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Aon posts revenue drop; expects Willis deal approval without divestitures

Greg Case

Aon PLC reported a 4.2% fall in second-quarter revenue to $2.5 billion and expects similar pressure on revenue for the remainder of the year if current economic conditions continue, the company’s top executives said Friday.

The brokerage remains on track to complete its purchase of rival Willis Towers Watson PLC in the first half of 2021, they said, and it does not expect regulators to require any divestments, including in its reinsurance business, where the deal will significantly extend Aon’s position as the world’s largest reinsurance broker.

Aon’s reversal of its COVID-19-related salary cut will affect cash flow in its third-quarter results, the executives said.

The decrease in second-quarter revenue compared with the year-earlier period was driven by a 2% unfavorable effect of foreign exchange changes, organic revenue decline of 1%, and a fiduciary investment income decline of 1%, according to Aon’s earnings statement.

If the economy continues to be similarly hit by fallout from the COVID-19 pandemic for the remainder of the year as it was in the second quarter, the brokerage’s revenue will likely also be affected, said Aon CEO Greg Case on a conference call with analysts  

“In terms of overall organic revenue expectations for Q3 and Q4, the outlook is obviously uncertain. If macroeconomic conditions persist, we expect to see ongoing firm-wide revenue pressures similar to what we observed in Q2,” he said.

But the economic outlook is better than at the beginning of the pandemic, Mr. Case said.

The probabilities of “worst-case scenarios assessed in early March have diminished,” he said. As a result of the improved outlook, Aon in June reversed its earlier decision to cut the salaries of most staff by 20%.

The reversal of the salary reductions and a bonus to affected employees of 5% of withheld pay will be reflected in the firm’s cash flow in the third quarter, Christa Davies, Aon’s chief financial officer, said on the call.

Aon’s purchase of rival Willis Towers Watson is on track for a shareholder vote on Aug. 26 and is expected to be completed in the first half of next year without any divestments of business due to antitrust concerns, Aon executives said.

“We feel really good about our ability to close the transaction with no divestitures, including reinsurance,” Ms. Davies said.

Analysts have speculated that regulators may require Aon to divest some of its business to allay antitrust concerns.

Aon is the world’s largest reinsurance broker. According to data from Business Insurance’s 2020 Agents & Brokers Directory, the combined reinsurance brokerage revenue of Aon and Willis Towers Watson in 2019 was about $2.66 billion and the reinsurance brokerage revenue of rival Marsh & McLennan Cos. Inc. was $1.48 billion.

The reinsurance businesses of Aon and Willis Towers Watson are highly complementary, Ms. Davies said. In the United States, for example, Aon has a significant number of large reinsurance clients whereas Willis Towers Watson’s business is more concentrated on middle-market cedents.

The reinsurance market also includes a significant amount of direct business where cedents deal directly with reinsurers without a broker, said Eric Andersen, president of Aon.

Aon’s reinsurance business saw the largest increase in revenue in the second quarter where individual business units posted varying results.   

Aon’s main insurance brokerage business, commercial risk solutions, reported second-quarter revenue of $1.13 billion, a 3.5% decrease compared with the same period last year. Organic revenue for the unit increased 1%.

Reinsurance solutions revenue increased 6.6% to $448 million in the second quarter, up 9% on an organic basis; retirement solutions revenue fell 6.2% to $393 million, with organic revenue down 1%; health solutions was down 18.6% to $317 million, with organic down 18%; and data and analytic services was down 4.2% to $274 million, with organic down 8%.

Net income was $398 million, a 43.6% increase over the same period last year, as operating expenses dropped on the completion of the brokerage’s restructuring plan at the end of 2019.

More insurance and risk management news on the coronavirus crisis here.