Aon second quarter total revenue increases 48% to $2.8 billion

Net income attributable to Aon stockholders increased 69% to $258 million or $0.75 per share, compared to $153 million or $0.54 per share for the prior year quarter.  Net income attributable to Aon stockholders from continuing operations increased 43% to $256 million or $0.75 per share, compared to $179 million or $0.63 per share for the prior year quarter.  Net income per share attributable to Aon stockholders from continuing operations, excluding certain items, increased 2% to $0.83, compared to $0.81 in the prior year quarter, including a $62 million increase in intangible asset amortization expense.  Certain items that impacted second quarter results and comparisons with the prior year quarter are detailed in the "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 12 of this press release.  

"We delivered solid organic revenue growth in our Retail Brokerage business while delivering on the synergy savings related to Aon Hewitt," said Greg Case, president and chief executive officer.  "While macro conditions remain challenging globally, we are firmly on track to deliver growth in 2011, our restructuring programs are delivering cost savings and we have solid financial flexibility that will continue to drive increased shareholder value, as highlighted by the repurchase of $303 million of common stock in the quarter."

SECOND QUARTER FINANCIAL SUMMARY

Total revenue increased 48% to $2.8 billion from the prior year quarter due to a 42% increase in commissions and fees resulting from acquisitions, primarily Hewitt, net of divestitures, a 6% increase from foreign currency translation and a 1% increase in organic revenue, partially offset by lower fiduciary investment income.

Total operating expenses increased 46%, or $747 million, to $2.4 billion due primarily to the inclusion of operating expenses related to the merger with Hewitt, an estimated $102 million unfavorable impact from foreign currency translation and a $62 million increase in intangible asset amortization expense, partially offset by benefits related to the restructuring programs and a $17 million decrease in restructuring related costs.  The prior year quarter included a $49 million non-cash charge to pension expense.

Depreciation and amortization expense increased 148%, or $89 million, to $149 million compared to the prior year quarter due primarily to the inclusion of $59 million in intangible asset amortization expense and $18 million of depreciation expense as a result of the merger with Hewitt.  The Company expects intangible asset amortization related to the Hewitt merger to be approximately $241 million in 2011, $310 million in 2012, $288 million in 2013 and to continue to decline each year from 2014 through 2023.

Restructuring expenses were $14 million compared to $31 million in the prior year quarter.  In the second quarter, the Company incurred $31 million of costs under the Aon Hewitt restructuring program, primarily related to lease consolidation and workforce reduction, partially offset by the reversal of $22 million of restructuring costs accrued in prior periods under the Aon Benfield and 2007 restructuring programs as a result of the company reoccupying vacated leasehold properties.  The Company has completed all restructuring activities and incurred 100% of the total costs for the 2007 program and has incurred approximately 95% of the total costs necessary to deliver the remaining savings under the Aon Benfield program.  An analysis of restructuring-related expenses by segment and type is detailed on page 13 of this release.

Restructuring savings in the second quarter related to the 2007 restructuring program are estimated at $134 million compared to $113 million in the prior year quarter.  Of the restructuring savings in the second quarter, $113 million were related to the Risk Solutions segment.  Before any potential reinvestment of savings, the 2007 restructuring program is expected to deliver cumulative cost savings of $536 million in 2011.

Restructuring savings in the second quarter related to the Aon Benfield restructuring program are estimated at $30 million compared to $24 million in the prior year quarter.  Before any potential reinvestment of savings, the Benfield restructuring program is expected to deliver cumulative cost savings of $122 million in 2011.

Restructuring savings in the second quarter related to the Aon Hewitt restructuring program are estimated at $34 million.  The Aon Hewitt merger is expected to deliver cumulative cost savings of $355 million in 2013, including $280 million related to the restructuring program and $75 million in areas such as information technology, procurement and public company costs.

Currency fluctuations in the second quarter had a $0.03 favorable impact on adjusted net income from continuing operations per diluted share when the Company translates prior year quarter results at current quarter foreign exchange rates.

Effective tax rate on net income from continuing operations was 24.7% in the second quarter compared to 24.5% in the prior year quarter.  The effective tax rate in the second quarter of 2011 and 2010 was favorably impacted by the resolution of an income tax audit and certain deferred tax adjustments.  The Company anticipates an effective tax rate on net income from continuing operations of 29.0% for 2011.

Discontinued operations after-tax income was $2 million in the second quarter compared to an after-tax loss of $26 million in the prior year quarter.  The prior year quarter included the settlement of legacy litigation.

