July 27, 2012 / 3:01 PM / 6 years ago

Aon getting back on track as investments pay off

(Reuters) - Aon Plc (AON.N) bounced back from a weak first quarter to post an estimate-topping profit as investments in its human resources business begin to pay off despite lingering margin concerns.

Shares of the company rose as much as 6 percent, their biggest single-day percentage gain in more than 4 years, to $49.40 on Friday on the New York Stock Exchange.

The company raised the operating margin outlook for its human resource business for the second half of the year as it lowers the pace of spending on the unit. It now expects operating margins at the unit to be relatively flat in the current quarter, while rising modestly in the fourth quarter.

Aon has invested a lot of money to bolster its healthcare operations and HR business process outsourcing and this has been a been a major reason for the margin squeeze in the last few quarters.

“We have made significant investments in HR solutions and some of those investments are moving from the investment stage to the benefits stage, and that’s going to help drive performance in the second half of the year,” Chief Executive Greg Case told Reuters.

In May, it reported its first fall in quarterly profit after three quarters of rising profits, hurt by lower margins at its HR segment, Aon Hewitt.

However, the management has been consistent in its view that these investments would start to pay off towards the beginning of 2013.

The HR unit contributes about 40 percent to Aon’s total revenue, while the risk solutions unit -- which includes retail insurance brokerage and reinsurance business -- accounts for the rest.

For the second quarter, operating costs at the HR segment rose 8 percent and operating margins fell 440 basis points to 15.4 percent on an adjusted basis, the company said.

“As our investments (in HR solutions) ramp, you are getting revenue growth which is slightly lower margin till the investments truly scale,” Chief Financial Officer Christa Davies said on a post-earnings conference call.

“As revenue growth continues to come through, and the investments scale, you will see higher margin growth.”

Aon, which competes with Marsh & McLennan Co (MMC.N) and Willis Group Holdings WSH.N in negotiating insurance and reinsurance policies for corporate clients, said it is on track to meet its long-term targets.

The company’s long-term targets include operating margins of 22 percent in HR solutions and 26 percent in risk solutions.


    Net income from continuing operations fell 4 percent to $247 million, or 73 cents per share, from 256 million, or 75 cents per share, a year earlier.

    Excluding items, the company posted earnings of $1.02 per share from continuing operations.

    Total revenue for the quarter increased marginally to $2.81 billion, helped by a 4 percent organic growth in both its risk solutions and human resources solutions units in the quarter.

    The risk solutions segment also had a favorable impact from the improving pricing environment as it recorded its highest levels of organic revenue from reinsurance since 2006.

    Analysts on average were expecting Aon to earn $1.01 per share, on revenue of $2.89 billion, according to Thomson Reuters I/B/E/S.

    Aon is one of the principal sponsors of English Premier League football club Manchester United, which is planning to list its Class A common stock in the United States through an up to $300 million IPO on the New York Stock Exchange.

    Shares of the company, which has a market capitalization of about $15 billion, have fallen 10 percent in the past three months, underperforming the broader S&P 500 Index .SPX, which has fallen about 7 percent during the period.

    They were trading up 6 percent at $49.20 in afternoon trade.

    Reporting by Aman Shah in Bangalore; Editing by Akshay Lodaya, Sreejiraj Eluvangal, Saumyadeb Chakrabarty and Anil D'Silva

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