Aon Reports Earnings Strain
By Mark E. Ruquet
NU Online News Service, Aug. 5, 3:25 p.m. EDT?Despite an 18 percent increase in net income for the second quarter, insurance broker Aon reported strain on its earnings resulting, in part, from the soft-market turn.
During an investors conference call, Patrick G. Ryan, chairman and chief executive officer of the firm, said that the company's "balance sheet remains strong," but that there were "some disappointments" in the result.
Organic revenue growth was a major disappointment for the firm, he said. Organic growth in risk and brokerage services in the second quarter showed a negative 1 percent, even though brokerage commissions and fees overall grew 4 percent. Consulting showed no organic growth. Mr. Ryan attributed these results to the soft-market turn and the hesitancy of employers to bring on new hires, which would fuel increases in consulting.
He noted that one major area of decline was reinsurance brokerage that showed a negative 8 percent organic growth, which pulled down the overall brokerage figure.
"The decline in reinsurance does not reflect a new business production issue. New business generated in the quarter was actually quite good, though modestly behind last year," Mr. Ryan said. "We are not losing our book of business to competitors in any way of significant change."
He attributed the loss to a number of carriers abandoning reinsurance or merging with other carriers. Executives said the firm had a number of exclusive arrangements with some of these insurers. This would influence Aon's reinsurance revenue growth through the rest of the year, with improvements in 2005, he explained.
In the second quarter, Aon reported net income increased more than 18 percent, or $27 million, going from $146 million, or 46 cents a share, to $173 million, or 52 cents a share. Revenues were up 6 percent, or $133 million, from $2.4 billon to $2.55 billion.
In the quarter, insurance underwriting grew 16 percent or $805 million.
During the six months, net income rose 15 percent, or $45 million, going from $298 million, or 94 cents a share, in 2003 to $343 million, or $1.04 a share. Revenues increased 7 percent, or $334 million, from $4.78 billion to $5.11 billion.
Mr. Ryan expressed confidence that the Chicago-based broker firm can achieve or exceed earnings per share of $2.20 from continuing operations in 2004.
To increase profitability in the future, Aon would aim to increase sales penetration into existing accounts and further reduce costs in its operations globally, executives noted.
"We have to adjust our cost structure to this market environment, and there are initiatives all over the world," Mr. Ryan remarked.
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