Aon Lags on Brokerage Revenue

Aon Corporation’s (AOC - Analyst Report) third quarter 2009 adjusted operating earnings (excluding non-recurring items) came in at 65 cents per share, compared to 76 cents per share in the prior quarter and 69 cents in the year-ago quarter. Results were just a penny short of the Zacks Consensus estimate mainly due to lower investment income and organic brokerage revenue. 

Net income for the quarter increased 2.5% to $120 million or 41 cents per share, compared to $117 million or 40 cents per share in the prior-year quarter. 

Total revenue decreased 2.1% year over year to $1.8 billion primarily due to a 5.0% decline from foreign currency translation and a 69.0% decline in investment income. It was partially offset by a 9.0% increase from the Benfield acquisition. 

In Risk and Insurance Brokerage Services, total revenue for the reported quarter increased 1.1% year over year to $1.5 billion. However, in the Consulting segment, total revenue decreased 8.6% year over year to $308 million, affected by a 4.0% unfavorable impact from foreign currency translation and a 5.0% organic revenue decline in commissions and fees. 

Total operating expenses remained flat year over year at $1.6 billion, including an $82 million favorable impact from foreign currency translation, partially offset by the inclusion of operating expenses from the Benfield merger and a $45 million increase in restructuring charges. 

Effective tax rate on continuing operations increased to 26.7% from 27.1% in the prior-year quarter. 

Foreign currency translation decreased net income by 1 cent 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 $3 million or 1 cent per share, compared to a loss of $38 million or 13 cents per share in the prior-year quarter. 

During the reported quarter, Aon repurchased 3 million of its common stock for $125 million. 

Restructuring plan 

Savings in the reported quarter related to 2007 restructuring program were estimated at $68 million compared to $29 million in the prior year quarter. The restructuring plan, prior to any potential reinvestment of savings, is now expected to deliver approximately $240–245 million of savings in 2009, approximately $467 million in 2010. Earlier, it was expected to deliver $240–265 million of savings in 2009, approximately $370 million in 2010. 

Savings related to Benfield restructuring program were estimated at $14 million. The restructuring plan, prior to any potential reinvestment of savings, is expected to deliver approximately $45–50 million of savings in 2009, approximately $90–100 million in 2010 and approximately $122 million in 2011. Earlier, it was expected to deliver approximately $33–41 million of savings in 2009, approximately $84–94 million in 2010 and approximately $122 million in 2011. 

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.