Aon Plc (Aon Corporation) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine months ended on that date. Aon Corporation operates globally as a leading provider of risk and insurance brokerage services, consulting, and insurance underwriting. The company recently reclassified its "Insurance Brokerage and Other Services" segment to "Risk and Insurance Brokerage Services" and moved its automotive finance servicing business to discontinued operations.
Key Financial Metrics
| Metric (in millions) | Q3 2003 | Q3 2002 | 9 Months 2003 | 9 Months 2002 |
|---|---|---|---|---|
| Total Revenue | $2,391 | $2,242 | $7,209 | $6,444 |
| Net Income | $115 | $128 | $413 | $288 |
| Net Income Available to Common | $114 | $127 | $411 | $286 |
| Diluted EPS | $0.36 | $0.46 | $1.30 | $1.03 |
| Operating Cash Flow (9mo) | $1,080 (2003) vs $1,049 (2002) | |||
| Total Assets | $26,210 (Sept 30, 2003) | |||
| Total Liabilities | $21,059 (Sept 30, 2003) | |||
| Stockholders' Equity | $4,399 (Sept 30, 2003) | |||
| Total Debt | ~$1.5 billion (Notes Payable + Short-term borrowings) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 7% in Q3 2003 and 12% for the nine-month period compared to 2002. Organic revenue growth (excluding currency and acquisitions) was 5% for the quarter and 9% year-to-date.
- Profitability: While pre-tax income from continuing operations rose 44% year-to-date ($754 million vs. $524 million), Net Income for Q3 declined 10% due to a $25 million loss from discontinued operations (automotive finance business) and increased pension costs.
- Segment Performance:
- Risk and Insurance Brokerage: Revenue up 10% (Q3) and 15% (9mo). Pretax income declined 11% in Q3 due to higher pension costs and lower investment income.
- Consulting: Revenue up 6% (Q3) and 15% (9mo). Pretax income declined 23% in Q3 due to cost allocation changes and a new outsourcing contract with lower initial margins.
- Insurance Underwriting: Revenue flat to slightly up. Pretax income increased 41% (Q3) and 67% (9mo) driven by a "back-to-basics" strategy improving benefit payout ratios.
- Unusual Items:
- World Trade Center: A $46 million pretax charge was recorded in the first nine months of 2003 related to the sublease of temporary office space. Conversely, Q3 2002 included an $18 million credit from insurance carriers.
- Endurance Warrants: A $64 million non-cash gain was recognized year-to-date in the Corporate and Other segment due to the revaluation of warrants held in Endurance Specialty Holdings following its IPO.
Guidance, Outlook, and Risks
- Outlook: Management expects dividend payments from insurance underwriting subsidiaries to resume in 2004 after strengthening statutory capital. The company is pursuing a "back-to-basics" strategy in accident and health underwriting, exiting non-core markets in Latin America and the U.S. large group life business.
- Discontinued Operations: Aon committed to selling its automotive finance servicing business, anticipating completion within 12 months. A $24 million revaluation loss was recorded in Q3 2003.
- Contingencies and Litigation:
- Unicover Pool: Aon is defending multiple lawsuits regarding a worker's compensation reinsurance pool. Management believes it has meritorious defenses but cannot determine the timing or amount of resolution.
- UK Pension Mis-selling: Aon is reviewing advice given on pension plans (1988–1994). While most claims are resolved, the ultimate exposure is subject to regulatory calculation tables and market variables.
- Shareholder Litigation: Aon reached a settlement of $7.25 million regarding shareholder and derivative actions filed in 2002, subject to court approval.
- Accounting Changes: The company is evaluating the impact of FASB Interpretation No. 46 (FIN 46) on the consolidation of variable interest entities, specifically regarding its Capital Securities. No material effect on equity or net income is currently expected.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the final sale price and timeline for the automotive finance business to assess the permanence of the $39 million Q3 loss.
- Endurance Warrant Valuation: Confirm the sensitivity of the $64 million gain to changes in the underlying stock price and volatility, as this is a non-cash, fair-value adjustment.
- Pension Cost Trajectory: Review the $31 million increase in pension costs for Q3 and $80 million year-to-date to determine if this is a recurring expense impacting future margins.
- World Trade Center Settlement: Monitor the receipt of the remaining $92 million cash payment from the WTC property insurance claim expected in Q4 2003.
- Debt Ratings: Note that Standard & Poor's changed Aon's outlook from stable to negative in Q3 2003; verify if this impacts borrowing costs or credit facility availability.