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Aon's M&A Activities, Divestitures, Restructuring Look Good

On Sep 26, 2014, we issued an updated research report on Aon Plc (AON). The company’s mergers and acquisition (M&A) activities, divestitures and restructuring initiatives position it to generate long-term growth. However, increasing debt levels and an unfavorable impact from foreign currency fluctuations remain headwinds.

Earlier, the company reported second-quarter 2014 earnings that surpassed the Zacks Consensus Estimate and also improved year over year mainly due to strong organic growth across both the segments, underlying operational improvement and efficient capital management.

Aon is a leading insurance and risk brokerage company globally. As a risk consultant, the company provides alternative captive management vehicles that are not available in the traditional insurance markets to help its clients manage risks successfully. In the first half of 2014, Aon vended a business in the Risk Solutions segment that led to a pre-tax gain of $1 million. Moreover, the latest divestiture of Aon eSolutions unit to Symphony Technology Group is expected to help the company focus on its core operations and generate further gains. Moreover, Aon has been upfront in undertaking inorganic growth strategies through acquisitions and partnerships. Since the beginning of the year, Aon closed the acquisition of three businesses in the Risk Solutions segment and one in the HR Solutions, acquired National Flood Services and Lima-Peru-based risk and insurance solutions provider, Grana y Asociados, and partnered with AXIS Insurance. Moreover, expansion of the coverage options under the Aon Active Health Exchange in Aug 2014 that will be available from Jan 2015 is expected to boost revenues.

Aon has devised a number of restructuring plans that has helped it control mounting expenses and also generate savings. Annualized savings of $402 million are anticipated in 2014, of which $382 million was achieved from the Aon Hewitt restructuring program in the first half of 2014. As a result, operating expenses also declined in the first half of 2014.

The operating cash flow of Aon has been strong over the years. Although operating cash flow as well as free cash flow declined in the first half of 2014, it was partly mitigated by strong underlying working capital performance and a decline in pension contribution. We believe that the company’s investments in innovative solutions position it to generate higher cash flows in the long term.

On the flip side, Aon’s debt burden has increased despite its efforts to reduce financial leverage. This is because the company resorts to the issuance of debts to repay earlier debts. Moreover, Aon faces threat from foreign currency fluctuations. Given the global economic volatility, foreign currency fluctuation is expected to persist for some time, thereby affecting earnings adversely.

Further, Aon has been facing litigation issues that challenge its financial strength. Additionally, the global economic weakness, repricing of credit risk and deterioration of the financial markets are weighing on customers’ demand for the retail and reinsurance brokerage products of the company, which could affect operational results adversely.

Other stocks in the insurance space that look attractive at current levels include Erie Indemnity Company (ERIE), ACE Limited (ACE) and Validus Holdings, Ltd. (VR).

Read the Full Research Report on ACE
Read the Full Research Report on AON
Read the Full Research Report on ERIE
Read the Full Research Report on VR


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