Aon 4Q Net Income Drops 95%

National Underwriter News
February 6, 2009

Declining rates, a volatile economic climate and restructuring expenses combined to push Aon's fourth-quarter earnings down by 95 percent, company management reported today.

The Chicago-based insurance broker said fourth-quarter net income dropped $197 million to $10 million, or 4 cents a share, compared to net income of $207 million, or 69 cents for the prior year. Revenues in the quarter dropped 4 percent, or $82 million, to $1.9 billion.

For the year, net income increased 71 percent, or $614 million, from $864 million, or $2.90 a share in 2007 to $1.48 billion, or $5.18 a share for last year.

Despite the economic downturn and soft pricing market, Aon said it recorded fourth-quarter organic growth in its brokerage business of 2 percent. Among the best performers were the Americas and Asia Pacific units with 3 percent organic growth and Reinsurance unit reporting 2 percent organic growth.

During a conference call with financial analysts, Greg Case, president and chief executive officer of Aon, said the company's results exhibited "solid market growth." He said the results "show meaningful progress" for the firm especially in comparison to the performance of the rest of the industry.

"However, we are not immune to the effects of the current [economic] turmoil," he continued. "Our team is making tough decisions on multiple fronts to ensure that we drive performance and continue to deliver results for our shareholders."

Pricing in both retail and reinsurance brokerage activity was down to 2 percent decreases in the quarter compared to higher single-digit decreases in past quarters, an indication of some improvement, said Mr. Case.

The results were also impacted by restructuring charges amounting to $86 million in the quarter that included workforce reductions.

Aon said it plans to continue its workforce reductions, though it did not say by how much, as it works through the consolidation of Aon and reinsurance broker Benfield. Cuts are primarily planned in back-office operations and where redundancy of services is found, it was explained.

Christa Davies, executive vice president and chief financial officer for Aon, said the firm expects to incur another $100 million in costs for its 2007 restructuring plan for annual savings of $70 million. Most of these savings are expected to come from workforce reduction in brokerage, but she did not say how many positions are expected to be eliminated.

The total cost of Aon's 2007 restructuring plan is expected to run $550 million and experience an annual benefit of $370 million by 2010, management said.

On the Benfield deal, integration costs are expected to run $185 with annual savings of $122 million by 2011.

The results were also impacted by a $48 million increase in restructuring costs, $40 million of Benfield operating expenses and $11 million for reviews under the Foreign Corrupt Practices Act.

In January, Aon paid the United Kingdom's Financial Services Office a fine of close to $8 million for what were termed suspicious payments to individuals overseas in six countries. The payments were blamed on lax controls.

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