Aon Reports Second Quarter 2011 Results

CHICAGO, July 29, 2011 /PRNewswire/ -- Aon Corporation (NYSE: AON) today reported results for the second quarter ended June 30, 2011.  

Net income attributable to Aon stockholders increased 69% to $258 million or $0.75 per share, compared to $153 million or $0.54 per share for the prior year quarter.  Net income attributable to Aon stockholders from continuing operations increased 43% to $256 million or $0.75 per share, compared to $179 million or $0.63 per share for the prior year quarter.  Net income per share attributable to Aon stockholders from continuing operations, excluding certain items, increased 2% to $0.83, compared to $0.81 in the prior year quarter, including a $62 million increase in intangible asset amortization expense.  Certain items that impacted second quarter results and comparisons with the prior year quarter are detailed in the "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 12 of this press release.  

"We delivered solid organic revenue growth in our Retail Brokerage business while delivering on the synergy savings related to Aon Hewitt," said Greg Case, president and chief executive officer.  "While macro conditions remain challenging globally, we are firmly on track to deliver growth in 2011, our restructuring programs are delivering cost savings and we have solid financial flexibility that will continue to drive increased shareholder value, as highlighted by the repurchase of $303 million of common stock in the quarter."

SECOND QUARTER FINANCIAL SUMMARY

Total revenue increased 48% to $2.8 billion from the prior year quarter due to a 42% increase in commissions and fees resulting from acquisitions, primarily Hewitt, net of divestitures, a 6% increase from foreign currency translation and a 1% increase in organic revenue, partially offset by lower fiduciary investment income.

Total operating expenses increased 46%, or $747 million, to $2.4 billion due primarily to the inclusion of operating expenses related to the merger with Hewitt, an estimated $102 million unfavorable impact from foreign currency translation and a $62 million increase in intangible asset amortization expense, partially offset by benefits related to the restructuring programs and a $17 million decrease in restructuring related costs.  The prior year quarter included a $49 million non-cash charge to pension expense.

Depreciation and amortization expense increased 148%, or $89 million, to $149 million compared to the prior year quarter due primarily to the inclusion of $59 million in intangible asset amortization expense and $18 million of depreciation expense as a result of the merger with Hewitt.  The Company expects intangible asset amortization related to the Hewitt merger to be approximately $241 million in 2011, $310 million in 2012, $288 million in 2013 and to continue to decline each year from 2014 through 2023.

Restructuring expenses were $14 million compared to $31 million in the prior year quarter.  In the second quarter, the Company incurred $31 million of costs under the Aon Hewitt restructuring program, primarily related to lease consolidation and workforce reduction, partially offset by the reversal of $22 million of restructuring costs accrued in prior periods under the Aon Benfield and 2007 restructuring programs as a result of the company reoccupying vacated leasehold properties.  The Company has completed all restructuring activities and incurred 100% of the total costs for the 2007 program and has incurred approximately 95% of the total costs necessary to deliver the remaining savings under the Aon Benfield program.  An analysis of restructuring-related expenses by segment and type is detailed on page 13 of this release.

Restructuring savings in the second quarter related to the 2007 restructuring program are estimated at $134 million compared to $113 million in the prior year quarter.  Of the restructuring savings in the second quarter, $113 million were related to the Risk Solutions segment.  Before any potential reinvestment of savings, the 2007 restructuring program is expected to deliver cumulative cost savings of $536 million in 2011.

Restructuring savings in the second quarter related to the Aon Benfield restructuring program are estimated at $30 million compared to $24 million in the prior year quarter.  Before any potential reinvestment of savings, the Benfield restructuring program is expected to deliver cumulative cost savings of $122 million in 2011.

Restructuring savings in the second quarter related to the Aon Hewitt restructuring program are estimated at $34 million.  The Aon Hewitt merger is expected to deliver cumulative cost savings of $355 million in 2013, including $280 million related to the restructuring program and $75 million in areas such as information technology, procurement and public company costs.

