Aon PLC

Good morning and thank you for holding. Welcome to Aon PLC's second 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 your line 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 second 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 Aon PLC. Thank you, sir. You may begin.

Thank you, and good morning, everyone. Welcome to our second 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 began by expressing our deepest appreciation for our colleagues, their extraordinary dedication in delivering results for clients, bringing the best of Aon from across geographies, and solution lines is inspiring. And their passion and commitment are reflected in the highest ever colleague engagement recorded in our latest full survey. In the second quarter, our colleagues delivered excellent results, demonstrating continued momentum and progress against our key financial metrics. Organic revenue growth is 8% in Q2 and year-to-date, on top of 11% in the prior year quarter, consistent with our ongoing financial guidance of mid-single-digit or greater organic revenue growth. This top-line strength translated into an adjusted operating margin of 26.2% in the quarter, up 40 basis points from last year, and adjusted EPS growth of 15%, demonstrating the strength of our hand-united strategy and hand-business services platform. Turning to revenue, commercial risk delivered 7% organic revenue growth, driven by ongoing strong retention and renewals, highlighting the strength of our core business and strength from areas of investment like cover wallet within digital client solutions. In addition, external trends, like inflation, continue to be an opportunity for us to help ensure clients are covered for increased exposure. Reinsurance delivered 9% organic revenue growth in a dynamic renewal market. Our team brought the full capability of our firm's data, analytics, and expertise, resulting in strong retention and net new business generation. Health Solutions delivered 11% organic revenue growth, with strong growth in core health and benefits driven by client demand increasing healthcare costs, and continued growth in advisory work related to regulatory changes, well-being, and resilience. Within Human Capital Solutions, demand remains very high to support clients with advice and solutions, especially as they manage ongoing return-to-work clients, a highly competitive talent market, wage inflation, and employee well-being. Funding Wealth Solutions delivered 3% organic growth as our team continued to deliver results in core retirement and investment solutions with ongoing additional work to help clients address regulatory changes and impact from recent market conditions, like the opportunity for pension risk transfer. Across wealth and health, external factors are increasing client costs, making it more important than ever for them to efficiently provide optimal benefits for their employees. Overall, our strong performance in Q2 and year-to-date reflects the strength of our core business across regions and solution lines. While there is uncertainty around external economic factors, some of the trends that challenge the broader economy are positive for our business and create opportunities to help clients. For the full year, we remain confident in our ability to deliver results in each of our three financial commitments. Mid-single digit or greater organic revenue growth, margin improvement, and double digit free cash flow growth. On the topic of innovation, among many categories of investment, we'd like to highlight two areas where clients are demanding new or better solutions. and we are making meaningful progress in serving them. Intellectual property and climate. On IP, our intellectual property solutions team is delivering a first-of-its-kind solution that enables entrepreneurs to fund IP-rich startup growth businesses without giving up ownership, using debt that is backed by insured IP assets. Q2 marked an exciting milestone as the team crossed the $1 billion threshold in IP-backed insurance-enhanced debt financing. Let me highlight one recent opportunity where our team supported a high-growth technology hardware company. Given the company's business model and growth stage, it had multiple funding avenues available. The company chose this solution to meet its growth capital needs, minimizing equity dilution. The $100 million transaction allowed the company to secure its financing for growth while insurance markets were able to diversify your schools with an innovative application to an intangible asset class. Going forward, We're making progress to increase the number of lenders and insurance carriers participating in that solution as we build client awareness, accelerate distribution, and continue to scale this business. One additional note, as current and evolving economic conditions may compress equity-driven valuation, IP-backed debt provides a potential new option for startup growth clients to protect equity ownership and forego potential down-round funding. On climate, our team is working on many initiatives. Today, we will highlight two, Aon's work on Aon and our work supporting renewable energy investment. We'll start with our progress on Aon's journey to zero carbon. In March of 2021, we made an industry-leading commitment to be net zero by 2030 in alignment with science-based targets for scope one, two, and three emissions. We're pleased to report that we've made great progress so far and reduced our 2021 carbon emissions 12% from our 2019 baseline as we decarbonized our supply chain, reduced our real estate footprint with smaller, greener space, and reduced travel, in part due to the impact of COVID-19. Our recent ESG impact report details our commitment and actions on climate, as well as other ESG topics, which are embedded in our overall strategy. For our clients, this comes down to helping them understand and quantify their climate risk, be prepared to communicate and report on this risk, and do something about it by building resiliency, positioning to lower carbon, and investing in transition. Given our track record of underwriting new risks and developing proprietary evaluation models, paired with our climate analytics data and partnerships, we're very well positioned to help clients quantify current and potential future risks, which we can then help them mitigate and transfer. For example, in renewable energy alone, onshore and offshore wind investment exceeds $70 billion today and could grow to nearly $400 billion by 2030. another rapidly growing addressable market that we serve with meaningful solutions today to ensure the construction and ongoing operation of these facilities. Similarly, in solar, there is $45 billion of investment today in construction, manufacturing, and technology development, and we expect this investment to grow to over $100 billion by 2025. Recently, our team facilitated a placement for the world's largest solar farm, requiring an un-united effort across commercial risk and reinsurance to obtain coverage despite challenging market conditions. As these renewable energy projects continue to grow in size, scale, and complexity, the need for expertise and innovation in existing technologies will only increase. Further innovation in areas like carbon capture and storage, hydrogen, and other new technologies will require even more innovation to enable the risk financing necessary to make these projects more economically attractive. Our ability to reduce risks of new solutions helps bring in new investment, and ultimately helps enable continued moves toward decarbonization. In summary, we delivered a strong quarter, demonstrating continued operating momentum and progress in our key financial metrics. Our AM United strategy and operating model, supported by AM Business Services, places us in a very strong position to support our clients as they face changing economic conditions. In addition, our colleague engagement is very high, as our team delivers on a strategy that enables us to achieve results today, both in the core and in the priority growth areas, while also investing in innovative new client solutions, like intellectual property and climate. Finally, our strong performance in Q2 and year-to-date reinforces our commitment to achieving our financial objectives for the year. Now I'd like to turn the call over to Christa for her thoughts on our performance and long-term outlook for continued shareholder value creation. Christa?