Aon Net Income Up 92%; Plans To Cut 6% Of Workforce

Aon reported its net income for the third quarter rose 92 percent, beating analyst's expectations, and announced another restructuring plan to eliminate 2,700 positions.

The Chicago-based insurance broker said its three-year reorganization plan will cut jobs in "predominantly non-client-facing roles," including 1,100 positions to be off-shored or outsourced. The cutbacks could save the company up to $510 million over a three-year period, Aon estimated.

Part of the plan will further consolidate operations including human resources, finance and information technology globally, and evaluate consolidation and simplification of European operations "on a country-by-country basis," simplifying real estate space.

An Aon spokesman said there is no indication if the cuts will be proportional to geographic regions or where the cuts will be made. He said the company employs approximately 43,000 in 120 different countries. Most of those positions are in the United States and Europe. The cuts represent more than 6 percent of the total workforce.

During an analysts' conference call today Aon President and Chief Executive Officer Greg Case said that despite the restructuring in 2005 that eliminated over 3,600 jobs, there remains substantial overlap in operations. He said the focus of the restructuring is to take the costs out of the system "and in no way impair our client capability."

The restructuring is expected to cost approximately $360 million pretax but result in estimated savings of $50-to-$70 million in 2008, $175-to-$200 million in 2009, and $240 million by 2010.

Aon's third-quarter results beat securities analysts' estimate of 59 cents a share by five cents, coming in at 64 cents a share in the quarter, a 100 percent jump from the same period last year of 32 cents a share.

For the quarter, net income rose 92 percent, or $98 million, to $204 million from $106 million last year. Revenues rose 11 percent, or $239 million, to $2.4 billion.

Comparing the nine months ending Sept. 30 to the same period last year, net income rose 32 percent, or $160 million, to $657 million, or $2.05 cents a share, from $497 million, or $1.46 a share. Revenues rose 11 percent, or $735 million, to $7.3 billion from $6.5 billion.

Organic growth stood at 6 percent for the firm as a whole, with brokerage services showing 3 percent organic growth despite a challenging with a continuing fall in prices.

Mr. Case said the growth figure was a very good one considering the challenges of the soft market. Brokerage revenues grew 7 percent, or $302 million, to $4.4 billion.

While commissions are dropping in tandem with the soft market, he acknowledged that the firm has seen some "meaningful movement in commission" rates and that it has had "some success having that dialogue with our partners."

"We're not going to use the soft market pricing cycle as an excuse," said Mr. Case as he emphasized the firm's determination to pursue growth.

"We will continue to manage expenses and improve operating margin, continue to effectually manage capital to create long-term shareholder value, and continue to make substantial investments that further support our industry leading platform and our ability to deliver distinctive client value," he promised.

Mr. Case said the spin-off of Aon's insurance company, Combined Insurance Company, continues on track and is expected to be completed in the first quarter of 2008. He declined to discuss the spin-off any further but did say the company has a book value of $1.7 billion.

David Small, an analyst with Bear Sterns, wrote that Aon's ability to expand margin through its restructuring was in stark contrast to its competitor Marsh & McLennan.

He said those firms that can expand margin during the soft market cycle will see better share performance. He also wrote that Aon has won new business, cutting into the business of other brokers, including Marsh.

During a question and answer period, Mr. Case, while acknowledging the company has won some notable new accounts, said the firm is not focused on beating Marsh but servicing clients. He added that there are many executives from other firms looking to join Aon, including people from Marsh.

On Oct. 11, Aon declared a quarterly cash dividend of 15 cents a share payable on Nov. 14 to shareholders of record as of Nov.1.