Aon Reports First Quarter 2010 Results

CHICAGO, April 30 /PRNewswire-FirstCall/ -- Aon Corporation (NYSE: AON) today reported results for the first quarter ended March 31, 2010.  

Net income attributable to Aon stockholders was $178 million or $0.63 per share, compared to $280 million or $0.96 per share for the prior year quarter.  The prior year quarter included an $83 million pretax gain related to the U.S. pension curtailment and a $43 million after-tax gain on the sale of Automobile Insurance Specialists (AIS).  Net income attributable to Aon stockholders from continuing operations decreased 23% to $178 million or $0.63 per share, compared to $230 million or $0.79 per share for the prior year quarter.  Net income attributable to Aon stockholders from continuing operations per share, excluding certain items, increased 11% to $0.83 compared to $0.75 for the prior year quarter.  Certain items that impacted first quarter results and comparisons with the prior year quarter are detailed in the reconciliation of non-GAAP measures on page 12 of this press release.  

“Our first quarter results reflect solid operational performance across both the Brokerage and Consulting segments.  Despite difficult economic and soft market conditions and a 48 percent decline in investment income, on an adjusted basis, we held total operating margins constant and increased EPS from continuing operations 11 percent,” said Greg Case, president and chief executive officer.  "Our restructuring programs are expected to deliver additional cost savings and margin improvement, while the substantial investments across our organization in areas such as construction, professional liability and retirement consulting continue to strengthen our client-serving capability.  Finally, our balance sheet and strong cash flow provide significant financial flexibility to create long-term shareholder value, as highlighted by the repurchase of an additional $50 million of stock during the quarter."

FIRST QUARTER FINANCIAL SUMMARY

Total revenue increased 3% to $1.9 billion from the prior year quarter due to a 6% increase from foreign currency translation and a 1% increase from acquisitions, primarily Allied North America, net of dispositions, partially offset by a 3% organic revenue decline in commissions and fees and a $12 million or 48% decline in investment income.

Total operating expenses increased 10% or $151 million to $1.6 billion due primarily to an estimated $92 million unfavorable impact from foreign currency translation and a $33 million increase in restructuring related expenses, partially offset by benefits related to the 2007 and Aon Benfield restructuring programs.  The prior year quarter expenses included an $83 million pension curtailment gain.

Restructuring expenses were $76 million in the first quarter compared to $43 million in the prior year quarter.  An analysis of restructuring-related expenses by segment and type for both the 2007 and Aon Benfield restructuring programs are detailed on page 13 of this release.

Restructuring savings in the first quarter related to the 2007 restructuring program are estimated at $110 million compared to $41 million in the prior year quarter.  Of the estimated restructuring savings in the first quarter, $92 million were related to the Brokerage segment primarily from workforce reductions.  Before any potential reinvestment of savings, the 2007 restructuring program is expected to deliver $536 million of annualized run-rate cost savings by the end of 2010.

Restructuring savings in the first quarter related to the Aon Benfield restructuring program are estimated at $22 million.  Before any potential reinvestment of savings, the Benfield restructuring program is expected to deliver cumulative cost savings of $90-100 million in 2010 and $122 million in 2011.

Currency fluctuations in the first quarter favorably impacted net income from continuing operations by $0.04 per diluted share when the Company translates prior year quarter results at current quarter foreign exchange rates.

Effective tax rate on net income from continuing operations decreased to 24.9% in the first quarter compared to 31.5% for the prior year quarter.  The first quarter was favorably impacted by certain deferred tax adjustments.  The prior year quarter reflected an underlying tax rate on operations of approximately 29%, plus the impact of a non-cash deferred tax expense on the U.S. pension curtailment gain.  The Company anticipates an underlying effective tax rate on continuing operations of 28% for 2010. 

Average diluted shares outstanding decreased to 283.4 million in the first quarter compared to 292.0 million in the prior year quarter due primarily to the Company’s share repurchase program.  During the quarter, the Company repurchased 1.2 million shares of common stock for $50 million.  The company has approximately $215 million remaining under the share repurchase program previously authorized in 2005 and $2 billion under the share repurchase program previously authorized in 2010.

