Aon Falls After Insurance Brokerage Misses Estimates (Update1)

By Doug Alexander
Bloomberg News
May 1, 2009

May 1 (Bloomberg) -- Aon Corp., the world's largest insurance brokerage, dropped the most since October 2004 after profit missed analysts' estimates because the recession is cutting into commissions.

Aon fell $5.82, or 14 percent, to $36.38 at 4:05 p.m. in New York Stock Exchange composite trading, the worst in the Standard & Poor's 500 Stock Index. First-quarter net income rose 28 percent to $280 million, or 97 cents a share, from $218 million, or 68 cents, a year earlier, the Chicago-based broker said today in a statement.

Aon's profit has been under pressure as insurance prices decline and companies scale back coverage. Brokers make commissions by matching buyers and sellers of insurance, taking a percentage of the deal for themselves. Revenue fell 3 percent to $1.85 billion, while operating expenses dropped 9 percent after Chief Executive Officer Gregory Case cut at least 3,200 jobs since 2007, saving Aon $41 million in the quarter.

"The realities of the economic recession for our clients will continue to pressure volume and constrain organic growth for the industry in the near future," Case said in the statement.

Profit excluding units Aon has agreed to sell rose 29 percent to $235 million, or 80 cents a share, from $182 million, or 55 cents, the company said. Aon was expected to earn 88 cents a share excluding items, according to the average estimate of 13 analysts surveyed by Bloomberg News.

Marsh & McLennan Cos., the second-biggest insurance broker, fell 5 percent to $20.06 and No. 3 ranked Willis Group Holdings Ltd. dropped 3.7 percent to $26.50.

Insurance Rates

U.S. commercial insurance rates fell 5.1 percent in the quarter, the smallest decline since 2006, according to the Council of Insurance Agents and Brokers. Revenue from Aon's insurance brokerage rose 1 percent when the impact of acquisitions and currency is excluded.

"Our first-quarter results reflect continued progress in the face of soft market conditions and a very challenging economic environment," Case said in the statement. "Restructuring programs are on track and just beginning to deliver cost savings."

U.S. property and casualty insurers posted the biggest sales decline in half a century last year as corporations and individuals scaled back purchases, according to the Property Casualty Insurers Association of America.

Sales dropped 1.4 percent to $434.6 billion in 2008, the industry group said in an April 9 report. The 2008 drop was the second straight after 47 years without a decline. Carriers are lowering prices to win new business as builders, manufacturers and banks cut jobs and reduce operations, limiting their need for coverage. Consumers, pinched by rising unemployment, are also reducing auto insurance purchases.

The reorganization announced in 2007 will cut costs by $240 million to $265 million this year, and $370 million next year.

Aon also expects to save as much as $257 over three years from its takeover of Benfield Group Ltd. Case agreed in August to buy London-based Benfield for about $1.6 billion to expand abroad and boost Aon's reinsurance business.

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