Operator:

Good morning and thank you for holding. Welcome to Aon plc's Second 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 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 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 first 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.

Edmund Reese:

Thank you, Greg, and good morning, everyone. I'm incredibly excited to be here. First, I want to start by thanking my Aon colleagues for their very warm welcome. I've connected with literally hundreds of colleagues over the last month. And it's been great to meet everyone and really experience the energy and the enthusiasm of Aon, and the commitment to deliver on our plans. What's been most exciting for me is seeing firsthand the investment in the corresponding growth opportunity for our clients, colleagues and shareholders as we deliver on a 3x3 plan over 2024, '25 and '26. And I have to say that with the 3x3 fully in place in '26 and the building momentum, equally compelling is the significant opportunity that will deliver value creation beyond '26 and over the long-term. Finally, the financial model is strong, and the company is performing and well positioned to continue to deliver long-term double-digit free cash flow growth. I also want to add that I'm looking forward to meeting investors and the sell-side in talking through how we will deliver on our guidance and continue to allocate and invest their capital with discipline, focused on high-return investments and capital return and, of course, reporting our third quarter results and fielding questions at that time. So Greg back to you.

Christa Davies:

Thank you so much, Greg, and thank you so much for the partnership. My time at Aon was and will continue to be the highlight of my career. I remain incredibly excited about the value creation potential we have ahead of us through the 3x3 plan. I'm thrilled to welcome Edmund, and I look forward to serving as an advisor to the team to support and ensure a smooth transition. Turning now to the quarter. As Greg highlighted, we delivered exceptional results in the second quarter, with 6% organic revenue growth highlighted by 7% in Wealth and 7% in -- sorry, 9% in Wealth and 7% in Reinsurance. Our overall organic revenue growth does not include the impact -- does include the impact of NFP, beginning from April '25 when we closed the acquisition. So we only had two months performance, NFP's Q2 performance was in line with the business case as it delivered mid-single-digit organic revenue growth. NFP also contributed to the 18% total revenue growth in the quarter, which translated into a 19% adjusted operating income growth, margins of 27.4% and 6% adjusted per share -- earnings per share growth. These results position us well to drive progress against all elements of the 3x3 plan, driving results in 2024 and over the long-term. As I reflect on our performance for the first half of the year, as Greg noted, organic revenue growth was 6% in Q2, driven by net new business generation and ongoing strong retention. We continue to expect mid-single-digit or greater organic revenue growth for the full year 2024 and over the long-term. As Greg described, we're making excellent progress with NFP. We continue to expect that NFP will contribute to the firm's overall revenue growth through organic revenue growth, including $175 million of net revenue synergies by 2026 and inorganic growth from ongoing M&A. While it's early, we're on track to achieve deal synergies, with no net impact in 2024 from cost and revenue synergies and positive impact in 2025 and 2026. This is exactly in line with the guidance we gave when we announced the deal. It's also worth noting that voluntary colleague attrition at NFP is down year-over-year. Moving to operating performance. We delivered strong operational improvement with adjusted operating margins of 33.8% in the first half, an increase of 20 basis points, driven by revenue growth, portfolio mix shift, efficiencies from Aon Business Services and restructuring savings, overcoming expense growth, including investments in colleagues and technology to drive long-term growth. If we consider the combined historic margin profile of Aon and NFP, including two-thirds of NFP's results from the second quarter of 2023, adjusted operating margins expanded 60 basis points in Q2 and 80 basis points year-to-date, which is how we think about ongoing margin expansion. We're making meaningful progress on our Aon Business Services strategy, including through our restructuring program, which helps to accelerate our 3x3 plan and contributes to margin expansion through net savings. We continue to streamline and improve operational processes, moving work to the best locations and enhancing colleague and client experience with powerful new tools such as our property, casualty, D&O, cyber and health risk analyzers. Restructuring savings in the second quarter were $25 million, resulting in $45 million of restructuring savings year-to-date and 60 basis points of contribution to adjusted operating margin year-to-date. Restructuring actions completed so far are expected to generate $95 million of savings in 2024. We expect restructuring savings will fall to the bottom line. At this time, we continue to expect $100 million of realized savings in 2024 as we continue to accelerate our plans for Aon Business Services and our business. As we think about adjusted operating margins moving forward, we continue to expect to drive adjusted operating margin expansion over the full year on a combined firm basis and the long-term through ongoing revenue growth, portfolio mix shift to higher revenue growth, higher margin areas of the portfolio, and efficiencies from Aon Business Services. As we previously communicated, we think the right baseline from which to measure 2025 adjusted operating margin growth is 30.6%. Calculated out as 31.6% from 2023, less 100 basis point drag from NFP for the period from the 2020 -- from the April '25 close through the end of 2024. We also expect fiduciary investment income to be relatively flat year-over-year based on current interest rate expectations. So we expect the tailwind we've seen in the first half of the year will be reduced in the back half. So we remain committed to driving full year adjusted operating margin expansion in 2024 and over the long-term against this adjusted baseline of 30.6%. Turning to EPS. Adjusted EPS grew 6% in Q2 and 7% year-to-date, reflecting double-digit adjusted operating income growth and ongoing share buyback, partially offset by higher interest expense, the issuance of 19 million shares to fund the acquisition of NFP and a higher tax rate. Turning now to free cash flow. We generated $721 million of free cash flow year-to-date, reflecting strong operating income growth and lower CapEx, offset by payments related to NFP transaction and integration charges, legal settlement expense, restructuring and higher cash tax payments, as we've previously communicated. As we look forward, our free cash flow outlook remains strong based on our strong expected operating income growth and a $500 million long-term opportunity in working capital. We've communicated that, in the near term, free cash flow will be impacted by restructuring, higher interest expense and NFP deal and integration costs. In 2025 and 2026, NFP is expected to add $300 million and $600 million of incremental free cash flow, respectively, contributing to our overall expectation of long-term double-digit free cash flow growth. We allocate capital based on ROIC and long-term value creation, which we've done through time through core business investment, share buyback and M&A. As we look historically, we have a successful track record of balancing organic investment, acquisitions, divestitures and share buyback as we continue to optimize our portfolio against our priority investment areas on an ROIC basis. Given the very strong long-term free cash flow outlook for the firm, we expect share repurchase will remain our highest ROIC opportunity. We completed $500 million of buyback in the first half and continue to expect share buyback to be substantial at $1 billion or more in 2024 based on our current M&A expectations for the rest of the year. We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address unmet client needs. Regarding M&A. Our M&A pipeline continues to be focused on our high priority areas, including the mid-market and attractive geographies that will bring scalable solutions to our clients' growing and evolving challenges, known that we closed an acquisition in France this quarter, bringing new specialist capabilities and health and benefits into Aon. We are also continuing to see success from NFP's impressive M&A engine. Since the beginning of 2024, NFP has completed 14 acquisitions at attractive multiples weighted towards commercial risk and health, representing $36 million in annualized revenue. As we previously communicated, we expect NFP to do M&A comprised of $45 million to $60 million of EBITDA per year, and they are on track for the full year 2024. We look forward to building on their established track record and executing against this strong pipeline to drive future growth in the space and value creation within our ROIC framework. Going forward, we'll continue to actively manage the portfolio and assess all capital allocation decisions on an ROIC basis, contemplating buyback, M&A and delevering. Turning now to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet. As previously communicated, we expect our credit ratios to be elevated over the next 12 to 18 months, as we 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 our current ratings. In summary, our strong financial results in the quarter and year-to-date position us well to continue driving progress against all elements of our 3x3 plan and driving results in 2024 and over the long-term. We look forward to building on this momentum. With that, I'll turn the call back over to the operator, and Greg, Eric and I'd be delighted to take your questions.

