Aon plc’s AON first-quarter 2015 operating earnings of $1.37 per share exceeded the Zacks Consensus Estimate of $1.29, thereby marking the eighth straight quarter of a positive earnings surprise. The results also increased 7% from the year-ago quarter.
Despite the adverse impact of foreign currency translation, Aon’s first-quarter earnings improved year over year on account of organic revenue growth across its segments, underlying operational improvement and efficient capital deployment.
Including extraordinary items worth 23 cents per share, Aon’s net income per share came in at $1.14, comparing favorably with $1.06 in the year-ago quarter.
The company’s total revenue decreased 3% year over year to $2.8 billion due to an unfavorable impact from foreign currency translation. This was partially offset by a 3% increase in organic revenues and 1% growth in commissions and fees. Revenues missed the Zacks Consensus Estimate of $2.97 billion.
Total operating expenses at the company were $2.4 billion, down 3% year over year. Lower intangible asset amortization and an unfavorable impact from foreign currency translation led to the improvement.
Segment Update
Risk Solutions: Total revenue came in at $1.9 billion, down 5% year over year. An unfavorable impact from foreign currency translation led to the deterioration in revenues.
Adjusted operating earnings declined 6% year over year to $440 million while adjusted operating margin plunged 40 basis points to 23.2% during the quarter. The deterioration was largely owing to the unfavorable impact of foreign currency translation.
Organic revenues at the Retail Brokerage segment increased 4% year over year. The growth came on the back of higher organic revenues from the Americas business (up 4%) and the International business (up 3%).
While growth in the Americas business was led mainly by better business in Latin America and Canada and management of the renewal book portfolio in U.S. Retail, the International business growth was largely attributable to improvement in Asia and emerging markets, and new business generation in Europe.
Organic revenues at the Reinsurance segment were down 1% mainly due to an unfavorable global market scenario, and moderate decrease in capital market transactions.
HR Solutions: Total revenue of $970 million reflected a 1% year-over-year rise owing to 4% organic growth in commissions and fees. However, this was partially mitigated by a 3% unfavorable impact of foreign currency translation. Adjusted operating earnings were $128 million, flat year over year while adjusted operating margin deteriorated 10 basis points to 13.2%. Apart from the adverse impact of foreign currency translation, higher expenses to support future growth also contributed to the decrease in margin.
Organic revenues at Consulting Services increased 2% year over year. This was primarily attributable to an improvement in the U.S. retirement business, mainly in investment consulting.
Organic revenues at Outsourcing increased 4%, driven by the addition of new clients in HR Business Process Outsourcing and improvement in follow-on enrollments and other off-cycle wins on the retiree exchange.
Financial Position
As of Mar 31, 2015, cash and cash equivalents of Aon were $378 million, up from $374 million, as of Dec 31, 2014. Total assets of Aon as of Mar 31, 2015, were $28.4 million, down from $29.8 billion, at 2014 end.
Operating cash inflow was $136 million in the first quarter of 2015. This compared favorably with a cash outflow of $11 million in the year-ago quarter. The improvement came from a decrease in pension contribution, improvement in working capital and a decrease in cash paid for taxes and restructuring.
Capital expenditures in the first quarter increased 13% year over year to $62 million. Free cash flow was $74 million as against $(66) million in the comparable quarter last year. This improvement was attributable to an increase in cash flow, partially mitigated by high capital expenditures.
Long-term debt decreased slightly to $4.7 billion as of Mar 31, 2015, from $4.8 billion at Dec 31, 2014. Debt-to-capital ratio of Aon rose 120 bps from 2014 end to 47.1% on Mar 31, 2015.
Share Repurchase Update
Aon bought back 2.5 million Class A Ordinary shares during the quarter for nearly $250 million.
Dividend Update
On Apr 10, 2015, Aon approved a 20% increase in its quarterly cash dividend. The dividend hike translates into a quarterly cash dividend of 30 cents per share, up from 25 cents paid on Feb 2. The raised dividend will be paid on May 15, to shareholders on record as of May 1.
Our Take
Aon’s earnings surpassed the Zacks Consensus Estimate and improved year over year despite the unfavorable impact of foreign currency translation. The improvement was backed primarily by organic revenue growth and capital management initiatives.
Lower capital expenditures and improvement in operating cash flows led to free cash flow generation that prompted the board of directors of Aon to raise its quarterly cash dividend by 20% last month.
Currently, Aon carries a Zacks Rank #3 (Hold).
Stocks to Consider
Better-ranked stocks in the insurance space include eHealth, Inc. EHTH, American Financial Group Inc. AFG and Arch Capital Group Ltd. ACGL. All three stocks have a Zacks Rank #2 (Buy).
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