Aon PLC

Good morning, and thank you for holding welcome to a on plc third quarter 2024 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 2024 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 third quarter conference call. I'm joined by Edmund Reese, our CFO, and Eric Anderson, our president. And we're especially delighted to have Edmund here leading his first quarterly earnings call as our CFO. As in previous quarters, we posted a detailed financial presentation on our website and will webcast slides, which Edwin will reference in his remarks. To begin, we want to extend our deepest sympathies to those impacted by recent natural disasters, including from hurricanes, flooding, and typhoons around the world, particularly Hurricane Celine and Milton. In these times of challenge, as communities endure the tragic loss of life and tremendous damage, our actions as a firm focus especially hard on helping businesses and communities respond and recover. To our 60,000 colleagues who make this possible, thank you in all you do and for your tireless commitment and dedication to our clients. Together, we're executing our three-by-three plan on each of the three pillars, delivering risk capital and human capital solutions through the Aon Client Leadership Model, scaled by our Aon Business Services operating platform. This is a monumental effort, and we're seeing it in our results. Year-to-date financial performance represents great progress and puts us well on track to achieve our goals in 2024 and over the long term. Highlighting our results and key messages from the quarter and year-to-date, in Q3, our team delivered 7% total organic revenue growth, with all solution lines at 6% or greater, and consistent organic revenue growth from Aon and NFP. With this organic growth and the addition of NFP, we delivered 26% total revenue growth, 28% adjusted operating income growth, an adjusted operating margin of 24.6%, an increase of 70 basis points year-over-year from our combined 2023 margin baseline. Year-to-date, we delivered 6% organic revenue growth, 15% total revenue growth, and 70 basis points of adjusted operating margin expansion from our baseline, including roughly five months with NFP contributing to 15% adjusted operating income growth and 9% growth in earnings per share. We also made progress on delivering, executing attractive M&A and returning capital to shareholders with 800 million share buyback year to date. NFP continues to perform exceptionally well, exactly in line with expectations for top line growth, cost and revenue synergies, free cash flow and ongoing M&A activity, all executed through our independent and connected operating strategy. Overall, we remain fully on track to achieve our financial guidance for mid-single digit or greater organic revenue growth, margin expansion, and double-digit free cash flow growth over the long term, all supported by disciplined capital management. As we reflect on future client demand and our momentum, we would offer a few observations. In every industry and region, our clients are telling us that it's getting harder to make decisions across risk and people issues. They face increasing volatility as decision-making becomes more complex. requires deeper insights, stronger partnerships, and more innovative solutions. Businesses are demanding urgent action and we're well positioned to respond with exceptional solutions in our core business and with the development and delivery of content, capability, and expertise that helps clients effectively address their challenges. Our three by three plan is designed to meet these needs across the pillars of risk capital, human capital, Aon client leadership, and Aon business services. Leveraging our structure to unlock new integrated solutions to support our clients. A recent client example highlights this opportunity across all three pillars of our plan. Our client, a leading global construction company, needed a partner who could help them place one of the largest insurance programs in the marketplace for their contractors, with seamless support and connection across multiple geographies. Historically, the program consisted of multiple regional placements, creating inefficiencies, which were growing with our client's own rapid business growth. To do this, our global team brought regional data and insights from our analytic tools together in a more efficient global placement supported by enhanced service delivery. Collectively, we delivered a program for our clients that enabled them to maintain coverage, optimize their placement process, improve transparency, and deliver savings. Our team's seamless work demonstrated the differentiated value that we bring without silos, underscored by the financial advantage and innovation made possible through risk capital insights, and AI Business Services. And as we think about AI Business Services, our data analytics were a meaningful part of this win. And this was only the beginning, not only for this client, but much more broadly. As we have often highlighted, a primary element of our strategy is bringing together our data, analytics, operations, and platforms to deliver insight in more powerful ways at scale. Because of the steps we've taken to build one platform, AI Business Services, we can develop tools and capabilities that effectively use AI today and evolve in the future, with capabilities like new climate risk data and our property analyzer, or with insight around medical innovation, demographics, and claims, and our health risk analyzer. The investments we're making are helping to ensure we can continue to develop these advanced analytic tools and deliver differentiated value for clients, further strengthening our relationships, and enable us to do more with them. Finally, highlighting NFP. We remain even more excited than when we announced and closed the deal, and remain exactly on track with our expectations. NFP's performance in the quarter continues to reinforce this thesis, reflecting great work by our combined teams. One area that we're really seeing strength is where we're building on NFP's strong client relationships by bringing additional content, capabilities, and tools to our NFP team. Let me briefly highlight two examples of how our independent and connected operating strategy is driving value for clients, and is a creative day on performance. In our commercial risk business, NFP colleagues can now bring our PsyQ tool to clients. This capability lets our clients analyze and understand their cyber risk in terms of underlying risk, mitigation factors, and insurance cost drivers. This is a powerful tool for clients of all sizes, and the benefit is resonating with our NFP teams and clients. Similarly, in health solutions, we're seeing great success with our health efficiency analyzers. This analytic capability helps clients understand health program dynamics across their population and across geographies, enabling actions to better assess drivers of spend, improve ROI, and manage healthcare investments for their people. Finally, our independent and connected operating strategy is resonating with our NFP colleagues and with our NFP M&A pipeline targets and with talented potential new hires who appreciate and understand the operating flexibility and additional value that being part of Aon can bring to their clients. In summary, our Q3 and year-to-date results demonstrate strong progress against our financial guidance. We're taking meaningful steps to continue to deliver great capability to our clients through our three-by-three plan, ensuring we bring relevant solutions to our clients, all enabled through Aon Business Services. We remain confident in our strategy, our financial guidance and outlook, and our ability to drive long-term value creation for our clients, our colleagues, and shareholders. Now, let me turn to Edmund for his thoughts on our financial results and outlook. Edmund?