Elyse Greenspan:

Hi, thanks. Good morning. Before I get into the questions, I just -- also just want to extend my congrats to Christa just on your successful career at Aon.

Elyse Greenspan:

Yes. Thanks, Christa. My first question is on Commercial Risk. I guess it's two parts. Maybe, Greg, you said the overall organic growth wasn't impacted by NFP. Would that statement also hold true for Commercial Risk? And then can you also just expand on what turned in the quarter? You guys went from 3% to 6%, you saw a doubling of growth within that segment in the quarter.

Eric Andersen:

Yes, Greg. So first of all, I would say that strong retention and strong new business really are an outcome of the work that's been going on in the quarter. But just to touch a little bit on the priority hires, if I could, for a second, as you mentioned, in the key specialty areas, construction, energy, other industry areas. We're looking at those investments in people like we do any other investment. We want to bring in the best talent that is out there, support them with the best tools and analytics, whether it's the new analyzers that Christa talked about, some of the broker-led analytics, new tools like automated certificates of insurance to make sure we're providing the right colleague and client experience. But I would also say that the analyzers fit into what we've been doing around the $1 billion investment in ABS and those tools. And when you match that talent, that new talent and existing talent, right, the great talent that's already here at Aon, with those new tools, you begin to provide a different experience for our colleagues who can actually serve their clients better, but also to the clients themselves who get better insight from us really begin to unlock the analytics that we've been talking about, match that with the global broking capability, the access to the reinsurance capital, really the whole strategy around how we're bringing capital to clients, and you see a different experience. And we've seen it in client events, whether it's at RIMS or our property symposium or other client events that have been going on in the first half of the year, you really see the excitement from the clients who are starting to really understand what we're trying to give to them in the whole ecosystem of tools and talent and people. I could share stories and tell you some client wins and things. But really, the new news are these risk analyzers and you see it also on the Health side. The ability to show a client where their risks are, how they structure a program around it and then how they access global capital with a client leader who fully understands their business is actually helping us drive better, stronger retention and better net new business wins.

Christa Davies:

Thanks so much for the question, Elyse. In Q2, similar to Q1, the tax rate was driven by a geographic mix of income and the impact of unfavorable discretes. I would note that discrete can be favorable or unfavorable in any one quarter, and therefore, the rate can be lumpy quarter-to-quarter. We really do think about it over the full year. And as you said, Elyse, we don't give guidance going forward, but that is a historical accurate rate going backwards.

Christa Davies:

That is exactly right, Elyse. And what we've really seen is the acquisition activities NFP slowed down a little as they were negotiating with us for obvious reasons. But the pipeline looks incredibly strong in the back half of the year, and we think they are fully on track to deliver that $45 million to $60 million of EBITDA in 2024.

Operator:

Thank you. Our next question comes from the line of Andrew Kligerman with TD Securities. Please proceed with your question.

Christa Davies:

Thank you very much, Andrew.

Greg Case:

Yes. So thank you, Andrew. Appreciate it, and I really appreciate your perspectives. First, take a step back overall. Just to remind, we have currently the highest engagement we've had in basically almost forever. It's a really positive story that continues to evolve and build. And it really is a function of our colleagues understanding and really contributing to and leading the ability for us to support and help clients. And if you think about the example we started off with today, it's a powerful example of what we can do and the impact our firm can have, and that's really -- that generates a lot of energy around our firm. That's why our engagement is so high. That's reflected in our attrition, and our voluntary attrition continues to be very low, lower than back to pre-pandemic. So very, very positive from that standpoint. It's really against that context, we also, though, said, listen, there are some areas where we think there are some priority opportunities. Construction is one, energy is one, et cetera, and there are a few others around the firm. And we've had great fortune in bringing colleagues in to drive that. But I think Eric's point that we're not just -- this isn't about numbers, this is about capability. So it's bringing in great practitioners and then arming them with our colleagues with these capabilities, these set of analytics. And make no mistake about it, what we've done with the analyzers, we think, is unique and it really is supported by an Aon Business Services platform also unique. And then remember, we also made the unpopular decision to invest $1 billion to accelerate that capability. And you're starting to see that show up, the beginnings of that. You saw it in the second quarter, you'll see it in the third and the fourth quarter and into 2025 and 2026. So that's really what's going on in terms of where we are. And you'll see us continue to make that investment as it strengthens the firm and our client-serving capability. But Eric, what else you got there?

Andrew Kligerman:

So I guess just kind of putting the -- framing it a little bit. This 6% organic revenue growth, it fits in with your mid-single digit or higher objective and it really shouldn't come as a surprise, right? It kind of fits with this strategy that you're describing?

Andrew Kligerman:

Got it. And then just quickly on NFP. Christa mentioned $45 million to $60 million of EBITDA acquired -- each year. How about a more sizable middle market acquisition? Is that something in the cards? Or is it something that maybe you need to digest NFP and maybe a year or two or three down the road, you start thinking about that?

Andrew Kligerman:

Awesome. Thanks, Greg.

Michael Zaremski:

Hey, good morning. Back to the -- so on the -- just curious with the math when you say share repurchases is the highest ROIC opportunity. Am I wrong to assume that M&A now on the NFP platform would be a higher ROIC opportunity? But of course, given just the size of Aon and the amount of M&A you can do that you can't spend it all in the near term. Or am I thinking about the math incorrectly, assuming recently a market multiple is paid for M&A and smaller acquisitions.

Michael Zaremski:

Okay. Interesting. Some of your peers, I guess, maybe probably more optimistic on the margins that I'm modeling out. But just switching gears a bit to just the overall market environment in organic growth. Great to see an improvement in Risk Solutions and organic. Would it be -- I know you characterized the M&A environment is picking up a bit. I mean, would it be fair to say, I know you've given us tidbits in the past that financial lines, cyber where Aon is one of the leaders, is still kind of a drag, but lesser of a drag. And to the extent those lines eventually kind of pricing normalizes that we -- that this is just a kind of a pricing impact that's going on? Any other color you want to kind of provide on some of the macro that's been going on?

Michael Zaremski:

Thank you.

Jimmy Bhullar:

Hi. Good morning. So first, I just had a question on organic growth in Commercial Risk. This was, I think, the best quarter you've had in over a year. So if you were to point to maybe two or three items that might have -- like what are the few large items that might have driven the uptick versus what you've seen in the last several quarters? I don't know to what extent it was hiring or capital markets activity, but any color that you could give on the drivers of the pickup?

Eric Andersen:

Greg, maybe let me pick it up a little bit of a level. We put out a report recently around a better decisions report that focused in on these four major trends that are happening around tech, trade, workforce and weather and how business leaders feel like they're not prepared to deal with all these. And this cyber-attack or system outage that happened this week is just one example that brings it to mind. And so clients are really looking hard at their risk exposures that give us an opportunity as a connected firm globally with the right analytics to be able to help them navigate some of these topics. And so we've been seeing this building in terms of client need and strong growth in Europe, strong growth in Latin America, connected around client opportunities everywhere in the world. So a lot of the underpinnings that have been our Aon United strategy have really begun to take effect in a period where clients feel significant need.

Christa Davies:

Yes. Thanks for the question. We haven't actually given that detail in terms of the split, but it is consistent with Q1 in that the two things driving it really are the mix of geographic income and unfavorable discretes. And I would say discretes can be favorable or unfavorable in any one quarter, which makes the tax rate lumpy by quarter, and I would go back to saying the way we think about it is over the course of a full year.

Operator:

Thank you. Our next question comes from the line of Rob Cox with Goldman Sachs. Please proceed with your question.

