Aon plc’s (AON) fourth-quarter 2014 operating earnings of $1.89 per share exceeded the Zacks Consensus Estimate of $1.86, thereby marking the seventh straight quarter of positive earnings surprise. The results were also higher than the year-ago quarter figure by 23%.
Aon’s earnings improved year over year on account of organic revenue growth, operating margin improvement across both the segments and effective capital deployment.
Including extraordinary items worth 33 cents per share, Aon’s net income per share was $1.56, comparing favorably with $1.14 in the year-ago period.
The company’s total revenue went up 3% year over year to $3.3 billion on higher organic revenues (up 6% from the year-ago quarter). Revenues were a tad lower than the Zacks Consensus Estimate of $3.4 billion.
Total operating expenses at the company were $2.7 billion, down 1% year over year. Lower formal restructuring costs, decline in intangible asset amortization and favorable impact from foreign currency translation led to the improvement.
Segment Update
Risk Solutions: Total revenue came in at $2.1 billion, up $3 million year over year. Organic growth of 3% in commissions and fees and a 1% increase in commissions and fees from acquisitions, net of divestitures led to the improvement in revenues.
Adjusted operating earnings increased 5% year over year to $507 million while adjusted operating margin increased 110 basis points to 24.7% during the quarter. The improvement was largely owing to organic revenue growth, return generated on investments and cost containment measures taken.
Organic revenues at the Retail Brokerage segment increased 4% year over year. This growth came on the back of higher organic revenues from the Americas business (up 7%), led mainly by better business in Latin America and US Retail, and the favorable impact from the timing of some revenues.
Organic revenues at the Reinsurance segment were up 3% mainly on increase in net new business in treaty placements, along with improvement in capital market transactions and advisory businesses and facultative placements. However, these positives were partially mitigated by an unfavorable market impact in treaty placements.
HR Solutions: Total revenue of $1.3 billion reflected an 8% year-over-year rise owing to 10% organic growth in commissions and fees. However, this was partially mitigated by a 1% decline in commissions and fees associated with acquisitions, net of divestitures and a 1% unfavorable impact of foreign currency translation. Adjusted operating earnings increased 19% year over year to $296 million while adjusted operating margin improved 210 basis points to 23.5%.
Organic revenues at Consulting Services improved 4% year over year. This was driven by improvement in the U.S. retirement for investment consulting and businesses across Asia
Organic revenues at Outsourcing increased 15%, driven by the addition of new clients in HR Business Process Outsourcing and improvement in health care exchanges.
Full-Year Highlights
Aon’s 2014 operating earnings of $5.71 per share exceeded the Zacks Consensus Estimate of $5.68. The results were also higher than the year-ago quarter figure by 17%.
Organic revenue growth and efficient capital deployment led to the year-over-year improvement.
Including extraordinary items worth $1.05 per share, Aon’s net income per share was $4.66, comparing favorably with $3.53 in the year-ago period.
Total revenue of Aon went up 2% year over year to $12 billion on organic growth in commissions and fees. Revenues were a tad lower than the Zacks Consensus Estimate of $12.1 billion.
Financial Position
As of Dec 31, 2014, cash and cash equivalents of Aon were $374 million, down 21.6% from $477 million as of Dec 31, 2013. Total assets of Aon as of Dec 31, 2014, were $29.8 billion, down from $30.3 billion at 2013-end.
Net operating cash flow came in at $1.64 billion in 2014, up from $1.63 billion n 2013. The improvement came from an increase in net income and a decrease in pension contributions. Capital expenditure in 2014 increased 11.8% year over year to $256 million. Free cash flow in 2014 decreased 1% from that at 2013 to $1.4 billion. This was attributable to increase in capital expenditures, partially mitigated by high operating cash flow.
Long-term debt increased to $4.8 billion as of Dec 31, 2014 from $3.7 billion as of Dec 31, 2013. Debt-to-capital ratio of Aon rose 1090 bps from 2013-end to 45.9% as of Dec 31, 2014.
Share Repurchase Update
In 2014, Aon bought back 25.8 million Class A Ordinary shares for nearly $2.25 billion.
Our Take
Aon’s earnings surpassed the Zacks Consensus Estimate and improved year over year as well, primarily on organic revenue growth, improved segmental performance and efficient capital deployment.
Although Aon expects to create significant shareholder value in 2015, a weak financial position and an increased debt burden raises caution regarding the company’s future capital deployments and investment in growth initiatives.
Currently, Aon carries a Zacks Rank #3 (Hold).
Stocks to Consider
Better-ranked stocks in the insurance space include Erie Indemnity Company (ERIE), The Allstate Corp. (ALL) and Validus Holdings, Ltd. (VR). All three have a Zacks Rank #2 (Buy).
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