Comparing Aon Inc. and TRV
Product Markets and Trends
Travelers Insurance is primarily engaged in the US insurance markets through its subsidiaries. According to the 10-K forms of the SEC, they face two main elements and activities – the entrance into the insurance markets and undertaking commercial and personal property and casualty insurance products to businesses, government units and individuals.
Aon on the other hand, has a split of its assets and resources between Risk Solutions and Human Resource Solutions. The Risk Solutions accounted for about 66% of the total revenue whilst the Human Resource Solutions was responsible for 34% of the firm's revenue (AON plc 3). This shows that although Travelers is mainly an insurance-focused entity, AON has a diversified portfolio which integrates various activities in the insurance industry and human resource industry as well as other forms of finance.
In terms of competitive advantage, Travelers Insurance attains its primary source of competitive advantage from their price, service quality, product offerings, agent relationships and methods of distribution. This is because they offer competitive pricing that other American insurance companies struggle to beat. Due to their strong asset base and their long-term existence in the market, they can gain financial leverage and charge less without feeling the impacts so severely. Also, the years of experience in the American insurance industry gives them a higher service quality and more challenging and competitive product offerings. Travelers Insurance also has strong distribution networks and long-term agency relationships that makes it a popular and established brand in the American insurance industry.
Aon's source of competitive advantage is in their specialization. Aon is a specialized and distinct entity that provides services to specific sections of the market that most insurance entities do not really take into account. They are into underwriting of specific risks and niches and provide reinsurance and large scale insurance services to British Commonwealth nations around the world. Technically, the British Commonwealth opens up the door to about a quarter of the nations of the world. This means the internationalization of their activities is extreme and they have exceptional links in foreign markets. Also, they provide advisory services that links various components and units of the international business arena.
Operationally, Traveler insurance has a primary focus on underwriting various risks in high end markets in the United States, mainly California, New York, Texas and Pennsylvania. They have other niches in smaller states like New Jersey where they underwrite various risks. They provide business insurance which involves commercial, natural, industry and other risks. Finally, they focus on high end risks and conveyancing which include construction, marine and other specialized markets. This makes Traveler Insurance an entity that is specialized in the most high earning components and units of the US economy. In terms of spread, Traveler Insurance has a spread over Select Accounts, which are specific niches where the company concentrates accounted for 24.5%. Commercial accounts was worth 25.5% whilst Industry focused underwriting accounted for 21.2%. This shows that the company's commercial links and niche-oriented insurance are the main sources of revenue. Also, industry focused underwriting is a source of revenue to the firm. The market share controlled by Traveler Insurance Inc was about 49% in the main areas they concentrate their efforts.
Aon plc on the other hand maintains various niche-oriented activities that ensures that they work closely with various stakeholders in the financial industry around the world where they operate. Aon arranges general advice and consultancy services in terms of risk management and insurance to large corporate entities around the globe. This is independent of their underwriting activities which provides specific insurance coverage to high end entities and consumers in different economies around the globe. They also provide consultancy in strategic management as part of their risk management portfolio. On the other hand Aon also provides human resource management consultancy to firms which covers recruitment and tax advisory services. This helps companies to invest their funds and they tend to undertake fund management activities and other institutional investor services to ensure that funds of businesses are used appropriately to help their employees. They design compensation plans and also provide strategic human resource and executive placement services as a small aspect of their HR unit.
Thus in comparison, the two entities have an activity set that overlaps – Insurance Underwriting. However, their focus differs. Geographically, Traveler Insurance is focused on high end states in the United States whilst Aon is a global entity which focuses on the trail of the British Commonwealth. Operationally, Traveler Insurance is focused on selected activities and operations in commercial, marine, business and corporate risks. They underwrite them and use their competency, experience and strong asset base to retain a competitive posture. Aon on the other hand focuses more on underwriting for corporate entities and they provide advisory services that helps them to target large entities with a global rich. They operate hand-in-hand with British and other American entities that seek to internationalize to insure them in foreign markets where they have insurance expertise and maintain world-class standards that these entities are used to.
Profitability Analysis: Aon Inc.
Profitability Analysis:
Operating Margin:
Net Profit Margin:
Return on Common Equity(Average Equity Basis):
c
Earning per Share:
Commentary:
Over the years, ranging from 2010 to 2012, our profitability analysis of Aon Inc. Indicates that the financial health of the company is under stress since the beginning of financial year of 2012. Company has been low on operating margins and net profit margins which have experienced downward trend from 2011 to 2012. Although the return on equity has shown a marginal increase from 2011 to 2012 but this increase was not consistent as it was the result of decreased equity and not higher revenue. Finally, the earning per share confirms our conclusion over profitability analysis that the marginal increase in EPS is decreasing which indicates that over the years, shareholders may lose their interest in company’s operations.
Profitability Analysis: Travelers Companies(TRV) Inc.
Profitability Analysis:
Operating Margin :
Net Income Margin:
Return on Equity:
Earning per Share:
Commentary:
Analyzing the profitability ratios of the company, we consider that TRV has earned good financial health during 2012 as all of its profitability measures indicates a optimistic position of the company. Both the operating and net margins of the company have relatively improved after a sheer downfall of 2011. Not only the profit margins, but the company has been successful in improving its return to equity which may be the good news for the investors and their faith in TRV’s operations may solidify further. Finally, the earning per share which now stands at $6.3/share is relatively the best in the industry and with 89% increase in EPS figures from 2011 to 2012, TRV is surely back on path of growth and stability.
