Aon PLC

Good morning and thank you for holding. Welcome to Aon PLC's first quarter 2023 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 previous release covering our first quarter 2023 results, as well as having been posted on our website. Now it's my pleasure to turn the call over to Greg Case, CEO of Aon PLC.

Thanks very much 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, for your reference, we posted a detailed financial presentation on our website. Before we begin, as always, we want to thank our colleagues for the great work they're doing every day around the world to help our clients and each other. We continue to live in a world where volatility, complexity, and uncertainty are increasing. And in this environment, our clients are being asked to make decisions faster than ever. And as a result, we see strong and ongoing demand for our advice and solutions. As many of our clients realize that remaining in defensive or reactive mode is not sufficient. And in fact, a pivot to offense is ultimately necessary to win and achieve their objectives. Clients are telling us, There are two primary areas where they're urgently looking for a competitive advantage, risk and people. Addressing these challenges requires that we bring the best from across our firm to enable our clients to make better decisions, which is the core of Aon United. Given these ongoing demands, our strategy positions Aon as uniquely capable of helping clients go on offense and make better decisions that mitigate risk to their business and maximize the impact and engagement of their people. Take ESG or environmental, social, and governance as an example. These are major interconnected categories that cut across traditional silos. Our clients need a broad strategic view to understand and assess all the risks around ESG and any targeted solutions and capabilities to solve for these risks. Our recently published ESG impact report describes our work helping clients address these issues as well as the impact across our firm. And we're delighted to report on our own progress against longstanding commitments in these essential areas. First, on environmental, we're making progress toward our goal of net zero emissions by 2030, and have reduced our overall scope one, two, and three emissions footprint by 16% from our 2019 baseline, and by 4% in 2022, enabled by efforts like smart working and supplier centralization through our own business services. On social, and specifically around our colleagues, and united is not just a strategy. It's our culture, and it reflects our commitment to inclusion, diversity, and the well-being of our colleagues. This year, we're continuing to embed IMD principles and practices and to hold ourselves accountable with increased transparency and oversight at all levels of the organization, starting at the top with our board of directors. On diversity, for example, we reported progress in 2022 in the percentage of female people managers. and U.S. ethically and racially diverse managers. In 2022, we also enhanced focus on learning, development, engagement, and well-being because we know that supporting our colleagues is not only the right thing to do for them, but it also ensures we retain, grow, and develop the best talent to continue to support our clients. And finally, on governance, we highlighted board review of top ESG and climate-related risks and actions from our ESG Steering Committee. as well as steps on cybersecurity and privacy, all aligned with our longstanding overall enterprise risk management strategy. While we're proud to report on these steps in our report, there's still work to do. And at the same time, we're even more excited about the work we're doing to help clients, as many risks connected to progress on ESG align with our core businesses. On the people side, for example, we continue to develop new solutions while bringing together existing capabilities across different markets and geographies to address specific needs. One recent client facing significant organizational change realized many of their employees were unsure and unclear about titles, career ladders, compensation mechanics. And at the same time, this client needed to reduce costs, increase efficiency and simplicity, which they knew would drive engagement. To address, we brought expertise from around the firm. Our commercial risk team brought deep understanding of this client's strategy and desired culture. Our Aon Business Services platform served as a powerful example of how we could help them simplify their operations and reduce costs. Finally, our health and human capital teams brought a series of solutions, including optimization of global benefits and a skills taxonomy strategy to increase employee alignment and engagement. And while the solution leverages many existing offerings, the real innovation was bringing these pieces together along with our Aon Business Services teams. who provided insight and change management expertise around moving to a business services model, an essential piece of the puzzle for our client. The result? Our client is driving increased engagement with a clearer, more effective benefit structure and talent strategy and outsourcing capabilities that will help drive simplicity and efficiency, all enabled by our teams coming together as Aon United. And we see examples like this across the firm every day as we help our clients manage risk and support their people. They demonstrate the opportunity we have to continue delivering innovative solutions at scale to address our clients' unmet needs at a time when doing so has never been more important. Turning to financial performance, in the first quarter, we delivered very strong organic revenue growth across our solution line, with 9% growth in reinsurance, 8% growth in health solutions, and 6% growth in both wealth solutions and commercial risk solutions. In reinsurance, our teams were exceptional in guiding our clients through the 1-1 renewal environment. demonstrating the strength of our team's advice, data-driven analytics, modeling, and execution capabilities. In health solution, we saw strength in core H&B and in human capital in a seasonally larger quarter for European health renewal, as our team helped clients navigate the ongoing challenging environment for their people, encompassing employee health, rewards, engagement, and well-being. In wealth solution, our team delivered another very strong performance with 6% growth, driven by ongoing trends around regulatory changes like GMP equalization, pension risk transfer, and the lingering impacts of the fixed income market volatility, as our teams help clients reassess and potentially adjust their strategy. We would note that after two very strong quarters, Q2 23 will be impacted by performance fees in the prior year period. And finally, commercial risk solutions grew 6% in the quarter, with strength in Europe and the UK in their seasonally largest quarter. Overall, we observe the property market remains an area of increasing challenge and volatility. Market dynamics are causing reinsurers to shift risk appetites, requiring primary carriers to accept more risk, which in turn means property placements are even more challenging for our clients. In this environment, our strength in analytics and the ability to respond to clients' needs for cover in a capital agnostic way, bringing capability across reinsurance and commercial risk is essential. Our capabilities enable us to assess and analyze integrated broking options, including traditional risk placement, wholesale, MGAs, faculties, captives, and insurance-like securities. By helping clients assess options across capital sources, we ensure they're able to optimize their own total cost of risk and risk appetite. For example, one client came to us looking to consolidate to a single property and terrorism program across 11 asset classes with over $80 billion in property values. Our team came together seamlessly across geographies and specialties to develop a program that leveraged traditional carriers around the world and a captive, successfully completing the program and driving significant cost savings for our clients, all enabled by the work we've done to break down barriers within our firm through Aon United. Overall, in the quarter, we're pleased with performance of the strength of our Aon United strategy and Aon Business Services platform, translated 7% organic revenue growth into 70 basis points of operating margin expansion. net of ongoing investment in the business for long-term growth in this period of ongoing external volatility and increasingly interconnected risk the opportunity for us to help clients is greater than ever position us very well to continue driving results in 2023 and over the long term now i'd like to turn the call over to krista for her thoughts on our financial performance and long-term outlook for continued charlotte value creation system thanks so much greg and good morning everyone