Thank you, Greg, and good morning, everyone. I joined Aon a little over three months ago, and I couldn't be more excited to be a part of this company, given the opportunities ahead of us. My confidence in the financial model, delivering organic revenue growth, margin expansion, and double-digit free cash flow over the long term has only increased. the immediate term i'm pleased to be here delivering the third quarter results and before jumping into the detail let me elevate what matters most first after a strong q3 we're right on track to deliver a full year 2024 in line with our objectives and guidance including mid single digit or greater organic revenue growth adjusted margin expansion and free cash flow generation that allows us to de-lever while simultaneously returning $1 billion in capital to shareholders through share repurchases. Second, our organic revenue growth reached 7% in the third quarter. Importantly, this performance was strong across the enterprise with organic revenue growth of 6% or higher in each of our solution lines. This is a direct result of executing our three by three plan. and the investments that were making the drive top line growth, beginning with our investment in hiring client-facing talent in specialty areas, expanding our client group to now nearly 450 clients, and further expanding our integrated risk data predictive analyzers across property, casualty, D&O, cyber, and health. And finally, the investment thesis on NFP remains. as we're off to a strong start with NFP performing in line or better than the metrics that we measure in the business case. With five months of results since the acquisition, NFP's year-to-date organic revenue growth is strong. Retention is better than last year on top of a solid recruiting pipeline, and the M&A middle market growth engine is humming, having acquired $26 million in EBITDA year-to-date. These acquired firms are seeing value in our independent and connected model, connected to Aon content and capabilities while maintaining an independent distribution and service model. Overall, we have momentum in our continued execution of the three by three strategy in creating investment capacity and margin expansion by delivering on our restructuring saves gives me a high level of confidence and delivering on our near and long-term financial objectives, including a double-digit three-year CAGR and free cash flow from 2023 through 2026. I'll add one logistical note before turning to the results. You'll notice that we took the opportunity to add content with the intention of providing additional transparency and clarity into our performance and expectations. and to help you better understand the connection between our strategy and performance. You can expect that we'll have minor adjustments to refine our material over the next few calls to support greater engagement with our investors and our analysts. So now, turning to the third quarter results and the financial summary on slide six. You see that we delivered 7% organic revenue growth in the third quarter. Adjusted operating margin was 24.6%, up 30 basis points. And I'll remind you that we look at our margin expansion relative to a 2023 baseline that includes an FP. And when doing so, operating margin expanded 70 basis points in the quarter. Adjusted EPS was up 17% to $2.72. And finally, we generated $951 million in free cash flow, bringing our total through three quarters to $1.7 billion. get into the details of these results starting with organic revenue growth on slide eight organic revenue growth of seven percent in q3 24 was at a high end of our mid single digit or greater guidance range growth and commercial risk was again strong at six percent with all other solution lines growing at or above seven percent in commercial risk organic revenue growth was six percent in q3 and reflected straight in our North American core P&C business, driven by net new business and strong retention, as well as double digit growth in M&A services and continued strong performance in EMEA. Reinsurance with 7% organic revenue growth in Q3 was led by a balanced contribution of growth from our treaty and facultative placements. It's worth noting that our outlook on the seasonally smaller fourth quarter is for low single digit growth given lower FAC revenue and the impact of growing over an elevated Q4-23. We expect full-year organic growth to achieve our mid-single-digit or greater growth objective. Health Solutions delivered 9% organic revenue growth with double-digit growth in our international markets from new business and core health and benefits and data analytics-driven sales in our talent business. The market demand environment continues to reflect increased health cost trends and positive impacts from enrollment levels. I'll also mention that in the fourth quarter, we'll be growing over an elevated Q423. And finally, wealth solutions, organic revenue growth was 7%, driven by continued strong demand for pension risk transfer and regulatory changes across the UK and EMEA, and a positive contribution from NFP. And let me also provide some additional color on NFP. NFP was accretive to commercial risk and wealth solutions and delivered mid-single-digit growth and health. NFP and Aon are both producing mid-single-digit organic revenue growth. And NFP is performing in line with our business case. Overall, organic revenue growth continues to be driven by net new business and strong retention. I'll provide a little color on how net new business growth and market impact helped us deliver our 7% organic revenue growth. As you think about the 7%, recurring new business from new logos and existing clients contributed 10 points to growth. And with continued high retention, net new business contributed five points to organic growth. The net market impact from growth and exposures and rate was two points. We saw flat rate impacts in reinsurance with limited increases in rate benefit across commercial, health, and wealth. I'll also pause here and note that we continue to make great progress