Aon PLC

Good morning and thank you for holding. Welcome to AON's PLC fourth quarter and full year 2020 conference call. At this time, all parties are in a listen only mode until the question and answer portion of today's call. I would like to also remind all parties the call is being recorded. If anyone has any objections, you may disconnect at this time. It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature, as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our fourth quarter and full year 2020 results, as well as being posted on our website. Now, it is my pleasure to turn the call over to Mr. Greg Case, CEO of AON's PLC. Sir, you may begin.

Thank you, Catherine, and good morning, everyone. Welcome to our fourth quarter and full year 2020 conference call. I'm joined virtually by Krista Davies, our CFO, and Eric Anderson, our president. As in previous quarters, we posted a detailed financial presentation on our website. There are very few firms who can say they ended 2020 stronger than they began. And I want to thank our colleagues for making Aon one of those firms. Our team delivered a tremendous year, set against the public health and economic impact of COVID-19 and an overall unprecedented level of global volatility, punctuated by social unrest around the world. During the year, our colleagues came together to deliver results for clients, to both time and energy, to getting to know the Willis-Tards Watson team and the integration planning for our pending combination, and to support each other through personal and professional challenges. One silver lining that we heard over and over from colleagues was that 2020 was a year of increased connection across our firm. We saw our colleagues respond to the virtual environment by replacing in-person connections with introducing experts and sharing thought leadership with clients. We felt the impact of that connectivity as our COVID-19 task force ramped up to share insights and best practices. And we saw it translate into client success as local teams won new business by seamlessly bringing together colleagues from across the globe. By all accounts, 2020 tested our firm. Looking back, it's clear that our colleagues not only passed, but that this adversity actually accelerated our one firm strategy. Seeing our colleagues come together and forge stronger connections in new ways was inspirational. And we'll build on these positive learnings and practices from 2020 as we continue to reject the constraints of the so-called new normal and instead look forward to defining a new better on our terms as we begin 2021. Turning to financial performance, in the fourth quarter, we delivered a great finish to the year with 2% organic revenue growth across the firm, including 12% growth in reinsurance solutions and 4% growth in commercial risk solutions. As in recent quarters, organic revenue growth in the fourth quarter was driven by strength in the core areas of our business, reflecting the resilience of our firm in a challenging economic environment, overcoming ongoing and expected pressure in the more discretionary areas. In particular, we would highlight growth in the core, driven by ongoing strong retention and net new business generation as we continue to deliver innovative solutions to our clients in a challenging environment. We saw increased organic revenue growth as compared to the third quarter, despite the somewhat larger portion of more discretionary revenues in the fourth quarter. The strong results stem partially from improvements in economic factors and sentiment around the virus and vaccine, which drives client buying behavior and investment. For example, we saw positive impacts to our revenue from construction starts and M&A activity in the U.S., as well as from employment levels. I would also note But in more discretionary areas, we're seeing meaningful variation in revenue growth across our businesses, with some recovering more quickly and some more slowly, largely driven by external factors tied to economic reopening and recovery. For example, I would highlight strength in voluntary benefits and health solutions and construction and commercial risk. I would also note that more discretionary areas like travel and events within data analytics and even capital within retirement solutions continue to be impacted by economic and pandemic-related conditions. Our strong finish in Q4 contributed to full-year financial results that demonstrate the strength and resilience of our business in this uncertain economic environment. For the year, we delivered organic revenue growth of 1%. operating income growth of 4% with full-year operating margins of 28.5%, an increase of 100 basis points from 2019, and free cash flow growth of 64% to $2.6 billion, the highest free cash flow in the history of our firm. This outstanding progress against each of our key financial metrics is a direct result of our one-firm strategy, which guides everything we do in supporting colleagues, delivering value to clients, and driving shareholder value. We are well positioned to continue to build on this momentum. And while we see many positive signs for the economy, significant uncertainty remains, and we expect the recovery will remain inconsistent. We continue to monitor several key factors, including GDP, asset values, corporate revenues, and employment. As we look to 2021, though significant uncertainty remains, we expect, as economic conditions continue to stabilize and improve, we anticipate modest growth in Q1, with growth increasing toward mid-single digits as we continue through the year. Looking back, the challenges we faced