Investors Like Aon’s Growth Strategy

By | December 2, 2010

Top global insurance broker Aon Corp. looks to grow over the next couple of years on the back of improved pricing and a recent key acquisition, which appears to be attracting smart investors to the stock.

While some analysts see relatively limited prospects for Aon in 2011, onward most expect it to rebound substantially from 2012 onward, which could pay off handsomely for patient investors.

Two of the largest U.S. equity-oriented hedge funds, Eminence Capital and Glenview Capital Management, made big moves in Aon shares in the third quarter. Glenview raised its Aon stake sevenfold, and Eminence boosted its position by 6 percent.

That was enough to land Aon on the list of the top 10 increases in existing positions in the quarterly “Smart Money” survey of 30 of the largest stock-picking hedge funds, conducted by Thomson Reuters.

“What we’re clearly seeing with most insurance brokers is that while last year’s revenues were enormously pressured … most of those factors are much less adverse than they were last year,” said Meyer Shields, an analyst at Stifel Nicolaus.

“The potential for companies to produce top-line growth is reasonable. Last year it was impossible.”

Interest from fund managers coincided with Aon’s four-year sponsorship deal with Manchester United, one of the most widely followed sports teams in the world. The soccer club started wearing jerseys emblazoned with Aon’s logo in July.

The third quarter was more crucial, though, for a big score on the M&A front. Aon, already the world’s largest insurance brokerage, bought Hewitt Associates for $4.9 billion, its largest deal ever, to become the largest provider of human resources services to companies as well.

The takeover did not come cheap, but may have been the only deal Aon could make to accomplish its goal of growing quickly in human resources consulting.

Shields said Aon has done a good job of proving the deal made sense financially, and the company appears committed to buying back shares to negate the dilution from the cash-and-stock transaction.

GROWTH OPPORTUNITY

The Hewitt deal was aimed at better positioning Aon against its closest competitors, Marsh & McLennan Cos. Inc. and Willis Group Holdings Plc. It already outstrips them in terms of revenue and operating income.

Aon and Willis are cross-town rivals of a sort, occupying famous buildings that frame the skyline in Chicago, Aon’s home. London-based Willis leased part of the former Sears Tower in 2009 and took over naming rights. Aon’s 83-floor, granite-faced headquarters, once the Standard Oil building, sits close to Lake Michigan.

Sources close to the Hewitt deal said Aon made a preemptive strike at a time when other potential buyers were circling the HR giant.

They said Aon CEO Greg Case, who joined the company in 2005 from consulting firm McKinsey & Co., had been watching Hewitt and wanted to move aggressively to diversify Aon’s business amid industry consolidation.

But Aon’s stock price has not reflected the apparent advantages of the Hewitt deal and Aon’s wider canvas. The shares are up just 6.7 percent this year, trailing gains of almost 16 percent for Marsh and 23 percent for Willis.

Aon’s price-to-book ratio, a preferred measure for the insurance industry that relates a company’s stock price to its net worth, stands at 2.43 versus 2.34 for Marsh, 2.54 for Willis and a sector average of 2.69.

Aon’s price-to-book ratio, a preferred measure for the insurance industry that relates a company’s stock price to its net worth, stands at 2.43 — not quite as attractive as Marsh’s 2.34 but better than Willis’ 2.54 and the sector average of 2.69.

PATIENCE TO PAY OFF?

Insurance brokers like Aon could be a good bet, provided hedge funds are willing to wait, potentially a year or more, until pricing in the property and casualty market recovers from the weak levels that reflect the soft economy and intense competition.

“Once P&C pricing turns positive (perhaps as early as 2012), the insurance broker stocks could generate attractive upside potential” because of better leverage and better market sentiment, Barclays Capital analyst Jay Gelb wrote in a recent note.

Most analysts agree that property insurers should see better pricing over the next 18 months, if for no other reason than rates seem almost certain to rise from current extremely low levels.

In the shorter term, Gelb said investors should expect slow growth and limited earnings appreciation, and he recommended using the brokers’ shares as a source of funds until the turnaround.

(Reporting by Ben Berkowitz, editing by Ros Krasny and John Wallace)

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