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Morningstar | Aon is an Attractive Tollbooth Business

In recent years, Aon has demonstrated modest growth and improving margins, and we expect much of the same going forward. In our view, Aon is a fundamentally attractive business, with a variety of operations that share the commonality of sticky customer relationships, limited capital requirements, and flexible cost structures. While results in individual areas may be lumpy, they rarely move in lockstep, providing a fairly smooth overall top line.In 2018, Aon saw a modest headwind turn into a tailwind. Because Aon generally takes a percentage of premiums as commission, it is exposed to the direction of the insurance pricing cycle. Reinsurance pricing has been very weak in recent years, and primary pricing had started to follow suit. However, the outsize level of catastrophe losses in the back half of 2017 provided a prompt to industry pricing. In our view, however, the insurance industry remains well-capitalized and competitive, which put a bit of a lid on price increases. As a result, we expect pricing was a minor tailwind. A further spate of catastrophes in 2018 could extend this positive, though.From a strategic point of view, Aon has been active in reshaping its business, but also a bit of a follower, evolving over time to a diversified business model that resembles that of its closest peer, Marsh & McLennan. More recently, Marsh & McLennan tightened up its operations, and Aon followed suit by announcing a sale of its benefits administration and human resources BPO operations. Even though this represents a substantial undoing of the Hewitt deal, we liked the move strategically, as Aon’s moat is strongest on the brokerage side, and the operations sold represent the least attractive area of the company’s human resources side, characterized by limited growth opportunities and relatively low margins. We think management has a good track record when it comes to balancing expansion opportunities and maintaining the company’s competitive position, which gives us confidence. We also like that Aon is focusing on improving cost efficiency.