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| AOC > SEC Filings for AOC > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
The outline for our Management's Discussion and Analysis is as follows:
EXECUTIVE SUMMARY
REVIEW OF CONSOLIDATED RESULTS
General
Consolidated Results
REVIEW BY SEGMENT
General
Risk and Insurance Brokerage Services
Consulting
Unallocated Income and Expense
FINANCIAL CONDITION AND LIQUIDITY
Cash Flows
Financial Condition
Borrowings
Equity
Restructuring Initiatives
Off Balance Sheet Arrangements
Contractual Obligations
CRITICAL ACCOUNTING POLICIES
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
EXECUTIVE SUMMARY
The current global economic recession is providing significant headwind for our business. We continue to operate in a soft insurance pricing market, as property and casualty rates continue to decline, although at a somewhat slower pace. In addition to pricing declines, we are seeing a volume impact driven by the current economic environment, which places pressure on our business in three primary ways:
† declining insurable risks due to decreasing asset values, including property values, shipment volume, payroll and number of active employees,
† client cost-driven behavior, where clients are actively looking to reduce spending in order to meet budget reductions and increase risk retention, as a result of prioritizing their total spending, and
† sector specific weakness, including financial services, construction, private equity, and mergers and acquisitions, all of which have been particularly impacted by the current recession.
Despite this difficult market environment, we grew the business organically in our Americas retail business and our reinsurance business. We are demonstrating expense discipline, enabling investment in our business and concurrently improving our margin.
Overall organic revenue was essentially unchanged for both the second quarter and six months 2009. See our discussion below for more details regarding organic revenue growth.
Our consolidated pretax margins from continuing operations for the quarter declined from 11.6% in 2008 to 11.1% in 2009. The decline was principally driven by a 4% decline in revenue, which more than offset a 3% decline in operating expenses, which include increased restructuring charges. Year-to-date margins increased from 12.5% last year to 14.8% in 2009. The improvement is mainly attributable to a net $78 million pension curtailment gain related to the decision to cease crediting future benefits relating to salary and service in our U.S. and Canada defined benefit pension plans, as well as restructuring savings, which more than offset lower investment income and the unfavorable impact of foreign currency translation.
The following is a summary of our second quarter and six months 2009 financial results:
† Revenue decreased $71 million or 4% for the quarter and $122 million or 3% year-to-date, as the negative effect of foreign exchange translation and significantly lower investment income was only partially offset by the impact of the Benfield merger and other acquisitions.
† Operating expenses decreased 3% and 6% for the quarter and six months 2009, respectively, due primarily to favorable foreign exchange translation and restructuring savings, partially offset by the impact of the Benfield merger and other acquisitions and higher restructuring charges. Six months 2009 expenses were favorably impacted by the net $78 million pension curtailment gain previously described.
† Income from continuing operations attributable to Aon stockholders decreased $19 million from second quarter 2008 to $147 million. For six months 2009, income from continuing operations attributable to Aon stockholders increased $34 million to $377 million, driven by the pension curtailment gain.
† Diluted earnings per share from continuing operations attributable to Aon's stockholders was $0.51 for the second quarter 2009, a decrease of 6% from $0.54 per share in 2008. Six months diluted earnings per share increased from $1.10 in 2008 to $1.30 in 2009.
REVIEW OF CONSOLIDATED RESULTS
General
In our discussion of operating results, we sometimes refer to supplemental information derived from our consolidated financial information.
We use supplemental information related to organic revenue growth to help us and our investors evaluate business growth from existing operations. Organic revenue growth excludes the impact of foreign exchange rate changes, acquisitions, divestitures, transfers between business units, investment income, reimbursable expenses, and unusual items.
Supplemental organic revenue growth represents a non-GAAP measure and should be viewed in addition to, not instead of, our condensed consolidated statements of income. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments.
Because we conduct business in over 120 countries, foreign exchange rate fluctuations have an impact on our business. In comparison to the U.S. dollar, foreign exchange rate movements may be significant and may distort true period-to-period comparisons of changes in revenue or pretax income. Therefore, we have:
† isolated the impact of the change in currencies between periods by translating last year's revenue and expenses at this year's foreign exchange rates, and
† provided this form of reporting to give financial statement users more meaningful information about our operations.
Some tables in the segment discussions reconcile organic revenue growth percentages to the reported commissions, fees and other revenue growth percentages. We disclose separately:
† the impact of foreign currency, and
† the impact from acquisitions, divestitures, transfers of business units, reimbursable expenses, and unusual items, which represent the most significant reconciling items.
