Aon PLC

Good morning and thank you for holding. Welcome to Aon PLC's first quarter 2025 conference call. At this time all parties will be in listen only mode until the question and answer portion of today's call. I'd 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 that 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 2024 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 and welcome to our first quarter earnings call. I'm joined by Edmund Reese, our CFO. As in previous quarters, we posted a detailed financial presentation on our website, which Edmund will reference in his remarks. We want to start by acknowledging our colleague and friend, Eric Anderson. We announced last month that Eric transitioned from his role as president to serve as a senior advisor. And in his 28 years with Aon, Eric played a significant role in advancing our Aon United strategy, and he's been a leader helping execute our three-by-three plan to deliver more value to our clients and positioning Aon for continued growth. Thank you, Eric, for your leadership and friendship. Turning to our financial performance, we continue to build momentum in year two of our three by three plan. And our execution is translating into results that are fully in line with our financial objectives. Our team delivered another quarter of mid single digit growth with organic revenue growth of 5%. With this organic growth and the addition of NFP, we delivered 16% total revenue growth, a 38.4% margin, contributing to 12 percent adjusted operating income growth and adjusted EPS of 567. And finally, we generated 80 million in free cash flow and returned 397 million in capital to shareholders. Notably, we also announced that we're increasing our quarterly dividend by 10 percent, the 15th consecutive year of dividend growth. The quarter's strong operating performance marks a start to 2025 on track and right in line with our expectations. Importantly, we achieve these results in an unpredictable and turbulent business environment that is creating greater complexity for our clients. Within the four mega trends that we reference, trade, technology, weather, and workforce, trade is currently and clearly top of mind. Today, tariffs have had limited direct impact on our business and financial results. Over the medium term, while there could be impact to client discretionary spending, we believe the demand-benefit is also meaningful, given the trust we've established with our clients, positioning us to support and help them adapt to new trade rules and to mitigate risk and capture new opportunities. But for many clients, tariffs have challenged the global landscape, posing a significant risk. And against this challenge, we are arming clients with real-time insights they need to make better decisions. A few examples include using our supply chain risk diagnostic tool to advise clients on effectively diversifying or reconfiguring their supply chain operations. We're tailoring credit solutions like political risk insurance, surety bonds, and trade credit insurance, and advising on human capital issues like restructuring employee stock grabs. Further, our expertise and ABS capabilities are helping clients fortify their operations to maintain stability despite trade disruptions. Ultimately, our unique and connected capability and the increased complexity of the global trade environment is driving demand for Aaron's advice and solutions. On our Q4 call, we highlighted that on the back of strong performance in year one of our 3x3 plan, we were entering 2025 with great momentum. And we've continued to execute in the first quarter, using AVS capabilities to expand with and better serve clients, attracting client-facing talent in priority areas, and utilizing exceptional NFP capability to accelerate middle market growth, which today reached the one-year anniversary as part of AI. And specifically on NFP, we couldn't be more thrilled to have NFP as part of the Aon family. As we reflect on this year one milestone, we highlight that the business continues to perform in line with high expectations. Our progress guided by the principle of independent and connected is right on track. Producer retention continues to be higher than pre-deal and the NFP acquisition engine continues to add high quality middle market EBITDA through targeted acquisitions with a strong pipeline for the remainder of 2025. This quarter is a testament to the power of the combined NFP and AOM as we absorb the peak impact of an increased share count from the transaction. With the acquisition now annualized, we expect NFP's contribution to become even more meaningful as we progress through 2025. Further, on the important people front, we made significant progress on our talent investment by hiring in priority areas like construction and charity. Colleagues are choosing Aon because they see the power of our capability and connected firm enabled by ABS to win new clients and better serve existing clients. Finally, to connect all the dots with one specific client example, we expanded our relationship with a major risk capital client who is facing soaring healthcare costs due to high cost claimants. We won their human capital mandate using our health risk analyzer to provide insights and predictive analytics on the client's future claims, helping them manage both their risk and benefits budget. And this example highlights the strength of our three by three plan to drive financial results. As we look ahead, while it's clear we're operating in a complex economic environment, we remain confident in the resilience and strength of our business and financial model. We have a track record of sustained performance across bull markets, recessions, economic shocks, and changing political landscapes. And in fact, our integrated solutions at AM United Strategy bring differentiated and substantial client benefit in periods of greatest uncertainty. We view the current environment as an opportunity to further strengthen our client relationships and reinforce Aon as a trusted advisor. In our daily interactions with clients, we have not seen a pullback in demand. Rather, we see an increase in clients looking for guidance and offerings to navigate the increasing complexity of their business challenges. And as a result, we are reaffirming our 2025 full-year guidance, including mince-single-digit or greater organic revenue growth, margin expansion, strong earnings growth, and double-digit free cash flow growth. To summarize, we want to reiterate our conviction about the opportunity ahead. Aon's advice and solutions are even more valuable to clients as they navigate increased complexity in their businesses. We continue to see momentum across our business, from the high-quality talent we're attracting to Aon to the progress we're making to attack the $31 billion middle market opportunity to major wins with both new and existing clients. and we remain on track to deliver against our 2025 financial goals. Of course, none of this would be possible without our global team. We want to thank our 60,000 colleagues around the world for their commitment to excellence and innovation. Your extraordinary leadership and hard work is what enables us to deliver for our clients. And finally, and to focus further on our long-term strategy and opportunity, we hope you can join us for our Investor Day on June 9th. Edmund and I and the senior executives leading our 3x3 plan look forward to sharing details about Aon United as a powerful asset and how we'll continue to drive sustainable long-term growth and create value for our shareholders. It promises to be a very productive event. Now I'll turn the call to Edmund from our detailed review of our financials and outlook. Edmund?

