Add
AOC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| AOC > SEC Filings for AOC > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-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
Variable Interest Entities
Restructuring Initiatives
Off Balance Sheet Arrangements
CRITICAL ACCOUNTING POLICIES
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
EXECUTIVE SUMMARY
The current global economic recession is providing significant headwinds 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 compared to last year. 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 volumes, 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.
As a result of this difficult market environment, organic revenue for the quarter declined in both our brokerage and consulting segments. We continue to demonstrate expense discipline, holding expenses to last year's levels while we continue to invest in our businesses.
Overall organic revenue declined 3% and 1% for the third quarter and nine months 2009, respectively. See our discussion below for more details regarding organic revenue.
Our consolidated pretax margins from continuing operations for the quarter declined from 11.8% in 2008 to 9.8% in 2009. The decline was principally driven by a 2% decline in revenue. Operating expenses were unchanged, despite a $45 million increase in restructuring charges, due to restructuring savings and a reduction in discretionary incentives. Year-to-date margins increased from 12.3% last year to 13.2% in 2009. The improvement is primarily attributable to net $78 million pension curtailment gains related to the decision to cease crediting future benefits relating to salary and service in our U.S. and Canada defined benefit pension plans, restructuring savings, and a reduction in discretionary incentives, which more than offsets a 3% decline in revenue, a $70 million increase in restructuring charges, lower investment income and the unfavorable impact of foreign currency translation.
The following is a summary of our third quarter and nine months 2009 financial results:
† Revenue decreased $38 million or 2% for the quarter and $160 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. Organic revenue declined due primarily to weak economic conditions globally.
† Operating expenses were comparable with last year for the quarter and decreased 4% for nine months 2009, due primarily to favorable foreign exchange translation, restructuring and other operational expense savings, and a reduction in discretionary incentives, partially offset by the impact of the Benfield merger and other acquisitions and higher restructuring charges. Nine months 2009 expenses were favorably impacted by the net $78 million pension curtailment gain previously described, restructuring and other operational expense savings and a reduction in discretionary incentives, which more than offset the decline in revenue, increased restructuring charges and lower investment income.
† Net income from continuing operations attributable to Aon stockholders decreased $38 million from third quarter 2008 to $117 million. For nine months 2009, net income from continuing operations attributable to Aon stockholders decreased $4 million to $494 million.
† Diluted earnings per share from continuing operations attributable to Aon's stockholders were $0.40 for the third quarter 2009, a decrease of 25% from $0.53 per share in 2008. Nine months diluted earnings per share increased from $1.61 in 2008 to $1.69 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 information related to 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):
Third quarter ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
Revenue:
Commissions, fees and other $ 1,780 $ 1,756 $ 5,466 $ 5,493
Investment income 28 90 81 214
Total revenue 1,808 1,846 5,547 5,707
Expenses:
Compensation and benefits 1,119 1,131 3,267 3,428
Other general expenses 424 419 1,287 1,333
Depreciation and amortization 56 49 174 157
Total operating expenses 1,599 1,599 4,728 4,918
209 247 819 789
Interest expense 32 32 87 96
Other (income) expense (1 ) (3 ) 1 (9 )
Income from continuing
operations before income
taxes $ 178 $ 218 $ 731 $ 702
Pretax margin - continuing
operations 9.8 % 11.8 % 13.2 % 12.3 %
|
Revenue
Commissions, fees and otherincreased by $24 million, or 1%, for the quarter but decreased $27 million for nine months. Both quarter and nine month 2009 results were positively influenced by the inclusion of revenue from the merger with Benfield. Negatively impacting both periods was foreign currency translation, which was $81 million for the quarter and $442 million for nine months. Overall organic revenue declined 3% for the quarter and 1% for the nine month period.
Investment income decreased $62 million for the quarter and $133 million for nine months reflecting significantly lower revenue from our PEPS I investment, the impact of lower interest rates, lower investment balances, and the negative impact of foreign currency translation.
Expenses
Compensation and benefits decreased $12 million or 1% for the quarter and $161 million or 5% for nine months. For the quarter, the decrease was driven by a $56 million favorable impact from foreign currency translation, lower discretionary incentive compensation costs and continued restructuring savings, partially offset by $14 million of increased 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 $290 million favorable impact from foreign currency translation, 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, lower discretionary incentive compensation costs and continued restructuring savings. These items were partially offset by higher expenses from the inclusion of Benfield's operations in 2009 and $32 million in increased restructuring charges.
