EUR 850.00 For Business Accounts Only

Morningstar | Aon Sees Strong Growth in 3Q; Restructuring On Track

Aon saw its organic top-line growth accelerate during the third quarter, with growth especially strong on the brokerage side. Further, the company’s attempts to lower its cost base appear to be on track, leading to material margin improvement. While we are impressed with the results from the quarter, it doesn’t alter our long-term view, which has Aon generating mid-single-digit organic growth and modest margin expansion over time. We will maintain our $139 fair value estimate and narrow moat rating.

Across the brokerage segments, revenue increased 8% year over year, excluding an accounting change, acquisitions, and currency effects. Coming into the year, we had believed that an improving insurance pricing environment--following the flurry of natural catastrophes in 2017--would be a modest tailwind this year, and that appears to be playing out. While this year’s catastrophe losses look somewhat elevated compared with historical averages, they're still far lower than the industry saw last year. As a result, at this point, we think this tailwind will likely prove somewhat fleeting.

Results on the consulting side of Aon's business were more mixed, but health solutions remains the positive standout, with 8% growth year over year, excluding an accounting change, acquisitions, and currency effects. We believe this segment has the strongest long-term growth prospects on the consulting side, but at only a little more than 10% of overall revenue, its impact will be limited, with some of the unit's more mature segments, such as retirement solutions (which was up 2% in the quarter), being a bit of a drag.

Operating margins, excluding amortization and one-time items, improved to 18.5% from 16.6% last year, driven by the company’s cost-control actions. At this point, management believes that it has incurred over 80% of the planned restructuring costs and achieved almost 70% of its estimated savings from this program. We think Aon's success in lowering costs in the wake of a reorganization of the business has been impressive, but the benefits of this program are close to being fully realized at this point. Longer-term, we think margin improvement will be much more modest.