New Holding - Aon

Amelia Nunn - Equity Analyst

22 January 2020

We recently added Aon plc to the HL Select Global Growth Shares Fund.

A global provider of insurance broking and HR consulting services, Aon helps businesses manage their risks and provides pension and benefits related services.

Their insurance brokers act as middlemen between clients and insurance companies, supporting clients to assess and understand their risks while helping insurers to price products. They earn money by taking a percentage of the premiums their clients place once they buy insurance.

Aon’s consultants predominately aid companies with retirement and healthcare related services, for example pension plan design, health and benefits plan management and admin services. They tend to charge hourly for these services.

Why did we invest?

We like businesses with recurring revenue - when customers keep coming back, it’s easier to generate strong returns – and in Aon’s case, around 85% of its revenue recurs each year because businesses can’t (or shouldn’t) ignore or stop the amount of time and money they spend on risk management, retirement or healthcare benefits.

Plus, because of the in-depth and repeating nature of the work, brokers and consultants build up long-standing relationships with their clients, who become loyal to Aon for their professional business needs. That’s another characteristic we like.

And recently, Aon restructured to unify its two business areas, leading to improved efficiency, scalability, flexibility and enhanced client experience. We saw this as a positive step, building on what was already a strong foundation.

Aon’s global scale and low fixed cost base (no machinery, factories and little equipment required) means they are good at converting revenue into profits. We think this will continue to improve thanks to the scalable nature of the business model, the recent efficiency improvements and the continued investment into higher growth and more profitable business areas.

Finally, the environment Aon works in should continue to support growing demand for their services. Risks are increasing in complexity and new risks continue to emerge (e.g. cyber), which are generally not well understood or catered for, hence the need for Aon’s expertise. On the HR consulting side, employers typically underspend on retirement, overspend on healthcare and so need help to overcome problems like underfunded pension plans and rising healthcare costs.

Using data and analytics

Like many businesses we hold in the fund, Aon uses data it captures from around the world to improve the content and capability it can offer clients. Analytical capability is a key determinant in selecting an insurance broker or consultant due to the complex nature of the work.

The data is not only used to support and underpin the main business areas, but Aon can also monetise it directly - for example, they have built a platform called ‘Affinity’ which is used to develop, market and administer customised insurance programs that insurers direct to small and medium customers.

No underwriting risk

Unlike insurance companies, Aon is not exposed to underwriting risks such as mispricing and outsized losses.

Insurance companies take regular premiums from customers in exchange for a pay-out if a claim is made. The price (premium) for the insurance is determined by statistical calculations. If there is an unexpected pay-out event (e.g. flooding) or premiums have been miscalculated, the insurance company may suffer losses.

Aon, though, as an insurance broker simply takes a percentage of the premium paid; they aren’t liable for any claims. We consider this a superior business model because it reduces the volatility of their earnings.