Aon Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2009. The unaudited filing reports under U.S. GAAP. The registrant named in the filing is Aon Corporation.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $1.808 billion | $1.846 billion | $5.547 billion | $5.707 billion |
| Commissions, fees and other | $1.780 billion | $1.756 billion | $5.466 billion | $5.493 billion |
| Investment income | $28 million | $90 million | $81 million | $214 million |
| Operating expenses | $1.599 billion | $1.599 billion | $4.728 billion | $4.918 billion |
| Continuing pretax income | $178 million | $218 million | $731 million | $702 million |
| Continuing income attributable to Aon stockholders | $117 million | $155 million | $494 million | $498 million |
| Diluted continuing EPS | $0.40 | $0.53 | $1.69 | $1.61 |
| Net income attributable to Aon stockholders | $120 million | $117 million | $549 million | $1.468 billion |
Consolidated continuing pretax margin was 9.8% in Q3, down from 11.8%; nine-month margin rose to 13.2% from 12.3%. Overall organic revenue declined 3% in Q3 and 1% year to date. Management attributed reported revenue pressure to recession-driven weakness, lower investment income and foreign-exchange translation; Benfield and other acquisitions partly offset those factors. Q3 investment income fell $62 million year over year, and nine-month investment income fell $133 million.
Risk and Insurance Brokerage Services revenue was $1.489 billion in Q3 and $4.617 billion for nine months; its pretax margins were 12.6% and 15.7%, respectively. Consulting revenue was $308 million and $917 million; its pretax margins were 10.7% and 15.7%. Consulting organic revenue fell 5% in Q3 and 2% year to date. Reinsurance brokerage growth reflected the Benfield merger, while higher cedant retentions weighed on Q3 organic revenue.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $181 million, versus $37 million a year earlier. Investing activities provided $63 million, compared with $1.866 billion, largely because 2008 included substantial sale proceeds from CICA and Sterling. Financing activities used $258 million, versus $2.026 billion.
- Cash and cash equivalents were $580 million at September 30, 2009, close to $582 million at year-end 2008. This included $99 million of restricted cash. Short-term investments were $602 million.
- Total debt was approximately $2.0 billion: $12 million short term and $1.998 billion long term. Total debt increased $33 million from year-end; debt to total capital attributable to Aon shareholders was 25.1%, down from 27.1%.
- In July, Aon issued €500 million of 6.25% senior unsecured debentures due 2014; most proceeds repaid $677 million outstanding under its Euro credit facility. A $600 million U.S. credit facility was due to expire in February 2010; foreign facilities were also available, with nothing outstanding under them at quarter-end.
- Total assets were $21.641 billion and total equity was $6.130 billion. Fiduciary assets and matching liabilities were each $9.551 billion; these client funds are not available for general operating expenses.
- Aon repurchased 6.5 million shares for $250 million in the first nine months and paid $124 million in dividends. Remaining authorization was approximately $605 million.
Material changes and unusual items
- Nine-month net income attributable to Aon stockholders fell to $549 million from $1.468 billion, principally reflecting the prior-year $1.4 billion gain on the sale of CICA and Sterling. In 2009, discontinued operations included an $86 million gain on the AIS sale; the P&C operations sale was completed in August.
- Q3 continuing income attributable to Aon stockholders declined $38 million year over year. Nine-month continuing income was nearly flat, while diluted continuing EPS increased partly because fewer shares were outstanding.
- Nine-month results included net pension curtailment gains of $78 million following changes to U.S. and Canadian defined-benefit plans. Aon reported $368 million of pension contributions through September and planned $424 million for the year.
- The Aon Benfield restructuring plan’s estimated cumulative cost was reduced from about $185 million to $155 million; approximately 450 of an estimated 700 positions had been eliminated. The 2007 restructuring plan had incurred $489 million against an estimated $700 million total.
Outlook, commentary and risks
Management cited recessionary pressure, soft insurance pricing, reduced insurable exposures, client spending cuts and weakness in financial services, construction, private equity and M&A. It said expense discipline, restructuring savings and lower discretionary incentives helped offset revenue pressure. No specific full-year revenue or EPS guidance is provided in the filing. Management expected the underlying 2009 continuing-operations tax rate to be 28%.
Before potential reinvestment of savings, Aon estimated Aon Benfield plan savings of $45–50 million in 2009, $90–100 million in 2010 and $122 million in 2011. For the 2007 plan, it estimated $240–245 million of savings in 2009 and $467 million annualized by the end of 2010; it cautioned that achievement was not assured. Restructuring charges were expected to affect continuing operations into 2011 for the Benfield plan and through the first half of 2010 for the 2007 plan.
Risks include prolonged economic weakness, falling premiums and interest rates, foreign-exchange movements, investment performance, insurer capacity, pension funding, credit-rating actions, and execution of restructuring and Benfield integration. The SEC and Department of Justice continued investigating anti-corruption matters, including FCPA compliance; Aon was cooperating and could not predict the outcome. Other contingencies included client, securities and ERISA litigation, and a class action involving a former subsidiary. Management said these matters were not expected to materially affect consolidated financial position based on information then available, but adverse outcomes could materially affect results or cash flows.
Important facts for investors to verify
- Whether organic revenue trends, especially in consulting and retail brokerage, improved after quarter-end and how much reported growth depended on acquisitions and currency.
- Whether restructuring savings materialized as estimated, and the remaining cash costs and timing of both plans.
- The sustainability of earnings excluding pension curtailment gains, disposal gains and other unusual items, alongside the sharp decline in investment income.
- Debt refinancing and liquidity needs, including the February 2010 U.S. facility expiry and the effect of any credit-rating downgrade.
- Developments in the FCPA investigations, litigation and indemnification exposures, including the premium-finance guarantee and retained-interest risk.