Currency fluctuations in the second quarter had a $0.03 favorable impact on adjusted net income from continuing operations 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 was 24.7% in the second quarter compared to 24.5% in the prior year quarter.  The effective tax rate in the second quarter of 2011 and 2010 was favorably impacted by the resolution of an income tax audit and certain deferred tax adjustments.  The Company anticipates an effective tax rate on net income from continuing operations of 29.0% for 2011.

Discontinued operations after-tax income was $2 million in the second quarter compared to an after-tax loss of $26 million in the prior year quarter.  The prior year quarter included the settlement of legacy litigation.

Average diluted shares outstanding increased to 342.7 million in the second quarter compared to 282.6 million in the prior year quarter due primarily to the issuance of 61 million shares of common stock related to the merger with Hewitt, partially offset by the Company's share repurchase program.  The Company has approximately $1.4 billion remaining under the share repurchase program.

SECOND QUARTER SEGMENT REVIEW

Certain noteworthy items impacted operating income and operating margins in the second quarter of 2011 and 2010.  The second quarter segment reviews provided below include supplemental information related to organic revenue, adjusted operating income and operating margin which is described in detail on the "Reconciliation of Non-GAAP Measures - Organic Revenue" on page 11 and "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 12 of this press release.

Risk Solutions total revenue increased 9% to $1.7 billion compared to the prior year quarter due to a 6% favorable impact from foreign currency translation, 2% organic growth in commissions and fees, and a 1% favorable impact from acquisitions and divestitures, partially offset by a decline in fiduciary investment income.

Retail Brokerage organic revenue increased 3% reflecting solid organic revenue growth both in the Americas and International businesses.  Americas organic revenue increased 3% due primarily to strong growth in Latin America and in Affinity products.  International organic revenue increased 3% driven by strong growth in Asia, New Zealand and Africa.  Reinsurance organic revenue decreased 2% due primarily to a decline in capital market transactions and advisory business, partially offset by growth in global treaty placements.  

Compensation and benefits for the second quarter increased 6%, or $58 million, compared to the prior year quarter due to a $57 million unfavorable impact from foreign currency translation, a $17 million increase from acquisitions, primarily Glenrand M.I.B, net of divestitures, and organic revenue growth, partially offset by benefits related to the restructuring programs and a $14 million decrease in restructuring related costs.  Other expenses for the second quarter increased 9%, or $33 million, due to a $28 million unfavorable impact from foreign currency translation, $16 million of lease termination costs, an $11 million increase from acquisitions, primarily Glenrand M.I.B, net of divestitures, and organic revenue growth, partially offset by a $32 million decrease in restructuring related costs.

Second quarter operating income increased 16% to $355 million.  Adjusting for certain items detailed on page 12 of this press release, operating income increased 1%, or $4 million, to $338 million compared to the prior year quarter. Operating margin in the second quarter decreased 140 basis points to 19.6% compared to the prior year quarter due primarily to a 90 basis point impact from lease termination costs, a 30 basis point impact from a decline in investment income and a 20 basis point impact from foreign currency translation.

HR Solutions total revenue increased 244% to $1.1 billion compared to the prior year quarter due to acquisitions, primarily Hewitt, net of divestitures and a 6% favorable impact from foreign currency translation.  Organic revenue in Consulting Services was flat as growth in global compensation and investment management consulting was offset by a decline in U.S. retirement and health and benefits consulting.  Organic revenue in Outsourcing was flat as new client wins and growth in point solutions revenue was offset by price compression and a decline in project-related revenue.

Compensation and benefits for the second quarter increased 221%, or $428 million, from the prior year quarter due primarily to the inclusion of Hewitt operating expenses and a $10 million unfavorable impact from foreign currency translation, partially offset by benefits related to the Aon Hewitt restructuring program.  Other expenses increased 353%, or $275 million, from the prior year quarter due primarily to the inclusion of Hewitt operating expenses, a $59 million increase in intangible asset amortization expense and $25 million of costs related to the Aon Hewitt restructuring program, partially offset by benefits related to the Aon Hewitt restructuring program.

