Aon PLC

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 fourth quarter and full year 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.

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, we posted a detailed financial presentation on our website. We want to start with a very sincere thank you to our Aon colleagues around the world for all they've done in 2023 to deliver for our clients and support each other. As we reflect on 2023, we'd observe that the client demand driving our Aon United journey, trends around increasing volatility and interconnected risk, have accelerated. Specifically, we see four broad areas of focus that increase the relevance of our core business and create opportunity to deliver more value to clients. These four megatrends revolve around trade and the consequence of sustained geopolitical uncertainty, technology, particularly the rise of AI, weather reflecting the rate of natural catastrophes, and workforce, where the pandemic has fundamentally impacted talent. These profound transitions described in our global risk management survey and human capital trends report require clients to both deliver against today's expectations and evolve to make better decisions on new risk and people challenges. Against that backdrop, we've taken significant steps to accelerate our A&United strategy in ways that drove performance in 2023 and set the stage to build momentum and deliver stronger performance in 2024. Most notably, we're executing our three by three plan to leverage our risk capital and human capital structure and capability, embed the Aon client leadership model across the firm, and utilize Aon Business Services to set a new standard of innovation and client service. We then doubled down on this plan by announcing a $900 million investment into our business to accelerate Aon Business Services as a catalyst for the 3x3 plan and to complete workforce strategy efforts that reflect our simplified and more connected go-to-market strategy. We closed the year with strong operating momentum and also took action to build upon our APS-driven capability to deliver innovative and accretive new products into the middle market by announcing our intent to acquire NFP. NFP, under the leadership of Doug Hammond and an exceptional team, is the premier operating platform in the middle market segment with tremendous client relationships and distribution. And together, we can bring stronger analytics and innovation to this space. And not just capability, but content that can serve the middle market, like Aon's Cyber Quotient Evaluation, or PsyQ, a proprietary platform that helps clients identify, measure, and manage cyber risk. NFP's operating platform will enable quick and efficient connection to Aon Business Services content, driving meaningful growth in the middle market. And we're incredibly excited about the top and bottom line growth potential for NFP, given our complementary businesses and expected synergies and the value it will create. For Aon overall, in barely one month into 2024, we already feel the momentum from these actions best demonstrated through the client benefits of our integrated risk capital and human capital capabilities. On the risk capital side, our recent weather climate catastrophe report highlights the growing frequency and severity of events around the world as clients look to manage volatility, enhance resilience, and unlock opportunity. To do this, organizations must have more actionable analytics. exactly the insight we bring with risk capital through the combined power of reinsurance and commercial risk analytics and expertise for our clients. We recently saw this in action at our annual property symposium with over 1,000 clients and insurance markets in the room where we demonstrated a new suite of advanced analytic tools that bring together content and capability across reinsurance and commercial risk. One example is our property risk analyzer, giving clients better understanding of the risk profile in real time which allows us to work more closely together to provide better insight into the risk mitigation options and enable them to make better decisions. From the overwhelming feedback and engagement, it's clear our clients are demanding better solutions and greater support. And because of the steps we've taken and progress we've made with Aon Business Services on products and platforms, we can develop and roll these tools out more quickly for our largest clients and the clients of all sizes delivered efficiently at scale. Equally compelling for human capital. Our human capital trends report highlights the rising importance to clients of having a unique and differentiated value proposition for employees. We see clients facing significant rising healthcare costs and lower overall population health at a time when the need to provide broad health and well-being offerings is greater than ever. We also saw attracting and retaining top talent as the fourth ranked risk in our global risk management survey. Our clients realize it's more important than ever to have a compelling strategy across health, wealth, and talent needs that's delivered in an efficient way to maximize the benefit towards offering. Together, this creates significant opportunity to work with clients to design and optimize their programs, including core offerings to improve colleague health, how