AON

Aon Plc (Aon Corporation) 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Aon Corporation for the period ended September 30, 2008. Aon is a global professional services firm operating primarily in two segments: Risk and Insurance Brokerage Services and Consulting. The reporting period is significantly impacted by the sale of its insurance underwriting subsidiaries (CICA and Sterling) in April 2008, which are now classified as discontinued operations, and the pending acquisition of Benfield Group Limited.

Key Financial Metrics

Note: Q3 2007 and 9-month 2007 balance sheet data is not provided in the text for direct comparison, but year-over-year income statement data is available.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 5% in Q3 2008 and 7% for the nine months ended Sept 30, 2008, driven by organic growth and favorable foreign currency translation.
• Discontinued Operations: Net income for the nine months ended Sept 30, 2008, was heavily influenced by a $1.4 billion pretax gain from the sale of CICA and Sterling insurance subsidiaries. Excluding this, continuing operations showed modest growth.
• Restructuring Costs: The company incurred $52 million in restructuring charges in Q3 2008 and $165 million for the nine-month period as part of a global plan estimated to cost $450 million in total.
• Operating Margins: Pretax margin for continuing operations decreased to 11.5% in Q3 2008 from 12.8% in Q3 2007, and 12.0% for the nine months from 13.6% in 2007, due to higher restructuring and litigation costs.
• Cash Flow: Operating cash flow for the nine months dropped to $413 million from $926 million in the prior year, largely due to the timing of insurance underwriting cash flows and the sale of discontinued operations.

Guidance, Outlook, and Risks

• Acquisition: Aon agreed to acquire Benfield Group Limited for approximately $1.56 billion (plus debt assumption). The deal is expected to close in Q4 2008. Share repurchases were suspended in August 2008 pending this acquisition.
• Restructuring Outlook: The 2007 restructuring plan is expected to result in annualized cost savings of $300 million by 2010. Approximately 1,000 jobs have been eliminated to date, with a total target of 2,700.
• Market Conditions: Management notes a "soft market" in insurance premiums, which may reduce commission revenues. The global credit crisis is cited as a risk to customer demand and insurer solvency.
• Legal and Regulatory: Significant contingencies include ongoing investigations into anti-bribery laws (FCPA), class action lawsuits regarding securities and ERISA (with alleged damages ranging from $59 million to $498 million), and litigation regarding the Standard Life Assurance policy placement.
• Divestitures: Aon reached an agreement to sell AIS Management Corporation for approximately $120 million, expected to close in Q1 2009.

Investor Verification Checklist

• Benfield Acquisition: Verify the closing status and integration costs of the Benfield Group Limited acquisition.
• Discontinued Operations: Confirm the final net proceeds from the CICA and Sterling sales and the classification of the $1.4 billion gain.
• Restructuring Progress: Monitor the actual vs. estimated costs of the $450 million restructuring plan and the realization of projected savings.
• Legal Contingencies: Review updates on the FCPA investigations and the Standard Life Assurance litigation, as outcomes could materially impact future earnings.
• Premium Finance Liquidity: Assess the impact of tighter credit markets on the company's premium finance securitization facilities and over-collateralization requirements.