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Highlights from the AON earnings release and analyst call

Aon plc (AON) reported full year and 4Q 2020 results this morning, followed by a call with the investment community. Adjusted earnings per share (EPS) was reported at $2.62 vs. consensus estimates of $2.46 for the quarter.

Highlights from the release and conference call include:

  • AON reported organic growth of 2% during 4Q, an improvement from 0% organic growth in 3Q. Full year organic growth was 1% while adjusted operating expenses were down 1%, which combined with other factors, yielded an increase in adjusted EPS in the full year of 7%.
  • Operating expenses in 4Q were up 4% due to increases in variable compensation and benefits compared to the prior year. Since 2009, AON has expended adjusted operating margins by 8.8% from 19.7% to 28.5%.
  • In its largest segment, Commercial Risk Solutions, the company reported 4% organic growth in the quarter. Broad results across its five operating segments indicate that more discretionary (project based) areas of the business continued to decline during the quarter, while pricing had a “modestly positive” impact. Retention and new business generation were strong across other, less discretionary areas.
  • AON called out specific sectors and lines of business recovering at different rates due to global economic activity and sentiment around vaccination progress and outlook:
    • Mergers & Acquisition (M&A), construction activity and voluntary benefits saw improvement in 4Q.
    • Travel, event, and retirement-related lines continued to be weak in 4Q and are recovering more slowly.
  • The forecast for overall growth in 1Q looks to be “modest” and will improve towards mid-single digits throughout 2021.
  • The company repurchased $800M worth of shares in 4Q ($1.8M in the full year 2020) but is maintaining a “conservative” cash management strategy given the macroeconomic uncertainties that remain and the fact that 1Q is typically the weakest cash generation quarter. Additional debt will be considered as EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) grows incrementally.
  • The AON and Willis Towers Watson (NASDAQ: WLTW) combination remains on track to close in the first half of 2021 and deliver an estimated $800M in cost synergies (5.5% of the combined cost base) by merging the organizations. The company reiterated that organic growth in the combined entities is expected to “mid-single digit or greater” over the long-term.

Generally, AON reported an improvement in results sequentially each quarter since 2Q20, suggesting that the global pandemic recovery is underway albeit uneven and with uncertainty still in the outlook. Looking to 2021 and beyond, the company is focused on making the most of its combination with WLTW by addressing new risk issues raised by the global pandemic and leveraging the strength of both companies.

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This earnings summary has been prepared by Marsh, Berry & Co., Inc. and is not intended to provide investment recommendations on any company. It is not a research report, as such term is defined by applicable laws and regulations, and it does not contain sufficient information upon which to make an investment decision. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities, financial instruments or to participate in any particular trading strategy. These materials are based solely on information contained in publicly available documents and Marsh, Berry & Co., Inc. has not independently attempted to investigate or to verify such information.

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