Aon Plc 2008 Annual Report (10-K) Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2008. Aon Corporation operates globally with approximately 37,700 employees across more than 120 countries. The company serves clients through two primary operating segments: Risk and Insurance Brokerage Services (82% of segment revenue) and Consulting (18% of segment revenue). In November 2008, Aon completed its merger with Benfield Group Limited, a leading reinsurance intermediary. The company also divested its former Insurance Underwriting segment, selling Combined Insurance Company of America (CICA) and Sterling Insurance Company in April 2008, with results reclassified to discontinued operations.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenue | $7,631 million | $7,359 million |
| Income from Continuing Operations | $621 million | $662 million |
| Income from Discontinued Operations (Net of Tax) | $841 million | $202 million |
| Net Income | $1,462 million | $864 million |
| Diluted EPS (Continuing Ops) | $2.06 | $2.07 |
| Diluted EPS (Total) | $4.86 | $2.69 |
| Total Assets | $22,940 million | $24,929 million |
| Total Debt | $2,000 million | $2,145 million |
| Stockholders' Equity | $5,310 million | $6,221 million |
| Operating Cash Flow | $959 million | $1,289 million |
Note: Net income for 2008 was significantly boosted by a $1.4 billion pretax gain on the sale of CICA and Sterling, classified as discontinued operations.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 4% to $7.631 billion. Organic revenue growth was 2%, driven by growth in both Risk and Insurance Brokerage Services (2%) and Consulting (3%).
- Profitability: Income from continuing operations decreased 6% to $621 million. Pretax margins declined from 13.7% in 2007 to 11.3% in 2008, primarily due to higher restructuring charges ($254 million in 2008 vs. $85 million in 2007) and unfavorable foreign exchange impacts.
- Discontinued Operations: After-tax income from discontinued operations surged to $841 million (from $202 million) due to the gain on the sale of CICA and Sterling. This contrasts with a projected $191 million pretax loss on the sale of remaining property and casualty operations.
- Capital Allocation: The company repurchased 42.6 million shares for $1.9 billion in 2008. Share repurchases were halted in August 2008 in anticipation of the Benfield merger.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted a "soft market" in the insurance industry characterized by reduced premium rates. Despite global credit market disruptions, the company grew organically and streamlined its portfolio. The Benfield merger is expected to create synergies, with a restructuring plan targeting $122 million in annualized savings by 2011.
Restructuring: Two major plans are active: the "2007 Plan" (estimated total cost $550 million) and the "Aon Benfield Plan" (estimated total cost $185 million). The company anticipates annualized savings of $370 million from the 2007 Plan by 2010.
Key Risks and Contingencies:
- Legal Proceedings: Ongoing investigations by the SEC, DOJ, and U.K. Financial Services Authority (FSA) regarding anti-corruption laws. A $7.9 million fine was settled with the FSA in January 2009. Significant class action lawsuits remain pending regarding securities and ERISA claims, with alleged damages ranging from $59 million to $490 million.
- Pension Obligations: Significant unfunded pension positions exist, particularly in the U.S. and U.K. The company plans to contribute approximately $400 million to major pension plans in 2009. Adverse market conditions could increase future funding requirements.
- Market Conditions: Disruptions in credit markets and economic downturns could reduce demand for brokerage and consulting services and increase client insolvencies.
- Foreign Exchange: A significant portion of income is non-U.S. dollar denominated. A stronger U.S. dollar negatively impacts reported results.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the one-time $1.4 billion gain from the sale of CICA and Sterling.
- Restructuring Costs: Monitor the execution of the $550 million (2007 Plan) and $185 million (Benfield Plan) restructuring charges and the realization of projected savings.
- Legal Exposure: Track the resolution of the FCPA investigations and the magnitude of potential settlements in pending securities and ERISA class actions.
- Pension Funding: Assess the impact of the projected $400 million pension contribution in 2009 on free cash flow and liquidity.
- Benfield Integration: Evaluate the progress of integrating Benfield operations and the achievement of the targeted $122 million in annualized savings by 2011.