Why did Aon's earnings decline so sharply in 2001?

Most of the decline came from non-operating Corporate and Other results, which fell by $242 million. Limited partnership valuations dropped and the company took impairment writedowns, producing a $171 million revenue loss. Underperformance in U.S. retail brokerage tied to the business transformation plan and the September 11 charge of $68 million, net of recoveries, also weighed on results.

What is the planned spin-off of Aon's underwriting business?

Aon plans to spin off its insurance underwriting businesses to stockholders as a tax-free dividend of shares in a new company, Combined Specialty Corporation, expected in spring 2002. The company says this will let brokerage and consulting fund growth independently and let the underwriting business expand into commercial property and casualty lines. The transaction still requires final board approval, a favorable IRS ruling and certain insurance regulatory approvals.

How did the September 11 attacks affect Aon financially?

Aon lost 175 employees and an office in the World Trade Center. It recorded a $68 million pretax unusual charge, net of an estimated $207 million of insurance and reinsurance recoveries, and wrote off $33 million of destroyed assets. About $90 million of reinsurance recoveries under a Business Travel Accident policy is in dispute and in litigation, and further costs and recoveries are expected in 2002.

Is Aon's core business still performing well despite the weaker earnings?

Largely yes, according to the filing. Organic revenue growth was about 8% in the operating segments, and Consulting revenue rose 22% to a record $938 million. Insurance Brokerage remained the largest segment, with $4.7 billion in revenue. The main weakness was U.S. retail brokerage, where delayed implementation of the transformation plan hurt new business production and client retention.

AON 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 15, 2002. Cited figures are marked; the original filing is the authoritative source.

Aon Corporation's 2001 Form 10-K shows a company in transition.

Reported net income fell 57% to $203 million^a ($0.73 per diluted share) from $474 million in 2000, while income before unusual and special charges fell 29% to $377 million ($1.37 per share, versus $2.01). The decline was driven mainly by a $242 million swing in non-operating Corporate and Other revenue, which turned to a $171 million loss on writedowns of limited partnership investments, and by underperformance in U.S. retail brokerage tied to the troubled business transformation plan. Total revenue still rose 4% to $7.68 billion, and the three operating segments were mostly healthy: Consulting revenue grew 22% and Insurance Underwriting revenue grew 4%, while Insurance Brokerage revenue grew 7%.

The filing also reports significant events. The September 11, 2001 attack on the World Trade Center destroyed one of Aon's largest offices and killed 175 employees, producing a $68 million^b pretax unusual charge, net of recoveries, with about $90 million of reinsurance recoveries in dispute. Aon announced a plan to spin off its insurance underwriting businesses as Combined Specialty Corporation in spring 2002, pending board approval and an IRS tax ruling.

Aon also securitized most of its limited partnership portfolio in a $450 million^c transaction, and it issued $400 million of new debt. Stockholders' equity was flat at $3.5 billion, or $13.03 per share, and the company's dividend rose to $0.895 per share.

Investors should weigh the weaker 2001 earnings and U.S. brokerage execution issues against the planned spin-off, the company's diversified global franchise, and the still-open legal and recovery questions tied to September 11. The filing is a parent-level annual report that incorporates most financial detail by reference from the Exhibit 13 annual report, but the financial statements and notes are included in the document reviewed here.

02—Key points

Key Highlights

Net income fell 57% to $203 million ($0.73 per diluted share) in 2001, down from $474 million ($1.79) in 2000; income before unusual and special charges fell 29% to $377 million ($1.37 per share).
Total revenue rose 4% to $7.68 billion, with Insurance Brokerage and Other Services up 7%, Consulting up 22% to a record $938 million, and Insurance Underwriting up 4%.
Corporate and Other revenue swung to a $171 million loss, driven by reduced valuations of limited partnership investments and $57 million of impairment writedowns, after a $71 million gain in 2000.
September 11 attacks: $68 million pretax unusual charge net of recoveries, 175 employees lost, and about $90 million of reinsurance recoveries disputed by reinsurers.
Planned spin-off of insurance underwriting into Combined Specialty Corporation, expected in spring 2002, subject to final board approval, an IRS tax ruling and regulatory approvals.
Business transformation plan: $300 million in special charges through 2001, about $150 million of annualized savings expected, and U.S. retail brokerage conversions targeted for completion by the end of Q2 2002.
Balance sheet is stable: total assets of $22.4 billion, stockholders' equity of $3.5 billion ($13.03 per share), and a dividend of $0.895 per share.

03—Questions

Frequently Asked Questions

Why did Aon's earnings decline so sharply in 2001?
Most of the decline came from non-operating Corporate and Other results, which fell by $242 million. Limited partnership valuations dropped and the company took impairment writedowns, producing a $171 million revenue loss. Underperformance in U.S. retail brokerage tied to the business transformation plan and the September 11 charge of $68 million, net of recoveries, also weighed on results.
What is the planned spin-off of Aon's underwriting business?
Aon plans to spin off its insurance underwriting businesses to stockholders as a tax-free dividend of shares in a new company, Combined Specialty Corporation, expected in spring 2002. The company says this will let brokerage and consulting fund growth independently and let the underwriting business expand into commercial property and casualty lines. The transaction still requires final board approval, a favorable IRS ruling and certain insurance regulatory approvals.
How did the September 11 attacks affect Aon financially?
Aon lost 175 employees and an office in the World Trade Center. It recorded a $68 million pretax unusual charge, net of an estimated $207 million of insurance and reinsurance recoveries, and wrote off $33 million of destroyed assets. About $90 million of reinsurance recoveries under a Business Travel Accident policy is in dispute and in litigation, and further costs and recoveries are expected in 2002.
Is Aon's core business still performing well despite the weaker earnings?
Largely yes, according to the filing. Organic revenue growth was about 8% in the operating segments, and Consulting revenue rose 22% to a record $938 million. Insurance Brokerage remained the largest segment, with $4.7 billion in revenue. The main weakness was U.S. retail brokerage, where delayed implementation of the transformation plan hurt new business production and client retention.

04—Continue

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