Greg Case:

Yes, Rob, thanks for the question. Step back for a second. Be careful with quarter-to-quarter you sort of compare where we are. Think about sort of Commercial Risk versus Q2 '23, we're 6% here, 5% the last quarter, so it's a progression over kind of a comparable quarter. And really, the fundamentals are exactly what we said they are. It really is net new business. It's better, it's stronger retention across the board. And also, by the way, the connectivity of our firm means we're doing things in human capital that leverages off of risk capital and then in risk capital it leverages off of human capital in ways that's sort of actually we're doing more with clients, and you're seeing that as well. And so that's the progression. And as we really dug into the 3x3 plan, as we closed last year and began this year, you're starting to see the momentum around that. You didn't see as much of that in Q1 as you now see in Q2, and we think it's going to continue to pick up as we continue to introduce the analyzers and all the capability and the service enhancements that Eric has talked about. So that really is the driver. This is really global, though. If you think about it, all of our solution lines are at 6% or greater, all of our solution lines. And the geographic strength was really global, even more so outside the US than even inside the US. And so that will continue to progress. And -- but that's really -- it's not complicated. It's just execution and we continue to execute and then amplified by priority capability we're bringing in from a hiring standpoint.

Eric Andersen:

Sure. And I would say, listen, if you go back to what I just said about those four trends and you think about trade and the reshoring. So that's usually manifest in our industry as construction as global supply chains become sort of nearer to home basis you see a significant amount of construction. Our enterprise client strategy where we are connecting with clients around the world, as they build into North America or they build into Mexico or other areas, we're there to capture and work with those clients on those exposures. Certainly, energy, not just traditional energy, but renewable energy. It's a very specific expertise both on a client management but also a sort of brokerage capability to be able to draw capital. Our ability to invest there is important. Don't forget the analytic investment that's needed as well to be able to provide the insight around how to strategically manage those risks and ultimately match capital to that risk. So we are investing across the spectrum of capability within that industry framework. You could put financial institutions, you could put pharmaceutical. We highlight construction and energy because they're so tangible and people can see what's happening, but there are certainly other areas where we are investing as well. But it goes across not just production, but through capability all the way through analytics.

Christa Davies:

Yes. So we are exactly on track with all deal financials and returns on the deal, including EPS accretion. Dilutive in '24, breakeven in '25 and accretive in '26. And I would note that free cash flow per share follows that same trajectory. And so we are super excited, albeit early days, two months in on delivering on the revenue synergies, the cost synergies and the free cash flow of $300 million in 2025 and $600 million in 2026.

Operator:

Thank you. Our next question comes from the line of David Motemaden with Evercore ISI. Please proceed with your question.

Christa Davies:

Thanks so much, David.

Greg Case:

Yes. Really appreciate the question, David. Listen, to step back, again, this thesis we've talked about is consistent and it will continue forever with this team and it really is around capability and delivering one client at a time and how you create the maximum leverage to do that for that client. And that means that whether you call it productivity, effectiveness, we need better solutions, better content to support these clients. By the way, if you haven't seen this megatrend analysis Eric's talked about, we love to send you a copy. You've got to take a look at this. And this is not -- our genius, this is looking around the world in the sense of saying what are clients facing? And we not only did the megatrends report, we actually did a survey on top of it. Went out and talked to 800 C-suite executives around how they think about these megatrends. David, all four of these were kind of five alarm fires, three of which they basically said, I need help on. And so right now, I don't know exactly what to do. Against that, you need, again, whether you call it productivity, you need better capability. To be blunt, you've got to give them better insight and that's really been the investment. And if you think about it, part of the investment is connected investment. We actually have to operate as a global firm. If someone's coming out of Europe to invest in the US and our colleagues aren't talking to each other, that means our clients integrating for. No, we're not going to do that. We're going to serve in an integrated way on behalf of client need. And we've done that. And by the way, call that productivity over the last number of years, that served us really well. And what you've seen us now do with the 3x3 is say, look, we're going to double down on that. We see even more opportunity, again, coming out of this megatrends report and what we're hearing from clients, and we are doubling down. This is a Aon Business Services. This is talent, capability and the risk analytics. This is a $1 billion bet to really strengthen that. And then we've said with that capability, our ability then to bring in colleagues and to arm our current colleagues is now greater. And so the reason we see opportunity to bring additional talent is the need is high. And when they come in, it isn't just more bodies. It's more individuals, no doubt, but it's actually more individuals, each of whom have greater capability, both in analytics, but also in a way in which we are really delivering on their behalf. So this is what you see us doing right now and it really cuts across all of our solution lines. So it really is a nice combination sort of in terms of where we are. And we're going to be able to do this without backing up on our commitments, mid-single-digit or greater, improved margins and free cash flow. And just to be clear, what's happening on free cash flow is an opportunity for us, which we think is quite unique for us and for you, and it really is the translation of revenue into free cash flow. The 3x3 is going to take what has been a decade-plus double-digit free cash flow growth and it's going to strengthen it. And so that's with additional capability, magnified by additional individuals. And so really -- there really isn't one over the other, David, it's both, and we're doubling down on capability and in doing so, it creates the opportunity. It's also why NFP was so attractive for us. We can bring this capability now not just at the large corporate arena, but into the middle market and we can do so with this incredible platform called NFP. So that really -- that's the combination. Now that's easy to say and really hard to do and almost impossible to duplicate. But that's the mission, that's what we love. And that's what you're starting to see in Q2 and you'll see throughout the year.

Eric Andersen:

Look, I think there is still a significant amount of room for us to grow in middle market. It's one of the reasons why we're so excited about this independent and connected philosophy that we're bringing to the NFP team. Independent as in we want their 900 salespeople certainly continuing to do what they've been doing historically for NFP, but they're seeing challenges to their client base around some of these risks that we've been talking about, whether it's cyber, et cetera, that are actually getting closer to the middle market as a real risk. And their ability to use Aon content or Aon producers and client leaders being able to use some of the NFP content for the middle market business that sits within Aon is such a great opportunity to drive more activity and more opportunity for us to serve that middle market client base. But we're still -- we still see a lot of runway in front of us on what you would call a $31 billion market. We're still relatively underweight in that space. And so there's a lot of good room to run here.

Operator:

Thank you. Our next question comes from the line of Meyer Shields with KBW. Please proceed with your questions.

Christa Davies:

Thank you, Meyer.

Christa Davies:

We are definitely more US weighted, that is true, because NFP is more US weighted.

Eric Andersen:

Listen, I would say when we launched the 3x3 strategy back at the middle of -- the end of last year, we outlined for ourselves the priority investments that we wanted to make where we thought there was real need for us to serve clients. And so it is not something we started last week, if that's your question. We've been looking at it essentially over the last 12 months. How you actually build that pipeline of talent, how you actually get them into the firm, how you onboard them, how you take existing Aon clients and deploy them into those growth areas as well has been something that's been going on parallel to bringing in outside talent. So it's not just an outside talent discussion. So it's something that we identified as we laid out the 3x3 plan. It's something we see over the next two to three years as well as a real opportunity for the firm to invest in growth.

Meyer Shields:

Okay, perfect. That's what I needed to know.

Grace Carter:

Hi. Thanks for taking my question. I have one more on, I guess, talent acquisition. I think you mentioned maybe some talent acquisition in NFP. Just how have you found, I guess, competition for talent in the middle market versus where you've historically played so far? And I guess, how receptive are people that have historically worked in the middle market to joining a larger organization? And how might your capabilities be an advantage when you're looking to hire in that market?

