Aon PLC

Good morning and thank you for holding. Welcome to Aon PLC's fourth quarter and full year 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 like to also remind 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 historic 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 2022 results, as well as having been posted on our website. It is now my pleasure to turn the call over to Greg Case, CEO of Aon PLC.

Good morning, everyone. Welcome to our fourth quarter conference call. I'm joined by Krista Davies, our CFO, and Eric Anderson, our president. As in previous quarters, for your reference, we posted a detailed financial presentation on our website. We begin today by thanking Aon colleagues around the world. Our strong performance in the fourth quarter through 2022 and our strong momentum as we start 2023 continues to reflect tremendous dedication by our colleagues and the power of our A&United strategy to support clients, both in their demands of today and if they plan to address their needs of tomorrow. 2022 was a year in which we continue to see clients focus on both the challenges and opportunities from increasing global risk, and the opportunities to engage clients continues to grow. In commercial risk, our latest weather, climate, and catastrophe insight report sized global economic losses from natural catastrophes at $313 billion, 4% over the 21st century average, and with only 42% covered by insurance, $190 billion protection gap. In wealth solutions, equity and fixed income market volatility in the back half of the year created demand for our wealth solutions colleagues to help organizations reassess retirement readiness and financial well-being. And in health solutions, which includes our human capital business, The continuation of broad trends around a changing workforce, encompassing health, culture, wellness, engagement, and inclusion, are growing in focus and importance across the C-suite, and the stakes have never been higher. In this environment of increasing risk and complexity across so many fronts, our colleagues are increasingly relying on A&United. It's what enables them to bring the full force of our firm, including core offerings and innovative solutions at scale, to address evolving client demands. Turning to financial performance, in the fourth quarter, we delivered organic revenue growth of 5%, highlighted by 9% growth in reinsurance, 7% growth in health solutions, and 6% growth in wealth solutions. In reinsurance, our teams were able to deliver strategic advice and data-driven analytics very early on in the renewal process to help clients navigate difficult market dynamics. This market leadership benefited our clients greatly in a challenging 1-1 renewal and reflects our strong performance. In Health Solutions, we saw strength in our core H&B and in human capital, both of which benefited from enhancements to our offerings, tools, and platforms, and increased client focus on employee health, rewards, engagement, and well-being. In Wealth Solutions, our team delivered the strongest quarterly organic revenue growth in over five years, as our teams worked tirelessly to respond to client demand resulting from market and interest rate volatility, particularly in the UK, and continued to help clients execute on pension risk transfer, strategic pension management, and respond to regulatory changes. And finally, commercial risk grew 4% in the quarter and 6% for the year. We delivered double-digit organic revenue growth in Canada and Latin America and strong growth in Europe, the UK, and Asia Pacific. In the U.S., otherwise strong results continue to reflect the impact of the external M&A and IPO environment on M&A services. This impact reduced quarterly organic growth by 5% and annual growth by 2.5%. And while this short-term pressure may continue into Q1, over the long term, we are very well positioned in this highly attractive business that has significant opportunities to contribute to long-term top and bottom line growth. For the full year, our organic revenue growth of 6% is a direct result of our A&United strategy and is a key driver of strong top and bottom line results for the full year. Noting, adjusted operating margins expanded 70 basis points to 30.8%. Adjusted earnings per share grew 12% to $13.39, overcoming a 3% or 44% FX headwind. Free cash flow exceeded $3 billion, with free cash flow margins of 24.2%. Both are highest ever. And we completed $3.2 billion of share buyback, demonstrating our confidence in the long-term value of the firm. Our team's performance positions us exceptionally well to deliver in 2023 and over the long term. Looking back since 2010, we've reported 4% average organic revenue growth, over 1,100 basis points of margin expansion, or about 90 basis points per year, while adjusted EPS and free cash flow increased to the compound annual growth rates of 12% and 13%, respectively. More important, we view the go-forward opportunity and momentum higher now than any time in our history. Looking ahead, we continue to expect mid-single-digit or greater organic revenue growth for the firm, margin improvement, and double-digit free cash flow growth for the full year 2023 and over the long term. Reflecting on the year, we would offer a few observations on how A&United continues to deliver for clients. The