Discontinued Operations after-tax income had no impact on results in the first quarter compared to an after-tax gain of $50 million or $0.17 per share in the prior year quarter.  The prior year quarter primarily includes a $43 million after-tax gain on the sale of AIS.

FIRST QUARTER SEGMENT REVIEW

Certain noteworthy items impacted operating income and operating margins in the first quarter of 2010 and 2009.  The first quarter segment reviews provided below include supplemental information related to organic revenue growth, adjusted operating income and operating margin which is described in detail on the “Reconciliation of Non-GAAP Measures - Organic Revenue Growth” on page 11 and “Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings Per Share” on page 12 of this press release.

Risk and Insurance Brokerage Services total revenue increased 3% to $1.6 billion compared to the prior year quarter due to a 6% favorable impact from foreign currency translation on commissions and fees and a 1% increase from acquisitions, primarily Allied North America, net of dispositions, partially offset by a 3% organic revenue decline in commissions and fees revenue and an $11 million or 46% decline in investment income.

Retail organic revenue declined 3% compared to the prior year quarter.  By geographic region in Retail, the Americas organic revenue declined 5% due to an unfavorable timing impact for certain renewal business and the impact of soft pricing, lower exposure units and lower construction demand in U.S. Retail, partially offset by solid growth in Latin America.  U.K. organic revenue decreased 2% due primarily to weak economic conditions, partially offset by strong growth in captives business.  EMEA organic revenue decreased 2% due to weak economic conditions and lower exposure units in Continental Europe and Ireland, partially offset by modest growth in emerging markets.  APAC organic revenue increased 1% reflecting strong growth in emerging markets, partially offset by soft market conditions in Australia.  Reinsurance organic revenue decreased 4% due primarily to higher cedent retentions globally in treaty placements and lower facultative and capital markets transactions, partially offset by new business growth in the Americas for treaty placements.

Compensation and benefits for the first quarter increased 14% or $114 million compared to the prior year quarter including a $53 million unfavorable impact from foreign currency translation and a $24 million increase in restructuring related costs, partially offset by benefits related to the restructuring programs.  The prior year quarter included a $58 million pension curtailment gain.  Other expenses for the first quarter decreased 1% or $4 million from the prior year quarter due primarily to benefits related to the restructuring programs, partially offset by a $24 million unfavorable impact from foreign currency translation.  The prior year quarter included $10 million of Benfield integration costs.

First quarter operating income decreased 20% to $257 million.  Adjusting for certain items detailed on page 12 of this press release, operating income increased 3% or $10 million to $326 million and operating margin was similar to the prior year quarter at 20.5% due primarily to benefits of the restructuring programs, offset by lower organic revenue, an $11 million or 46% decrease in investment income and an unfavorable margin impact from foreign currency translation.

Consulting total revenue increased 4% to $322 million compared to the prior year quarter due primarily to a 6% favorable impact from foreign currency translation, partially offset by a 1% decline in organic commissions and fees revenue.  Organic revenue in Services decreased 1% primarily reflecting the impact of weak economic conditions in our health and benefits and retirement consulting businesses, partially offset by strong growth in global compensation consulting.  Organic revenue in Outsourcing declined 4% due to lower payroll counts impacting certain employee benefits and retirement outsourcing contracts.

Compensation and benefits for the first quarter increased 21% or $34 million from the prior year quarter including a $10 million unfavorable impact from foreign currency translation and a $3 million increase in restructuring related costs, partially offset by benefits related to the 2007 restructuring program.  The prior year quarter included a $21 million pension curtailment gain.  Other expenses were similar to the prior year quarter due primarily to benefits related to the 2007 restructuring program, partially offset by a $5 million unfavorable impact from foreign currency translation.

