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AON's Q4 Earnings Miss on Higher Expenses, '23 FCF Jumps 5%
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Aon plc (AON - Free Report) reported fourth-quarter 2023 adjusted earnings of $3.89 per share, which missed the Zacks Consensus Estimate by 4.4%. The bottom line remained flat year over year.
Total revenues advanced 8% year over year to $3.4 billion in the quarter under review and surpassed the consensus mark by 0.6%. The top line consisted of organic revenue growth of 7% and a 2% favorable impact from foreign currency translation. It also had a 1% favorable impact from fiduciary investment income.
The lower-than-expected quarterly earnings were caused by an elevated operating expense level, partly offset by strong retention in multiple segments, new business generation and favorable impacts from currency translation. Strong performance in Wealth Solutions, Health Solutions and Reinsurance Solutions was a major highlight.
Total revenues of $13.4 billion jumped 7% from 2022 levels, while adjusted earnings of $14.14 per share rose 6%. Adjusted operating income rose 10% year over year to $4.2 billion. Total operating expenses rose 9% in 2023 to $9.6 billion.
Q4 Operations
Total operating expenses of $2.6 billion escalated 23% year over year in the fourth quarter and came higher than our estimate of $2.2 billion. The increase was primarily due to a 9% higher compensation and benefits and 70% higher other general costs.
Adjusted operating income was $1.1 billion, which rose 10% year over year and met our estimate. The adjusted operating margin of 33.8% increased from 33.2% a year ago and came lower than our estimate.
Revenue Lines
Commercial Risk Solutions: Organic revenues grew 4% year over year in the fourth quarter, attributable to solid retention rates, new business growth and management of the renewal book that led to strong growth across most of the major geographies. Strength in retail brokerage drove growth across Asia and the Pacific, while U.S. operations were aided by well-performing construction, property and casualty businesses. The segment’s revenues of $1.9 billion advanced 5% year over year but missed the Zacks Consensus Estimate by 1.6%, as well as our estimate by 0.4%.
Reinsurance Solutions: Organic revenues climbed 14% year over year in the quarter under review, driven by solid retention rates, new business generation, solid growth in facultative placements and investment banking. The unit recorded revenues of $332 million, which rose 18% year over year and beat the consensus mark by 6.4%, as well as our estimate by 8.5%.
Health Solutions: Organic revenues improved 11% year over year, courtesy of net new business growth and management of the renewal book, resulting in global expansion of the core health and benefits brokerage business. Strength in Consumer Benefit Solutions, as well as a modest improvement in Talent, contributed to the quarterly results. The segment’s revenues grew 13% year over year to $763 million in the fourth quarter, 3.9% higher than the Zacks Consensus Estimate and 4.2% higher than our model estimate.
Wealth Solutions: Organic revenues advanced 5% year over year in the quarter under review on the back of Retirement strength resulting from sustained advisory demand and project-related work associated with pension de-risking. The unit’s revenues of $377 million rose 7% year over year and outpaced the consensus mark by 2.1%, as well as our model estimate by 0.8%.
Financial Position (as of Dec 31, 2023)
Aon exited the fourth quarter with cash and cash equivalents of $778 million, which climbed from the $690 million level in 2022 end. Total assets of $33.9 billion increased from the 2022-end figure of $32.7 billion.
Long-term debt amounted to $10 billion, up from the $9.8 million figure as of Dec 31, 2022. Short-term debt and the current portion of the long-term debt stood at $1.2 billion.
Aon generated cash flow from operations of $3.4 billion in 2023, which increased 7% from the prior-year level. Free cash flows (FCF) of $3.2 billion rose 5% year over year in the same time frame. Capital expenditure was $252 million in 2023.
Capital Deployment Update
Aon bought back 2.3 million class A ordinary shares for roughly $800 million in the fourth quarter. A leftover capacity of around $3.3 billion remained under its repurchase authorization as of Dec 31, 2023.
Management paid out a quarterly cash dividend of 61.5 cents per share in the quarter under review.
