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AON Q2 Earnings Miss Estimates on Higher Benefit Expenses
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Aon plc (AON - Free Report) reported second-quarter 2024 adjusted earnings of $2.93 per share, which lagged the Zacks Consensus Estimate by 5.2%. The bottom line advanced 6% year over year.
Total revenues of $3.8 billion improved 18% year over year. The top line beat the consensus mark by 1%. It consisted of organic revenue growth of 6%, partly offset by a 1% adverse impact of foreign currency translation.
The quarterly results suffered a blow from increased operating expenses, resulting from higher compensation and benefits, and expenses linked with the Aon United program. Interest expenses increased significantly due to an elevated debt level. Nevertheless, the downside was partly offset by strong retention in multiple segments and new business generation. Wealth Solutions and Health Solutions businesses performed robustly.
Total operating expenses escalated 33% year over year to $3.1 billion in the second quarter. The increase was due to the addition of NFP's (an Aon acquired company) ongoing operating expenses, charges from the Accelerating Aon United restructuring program, higher expenses tied to 6% organic revenue growth and investments aimed at long-term growth. The metric was higher than our estimate of $2.8 billion.
Adjusted operating income was $1.03 billion, which rose 19% year over year and surpassed our estimate of $1 billion. The metric benefited on the back of NFP impact, organic revenue growth, net restructuring savings and higher fiduciary investment income. Adjusted operating margin improved 10 basis points (bps) year over year to 27.4%.
Revenue Lines
Commercial Risk Solutions: Organic revenues advanced 6% year over year in the second quarter resulting from new business growth and strong retention rates. The retail brokerage business experienced significant expansion, marked by double-digit growth in EMEA and Latin America. The segment’s revenues rose 14% year over year to $2.02 billion, higher than the Zacks Consensus Estimate of $1.96 billion and our estimate of $1.97 billion.
Reinsurance Solutions: Organic revenues grew 7% year over year, driven by favorable retention rates, new business generation and solid facultative placement growth. The unit’s revenues of $635 million increased 5% year over year but lagged the consensus mark of $643.9 million and our estimate of $637.4 million.
Health Solutions: Organic revenues advanced 6% year over year on the back of global expansion in core health and benefits brokerage business. Strength in Consumer Facing Solutions was partially offset by some weaknesses observed in Talent operations. The segment recorded revenues of $662 million, which soared 48% year over year and came higher than the Zacks Consensus Estimate of $629.2 million and our estimate of $572.2 million.
Wealth Solutions: Organic revenues increased 9% year over year thanks to sustained advisory demand and project-related work associated with pension de-risking. The unit’s revenues climbed 32% year over year to $463 million, which outpaced the consensus mark of $428.3 million and our estimate of $436.3 million.
Financial Position (As of Jun 30, 2024)
Aon exited the second quarter with cash and cash equivalents of $974 million, which rose 25.2% from the 2023-end level. Total assets of $51.5 billion climbed 51.5% from the figure in 2023-end.
Long-term debt amounted to $17.6 billion, up 76.2% from the figure as of Dec 31, 2023. Short-term debt and the current portion of the long-term debt totaled $4 million.
Cash Flows
Aon generated cash flow from operations of $822 million in the first half of 2024, which dropped 27% from the prior-year comparable period. Free cash flows were recorded at $721 million in the same time frame, down 27% year over year.
Capital Deployment Update
Aon bought back 0.8 million class A ordinary shares for roughly $250 million in the second quarter. A leftover capacity of around $2.8 billion remained under its repurchase authorization as of Jun 30, 2024.
Management announced a quarterly cash dividend of 67.5 cents per share.
Forward View
Revenues are expected to register mid-single-digit or higher organic growth for 2024 and beyond. The company expects the adjusted operating margin to expand in 2024.
Free cash flow is projected to witness a decline in the short term due to multiple reasons, such as restructuring, the NFP deal and integration expenses. However, management remains optimistic about returning to its history of double-digit free cash flow growth in the long term on the back of growing operating income and continued working capital improvements.
The Aon United Restructuring program is likely to enable the company to achieve total annual run-rate savings of approximately $350 million by the end of 2026. It realized savings of $25 million in the second quarter and projects $100 million of total savings for 2024, anticipating an increase in savings as the program progresses.
At current foreign currency rates, it expects an unfavorable impact of 1 cent in the third quarter and 2 cents in the fourth quarter. An unfavorable impact of 7 cents per share is expected in 2024. Interest expenses are anticipated to be $214 million in the third quarter while interest income is expected to be negligible.
Of the insurance industry players that have reported second-quarter 2024 results so far, the bottom-line results of Marsh & McLennan Companies, Inc. (MMC - Free Report) , Brown & Brown, Inc. (BRO - Free Report) and Kinsale Capital Group, Inc. (KNSL - Free Report) beat the Zacks Consensus Estimate.
