Aon Plc (Aon Corporation) 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Aon Corporation for the period ended September 30, 2007. Aon operates globally in three primary segments: Risk and Insurance Brokerage Services, Consulting, and Insurance Underwriting. The company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric (in millions) | Q3 2007 | Q3 2006 | 9 Months 2007 | 9 Months 2006 |
|---|---|---|---|---|
| Total Revenue | $2,407 | $2,168 | $7,276 | $6,541 |
| Net Income | $204 | $106 | $657 | $497 |
| Diluted EPS | $0.64 | $0.32 | $2.05 | $1.46 |
| Operating Cash Flow (9mo) | $926 (vs. $824 in 2006) | |||
| Total Assets | $23,823 (Sept 30, 2007) | |||
| Total Liabilities | $18,208 (Sept 30, 2007) | |||
| Stockholders' Equity | $5,615 (Sept 30, 2007) | |||
| Total Debt | $2,008 (Sept 30, 2007) |
Segment Performance (9 Months 2007):
- Risk & Insurance Brokerage: Revenue $4,408M; Pretax Income $756M.
- Consulting: Revenue $979M; Pretax Income $129M.
- Insurance Underwriting: Revenue $1,811M; Pretax Income $189M.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 11% year-over-year for the nine months ended Sept 30, 2007. This was driven by organic growth in brokerage and consulting, favorable foreign currency translation, and strong growth in the Sterling subsidiary's Medicare Advantage (MA) products within the Insurance Underwriting segment.
- Profitability: Net income increased 32% for the quarter and 32% for the nine-month period. Pretax margins for continuing operations improved to 13.6% (9 months 2007) from 10.3% (9 months 2006).
- Investment Income: Increased 34% year-to-date, largely due to non-liquidating distributions from the PEPS I investment ($52M) and higher interest rates.
- Restructuring: In October 2007, Aon announced a new global restructuring plan with estimated cumulative pretax charges of $360 million. Approximately $17 million was recorded through Sept 30, 2007. The 2005 restructuring plan is substantially complete.
Guidance, Outlook, and Risks
- Restructuring Outlook: The new 2007 plan targets annualized cost savings of $50-$70 million in 2008, $175-$200 million in 2009, and $240 million by 2010. It involves approximately 2,700 job eliminations.
- Strategic Alternatives: Aon is considering strategic options for Combined Insurance Company of America (CICA), including a potential spin-off to shareholders or a sale.
- Debt Redemption: Aon announced the redemption of all outstanding 3.5% Senior Convertible Debentures (approx. $243M principal) on November 19, 2007. Holders may convert to common stock prior to November 16, 2007.
- Regulatory Risks: Changes in Medicare Advantage enrollment rules (repeal of year-round enrollment) may impact Sterling's growth. Aon is also subject to ongoing investigations regarding broker compensation practices and an internal review of anti-bribery compliance (FCPA).
- Market Risks: Exposure to foreign exchange fluctuations, interest rate changes, and credit risk in the fixed-income portfolio (though 100% investment grade).
Key Facts for Investor Verification
- Stock Repurchases: Aon repurchased 18.5 million shares for $725 million in the first nine months of 2007. The remaining authorized amount under the $2 billion program is approximately $203 million.
- Convertible Debt: Verify the conversion rate (46.5658 shares per $1,000 debenture) and the potential dilution of ~11.3 million shares if all debentures are converted.
- Medicare Advantage Exposure: Assess the impact of the repeal of year-round enrollment for Sterling's MA products on future revenue growth in the Insurance Underwriting segment.
- Restructuring Costs: Monitor the execution of the $360 million restructuring plan and the realization of projected cost savings.
- Legal Contingencies: Review the status of the New York/State Attorney General settlements and the internal FCPA review, as outcomes could materially affect future cash flows.