Thank you, Greg, and good morning, everyone. I'm excited to be here discussing the results for the first quarter of 2025. Before jumping into the details, it's important to filter the quarterly noise both within our first quarter results and within the uncertainty of the broader macroeconomic environment, and emphasize the signals from Q1 that reinforce our confidence in the fundamentals of our business and financial model, supporting our four-year 2025 guidance and ongoing long-term growth. First, our Q1 performance underscores our commitment to making the investments that support sustainable, mid single digit or greater organic revenue growth investing in hiring client facing talent strengthening and accelerating our abs capabilities and increasing our aeon client leaders to expand with our existing clients organic revenue growth reached five percent for the quarter with retention trucking one point better than q124 and market impact from pricing and exposures reflecting some pressure but slightly better than our expectations and still within our estimated range. Second, relentless execution on our accelerating Aon United restructuring program, notably in ABS, is creating 85 basis points of margin expansion in the quarter, creating capacity to fund the investments that I just referenced and strengthening the foundation for ongoing operating leverage from scale benefits. Third, we continued our balanced capital allocation discipline, remaining on track to meet our leverage objective while simultaneously continuing our middle market tuck-in acquisition to drive growth and returning $397 million in capital to shareholders through the dividend and share repurchases. Additionally, our continued focus on portfolio management positions us to further strengthen our capital position double down on growth in our core business and sustain healthy capital returns to shareholders so the drivers of full year 2025 growth investing for sustainable organic revenue growth continued margin expansion and our strong capital position remains stable and we are executing our plan despite the uncertainty in the macroeconomic environment and the noise in the first quarter specifically from FX, given the dollar is three to 7% stronger than it was in Q1 24, where we have currency exposure, three months of additional impact on margin from NFP, higher interest in shares driven by the acquisition of NFP. All items that we communicated as part of our 2025 guidance. We have a high level of confidence in delivering on our financial objectives and achieving full-year results in line with our 2025 guidance. So now turning to the first quarter results and the financial summary on slide six, you see that total revenue increased 16% to $4.7 billion, and we delivered 5% organic revenue growth in the quarter. Adjusted operating income margin was 38.4%. down 130 basis points as we recognized the impact of NFP in the Q125 results. Adjusted EPS was $5.67, reflecting the impact of higher interest in shares. And finally, we generated $84 million in free cash flow. So let's get into the details of these results, starting with organic revenue growth on slide eight. Organic revenue growth reached 5% in Q1 2025, continuing to be in line with our mid-single-digit or greater guidance range. In commercial risk, organic revenue growth was 5%, with the biggest contribution coming from our international P&C business. Additionally, the growth reflected continued strength in our North American core P&C business, and while deal activity was slower than expected when entering the year, we had a modest tailwind from M&A services relative to Q124. Reinsurance with 4% organic revenue growth was driven by growth in treaty placements and double-digit growth in both facultative placements and insurance-linked securities. This growth was partially offset by the impact of a multi-year extension with a significant client at higher limits and adjusted commission. Looking ahead to the second quarter, we expect softer market conditions with April 1 property rates in both the U.S. and Japan down 5% to 20%. Importantly, we expect full-year organic revenue growth in line with our mid-single-digit or greater objective, as we see a strong second half driven by higher limits at July 1 renewals, continued growth in our international faculty placements, and strength in our strategy and technology group. Health Solutions also delivered 5% growth. driven by a double-digit increase in our core health and benefits business, which was particularly strong in our international markets. The growth was fueled by net new business and market conditions that continue to stimulate rising healthcare costs. In talent, we saw high single-digit growth in our advisory business, offset by lower data analytics sales, which were impacted by our data delivery schedule. we still expect our talent business to deliver mid-single-digit or greater full-year growth. And finally, wealth was our highest-growing solution line in the quarter, generating 8% organic revenue growth primarily driven by NFP asset inflows and market performance and continued regulatory work across the UK and EMEA. I will note that in the second quarter, we will be growing over an elevated Q2 2024. Our Q1 organic revenue growth continued to be powered by new business, which contributed nine points from both existing and new clients. Retention was one point better than a year ago, with commercial risk steadily improving as we deploy our risk capital analyzers, supporting a net new business contribution of four points to organic revenue growth. The net market impact, which measures the impact of exposures and rate, contributed one point to organic revenue growth, squarely within our zero to two point estimated range. Reinsurance was flat as rate declines were mitigated with increased sideways coverage. And rate pressure and commercial risk was offset with limit and coverage increases across our book. Health and wealth had positive net market impact as we continue to see increasing