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered continued progress for both the quarter and year-to-date. Through the first half of the year, we translated 8% organic revenue growth into 50 basis points of adjusted margin expansion and double-digit adjusted earnings per share growth. We look forward to building on this momentum through the rest of 2022. As I reflect on our performance through the first half of the year, as Greg noted, organic revenue growth was 8% in both Q2 and year-to-date. We continue to expect mid-single digital greater organic revenue growth for full year 2022 and over the long term. I would also note the reported revenue growth of 3% in Q2 and 4% year-to-date includes an unfavorable impact on changes in effects, primarily driven by a stronger U.S. dollar versus most currencies, and fiduciary investment income of $7 million in Q2 and $9 million year-to-date. Further, I note we are uniquely well-positioned with respect to current economic conditions. Inflation increases insured values, which has a positive impact on our business, and we continue to see modest tailwinds from insurance pricing, which remains stock strong. Interest rate increases benefit us through fiduciary investment income and reduced pension liabilities. Broadly, as Greg mentioned, volatility makes the solutions and advice we offer around risk and people even more valuable to our clients. for instance, in areas like workforce resilience and pension de-risking. Moving to operating performance, we delivered strong operational improvement through the first half of the year, with adjusted operating margins of 32.7%, an increase of 50 basis points, driven by organic revenue growth and efficiencies from our AM business services platform, overcoming expense growth, which includes investment in colleagues, technology to drive long-term growth, and some ongoing resumption of T&Es. Looking forward, we expect to deliver margin expansion in 2022 and over the long term as we continue our track record of cost discipline and managing investments in long-term growth on an ROIC basis. As we've previously communicated, we think about margins over the course of a full year, and we expect continued investment in colleagues and ongoing resumption of T&E throughout the year. Our Aon Business Services platform continues to be a key contributor to margin expansion and represents a competitive advantage, especially in a high inflationary market. While our AOM Business Services platform continues to enhance our ability to scale innovation and unlock growth opportunities, it also supports continuous improvement as we automate day-to-day processes around the firm. For instance, our AOM Business Services and commercial risk teams saw an automation opportunity for certificates of insurance. We're now using automation to locate, extract, and validate the data, rather than manually pulling it from emails and attachments. Over the year, this will save our North American team 83,000 work hours, representing a 30% reduction in total time spent processing service requests and certificates of insurance before further enhancements. We're delivering high-quality client service and enabling our colleagues to spend more time on higher-value-added activities and improving colleague engagement. Our business services platform enables us to find and capture efficiency opportunities like this around the firm and remains a key driver of ongoing efficiency improvements and margin expansion. We translated strong adjusted operating income growth into double-digit adjusted EPS growth of 15% in Q2 and 14% year-to-date. As noted in our earnings materials, FX translation was an unfavorable impact and approximately 10 cents per share in Q2 and $0.29 per share year-to-date. If currency remains stable at today's rates, we'd expect an unfavorable impact of approximately $0.11 per share in the second half or approximately $0.04 in Q3 and $0.07 in Q4 of 2022. Turning to free cash flow and capital allocation. Free cash flow decreased 17% year-to-date to $1,063 million, primarily driven by higher receivables. as well as higher incentive compensation payments given our strong 2021 financial results, as we described in Q1, offset by strong operating income growth. As we've communicated before, free cash flow can be lumpy quarter to quarter, and free cash flow generation in the second half of the year is seasonally stronger than the first half. We continue to expect to deliver double-digit free cash flow growth for the full year 2022. Looking forward, we continue to expect to drive free cash flow growth over the long term, driven by operating income growth and working capital improvements. 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 per capital allocation. We believe we are significantly undervalued in the market today, highlighted by approximately $500 million of share of purchase in the quarter and $1.3 billion year-to-date. We can also expect to continue to invest organically and inorganically in content and capabilities to address unmet client needs. Our M&A pipeline continues to be focused on our priority areas that will bring scalable solutions to our clients' growing and evolving challenges. We will continue to actively manage the portfolio and assess all capital allocation decisions on an ROIC basis. Now turning to our balance sheets and debt capacity. We remain confident the strength of our balance sheet and manage liquidity risk through a well-laden debt maturity profile. As we've said before, we'll continue to add debt as EBITDA grows while maintaining our current investment grade credit ratings. Thinking about interest rates, I'd note that our term debt is all fixed rate with an average interest rate of approximately 3.8% and a weighted average maturity of approximately 12 years. I'd also note that our pension liability improves as interest rates increase And historically, we've taken steps to deal with this liability and reduce volatility. In summary, our strong financial results in the quarter and year to date demonstrate continued momentum and progress against our key financial metrics. While we're seeing signs of economic uncertainty, we remain confident in the strength of our firm and our financial guidance for 2022. Overall, our business is resilient, And our AOM United strategy gives us confidence in our ability to deliver results in any economic scenario. With that, I'll turn the call back over to the operator, and we'd be delighted to take your questions.