EUR 850.00 For Business Accounts Only

Morningstar | Charges Ding Aon’s 2Q, but Underlying Results Solid; No Change to FVE

Restructuring charges and an accounting change led to only nominal GAAP income of $48 million for Aon during the second quarter, but underlying results showed the company is on a positive trajectory. We continue to expect modest growth and margin improvement for Aon over time, although its restructuring efforts should lead to more material margin improvement in the near term. We are maintaining our $132 fair value estimate and narrow-moat rating.

Overall year-over-year growth, excluding currency effects, accounting changes and acquisitions, was 5%, roughly in line with our long-term expectations. The brokerage side of the business performed well, with 6% and 8% year-over-year growth in primary lines and reinsurance, respectively. We had expected an improving insurance pricing environment to provide a modest tailwind coming into the year, and that appears to be playing out. A large commercial insurance carrier recently noted in its earnings release that pricing increases have been accelerating as we've moved through the year, so this trend could have some legs for the brokers.

Results on the consulting side were mixed, but overall less positive. Aon continues to see fairly strong underlying year-over-year growth of 7% in its healthcare exchange business, and we expect this to continue. However, its data and analytics segment saw a 4% year-over-year decline, as some large contracts made the transition to less favorable terms. We continue to believe results on the consulting side will be somewhat lumpy, but the fact that these businesses rarely move in tandem leavens this fact.

Adjusted for charges and the accounting change, Aon's operating margins improved to 22.0% during the second quarter from 20.7% in the year-ago period, suggesting that the firm's restructuring efforts (which management believes will ultimately deliver $450 million in annual savings) are delivering more meaningful margin improvement.

Restructuring expenses were $195 million during the second quarter, and at this point the company has incurred 75% of expected costs. As for restructuring savings, they hit $84 million before reinvestments during the second quarter, and management believes that at this point the company has achieved around 57% of the expected savings from its restructuring efforts.