operations drive workers' compensation costs, choosing optimal partners in their health model, and supporting top talent through a strong employee value proposition. to ultimately maximize return on investment of their people spend. All these are examples of our three by three plan in action. It's human capital and risk capital delivered through our Aon client leadership model and enabled by Aon business services. These three pillars reinforce and accelerate our Aon United strategy, which has driven financial performance and gives us great confidence in our outlook. On financial performance, we delivered strong results in the quarter contribute to full year progress against our key financial metrics organic revenue growth of seven percent in the quarter and seven percent for the full year was highlighted by full year double-digit growth in reinsurance solutions and health solutions and we've maintained strong overall growth throughout the year on top of six percent organic in the prior year in the fourth quarter commercial risk grew four percent organically with strength in property casualty and construction even against the headwind communicated in prior quarters of ongoing pressure from trends in the M&A and IPO markets. Wealth Solutions' organic growth of 5% in Q4 reflects strong growth in retirement, which includes growth from ongoing pension risk transfer projects and work to help clients address changing regulatory requirements. Reinsurance Solutions' organic growth was 14%, contributing to a full-year organic growth of 10%, as our team closed the year strong while also helping clients prepare for and execute an early 1-1 renewal. Health Solutions delivered 11% organic growth, reflecting strength around the world in the core, driven by net new business and retention, as well as strong growth in the U.S. consumer benefit solutions. This performance gives us confidence in our ability to drive ongoing growth across the portfolio, fully reflecting the strength today at United. For the full year, 7% organic growth and ongoing operational improvement have contributed to 80 basis points of adjusted operating margin expansion, and 10% adjusted operating income growth. These strong results demonstrate our progress and momentum, as well as the power of our AN United strategy and AM Business Services platform. This performance builds on our long-term track record of results. Over the past 12 years, we've strengthened and accelerated organic revenue growth amidst single digits or greater, delivered over 1,200 basis points of adjusted operating margin expansion, and grown EPS and free cash flow at 11% compounded annual rate. ending 2023 with nearly $3.2 billion in free cash flow. The steps we've taken to accelerate A&United with our 3x3 plan reinforce and strengthen our long-term financial guidance for the firm, including mid-single-digit or greater organic revenue growth in 2024 and over the long term, adjusted operating margin expansion over the long term, and long-term double-digit free cash flow growth. As we've communicated, Initiatives like our restructuring program and expected acquisition of NFP impact this guidance in the near term. And over time, we believe these initiatives will contribute to significant ongoing shareholder value creation. More important, we view the opportunity as higher over the next five years than at any time in our history. And in closing, we're pleased to report another strong year of progress against our AN United strategy, which we're accelerating with our three by three plan to deliver risk capital and human capital at scale fully reinforced through Aon Business Services. Looking back on the year, we delivered accelerating growth across three or four solution lines and built momentum across the firm, including 7% full-year organic revenue growth, 80 basis points of adjusted operating margin expansion, 10% adjusted operating income growth, and nearly $3.2 billion of free cash flow. Equally important, we took a series of major actions that positioned Aon for stronger performance in 2024 and over the coming years. Now I'd like to turn the call over to Krista for her thoughts on our financial results and long-term outlook. Krista?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered strong operating results in the fourth quarter to finish the year strong. In the quarter, we translated 7% organic revenue growth into 60 basis points of adjusted operating margin expansion and 10% adjusted operating income growth. The full year, 2023, we delivered 7% organic revenue growth, 80 basis points of margin expansion, 6% EPS growth and generated 3.2 billion of free cash flow. In the quarter, we announced our definitive agreement to acquire leading broker NFP, enabling us to unlock the fast-growing mid-markets with Aon Business Services-enabled enhanced distribution and further accelerate our Aon United strategy. The steps that we've taken around Aon Business Services now enable us to address this attractive market in a compelling way that delivers risk capital and human capital at scale to clients of all sizes. The expected acquisition of NFP builds on our long-term, proven track record of strategically allocating capital at scale to high return opportunities to create long-term value for clients, colleagues, and shareholders. And as Greg mentioned, we see the expected acquisition and our restructuring