steps we've taken over the past decade, including our single brand and single P&L, put us in an exceptionally strong position to deliver for clients and have significant impact on some of the greatest opportunities and challenges they face. These ideas are not new. They're a continuation of over a decade of progress, on the areas highlighted in our AMUnited Blueprint, clients, colleagues, innovation at scale, and AI business services that are increasingly interconnected and mutually reinforcing. On delivering innovation at scale, the platform we've built not only enables innovation of new concepts, as we've demonstrated in areas like intellectual property solutions and climate, but increasingly enables us to bring together our analytics and expertise for new solution development, both from within solution lines and connected across our business. For example, our health solution scheme has developed an Aon Health Analytics platform supported by hundreds of data scientists and credentialed health actuaries, as well as experts from Human Capital and Aon Business Services. It's designed to help clients assess and improve their employees' health, which in turn helps deliver well-being, productivity, and lower cost. Within this offering, driven by proprietary analytics, we can assess data around employee health information, insurance and claims, workplace safety, absence engagement data, and external data on health trends and solutions, which together form a robust view of employee physical well-being. With this insight, our teams can recommend individualized solutions, including better insurance offerings and targeted programs. As an example, one manufacturing client wanted to improve employee physical well-being and reduce costs. Together, we designed a comprehensive long-term well-being strategy and a customized health program that included 12 vendors. and targeted specific health and well-being programs for employees based on individual factors correlated to success. The results were impressive. In our target group, as compared to non-participants, we saw meaningful improvement in selected health metrics at 24% lower cost per person. Further, the platform allows for rapid scale and distribution of solutions that help our clients drive workforce health, wealth, and productivity. Equally important, our colleagues love having this kind of impact, which is an important driver of our very high Aon colleague engagement. And we see examples like this across the firm every day as we help our clients manage risk and support their people. And this demonstrates the opportunity to continue delivering innovative solutions at scale to address our clients' biggest challenges across the backdrop of rapid change and ongoing volatility. To summarize, we begin 2023 in a position of strength. Our firm is more connected than ever before. to deliver better solutions for clients and to better support our colleagues. A.N. United will continue to deliver results now and over the long term for our clients, colleagues, and shareholders, and is reflected in our progress to achieve key financial objectives. Now I'd like to turn the call over to Krista for her thoughts on our financial progress in Q4 in 2022 and our long-term outlook. Krista?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered another strong quarter of performance across our key metrics to finish the year. In the quarter, we translated 5% organic revenue growth into 40 basis points of adjusted margin expansion and strong growth in adjusted earnings per share. For the full year 2022, organic revenue growth was 6%. Adjusted operating margins increased 70 basis points to 30.8%, and we generated over $3 billion in free cash flow, an all-time high. We look forward to building on this momentum as we head into 2023. As I reflect on results, as Greg noted, organic revenue growth was 5% in the fourth quarter and 6% for the full year. We continue to expect mid-single digital greater organic revenue growth for the full year 2023 and over the long term. I would also note that reported revenue growth of 2% in both Q4 and the full year includes an unfavorable impact from changes in FX of 4% in both periods. primarily driven by a stronger U.S. dollar versus most currencies. I'd also highlight that fiduciary investment income, which is not included in our organic revenue growth, was $41 million in Q4 and $76 million for the full year, or 1% in both periods. Moving to operating performance, we delivered strong operational improvement in Q4 with adjusted operating margins of 33.2%, an increase of 40 basis points. driven by organic revenue growth and efficiencies from our business services, overcoming expense growth, including investments in colleagues and technology to drive long-term growth, and some ongoing resumption of T&E. For the full year, adjusted operating margins of 30.8% reflect margin expansion of 70 basis points year over year. And I note over the past 12 years, we've delivered 90 basis points of margin expansion a year. Looking forward, we expect to deliver margin expansion in 2023 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 previously communicated, we think about margins over the course of a full year, driven by three areas. The first is top-line revenue growth. The second is portfolio mix shift to higher margin businesses