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With its fourth-quarter 2013 operating earnings of $1.54 per share exceeding the Zacks Consensus Estimate by a penny, Aon plc (AON - Analyst Report) delivered three straight quarters of positive surprises. The result also outpaced the year-ago quarter’s earnings by 21%.

Strong operating performance, low effective tax rate and capital management initiatives during the quarter mainly fuelled the increase.

Net income of $1.14 per share compared favorably with 93 cents per share in the year-ago period.

Total revenue of Aon grew 3% year over year to $3.2 billion on higher organic revenues (up 4% year over year), partly offset by an unfavorable impact from foreign currency translation. However, results lagged the Zacks Consensus Estimate of $3.3 billion.

Total operating expenses of Aon were $2.7 billion, up 2% year over year due to higher expenses related to growth in organic revenues and $29 million expended on restructuring. This was partially offset by an $18 million favorable impact from foreign currency translation, lower acquisition-related expenses (by $12 million) and savings associated with the restructuring programs.

Segment Update

Risk Solutions: Total revenue was $2.1 billion, flat with the year-ago quarter. Organic growth of 3% in commissions and fees that was mitigated by a 2% decline in acquisition-related commissions and fees and a 1% unfavorable impact from foreign currency translation let to the constant revenues. Operating earnings decreased 5% year over year to $413 million during the quarter.

Organic revenues in Retail Brokerage increased 3% year over year driven by higher revenues in Americas business (up 4%), triggered by growth in Latin America and new operations in U.S. Retail and International business (up 2%).

Organic revenues in the Reinsurance segment were in line with the year-ago quarter as an expected unfavorable impact from timing mitigated the improvement in capital market transactions and advisory business, and an increase in new businesses in treaty placements.

HR Solutions: Total revenue was $1.2 billion, up 8% year over year on an 8% organic growth in commissions and fees. Operating earnings increased 100% year over year to $156 million.

Organic revenues in Consulting Services increased 1% year over year due to higher investment and compensation consulting. This was partly mitigated by deterioration in the actuarial services in retirement consulting.

Organic revenues in Outsourcing increased 11%. This improvement was attributable to an improvement in health care exchanges, benefits administration and HR BPO.

Full Year Highlights

Aon reported full-year 2013 operating earnings of $4.89 per share. Results exceeded the year-ago earnings of $4.21 by 16%. Net income for 2013 increased 18% to $3.53 per share.

Total revenue for 2013 grew 3% year over year to $11.8 billion on higher organic revenues (up 3%) and commissions and fees from acquisitions, net of divestitures (up 1%). This was partly offset by an unfavorable impact from foreign currency translation (1%).

Share Repurchase Update

During the reported quarter, Aon repurchased 0.97 million Class A Ordinary shares for nearly $77 million. The company was left with $2.87 billion under its authorization at the end of Dec 2013.

Financial Position

As of Dec 31, 2013, cash and cash equivalents of Aon was $477 million, up 63.9% from that on Dec 31, 2012. Total assets of Aon as of Dec 31, 2013 were $30.3 billion, down from $30.5 billion at 2012-end.

Net cash from operations was $649 million in the quarter, up 18% year over year, driven by higher net income and lower pension contributions. Capital expenditure during the quarter declined 19% year over year to $55 million. Free cash flow in the reported quarter was $594 million, up 23% year over year. The increase was driven by a decline in capital expenditure and an increase in cash flow from operations.

Long-term debt decreased to $3.69 billion at the end of 2013 from $3.71 billion at 2012-end. However, the debt-to-capital ratio of Aon increased by 10 basis points from 2012-end to 34.9% at the end of 2013.

Our Take

Although Aon’s revenues did not match our expectation, earnings surpassed the Zacks Consensus Estimate and also improved on a year-over-year basis, primarily on improved operating performance and efficient capital management.

Aon is undertaking a number of acquisitions and other global expansion strategies that are expected to help the company better serve its clients and generate more revenues. Going forward, although macro factors are likely to continue as a headwind in 2014, Aon’s new business development and long-term investments are expected to help the company combat the volatility to deliver improved performance. Aon’s positive performance is expected to help the company generate strong free cash flow and increase financial strength in 2014.

Aon currently carries a Zacks Rank #3 (Hold).

Performance of Another Insurance Broker

Arthur J Gallagher & Co. (AJG - Snapshot Report) reported fourth-quarter 2013 operating net earnings of 48 cents a share that missed the Zacks Consensus Estimate by a penny.

Other Stocks to Consider

Some better-ranked stocks in the financial services space include Marsh & Mclennan Companies, Inc. (MMC - Analyst Report) and CNO Financial Group, Inc. (CNO - Analyst Report) that are expected to report fourth-quarter 2013 results on Feb 11, 2014. While CNO Financial sports a Zacks Rank #1 (Strong Buy), Marsh & Mclennan carries a Zacks Rank #2 (Buy).

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