Aon Unveils Q3 Data; Remarks on Cambridge Sale, Contingent Commissions

Chicago-based Aon Corp. (NYSE:AOC) has reported third quarter and nine months 2004 results.

Net income per share for the third quarter was $0.36 for both 2004 and 2003. Net income from continuing operations was $121 million or $0.36 per share compared to $143 million or $0.45 per share a year ago.

For the first nine months, net income per share for 2004 and 2003 was $1.40 and $1.30, respectively. Net income from continuing operations and the related per share amounts for nine months increased to $493 million or $1.48 from $460 million or $1.45.

Patrick Ryan, Aon’s chairman and CEO stated, “Our continued progress in improving our financial discipline is masked by our current revenue results. During the quarter, negative organic revenue growth in our brokerage segment caused deterioration of its margin. Consulting and Insurance Underwriting results were in line with our expectations, with margins improving nicely in both segments. As previously announced, during the quarter we signed a definitive agreement to sell a majority interest in our Cambridge Integrated Services claims business. We expect to complete this sale within the coming weeks.”

Commenting on recent industry developments, Ryan said, “While recent allegations concerning our industry are extremely troubling, at Aon we have always been committed to our core values of integrity and acting in our clients’ best interest. As the second largest insurance broker in the world, Aon is committed to playing a leading role in restoring the credibility of the industry. We are in the process of terminating contingent commission arrangements, and we will work with clients, insurance carriers and regulators to implement a new business model which ensures that we are appropriately compensated, while maintaining full transparency and the trust of our clients.” On Oct. 22, Aon announced that it is terminating contingent commissions from underwriters.

Risk and Insurance Brokerage Services reported revenue was $1.3 billion for both the current and prior year quarters, with organic revenue growth of negative 3%.

Pretax income for the quarter was $144 million compared to $192 million in 2003 and the pretax margin was 10.7% versus 14.2% a year ago. Third quarter 2004 pretax income and margin comparisons versus the prior year were adversely influenced by lower revenue in the retail, reinsurance and claims services businesses. Expenses were up 2% on an organic basis driven primarily by increased pension costs in Aon’s major plans. Third quarter 2003 results were adversely impacted by a $7 million stock-based incentive adjustment.

Nine months pretax income declined 1% to $600 million and the pretax margin declined 60 basis points to 14.2%.

Consulting revenue rose 6% to $300 million during the quarter. Organic revenue growth for the segment was 2%. Benefits, compensation, management and communications consulting achieved 4% organic revenue growth, while outsourcing revenues declined 3% on an organic basis.

Pretax income increased 45% in the quarter to $29 million and the pretax margin grew to 9.7% from 7.0% in 2003. The pretax margin increase was driven by improved results in international consulting, human resource outsourcing, and the inclusion in third quarter 2003 of a $3 million stock-based incentive adjustment.

Nine months pretax income rose 32% to $83 million and the pretax margin increased 180 basis points to 9.2%.

Insurance Underwriting revenue increased 5% to $779 million, with segment organic revenue growth of negative 1% during the quarter. Reported revenue in the quarter was $26 million lower as a result of a book of U.K. specialty A&H business that was placed in run-off. This was largely offset by a $23 million increase in reported revenue due to reinsurance program changes for a specialty A&H line.

Pretax income rose 16% to $67 million in the quarter. Pretax margins were 8.6% for 2004 and 7.8% for 2003. Third quarter 2003 results in the select property and casualty portfolio included a $21 million pretax loss from the run-off of National Program Services Inc. business with no comparable amount in 2004. In the balance of the specialty property and casualty business, profitability was lower due to reduced retentions and the discontinuance of certain programs.

Nine months pretax income was $193 million compared with $185 million in 2003, and the pretax margin was 8.2% versus 8.6% a year ago.

Corporate and Other segment revenue was a negative $6 million in the quarter compared to a positive $14 million in 2003. Third quarter 2004 results included a pretax loss of $13 million ($0.02 per share) related to the quarterly revaluation of Endurance warrants compared to a $2 million loss in the prior year. For the third quarter, Endurance equity earnings were $4 million in 2004 and $8 million in 2003.

The pretax loss in the quarter was $52 million compared with a loss of $28 million a year ago. Interest expense in the quarter benefited from lower levels of debt offset by a $14 million increase in pretax interest expense from the reclassification of the trust preferred after tax minority interest (as of first quarter 2004 under the adoption of FIN 46). Prior periods were not restated.

The pretax loss for nine months was $106 million compared to a loss of $84 million in 2003. Nine months 2003 results included a $46 million pretax ($0.09 per share) World Trade Center unusual charge.

The third quarter after-tax gain from discontinued operations was $1 million in 2004 and a loss of $28 million ($0.09 per share) in 2003. During third quarter 2004, a non-core brokerage unit was reclassified to discontinued operations. The net loss in the quarter attributable to this discontinued business was $3 million after tax ($0.01 per share) for 2004 with a $1 million loss in 2003. Revenues for this unit were $1 million in each of the comparable periods.

As for the future, Ryan said, “Aon employees around the world have been working diligently to serve our clients and policyholders, improve our financial discipline, and deliver the results our shareholders expect and deserve. During the course of this year, we established certain financial goals, including attaining earnings per share from continuing operations of $2.20 or greater. While softening market conditions are increasingly favorable to our clients, our revenue growth has not been what we anticipated.

“This reality, coupled with the impact of recent industry developments (including our decision to terminate contingent commission arrangements), leads us to withdraw our prior guidance relating to the $2.20 earnings per share objective. We remain committed to improving our margins and returns to our shareholders. We believe that today’s environment presents an unprecedented opportunity for Aon to gain market share due to our client-focused approach, our global network and our broad and deep resources. Our most immediate priority will be to ensure the confidence of clients and investors in the integrity and ethics of our industry.”

The company will host an audio webcast on Friday, Oct. 29 at 10 a.m. central time that can be accessed at www.aon.com.