Consolidated Results
The consolidated results of continuing operations are as follows (in millions):
Second Quarter Ended Six Months Ended
June 30, June 30,
(millions) 2009 2008 2009 2008
Revenue:
Commissions, fees and other $ 1,864 $ 1,889 $ 3,686 $ 3,737
Investment income 21 67 53 124
Total revenue 1,885 1,956 3,739 3,861
Expenses:
Compensation and benefits 1,134 1,143 2,148 2,297
Other general expenses 466 500 863 914
Depreciation and amortization 58 58 118 108
Total operating expenses 1,658 1,701 3,129 3,319
227 255 610 542
Interest expense 26 31 55 64
Other (income) expense (9 ) (2 ) 2 (6 )
Income from continuing
operations before income taxes $ 210 $ 226 $ 553 $ 484
Pretax margin - continuing
operations 11.1 % 11.6 % 14.8 % 12.5 %
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Revenue
Commissions, fees and otherdecreased by $25 million for the quarter and $51 million for six months. The 1% decrease in both periods was driven by the negative impact from foreign currency translation, which was $171 million for the quarter and $361 million for six months, partially offset by inclusion of Benfield's revenue in 2009 results. Overall organic revenue remained flat for both the quarter and the six month period.
Investment income decreased $46 million for the quarter and $71 million for six months reflecting the impact of lower interest rates, lower investment balances, and the negative impact of foreign currency translation.
Expenses
Compensation and benefits decreased $9 million or 1% for the quarter and $149 million or 6% for six months. For the quarter, the decrease was driven by a $111 million favorable impact from foreign currency translation and restructuring savings, partially offset by $35 million of higher restructuring costs and higher expenses due to the inclusion of Benfield's operations in 2009. On a year-to-date basis, the decrease is due to a $234 million favorable impact from foreign currency translation, restructuring savings, and a net $78 million pension curtailment gain related to the decision to cease crediting future benefits relating to salary and service in our U.S. and Canadian defined benefit pension plans. These items were partially offset by higher expenses from the inclusion of Benfield's operations in 2009 and $19 million in higher restructuring charges.
Other general expenses decreased $34 million or 7% for the quarter and $51 million or 6% for six months. The decline was driven by $44 million and $91 million in favorable foreign currency translation on a quarterly and year-to-date basis, respectively, lower E&O costs and reduced expenses related to the FCPA and anti-corruption reviews and related compliance initiatives, partially offset by Benfield's cost of operations and higher restructuring charges.
Depreciation and amortization expense was consistent for the second quarter 2009 and 2008 and increased $10 million or 9% for six months, with favorable foreign currency translation impacting both periods. Higher amortization expense related to the Benfield merger offset the impact of asset impairments taken in 2008 as part of the 2007 restructuring plan. The year-to-date growth is driven by the higher intangible amortization related to the Benfield merger.
Interest expense decreased $5 million for the quarter and $9 million for six months reflecting the impact of lower interest rates and favorable foreign exchange translation.
Other income of $9 million for the current quarter includes a $5 million gain on the extinguishment of $15 million of junior subordinated debentures, and a net gain on the disposal of several small operations, partially offset by costs related to the integration of Benfield. In 2008, the $2 million of income represented a gain from the disposal of businesses. On a year-to-date basis, $2 million of other expense includes $12 million of Benfield integration costs, which more than offset gains from the extinguishment of $15 million junior subordinated debentures and net gains on disposal of operations. In 2008, we recorded $6 million of income for six months, which included a $5 million gain on the sale of land in the U.K.
Income from Continuing Operations Before Income Taxes
Income from continuing operations before income taxes decreased $16 million or 7% to $210 million for the quarter, but increased $69 million or 14% for six months. Both periods were impacted by the unfavorable impact of foreign exchange translation, lower investment income and higher restructuring costs. For the quarter, these items more than offset the positive impact of the Benfield merger and other acquisitions, and restructuring savings. The year-to-date improvement, despite those items listed above, was driven by the net $78 million pension curtailment gain.
Income Taxes
The effective tax rate for continuing operations was 27.1% for second quarter 2009 compared to 25.2% for second quarter 2008. On a year-to-date basis, the effective tax rate for continuing operations was 29.8% and 27.5% for 2009 and 2008, respectively. The rates for all periods were favorably impacted by the benefit of statutory rate reductions in key operating jurisdictions in 2008 and the projected geographic distribution of earnings in both years. The increase from 2008 on a year-to-date basis was driven by the tax impact of the U.S. pension curtailment gain. The underlying tax rate for continuing operations is expected to be 28% for 2009 and was 30% for 2008.
Income from Continuing Operations
Income from continuing operations for second quarter 2009 and 2008 was $153 million and $169 million, respectively. Diluted income per share in the second quarter 2009 was $0.51, versus $0.54 in 2008. Income from continuing operations for six months 2009 and 2008 was $388 million and $351 million, respectively. Diluted income per share for six months 2009 was $1.30, versus $1.10 in 2008. Currency fluctuations negatively impacted income from continuing operations in 2009 by $0.03 per diluted share in the quarter and $0.05 for six months when we translate the 2008 results at current period foreign exchange rates. Our diluted per share calculations were favorably impacted this year by lower shares outstanding as a result of shares acquired as part of our share repurchase program.