Grace Carter:

Thank you. And I also wanted to ask about the Wealth organic growth. It was quite a bit higher than how it's historically trended, maybe kind of in the mid-single digits, maybe low single digits. Is there anything in there that would be unusual this quarter? Or to what extent like these results are sustainable going forward? And can you just remind us if there's anything in the NFP acquisition that might change the mix of that business going forward? Thank you.

Grace Carter:

Thank you.

Cave Montazeri:

Yes. I just wanted to follow up on your comments you just made on the last question. The NFP, the legacy NFP producers, are they already using the new tools from Aon? Or is that something that's going to take a bit longer to give them access to?

Cave Montazeri:

Makes sense. And my second question is on cyber. In light of last week's CrowdStrike outage and the fact that it's unlikely to be the last time we see this given how interconnected the digital world is, on a go-forward basis, do you think your clients who already have cyber insurance, do you think they have the right amount of insurance and the right type of cyber protection in place in case their business comes to a halt due to systemic outage driven by the software glitch from the third-party or something of the like?

Cave Montazeri:

Thank you.

Greg Case:

Just wanted to do two things. First, again, recognize and welcome Edmund. Edmund, so awesome to have you around the leadership table, and just looking forward to our work and our mission together. And will be teed up and ready to go for Q3 to lead the call. So thanks for that, Edmund. And then, of course, to Christa. Christa, you are an extraordinary leader and an even more compelling individual. And thank you. Thank you so much on behalf of global Aon for 16 years of true, true excellence. Thanks so much. Talk to you soon everyone.

Operator:

Good morning, and thank you for holding. Welcome to Aon Plc's First Quarter 2024 Conference Call. [Operator Instructions] I would also like to remind both partes that this call is being recorded. If anyone has any objection, you may disconnect your line at this time.

Operator:

[Operator Instructions] Our first question is from Andrew Kligerman with TD Securities.

Gregory Case:

Well, I appreciate the question. Listen, if you step back and think about sort of talent overall and what we're about and what we're up to. This is really about how we built on Aon United and the strategy around the culture, and it's been foundational, how we connect our colleagues support each other and deliver the best we can for our clients. And that has just continued to build, and it really gives them an opportunity to sit across the table to do some pretty unique things with clients, which is why they're here, why they're excited about being part of our firm.

Christa Davies:

Thanks so much for the question, Andrew. And we did see a higher tax rate this quarter driven by, as you said, changes in the geographic distribution of income and unfavorable discrete. And I will note, Andrew, that discrete has historically been positive for us, and in this quarter, they really did just line up to be net negative. And what I would say is, look, it's just lumpy quarter-to-quarter. And as you said, we don't give guidance going forward. But if we look back historically, exclusive of the impact of discrete, which can be positive or negative, our historic underlying rate for the last 5 years has been 18%.

Jamminder Bhullar:

So first, I just had a question on organic growth in commercial risk. If we look over the past year, 1.5 years or so, it seems to have lagged what we've seen at some of your peers. And initially, I think a lot of people were concerned that this was because of the fallout from Willis. You've highlighted the capital markets activity pressuring your results more than peers as well. But wondering if you just talk about why you feel your growth has lagged some of your large peers, even though historically, you've actually been fairly consistent with growth with most of the other competitors.

Jamminder Bhullar:

Okay. And then just following up on buybacks. I'm assuming this year is going to be lower than last year, partly because of the drag because of NFP and also the drag because of the restructuring program. But if we think about 1Q, was it also depressed because of just seasonality of cash flows? Or is this sort of a normal quarter in terms of buybacks.

Operator:

Our next question is from Mike Zaremski with BMO Capital Markets.

Christa Davies:

Thanks very much for the question. And we did issue the 19 million shares yesterday. So that occurred and we haven't disclosed anything related to the MDP lockup. What we can say is the NFP management team did receive a meaningful amount of Aon shares and the purchase agreement refers to their lockup period. And we have spent time with our new investors, and they're really excited about the Aon story and appreciate how the acquisition furthers our Aon United strategy and are particularly excited about the 3x3 plan to.

Christa Davies:

Thanks so much for the question, Mike. And so if you look at the financials, we've outlined the synergies and deal financials, what you'll observe with the interest expense is, when we originally announced this in December, we had $230 million of interest expense in the stub period, which at the time was a 6-month stub period and we now have $285 million in that period, and it's really a result of the extra months.

Operator:

Our next question is from Elyse Greenspan with Wells Fargo.

Gregory Case:

I appreciate the question, Elyse. Start overall globally, very strong profile across the board, as we said before, both on retention, exceptionally high and on new business overall. All we just did is highlight a couple of areas in the U.S. where we're seeing some pressure. And that's really what we're showing up. That will rebound over time as we continue to talk to clients about the opportunities they've got to -- as they think about their overall programs in terms of where they are.

Eric Andersen:

Yes. Great. I mean you talked about D&O in particular, but I would also say we've had some really solid growth in areas like energy and construction and other places where we're investing in talent to grow our capabilities there. That's the sector piece, but we're also investing in geographic areas called Continental Europe, Asia Pacific, where we're also seeing good growth. So I think we will see great opportunity for us as we go forward through the year.

Eric Andersen:

So Elyse, I don't think there's anybody on the planet that looks at it closer than us as we've been watching it. We hear people talk of green shoots. But the reality is, and I think we've said it on the past that our opportunity happens when the deals close and so at this point, you hear things in the market about dry powder and people wanted to do transactions. But at this point, it's still fairly depressed.

Elyse Greenspan:

And then one more on the margin side, you gave the baseline, Christa, 30.6% for this year. I know in the past, you'll typically point to your historical kind of 80 to 90 basis points of margin improvement annually. Is that the right way to think about the improvement off of the 30.6% given the puts and takes of fiduciary investment income savings and then just leverage against your revenue growth?

Operator:

Our next question is from David Motemaden with Evercore ISI.

Gregory Case:

I'll start overall. First, Dave, I appreciate the question. This is not something that we generally enter into, particularly in the U.S., where obviously this is going to focus on. But the macro point is really the talent question I think you're really getting at, which is fundamental. Maybe Eric can offer some thoughts on that. This is a place we live every day it's our focus.

David Motemaden:

Got it. Great. That's helpful. And then just my second question. It looks like U.S. organic growth within CRS was down in the first quarter compared to being flat in the fourth quarter. I'm just wondering, was there anything that got incrementally worse in the first quarter versus the fourth quarter? It feels like the pressures were kind of all, kind of consistent. So I'm just wondering what that incremental -- what's driving that incremental decline if I look at the organic growth in first quarter versus 4Q?

Robert Cox:

I think in the previous presentation on NFP the target was for sort of similar to historical levels of total revenue growth, I think, about 14%. Are you guys still -- is that projection sort of maintained here? And are you still confident in that projection considering there could be some slowing levels of inflation or caution around the economy going forward.

Eric Andersen:

Yes, I think there's 2 components. And first, just to touch on the independent and connected piece, which is such a critical part of how both the NFP team and the Aon team have been approaching this. And the independent piece is really to respect and sort of celebrate the way NFP approaches its clients locally and how the team service those clients. So really focusing in to make sure that those teams know exactly what they were doing before is what they're going to continue to do.

Robert Cox:

Great. I appreciate the color. And then maybe as a follow-up on Transaction Solutions, I think you guys have talked about doubling down on Transaction Solutions in the past. Could you talk about exactly what that means? And have you added talent there recently and expanded your practice basically in anticipation of a rebound in M&A.

Meyer Shields:

Christa, congratulations. One question on the first quarter margin. I guess if we take out fiduciary investment income and the savings, it doesn't seem -- and compare that to the same issue last year, it doesn't seem like there's been a lot of margin expansion despite the 5% organic growth. And I was hoping you could walk us through why that would be the case.

