Aon Earnings: Growth Lags Peers

Aon AON reported solid third-quarter results that reflect a favorable industry backdrop, but its results continue to lag its closest peer. Overall revenue grew 10% year over year, or 6% on an organic basis. Organic growth is still a bit above what we expect long-term. We will maintain our $291 fair value estimate for the narrow-moat company and see shares as slightly overvalued.

Year-over-year growth in the Commercial Risk and Reinsurance segments was 4% and 11%, respectively, on an organic basis. We think the tailwind from better primary insurance pricing may be starting to ebb, but a stronger reinsurance market is picking up the slack to some extent. This area of the business is also benefiting from higher interest rates and better fiduciary income, which boosted overall growth by 2 percentage points.

The Health and Wealth segment followed recent trends with 10% and 4% year-over-year growth, respectively, on an organic basis. We think the Health segment has much better long-term growth prospects longer-term.

Adjusted operating margins improved to 24.3% from 23.1% last year. The increase appears to be entirely because of better fiduciary income, which falls almost completely to the bottom line. Excluding this factor, we believe margins would have compressed modestly. Management announced a cost savings plan that will include a $900 million charge but should result in $350 million in annual run-rate savings by the end of 2026. Aon, in this respect, seems to be following the lead of Marsh McLennan, which recently announced a similar plan. We think the failed Willis Towers Watson merger might take large-scale M&A off the table for Aon, and a greater focus on efficiency would be an appropriate pivot.