Aon Second Quarter Net Income Increases 10% to US$191 Million; Earnings Per Share Increases 10% to US$0.57

CHICAGO, August 3 /PRNewswire/ -- Aon Corporation (NYSE: AOC) today reported second quarter and six months 2005 results.

Second quarter 2005 net income and the related per share amount increased 10% to US$191 million or US$0.57 per share from the second quarter of 2004. Net income from continuing operations increased to US$193 million or US$0.58 per share from US$180 million or US$0.54 per share a year ago.

Six months 2005 net income of US$391 million or US$1.16 per share increased 14% and 13%, respectively, from the prior period. Net income from continuing operations and the related per share amounts for six months increased to US$393 million or US$1.17 from US$372 million or US$1.12, respectively.

Greg Case, Aon's president and CEO, said, "Our second quarter results show ongoing improvement, and we are pleased with our performance despite the continued decline in insurance premium rates and our decision to terminate contingent commission arrangements. Excluding the effect of contingent commissions, organic revenue increased in both the Risk & Insurance Brokerage Services and Consulting segments. We were encouraged by the progress of U.S. retail brokerage, employee benefits consulting, and insurance underwriting. Second quarter results also benefited from continued tight management of our cost base, which is a central component of our program to improve Aon's profitability."

Case added, "While we are clearly making progress, our aspirations are very high. We are committed to achieving optimal performance and generating attractive returns irrespective of market influences. To ensure that we deliver continuous improvements, we are reviewing the revenue potential and cost structure of each of our businesses. Although these efforts are not yet complete, we anticipate adopting restructuring initiatives that will lead us to record a pretax charge ranging from US$200 million to US$300 million, beginning in the third quarter. We also anticipate that these initiatives will lead to annualized cost-savings ranging from US$100 million to US$150 million."

As the Company continues to refine its plans to improve operational focus and reduce its cost base, it is possible that we may identify additional opportunities that could result in additional charges and potential cost-savings.

Second Quarter and Six Months Segment Review

Risk and Insurance Brokerage Services second quarter revenue declined 3% to US$1.4 billion, with organic revenue declining 2%. Excluding the loss of contingent commissions, organic revenue in the current quarter rose 1%. Contingent commission revenue was US$4 million in the second quarter of 2005, reflecting amounts collected during the quarter relating to arrangements terminated as of October 1, 2004. By comparison, contingent commission revenue was US$43 million in the second quarter of 2004. Investment income increased US$12 million in the quarter compared to the prior year, primarily reflecting higher short-term interest rates.

Organic revenue in Brokerage-Americas declined 2%, primarily driven by the loss of contingent commissions and the impact of declining property and casualty pricing. Excluding the impact of contingent commissions, Brokerage-Americas organic revenue grew 3%. Brokerage-International and Reinsurance organic revenues declined 1% and 6%, respectively.

Second quarter 2005 pretax income and margin comparisons were favorably influenced by improved retention in U.S. retail, a 4% reduction in expenses largely reflecting the exit of the claims services business, changes to incentive compensation programs, and continued emphasis on cost control. Pretax income increased 8% to US$231 million, and the pretax margin improved to 16.5% from 14.9% a year ago.

Six months pretax income increased 4% to US$474 million and the pretax margin improved 130 basis points to 17.0% from 15.7%.

Consulting revenue rose 3% to US$315 million during the quarter. Organic revenue declined 1%, reflecting the loss of contingent commissions and a decline in outsourcing revenue. Excluding the loss of contingent commissions, organic revenue rose 3% in the current quarter reflecting growth in U.K. and U.S. employee benefits. Contingent commission revenue was US$1 million in the second quarter of 2005 compared with US$11 million in the second quarter of 2004. Organic revenue growth in consulting services was 2%, while outsourcing revenues declined 7%, primarily reflecting lost business.

Pretax income rose 4% to US$29 million, and the pretax margin was 9.2% for both 2005 and 2004.

Six months pretax income increased 2% to US$55 million and the pretax margin was 8.8% versus 8.9% in 2004.

