Updated from 9:01 a.m. EST
kicked off earnings season by announcing an expected shortfall for the fourth quarter because of about $150 million in pretax charges, causing its stock price to plummet 28%.
The Chicago-based company's shares were down a whopping 12 to 30 3/4 in midday trading Monday. (Aon closed down 12 1/2, or 29%, to 30 1/4.)
For the fourth quarter ended Dec. 31, earnings per share should be in the range of 5 cents to 10 cents a diluted share, from 53 cents a share a year earlier, the company announced. That is well below the consensus estimate of 58 cents, according to analysts polled by
First Call/Thomson Financial
Net income for 2000 should be at least in the range of $2.10 to $2.20 a share, the company said. That is also below First Call's $2.25 estimate.
There are three components to the pretax charges, which should total $125 million to $150 million: Aon's participation in settlements related to the failed workers' compensation pool run by
, refunds of money made in selling insurance products as retirement products in the U.K. and increased reserves for other litigation matters.
Reliance Group Holdings
announced that it had settled with various insurance and reinsurance companies to resolve issues related to the Unicover pool. As a result of that settlement, all commissions earned by reinsurance brokers, such as Aon, must be returned. Aon announced that it will return $27 million in premium commissions. That is the only specific pretax charge broken down by the company. (Reliance shares settled down 11/16, or 10%, to 6 1/8.)
The special pretax charges are likely to total $125 million to $150 million. Aon's participation in the settlement by
Reliance Group Holdings
of matters related to
will cost $27 million, which comprises "a return of previously earned fees and commissions on Reliance-related Unicover business," according to the company. Because of the settlement, Aon has also established reserves related to Unicover and further strengthened its reserves related to both U.K. pension mis-selling and other litigation matters.
Fourth-quarter results were also hit by a number of other problems, including additional costs for systems development and investments in e-commerce related to Aon's acquisitions, the lack of Unicover-related revenues, weaker-than-expected income from U.K. and Northern European brokerage operations and significantly lower income from private equity investments. Income from private equity investments should be lower for 2000 as well.
"It was bad news followed by more bad news," said analyst Ira Zuckerman of
. He was less concerned with the charges for the Unicover and U.K. pension issues, saying that the market was overreacting to the fact that both issues were being reversed in a single quarter. He rates Aon a neutral and his firm has not done any underwriting for the company.
However, analyst Greg Lapin of
said it's unclear how large the Unicover-related charge will be, and that it could be higher. He maintains his buy rating on Aon and his firm has done no underwriting for the company.
Analysts were more concerned about the ongoing cost of systems integration for the many acquisitions made over the past two years and other problems in the business.
"Overall, the business is worse than expected," said analyst Cathy Seifert of
Standard & Poor's Equity
, who, like many of her peers, was taken aback by the news this morning.
"They already took a number of restructuring charges last year to integrate and consolidate its brokerage business," she added. "In a business that's consolidating, if you want to be a net buyer, you have to get your act together." She rates the company a hold.
Aon claims that 2000 will be the peak year for technology spending, "but that remains to be seen," said analyst Mark Lane of
, who recalled that at the company's analyst meeting last November, Aon had not indicated there would be problems in this area. "I'm taking a conservative stance, given they had no handle on it the first time." Lane rates Aon a long-term buy and his firm has not done underwriting for the company.
Lapin added: "There is no finite boundary with regards to investment in technology. There's the flexibility to ratchet the number up as they see fit and that causes a lot of concern. It will be more expensive and it could be used as a rationale for margins not meeting expectations."
In a conference call with analysts this morning, Patrick Ryan, Aon's chairman and chief executive, attempted to justify the increased technology costs by saying that many acquisitions -- such
as Frank B. Hall
Alexander and Alexander Services
-- "had not spent significant dollars on infrastructure," said Sean O'Neill, Aon's director of investor relations, in an interview.
Both Lane and Zuckerman think, however, that the continued stabilization of the commercial insurance market will help the company's fundamentals in the long term.
Aon is expected to announce its fourth-quarter and full-year results on Feb. 8.