Aon PLC

Good morning and thank you for holding. Welcome to Aon PLC's second quarter 2023 conference call. At this time, all parties will be in 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 any 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 and 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 2023 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.

Thanks, Rob, 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, for your reference, we posted a detailed financial presentation on our website. We're pleased to report that our global team delivered another strong quarter of performance, results, and momentum. And we begin the call today by thanking our colleagues for everything they do to help our clients address immediate and long-term demands around the risk in people. A.M. United, delivered by our colleagues, gives us the ability to meet this demand and balance across our portfolio, capitalizing on innovation and momentum, and investing to meet demand. This ensures we win more, retain more, and do more with our clients. There is now almost universal agreement that client demand to address risk and human capital has never been greater. For example, our Catastrophe Insight Report estimated global economic losses from natural disasters in the first half of 2023 were $194 billion. notably above the 21st century average of $128 billion and fifth highest on record. Even more profound, in addition to economic costs, we know these disasters have tragic human costs that reinforces the high value in building resiliency and protection in advance of disaster. To this end, we recently announced the placement of a parametric insurance program for the government of Puerto Rico. It's the single largest program of its kind that the U.S. Commonwealth has ever placed. This program was designed by our reinsurance and commercial risk teams. And in the event of a sizable earthquake or hurricane, Puerto Rico will quickly receive liquidity, enabling its government to focus on rapid recovery and reconstruction. This placement was a result of AOM's data, analytics, and capabilities from across our firm, cemented by our deep understanding of public entity demand, risk capital, and reinsurance markets, and really, really great work by our team. Turning to financial performance, in the second quarter, we delivered strong organic revenue growth across our solution line, including 10% growth in health solutions and 9% growth in reinsurance solutions, contributing to 6% overall organic growth in the quarter and 7% in the first half. In health solutions, organic revenue growth of 10% on top of 11% last year was driven by strength in the core. Our team has done terrific work, helping clients navigate the demands of their talent agendas balancing optimal benefits for their people with inflationary cost pressures, while also taking steps to deliver on their people's strategies at a time when bringing total rewards, health, and wealth benefits together as human capital are more important than ever. In reinsurance solutions, our team delivered another very strong quarter at 9% organic growth on top of 9% last year, driven by strong net new business generation. Our teams continue to help clients navigate a challenging and complex market and are already preparing data, analytics, and insight as we help our clients understand and address ongoing volatility and capital considerations. We're also seeing capital come into the market, particularly in cap bonds, as our team has placed over $5 billion across 21 deals year-to-date. In wealth solutions, we deliver 2% organic growth driven by ongoing trends and demand we've seen in project work around market volatility and regulatory changes, as well as the ongoing trend of pension de-risking, which we expect to continue and quarters coming ahead given the market conditions. We continue to see opportunity to help clients react and prepare for regulatory changes and market volatility with our data analytics and expertise. And finally, commercial resolutions delivered 5% organic growth in the quarter. Globally, we saw strong growth across most major geographies with double-digit growth in Asia and the Pacific. In the U.S., we saw strength in core retail brokerage, including from property casualty and construction. As we've communicated previously, results were pressured by the impact of external M&A and IPO markets on M&A services. A headwind we now expect to continue in the back half of the year, giving ongoing external conditions. Overall, in the quarter, our strong performance was driven by the strength of our A&United strategy and Aon Business Services platform. In Q2, we translated 6% organic revenue growth into 110 basis points of operating margin expansions. net of ongoing investment in the business for long-term growth. These results contributed a first half financial performance of 7% organic revenue growth and 90 basis points of adjusted operating margin expansion. And we remain very well positioned to maintain this momentum and to deliver our ongoing financial guidance of mid-single digit or greater organic revenue growth, margin expansion, and double-digit free cash flow growth for 2023 and the long term. This financial performance is ultimately the product of our ability to address client needs through Aon United. And this strength is foundational in supporting our ability to evolve in response to changing client demand, fully demonstrated by our move to risk capital and human capital. This focus is bringing our four solution lines more closely together to better address client needs and is already yielding meaningful client impact. Take human capital. Our clients are changing how they're thinking about their colleagues. they're facing an increasingly complex external environment with pressures around cost, growth, remote and hybrid work, and workforce composition. In their own internal environment, their people strategies are increasingly complex, considering traditional total rewards and health benefits and newer additions around future skills and well-being. Our connectivity across health, wealth, and talent enables us to bring data, analytics, and solutions to address this need. In one great example, our team developed a diagnostic tool for clients that produces a Human Sustainability Index, or HSI. This tool combines individual and team assessments with peer data and analytics-based benchmarking to enable our clients to directly connect people strategy goals to execution. The measurable results encompassing eight wellness pathways, such as physical, emotional, and financial aspects, supports individuals and teams to assess exactly what's working and for whom, along key metrics so our clients can adjust or change their tactics to drive their people strategy, and ultimately, their bottom line. In many respects, this work represents bringing next-level data science into talent development and leadership. Ultimately, the HSI solution identifies gaps in what our clients offer to their people, encompassing health, wealth, rewards, and other wellness programs. And it provides a trackable plan to strengthen the company's talent strategy on their most significant, often external, commitments at a time when these commitments are more important than ever. In summary, our strong performance is a direct result of our ability to help clients better understand their challenges and opportunities and to take actions that protect their business and improve their performance. Further, our recently announced enhanced focus on risk capital and human capital is already driving benefits in strengthening this capability. Our strong year-to-date financial results, including 7% organic revenue growth and 90 basis points of margin expansion are the direct outcome of the strategy and position us very well to continue delivering in 2023 and over the long term. Now, I'd like to turn the call over to Krista for her thoughts on our financial results and long-term outlook for continued shareholder value creation. Krista?