Aon’s Q1 Growth Weaker Than Expected

Aon’s first-quarter results showed weaker-than-expected growth in HR Consulting. Overall, the company reported 2% growth in revenue and essentially no change in operating margins at 18.5%. The company reported adjusted operating income–net of restructuring charges and amortization of intangible assets–of $538 million, up about 2% from a year ago.

Revenue growth slowed significantly within the consulting segment. The unit reported a 1% year-over-year increase due to lower-than-expected new client wins and weakening demand in Europe. We are more concerned by operating margins, which dropped more than 200 bps to 14%, due to a $10 million litigation expense and unfavorable revenue mix shift from high-margin consulting to lower margin business processing. Additionally, health care exchanges failed to create as large of an impact on growth as originally anticipated. However, the pipeline for new potential clients on the exchanges seems healthy.

In Risk Solutions, retail brokerage grew 4% to $1.56 billion for the quarter, in line with our expectations, with P&C pricing starting to firm. However, reinsurance reported only a 1% increase, versus 5% a year ago, confirming our view that there is excess capacity in the market and that companies are retaining more risk.

Free cash flow improved due to better working capital performance and lower capital expenditures. Aon remains strong in terms of its capital position. The company repurchased 5 million shares for approximately $300 million.

We came into this quarter excited about the company’s longterm growth initiatives, including the Global Risk Insight Platform (GRIP) and health care exchanges. However, they were off to a slow start in the quarter. We would hope tosee more evidence that they could have a positive impact on margins as the year unfolds. We think the company could benefit from favorable P&C pricing, but the fragile situation in Europe could weigh on consulting revenue in the near term.

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