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Aon (AON) Earnings Beat, Revenues Miss Estimates in Q4

Aon plc 's AON fourth-quarter 2016 adjusted operating earnings of $2.56 per share surpassed the Zacks Consensus Estimate of $2.49 by 2.8%. Earnings also increased 13% from the year-ago quarter.

For 2016, the company reported adjusted earnings of $6.59 per share, up 7% year over year.

Aon's total revenue of $3.3 billion in the fourth quarter missed the Zacks Consensus Estimate of $3.4 billion. Revenues remained almost flat year over year. This was because a 3% year-over-year increase in organic revenues was partially offset by a 2% unfavorable impact from foreign currency translation. For 2016, total revenue was $11.6 billion due to 3% year-over-year growth in organic revenues.

Operating expenses increased 5% year over year to $2.7 billion in the fourth quarter, primarily due to $158 million of non-cash expenses related to certain pension settlements, $15 million of transaction costs related to the pending sale of certain assets, $6 million of transaction costs related to acquisitions, and an increase in expenses to support 3% organic revenue growth. However, these were partially offset by a $67 million favorable impact from foreign currency translation, a $10 million decrease in the core expense base related to divested businesses, net of acquisitions, and a $7 million decrease in intangible asset amortization.

Quarterly Segmental Update

Risk Solutions

Total revenue of $2.05 billion inched up 2% year over year due to 3% growth in commissions and fees, partially offset by 1% unfavorable impact from foreign currency translation.

Retail organic revenues increased 3% to $1.7 billion due to revenue growth in both the Americas and International businesses. Reinsurance organic revenues increased 2% to $322 million from the prior-year quarter driven by new business generation in treaty and growth in facultative placements.

Total operating expenses grew 5% year over year to $1.6 billion as compensation and benefits increased 5% to $1.2 billion, primarily due to $83 million of non-cash expenses related to certain pension settlements and a $20 million increase in the core expense base related to acquired businesses and other general expenses increased 5% to $406 million.

Adjusted operating income increased 9% year over year to $566 million. Adjusted operating margin grew 190 basis points (bps) to 27.6% during the quarter. The increase in adjusted operating margin was driven primarily by organic revenue growth of 3%, return on investments in data and analytics across the portfolio, and a 100 bps favorable impact from foreign currency translation.

HR Solutions

Total revenue of $1.28 billion dipped 1% year over year due to a 4% decrease in commissions and fees associated with net divestitures and a 2% unfavorable impact of foreign currency translation. Nonetheless, organic growth in commissions and fees of 5% partially mitigated the downside.

On a year-over-year basis, organic revenues in Consulting remained flat at $446 million as a result of continued growth in retirement solutions, partially offset by a decline in project-related work from the prior-year quarter and a modest decline in talent and compensation consulting. On the other hand, organic revenues in outsourcing were up 8% to $854 million due to robust growth in health care exchanges and continued strength in HR BPO for cloud-based solutions, partially offset by an anticipated modest decline in benefits administration.

Compensation and benefits were down 1% year over year to $683 million due to a $34 million decrease in the core expense base of divested businesses, net of acquisitions, and a $12 million favorable impact from currency translation. Other general expenses rose only by $1 million from the year-ago quarter due to an increase in expenses to support 5% organic growth and $15 million of transaction costs related to the pending sale of certain assets.

Adjusted operating income increased 7% year over year to $363 million. The adjusted operating margin improved 210 bps to 28.3% during the quarter. The increase in adjusted operating margin was primarily driven by solid organic revenue growth of 5% and expense discipline, partially offset by an $8 million, or deterioration of 10 bps unfavorable impact from foreign currency translation.

Aon PLC Price, Consensus and EPS Surprise

Aon PLC Price, Consensus and EPS Surprise | Aon PLC Quote

Financial Position

Cash flow from operations for 2016 rose 16% year over year to $2.3 billion, mainly due to an increase in underlying net income after adjusting for certain non-cash pension expenses, lower cash pension contributions, and lower cash tax payments.

Free cash flow for the first nine months was $2.1 billion after a 22% year-over-year increase due to growth in cash flow from operations and a drop in capital expenditures.

During 2016, Aon repurchased approximately 12.2 million Class A Ordinary Shares for $1.3 billion at an average price of $102.66 per share.

Zacks Rank and Stocks to Consider

Aon presently carries Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Among the other players from the insurance space that have reported their fourth-quarter earnings so far, the bottom line at Progressive Corp. PGR , The Travelers Companies, Inc. TRV and RLI Corp. RLI beat their respective Zacks Consensus Estimate.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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