Vincent Lui: The Affordable Care Act, or ACA, aims to broaden coverage for 30 million uninsured Americans and low-income families through the use of public exchanges. The law sets up an individual mandate that requires nearly everyone to get coverage or risk paying a penalty.
Over on the private-sector side, we see parallel development of private exchanges and we continue to see growing interest among U.S. employers who are thinking about moving employees to the private exchanges.
We think that gradual migration to private exchanges creates a unique opportunity for Aon (AON) to widen its economic moat, primarily through the network effect. Aon is one of the largest insurance brokers in the world, with a long list of corporate U.S. clients and global clients. Aon is also the first mover into exchange solutions, so it makes sense for Aon to partner with health-care insurers to set up the private exchanges.
Through the private exchanges, employers hope to get better control over soaring health-care costs and leave most of the administrative work to the exchange operators. And this is where Aon comes in. So far, the 2015 enrollment results have been very encouraging.
We think the biggest challenge for Aon is to convince U.S. employers of the long-term benefits and cost savings of delivering benefits through the exchange solutions and have them overcome concerns about the potential loss of productivity and morale as well as the more stringent reporting requirements under the ACA.
Currently, narrow-moat Aon is trading above our $90 fair value estimate. With the volatility we see in the market these days, we think investors should require a wider margin of safety before investing in the company.