on our priority talent acquisition. We're continuing to focus on hiring specialty talent in construction, energy, and health, as well as in our enterprise client group. We expect these new colleagues to season and contribute to organic growth within 12 to 18 months, which contributes to our mid single digit or better organic growth objective. And one final point on revenue. Third quarter fiduciary investment income was up 6% over last year to 85 million. And as a reminder, we do not include fiduciary investment income in our organic revenue growth calculation. Of course, as interest rates decline, we expect an impact on income from fiduciary balances, which average $7.3 billion over the trailing 12 months. For modeling purposes, I'll remind you that 100 basis point impact on rates has a full year impact of approximately $70 million on investment income. As interest rates decline, lower investment income does lower our margins However, we still expect to drive adjusted operating margin expansion. Additionally, I'll point out that the earnings impact is partially offset by lower interest expense on our term loan debt. The strength of our business model and our outlook for top and bottom line growth underpins our expectations that we will deliver double-digit free cash flow growth irrespective of interest rate movements. On slide 10, operating income was up 28% to $915 million. Adjusted operating margins were 24.6% in the third quarter and 30.8% year to date. For the quarter, margins were up 30 basis points. From our combined baseline with NFP, margins expanded 70 basis points in the quarter and year to date. Adjusted operating margin continued to benefit from the scale in our business, particularly in Aon Business Services, or ABS, our continued portfolio management and shift to higher margin businesses, as well as ongoing expense discipline, and importantly, the benefit from our restructuring initiative to accelerate our 3x3 plan. Specifically, restructuring savings in the third quarter were $25 million, resulting in 70 million year-to-date savings and 70 basis points of contribution to adjusted operating margins. Looking ahead, we continue to expect 100 million of savings in 2024 and are well on track to achieve our stated goal of 350 million of run rate savings in 2026. Additionally, the momentum in ABS gives us confidence in continued margin expansion over the long term as we standardize our operations and integrate our platforms. We remain committed to driving full year adjusted operating margin expansion in 2024 and over the long term from the NFP adjusted 2023 baseline of 30.6. Moving to interest, other income and taxes on slide 11. Interest expense of $213 million was up $94 million versus last year, reflecting $7 billion in higher debt driven by the NFP acquisition. We expect $210 million of interest expense in Q4. Other income was $54 million higher year over year as we divested non-core personal lines and real estate advisory assets. The result of our continued focus on portfolio management is a higher growth, and higher margin portfolio. And finally, the Q3 tax rate was 18%, with year-over-year increase driven by growth in higher tax geographies, the unfavorable impact of discrete items, and policy changes across the globe. As we look forward, we expect to provide further color on 2025 tax rates during our year-end earnings call. Turning now to free cash flow. We generated $1.7 billion of free cash flow year to date, reflecting strong operating income growth and continued working capital improvements. Our free cash flow is being impacted by extraordinary items, including NFP transaction and integration charges, restructuring and legal settlement expenses previously communicated. We have line of sight on these items and remain confident in underlying free cash flow growth. We continue to expect a double-digit three-year CAGR on free cash flow from 2023 to 2026. And given our expectations on free cash flow, we are well positioned to pay down $2.1 billion in debt in 2024. As we look forward, we continue to have confidence in our ability to reduce our debt to even a leverage ratio from 3.9 to 2.8 to three times in Q4 2025. I'll also highlight that through the first nine months of the year, we have returned 1.2 billion in capital to shareholders through the dividend and 800 million in share repurchases. We continue to estimate approximately 1 billion in share repurchases for 2024. I'll end my prepared remarks on slide 13 with guidance and some concluding thoughts. With 7% organic growth and continued margin expansion The third quarter reflects continued momentum in our business. We are executing on our three by three plan and are pleased to see that execution come through in our results. We are reaffirming our full year guidance for 2024, including mid single digit or greater organic revenue growth, adjusted operating margin expansion above our 2023 30.6% baseline, 100 million of savings in 2024 from our restructuring initiative, all contributing to double digit free cash flow growth over 23 to 26. Additionally, the investments that we're making to higher in priority areas highlights the strength of our financial model and our ability to balance sustainable organic growth with growth investments while driving margin expansion. and generating double-digit free cash flow growth over the long term. This financial model gives us confidence in meeting our 24 to 2026 objectives and in driving sustainable long-term growth. My prepared remarks gives you a sense of why I'm excited to be the CFO of Aon, working with my 60,000 colleagues to build on Aon's long track record of performance. We have a clear strategy for growth, We are executing on that strategy in making the investments in ABS and middle market and priority hires to sustain that growth on both the top and the bottom line. And as you can see in our 24 third quarter and year to date results, that execution is driving strong performance. So with that, let's jump into your questions. Melissa, I'll turn it back to you.