AON

Aon Plc 10-Q Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2008, for Aon Corporation (Aon). Aon operates primarily through two segments: Risk and Insurance Brokerage Services and Consulting. The reporting period is significantly impacted by the divestiture of its insurance underwriting businesses (CICA and Sterling), which are classified as discontinued operations.

Key Financial Metrics

Note: Net Income is heavily influenced by a $1.0 billion after-tax gain from discontinued operations in Q2 2008.

Material Changes vs. Prior Period

• Discontinued Operations: The most significant change is the sale of CICA and Sterling subsidiaries on April 1, 2008, resulting in a pretax gain of approximately $1.4 billion. This drove the massive increase in Net Income and EPS compared to 2007.
• Continuing Operations: Income from continuing operations before tax decreased 20% in Q2 2008 ($226M vs $281M) and 7% for the six months ($482M vs $521M). This decline is attributed to higher restructuring charges ($53M in Q2) and lower gains on business sales compared to 2007, partially offset by organic revenue growth and favorable foreign currency translation.
• Revenue Growth: Total revenue increased 6% in Q2 and 7% for the six months. Organic growth was driven by the Risk and Insurance Brokerage segment, while the Consulting segment saw a decline in outsourcing revenue due to the termination of the AT&T contract.
• Cash Flow: Operating cash flow for the six months dropped to $268 million from $833 million in the prior year, primarily due to the cessation of cash flows from the sold insurance underwriting businesses.

Guidance, Outlook, and Risks

• Restructuring: Aon continues its 2007 global restructuring plan, with cumulative pretax charges estimated at $360 million. Approximately $159 million has been incurred to date. The company anticipates annualized cost savings of $240 million by 2010.
• Market Conditions: Management expects a "soft market" (declining premium rates) to continue through the remainder of 2008, which may pressure commission revenues in the brokerage segment.
• Share Repurchases: The company repurchased 33.4 million shares for $1.5 billion in the first six months of 2008, utilizing proceeds from the CICA and Sterling sales. The remaining authorized amount is approximately $1.28 billion.
• Legal and Regulatory Risks:
  • Anti-Bribery Investigations: Ongoing internal and external investigations (including by the SEC and DOJ) regarding compliance with the Foreign Corrupt Practices Act (FCPA). Outcomes and costs are currently unpredictable.
  • Litigation: Various class actions regarding broker compensation practices and securities/ERISA claims remain pending. A specific negligence claim involving Standard Life Assurance Ltd. is being contested.
• Liquidity Risk: The company relies on special purpose entities (SPEs) for premium financing. Disruptions in credit markets could impact the ability to fund new premium finance agreements.

Investor Verification Checklist

• Continuing vs. Discontinued Earnings: Verify the distinction between the $1.0 billion gain from discontinued operations and the underlying performance of continuing operations, which showed a decline in pretax income.
• Restructuring Progress: Monitor the execution of the 2007 restructuring plan and the realization of projected cost savings against the $360 million total charge estimate.
• Legal Exposure: Assess the potential financial impact of the ongoing FCPA investigations and the Standard Life Assurance Ltd. litigation, as management states losses cannot currently be estimated.
• Market Trends: Evaluate the impact of the "soft market" on future premium volumes and commission rates in the core brokerage business.
• Capital Allocation: Review the sustainability of the share repurchase program given the one-time nature of the divestiture proceeds used to fund it.