1Q24 View
At current foreign currency rates, management estimates a favorable impact of 3 cents per share in the first quarter of 2024. Interest expenses are anticipated to be $120 million.
Forward Outlook
Revenues are forecasted to witness mid-single-digit or higher organic growth for 2024 and beyond. Free cash flow is projected to witness a decline in the short term due to multiple reasons. However, management remains optimistic to revert to its history of double-digit free cash flow growth in the long term on the back of growing operating income and continued working capital improvements.
It expects to accelerate the Aon United program, which can deliver around $100 million run-rate savings in 2024. AON expects the NFP acquisition to close in the second quarter of 2025 and unlock new markets for the company. At current foreign currency rates, it expects an unfavorable impact of 3 cents in the second quarter of 2024, no impact in the September quarter and a favorable impact of 2 cents in the December quarter.
The Zacks Consensus Estimate for Ryan Specialty’s 2023 full-year earnings indicates a 20.9% year-over-year increase. It beat earnings estimates in two of the past four quarters and met twice, with an average surprise of 5.1%. Also, the consensus mark for RYAN’s 2023 full-year revenues suggests 20.2% year-over-year growth.
The consensus mark for Chubb’s 2024 full-year earnings is pegged at $20.89 per share, which rose by 25 cents in the past week. It beat earnings estimates in all the past four quarters, with an average surprise of 23.4%. Furthermore, the consensus estimate for CB’s 2024 full-year revenues suggests 6.6% year-over-year growth.
The Zacks Consensus Estimate for Brown & Brown’s 2024 full-year earnings is pegged at $3.20 per share, which indicates 13.9% year-over-year growth. BRO beat earnings estimates in each of the past four quarters, with an average surprise of 11.2%.
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AON's Q4 Earnings Miss on Higher Expenses, '23 FCF Jumps 5%
Aon plc (AON - Free Report) reported fourth-quarter 2023 adjusted earnings of $3.89 per share, which missed the Zacks Consensus Estimate by 4.4%. The bottom line remained flat year over year.
Total revenues advanced 8% year over year to $3.4 billion in the quarter under review and surpassed the consensus mark by 0.6%. The top line consisted of organic revenue growth of 7% and a 2% favorable impact from foreign currency translation. It also had a 1% favorable impact from fiduciary investment income.
The lower-than-expected quarterly earnings were caused by an elevated operating expense level, partly offset by strong retention in multiple segments, new business generation and favorable impacts from currency translation. Strong performance in Wealth Solutions, Health Solutions and Reinsurance Solutions was a major highlight.
Aon plc Price, Consensus and EPS Surprise
Aon plc price-consensus-eps-surprise-chart | Aon plc Quote
2023 Full-Year Results
Total revenues of $13.4 billion jumped 7% from 2022 levels, while adjusted earnings of $14.14 per share rose 6%. Adjusted operating income rose 10% year over year to $4.2 billion. Total operating expenses rose 9% in 2023 to $9.6 billion.
Q4 Operations
Total operating expenses of $2.6 billion escalated 23% year over year in the fourth quarter and came higher than our estimate of $2.2 billion. The increase was primarily due to a 9% higher compensation and benefits and 70% higher other general costs.
Adjusted operating income was $1.1 billion, which rose 10% year over year and met our estimate. The adjusted operating margin of 33.8% increased from 33.2% a year ago and came lower than our estimate.
Revenue Lines
Commercial Risk Solutions: Organic revenues grew 4% year over year in the fourth quarter, attributable to solid retention rates, new business growth and management of the renewal book that led to strong growth across most of the major geographies. Strength in retail brokerage drove growth across Asia and the Pacific, while U.S. operations were aided by well-performing construction, property and casualty businesses. The segment’s revenues of $1.9 billion advanced 5% year over year but missed the Zacks Consensus Estimate by 1.6%, as well as our estimate by 0.4%.
