AON

Aon Plc 2007 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2007. Aon operates primarily through two segments: Risk and Insurance Brokerage Services (82% of revenue) and Consulting (18% of revenue). In December 2007, Aon signed definitive agreements to sell its Combined Insurance Company of America (CICA) and Sterling Life Insurance Company subsidiaries, which are now classified as discontinued operations. The company ceased writing new property and casualty insurance in 2006, with remaining operations in runoff.

Key Financial Metrics

Margins: Pretax margin for continuing operations improved to 13.7% in 2007 from 9.6% in 2006. The Risk and Insurance Brokerage segment achieved a 17.1% pretax margin, while the Consulting segment reached 14.0%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 9% ($590 million), driven by an 8% increase in brokerage revenue and a 5% increase in consulting revenue. Organic revenue growth was 2% overall.
• Profitability: Net income rose 20% to $864 million. Income from continuing operations increased 50% to $672 million, aided by improved segment profitability, lower restructuring costs, and pension savings.
• Discontinued Operations: After-tax income from discontinued operations (CICA and Sterling) was $192 million in 2007, down from $272 million in 2006, primarily due to the absence of gains from the sale of AWG and CPG in the prior year.
• Restructuring: A new global restructuring plan (2007 Plan) was announced, with $46 million in charges incurred in 2007. The prior 2005 Plan was substantially complete, yielding $225 million in estimated benefits in 2007.

Guidance, Outlook, and Risks

• Divestitures: Aon expects to complete the sale of CICA (to ACE Limited for $2.4 billion) and Sterling (to Munich Re for $352 million) in the second quarter of 2008. Proceeds are designated for share repurchases.
• Restructuring Savings: The 2007 Plan targets annualized savings of approximately $240 million by 2010. The 2005 Plan is expected to yield $270 million in annualized savings in 2008.
• Share Repurchases: The Board increased the authorized repurchase program to $4.6 billion. Aon spent $751 million to repurchase 19.1 million shares in 2007.
• Market Conditions: Management noted a "soft market" in insurance premiums, which may reduce commission revenues. They expect this to continue into 2008.
• Key Risks:
  • Legal & Regulatory: Ongoing investigations into broker compensation practices (New York Attorney General) and anti-bribery laws (FCPA). A significant E&O lawsuit in the U.K. (Standard Life) resulted in a preliminary adverse ruling, though Aon is appealing.
  • Pension Obligations: Significant unfunded pension liabilities exist, particularly in the U.K. Estimated cash contributions for 2008 are $195 million.
  • Reserve Adequacy: Uncertainty regarding property and casualty runoff reserves and underwriting assumptions.

Investor Verification Checklist

• Transaction Closing: Verify the successful closing of the CICA and Sterling sales in Q2 2008 and the receipt of expected proceeds ($2.75 billion total).
• Restructuring Execution: Monitor progress on the 2007 restructuring plan to ensure the elimination of 2,700 positions and achievement of targeted cost savings.
• Legal Outcomes: Track the status of the Standard Life Assurance Ltd. appeal and the outcome of FCPA and broker compensation investigations.
• Pension Funding: Confirm actual cash contributions to pension plans in 2008 against the estimated $195 million requirement.
• Market Trends: Assess the impact of the "soft market" on brokerage commission rates and premium volumes in 2008.