Second quarter operating income increased 156% to $115 million.  Adjusting for certain items detailed on page 12 of this press release, operating income increased 221%, or $104 million, to $151 million reflecting operating income as a result of the merger of Hewitt and cost savings related to the restructuring program, partially offset by higher intangible asset amortization expense.  Operating margin decreased 90 basis points to 13.9% versus the prior year quarter due primarily to the inclusion of Hewitt operating results and an increase in intangible asset amortization expense.

Unallocated expenses were $36 million, a decrease of $46 million compared to prior year quarter.  The prior year quarter included a non-cash charge to pension expense of $49 million, which resulted from an adjustment to the market-related value of plan assets.  Interest income was comparable to the prior year quarter at $4 million. Interest expense increased $30 million to $63 million due primarily to an increase in the average amount of debt outstanding following the merger with Hewitt.  Other expense of $23 million in the second quarter includes a non-cash charge of $19 million as a result of the accelerated amortization of deferred financing costs associated with a repaid term credit agreement.  The second quarter also included a $13 million loss related to the company's ownership in certain insurance investment funds and $9 million of distributions from certain private equity securities.  The prior year quarter included gains from certain investments and the sale of certain businesses.

Conference Call and Webcast Details

The Company will host a conference call on Friday, July 29, 2011 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 resource solutions and outsourcing. Through its more than 60,000 colleagues worldwide, Aon unites to deliver 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 in over 120 countries. Named the world's best broker by Euromoney magazine's 2008, 2009 and 2010 Insurance Survey, Aon also ranked highest on Business Insurance's listing of the world's 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 revenues in 2007, 2008 and 2009, and Aon was voted best insurance intermediary 2007-2010, best reinsurance intermediary 2006-2010, best captives manager 2009-2010, and best Employee benefits consulting firm 2007-2009 by the readers of Business Insurance. Visit http://www.aon.com for more information on Aon and http://www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United.

Safe Harbor Statement

This communication 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: the possibility that the expected efficiencies and cost savings from the merger with Hewitt Associates Inc. ("Hewitt") will not be realized, or will not be realized within the expected time period; the risk that the Aon and Hewitt businesses will not be integrated successfully; disruption from the merger with Hewitt making it more difficult to maintain business and operational relationships; general economic conditions in different countries in which Aon does 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 Aon's ability to borrow funds; funding of Aon's various pension plans; our ability to implement restructuring initiatives and other initiatives intended to yield cost savings, and the ability to achieve those cost savings; changes in the competitive environment; 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 and ERISA class actions; the cost of resolution of other contingent liabilities and loss contingencies, including potential liabilities arising from error and omissions claims against Aon; the extent to which Aon retains existing clients and attract new businesses; the extent to which Aon manages certain risks created in connection with the various services, including fiduciary and advisory services, among others, that Aon currently provides, or will provide in the future, to clients; the extent to which Aon retains existing employees and attracts new personnel; Aon's ability to maintain the security and privacy of confidential information belonging to its clients or their personnel; Aon's ability to innovate and keep pace with rapid and continuing changes in technology, industry standards and client preferences; the impact of, and potential challenges in complying with, legislation and regulation in the jurisdictions in which Aon operates, particularly given the global scope of Aon's  businesses and the possibility of conflicting regulatory requirements across jurisdictions in which Aon does business; changes in costs or assumptions associated with our outsourcing and consulting engagements that affect the profitability of these engagements; and the ability to realize the anticipated benefits to Aon of the Benfield merger. Further information concerning Aon and its business, including factors that potentially could materially affect Aon's financial results, is contained in Aon's and, historically, Hewitt's filings with the SEC. See Aon's Annual Report on Form 10-K and Annual Report to Stockholders for the fiscal year ended December 31, 2010 and Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011 and other public filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our businesses. Aon does not undertake, and expressly disclaims, any duty to update any forward-looking statement whether as a result of new information, future events or changes in their respective expectations, except as required by law.

Explanation of Non-GAAP Measures

This communication includes supplemental information related to organic revenue and several additional measures including expenses, margins and income per share, that exclude the effects of restructuring charges, transaction and integration costs and certain other noteworthy items that affected results for the comparable periods.  Organic revenue 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 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.