First quarter operating income decreased 30% to $49 million.  Adjusting for certain items detailed on page 12 of this press release, operating income increased 8% or $4 million to $56 million and operating margin increased 60 basis points to 17.4% versus the prior year quarter due primarily to benefits related to the 2007 restructuring program, partially offset by lower organic revenue.

Unallocated expenses increased $6 million to $33 million due primarily to higher performance-based incentive compensation.  Interest income decreased $6 million compared to the prior year quarter due primarily to lower cash balances and lower income related to certain private equity securities.  Interest expense increased $5 million to $34 million due to an increase in the average rate on outstanding debt.  Other income was $7 million including $4 million related to gains on sales of certain businesses.

Conference Call and Webcast Details

The Company will host a conference call on Friday, April 30, 2010 at 7:30 a.m. central time.  Interested parties can listen to the conference call via a live audio webcast at www.aon.com.

About Aon

Aon Corporation (NYSE: AON) is the leading global provider of risk management services, insurance and reinsurance brokerage, and human capital consulting. Through its more than 36,000 colleagues worldwide, Aon readily delivers distinctive client value via innovative and effective risk management and workforce productivity solutions. Aon's industry-leading global resources and technical expertise are delivered locally through more than 500 offices in more than 120 countries. Named the world's best broker by Euromoney magazine's 2008 and 2009 Insurance Survey, Aon also ranked highest on Business Insurance's listing of the world's largest insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues in 2008 and 2009. A.M. Best deemed Aon the number one insurance broker based on brokerage revenues in 2007, 2008, and 2009, and Aon was voted best insurance intermediary, best reinsurance intermediary and best employee benefits consulting firm in 2007, 2008 and 2009 by the readers of Business Insurance. For more information on Aon, log onto http://www.aon.com.

Safe Harbor Statement

This press release contains certain statements related to future results, or states our intentions, beliefs and expectations or predictions for the future which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results depending on a variety of factors. Potential factors that could impact results include: general economic conditions in different countries in which we do business around the world, changes in global equity and fixed income markets that could affect the return on invested assets, fluctuations in exchange and interest rates that could influence revenue and expense, rating agency actions that could affect our ability to borrow funds, funding of our various pension plans, changes in the competitive environment, our ability to implement restructuring initiatives and other initiatives intended to yield cost savings, changes in commercial property and casualty markets and commercial premium rates that could impact revenues, the outcome of inquiries from regulators and investigations related to compliance with the U.S. Foreign Corrupt Practices Act and non-U.S. anti-corruption laws, the impact of investigations brought by U.S. state attorneys general, U.S. state insurance regulators, U.S. federal prosecutors, U.S. federal regulators, and regulatory authorities in the U.K. and other countries, the impact of class actions and individual lawsuits including client class actions, securities class actions, derivative actions, ERISA class actions, the cost of resolution of other contingent liabilities and loss contingencies, and to realize the anticipated benefits of the Benfield merger.  Further information concerning the Company and its business, including factors that potentially could materially affect the Company's financial results, is contained in the Company's filings with the Securities and Exchange Commission.

Explanation of Non-GAAP Measures

This press release includes supplemental information related to organic revenue growth and several additional measures including expenses, margins and income per share, that exclude the effects of restructuring charges and certain other noteworthy items that affected results for the comparable periods.  Organic revenue growth excludes from reported revenues the impact of foreign exchange, acquisitions, divestitures, transfers between business units, reimbursable expenses and unusual items.  The impact of foreign exchange is determined by translating last year's revenue, expense or net income at this year's foreign exchange rates.  Reconciliations are provided in the attached schedules.  Supplemental organic revenue growth information and additional measures that exclude the effects of the restructuring charges and certain other items do not affect net income or any other GAAP reported amounts.  Management believes that these measures are important to make meaningful period-to-period comparisons and that this supplemental information is helpful to investors.  They should be viewed in addition to, not in lieu of, the Company’s Consolidated Statements of Income.  Industry peers provide similar supplemental information regarding their performance, although they may not make identical adjustments.