Discontinued Operations
Second quarter income from discontinued operations was $2 million for 2009 ($0.01 per diluted share), versus income of $967 million for 2008 ($3.17 per diluted share). Six months income from discontinued operations was $52 million for 2009 ($0.18 per diluted share), versus income of $1.0 billion for 2008 ($3.22 per diluted share). Results for second quarter 2009 primarily reflects our FFG operations. Results for six months 2009 include our FFG operations, as well as the gain on the sale of AIS, a curtailment gain on the post-retirement benefit plan related to the CICA disposal and residual tax settlements related to our
AWG disposal. Our results for second quarter and six months 2008 primarily reflect the gain on the sale of our CICA and Sterling businesses, which were sold on April 1, 2008. Year-to-date 2008 results also include CICA and Sterling's operations through the date of sale. Results for AIS and FFG are also included for both the three and six month periods in 2008.
REVIEW BY SEGMENT
General
We classify our businesses into two operating segments: Risk and Insurance Brokerage Services and Consulting.
Segment revenue includes investment income generated by invested assets of that segment, as well as the impact of related derivatives. Our Risk and Insurance Brokerage Services and Consulting businesses invest funds held on behalf of clients and operating funds in short-term obligations.
The following table and commentary provide selected financial information on the operating segments (in millions):
Second Quarter Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
Commissions, fees and other
revenue: (1) (2)
Risk and Insurance Brokerage
Services $ 1,559 $ 1,561 $ 3,079 $ 3,076
Consulting 300 335 608 677
Investment income:
Risk and Insurance Brokerage
Services 19 49 49 100
Consulting - 1 1 2
Income from continuing operations
before income taxes:
Risk and Insurance Brokerage
Services 210 234 538 477
Consulting 41 43 111 106
Pretax margins-continuing
operations:
Risk and Insurance Brokerage
Services 13.3 % 14.5 % 17.2 % 15.0 %
Consulting 13.7 % 12.8 % 18.2 % 15.6 %
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(2) Intersegment revenues of $12 million and $16 million were included in six months 2009 and 2008, respectively.
Risk and Insurance Brokerage Services
Aon is a leader in many sectors of the insurance industry. Aon was ranked in 2008 by Business Insurance as the world's largest insurance broker, by A.M. Best as the number one global insurance brokerage based on brokerage revenues, and voted the best insurance intermediary and best reinsurance intermediary by the readers of Business Insurance.
In 2008, we experienced a soft market in many business lines/segments and in many geographic areas. In a soft market, premium rates flatten or decrease, along with commission revenues, due to increased competition for market share among insurance carriers or increased underwriting capacity. Prices fell throughout the year,
although the rate of decline slowed toward the end of the year. In the first half of 2009, we continued to see a soft market in our retail business. In reinsurance, pricing overall was flat to up slightly, with firmer pricing primarily in the U.S. property catastrophe areas. Changes in premiums have a direct and potentially material impact on the insurance brokerage industry, as commission revenues are generally based on a percentage of the premiums paid by insureds.
Beginning in late 2008, we faced difficult conditions as a result of unprecedented disruptions in the global economy, the repricing of credit risk and the deterioration of the financial markets. Continued volatility and further deterioration in the credit markets may reduce our customers' demand for our brokerage and reinsurance services and products, which could hurt our operational results and financial condition. In addition, overall capacity in the industry could decrease if a significant insurer either fails or withdraws from writing insurance coverages that we offer our clients. This failure could reduce our revenues and profitability, since we would no longer have access to certain lines and types of insurance.