Meyer Shields:

Okay. No, that's fair. Makes sense that gets modeled in. For reporting purposes, is NFP's organic growth going to be included in the organic growth number that you report on a consolidated basis?

Operator:

I would now like to turn the call back over to Greg Case for closing remarks.

Operator:

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Good morning, and thank you for holding. Welcome to Aon plc's Fourth 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'd 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's 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 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.

Christa Davies:

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 out 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 enables 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 three-by-three 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 this favorable impact from changes in FX of 2%, and there is 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, was $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 Aon 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 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 a $100 million of run-rate savings in 2024 as we continue to execute against our plans at Aon Business Services and our business. As we've previously communicated, we conservatively modeled the expected acquisition of NFP to close mid-year 2025. While the combined adjusted operating margin will initially be lower than Aon 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 flat in 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 $0.15 per share or 4% unfavorable impact in Q4 and a $0.98 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 $0.03 per share in Q4 and an unfavorable impact of $0.17 per share for the full-year. If currency to remain 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 NOI 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 adjusted 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 $3.3 billion of free-cash flow in 2023. For the full-year, cash from 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 invoicing 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 three-by-three plan. As Greg highlighted, three-by-three plan is accelerating our Aon United strategy. We see particular opportunity around Aon Business Services as the catalyst. We are investing to standardized platforms and operations, drive data analytic-based product innovation and deliver at scale to create better tools, better experiences and greater relevance to clients and colleagues. In the fourth quarter, we incurred a $129 million of restructuring-related charges with a cash outflow of $13 million. We're pleased with the progress we 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 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 now are 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 allocation. 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 of 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 repurchases to continue to remain our highest-return on capital opportunity for meaningful ongoing capital allocation. We believe we are significantly undervalued in the market today, highlighted by the $2.7 billion of share repurchase in 2023. We expect to continue to invest organically in content and capabilities we can scale across the firm and we'll continue to assess priority as inorganic investments 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, transaction-related debt, and as we take steps to delever 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 Aon United strategy. Our strong financial results and disciplined capital management enables us to return to $3.2 billion to shareholders through share repurchases and dividends. The steps we've taken around our three-by-three 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.

Andrew Kligerman:

Hi, thank you. Thank you and good morning. Kind of interested in the robust growth in both the reinsurance business, and the health solutions business, and the sustainability there. On reinsurance with 14% organic growth, was it largely driven by the capital markets and advisory? And how sustainable do you think that could be? And then on the consumer benefits solutions inside of health, what actually drove the consumer benefits solution strength?

Eric Andersen:

Sure, Greg. It's a great question. And just to reaffirm, just a fantastic team operating really on fire. I would say on Q4, to go to your question, there was record cat bond issuance for the quarter, but we also had very strong growth in Treaty and Fac. So across the board, good. And I would say that the trends that we have been seeing over the last couple of years, I think have an opportunity to continue. Certainly, whether it's climate change, whether it's casualty uptick in terms of lost costs, whether it's opportunities from a profitability standpoint that, our insurers are dealing with from their own books of business. The need for data analytics, the need for capital support as a position, their primary businesses are all still there. And it's a global answer. So, we're seeing it in Europe and Asia Pacific, as well as strength in North America and the U.K. So, we're really optimistic about the business, and feel like it's really well positioned.

Eric Andersen:

Listen, we having same thing, right? We had great wins in the core health and benefit business. And as you mentioned, the consumer business across the globe, whether led by EMEA, U.K., U.S., and it really was new logos for us on core health and benefits. I think on the consumer side, the ability to offer unique products, to the consumer part of our corporate clients, is really a strength of the firm and those products evolve. And I think they're meeting the needs of the individual consumer. And we also see that as an opportunity to continue to grow.

Greg Case:

So let me just start overall, as Christa described, we continue to look as we think about deployment of capital, obviously buyback, it's top of the list given how undervalued we are. But we're looking across the board, even as we think about sort of the closure on the NFP front. And again, return on investment capital-based, content-based in every way, but we see opportunities around the world. And our pipeline continues to be very strong. But what else could you add from a capital allocation standpoint?

Andrew Kligerman:

And if you see the right opportunity, you wouldn't hesitate to go after it, correct?

Andrew Kligerman:

Very helpful. Thank you.

Jack Matten:

Hi, good morning. This is Jack on for Mike. A question on organic growth. In your footnotes, it says that organic growth benefited by 1% from a held-for-sale business and, which segment did that impact and will that have a similar impact until the business is sold?

Jack Matten:

Got it. Thank you. And then second question, you call-out again this quarter decline in global M&A activity, as being a source of organic growth deceleration from prior periods. Would you be able to offer any color on what percentage of Aon revenues touched M&A spend, is it a big enough driver, it impacts continue negatively impacting growth given that M&A volumes are still falling by double-digit levels?

Eric Andersen:

Greg, I think you described it perfectly, just maybe one little bit of color. This week, for example, we held a conference where we had 400 members of the private-equity community, the corporate M&A, Corp Dev teams, the insurance markets, the reps and warranties, tax indemnity, and we essentially were going through the marketplace. Just from a growth standpoint, but also from a product innovation standpoint, recognizing that as the deals return and they will. We want to make sure we're well situated with the clients with the markets, making sure the products are fit-for-purpose, and are evolving to meet the needs, not just here in the US, but in Europe and other places. Where, when it returns we have made that commitment, we want to hold the team so that, we're ready and front and center when the deals start to happen.

Operator:

Our next question is from the line of Jimmy Bhullar with JPMorgan. Please proceed with your questions.

Greg Case:

Jimmy, we're seeing exactly the same thing you're seeing and you're hearing about. You can imagine, this is a market where highly connected to, with clients and with all the banks, and everyone else involved in the process. And I would say there's high expectations everywhere, you'd only listened to the Investment Bank our quarterly calls, to sort of understand that. And so, we certainly see lots of potential. And as Eric described, the amount of capital on the sidelines ready to return is high and we're incredibly well-positioned to do that. But I would say, as I mentioned before, it shows up in organic for us as the deals were completed. And so, as you see that move, you can expect it's going to be fully reflected in our performance.

Greg Case:

Yes. I would start overall, your overall assertion continue where you're getting to, but really doesn't reflect what's going on in reality. Obviously the business is a very, very different sizes. So, one doesn't really offset the other in any way, shape or form. We would come back to the overall commercial risk story, is exactly what we described before, which is, listen, we are exactly where we were in Q4 of last year with an emerging headwind and became a substantial headwind. We overcame that and a lot of this is not just commercial risk, but the connection of commercial risk reinsurance, and risk capital. And we closed the year, we'd observed some others in the market seem to be retreating. We're not retreating at all, 12% versus 12% of last year and we're going into '24, with a lot of momentum. So, we're very excited about the overall prospects, as we move into 2024. And maybe Eric talk a little bit about the risk capital implications of all this is coming together, and the potential around it?

Operator:

Thank you. The next question is from the line of Bob Huang with Morgan Stanley. Please proceed with your questions.

Greg Case:

Listen - I would just open by saying that we strategically wanted to draw a line under this issue for our market partners and for ourselves. So that we were able to move forward together as partners. And so, the effort was made to come to an agreement with each of the affected parties, sorry. So that we could then continue to both one trade forward. But then also begin to work on recoveries together. And so, we see an opportunity for recoveries that will happen over-time, as the bankruptcy process runs its way through. And we're confident that we'll be able to recover meaningful amount.