Average diluted shares outstanding increased to 342.7 million in the second quarter compared to 282.6 million in the prior year quarter due primarily to the issuance of 61 million shares of common stock related to the merger with Hewitt, partially offset by the Company's share repurchase program.  The Company has approximately $1.4 billion remaining under the share repurchase program.

SECOND QUARTER SEGMENT REVIEW

Certain noteworthy items impacted operating income and operating margins in the second quarter of 2011 and 2010.  The second quarter segment reviews provided below include supplemental information related to organic revenue, adjusted operating income and operating margin which is described in detail on the "Reconciliation of Non-GAAP Measures - Organic Revenue" on page 11 and "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 12 of this press release.

Risk Solutions total revenue increased 9% to $1.7 billion compared to the prior year quarter due to a 6% favorable impact from foreign currency translation, 2% organic growth in commissions and fees, and a 1% favorable impact from acquisitions and divestitures, partially offset by a decline in fiduciary investment income.

Retail Brokerage organic revenue increased 3% reflecting solid organic revenue growth both in the Americas and International businesses.  Americas organic revenue increased 3% due primarily to strong growth in Latin America and in Affinity products.  International organic revenue increased 3% driven by strong growth in Asia, New Zealand and Africa.  Reinsurance organic revenue decreased 2% due primarily to a decline in capital market transactions and advisory business, partially offset by growth in global treaty placements.  

Compensation and benefits for the second quarter increased 6%, or $58 million, compared to the prior year quarter due to a $57 million unfavorable impact from foreign currency translation, a $17 million increase from acquisitions, primarily Glenrand M.I.B, net of divestitures, and organic revenue growth, partially offset by benefits related to the restructuring programs and a $14 million decrease in restructuring related costs.  Other expenses for the second quarter increased 9%, or $33 million, due to a $28 million unfavorable impact from foreign currency translation, $16 million of lease termination costs, an $11 million increase from acquisitions, primarily Glenrand M.I.B, net of divestitures, and organic revenue growth, partially offset by a $32 million decrease in restructuring related costs.

Second quarter operating income increased 16% to $355 million.  Adjusting for certain items detailed on page 12 of this press release, operating income increased 1%, or $4 million, to $338 million compared to the prior year quarter. Operating margin in the second quarter decreased 140 basis points to 19.6% compared to the prior year quarter due primarily to a 90 basis point impact from lease termination costs, a 30 basis point impact from a decline in investment income and a 20 basis point impact from foreign currency translation.

HR Solutions total revenue increased 244% to $1.1 billion compared to the prior year quarter due to acquisitions, primarily Hewitt, net of divestitures and a 6% favorable impact from foreign currency translation.  Organic revenue in Consulting Services was flat as growth in global compensation and investment management consulting was offset by a decline in U.S. retirement and health and benefits consulting.  Organic revenue in Outsourcing was flat as new client wins and growth in point solutions revenue was offset by price compression and a decline in project-related revenue.

Compensation and benefits for the second quarter increased 221%, or $428 million, from the prior year quarter due primarily to the inclusion of Hewitt operating expenses and a $10 million unfavorable impact from foreign currency translation, partially offset by benefits related to the Aon Hewitt restructuring program.  Other expenses increased 353%, or $275 million, from the prior year quarter due primarily to the inclusion of Hewitt operating expenses, a $59 million increase in intangible asset amortization expense and $25 million of costs related to the Aon Hewitt restructuring program, partially offset by benefits related to the Aon Hewitt restructuring program.

Second quarter operating income increased 156% to $115 million.  Adjusting for certain items detailed on page 12 of this press release, operating income increased 221%, or $104 million, to $151 million reflecting operating income as a result of the merger of Hewitt and cost savings related to the restructuring program, partially offset by higher intangible asset amortization expense.  Operating margin decreased 90 basis points to 13.9% versus the prior year quarter due primarily to the inclusion of Hewitt operating results and an increase in intangible asset amortization expense.

Unallocated expenses were $36 million, a decrease of $46 million compared to prior year quarter.  The prior year quarter included a non-cash charge to pension expense of $49 million, which resulted from an adjustment to the market-related value of plan assets.  Interest income was comparable to the prior year quarter at $4 million. Interest expense increased $30 million to $63 million due primarily to an increase in the average amount of debt outstanding following the merger with Hewitt.  Other expense of $23 million in the second quarter includes a non-cash charge of $19 million as a result of the accelerated amortization of deferred financing costs associated with a repaid term credit agreement.  The second quarter also included a $13 million loss related to the company's ownership in certain insurance investment funds and $9 million of distributions from certain private equity securities.  The prior year quarter included gains from certain investments and the sale of certain businesses.