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WIKI ANALYSIS
Aon’s operations can be divided into three core groups: Insurance, warranties, and consulting. Aon’s insurance operations are aimed largely at corporations and wealthy individuals. It also provides health and life insurance for individuals. Its warranties segment deals with extended product warranties, and its consulting segment provides its corporate clients with advice on human resources and benefit plans.
Business Overview
Based in Chicago, Aon Corporation (AOC) is the world's largest insurance and reinsurance broker. Through its subsidiaries, the company operates in three broad segments: Risk and Insurance Brokerage Services, Insurance Underwriting, and Consulting. The Risk and Insurance Brokerage Services segment (62.3% of the $9.0 billion total revenues in 2006) consists of Aon's retail and reinsurance brokerage operations, which include a broad range of advisory and outsourcing services such as risk identification and assessment, safety engineering, alternative risk financing, loss management, and program administration for its clients. The Insurance Underwriting segment (22.9%) sells life, accident, and health insurance, along with extended warranty, specialty, and other insurance products. The Consulting segment (14.3%) provides employee benefits, human resources, compensation, outsourcing, change management, and communications for multinationals, small businesses, agents/brokers, and some individual customers. By source, the company derived 74.6% of its 2006 revenues from brokerage commissions and fees, 21.4% from premiums and other, and 4.0% from investment income.
Aon’s business operations fall under one of three categories: Insurance underwriting, risk insurance brokerage services, and consulting. In December 2007, Aon announced that it was planning the sale of the majority of its insurance underwriting business so that it may focus on the other two. Aon’s clients include corporations and other businesses, insurance businesses, independent agents and brokers, governments, and professional organizations.
Risk and Insurance Brokerage Services
Aon’s largest division, the Risk and Insurance Brokerage Services division, accounted for 82% of operating revenue for 2007. Revenue is earned via fees from clients, commission, and consulting fees from other insurance and reinsurance firms.
Risk Management
As a retail broker and insurance underwriter, Aon serves as an advisor to corporate clients on matters regarding property, general, and executive liability, and workers’ compensation. Aon also provides life and disability insurance for individuals and businesses. Its retail brokerage is broken down into sections according to industry specialization, which include entertainment, media, marine, aviation, and construction, amongst others.
Reinsurance Brokerage
Its reinsurance division consults clients on how to increase claims recoveries, enhance the risk to return ratio of investment portfolios, decrease exposure to catastrophic loss worldwide, and improve capital utilization.
Aon acts as a broker to insurance companies wishing to remove risky obligations from its portfolio. It mainly focuses on
Consulting
Aon’s consulting segment accounted for 18% of operating revenue for 2007. Its consulting segment maintains a presence in the United States, Canada, Europe, South Africa, and the Pacific region. Its consulting segment is further divided into consulting services and outsourcing divisions.
Consulting Services
Aon’s consulting services include employee benefit, compensation, management, communications, human resources, and financial advisory and litigation consulting. Aon is the third largest employe benefit consulting in the world and second in the U.S. in terms of revenue. Revenue is generated via client consulting fees as well as placement fees paid by insurance companies for recommending their products.
Its employee benefits arm focuses on attracting, retaining, and motivating employees by providing programs such as executive compensation, retirement benefits, and elective benefits, amongst others.
Trends and Forces
- Fluctuations in interest rates may hurt Aon’s investment portfolio. Aon’s portfolio is largely composed of long-term investments and fixed-maturity products. Declines in the expected returns of the portfolio may render Aon unable to meet its financial obligations. If the securities it holds are downgraded, Aon may have to write the assets off as impaired, which will lead to weaker earnings. Furthermore, if it does not have the liquidity it needs to meet its financial obligations, Aon may be forced to sell parts of its portfolio at below-market prices.
- Obligations to pension plans have currently been hurting Aon’s earnings. Due to decreasing interest rates, the assets backing several major pension plans under Aon’s control have increased at a slower rate than its liabilities, resulting in unfunded portions of its pension plans. For 2008, Aon expects to transfer $195 million to these plans, which will come out of its earnings.
- A significant portion of Aon’s business is conducted overseas, which might make it harder to predict future growth and profitability. Although this helps protect Aon from economic downturns in the United States, Aon must conform to each countries’ accounting, staffing, and legal standards. Stricter governmental regulations, longer payment cycles, hyperinflation, and difficulty collecting payments may hurt its investment opportunities and revenue streams. Since all revenues are translated into U.S. dollars, a strong dollar or hyperinflation of the local currency might cause Aon’s financial positions to be understated. Likewise, the converse may make Aon appear more financially stable than it really is.
- Large-scale disasters may increase claims to levels which Aon is not financially prepared to honor. Terrorist attacks, floods, pandemics, and earthquakes may increase its liabilities and may also decrease its investment portfolio. Depending on the disaster, such as terrorism, Aon may be unable to diversify away its exposure. Furthermore, an economic decline in the affected area may result in clients being unable to pay insurance premiums, leading to a decrease in its business earnings.
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