10-QPeriod: Q3 FY2008

Aon plc Quarterly Report for Q3 Ended Sep 30, 2008

Filed November 7, 2008For Securities:AON

Summary

Aon plc's third quarter 2008 report shows a mixed financial performance, with net income at $117 million for the quarter, down from $204 million in the prior year. However, income from continuing operations increased to $153 million from $130 million. Revenue saw a 5% increase to $1.85 billion, primarily driven by growth in the Risk and Insurance Brokerage Services and Consulting segments, benefiting from foreign currency translation and organic growth. The company is navigating a challenging economic environment, with the ongoing credit market disruptions impacting financial institutions. Aon is actively managing its business through significant restructuring initiatives, aiming for annualized cost savings of $300 million by 2010. The company also announced a major agreement to acquire Benfield Group Limited for approximately $1.56 billion, signaling a strategic move to enhance its reinsurance brokerage capabilities, though this acquisition introduces integration risks. Financially, Aon repurchased a significant amount of its stock ($1.9 billion year-to-date), though this activity was suspended in August due to the pending Benfield acquisition. The company maintained a solid liquidity position with $478 million in cash and $1.9 billion in short-term investments. Despite some headwinds from restructuring charges and litigation expenses, Aon demonstrates resilience and strategic focus on growth through acquisitions and operational efficiencies.

Financial Highlights

27 data points
Beta

Revenue

$1.85B

Net Income

$117.00M

6.3% Net Margin

EPS (Diluted)

$0.40

Cash & Equivalents

$478.00M

Free Cash Flow

-$253.00M

Financial Statements
Beta
Revenue$1.85B
Operating Expenses$1.60B
Operating Income$247.00M
Interest Expense$32.00M
Net Income$117.00M
EPS (Basic)$0.42
EPS (Diluted)$0.40
Shares Outstanding (Basic)281.70M
Shares Outstanding (Diluted)293.90M

Key Highlights

  • 1Net income for the quarter was $117 million, a decrease from $204 million in Q3 2007, but income from continuing operations rose to $153 million from $130 million.
  • 2Total revenue increased by 5% to $1.85 billion, driven by growth in Risk and Insurance Brokerage Services and Consulting segments, supported by favorable foreign currency translation and organic growth.
  • 3Aon announced a definitive agreement to acquire Benfield Group Limited for approximately $1.56 billion, a significant move to bolster its reinsurance brokerage business.
  • 4The company incurred $52 million in restructuring charges in the third quarter, as part of a larger global restructuring plan aimed at achieving substantial cost savings by 2010.
  • 5Share repurchases totaled $1.9 billion year-to-date, though this activity was suspended in August due to the pending Benfield acquisition.
  • 6The company ended the quarter with $478 million in cash and $1.95 billion in short-term investments, indicating a stable liquidity position.
  • 7Discontinued operations resulted in a net loss of $36 million for the quarter, primarily due to the reclassification of AIS Management Corporation to discontinued operations and related provisions.

Frequently Asked Questions

The credit market disruptions have created challenging conditions for financial institutions, including the insurance industry. Aon notes that continued volatility and further deterioration in credit markets may reduce customer demand for its services and could negatively impact its results. However, the company has not reported a material adverse effect directly from these disruptions on its core brokerage and consulting operations in this quarter, but it is a noted risk factor.

Aon is executing a global restructuring plan, initiated in 2007, aimed at streamlining operations and reducing expenses. The plan is estimated to result in cumulative pretax charges of approximately $450 million. The company expects annualized cost savings of $75-$80 million in 2008, $220-$245 million in 2009, and $300 million by 2010. In the third quarter of 2008, Aon recorded $52 million in restructuring and related expenses.

The acquisition of Benfield Group Limited for approximately $1.56 billion is intended to significantly enhance Aon's reinsurance brokerage capabilities, creating a leading global reinsurance intermediary under the Aon Benfield Re brand. While the transaction is expected to close in the fourth quarter of 2008, it introduces integration risks and requires significant financial commitment. Aon suspended its share repurchase program in August 2008 to conserve capital for this acquisition. The company funded the transaction with cash on hand.

The sale of Combined Insurance Company of America (CICA) and Sterling Life Insurance Company was completed in the first quarter of 2008, generating approximately $2.9 billion in cash. This transaction resulted in a pretax gain of $1.4 billion, which was largely recognized in the first nine months of 2008, contributing significantly to the net income from discontinued operations. The proceeds from these sales were also used to fund share repurchases.