Moody’s Investors Service has changed Aon’s rating outlook to positive from stable based on the company’s record of improving profitability, its healthy free cash flow, and Moody’s expectation that Aon will maintain financial leverage toward the low end of its historical range.
The rating agency has also affirmed the Baa2 senior unsecured debt and Prime-2 commercial paper ratings of subsidiaries of Aon, and assigned provisional (P)Baa2 senior unsecured ratings to the group’s new multipurpose shelf registration.
Moody’s suggested that the ratings reflect Aon’s global market presence; its expertise in providing advice and solutions to clients in the areas of risk, health and wealth; and its diversification across client types, products and regions.
“Aon has a long record of increasing its EBITDA and free cash flow through organic growth, strategic acquisitions and good expense management,” Moody’s explained.
The rating agency continued, “The company operates through a single reporting segment, Aon United, with a centralized capital allocation process designed to maximize the return on invested capital.”
Though, Moody’s noted that partly offsetting these credit strengths is Aon’s large debt burden and its practice of periodically using debt proceeds to help fund substantial share buybacks.
Moody’s also highlighted that Aon faces integration risks associated with acquisitions, and potential liabilities arising from errors and omissions in the delivery of professional services.
The firm went on, “Moody’s expects that Aon will continue to grow its borrowings with rising EBITDA, keeping its debt-to-EBITDA ratio close to 3x (per Moody’s calculations, which incorporate pension and lease adjustments).
“This is somewhat high for Aon’s rating category but offset by healthy coverage metrics, including (EBITDA – capex) interest coverage of 7x-9x and a free-cash-flow-to-debt ratio of 15%-20%.
“Aon uses internally generated cash along with increased borrowings to help fund internal investments, acquisitions and payments to shareholders through dividends and share buybacks.”
In Q1 of 2023, Aon reported organic revenue growth of 7%, including organic growth rates of 6% in Commercial Risk Solutions, 9% in Reinsurance Solutions, 8% in Health Solutions and 6% in Wealth Solutions.
Moody’s anticipates this organic growth will likely continue in the mid-single digits or higher through 2023 based on further rate increases in most lines of commercial property & casualty insurance partly offset by slower global economic growth.