Marsh & McLennan reported second-quarter 2024 adjusted earnings per share of $2.41, which beat the Zacks Consensus Estimate by 0.8%. The bottom line advanced 10% year over year. Consolidated revenues rose 6% year over year to $6.2 billion. The figure also improved 6% on an underlying basis. The top line, however, fell short of the consensus mark by 1%. MMC’s adjusted operating income was $1.72 billion, which grew 11% year over year. Adjusted operating margin improved 130 bps year over year to 29%.
The Risk and Insurance Services segment’s revenues were $4.02 billion, which advanced 8% year over year and 7% on an underlying basis. Adjusted operating income advanced 12% year over year to $1.34 billion. Revenues of Marsh, a unit within the segment, improved 8% year over year and 7% on an underlying basis to $3.27 billion. In the United States/Canada, underlying revenues grew 6% year over year. International operations also witnessed underlying revenue growth of 7%.
Brown & Brown’s second-quarter adjusted earnings of 93 cents per share beat the Zacks Consensus Estimate by 6.8%. The bottom line increased 17.7% year over year. Total revenues of $1.2 billion beat the consensus estimate by 3.3%. The top line improved 12.5% year over year. The upside can be primarily attributed to commission and fees, which grew 11.4% year over year to $1.1 billion.
Organic revenues improved 10% to $1 billion. Investment income more than doubled year over year to $22 million. Adjusted EBITDAC was $420 million, up 17.3% year over year. EBITDAC margin expanded 150 bps year over year to 35.7%.
Kinsale Capital delivered second-quarter net operating earnings of $3.75 per share, which outpaced the Zacks Consensus Estimate by 6.5%. The bottom line increased 30.4% year over year. Operating revenues jumped 45.1% year over year to $378 million. Revenues beat the consensus estimate of $377 million. Gross written premiums of $529.8 million rose 20.9% year over year. Net written premiums climbed 17.9% year over year to $430.2 million.
Net investment income increased 48.3% year over year to $35.8 million. Kinsale Capital’s underwriting income was $76.1 million, which grew 23.6% year over year. The combined ratio deteriorated 100 bps to 77.7% in the quarter under review. The expense ratio deteriorated 10 bps to 21.1 while the loss ratio deteriorated 60 bps to 56.6.
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AON Q2 Earnings Miss Estimates on Higher Benefit Expenses
Aon plc (AON - Free Report) reported second-quarter 2024 adjusted earnings of $2.93 per share, which lagged the Zacks Consensus Estimate by 5.2%. The bottom line advanced 6% year over year.
Total revenues of $3.8 billion improved 18% year over year. The top line beat the consensus mark by 1%. It consisted of organic revenue growth of 6%, partly offset by a 1% adverse impact of foreign currency translation.
The quarterly results suffered a blow from increased operating expenses, resulting from higher compensation and benefits, and expenses linked with the Aon United program. Interest expenses increased significantly due to an elevated debt level. Nevertheless, the downside was partly offset by strong retention in multiple segments and new business generation. Wealth Solutions and Health Solutions businesses performed robustly.
Aon plc Price, Consensus and EPS Surprise
Aon plc price-consensus-eps-surprise-chart | Aon plc Quote
Operations
Total operating expenses escalated 33% year over year to $3.1 billion in the second quarter. The increase was due to the addition of NFP's (an Aon acquired company) ongoing operating expenses, charges from the Accelerating Aon United restructuring program, higher expenses tied to 6% organic revenue growth and investments aimed at long-term growth. The metric was higher than our estimate of $2.8 billion.
Adjusted operating income was $1.03 billion, which rose 19% year over year and surpassed our estimate of $1 billion. The metric benefited on the back of NFP impact, organic revenue growth, net restructuring savings and higher fiduciary investment income. Adjusted operating margin improved 10 basis points (bps) year over year to 27.4%.
Revenue Lines
Commercial Risk Solutions: Organic revenues advanced 6% year over year in the second quarter resulting from new business growth and strong retention rates. The retail brokerage business experienced significant expansion, marked by double-digit growth in EMEA and Latin America. The segment’s revenues rose 14% year over year to $2.02 billion, higher than the Zacks Consensus Estimate of $1.96 billion and our estimate of $1.97 billion.
Reinsurance Solutions: Organic revenues grew 7% year over year, driven by favorable retention rates, new business generation and solid facultative placement growth. The unit’s revenues of $635 million increased 5% year over year but lagged the consensus mark of $643.9 million and our estimate of $637.4 million.
Health Solutions: Organic revenues advanced 6% year over year on the back of global expansion in core health and benefits brokerage business. Strength in Consumer Facing Solutions was partially offset by some weaknesses observed in Talent operations. The segment recorded revenues of $662 million, which soared 48% year over year and came higher than the Zacks Consensus Estimate of $629.2 million and our estimate of $572.2 million.