Insurance Underwriting revenue increased 1% to US$816 million, while organic revenue declined 2% during the quarter. Strong growth in the sales of a supplemental health product was partially offset by planned reductions in certain programs and the run-off of non-core businesses.

The decline in warranty, credit and property and casualty organic revenue principally reflected returned premiums on a Japanese program and the earlier loss of an account within the European credit insurance business, with minimal impact on pretax income.

Pretax income rose 14% to US$83 million. The pretax margin improved to 10.2% from 9.1% for 2004, reflecting improved profitability in both underwriting subsegments and higher investment income.

Six months pretax income increased 20% to US$151 million and the pretax margin improved to 9.4% from 7.9% in 2004.

The pretax loss in the Corporate and Other segment was US$51 million compared with a loss of US$32 million a year ago, principally driven by equity earnings on Endurance common stock of US$18 million in 2004.

The pretax loss for six months was US$75 million compared to a pretax loss of US$54 million a year ago.

Effective Tax Rate

The effective tax rate for continuing operations was 34.1% for the second quarter 2005 compared to 36% for the second quarter of 2004. The year-to-date tax rate for 2005 and 2004 was 35.1% vs. 36%, respectively. The reduction in the tax rate for both the first quarter and six months 2005 is attributable to the resolution of tax issues which had a net favorable impact of US$6 million.

Foreign Exchange Impact

Second quarter 2005 earnings per share were positively affected by US$0.02 related to foreign currency translation gains. In addition, both second quarter 2005 and 2004 earnings per share included US$0.02 of currency hedging gains.

Financial Condition

Total debt and preferred stock decreased US$206 million to US$1.9 billion at June 30, 2005 from June 30, 2004. Total debt and preferred stock as a percentage of total capital was reduced to 27% from 31% over the same period. Stockholders' equity was US$5.3 billion. Compared to December 31, 2004, total debt and preferred stock decreased US$265 million.

Approximately 94% of Aon's investment portfolio at quarter end was in short-term and fixed maturities, with 97% of the fixed income securities rated investment grade.

The Company will host an audio webcast on Wednesday, August 3 at 10:00 a.m. central time that can be accessed at http://www.aon.com .

Aon Corporation ( http://www.aon.com ) is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 47,000 employees working in Aon's 500 offices in more than 120 countries. Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.

This press release contains certain statements related to future results, or states our intentions, beliefs and expectations or predictions for the future which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results depending on a variety of factors. Potential factors that could impact results include: general economic conditions in different countries in which we do business around the world, changes in global equity and fixed income markets that could affect the return on invested assets, fluctuations in exchange and interest rates that could influence revenue and expense, rating agency actions that could affect our ability to borrow funds, funding of our various pension plans, changes in the competitive environment, our ability to implement restructuring initiatives and other initiatives intended to yield cost savings, changes in commercial property and casualty markets and commercial premium rates that could impact revenues, changes in revenues and earnings due to the elimination of contingent commissions, other uncertainties surrounding a new compensation model, the impact of investigations brought by state attorneys general, state insurance regulators, federal prosecutors, and federal regulators, the impact of class actions and individual lawsuits including client class actions, securities class actions, derivative actions, and ERISA class actions, the cost of resolution of other contingent liabilities and loss contingencies, and the difference in ultimate paid claims in our underwriting companies from actuarial estimates. Further information concerning the Company and its business, including factors that potentially could materially affect the Company's financial results, is contained in the Company's filings with the Securities and Exchange Commission.

This press release includes supplemental information related to organic revenue growth, a measure that management believes is important to evaluate changes in revenue from existing operations. We also believe that this supplemental information is helpful to investors. Organic revenue growth excludes from reported revenues the impact of foreign exchange, acquisitions, divestitures, transfers between business units, investment income, reimbursable expenses, unusual items, and for the underwriting segment only, an adjustment between written and earned premium. A reconciliation is provided in the attached schedules. The supplemental organic revenue growth information does not affect net income or any other GAAP reported amounts. It should be viewed in addition to, not in lieu of, the Company's Consolidated Summary of Operations. Industry peers provide similar supplemental information regarding their revenue performance, although they do not make identical adjustments.

Web site: http://www.aon.com