As Greg highlighted, we've had strong operational performance in the first quarter, highlighted by 7% organic revenue growth that translated into 70 basis points of adjusted margin expansion. This is a strong start to the year, and we're very well positioned to continue driving results in 2023 and over the long term. As I reflect on the quarter, as Greg noted, organic revenue growth was 7% driven by ongoing strong retention and net new business generation. 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 5% includes an unfavorable impact from changes in FX of 3%, driven primarily by a weaker euro versus the US dollar, as Q1 is our seasonally largest quarter for euro-denominated revenues. I'd also highlight fiduciary investment income, which is not included in our organic revenue growth, was $52 million, or 1.4%. Moving to operating performance, we delivered strong operational improvement with adjusted operating margins of 38.7%, an increase of 70 basis points, driven by organic revenue growth and efficiencies from our own business services, overcoming expense growth, including some investments in colleagues and technology to drive long-term growth, and some ongoing resumption of T&E, especially compared to the prior year period when business travel was still suppressed by COVID-19. 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've 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 high margin businesses as we invest disproportionately in areas of increasingly client demand supported by data-driven solutions. And the third area is increased operating leverage from ongoing productivity improvements from our Aon Business Services platform. I'd highlight Aon Business Services continues to be a key contributor to margin expansion and represents a competitive advantage, especially in an inflationary market. Our Aon Business Services platform continues to drive efficiency gains, improved quality and service, and increased innovation at scale. And related to Aon Business Services, I'd like to highlight the essential role of Aon Business Services in enabling our climate net zero goals. As a professional services firm, the biggest part of our own emissions is from our supply chain. Through the Aon Business Services organization, 90% of the spend is managed through preferred channels, which enables us to drive efficiency, and also deploy decarbonization strategies. As Greg said, this resulted in a 4% reduction in emissions last year, while also allowing us to increase supplier diversity utilization to 6% of our addressable US spend in support of our goals around inclusion and diversity, both meaningful accomplishments that are enabled by our AIR-United strategy. Organic growth and margin expansion translated into adjusted EPS growth of 7%. As noted in our earnings materials, FX translation was an unfavorable impact of approximately 14 cents per share. If currency remains stable at today's rates, we would expect an unfavorable impact of approximately 4 cents per share in the second quarter and 14 cents per share for the full year 2023. I'd also note other expense had a 19 cents per share unfavorable impact in the quarter, including a 5 cents per share unfavorable impact from an increase in non-cash net periodic pension cost in line with what we communicated previously, as well as an unfavorable impact from a gain on sale of business in the prior year period and balance sheet FX remeasurement in the current period. We expect the $0.05 per share unfavorable impact from increased net periodic pension costs to continue for each quarter this year. And we currently expect gains from divestitures to be immaterial for the full year. Turning to free cash flow and capital allocation, I'd note Q1 has historically been our seasonally smallest quarter from a cash flow standpoint, due primarily to incentive compensation payments. And as we've communicated before, free cash flow can be lumpy from quarter to quarter. Free cash flow decreased 17% to $367 million, primarily driven by higher cash tax payments and a $53 million increase in CapEx. CapEx was elevated in the first quarter compared to the prior year period as we initiated a number of projects with spend heavily weighted in Q1 across technology to drive long-term growth and real estate aligned with our smart working strategy. I've noted CapEx can be lumpy quarter to quarter and we expect an investment of 200 to 225 million to 2023. As we've said before, we manage CapEx like all of our investments on a disciplined ROIC basis. Our outlook for free cash flow growth in 2023 and beyond remains strong, and we continue to expect 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 2023 and beyond, we expect share of purchase to continue to remain our highest ROIC opportunity for capital allocations. We believe we're significantly undervalued in the market today, highlighted by approximately $550 million of share of purchase in the quarter. We also expect to continue to invest organically and inorganically in content and capabilities that we can scale 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. Turning now 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 $750 million of 10-year senior notes consistent with our past practice, an expectation to add incremental debt as EBITDA grows over the long term while maintaining our current investment-grade credit ratings. Factoring in this issuance, I'd note that our term debt is all fixed rates with a weighted average interest rate of approximately 4% and a weighted average maturity of approximately 11 years. Our first quarter results reflect strong operational performance by our A&United strategy. We start the year in a position of strength and expect to continue to make progress on our key financial metrics and our commitment to drive 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.