Aon PLC

And thank you for holding. Welcome to the Aon PLC third 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 third 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.

Good morning, everyone. Welcome to our third 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 begin by thanking our Aon colleagues for delivering another strong quarter of top and bottom line growth. Our recently concluded all-colleague engagement survey reinforces the resilience and commitment of our team As we continue to receive and benefit from exceptional colleague feedback with overall engagement, ways of working, and brand strength, all at 80% or greater. More than ever, colleagues understand the power of our A&United strategy and have embraced the smart working approach we developed to preserve flexibility in how and where we work, while enabling them to be better connected and more capable of helping clients make better decisions to support their businesses. The importance of the support and the exceptional nature of our response is illustrated by our recently released Executive Risk Survey and the tremendous leadership of our team on Hurricane Ian. Taken together, these two data points reinforce the relevance and return on our Ian United strategy. First, our 2022 Executive Risk Survey, which surveyed 800 C-suite executives from global companies, underscores the volatility facing leading organizations and offers a window into their mindset and needs. A majority surveyed 79% to increase volatility on the horizon, but only a third, just 35%, feel fully prepared to manage the impact of that volatility. Most important, those that feel very prepared share three fundamental leadership attributes that reinforce the relevance of our capabilities. First, they see embracing risk as a source of potential competitive advantage. 62% of very prepared leaders agree that their company's appetite for risk has increased significantly in response to the current economic conditions. Second, they're willing to invest in new approaches to address emerging risks. These leaders focus on long-tail risks and call out concerns around disruptive categories like cyber and supply chain. And third, they value expert insight and are looking for partners to help them make better business decisions. Prepared leaders are nearly twice as likely to look to counsel from an external advisor that can provide a more holistic enterprise perspective on decisions to protect and grow their businesses. And while these survey findings reinforce the relevance of our strategy, Hurricane Ian highlights an excellent example of that value in action. To begin, we want to extend our deepest sympathies to those impacted by this event. In these times of challenge, as communities endure the tragic loss of life and tremendous damage, we believe that our actions as a firm can help businesses and communities respond and recover. As always, our team took a holistic and united view towards serving our clients before, during and after the event. Pre-event, we used our resource development models to ensure that our 1,800 promotional risk claims colleagues around the world were prepared to respond to a surge in client need. This was a collaborative global effort, possible only because of our mindset and single P&L approach. In addition, we were able to use impact forecasting models from our reinsurance team to game out potential hurricane paths and share those insights with our promotional risk colleagues so they could alert clients to potential exposures. allowing for early activation of business continuity plans. During the event, we provided real-time insight on actual harm by leveraging satellite and drone imagery provided through technology partnerships enabled by our Aon Business Services team. This is another example of how our emphasis on technology-driven innovation is reshaping client service at scale. Post-event, we obviously focused on accelerating client's resolution, but we're also stepping back with clients and taking an enterprise view of what the hurricane means for the benefit plan, leveraging our health solutions teams, and beginning new conversations around how they think about return to work, exploring how our human capital solutions colleagues can apply learnings from our own smart working strategy to their workforce management. This is Aon United in action, and only possible because of the decade-plus investment we've made to break down barriers across our business and build Aon Business Services into an engine that provides us the insight and scale necessary to meet client needs. Turning to performance. In the third quarter, our colleagues delivered excellent results, demonstrating continued momentum and year-to-date progress against our key financial metrics. For Q3, organic revenue growth was 5%, on top of 12% in the prior year quarter. Adjusted operating margin was up 100 basis points, and adjusted EPS was up 16%. These results are consistent with our full-year ongoing financial guidance, and we would note that Q3 is our seasonally smallest quarter for revenues. Year-to-date, we delivered 7% organic revenue growth, adjusted operating margin expansion of 80 basis points, adjusted EPS growth of 14%, and generated over $2 billion in free cash flow. Turning to solution lines, commercial risk delivered 5% organic revenue growth this quarter, on top of 13% in the prior year quarter, contributed 7% organic revenue growth year-to-date. Driven by ongoing strong retention, new business generation and renewal, highlighting the resilience of our core business, as we continue to help clients protect and grow their businesses. As we previously mentioned, the significant decrease in M&A volume impacted our transaction solutions business, especially compared to last year's results, which was particularly strong in Q3 and Q4. Reinsurance delivered 7% organic revenue growth in the quarter, with 7% year-to-date, as our team continues to help clients in the current market by bringing new solutions and capabilities. For instance, our newly established strategy and technology group provides our clients with strategic advice, data-driven consulting, analytics, and modeling tools, and is further strengthened by the capability we gain through our acquisition of Tyke. This is all that is time and driving growth, efficiency, and resilience have never been more important. Health Solutions delivered 5% organic revenue growth in Q3 on top of 16% in the prior year quarter, contributing to 8% year-to-date growth, with particularly strong growth in human capital solutions. Across health, we see clients assessing their people strategies to optimize for workforce, skill, and organizational structure while making sure those employees feel valued and engaged. Finally, Wealth Solutions delivered 2% organic growth on top of 4% in Q3 last year and 2% year-to-date as our team continues to help clients address market volatility, tackle regulatory challenges, and execute ongoing pension risk transfers. In two exciting milestones, our team has advised over $200 billion of pension risk transfer transactions in the U.S. and U.K. as pension plans continue to de-risk and take advantage of market conditions. And we reached the $1 billion mark in client assets and commitments for our pooled employer plan, which helps cover and helps lower costs and enhance retirement security for employees at smaller organizations. Overall, our strong performance in Q3 and year-to-date reflects the strength of our Aon United strategy and Aon Business Services platform. delivered for clients across regions and solution lines. For the