Aon Q2 beats on Hewitt buy, says soft pricing to continue

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BANGALORE (Global Markets) - Aon Corp (AON.N) posted an estimate-topping quarterly profit as its acquisition of Hewitt Associates paid off, but the world's largest insurance broker said it still expects soft insurance pricing to continue.

High unemployment and stiff competition made it hard for insurers to raise premiums, hurting insurance brokers like Aon, Marsh & McLennan (MMC.N) and Willis Group (WSH.N) that depend on commissions for much of their revenue.

As insurers have faced high levels of losses over the last year, analysts expect them to increase premiums, benefiting insurance brokers like Aon. But the company is not optimistic.

"Despite industry loss expense in the first half, we believe excess capacity globally will continue to drive soft pricing, albeit at a more modest rate of decline," Aon Chief Executive Greg Case said on a conference call.

Aon's views on soft insurance come in sharp contrast to what has been said by virtually every major insurer to report results so far this season.

Sandler O'Neill analyst Paul Newsome said the disconnect between the brokers and insurance companies relates to the difference between renewal pricing and new insurance pricing.

The fall in the operating margin for Aon's brokerage unit also disappointed investors, but analysts expect the margin to expand in the future.

"We should see stronger margins in the back half of the year as organic growth continues," Stifel analyst Meyer Shields told Global Markets.

For the second quarter, the adjusted operating margin from the brokerage operations fell to 19.6 percent from 21 percent a year ago.

Second-quarter net income attributable to common shareholders rose to $258 million, or 75 cents a share, from $153 million, or 54 cents a share, in the year-ago period.

Excluding items, earnings from continuing operations were 83 cents a share.

Analysts, on average, expected the company to earn 82 cents a share, according to Thomson Global Markets I/B/E/S.

Total revenue rose 48 percent to $2.8 billion. HR solutions revenue more than tripled to $1.09 billion.

Aon Corp last year spent $4.9 billion to buy Hewitt Associates Inc in an aggressive bid to leapfrog arch rival Marsh and McLennan and create the world's largest human resource services company.

Shares of the Chicago-based company were down 3 percent at $47.98 in morning trade on Friday on the New York Stock Exchange.

(Reporting by Jochelle Mendonca in Bangalore; Additional reporting by Ben Berkowitz in New York; Editing by Joyjeet Das and Gopakumar Warrier)