costs in health and positive market impact in wealth. And one final point on revenue. First quarter fiduciary investment income was down 15% versus last year to $67 million as the increase in average balances was more than offset by lower interest rates. And as a reminder, we do not include fiduciary investment income in our organic revenue growth calculation. On slide nine, adjusted operating income was up 12% for the quarter to $1.8 billion. Adjusted operating margin was 38.4% in the first quarter, in line with expectations and down from 39.7% in Q124, reflecting the impact of the NFP acquisition, which closed in late April 2024, as well as the interest rate impact on investment income from fiduciary balances. Adjusted operating margin continued to benefit from the scale in our business, particularly through Aon Business Services and from a restructuring initiative to accelerate our 3x3 plan. Specifically, restructuring savings in the first quarter were $40 million, which contributed approximately 85 basis points to adjusted operating margin. Looking ahead, We continue to expect $150 million of savings for the full year 2025 and are well on track to achieve our stated goal of $350 million of run rate savings in 2026. Our organic revenue growth and the actions we are taking through Aon Business Services to standardize our operations and integrate our platforms are creating capacity to fund our growth investments and setting the foundation for ongoing margin expansion through operating efficiencies and scale in our business. We remain committed to driving four-year adjusted operating margin expansion of 80 to 90 basis points in 2025. Moving to interest, other income, and taxes on slide 10. Interest income of $5 million was $23 million lower than last year when we earned interest on funds utilized in the NFB acquisition. We expect interest income to be negligible in Q2 25 compared to the $31 million in Q2 24. Interest expense of $206 million was up $62 million versus last year, reflecting $7 billion in higher debt driven by the NFP acquisition. We expect $209 million of interest expense in Q2 25. Other expense increased $23 million year-over-year primarily due to higher non-cash pension expense. And finally, the Q1 tax rate was 20.9%, 160 basis points lower than Q1 24, reflecting the geographic mix of income growth and the favorable impact of discrete items. Our tax guidance for the full year remains at 19.5 to 20.5%. Turning now to free cash flow and capital allocation on slide 11, We generated $84 million of free cash flow in Q1, reflecting strong operating income growth and DSO improvements, partially offset by higher incentive, interest, and restructuring payments. We continue to expect double-digit free cash flow growth in 2025 and a double-digit three-year CAGR on free cash flow from 2023 to 2026. In the quarter, our leverage ratio was 3.5 times, and we continue to be on track to achieve a 2.8 to 3 times leverage ratio in Q4 2025, consistent with the objective that we set when we announced the NFP acquisition. Additionally, we remained active in M&A, continuing our targeted tuck-in acquisitions across priority areas, including middle market acquisitions through NFP. which acquired 19 million in EBITDA in Q1. The pipeline remains strong, especially with opportunities and commercial risk, and we continue to expect to acquire 45 to 60 million of EBITDA through NFP middle market acquisitions in 2025. Finally, we returned 397 million in capital to shareholders through the dividend and 250 million in share repurchases in Q1. Additionally, and as Greg mentioned, in April, we increased our quarterly dividend by 10% to 74 cents per share, marking 15 consecutive annual dividend increases, reflecting the strength of our business and financial model and our confidence in achieving double-digit free cash flow growth. I will conclude my prepared remarks on slide 12 with our 2025 guidance and some final thoughts. The first quarter 2025 performance signals a start to the year that is right in line with our expectations. We are executing our three by three plan and have momentum that is being reflected in our first quarter results. Removing the noise and elevating what matters for our four year 2025 guidance, let me highlight the following. We achieved 5% organic revenue growth in the first quarter, meeting our objective So we are reaffirming our mid single digit or greater 2025 full year guidance for organic revenue growth. We continue to get scale benefits through ABS. We are achieving our restructuring goals and we continue to actively manage the portfolio. So we are still expecting and reaffirming 80 to 90 basis points of margin expansion for the full year 2025. We also continue to expect strong earnings growth for the full year. And I will note that we are excited that today marks the one year anniversary of the NFP acquisition. And as a reminder, the late April 24 close will impact Q2 25 margin and earnings just as we expected. For modeling purposes, we are estimating 15 to 18% adjusted EPS growth in Q2 25. And finally, Our earnings growth, including NFPs, will contribute to double-digit free cash flow growth in 2025 and a double-digit three-year TAGR for 23 to 26. Our guidance demonstrates the strength and resiliency of our business and financial model. We are prioritizing investments that support sustainable organic revenue growth. Our execution in Aon Business Services is supporting top-line growth creating investment capacity and delivering margin expansion. We expect to deliver strong earnings per share growth and to generate double digit free cash flow growth. And we continue to have disciplined capital allocation, balancing between high return growth investment and capital return to shareholders. Finally, as Greg mentioned, my 60,000 plus colleagues and I are excited to host an investor day on June 9th, our first in 20 years. and I look forward to your participation. So with that, Rob, I'll hand it back to you and we'll jump into questions.