AON's Q3 Earnings Beat on Strong Reinsurance Performance

Aon plc AON reported third-quarter 2022 operating earnings of $2.02 per share, which beat the Zacks Consensus Estimate by a penny and met our estimate. The bottom line also climbed 16% year over year.

Total revenues of $2,696 million were marginally down from $2,702 million a year ago and missed the consensus mark of $2,799 million and our estimate of $2,802.9 million. The top line comprised organic revenue growth of 5%, partially offset by a 1% unfavorable impact from acquisitions and divestitures and a 5% unfavorable impact from foreign currency translation.

The strong third-quarter earnings were due to lower operating expenses, strong retention and new business generation, supported by solid contributions from Reinsurance Solutions. Growth in core P&C also benefited the results. However, the positives were partially offset by the frail performance of Wealth Solutions.

Aon plc Price, Consensus and EPS Surprise

Aon plc Price, Consensus and EPS Surprise

Aon plc price-consensus-eps-surprise-chart | Aon plc Quote

Operations

Total operating expenses declined 40% year over year to $2,106 million due to 78% and 17% decreases in other general expenses, as well as compensation and benefits, respectively. The reported figure was lower than our estimate of $2,203.8 million.

Adjusted operating income jumped 4% year over year to $624 million and marginally beat our estimate of $627.6 million. Adjusted operating margin expanded 100 bps to 23.1%.

Revenue Lines

Commercial Risk Solutions:  Organic revenues improved 5% year over year on the back of strong performance in different geographical locations, robust retention, new business generation and management of the renewal book portfolio.

Double-digit growth in the Latin America, UK and Asia regions in the third quarter reflects a strong retail brokerage. Results also reflected solid growth in core P&C and an average positive global exposure and pricing. The segment reported a year-over-year decline of 2% in total revenues to $1,482 million, which missed the Zacks Consensus Estimate of $1,933.7 million and our estimate of $1,581 million. Decreased external deal volume affected its U.S. retail brokerage.

Reinsurance Solutions:  Organic revenues improved 7% year over year, courtesy of a continued new business generation, strong retention, robust growth in treaty and a hike in facultative placements. Total revenues climbed 12% year over year to $396 million, beating the Zacks Consensus Estimate of $233.9 million and our estimate of $363.6 million.

Health Solutions: Organic revenues improved 5% year over year, driven by growth in core health and benefits brokerage, owing to solid retention and management of its renewal book portfolio. Other factors contributing to the upside include growth in human capital on the back of data and advisory solutions. Total revenues of the segment decreased 1% year over year to $494 million, missing the Zacks Consensus Estimate of $684.3 million, and our estimate of $511.9 million. The timing of some revenues affected the segment.

Wealth Solutions: Organic revenues increased 2% year over year, driven by retirement growth, increased utilization and pension de-risking. The positives were partially offset by lower AUM-based delegated investment management revenues. Total revenues of the segment declined 7% year over year to $326 million, missing the Zacks Consensus Estimate of $361.9 million and our estimate of $351.4 million.

Financial Position

AON exited the third quarter with cash and cash equivalents of $692 million, which increased from $544 million in 2021 end. As of Sep 30, 2022, Aon had total assets worth $31.2 billion, down from $31.9 billion on Dec 31, 2021.

At the third quarter-end, long-term debt was $10,116 million, which jumped from $8,228 million at the 2021 end. Short-term debt and the current portion of the long-term debt amounted to $711 million at the third-quarter end.

Cash flow from operations was up to $2,177 million in the first nine months of 2022 from the year-ago level of $1,251 million. Free cash flow increased 79% year over year to $2,177 million during this period. Capital expenditure came in at $126 million, up 79% year over year, during this period.

Capital Deployment

AON bought back 4.2 million Class A Ordinary shares for around $1.2 billion in the quarter under review. Aon had $6.7 billion of authorization left under its share repurchase program as of Sep 30, 2022.

Outlook

Aon continues to expect to achieve double-digit free cash flow growth this year. Organic revenue growth is expected to be more than mid-single-digit for 2022.

At current foreign currency rates, AON expects to incur an 11-cent unfavorable impact per share in the fourth quarter. Also, in the December quarter, Aon is expected to bear a $108 million interest expense.

Zacks Rank & Key Picks

AON currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader finance space are StoneX Group Inc. SNEX, Axos Financial, Inc. AX and FlexShopper, Inc. FPAY. While StoneX Groupsportsa Zacks Rank #1 (Strong Buy), Axos Financial and FlexShopper have a Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

New York-based StoneX Group works as a global financial services network. The Zacks Consensus Estimate for SNEX’s 2022 bottom line indicates 54.8% year-over-year growth.

Headquartered in Las Vegas, NV, Axos Financial is a consumer and business banking products provider. The Zacks Consensus Estimate for AX’s current year bottom line indicates a 10.4% increase from the prior-year reported number.

Based in Boca Raton, FL, FlexShopper is a leading e-commerce marketplace operator. The Zacks Consensus Estimate for FPAY’s 2022 earnings is pegged at 70 cents per share, signaling a massive jump from 4 cents a year ago.

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