Other general expenses increased $5 million or 1% for the quarter and decreased $46 million or 3% for nine months. Favorable foreign currency translation impacted the quarter and nine months by $20 million and $111
million, respectively. For the quarter, higher restructuring and Benfield's operational costs more than offset restructuring savings and the impact of foreign exchange. For nine months, the benefits of operational expense management, lower E&O costs, reduced expenses related to the FCPA and anti-corruption reviews and related compliance initiatives, restructuring savings and the impact of foreign exchange exceeded the additional costs related to Benfield and higher restructuring charges.
Depreciation and amortization expense increased $7 million for the quarter and $17 million for nine months. Higher amortization expense related to the Benfield merger and the charge associated with asset impairments taken as part of our restructuring plans more than offset the favorable impact of foreign exchange. The year-to-date increase is driven by the higher intangible amortization related to the Benfield merger, which more than offset the favorable foreign exchange impact.
Interest expense was unchanged for the quarter and decreased $9 million for nine months principally reflecting the impact of lower interest rates and favorable foreign exchange translation.
Other income of $1 million for the quarter primarily represents a net gain on the disposal of several small operations. In 2008, the $3 million of income represented a restructuring of ownership interests of one of our subsidiaries, partially offset by expenses related to the acquisition of Benfield. On a year-to-date basis, $1 million of other expense includes $13 million of Benfield integration costs, which more than offset a $5 million gain from the extinguishment of $15 million of Junior Subordinated Debentures and net gains on disposal of operations. In 2008, we recorded $9 million of income, which included the restructuring of ownership interests of one of our subsidiaries and a $5 million gain on the sale of land in the U.K, partially offset by expenses related to the Benfield acquisition.
Income from Continuing Operations before Income Taxes
Income from continuing operations before income taxes decreased $40 million or 18% to $178 million for the quarter but increased $29 million or 4% for nine months. Both periods were negatively impacted by lower investment income and higher restructuring costs, and for the nine month period, foreign exchange translation. For the quarter, these items more than offset the positive impact of the Benfield merger and other acquisitions as well as restructuring and other operational expense savings. The year-to-date improvement was driven by the net $78 million pension curtailment gain, partially offset by those items listed above.
Income Taxes
The effective tax rate for continuing operations was 26.7% for third quarter 2009 compared to 27.1% for third quarter 2008. On a year-to-date basis, the effective tax rate for continuing operations was 29.1% and 27.4% 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 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 29% for 2008.
Income from Continuing Operations
Income from continuing operations for third quarter 2009 and 2008 was $131 million and $159 million, respectively. Diluted income per share in the third quarter 2009 was $0.40 versus $0.53 in 2008. Income from continuing operations for nine months 2009 and 2008 was $519 million and $510 million, respectively. Diluted income per share for nine months 2009 was $1.69 versus $1.61 in 2008. Currency fluctuations negatively impacted income from continuing operations in 2009 by $0.01 per diluted share in the quarter and $0.06 for nine months when we translate 2008 results at current period foreign exchange rates. Our diluted per share calculations were favorably impacted this year primarily by lower shares outstanding as a result of shares acquired as part of our share repurchase program.
Discontinued Operations
Third quarter income from discontinued operations was $3 million for 2009 or $0.01 per diluted share, versus a $38 million loss for 2008 or ($0.13) per diluted share. Nine months income from discontinued operations was $55 million for 2009 or $0.19 per diluted share, versus $1.0 billion for 2008 or $3.14 per diluted share. Results for third quarter 2009 primarily reflect adjustments to the gains and losses of previously sold companies. Results for nine months 2009 include our FFG operations through the date of disposal, 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 third quarter 2008 primarily reflect an adjustment to the gain on the sale of our CICA and Sterling businesses. Year-to-date 2008 results include both the gain on the sale of CICA and Sterling as well as their operating results through the date of sale. Results for AIS and FFG are also included for both the three and nine 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):
Third quarter ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
Commissions, fees and other revenue: (1)
(2)
Risk and Insurance Brokerage Services $ 1,471 $ 1,425 $ 4,550 $ 4,501
Consulting 308 335 916 1,012
Investment income:
Risk and Insurance Brokerage Services 18 48 67 148
Consulting - 2 1 4
Income from continuing operations before
income taxes:
Risk and Insurance Brokerage Services 188 192 726 669
Consulting 33 52 144 158
Pretax margins - continuing operations:
Risk and Insurance Brokerage Services 12.6 % 13.0 % 15.7 % 14.4 %
Consulting 10.7 % 15.4 % 15.7 % 15.6 %
|