program reinforcing our Aon United strategy and our 3x3 plan. We are extremely well positioned to build on this momentum as we head into 2024. As I reflect on our results, as Greg noted, organic revenue growth was 7% in Q4 and for the full year, highlighted by double-digit organic revenue growth in reinsurance solutions and health solutions. I would note that reported revenue growth of 8% in Q4 includes a favorable impact from changes in NFX of 2%, and there's no net impact from changes in FX to full-year reported revenue. I'd also highlight fiduciary investment income, which is not included in organic revenue growth, with $78 million in Q4 and $274 million for the full year. If you were to include fiduciary investment income, organic revenue growth would have been 8% in both Q4 and the full year. We continue to expect mid-single-digit or greater organic revenue growth for the full year 2024 and over the long term. Moving to operating performance, we delivered strong operational improvement in Q4 with adjusted operating margins of 33.8%, an increase of 60 basis points. Driven by revenue growth, efficiencies from our business services, overcoming expense growth, including investment in colleagues and technology to drive long-term growth. For the full year, adjusted operating margins of 31.6% reflect margin expansion of 80 basis points. As previously communicated, there was no impact on margin from restructuring savings. Looking forward, we expect to deliver margin expansion in 2024 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. We expect restructuring savings will fall to the bottom line and contribute to full-year adjusted operating margin expansion. Restructuring actions completed in 2023 are expected to generate $70 million of run rate savings in 2024. At this time, we continue to expect $100 million of run rate savings in 2024 as we continue to execute against our plans for our business services and our business. As we've previously communicated, we've conservatively modeled the expected acquisition of NFP to close mid-year 2025. While the combined adjusted operating margin will initially be lower than Aon's standalone, we expect over time to continue to improve Aon's overall margins through operational improvement and the impacts from previously communicated cost synergies. Turning to EPS, adjusted EPS was flattened Q4. Operating income grew 10%, but was offset by a headwind from a higher tax rate in the quarter and non-operating expense. For the full year, organic revenue growth and margin expansion translated into adjusted EPS growth of 6%, overcoming a headwind from non-operating expense. I'd note the change in other non-operating expense had a 15 cent per share or 4% unfavorable impact in Q4, and a 98 cent per share or 7% unfavorable impact for the full year. This reflects an unfavorable impact from balance sheet FX remeasurement in the current period, an increase in non-cash net periodic pension expense, as well as a gain on sale of businesses in the prior year period. Also, as noted in our earnings materials, FX translation had a favorable impact or approximately 3 cents per share in Q4 and an unfavorable impact of 17 cents per share for the full year. If currency remains stable at today's rates, we would expect no material net translation impact results for the full year 2024. Additionally, in 2024, we expect non-cash pension expense in OIE to be $43 million, spread evenly across quarters, compared to $71 million in 2023. And, as we've previously communicated, Based on a mid-2025 close, the expected acquisition of NFP is expected to be dilutive in 2025, breakeven to adjust to 2026 EPS, and accretive in 2027 and beyond. At this time, there are no further updates on the regulatory process or deal timeline for NFP. Turning to free cash flow, we generated $3.2 billion of free cash flow in 2023, For the full year, cash flow operations increased $216 million year-over-year, or 7%, reflecting double-digit operating income growth and overall working capital optimization, partially offset by higher cash tax payments. I'd note the negative impact to working capital caused by temporary inversing delays associated with the new system implementation, which we communicated last quarter, persisted in Q4 and impacted our overall continued progress on working capital. Free cash flow increased 5%, as cash flow from operations was offset in part by a $56 million or 29% increase in CapEx. CapEx was $252 million in 2023 as we executed technology projects to drive long-term growth. Going forward, we expect CapEx to grow in line with the business, managed on a disciplined ROIC basis. Looking forward, free cash flow will be impacted in the near term by restructuring, higher interest expense, and the expected NFP deal and integration costs. We expect to return to our trajectory of double-digit free cash flow growth over the long term, driven by operating income growth and a $500 million opportunity in working capital. As we contemplate the expected acquisition of NFP, the transaction strengthens our long-term free cash flow outlook. We expect the transaction to add over $300 million of free cash flow in 2026 and $600 million of free cash flow in 2027. Now let me provide an update on our Accelerating Aon United program, which is enabling Aon Business Services and our 3x3 plan. As Greg highlighted, the 3x3 plan is