Wealth Solutions: Organic revenues increased 9% year over year thanks to sustained advisory demand and project-related work associated with pension de-risking. The unit’s revenues climbed 32% year over year to $463 million, which outpaced the consensus mark of $428.3 million and our estimate of $436.3 million.
Financial Position (As of Jun 30, 2024)
Aon exited the second quarter with cash and cash equivalents of $974 million, which rose 25.2% from the 2023-end level. Total assets of $51.5 billion climbed 51.5% from the figure in 2023-end.
Long-term debt amounted to $17.6 billion, up 76.2% from the figure as of Dec 31, 2023. Short-term debt and the current portion of the long-term debt totaled $4 million.
Cash Flows
Aon generated cash flow from operations of $822 million in the first half of 2024, which dropped 27% from the prior-year comparable period. Free cash flows were recorded at $721 million in the same time frame, down 27% year over year.
Capital Deployment Update
Aon bought back 0.8 million class A ordinary shares for roughly $250 million in the second quarter. A leftover capacity of around $2.8 billion remained under its repurchase authorization as of Jun 30, 2024.
Management announced a quarterly cash dividend of 67.5 cents per share.
Forward View
Revenues are expected to register mid-single-digit or higher organic growth for 2024 and beyond. The company expects the adjusted operating margin to expand in 2024.
Free cash flow is projected to witness a decline in the short term due to multiple reasons, such as restructuring, the NFP deal and integration expenses. However, management remains optimistic about returning to its history of double-digit free cash flow growth in the long term on the back of growing operating income and continued working capital improvements.
The Aon United Restructuring program is likely to enable the company to achieve total annual run-rate savings of approximately $350 million by the end of 2026. It realized savings of $25 million in the second quarter and projects $100 million of total savings for 2024, anticipating an increase in savings as the program progresses.
At current foreign currency rates, it expects an unfavorable impact of 1 cent in the third quarter and 2 cents in the fourth quarter. An unfavorable impact of 7 cents per share is expected in 2024. Interest expenses are anticipated to be $214 million in the third quarter while interest income is expected to be negligible.
Zacks Rank
Aon currently has a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performances of Other Insurers
Of the insurance industry players that have reported second-quarter 2024 results so far, the bottom-line results of Marsh & McLennan Companies, Inc. (MMC - Free Report) , Brown & Brown, Inc. (BRO - Free Report) and Kinsale Capital Group, Inc. (KNSL - Free Report) beat the Zacks Consensus Estimate.
Marsh & McLennan reported second-quarter 2024 adjusted earnings per share of $2.41, which beat the Zacks Consensus Estimate by 0.8%. The bottom line advanced 10% year over year. Consolidated revenues rose 6% year over year to $6.2 billion. The figure also improved 6% on an underlying basis. The top line, however, fell short of the consensus mark by 1%. MMC’s adjusted operating income was $1.72 billion, which grew 11% year over year. Adjusted operating margin improved 130 bps year over year to 29%.
The Risk and Insurance Services segment’s revenues were $4.02 billion, which advanced 8% year over year and 7% on an underlying basis. Adjusted operating income advanced 12% year over year to $1.34 billion. Revenues of Marsh, a unit within the segment, improved 8% year over year and 7% on an underlying basis to $3.27 billion. In the United States/Canada, underlying revenues grew 6% year over year. International operations also witnessed underlying revenue growth of 7%.
Brown & Brown’s second-quarter adjusted earnings of 93 cents per share beat the Zacks Consensus Estimate by 6.8%. The bottom line increased 17.7% year over year. Total revenues of $1.2 billion beat the consensus estimate by 3.3%. The top line improved 12.5% year over year. The upside can be primarily attributed to commission and fees, which grew 11.4% year over year to $1.1 billion.
Organic revenues improved 10% to $1 billion. Investment income more than doubled year over year to $22 million. Adjusted EBITDAC was $420 million, up 17.3% year over year. EBITDAC margin expanded 150 bps year over year to 35.7%.
Kinsale Capital delivered second-quarter net operating earnings of $3.75 per share, which outpaced the Zacks Consensus Estimate by 6.5%. The bottom line increased 30.4% year over year. Operating revenues jumped 45.1% year over year to $378 million. Revenues beat the consensus estimate of $377 million. Gross written premiums of $529.8 million rose 20.9% year over year. Net written premiums climbed 17.9% year over year to $430.2 million.
Net investment income increased 48.3% year over year to $35.8 million. Kinsale Capital’s underwriting income was $76.1 million, which grew 23.6% year over year. The combined ratio deteriorated 100 bps to 77.7% in the quarter under review. The expense ratio deteriorated 10 bps to 21.1 while the loss ratio deteriorated 60 bps to 56.6.