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Aon PLC’s top executive on Friday said the salary cut for most staff that Aon announced earlier this week will enable the company to avoid layoffs related to the economic crisis and maintain its service levels for customers.
Speaking on Aon’s first-quarter financial results call with analysts, CEO Greg Case said Aon’s priority was to keep the “entire firm in place” and maintain its operations “in a potentially historic and sustained downturn,” which has required that it take “difficult steps.”
The alternative would be to hope that the coronavirus-related economic downturn is like the 2008 financial crisis, he said. “There’s no doubt that that’s the easier path to take and you can put a shade over a lot of things along the way,” he said.
Aon announced Monday that it would impose 20% salary cuts on about 70% of its staff.
Aon’s main rival, Marsh & McLennan Cos. Inc., said Thursday that it would look to avoid salary reductions and job cuts. Willis Towers Watson PLC, which Aon agreed to buy earlier this year, also signaled that it would try to avoid pay cuts.
Meanwhile, Aon executives said that any reduction in revenue for 2020 will likely be offset by further reductions in expenses and that recent investment market turmoil will not affect its deal to purchase Willis Towers Watson, which is expected to close next year.
Aon reported first-quarter revenue of $3.22 billion, a 2.4% increase over the same period last year. Organic growth, which excludes foreign exchange changes and acquisitions and divestitures, increased 5%.
Commercial risk solutions, its main insurance brokerage operation, reported $1.15 billion in revenue for the quarter, up 2.5% compared with last year and 4% on an organic basis. Its reinsurance division reported $848 million in revenue, a 7.6% increase over the 2019 period and up 9% on an organic basis.
Aon reported net income of $791 million for the first quarter, a 17% increase over the same period last year.
Given the economic turmoil, Aon is withdrawing its guidance of mid-single digit organic revenue growth for 2020 and is taking “preemptive steps” to reduce expenses, said Christa Davies, Aon’s chief financial officer.
“If there are any reductions in revenue, we would reduce expenses proportionally to match,” she said.
Much of Aon’s revenue is derived from coverage and services that companies must buy, Ms. Davies said.
“Roughly 80% is nondiscretionary and has a significant portion that renews every year with 95% percentage retention rates on average,” she said.
“Many of the services are regulatorily required or necessary costs of doing business. Even for clients in financial distress, even for clients who are potentially entering bankruptcy, many of these services are still required,” Ms. Davies said.
The proposed all-stock purchase of Willis Towers Watson will not be affected by drops in stock prices, Mr. Case said. Aon’s share price has fallen about 17% amid market turmoil since the deal was announced and Willis Towers Watson’s share price has fallen about 8%.
“The structure of the deal means the share price movements down are really less relevant in terms of where we are,” and the expected synergies between the firms have not changed, he said.
More insurance and risk management news on the coronavirus crisis here.