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we continued delivering on our key financial metrics both in the quarter and year-to-date. Through the first half, we translated 7% organic revenue growth into 90 basis points of adjusted operating margin expansion. These results position us very well to continue to drive results in 2023 and over the long term, and we look forward to building on this momentum. As I reflect on our performance through the first half of the year, as Greg noted, organic revenue growth was 6% in Q2 and 7% year-to-date. We continue to expect mid-single digit or greater organic revenue growth for the full year 2023 and over the long term. I would also note that reported revenue growth of 7% in Q2 and 6% year-to-date, sorry, 6% in Q2, 7% in Q2 and 6% year-to-date includes an unfavorable impact from changes in NFX of 1% for Q2 and 2% year-to-date, primarily driven by a strong dollar versus most currencies. I'd also highlight fiduciary investment income, which is not included in organic revenue growth, with 64 million in Q2 and 116 million year-to-date, or 2% of total revenue in both periods. Moving to operating performance, we delivered strong operational improvement with adjusted operating margins of 33.6% in the first half, an increase of 90 basis points driven by revenue growth and efficiencies from male business services, overcoming expense growth, including investments in colleagues and technology to drive long-term growth. Looking forward, we expect to deliver sustainable 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 said previously, Aon Business Services remains one of our key drivers of margin improvement, and this operating model has now reached an inflection point. In response to client demand and the opportunity, we're evolving to an organization that drives efficiency, operating leverage, and margin expansion, to one that's also increasingly driving improved client service delivery and accelerating innovation at scale. This evolution of AOM business services requires investment in three areas, which we expect to manage in line with our ongoing financial guidance and, like we do for all investments in long-term growth, on a disciplined ROIC basis. First, standardized platforms. We're digitizing and connecting existing platforms and creating an ecosystem that encompasses technology and operations and brings our data, analytics, and expertise together for our clients and our colleagues. Second, standardized operations. Across our solution lines, there are places where we have common processes. We see opportunity to continue to bring operations and expertise together across our firm to support clients across all solution lines. Bringing people and process together drives further efficiency and enables us to scale best practices. Third, new products at scale. We see significant opportunity to deliver new data-driven products, which we can then effectively develop and scale. The work we've done to standardize platforms and operations enables us to rapidly develop, deliver, and scale innovative solutions across the portfolio. In response to client demand, and to deliver content and capability to all clients, be it from organic or inorganic investments. Even more importantly, operating AI on Business Services as one organization with discipline prioritization and governance around initiatives ensures we can move quickly on opportunities that create value for our clients and colleagues, such as the one we see on AI. Just as a few examples, we see real opportunity here to enhance colleague productivity by leveraging the services of our technology partners in a protected environment, to enhance existing offerings like our human capital assistance, by building an AI risk framework for our clients, and finally, to create complementary data sets to enhance our risk analytics like the catastrophe modeling. We translated strong adjusted operating income growth into adjusted EPS growth of 5% in Q2 and 6% year-to-date. As noted in our earnings materials, FX translation was an unfavorable impact of approximately $0.05 in the quarter and $0.19 per share year to date. If currency is to remain stable at today's rates, we would expect no impact in the third quarter and a favorable impact of $0.05 per share in the fourth quarter for an unfavorable impact of $0.14 per share for full year 2023. I'd also note other non-operating expense had a 25 cent per share or 10% unfavorable impact in Q2 and a 44 cent per share or 6% unfavorable impact year to date. This reflects an unfavorable impact from increase in non-cash net periodic pension expense, as well as a gain on sale of businesses in the prior year period and balance sheet FX remeasurement in the current period. Turning to free cash flow and capital allocation. Cash flow operations was flat year over year, and free cash flow decreased 7% for $986 million, primarily driven by a $77 million increase in CapEx. 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. CapEx was elevated in the first half of the year compared to the prior year period as we initiated a number of projects with spend heavily weighted in the first half across technology to drive long-term growth, like the investments we're making to evolve Aon Business Services. I'd note CapEx can be lumpy quarter to quarter. We expect CapEx to moderate in the back half of the year and now expect an investment of $220 to $215 million in CapEx in 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 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 2023 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, highlighted by approximately $1.1 billion of share of purchase year-to-date. We also expect to continue to invest organically and inorganically in content and capability that we can scale to address unmet client needs. 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 will continue to actively manage the portfolio and assess all capital allocation decisions on an ROIC 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. As we've said before, we expect to add incremental debt as EBITDA grows over the long term while maintaining a strong investment grade credit profile. I'd note our term debt is all fixed rate with an average weighted interest rate of approximately 4% and an average weighted maturity of approximately 11 years. In summary, our strong financial results in the quarter and year to date reflects strong operational performance driven by our A&United strategy and our Aon Business Services platform. We 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.