in 2020 underscore the importance of our colleagues, our culture, and our commitment to inclusion and diversity. We've long observed that leaders who embody one firm are our most successful leaders. both in delivering business results and driving colleague engagement. And this year, we've seen that essential leadership traits result in even stronger engagement and confidence in the combination that's measured in a January poll survey reflecting high engagement and consistently lower voluntary attrition, which decreased by 35% year-over-year from 2020, with strength in every major region and solution line. Further, We know the diverse talent, expertise, and insights of our colleagues are vital to the success of our firm and our clients, and we continually invest to attract, grow, and retain the best talent. In support of this priority, we announced the expansion of our apprenticeship program, including an investment of $30 million over the next five years and development of a nationwide network of employers to create 10,000 apprenticeships by 2030. With this expansion, we're building on our already successful program, which bridges the gap from education to employment by bringing high school graduates into the workforce while they complete their college education. This program provides a fantastic pipeline of diverse talent and embodies our commitment to inclusion and diversity. In addition to emphasizing the importance of our colleagues and our culture, the events of 2020 exposed the interconnected nature of risk and vulnerabilities in many companies. A recently published 2020 risk report highlights the increasing likelihood of connected extremes and reinforces that leading organizations in the future will be defined by their ability to manage the global implications of long-tail risks. In this survey of over 500 organizations across geographies and industries, 82% did not have pandemic in their top 10 risks before COVID-19 struck, and only 30% had a pandemic plan in place. Looking forward, respondents overwhelmingly agreed on the need for an enterprise-wide approach to risk. We know that existing and emerging long-term risks will continue to challenge organizations across all industries and geographies. Organizations must prioritize strategies to address risk and resilience. We also know our strategy enabled us to support clients in this changing landscape because it enabled us to understand their biggest challenges and bring world-class content, capability, and innovative solutions to bear. And while we didn't architect our pending combination with Willis Towers Watson with the pandemic in mind, we see that the pandemic and its associated economic impacts have increased our conviction and the need to accelerate innovation to address client demand. On the topic of Willis Towers Watson, Our excitement about the combination as well as the leadership and talent from both sides continues to grow. Last week, we reached another important milestone with the announcement of the combined executive committee that will be in place once the combination is closed. This team embraces the commitment to a one firm mindset and brings together the best expertise, talent, and leadership from both organizations. This team also brings to the table an exceptional set of experiences and capability, reinforcing the power of inclusion. As we said before, our culture is built to bring the best of our firm to clients. It's an essential part of how we operate our firm and drive results. At Willis Towers Watson, it's clear that their culture is equally focused on putting clients first. This newly announced team will blend the best of those cultures, and that client-focused mindset will guide everything we do. In summary, 2020 was a momentous year. Our performance and actions throughout the year reflect exceptional resilience and are the result of structural steps and investments we've made to ensure we're ready to not only take on, but grow stronger in the face of these challenges. Further, we've demonstrated momentum that will accelerate in combination with Willis-Towers Watson. We begin 2021 in a position of strength, to continue executing our strategy and making progress on our key financial metrics, both as standalone Aon and in our pending combination with Little Stars Watson, creating a significant growth opportunity for clients, for colleagues, and for shareholders. Now I'd like to turn the call over to Krista for her thoughts on our financial progress this year and long-term outlook. Krista?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered a strong operational and financial performance in Q4 to finish the year despite continuing macroeconomic challenges, demonstrating the resiliency and strength of our business in any economic environment. Turning to our results, we delivered organic revenue growth of 2% in the fourth quarter and 1% for the full year, driven by ongoing strength in our core business, offset by pressure in our more discretionary areas. I would note total reported revenue was up slightly, overcoming a nearly $100 million headwind from the unfavorable impact of changes in FX, as well as lower fiduciary investment income due to lower interest rates globally. We also delivered operational improvement for the full year, with operating income growth of 4% and operating margin expansion of 100 basis points to 28.5%, continuing our trajectory of long-term, sustainable margin expansion. For the full year, adjusted operating expense declined 1% due to expense discipline and a reduction in travel and entertainment, offset by increased compensation costs. Adjusted