Aon Corporation — Form 10-Q Summary
Business context and reporting period. This filing is for the quarter and six months ended June 30, 2009, filed August 7, 2009. The registrant named in the filing is Aon Corporation. Its two segments are Risk and Insurance Brokerage Services and Consulting. Results are unaudited and in U.S. dollars; financial amounts below are in millions unless noted.
Key financial results
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $1,885 | $1,956 | $3,739 | $3,861 |
| Commissions, fees and other revenue | $1,864 | $1,889 | $3,686 | $3,737 |
| Investment income | $21 | $67 | $53 | $124 |
| Operating expenses | $1,658 | $1,701 | $3,129 | $3,319 |
| Income from continuing operations before tax | $210 | $226 | $553 | $484 |
| Continuing-operations pretax margin | 11.1% | 11.6% | 14.8% | 12.5% |
| Continuing income attributable to Aon stockholders | $147 | $166 | $377 | $343 |
| Diluted EPS from continuing operations | $0.51 | $0.54 | $1.30 | $1.10 |
| Net income attributable to Aon stockholders, including discontinued operations | $149 | $1,133 | $429 | $1,351 |
- Cash flow: Operating cash flow was $97 for the first six months, versus $268 a year earlier. Investing activities provided $47, compared with $1,087; financing activities used $150, compared with $1,500. Cash and cash equivalents ended June at $537, down from $582 at year-end 2008.
- Liquidity and debt: Short-term debt was $681 and long-term debt $1,249 at June 30, for total debt of $1,930. Debt was 24.3% of total capital, versus 26.7% at year-end 2008. Working capital, excluding assets and liabilities held for sale, was $951. Fiduciary assets and matching liabilities were each $12,323; fiduciary funds are held for clients and are not generally available for Aon’s operating needs.
- Subsequent financing: On July 1, Aon issued €500 million of 6.25% senior unsecured debentures due 2014 and used most proceeds to repay the $677 Euro credit facility balance classified as short-term debt at quarter-end.
Changes versus the prior comparable period
- Q2 revenue fell 4% and continuing pretax income fell 7%. Management attributed pressure to foreign-currency translation, much lower investment income, restructuring charges and the recession; organic revenue was essentially unchanged.
- First-half revenue declined 3%, but continuing pretax income increased 14% and diluted continuing EPS rose from $1.10 to $1.30. Management said the improvement was principally supported by a net $78 pension curtailment gain, restructuring savings and expense discipline.
- Investment income fell $46 in Q2 and $71 for the first half, reflecting lower interest rates, lower investment balances and currency effects. Currency translation reduced diluted EPS by $0.03 in Q2 and $0.05 year to date, according to management.
- Segment trends differed: Risk and Insurance Brokerage Services revenue was essentially flat as reported in Q2, with organic growth in the Americas and reinsurance offset by declines elsewhere. Consulting revenue fell 10% as reported in Q2; organic revenue declined 1%.
- Reported net income was far below 2008 because the prior-year periods included a large gain on the sale of CICA and Sterling. Those businesses generated $967 of discontinued-operations income in Q2 2008; the 2009 comparison therefore does not reflect continuing operating performance alone.
Outlook, commentary, risks and unusual items
- Management described the global recession and soft insurance-pricing conditions as significant headwinds. Risks include reduced insurable exposures, client cost-cutting and risk retention, weakness in financial services and construction, and possible reductions in insurance capacity.
- The Benfield integration plan targets 500–700 job eliminations; about 400 had occurred by June 30. Estimated total costs are approximately $185, of which $134 had been recorded to date, and restructuring activity is expected to affect continuing operations into 2011. Management projected cost savings of $33–$41 in 2009, $84–$94 in 2010 and $122 in 2011, before possible reinvestment.
- The 2007 restructuring plan had incurred $405 of an estimated $550 total by June 30. Management expected remaining charges through 2009 and projected annualized savings of $240–$265 in 2009 and $370 by 2010, while cautioning that savings are not assured.
- The underlying 2009 tax rate for continuing operations was expected to be 28%. The filing provides no full-year revenue or earnings guidance and cautions that interim results are not necessarily indicative of full-year results.
- Unusual items include the first-half $78 net pension curtailment gain, the $86 gain on the January sale of AIS, and a $5 gain from repurchasing junior subordinated securities. Aon recorded $30 of Benfield restructuring and related expenses in the first half.
- Legal and regulatory matters include a proposed $30 settlement of a federal securities class action, subject to court approval; ongoing SEC and DOJ anti-corruption investigations following an FSA settlement and £5.25 million fine; and a July agreement to pay £46 million to settle the Standard Life claim, partially offset by a third-party indemnification receivable. Management said adverse outcomes in contingent matters could materially affect a particular period’s results or cash flows, although it did not expect the matters, based on information then available, to materially affect consolidated financial position.
- The sale of remaining property and casualty operations was expected to close in the second half of 2009; the anticipated pretax sale loss of approximately $191 had been recorded in 2008. Aon also disclosed a $597 reinsurance-recoverables indemnification exposure, offset by approximately $118 in trust balances and letters of credit, with a recorded fair-value liability of $9.
- Credit, interest-rate and foreign-exchange risks remain relevant. Aon reported stable debt ratings during the quarter and warned that a downgrade could raise borrowing costs or limit commercial-paper access. Premium-finance arrangements also carry recourse and over-collateralization exposure; the latter was approximately $61 at June 30.
Important facts for investors to verify
- Whether organic revenue and margins improve as recessionary, pricing and currency pressures evolve, particularly in the U.K., EMEA, Asia Pacific and Consulting.
- How much of first-half earnings growth depended on the pension curtailment gain, and whether restructuring savings are achieved net of charges and reinvestment.
- Completion and terms of the P&C operations sale, the July debt refinancing, and the resulting debt maturities, borrowing costs and liquidity position.
- Final approval and payment timing for the securities settlement; outcomes and potential costs of the SEC/DOJ investigations, Standard Life settlement and other disclosed claims.
- Actual cash generation after pension contributions, restructuring payments and dividends; client fiduciary balances should be distinguished from funds available for corporate use.
- Whether premium-finance covenants, increased collateral requirements and retained credit exposures remain manageable as Aon transitions those operations to third parties.