Christa Davies:

Yes, thanks so much for the question. So firstly, I'd reiterate your point, which is we are incredibly confident in the long-term free cash flow growth of double-digits. I'm extremely excited about how NFP accelerates the long-term free cash flow growth of Aon, adding $300 million in free cash flow in 2026 and $600 million free cash flow in 2027. And look, as we think about free cash flow in 2024, we haven't given specific guidance. But here's how I think about it. We expect to grow free cash flow driven by operating income growth and improvements in working capital. We do expect ongoing cash tax headwinds. We've communicated the restructuring program, but we haven't given specific guidance around the timing of the cash impact, and we've talked about the impacts of NFP. We don't expect to incur material costs before close. And we've said, we would expect to incur $12.5 million of negative interest carry expenses per quarter until deal close following the transaction-related debt issuance. We said CapEx will grow in-line with the business from $252 million in 2023. We've communicated legal settlements and as Eric just said, expect those to flow through over the next several years known - there will be meaningful recoveries. Ultimately, we expect to deliver underlying free cash flow growth. And we're targeting double-digits as we move past the negative impact of restructuring and NFP, very excited about the long-term double-digit free cash flow trajectory of Aon. Lastly in 2024, we do expect a disproportionate, majority of the free cash flow to be allocated to buyback given we're operating on a return on capital basis, and we are substantially undervalued today.

Operator:

Our next question is from the line of Rob Cox with Goldman Sachs. Please proceed with your questions.

Eric Andersen:

Maybe I'll take a stab at that one. Thanks for the question. Listen, there's been explosive growth in the wholesale market over the last or the E&S market over the last five to seven years. They are on the magnitude of tenfold, there's a lot that's driving and, whether it's the lawsuit. But you see in the property market, whether it's regulatory pressure on pricing and forms and there's a lot to it. We have consolidated our wholesale relationships. So that we're actually working in partnership to get access, to those to that capital when we needed for our clients. Some of our competitors do own wholesalers and that's the way they chose, to enter into the marketplace. So it's something we always looked at, but we like where we are today. And we like the. We like the relationships that we have with our major partner [ph] as we need. That marketplace tends to flex up and down with different market cycles. And so, I would say right now, it is based on the challenging market conditions, especially in the property area. It's significant, a significant growth, but it will ebb and flow overtime.

Eric Andersen:

So I think a number of people have commented on it during this earning season. I would say that we're probably heading towards a market where it's more of a series of markets where you see price competitive - price competitiveness in certain areas, where new capital has drawn in D&O for example, would be one that's been called out. You also see challenges still in certain parts of property and people are a little worried about casualty as social inflation from nuclear verdicts have kind of hit the wires. And they're worried about prior year reserves. So, I think rather than just a rising market for all what we're going to see over '24 and '25, it's going to be very product specific and very risk specific, which is something that I think plays well to us, because it allows to use our teams in our analytics, to able to help them think through, how they either want to trade, or manage the risks. And so, but I think that's where we see the market going in '24 and '25.

Rob Cox:

Appreciate that thanks.

Elyse Greenspan:

Hi, thanks, good morning. I wanted to come back to commercial risk. You guys said. I guess there was a 1% impact of business that you put out in dispositions in the quarter overall, right. So that would imply if it impacted commercial risk that, was 2% of the segment, which would bring your organic 2% before that adjustment. And I know you've highlighted the M&A and the SPAC [ph] and the IPO slowdown. And I think Greg in response to one of your question. You pointed that the U.S. probably would not have been flat, right, that there's if we couldn't really back into that. But what is actually impacting commercial risk away from the M&A and SPAC business that aside from this disposition, the growth would have been 2%?

Christa Davies:

Oh sorry. So, Elyse one of the things I wanted to clarify, was on the held-to-sale item, it is across a couple of solution lines and we didn't disclose the specifics. But we are divesting this business. And so, we think it's a much better presentation of our organic revenue growth, and the go forward business. And then as we continue to describe, the major impact on commercial risk is the M&A and IPO environment. And that has remained depressed and Eric and Greg have outlined how they see that recovering in 2024, but Eric, would you like to add anything here?

Elyse Greenspan:

Okay. That's helpful. And then as we - one question. I had on reinsurance, right. Obviously to lower volume quarter. And we went through kind of what drove the growth in the fourth quarter. As we think about the Q1 and '24, right. We've heard about the renewals, it January 1 being good, but right obviously, price increases came down, because they were so strong last year. How do we think about reinsurance organic growth in a still strong, but decelerating price increase environment?

Greg Case:

I would add Elyse though, the momentum of this team in the core space, reinsurance, more broadly across risk capital, has been tremendous. And obviously, the quarter-by-quarter view is helpful. But we look at the annual view. If you think about kind of 10% for the year. That's what's really unique not saying where we're going to be next year. Other than mid-single-digit, or greater across the solution lines, which is what we - which we aspire to. And so, I think you can take away you've just heard on commercial risk momentum into 2024 and clearly as you look at reinsurance momentum into 2024, for all the reasons that Eric described in the core solution lines, but also in risk capital, don't lose this, this risk capital orientation is a big deal. It is meaningful in terms of sort of what we're doing the same on the human capital side. The connectivity across reinsurance or commercial risk creates better solutions, Eric described a couple of them already. And so for us, we feel good about the momentum going into 2004 based on the work we did the groundwork we laid in '23, on risk capital and human capital.

Christa Davies:

That's correct. Elyse.

Operator:

Our next question is from the line of Meyer Shields with KBW. Please proceed with your question.

Greg Case:

Well, if you step back, Meyer. You can step-back and say, look at the overall performance of the firm year-over-year in essence we are up to the year 6%, last year, 7% this year across the firm. We think about commercial risk. Again, we are 4% in Q4 last year was 4% in Q4 this year, even against a substantial headwind we described. And what we want you to understand in the context of that, is imagine all the things sort of behind that created that momentum in Q4 and our 2024 in the commercial risk space. We've overcome that and maintain where we were last year. So, we're very optimistic about the momentum in 2024. This category is substantial in M&A and we love it, and we are disproportionately good at it. We are unbelievably good at it from a client leadership standpoint. And so, we don't feel bad about that in the least. We love it, and we're going to double down on it. But we also continue to build-out other platforms. This year given us the opportunity to really think that through and really leverage the risk capital orientation. I would highlight I mentioned in my comments, the Property Symposium. We got a 1,000 clients and markets in the room and we bring up the property risk analyzer. And this is really a function of reinsurance, and commercial risk analytics and the power of that in the minds of a client were substantial. And so, now we've got a suite of capabilities that are going to contribute to the commercial risk and the reinsurance, as we head into 2024. So from our standpoint, what you really like you to take away and certainly our feeling and commitment is mid-single-digit or greater, the translation into OI margin improvement and as Christa described the translation into double-digit free cash flow growth. We have - never had more conviction about each of those three categories and on our delivery knows and will continue to deliver those. And the addition of NFP is only going to strengthen our free cash flow profile over time. So for us, we're always going to be cautious in our approach, but resolute and we feel very good about the momentum going into 2024.

Christa Davies:

So reinsurance is a similar margin business to all of our businesses, which is why we operate Aon as one segment Meyer. And one of the things we would say, part of our Aon United strategy is, we are bringing together a lot of the back-office technology, operations and shared service functions into Aon Business Services, which is enabling our focus on common and shared operations, technology platforms at scale, and then product innovation at-scale. And so, we're really operating more-and-more the firm in one segment with risk capital, human capital, enterprise client and Aon Business Services.

Meyer Shields:

Okay, fantastic. Thank you so much.

Charlie Lederer:

Hi, thanks. Good morning. I guess, first question, as we've seen some reserving issues in casualty and financial lines across the industry. Wondering if this were to become a more widespread issue for the industry. Could that impact Aon's profit commissions and that material enough that it would impact your margins are organic growth near-term?

