves represent our best estimate of what we expect the ultimate settlement and administration of claims will cost
These estimates represent informed judgments based on our assessment of currently available data, as well as estimates of future trends in claims severity, frequency, judicial theories of liability and other factors
Many of these factors are not quantifiable in advance and both internal and external events, such as changes in claims handling procedures, inflation, judicial and legal developments and legislative changes, can cause our estimates to vary
The inherent uncertainty of estimating reserves is greater for certain types of liabilities, where the variables affecting these types of claims are subject to change and long periods of time may elapse before a definitive determination of liability is made
Reserve estimates are periodically refined as experience develops and further losses are reported and settled
Adjustments to reserves are reflected in the results of the periods in which such estimates are changed
Because setting the level of reserves for policy and contract claims is inherently uncertain, we cannot assure that our current reserves will prove adequate in light of subsequent events
Future policy benefit reserves generally reflect our liability to provide future life insurance benefits and future accident and health insurance benefits on guaranteed renewable and non-cancelable policies
Future policy benefit reserves on accident and health and life products have been provided on the net level premium method
These reserves are calculated based on assumptions as to investment yield, mortality, morbidity and withdrawal rates that were determined at the date of issue and provide for possible adverse deviations
Each of our business lines may be adversely affected by an overall decline in economic activity
The demand for property and casualty insurance generally rises as the overall level of economic activity increases and generally falls as such activity decreases, affecting both the commissions and fees generated by our brokerage and consulting businesses and the premiums generated by our underwriting businesses
In particular, a growing number of insolvencies associated with an economic downturn, especially insolvencies in the insurance industry, could adversely affect our brokerage business through the loss of clients or by hampering our ability to place insurance and reinsurance business
Moreover, the results of our consulting business are generally affected by the level of business activity of our clients, which in turn is affected by the level of economic activity in the industries and markets these clients serve
As our clients become adversely affected by declining business conditions, they may choose to delay or forgo consulting engagements with us
We have substantial debt outstanding that could adversely affect our financial flexibility
We have substantial debt outstanding
As of December 31, 2005, we had total consolidated debt outstanding of approximately dlra2dtta1 billion
This substantial amount of debt outstanding could adversely affect our financial flexibility
16 _________________________________________________________________ A decline in the credit ratings of our senior debt and commercial paper may adversely affect our borrowing costs and financial flexibility
In 2004, Standard & Poorapstas (S&P) lowered its ratings on our senior debt to the current rating of &quote BBB+ &quote from &quote A- &quote
In addition, S&P placed all their ratings for Aon on credit watch with negative implications
placed both our senior debt and commercial paper ratings on negative outlook and credit watch with negative implications, respectively
lowered its ratings on our senior debt from &quote A- &quote to &quote BBB+ &quote and affirmed our commercial paper rating of &quote F2 &quote
They removed us from credit watch and changed their outlook from negative to stable
S&P affirmed its ratings for Aon, removed us from credit watch and changed their outlook from negative to stable and later to positive
Moodyapstas affirmed its ratings on our senior debt and changed their outlook from negative to stable
A downgrade in the credit ratings of our senior debt and commercial paper would increase our borrowing costs and reduce our financial flexibility
In addition, any further downgrade may trigger obligations of our company to fund certain amounts with respect to our premium finance securitizations
Moreover, some of our debt instruments, such as our 6dtta20prca notes due January 2007 (dlra250 million of which are outstanding), expressly provide for interest rate increases in the case of certain ratings downgrades
Similarly, any such downgrade would increase our commercial paper interest rates or may result in our inability to access the commercial paper market altogether
We cannot assume that our financial position would not be adversely affected if we are unable to access the commercial paper market
A downgrade in the credit ratings of our senior debt may also adversely affect the claims-paying ability or financial strength ratings of our insurance company subsidiaries
See &quote A decline in the financial strength or claims-paying ability ratings of our insurance underwriting subsidiaries may increase policy cancellations and negatively impact new sales of insurance products &quote above
Recent and proposed accounting rule changes could negatively affect our financial position and results
The FASB is considering several accounting rule changes, including proposals on pension accounting, intangibles and SPEs, among others
Whether these proposals will become final rules are uncertain, as is their final content
However, if enacted, these proposals could negatively affect our financial position and results of operations
In December 2004, the FASB issued Statement Nodtta 123 (revised 2004) Share-Based Payment ( &quote Statement Nodtta 123(R) &quote ) which is a revision of Statement Nodtta 123
Statement Nodtta 123(R) supersedes APB Opinion Nodtta 25 and amends FASB Statement Nodtta 95, Statement of Cash Flows
Generally, the approach in Statement Nodtta 123(R) is similar to the approach described in Statement Nodtta 123
As such, we expensed the cost of stock awards over the period during which an employee is required to provide service in exchange for the award
Generally, we were required to disclose proforma compensation expense for stock options but were not required to recognize compensation expense
Beginning in the first quarter of 2006, Statement Nodtta 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values
Proforma disclosure is no longer an alternative
See Note 1 to the consolidated financial statements for further information
We are a holding company and, therefore, may not be able to receive dividends in needed amounts from our subsidiaries
Our principal assets are the shares of capital stock of our subsidiaries, including our insurance underwriting companies
We have to rely on dividends from these subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations and for paying dividends to 17 _________________________________________________________________ stockholders and corporate expenses
Payments from our underwriting subsidiaries are limited by governmental regulation and depend on the surplus and future earnings of these subsidiaries
In some circumstances, specific payments from our insurance underwriting subsidiaries may require prior regulatory approval and we may not be able to receive dividends from these subsidiaries at times and in the amounts we anticipate or require
The volume of premiums we write and our profitability are affected by the availability of reinsurance and the size and adequacy of our insurance company subsidiaries &apos capital base
The level of business that our insurance underwriting subsidiaries are able to write depends on the size and adequacy of their capital base
Many state insurance laws to which they are subject impose risk-based capital requirements for purposes of regulating insurer solvency
Insurers having less statutory surplus than that required by the risk-based capital model formula generally are subject to varying degrees of regulatory scrutiny and intervention depending on the level of capital inadequacy
As of December 31, 2005, each of our insurance company subsidiaries substantially exceeds NAIC risk-based statutory surplus requirements
We purchase reinsurance for certain of the risks underwritten by our insurance company subsidiaries
Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase, which may affect the level of business we are able to write and our profitability
We cannot assure that we will be able to maintain our current reinsurance facilities or that we can obtain other reinsurance facilities in adequate amounts and at favorable rates
If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling to bear an increase in net exposures, we would have to reduce the level of our underwriting commitments
Either of these potential developments could adversely affect our underwriting business
We cannot guarantee that our reinsurers will pay in a timely fashion, if at all
To better manage our portfolio of underwriting risk, we purchase reinsurance by transferring part of the risk that we assume (known as ceding) to a reinsurance company in exchange for part of the premium that we receive in connection with the risk
Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred (or ceded) to the reinsurer, it does not relieve us of our liability to our policyholders
Accordingly, we bear credit risk with respect to our reinsurers
Recently, due to industry and general economic conditions, there is an increasing risk of insolvency among reinsurance companies, resulting in a greater incidence of litigation and affecting the recoverability of claims
We cannot assure that our reinsurers will pay the reinsurance recoverables owed to us or that they will pay these recoverables on a timely basis