Thursday, October 15, 2020

An International Equity holding: Aon (AON, $205.52): “Is Aon Continuing to Chug Along?” by: Joseph Vitrano, AIM Student at Marquette University

 Aon (AON, $205.52): “Is Aon Continuing to Chug Along?”

By: Joseph Vitrano, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.




• Aon (NYSE:AON) provides insurance brokerage products for large to medium sized businesses. Their products include commercial risk (42%), retirement (17%), healthcare (15%), reinsurance (15%), and data analytics solutions (11%). These products are offered across the globe through Aon’s 112 offices. The company was founded in 1982 and is headquartered in Dublin, Ireland.

• Aon announced on March 9, they are acquiring Willis Towers Watson plc (WTLW.O) for approximately $30 billion. This is an all stock deal and Aon owners will retain essentially 2/3 of the combined company. This will make them the largest insurance broker in the world. The deal was accepted by WLTW shareholders and is expected to close in 2021.

 Aon beat Q2 earnings estimates by $0.04 which was primarily due to cost savings during the quarter. The firm paused share buy-backs but is looking to reinstate them for 2H 2020

• The firm has not cut any employees but has reduced salaries during the pandemic.

 Organic revenue growth fell by 1% in Q2 2020 due to declining revenues in their core business. 


Key points: 


Aon’s revenue grew by -1% due to many of their segments staying flat and few compressing. The firm’s reinsurance business grew by 9% organically in Q2 which was due to the uptick in need for reinsurance solutions from the pandemic. Aon’s most recent earnings beat was caused by a reduction in expenses. This is likely not going to continue into 2H 2020. 


The company’s health and data analytics segments fell the most in revenue growth on a percentage basis. The health segment lost $34 million (18%) of revenue due to clients having less employees and overall less renewals ($19MM), discretionary losses ($15MM), and a onetime adjustment ($16MM). The analytics segment compressed by 8% from client reduction in travel and events. 


Aon’s Business Solutions (ABS) and United strategy have been vital in retaining customers during this time of uncertainty and improving upon costs. The united strategy will also help in combining WLTW as it works to connect all products firmwide for clients to have access to. The ABS platform has continued to reduce costs as associates can use it to perform arduous tasks which is part of the reason for the excellent margin growth of 240 bps. 


The Acquisition of Willis Towers Watson will be a large undertaking for Aon. The acquisition presented challenges but looks to close in 1H 2021. Before Q2 management expected the acquisition to be accretive to EPS however, they have withdrawn EPS guidance due to the pandemic. Management have indicated though that the combined company still will recognize $800 million in cost synergies over a three-year period. The cost synergies will not come from divesting assets, and many of the two companies’ segments can complement each other. WTLW for example targets smaller businesses in their reinsurance segment while Aon focusses on larger ones. The combined firm will become the largest insurance broker, and with that comes a favorable pricing trend. 


What has the stock done lately?

Aon is currently priced at $214.52 up about 43% from the March 23 lows. The stocks performance essentially matched the benchmark of 43% from march to today. The stock has been held back by being related to the financial sector but has performed remarkably better than many of the largest insurance companies. Over the past month Aon is up 5% while the benchmark is up 4%.


Past Year Performance: 

Aon had a tough road ahead of it going into the pandemic. With that fact the stock is still up 12.1% over the past year as opposed to benchmark which is up 3.6%. Aon has been a safer bet than other international firms due to their stable business model. The timing of the addition of Aon to the Aim international fund has not helped its overall performance as it was purchased for $221.06 in February of 2020. 

Source: FactSet

My Takeaway

While Aon in the Aim portfolio hasn’t had the best performance, it has been a more stable financial firm during the pandemic. Looking back at my past pitch, I indicated three drivers that were going to continue to grow the company. Those drivers being the cyber security insurance market, the gap in insured losses, and faster online quotes. Today those drivers are not only intact, but more important than before. The pandemic has brought the need for more data to be shared and stored online. The wildfires and hurricanes have brought attention to the issue of insuring catastrophe losses around the world. Faster quotes from online algorithms will reduce the need for expensive human capital going forward. For these key reasons Aon is recommended to continue to be held in the Aim international portfolio.

Source: FactSet