Charlie Lederer:

Got it, thanks. And then on the commercial risk segments. Just wondering it as deal volumes come back eventually, does that carry a higher margin where that would help your margins, as that becomes a larger proportion of the mix again?

Charlie Lederer:

Got it, thank you guys.

Jimmy Bhullar:

Great, thanks. I just wanted to follow-up on your comments around the expected timing of the close of the NFP deal. Is mid-2025, what do you realistically think the deal will close, or is it just more given the uncertainty, you don't want to over promise. Because it seems like it's a long-lead time for a deal that really, in my view, doesn't entail a lot of antitrust or other issues, given the market focus of NFP, but...?

Jimmy Bhullar:

Okay. But in terms of - and then in terms of sort of processes are there areas there is some overlap, but we can see from the outside. Or do you not think there is going to be anything related, to potential dispositions in order to get the deal approved?

Jimmy Bhullar:

Okay. Thank you.

Greg Case:

Thanks very much. I would like to add a couple of thoughts as we close today, just picking up Eric and Christa, on some of the comments that have been made throughout the call, which has been very, very helpful. Just reiterate a couple of things. First reflect on the track-record we've had delivering on the strategic initiatives and external commitments and think about it included in a number of significant acquisitions and divestitures. And a history of successfully executing around the restructuring programs, and that brings us to where we are today, which you can tell from our enthusiasm we're very excited about. You think about the 3x3 plan each component of our strategy and the execution plan here, are fully aligned totally connected. If you think about Eric described today risk capital and human capital and the capability that comes together with that, the client response of this has been exceptional. As we continue to build that it's now connected completely, through our ability to deliver that into the field, enterprise clients and Aon client leadership model fully connected. And this amplification on Aon Business Services came up a few times today. We'd encourage you to really dig in and understand the power of what this really means 15,000 colleagues in this group well beyond the efficiency that Christa described, which you saw in '23 OI margin of 31.6%. It's really the ability to deliver better content in a better service experience that, combination really is extremely it's exciting for us in terms of what it means for Aon, and for our clients. And as Eric described it really you think about sort of NFP, the opportunity in NFP is there, because of their great capability and awesome operating platform and our Aon Business Services capability. And again we bring all that together with the $900 million investment to accelerate that do that over three years across the 3x3 plan with what do we are taking more time. So, I just want to highlight as the questions come together, we really connected in our mind and really put us in a unique position, to execute against our overall plan and deliver great momentum in '24, '25 and '26. So just want to end with a summary, and say thanks to everyone for being part of the call today. And look forward to our discussion next time.

Operator:

Good morning and thank you for holding. Welcome to Aon plc's Third 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 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 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 2023 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.

Christa Davies:

Thanks so much Greg and good morning everyone. As Greg highlighted, we delivered strong operating results in the third quarter and year-to-date. Through the first nine months of the year, we translated 7% organic revenue growth into 80 basis points of adjusted margin expansion and 10% adjusted operating income growth. These results position us very well to continue driving results in 2023 and over the long-term. We look forward to building on this momentum as we head into the last quarter of the year. As I reflect on our performance year-to-date, as Greg noted, organic revenue growth was 6% in Q3 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 10% in Q3 includes a favorable impact from changes in FX of 2%, primarily driven by a weaker US dollar versus most currencies, compared to the prior year period. Reported revenue growth of 7% year-to-date includes an unfavorable impact from changes in FX 1%, primarily driven by a stronger US dollar versus most currencies compared to the prior year period. I'd also highlight fiduciary investment income, which is not included in organic revenue growth, with $80 million in Q3 and $196 million year-to-date or 3% of total revenue in Q3 and 2% of total revenue year-to-date. Moving to operating performance. We delivered strong operational improvement through the first nine months of the year with adjusted operating margins of 30.8% an increase of 80 basis points driven by revenue growth, efficiencies from Aon Business Services, overcoming expense growth, including investments in colleagues and technology to drive long-term growth. We translated double-digit adjusted operating income growth into adjusted EPS growth of 15% in Q3 and 8% year-to-date. As noted in our earnings material, FX had an unfavorable impact of approximately $0.01 per share in Q3 and an unfavorable impact of $0.20 per share year-to-date. If currency remains stable at today's rates, we would expect a favorable impact of $0.03 per share in the fourth quarter, totaling an unfavorable impact of $0.17 per share for the full year 2023. I'd also note the change in other nonoperating expense had a $0.15 per share or 7% unfavorable impact in Q3 and a $0.59 per share or 6% unfavorable impact year-to-date. This reflects an unfavorable impact from an increase in non-cash net periodic pension expense, as well as balance sheet FX remeasurement in the current period and a gain on sale of businesses in the prior year period. Turning to free cash flow. Cash flow from operations decreased $3 million year-over-year, reflecting double-digit operating income growth, offset in part by higher cash tax payments as we mentioned previously and the negative impact to working capital in the third quarter caused by temporary invoicing delays associated with the implementation of a new system. Free cash flow decreased 4% to approximately $2 billion, primarily driven by a $77 million increase in CapEx. CapEx was elevated in the first nine months of the year compared to the prior year period as we executed a number of technology projects to drive long-term growth. And net CapEx could be lumpy quarter-to-quarter and we expect CapEx to moderate in the fourth quarter to total CapEx investment of $220 million to $250 million in 2023. As we've said before, we manage CapEx like all of our investments on a disciplined ROIC basis and we expect it to grow the business going forward. Now let me share more details about our accelerating Aon United program. As Greg highlighted, we are doubling down on three strategic commitments, including accelerating Aon Business Services, which in turn enables us to unlock advancers in risk capital and human capital and our Aon Client Leadership strategy. Together, these commitments will drive more value for clients, colleagues and shareholders. The investment to accelerate our three-year Aon Business Services operating model focuses on the same three areas we've mentioned previously. We see proven benefit and will now accelerate. Number one standardized operating operations; number two integrating operating platforms; and number three increasing product innovation and development. We've already made considerable progress in standardizing our operations but we see significant opportunity both within and across our solution lines. The work we're doing to standardize operations will drive integrated service delivery platforms, which provide additional opportunities to standardize how we do business, and standard operations combined with integrated platforms enables more effective new product development and innovation at scale. By accelerating standardization across the portfolio and establishing fewer more integrated platforms, we'll be able to deliver more analytical tools to colleagues and clients across the entire portfolio. With this underlying infrastructure in place, we'll be able to leverage advances in AI and machine learning to further accelerate the product development cycle and unlock new efficiencies across the portfolio. Let me provide a bit more financial detail about the strategic investment. We expect total annual in-year savings of $350 million to be achieved in 2026, contributing to ongoing sustainable long-term margin expansion. I'd note we expect savings to ramp over time with annual Indian savings expected to be $100 million in 2024, $250 million in 2025 and $350 million in 2026. We do not expect material savings or impacts to cash flow in 2023. Cash restructuring charges of $900 million reflects the savings ratio of 2.6 times and a largely to technology costs and workforce optimization. I'd note you can think of the $900 million cash restructuring charge as less than 10% of underlying free cash flow over the next three years and the $350 million of savings as a 4% cost takeout relative to our cost base of approximately $9 billion. We also expect an additional $100 million of non-cash charges, largely related to asset and lease impairments. We do not expect significant incremental CapEx associated with the program and we expect CapEx will grow in line with the business in the future from our guidance of $220 million to $250 million in 2023. In the third quarter of 2023, we incurred $6 million of restructuring charges and we'll communicate charges and savings going forward each quarter. Contemplating the program, as we look forward we continue to expect mid-single-digit or greater organic revenue growth for the full year 2023 and over the long-term. We expect program savings will contribute to ongoing sustainable long-term margin expansion and expect to deliver margin expansion in 2023, 2024 and over the long-term. As we've noted previously, over the last 12 years we've delivered 1,120 basis points of margin expansion or about 90 basis points a year on average. Our outlook for free cash flow remains strong. We expect to deliver high single-digit free cash flow in 2023. I'd note this guidance contemplates the impact from restructuring on free cash flow in Q4 so we do not expect restructuring to have a material impact on cash flow this year. While free cash flow will be reduced in the near-term by restructuring we expect to return to our trajectory of double-digit free cash flow growth over the long-term driven by operating income growth and ongoing working capital improvements. As we've said previously, as we look at the opportunity in Aon Business Services and across our client-facing capability we know that delivering this strategy will result in long-term progress against our key financial metrics

Rob Cox:

Hi. Thanks for taking my question. Just curious on the free cash flow. I just want to make sure I understand what exactly is driving the lower free cash flow guide? Because it sounds like the restructuring is it material this year and you mentioned the invoicing was a temporary issue. So just trying to understand what exactly is driving the guide lower.

