Aon PLC

Good morning, and thank you for holding. Welcome to Aon PLC's first quarter 2022 conference call. At this time, all parties will be in a listen-only mode until the question and answer portion of today's call. I would also like to remind all parties that this call is being recorded. If anyone has an objection, 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 first quarter 2022 results, as well as having been posted on our website. Now, it is my pleasure to turn the call over to Greg Case, CEO of AonPLC.

Thank you, and good morning, everyone. Welcome to our first quarter conference call. I'm joined by Krista Davies, our CFO, and Eric Anderson, our president. As in previous quarters, we posted a detailed financial presentation on our website. We'd like to start by acknowledging the tremendous work of our colleagues across the firm. They continue to exhibit remarkable leadership, supporting clients in a challenging environment. We also want to thank our colleagues for their inspiring support of our team, their families, and others who've been impacted by the Russian war in Ukraine. This is a tragic example of increasing global volatility, adding to the challenges of facing organizations and individuals every day, including continued effects of COVID-19, especially in Asia. Inflation, climate change, capital availability, and connected impact to supply chains, intellectual property, workforce resilience, and retirement readiness. In this environment, helping our clients protect and grow their businesses, support their employees, their communities, and their stakeholders has never been more important. Turning to financial performance, our team delivered an excellent first quarter and start to the year, with 8% organic revenue growth, an increase from a strong prior year performance of 6% in Q1 2021. This top line strength translated to a 38% adjusted operating margin, an increase of 60 basis points, and 13% adjusted EPS growth, demonstrating the power of our Aon Business Services platform to drive sustainable margin expansion as well as support growth. Within our solution lines, we would highlight in commercial risk, we delivered 9% organic revenue growth, with growth in every major geography, and particular strength across renewals and retention. Our teams are working incredibly hard to make sure our clients have the right coverage that fully considers the impact of inflation and other economic factors. Reinsurance Solutions' organic revenue grew 7%, driven by continued strength in retention and new business generation around the world, as we help clients navigate a complicated and challenging risk environment. In health solutions, organic revenue grew 8%, reflecting global strength in core health and benefits and advisory work, especially around well-being and resilience. We also saw double-digit growth in consumer benefits solutions and human capital, and we would note particular strength in our rewards in corporate governance and ESG practices, as we see our clients increasingly focused on talent, compensation, and risk and opportunities related to ESG. And finally, Wealth Solutions' organic revenue growth was flat in the quarter. Our retirement investments team continues to do excellent work, Opener clients address ongoing opportunities as well as regulatory changes and challenges. Priority development areas like delegated investment management and growth and pooled employer plans were a highlight in the quarter. Looking ahead and fully recognizing increasing uncertainty and global complexity for the full year 2022 and over the long term, we continue to expect mid-single digit or greater organic revenue growth. We also continue to expect margin improvement and double-digit free cash flow growth for the full year 2022 and over the long term. As we reflect on the strong combination of organic revenue growth and margin expansion in the quarter and our expectations for the year, we would highlight that our Aon Business Services platform is becoming an increasingly powerful tool for client service and growth in addition to driving ongoing efficiency gains. For example, in recent discussions with a multinational chemical company, our Aon Business Services client dashboard changed the game on how we interacted with them on their M&A growth strategy. Comprehensive data sets, easily accessible to our team, enabled them to bring insights around the value of the client's intellectual property as a driver of their priority M&A activity. This created great value for them and opened up substantial opportunities for us in many areas, including transactional liability and intellectual property solutions. More simply, these analytics help us identify innovative opportunities and where we might be underpenetrated today by geography or by solution lines. In another example, AI Business Services is equally powerful supporting our work with clients in ESG, an increasingly wide-ranging topic for our clients. Our ESG practice within Human Capital Solutions specializes in assessing and prioritizing risks and opportunities for our clients across their stakeholder base and their business. Our ESG risk assessment tool allows clients to monitor key risks in real time and is focused on specific client priorities, given their business, geography, industry, and competitive landscape. The tool links those risks to Aon Insight, experts and solutions to drive sustainability, model their climate risk, better navigate the DNO or cyber landscape, and reinforce their culture to strengthen their people strategy. And specifically on environmental risk, we're using our proprietary climate analytics to quantify the impacts of climate change on a client's physical assets, which then helps inform risk mitigation and improve resilience. The power of this capability is not just in developing innovative solutions or the ways in which it helps colleagues better inform and advise our clients. It's also in our ability to connect and scale distribution of these solutions across the firm, including in our acquisition, where we bring in expertise with the express intent to scale new capabilities. In the latest example, we recently announced the acquisition of a UK-based technology company, Taiki, and we're delighted to welcome our new colleagues to Aon. The actuarial software platform they've built enhances our balance sheet modeling capability, especially in reserving and pricing, and allows us to enhance our analytics offering to a broad base of reinsurance clients and commercial risk clients with complex balance sheets. Tykey's differentiator is the strength and speed of simulations, enabling our teams to model complex risk transparently, help our clients better understand global risk, and meet evolving regulatory requirements. Scaling the formidable capability that Tykey brings reinforces our broader strategy by enhancing analytical tools and actual modeling capabilities. This will enable us to advise and execute across the insurance industry with clients and help them meet their goals of ongoing growth, capital management, and ultimately economic returns. In summary, our strong first quarter results reinforce continued momentum and position us well to deliver on our key metrics over the full year. While we continue to anticipate that volatility of all kinds and its impact on organizations will continue to grow, in this environment, Our AM United strategy and business services platform both become more relevant. The capability to track records that we've built gives us confidence in our ability to drive further value for our clients, colleagues, society, and shareholders. Now I'd like to turn the call over to Crystal for her thoughts on our performance and long-term outlook.