Reinsurance Solutions: Organic revenues climbed 14% year over year in the quarter under review, driven by solid retention rates, new business generation, solid growth in facultative placements and investment banking. The unit recorded revenues of $332 million, which rose 18% year over year and beat the consensus mark by 6.4%, as well as our estimate by 8.5%.
Health Solutions: Organic revenues improved 11% year over year, courtesy of net new business growth and management of the renewal book, resulting in global expansion of the core health and benefits brokerage business. Strength in Consumer Benefit Solutions, as well as a modest improvement in Talent, contributed to the quarterly results. The segment’s revenues grew 13% year over year to $763 million in the fourth quarter, 3.9% higher than the Zacks Consensus Estimate and 4.2% higher than our model estimate.
Wealth Solutions: Organic revenues advanced 5% year over year in the quarter under review on the back of Retirement strength resulting from sustained advisory demand and project-related work associated with pension de-risking. The unit’s revenues of $377 million rose 7% year over year and outpaced the consensus mark by 2.1%, as well as our model estimate by 0.8%.
Financial Position (as of Dec 31, 2023)
Aon exited the fourth quarter with cash and cash equivalents of $778 million, which climbed from the $690 million level in 2022 end. Total assets of $33.9 billion increased from the 2022-end figure of $32.7 billion.
Long-term debt amounted to $10 billion, up from the $9.8 million figure as of Dec 31, 2022. Short-term debt and the current portion of the long-term debt stood at $1.2 billion.
Aon generated cash flow from operations of $3.4 billion in 2023, which increased 7% from the prior-year level. Free cash flows (FCF) of $3.2 billion rose 5% year over year in the same time frame. Capital expenditure was $252 million in 2023.
Capital Deployment Update
Aon bought back 2.3 million class A ordinary shares for roughly $800 million in the fourth quarter. A leftover capacity of around $3.3 billion remained under its repurchase authorization as of Dec 31, 2023.
Management paid out a quarterly cash dividend of 61.5 cents per share in the quarter under review.
1Q24 View
At current foreign currency rates, management estimates a favorable impact of 3 cents per share in the first quarter of 2024. Interest expenses are anticipated to be $120 million.
Forward Outlook
Revenues are forecasted to witness mid-single-digit or higher organic growth for 2024 and beyond. Free cash flow is projected to witness a decline in the short term due to multiple reasons. However, management remains optimistic to revert to its history of double-digit free cash flow growth in the long term on the back of growing operating income and continued working capital improvements.
It expects to accelerate the Aon United program, which can deliver around $100 million run-rate savings in 2024. AON expects the NFP acquisition to close in the second quarter of 2025 and unlock new markets for the company. At current foreign currency rates, it expects an unfavorable impact of 3 cents in the second quarter of 2024, no impact in the September quarter and a favorable impact of 2 cents in the December quarter.
Zacks Rank & Key Picks
AON currently has a Zacks Rank #3 (Hold).
Investors interested in the broader Finance space can look at some better-ranked stocks like Ryan Specialty Holdings, Inc. (RYAN - Free Report) , Chubb Limited (CB - Free Report) and Brown & Brown, Inc. (BRO - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Ryan Specialty’s 2023 full-year earnings indicates a 20.9% year-over-year increase. It beat earnings estimates in two of the past four quarters and met twice, with an average surprise of 5.1%. Also, the consensus mark for RYAN’s 2023 full-year revenues suggests 20.2% year-over-year growth.
The consensus mark for Chubb’s 2024 full-year earnings is pegged at $20.89 per share, which rose by 25 cents in the past week. It beat earnings estimates in all the past four quarters, with an average surprise of 23.4%. Furthermore, the consensus estimate for CB’s 2024 full-year revenues suggests 6.6% year-over-year growth.
The Zacks Consensus Estimate for Brown & Brown’s 2024 full-year earnings is pegged at $3.20 per share, which indicates 13.9% year-over-year growth. BRO beat earnings estimates in each of the past four quarters, with an average surprise of 11.2%.