Aon Outperforms on Cost Savings

Aon Corporation’s (AOC) second quarter adjusted operating earnings (excluding non-recurring items) came in at 76 cents per share, compared to 70 cents in the year-ago quarter. Results were 2 cents ahead of the Zacks Consensus estimate of 74 cents.

Despite considerable volatility due to ongoing market challenges, Aon’s operating improvement; risk management, organic growth, and margin expansion were impressive during the quarter.

Net income for the quarter decreased 86.5% to $149 million or $0.52 per share, compared to $1.1 billion or $3.71 per share in the prior-year quarter.

Total revenue decreased 3.6% year over year to $1.9 billion primarily due to a 9.0% decline from foreign currency translation and a 69.0% decline in investment income. It was partially offset by a 7.0% increase from the Benfield acquisition.

In Risk and Insurance Brokerage Services, total revenue for the reported quarter decreased 2.4% year over year to $1.6 billion. In Consulting segment, total revenue decreased 10.7% year over year to $300 million, affected by a 9.0% unfavorable impact from foreign currency translation and a 1.0% organic revenue decline in commissions and fees.

Total operating expenses decreased 2.5% year over year at $1.7 billion, including a $160 million favorable impact from foreign currency translation partially offset by the inclusion of operating expenses from the Benfield merger and a $42 million increase in restructuring charges.

Effective tax rate on continuing operations increased to 27.1% from 25.2% in the prior-year quarter.

Foreign currency translation decreased net income by $0.03 per share compared to the prior-year quarter due to fluctuations in the U.S. dollar against most major currencies.

After-tax income from discontinued operations was $2 million or $0.01 per share, compared to $967 million or $3.26 per share in the prior-year quarter.

During the reported quarter, Aon repurchased 3.4 million of its common stock for $125 million.

Restructuring plan: Savings in the reported quarter related to 2007 restructuring program were estimated at $52 million compared to $16 million in the prior year quarter. The restructuring plan, prior to any potential reinvestment of savings, is expected to deliver approximately $240–265 million of savings in 2009, approximately $370 million in 2010.

Savings related to Benfield restructuring program were estimated at $10 million. The restructuring plan, prior to any potential reinvestment of savings, is expected to deliver approximately $33–41 million of savings in 2009, approximately $84–94 million in 2010 and approximately $122 million in 2011.

Not all of the components of the restructuring plan have been finalized and actual savings, total costs and timing may vary from those estimated due to changes in the scope or underlying assumptions of the plan.

Aon continues to heavily invest in client-servicing capabilities through the acquisition of Benfield and the introduction of Client Promise and Global Risk Insight Platform in Brokerage, which we think will drive value. Further, while Aon continues to win new clients from its business rivals and derive significant cost savings from its restructuring programs, continued weakness in the economy will hurt the results in the near term.

After reviewing the results, we are maintaining our Hold recommendation on the shares.

Read the full analyst report on AOC