Risk and Insurance Brokerage Services
Aon is a leader in many sectors of the insurance industry. Aon was ranked in
2009 and 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 in 2008 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. During 2009, we continued to see a soft market in our retail business. In reinsurance, pricing overall was flat to up slightly, but was more than offset by higher cedant retentions. 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 and continuing throughout 2009, we faced difficult conditions as a result of unprecedented disruptions in the global economy, the repricing of credit risk and the deterioration of financial markets. Continued volatility and further deterioration in the credit markets have reduced our customers' demand for our brokerage and reinsurance services and products, which have hurt our operational results. 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 83% of Aon's total operating segment revenues for both the third quarter and first nine 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):
Third Quarter Ended September 30,
Less:
Less: Acquisitions, Organic
Percent Currency Divestitures, Revenue
2009 2008 Change Impact & Other Growth
Americas $ 541 $ 557 (3 )% (2 )% - % (1 )%
United Kingdom 167 182 (8 ) (9 ) 5 (4 )
Europe, Middle East
& Africa 273 314 (13 ) (7 ) (1 ) (5 )
Asia Pacific 111 120 (8 ) (5 ) (2 ) (1 )
Reinsurance 379 252 50 (4 ) 58 (4 )
Total $ 1,471 $ 1,425 3 % (5 )% 11 % (3 )%
Nine Months Ended September 30,
Less:
Less: Acquisitions, Organic
Percent Currency Divestitures, Revenue
2009 2008 Change Impact & Other Growth
Americas $ 1,592 $ 1,638 (3 )% (4 )% - % 1 %
United Kingdom 464 546 (15 ) (14 ) 4 (5 )
Europe, Middle East
& Africa 1,030 1,188 (13 ) (11 ) - (2 )
Asia Pacific 318 373 (15 ) (12 ) (2 ) (1 )
Reinsurance 1,146 756 52 (6 ) 58 -
Total $ 4,550 $ 4,501 1 % (8 )% 10 % (1 )%
|
† The 3% decline in Americas revenue for the quarter is driven by unfavorable foreign currency translation and overall economic weakness, especially in the construction and private equity sectors, which more than offset strong organic revenue growth in Latin America. Year-to-date, the decline was driven by unfavorable foreign currency translation, as organic revenue growth was 1% due to strong growth in Latin America and growth in our U.S. retail operations despite overall economic weakness.
† U.K. revenue declined 8% for the quarter and 15% for nine months due to unfavorable foreign currency translation and a 4% and 5% decline in organic revenue for the quarter and nine months, respectively, reflecting weak economic conditions as well as lower retention and new business.
† Europe, Middle East & Africa revenue decreased 13% for both the quarter and nine months, mainly reflecting unfavorable foreign currency translation. Organic revenue declined 5% for the quarter and 2% for nine months, reflecting weak economic conditions in continental Europe and slower growth in emerging markets.
† Asia Pacific revenue declined 8% for the quarter and 15% for nine months, driven by unfavorable foreign currency translation and a 1% organic revenue decline for both periods. The decline in organic revenue for both periods reflects the impact from exiting certain businesses in Japan, economic weakness in Asia, and political unrest in Thailand, partially offset by growth in New Zealand and certain emerging markets.
† Reinsurance revenue increased 50% for the quarter and 52% for nine months due to the impact of the fourth quarter 2008 Benfield merger and the Gallagher Re acquisition in first quarter 2008. Organic revenue declined 4% for the quarter due primarily to higher cedant retentions in our treaty business, partially offset by new net business globally in treaty placements.
Income from Continuing Operations before Income Taxes
Third quarter 2009 income from continuing operations before income taxes decreased $4 million to $188 million while nine months 2009 income from continuing operations before income taxes was $726 million, a $57 million increase. In 2009, the quarterly pretax margin in this segment was 12.6%, down 40 basis points from 13.0% in 2008. On a year-to-date basis the pretax margin was 15.7%, up 130 basis points from 14.4% in 2008. Contributing to the decreased margins and pretax income for the quarter are:
† $31 million in higher restructuring costs, † $30 million lower investment income, and † higher amortization costs related to the Benfield intangible assets. |
These declines were partially offset by:
† restructuring savings, † other cost saving initiatives, † lower discretionary incentive costs, and † $5 million in lower costs related to anti-corruption and compliance initiatives |
Contributing to the nine months increased margins and pretax income were:
† a $54 million gain from the pension curtailments, † $28 million in lower costs related to anti-corruption and compliance initiatives, † the inclusion of Benfield results, † restructuring savings, † lower discretionary incentive costs, and † other cost saving initiatives. |
These improvements were partially offset by:
† $81 million of lower investment income, † $57 million of higher restructuring costs, † the impact of unfavorable foreign exchange rates, 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 17% of Aon's total operating segment revenue for both third quarter and nine months 2009.
Beginning in late 2008 and continuing throughout 2009, the disruption in the global credit markets and the deterioration of financial markets created significant uncertainty in the marketplace. The prolonged economic downturn is . . .
|
|