full year, we remain confident in our commitment to mid-single-digit or greater organic revenue growth, margin improvement, and double-digit free cash flow growth. As our clients assess the impact of increased economic volatility on their businesses, many are looking to improve their own working capital and liquidity, often by accessing new sources of capital. In one recent example, an A&United example, our client based in Asia was awarded a multi-billion dollar construction contract in Latin America for a manufacturing facility that incorporates innovative carbon reduction technologies. The client had a regulatory and contractual requirement that they provide a financial performance guarantee, essentially drawing on their own credit facility. To address, our local commercial risk team, who has deep understanding of our client's strategy and financial position, collaborated closely with our local credit experts in LATAM to design a bespoke surety bond solution for our client. Rather than using a bank guarantee facility, our client was able to access capital at a lower cost and more attractive terms while maintaining their own balance sheet strength and flexibility. Just as we've done with intellectual property lending and pension risk transfer solutions, this is another example of how we help clients access new capital to reduce risk and drive their own growth and justice. In summary, we delivered a strong quarter of top and bottom-line results, contributing to our year-to-date progress against key metrics. We continue to be strongly positioned to deliver on our full-year financial commitments amidst single-digit or greater organic revenue growth, margin expansion, and double-digit free cash flow growth. We see increasing opportunity to help our clients, and the steps we've taken to operationalize A&United and our A&Business Services platform gives us confidence in our ability to address our clients' existing and emerging needs as they continue to protect and grow their businesses. Now I'd like to turn the call over to Krista for her thoughts on our performance in the quarter and year-to-date, as well as our long-term outlook for continued shareholder value creation. Krista?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered continued progress on our key financial metrics for both the quarter and year-to-date. Through the first nine months of the year, we translated 7% organic revenue growth into 80 basis points of adjusted margin expansion and 14% growth in adjusted earnings per share. and generated over $2 billion in free cash flow. We look forward to building on this momentum as we head into the last quarter of 2022. As I reflect on our performance year to date, as Greg noted, organic revenue growth was 5% in the third quarter and 7% year to date. We continue to expect mid-single digital greater organic revenue growth for the full year 2022 and over the long term. I would also note that SLAT reported revenue growth in Q3 And 3% year-to-date includes an unfavorable impact from changes in FX of 5% for Q3 and 4% year-to-date, primarily driven by a stronger U.S. dollar versus most currencies. And I'd highlight fiduciary investment income, which is not included in our organic revenue growth calculation, was $26 million in Q3 and $35 million year-to-date. Moving to operating performance. We delivered strong operational improvement through the first nine months of the year with adjusted operating margins of 30%, an increase of 80 basis points, driven by organic revenue growth and efficiencies from Aon Business Services, overcoming expense growth, including investment in colleagues and technology to drive long-term growth, and some ongoing resumption of T&E. 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, as well as ongoing investments in long-term growth like technology throughout the year. Aon Business Services is a key contributor to margin expansion and represents a competitive advantage, especially in a highly inflationary market. Our Aon Business Services platform continues to drive efficiency gains, improved quality and service, and increased innovation at scale. Let me share one fantastic example of how Aon Business Services platform supports ongoing improvement as we automate day-to-day processes around the firm. Reinsurance has operated on a single global broking platform and client service model since 2017. Over the past five years, the team has digitized processes, automated workflows, and moved work to low-cost locations. 64% of transactions are now processed digitally, increasing speed and accuracy, which has helped reduce the average number of days it takes to get claims from carriers paid to our clients by 22%. from 38 to 30 days. Increase in capacity enabled 27% more throughput, while costs are up just 9% over five years, a particularly impressive outcome when considering recent cost and wage inflation trends. And the platform enables the team to provide enhanced services while dealing with more complex transactions, an Aon United outcome that allows our colleagues to better support each other and our clients. we continue to find and capture efficiency opportunities like this around the firm and expect Aon Business Services will continue to be a driver of ongoing efficiency improvements, quality and service improvements, and increased innovation for clients. We translated strong operating income growth into double-digit adjusted EPS growth of 16% in Q3 and 14% year-to-date. As noted in our earnings materials, FX Translation, was an unfavorable impact to approximately $0.05 per share in Q3 and $0.34 per share year-to-date. If currency to remain stable at today's rates, we would expect an unfavorable impact to approximately $0.11 per share or approximately $33 million decrease in operating income in the fourth quarter of 2022. Turning to free cash flow and capital allocation. Free cash flow increased 79% year-to-date to $2 billion and $51 million. reflecting an increase in cash flow from operations due primarily to the billion-dollar termination fee payment in the prior year period. As we've communicated before, free cash flow can be lumpy quarter to quarter, and I'd note Q4 is our seasonally strongest for free cash flow generation. We continue to expect to deliver double-digit free cash flow growth for the full year and 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 for capital allocation. We believe we are significantly undervalued in the market today, highlighted by the approximately $1.2 billion of share of purchase in the quarter and $2.5 billion year-to-date. We also expect to continue to invest organically and inorganically in content and capabilities to address unmet client needs. We've invested in expertise and content in our retirement business, where we're helping clients navigate regulatory changes, such as GMP in the UK, and utilizing higher interest rates to drive record levels of pension risk transfers. 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'll continue to actively manage the portfolio and assess all capital allocation decisions on a return on capital balance 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. We issued $500 million of 10-year senior notes in Q3, and as we've said before, we'll continue to add debt as EBITDA grows while maintaining our current investment-grade credit ratings. With respect to interest rates, I'd note that our term debt is all fixed rates. with a weighted 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 de-risk 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 Aon 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.