Aon Earnings: Multiple Tailwinds Drive Strong Results, but Aon Lags Closest Peer

Aon AON continued to produce good results in the second quarter as the company continues to benefit from multiple tailwinds across its business. However, results also continue to lag what we’re seeing from the company’s closest peer, Marsh McLennan. We appreciate Aon’s strong near-term position, but historically the company has produced only modest growth, and we think a return to more normalized growth is inevitable. We think that the market is overly focused on near-term prospects, and the shares are overvalued as a result. We will maintain our $275 per share fair value estimate for the narrow-moat company.

Overall revenue increased 6% year over year on an organic basis. On the brokerage side, the corporate risk and reinsurance segments were up 5% and 9%, respectively, when compared with the prior year’s period. We think Aon continues to benefit from the tailwind provided by stronger commercial insurance pricing. While pricing increases in primary lines appeared to have moderated, reinsurance pricing now looks to be picking up the slack. While this is likely to remain a tailwind for P&C insurers nearer term, the positive situation is unlikely to persist for much longer. On the consulting side, the health and wealth segments were up 10% and 2%, respectively, when compared with the year-ago period. We think health has better long-term growth prospects but don’t expect the gap to always be this wide.

Adjusted operating margins improved to 27.3% from 26.2% last year. The increase appears to be entirely driven by a rise in fiduciary interest income as interest rates have risen. This revenue tends to have an outsize impact on margins, as it drops almost completely to the bottom line. While this will likely continue to provide a boost to margins in the near term, the positive impact should be temporary.