Business Context and Reporting Period
This summary covers Aon Corporation's Form 10-Q for the quarterly period ended June 30, 2007. Aon is a global professional services firm operating through three primary segments: Risk and Insurance Brokerage Services, Consulting, and Insurance Underwriting. The company is a large accelerated filer with 292.8 million shares of common stock outstanding as of the reporting date.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenue | $2,488 million | $4,869 million |
| Net Income | $240 million | $453 million |
| Diluted EPS | $0.75 | $1.41 |
| Cash Provided by Operating Activities | N/A (Quarterly not provided) | $851 million |
| Total Assets | $24,791 million | $24,791 million |
| Total Liabilities | $19,447 million | $19,447 million |
| Total Debt | $2,186 million | $2,186 million |
| Stockholders' Equity | $5,344 million | $5,344 million |
Segment Performance (Six Months Ended June 30, 2007):
- Risk and Insurance Brokerage Services: Revenue of $2,971 million; Pretax income of $520 million.
- Consulting: Revenue of $654 million; Pretax income of $91 million.
- Insurance Underwriting: Revenue of $1,184 million; Pretax income of $126 million.
Material Changes vs. Prior Period
Compared to the six months ended June 30, 2006:
- Revenue Growth: Total revenue increased 11% to $4.869 billion. This was driven by an 8% increase in commissions and fees and a 19% increase in premiums and other revenue, largely due to growth in the Sterling subsidiary's Medicare Advantage (MA) products.
- Profitability: Net income rose 16% to $453 million. Income from continuing operations before tax increased 27% to $676 million.
- Investment Income: Increased 39% year-over-year, driven by non-liquidating distributions from the PEPS I investment ($39 million) and higher interest rates.
- Discontinued Operations: Income from discontinued operations dropped significantly to $3 million (from $42 million in the prior year) as major businesses (AWG and CPG) were sold in late 2006.
- Restructuring: The company incurred $36 million in restructuring costs for the six months ended June 30, 2007, compared to higher costs in the prior year, as the 2005 restructuring plan nears completion.
Outlook, Risks, and Management Commentary
Strategic Alternatives: In July 2007, Aon announced it is considering strategic options for Combined Insurance Company of America (CICA), including a potential spin-off to shareholders or a sale to a third party.
Regulatory Impact: Federal legislation repealing year-round enrollment for Medicare Advantage plans (effective August 1, 2007) is expected to impact the consistency of revenue growth for the Sterling subsidiary. Sterling voluntarily suspended marketing of certain plans pending CMS approval of new controls.
Restructuring: The 2005 restructuring initiative is expected to result in cumulative pretax charges of approximately $365 million. As of June 30, 2007, $361 million has been expensed, with an estimated $4 million remaining for 2007. The plan aims to eliminate 3,600 positions and achieve annualized cost savings of $280 million by 2008.
Capital Allocation: Aon repurchased 16.2 million shares for $625 million in the first six months of 2007. The company has $303 million remaining under its $2 billion authorized repurchase program.
Risks and Contingencies:
- Legal Proceedings: Aon faces various class actions and investigations regarding broker compensation practices and securities/ERISA matters. Management believes it has meritorious defenses and does not expect a material adverse effect on financial position, though outcomes are unpredictable.
- Reinsurance Guarantees: Aon has provided a corporate guarantee of approximately $976 million regarding reinsurance recoverables related to its property and casualty business.
- Tax Rate Change: A reduction in the U.K. corporate tax rate from 30% to 28% is expected to result in a one-time non-cash charge of approximately $20 million in the third quarter of 2007.
Investor Verification Checklist
- CICA Strategic Options: Verify the timeline and potential financial impact of the announced strategic review of Combined Insurance Company of America.
- Sterling Regulatory Exposure: Assess the long-term revenue impact of the repeal of year-round Medicare Advantage enrollment and the suspension of marketing activities.
- Restructuring Completion: Monitor the final costs of the 2005 restructuring plan and the realization of the projected $280 million in annualized savings.
- Legal Reserves: Review updates on the New York/State settlement fund and pending class action lawsuits regarding broker compensation.
- Investment Portfolio: Confirm the stability of the fixed-maturity portfolio, which holds $98 million in gross unrealized losses but remains 100% investment grade.