Final Conclusion on Profitability:
In terms of profitability, our analysis indicates that where AON Inc is experiencing tough times to maintain a stable profitability with decreasing profit margins and low EPS figures, TRV on the other hand, has shown optimistic view in its operations and EPS figures after the company experienced financial distress during 2011. Although, both companies have experienced high Return on Equity, but for Aon Inc. this increase is not sustainable as it was achieved with decrease in Shareholder Equity. On the other hand, TRV’s ROE multiple went almost double during 2012 with 73.42% growth in its net income figures while its equity experienced only a marginal increase.
Financial Leverage Analysis: Aon Inc.
Debt to Equity
Interest Coverage Ratio:
Financial Leverage Ratio: (Average Total Assets/Average Total Equity)
Commentary:
Refering to the above analysis, initialy the debt to equity ratio of the company indicates that over the years Aon has reduced the use of debt in its capital structure and has improved interest coverage ratio of 2012 which was in downward trend during 2011. However, the ratio of financial leverage confirms that company has increased the use of debt financing which has increased the financial leverage from 3.69 to 3.77 and thus, equity holders and bond holders are likely to face increased risk.
Financial Leverage Analysis: TRV Inc.
Debt to Equity:
Interest Coverage Ratio:
Financial Leverage:
Commentary:
Refering to above analysis of TRV Inc, it was interesting to judge that the company has recovered strongly during 2012. During an year, company has not reduced its debt equity ratio but has also improved its Interest Coverage Ratio from 4.50(2011) to 9.37(2012). Our analysis is confirmed with ratio of financial leverage which has reduced from 4.28 to 4.11 during an year which indicates that TRV has reduced the use of debt financing and the shareholders and bondholders have low risk to deal while investing in the company.
Final Conclusion on Financial Leverage:
Comparing the financial leverage of Aon Inc and TRV Inc, we find that apart from Profitability, Aon is indeed into greater financial risk as indicated by the Financial Leverage Ratio. Also the interest coverage ratio is well below than industry standards. On the other hand, TRV Inc. has shown growth in its financial leverage measures as the debt equity ratio has declined while the interest coverage ratio has improved over the year, which indicates the recovering financial soundness of the company and with low financial leverage, investors are likely to show more faith in the company.
Operating Leverage:Aon Inc
Operating Leverage is another measure to judge the efficiency of a company in measuring as how the change in sales/revenue translates into growth in operating income. In other words, it is used to judge as how volatile and fair a company’s operating earning is.
=28.29/32.84
= 0.861
= 0, since there was no change in operating earnings duing 2011 and 2012.
Operating Leverage: TRV Inc
Final Conclusion on Operating Leverage:
The analysis of operating leverage indicates that TRV Inc. has improved operating leverage during 2011 and 2012 while the situation of Aon Inc is evident from the above analysis where the operating leverage has experienced a sharp reduction in its operating leverage which has decreased from .861 to 0.
Challenges Faced
Our element of leverage analysis reveals that Aon Inc. is going through tough financial times. Ranging from Profitability analysis to Financial Leverage, Aon Inc. has seen tough times with decreasing profit margins and increasing financial leverage may not interest the shareholders because of increasing risk in the company . Also an element of major poison pills identified in the analysis is in the area of Debt to Equity. The debt equity ratio of TRV shows a figure of .258 whilst AON has a figure of .47. This maens that where TRV uses only quarter of debt in its financial structure, Aon Inc involves almost 50% of debt in its capital structure. This indicates that for the worth of every single share, TRV has about 25.5 times of the debtors while for Aon the figure goes to 60 times debt in relation to every share. In other words, Aon Inc will be more risky in future and will face the challenge of financial risk and low shareholder interest as it will be more interest on their debts than they will be paying to their shareholders. This is not a healthy situation for any company as increase in interest expenses will lead to lower net profits and thus will affect the dividend payments to the common shareholders. Thus, an investor will have to be careful in regard to their investment in Aon Inc.
For TRV, although it has improved financial leverage measures and profitability measures along with operating leverage but refering to liquidity analysis of TRV, we find that there is poison pill with TRV also, as it uses only 40% current assets in comparison to current liabilities. This shows that TRV is borrowing on short term basis and any economic or operational downturn can affect the share value of the company. Thus, although TRV seems to be a good investment and the fundamentals of the company reveals that the share price of the company will go up but liquidity analysis of the company is surely to look for before investing or increasing the investment share in TRV.
Works Cited
Aon Inc. "Annual Report 2012." Annual Report. 2012. PDF Document.
Aon Incorporation. SEC 10-K Filings. Annual Submission. USA, 2012. Web.
Robinson, Thomas. "Financial Analysis Techniques." Institute, CFA. Financial Reporting and Analysis. Boston: Custom, 2011. 133-178. Print.
TRV Corporation. SEC 10-K Filing. Annual Submission. USA, 2012. Web.
TRV Inc. "Annual Report." Annual Report. 2012. PDF Document.
Yahoo Finance. Financial Statements: Aon Inc. 2013. Web. 6 December 2013.