operating expenses increased 4% in the fourth quarter. Putting Q4 in context, due to the significant uncertainty we saw during the year, we tightly controlled our expense base and level of long-term investment in the business. During 2020, our organic revenue growth improved sequentially from the second quarter through to the fourth quarter, as internal and external factors contributed to a strong finish to the year. This led to a year-over-year increase in compensation benefit expense in the fourth quarter, a portion of which was variable compensation. This resulted in a four-year increase in adjusted compensation and benefit expense of 1%. I would also note that compensation expense increased in part because of our commitment during 2020 to retain all 50,000 colleagues, as well as lower voluntary attrition, which Greg described. As we've said before, we make decisions on expenses and margins in the context of each full year and expect to continue to drive margin expansion in 2021. For the full year, we translated strong operational performance into EPS growth of 7%, overcoming a headwind from FX translations. If currency to remain stable at today's rate, we'd expect a favourable impact of approximately 20 cents per share or approximately $60 million of operating income in the first quarter of 2021 due to a weaker dollar versus the euro. A key driver of our operational success has been the history of investment in our Aon Business Services platform, which has undergone a significant transformation over the last several years. The journey began with an initial group of 4,000 colleagues after the divestiture of our outsourcing business in 2017. By centralizing activities, eliminating inefficiencies, and promoting standardization, we delivered higher quality service levels and cost savings with better scalability, flexibility, and enhanced colleague experience. Today, approximately 13,000 of Aon's 50,000 colleagues are part of Aon Business Services, focused on driving operational improvement and enhancing how we serve clients. In 2020, for instance, we completed our data center consolidation program in the Americas, closing an additional 10 data centers and achieving 23 million of annual savings. We increased usage of our digital figures tool by over 110%, saving more than 65,000 hours annually. We renewed 90% of the nearly 9,000 US commercial risk licenses paperlessly. And we improved our global operations and shared capabilities by delivering over a million hours of automation, freeing colleague capacity for high-value activities with clients. Looking forward, we expect to leverage our AOM Business Services platform to continue to drive sustainable margin expansion. In addition, we see opportunities to embed best practices around agility and connectivity into how and where we operate, ultimately reducing our overall real estate footprint over the long term. Turning to cash and capital allocation, free cash flow increased 64% to $2.6 billion, primarily driven by working capital improvements, including improved collections, a decrease in restructuring cash outlays, and strong operational improvements. We remain focused on maximising the translation of revenue into the highest level of free cash flow, as highlighted by our free cash flow margin of 23.9%, up substantially from last year. We allocate capital based on return on invested capital, cash on cash returns. We continue to maximize shareholder value creation, highlighted by the $800 million of share of purchase in the quarter and nearly $1.8 billion in 2020. In 2021, we expect to continue to allocate capital according to this framework, and we expect share of purchase will continue to be our highest return on capital investment, given our free cash flow valuation and outlook. we expect to remain highly focused on closing and then successfully integrating our combination with Willis-Tiles Watson. Following that, we expect to continue to invest organically and inorganically in innovative content and capabilities in our priority areas. We remain very confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile. Historically, we've looked to increase debt as EBITDA grows while maintaining leverage ratios. However, due to uncertain macroeconomic conditions, we expect to continue to manage our leverage ratios conservatively in the near future and return to our past practice of growing debt as EBITDA grows over the long term. As I look towards 2021 and our pending combination with Willis Towers Watson, I'd like to reiterate how excited we are about the newly announced leadership team and the significant shareholder value creation potential we see in bringing together our two complementary businesses, both from a top-line growth driven by accelerated innovation for clients and from the bottom-line impact of $800 million in cost synergies. We continue to work collaboratively with the appropriate regulators to gain approvals and are focused on achieving a result that optimizes shareholder value. We remain committed to our expected close in the first half of 2021. In summary, our business has shown resiliency through the challenges of 2020. Our Aon United strategy, underpinned by our Aon Business Services operational platform, has enabled historically high free cash flow of $2.6 billion and enabled us to return nearly $2.2 billion of capital to shareholders in 2020. As we head into 2021, to our pending combination with Willis Charles Watson, this momentum will continue to enable long-term shareholder value creation. With that, I'll turn the call back over to the operator, and we'd be delighted to take your questions.