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered a strong operational and financial performance in the first quarter to start the year. highlighted by 8% organic revenue growth that translated into 60 basis points of margin expansion and double-digit growth in earnings per share. We look forward to building on this momentum through the rest of 2022. As I reflect on the quarter, first, organic revenue growth was 8% driven by strong ongoing retention and net new business generation. I would note that total revenue growth of 4% includes an unfavorable impact from changes in FX, driven primarily by a weaker euro versus the dollar. Q1 is our seasonally largest quarter for Euro-denominated revenues. As we look to the rest of 2022, we're continuing to monitor various macroeconomic factors, including the underlying drivers of GDP, inflation, and interest rates, which all impact our clients and our business. In particular, I would note a few interrelated impacts. On GDP, we've noted there's a correlation between our revenue and GDP growth. particularly the underlying drivers of GDP, such as asset values, corporate revenues, and employment levels. We've recently seen decreases in global GDP growth forecasts for the year, driven by the factors such as ongoing impacts of COVID-related restrictions, the war in Ukraine, rising inflation, and expected increases in interest rates. As we've communicated previously, our revenue base is very resilient, and impacts from GDP tend to show up in the more discretionary portions of our business, such as project-related work across the portfolio. These portions of our business were strong in Q1, though, as Greg mentioned, we're seeing increased uncertainty in overall trends. I would also note there are many ways in which we can help clients in times of challenging economic circumstances or increased volatility. On inflation, we see impacts to our revenue and expense base. On revenue, inflation increases underlying exposures across our business, for instance, in property values and healthcare costs. As Greg mentioned, we're working with our clients to ensure they're appropriately protected against these increasing values and optimizing their total cost of risk. On expenses, we're continuing to invest in our colleagues and are hiring to support growth, especially in priority areas. This does increase overall compensation costs, although our owners and services strategy continues to drive efficiency in operations and support our goal of ongoing margin expansion. And on interest rates, there are puts and takes at play. but generally we are very well positioned for higher interest rates. While revenue in some areas of our business, like construction and transaction liability, is often dependent on client investment behavior, which may be impacted by rising interest rates, I would highlight three main points on how we benefit from higher interest rates. First, we see investment income increases as short-term interest rates rise. Over the course of a year, a 100 basis point increase in short-term interest rates, such as the U.S. federal funds rate, and ECB deposit facility rate translates to an impact of about $60 million in total revenue and operating income. Second, our pension liability improves as increases in interest rates result in higher discount rates used to value our pension obligations. Third, our term debt is all fixed rate with an average rate of 3.8%, so the interest expense associated with our existing term debt does not increase. Overall, our business is resilient, and our Aon United strategy gives us confidence in our ability to deliver results in any economic scenario. As Greg said, we do see increased external volatility, however. We continue to expect single digital greater organic revenue growth for 2022 and over the long term. Moving to operating performance, we delivered strong operational improvement with adjusted operating margins of 38%, an increase of 60 basis points driven by organic revenue growth and efficiencies from our Amazon services platform, overcoming a negative impact of FX and expense growth, which includes investment in colleagues and technology to drive long-term growth and some resumption of T&E. As we've previously communicated, we think about margins over the course of a full year. We expect continued investment in colleagues and ongoing resumption of T&E throughout the year. We expect to deliver margin expansion in 2022, as we continue our track record of cost discipline and managing investments in long-term growth on an ROIC basis. We translated strong adjusted operating income growth into double-digit adjusted EPS growth of 13% for the quarter. As noted in our earnings material, FX translation was an unfavorable impact of approximately 19 cents per share on the quarter. If current city remains stable at today's rates, we would expect an unfavorable impact of approximately $0.08 per share or approximately $24 million decrease in operating income in the second quarter of 2022. Turning to free cash flow and capital allocation, free cash flow decreased 17% to $440 million, primarily driven by higher incentive compensation payouts given our strong 2021 financial results. I would note that we had strong growth in the prior year period and that Q1 has historically been our seasonally smallest quarter from a cash flow standpoint, due primarily to incentive compensation payments. As we've communicated before, free cash flow can be lumpy from quarter to quarter. We continue to expect to deliver double-digit free cash flow growth for the full year 2022. Looking forward, we expect to drive free cash flow growth over the long term, driven by operating income growth, working capital improvements, and reduced structural uses of cash, enabled by Aon Business Services. Given our strong outlook for free cash flow growth in 2022 and beyond, we expect share of purchase to continue to remain our highest return on capital opportunity for capital allocation. We believe we're significantly undervalued in the market today, even at all-time highs, highlighted by approximately $800 million of share of purchase in the first quarter. We also expect to continue to invest organically and inorganically in content and capabilities to address unmet client need, as we've done with Tykee. Our M&A pipeline is focused on our high-priority areas that will bring scalable solutions to our clients' growing and evolving challenges. As we've said in the past, we continue to assess all capital allocation decisions and manage our portfolio on a return-on-capital basis. Now turning to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile. In Q1, we issued $1.5 billion of senior notes. We estimate our leverage ratios to be within the ranges expected for our current investment-grade credit ratings. As we said before, we'll continue to evaluate the opportunity to add debt as EBITDA grows while maintaining our current investment-grade credit ratings. In summary, our first quarter results reflect strong top and bottom-line performance driven by our A&E United strategy. We start the year in a position of strength and expect to continue to make progress on our key financial metrics and drive shareholder value creation.