Risk and Insurance Brokerage Services generated approximately 84% of Aon's total operating segment revenues for both the second quarter and first six months of 2009. Revenues are generated primarily through:
† fees paid by clients, † commissions and fees paid by insurance and reinsurance companies, and † interest income on funds held on behalf of clients. |
Our revenues vary from quarter to quarter throughout the year as a result of:
† the timing of our clients' policy renewals, † the net effect of new and lost business, † the timing of services provided to our clients, and † the income we earn on investments, which is heavily influenced by short-term interest rates. |
Revenue
These tables show Risk and Insurance Brokerage Services commissions, fees and
other revenue (in millions):
Second Quarter Ended June 30,
Less:
Less: Acquisitions, Organic
Percent Currency Divestitures, Revenue
(millions) 2009 2008 Change Impact & Other Growth
Americas $ 574 $ 588 (2 )% (4 )% (1 )% 3 %
United Kingdom 181 214 (15 ) (14 ) 4 (5 )
Europe, Middle
East & Africa 309 364 (15 ) (14 ) 2 (3 )
Asia Pacific 123 147 (16 ) (14 ) (1 ) (1 )
Reinsurance 372 248 50 (7 ) 53 4
Total $ 1,559 $ 1,561 - % (9 )% 9 % - %
Six Months Ended June 30,
Less:
Less: Acquisitions, Organic
Percent Currency Divestitures, Revenue
(millions) 2009 2008 Change Impact & Other Growth
Americas $ 1,051 $ 1,081 (3 )% (4 )% (1 )% 2 %
United Kingdom 297 364 (18 ) (16 ) 3 (5 )
Europe, Middle
East & Africa 757 874 (13 ) (13 ) 1 (1 )
Asia Pacific 207 253 (18 ) (16 ) (1 ) (1 )
Reinsurance 767 504 52 (7 ) 57 2
Total $ 3,079 $ 3,076 - % (10 )% 10 % - %
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† The decline in Americas revenue is 2% for the quarter and 3% for six months, driven by unfavorable foreign currency translation, partially offset by organic revenue growth of 3% and 2% for the second quarter and six months, respectively, reflecting strong growth in Latin America and strong new business in our U.S. retail operations. This growth was tempered by soft market conditions, as well as overall economic weakness, especially in the construction and private equity sectors.
† U.K. revenue declined 15% for the quarter and 18% for six months due to unfavorable foreign currency translation and a 5% decline in organic revenue for both periods, reflecting weak economic conditions as well as lower new business.
† Europe, Middle East & Africa revenue decreased 15% and 13% for the quarter and six months, respectively, reflecting unfavorable foreign currency translation. Organic revenue declined 3% for the quarter and 1% for six months reflecting weak economic conditions in continental Europe and slower growth in emerging markets.
† Asia Pacific revenue declined 16% for the quarter and 18% for six months, driven by unfavorable foreign currency translation and a 1% organic decline for both periods, reflecting the impact from exiting certain businesses in Japan, economic weakness in Asia, and political unrest in Thailand partially offset by strong growth in New Zealand and modest growth in Australia.
† Reinsurance revenue increased 50% for the quarter and 52% for six months due to the impact of the Benfield merger in fourth quarter 2008, Gallagher Re acquisition in first quarter 2008 and organic revenue growth. Organic growth for the quarter and six months was 4% and 2%, respectively, driven primarily by growth in global treaty placements and a
slight hardening of markets.
Income from Continuing Operations Before Income Taxes
Second quarter 2009 income from continuing operations before income taxes decreased $24 million to $210 million while six months 2009 income from continuing operations before income taxes was $538 million, a $61 million increase. In 2009, the quarterly pretax margin in this segment was 13.3%, down 120 basis points from 14.5% in 2008. On a year-to-date basis the pretax margin was 17.2%, up 220 basis points from 15.0% in 2008. Contributing to the decreased margins and pretax income for the quarter are:
† $43 million in higher restructuring costs, † $30 million lower investment income, † $16 million impact of unfavorable foreign exchange rates, and † higher amortization costs related to the Benfield intangible assets. |
These declines were partially offset by:
† $10 million in lower costs related to anti-corruption and compliance initiatives,
† restructuring savings, and
† lower E&O expenditures.
Contributing to the six months increased margins and pretax income were:
† a $54 million gain from the pension curtailments, † $23 million in lower costs related to anti-corruption and compliance initiatives, † the inclusion of Benfield results, and † restructuring savings. |
These improvements were partially offset by:
† $51 million of lower investment income, † $35 million impact of unfavorable foreign exchange rates, † $25 million of higher restructuring costs, † a $5 million gain in 2008 related to the sale of land, and † higher intangible amortization costs related to Benfield. |
Consulting
Aon Consulting is one of the world's largest integrated human capital consulting organizations. Our Consulting segment:
† provides a broad range of consulting services and outsourcing, and
† generated 16% of Aon's total operating segment revenue for both second quarter and six months 2009.
Beginning in late 2008, the disruption in the global credit markets and the deterioration of the financial markets created significant uncertainty in the marketplace. A severe and/or prolonged economic downturn could hurt our clients' financial condition and the levels of business activities in the industries and geographies where we operate. While we believe that the majority of our practices are well positioned to manage through this time, these challenges may reduce demand for some of our services or depress pricing of those services and have an adverse effect on our new business and results of operations.
Consulting Services are provided in the following practice areas:
† Health and Benefits advises clients about how to structure, fund, and administer employee benefit programs that attract, retain, and motivate employees. Benefits consulting includes health and welfare, executive benefits, workforce strategies and productivity, absence management, benefits administration, data-driven health, compliance, employee commitment, investment advisory and elective benefits services.
† Retirement professionals specialize in global actuarial services, defined contribution consulting, investment consulting, tax and ERISA consulting, and pension administration.
† Compensation focuses on compensatory advisory/counsel including: . . .
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