accelerating our Aon United strategy. We see particular opportunity around Aon Business Services as the catalyst. We are investing to standardize platforms and operations, drive data analytic-based product innovation, and deliver at scale to create better tools better experiences, and greater relevance for clients and colleagues. In the fourth quarter, we incurred 129 million of restructuring-related charges, with a cash outflow of $13 million. We're pleased with the progress we've made in the quarter, and we've incurred 12% of total expected cash restructuring charges. The actions we've taken in 2023 are expected to generate $70 million of run rate savings in 2024, contributing to the $100 million of cumulative savings we expect for the full year 2024. As mentioned, program savings were not material in 2023. As we've said previously, we look at the opportunity in Aon Business Services and across our client-facing capabilities. We know delivering our strategy will result in long-term progress against our key financial metrics and will drive more value for clients, colleagues, and shareholders. Turning now to capital allocations. We allocate capital based on return on capital and long-term value creation. I'd note over time, we've driven value creation through core business results, share buyback, and acquisitions. As you look historically, we have a successful track record balancing acquisitions and dispositions of all sizes and share buyback. Given our strong outlook for free cash flow over the long term, we expect share of purchase to continue to remain our highest return on capital opportunity for meaningful ongoing capital allocations. We believe we are significantly undervalued in the market today, highlighted by the $2.7 billion of share of purchase in 2023. We expect to continue to invest organically in content and capabilities we can scale across the firm, and we will continue to assess priority areas for inorganic investment, noting our M&A pipeline continues to be focused on our global priority areas that will bring scalable solutions to our clients' growing and evolving challenges. we will continue to assess all capital allocation decisions on an ROIC basis, noting we ended 2023 with an ROIC of 33.1%, an increase of nearly 2,100 basis points over the last 12 years, reflecting our track record of balancing growth and returns to create long-term value. I'd note ROIC will initially be negatively impacted after the expected acquisition of NFP, We expect it to improve over time as we execute our Aon United strategy to drive long-term value creation. Our expected acquisition of NFP is consistent with our proven capital allocation framework. It enables us to put capital to work at scale and strengthen our free cash flow profile in the long term, which will continue to allocate to drive shareholder value creation. Between now and the expected close of the deal, we expect discretionary capital allocation will continue to be much more weighted towards share buyback. given the commitments we've made around NFP. Following the expected close of NFP, free cash flow will be impacted in the near term by deal and integration costs and higher interest expense for transaction-related debt, and as we take steps to deliver our balance sheet and return metrics to levels consistent with our current credit ratings profile. 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. We remain committed to maintaining our current investment-grade credit ratings. We expect to continue adding debt supported by EBITDA growth until we complete the expected acquisition of NFP and expect to maintain our current ratings. As we've previously communicated, we expect to fund the cash portion of the purchase with approximately $7 billion of new debt. with $2 billion borrowed at close and $5 billion raised in 2024 across a range of maturities subject to market conditions. Following the transaction-related debt issuance in 2024, we expect to incur approximately $12.5 million of negative interest carry expense per quarter until deal close. As we previously communicated, the financing and capital management plan contemplated in this transaction is consistent with maintaining our current investment-grade credit profile. We expect our credit ratios to be elevated over the 12 to 18 months post-close, and we expect to bring our leverage ratios back in line with levels consistent with our credit profile, driven by substantial free cash flow generation and incremental debt capacity from EBITDA growth, noting our track record of effectively managing leverage within current ratings. In summary, in 2023, we delivered strong operational performance, contributing to continued progress against our A&United strategy. Our strong financial results and disciplined capital management enable us to return 3.2 billion shareholders through share of purchase and dividends. The steps we've taken around our 3x3 plan are accelerating our Aon United strategy, catalyzed by Aon Business Services and reinforced by the restructuring program and our expected acquisition of NFP. We remain incredibly excited about the opportunity to continue to drive top and bottom line results to drive value for clients, colleagues and shareholders. and look forward to building on this momentum in 2024. With that, I'll turn the call back over to the operator and we'd be delighted to take your questions.