Aon Earnings: Solid Results, but Lagging Peers

Aon AON continued to generate solid results in the first quarter, with the company seeing relatively strong growth relative to its historical performance, and margin improvement. But overall year-over-year organic growth of 7%, while healthy, falls a bit short of what we saw from peers. Further, we believe that a return to more modest growth is coming. We will maintain our $275 fair value estimate for the narrow-moat company and see shares as modestly overvalued.

The commercial risk and reinsurance segments saw year-over-year organic revenue growth of 6% and 9%, respectively. We think Aon continues to benefit from a harder insurance pricing market. While pricing increases in primary lines have started to moderate, strong pricing increases in reinsurance markets now appear to be acting as a spur. While the near-term outlook on this front remains positive, this tailwind may be set to ebb.

The health and wealth segments saw year-over-year organic revenue growth of 8% and 6%, respectively. We think this side of the business benefits from economic uncertainty. However, if the economic situation were to take a turn for the worse, these segments would be most at risk.

Adjusted operating margins improved to 38.7% from 38.0% last year. Aon saw a $50 million year-over-year increase in fiduciary investment income, due to higher interest rates. Given that this income is very high margin, we think the increase in fiduciary investment income is sufficient to explain the year-over-year margin improvement.