as we invest disproportionately in areas of increasing client demand. supported by data-driven solutions to deliver the insights and advice that help our clients protect and grow their organizations. And the third area is increased operating leverage from ongoing productivity improvements from our Aon Business Services platform. I'd highlight that Aon Business Services continues to be a key contributor to margin expansion and represents a competitive advantage, especially in a high inflationary market. Our Aon Business Services platform continues to drive efficiency gains, improved quality and service, and increased innovation at scale. During 2022, we continue to make progress on IAM business services and driving efficiencies and enhanced services, particularly through process improvement, automation, and the use of artificial intelligence. For instance, our captive business has clients with hundreds of legal entities who each require multiple policies. Previously, the process of checking policies was manual and inefficient. We've now moved to a digital solution that can identify differences quickly and accurately, and deliver these to clients much more quickly. Similarly, the use of AI is increasingly enabling us to deliver better solutions to clients. For example, we delivered a new solution for our human capital clients using an AI-powered search engine that provides them with insights on technology talent globally, including geography-based pay differentials. This is essential for finding the best technology talent and optimizing within the client's existing workforce, a key area of growth for many firms. As we've said before, these improvements not only improve accuracy and client service delivery, they also help free up our colleagues' time for more valuable client activities and drive better outcomes for our clients. Organic growth and margin expansion translated into adjusted EPS of 5% in Q4 and double-digit growth of 12% for the full year. As noted in our earnings materials, FX translation was an unfavorable impact to approximately $0.09 per share in Q4 and 44 cents per share for the full year 2022. If currency remained stable at today's rate, we would expect an unfavorable impact of approximately 13 cents per share in the first quarter of 2023 and 12 cents per share for the full year 2023. Turning to free cash flow and capital allocation. We generated over 3 billion in free cash flow in 2022. contributing to our long-term track record of growing free cash flow at 13% CAGR since 2010. Our outlook for free cash flow in 2023 and beyond remains strong, and 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. I'd note CapEx returned to a more normalized level in 2022 as we made ongoing investments in ADS-enabled platforms, and technology to drive long-term growth. As we've said before, we manage CapEx like all of our investments on a disciplined return on capital basis. Given our strong outlook for free cash flow growth in 2023 and beyond, we expect share of purchase to continue to remain our highest ROIC opportunity for capital allocation. We believe we're significantly undervalued in the market today, highlighted by the approximately $675 million of share of purchase in the quarter and $3.2 billion of share of purchase for the full year. We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address unmet client needs. We've invested in expertise and content to help meet our clients' needs, such as our Q4 acquisition of ERM, a Mexico-based leader in risk assessment modeling, which expands our catastrophe modeling and consulting capabilities in reinsurance. Our M&A pipeline continues to be focused on our highest 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 an ROIC basis. We ended 2022 with an ROIC of 30.6%, an increase of nearly 1,900 basis points over the last 12 years. 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 expect to add incremental debt as EBITDA grows over the long term while maintaining our current investment-grade credit ratings. With respect to interest rates, I'd note our term debt is all fixed rate with a weighted average interest rate of approximately 4% and a weighted average maturity of approximately 12 years. I'd note our pension liability improves as interest rates increase. As a continuation of our pension de-risking efforts, I'd highlight that we completed an annuity settlement transaction in the fourth quarter, resulting in approximately $300 million reduction in our pension benefit obligation. This continues to be an incredibly attractive environment for our clients to do pension risk transfers, and we continue to see very strong demand from clients. We've done substantial numbers of pension risk transfers in the US and the UK, and they're a leader in the space. In summary, 2022 was another year of strong top and bottom line performance, driven by the strength of our Aon United strategy and Aon Business Services. We returned over 3.6 billion shareholders through share of purchase and dividends. The success we achieved this year continues to provide momentum as we head into 2023. While we're seeing signs of economic uncertainty, we remain confident in the strength of our firm and our financial guidance for 2023. Overall, our business is resilient, and our AM 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.