Rob Cox:

Okay. Got it. Thank you. And just on the restructuring program, just compared to your history with these programs and some peers the 2.6x saving ratio maybe seems a little conservative for a program that includes an element of workforce rationalization. So just curious if as management views it that way and if we could potentially see more savings come to light beyond the $350 million?

Eric Andersen:

Sure, Greg. And maybe I'll do to an example might be the easiest way to bring it to life because it's evolving so quickly that as clients are looking at these exposures and these developments, they're pressing us for more insight more analytics and maybe just one that's come to mind around climate which is such a topic today. We had a client in Asia Pacific that was looking at severe weather and how it was going to affect their loan portfolio, how it was going to affect their future financial obligations in terms of disclosure. And we engage with them because they had asked us about their future. They asked us about the physical climate risk that was coming. But as we began to talk to them, they were really starting to press for a baseline of their loan exposures today, which required climate analytics that are cutting edge and are really just coming to the fore. And so what they're doing with it today is they're looking at integrating their climate analytics into their risk modeling themselves, as they go forward as a business. And I guess the point of it is, that capability as it's being developed and being brought to the market, really allows all types of clients to look at climate physical risk, put it into their own business model as they go forward, but they're starting from one place and often ending in another. But to be able to deliver those analytics in the form that they can use to be able to build their own business, Aon Business Services provides that engine to be able to aggregate the data to be able to put it in usable format going forward. So we're really excited about what this gives us and the ability to replicate that across the globe as financial institutions of all type are being pressed to understand their climate risk.

Rob Cox:

Thanks. Appreciate all the color.

Paul Newsome:

Good morning. Thanks for the call. Congratulations on the quarter. I wanted to ask about whether or not the restructuring charge here, the cost savings from the restructuring charge that we're looking at is really additive to the ongoing margin improvement? In other words, would you need to have – do you need to have this effort to continue that margin expansion? I think given how good the margins are people sometimes wonder if there's a limit here and if you more extraordinary things need to happen to continue to have that margin expansion.

Greg Case:

Maybe I would just add one other point on this Paul. When you think about the margin, we often get asked about this is, it's almost like it's treated like a zero-sum game, the split between clients and colleagues and shareholders. We don't see it that way. We see it around value. The example Eric described is really around incremental value to a client, asking a question they hadn't asked before, we provided an insight around analytics. That simply is not possible without Aon Business Services on a scale basis. We provide incremental value. We get obviously compensated for that. That actually – that contribution is really what drives margin over time. So greater value means more margin. And so that's what you're hearing today sort of how we're going to invest create greater capability to deliver more value for clients and that really is the engine around margin improvement, which is why we're so confident now even more so with this investment to continue margin improvement over time.

Christa Davies:

It is Paul. Yeah. It is very different. So what we would say and I think Greg said this earlier is, it's responding to client need. And meeting unmet client needs. And we are seeing more of that than ever before. And you saw that in our risk survey where clients have significant unmet client needs, but Aon Business Services at the catalyst here. And we're really building on a proven track record of success and we see Aon Business Services as a catalyst which drives risk capital, human capital and Aon client leadership strategies. And we brought together a set of new leaders and developed a three-year strategy to further strengthen and connect our firm. And this strategy accelerates our ability to deliver on standardized platforms, standardize operations and innovative product scale. And so that is very different than what we've done before Paul. And that really is much more sustainable long-term strategy development, that's going to benefit clients, going to benefit colleagues and going to benefit shareholders.

Paul Newsome:

Great. Thank you. I always appreciate the help and your patience.

Charlie Lederer:

Hey. Good morning. I'll ask another on the acceleration program. It sounds like a revenue synergy play in a lot of ways too. Am I digesting that correctly? And can you talk about how it will differentiate you from your competitors?

Eric Andersen:

Yeah, absolutely.

Eric Andersen:

Absolutely Chris. Listen the whole strategy is predicated upon bringing our risk capital and human capital colleagues together to be able to do more for clients. We can talk about a lot of examples and all usual on the Parametric business which is actually bringing reinsurance knowledge to commercial clients as well on the health care side where we're using bonds to be able to do resiliency and other things. That just doesn't happen by accident. It needs capability. It needs analytics it needs connectivity and it needs an enterprise client strategy where we can deliver those capabilities right at the largest most complex clients. So really excited about the opportunity Paul.

Eric Andersen :

We have 1,000 data scientists across our risk capital business. And so I feel like we're cutting edge in that area.

Charlie Lederer :

Thank you.

Elyse Greenspan :

Hi. Thanks. Good morning. My first question is on commercial risk. Growth slowed there in the quarter. I was hoping to get more color on what's driving that. Is that still a slowdown in the M&A and IPO activity, or is there something else going on within that business in the quarter?

Greg Case :

And we've said this last time I think on the call Elyse. We love this area and this team. They are phenomenal. We just got such great capability here and Eric and team have continued to kind of double down and invest behind content capability. We're quite confident that transactions will come back at some point in time when they do we're unbelievably well positioned. And we'll absorb the headwind in the process but very, very bullish on the future in this category.

Eric Andersen :

There was nothing unique in the third quarter. When we look at some of the strong areas around the world, some of the specialty businesses like construction that continue to have very solid performance, we're pretty happy with the way the business has been performing and when that area comes back. We've held the team and are really excited about the future opportunity.

Christa Davies:

So thanks so much for the question, Elyse. The first answer is yes we do expect the $350 million to drop to the bottom line. We obviously are continuing to invest in the business as I described earlier. A good example of that is the investments we've made in technology in the first nine months of the year. You see that in our technology expense and our CapEx expense both being up funding investments in long-term operations, technology platforms and product development to meet client needs. And so we will see those savings drop to the bottom line but they are in the context of our overall financial guidance which is mid single-digit or greater organic revenue growth for 2023 and the long term. margin expansion in 2023-2024 in the long term and long-term double-digit free cash flow growth. And then in terms of the breakout we do expect the breakout of the $900 million to be primarily technology expense and workforce optimization. We have not provided specific details on that and we will report on it each quarter.

Operator:

Our next question is from Jimmy Bhullar with JPMorgan. Please proceed.

Eric Andersen:

Sure. This is Eric. We don't disclose that number, but I would just say if you track M&A from outside sources is certainly down 30% year-on-year and that continues to show headwinds. And I would just say, listen as that recovers we will recover with it. We've maintain the team. We've maintained the relationships. We continue to stay very close to those clients. And when they react we will be right there with them. But it's a good business for us. We really think it provides great value to them and the ultimate clients and we continue to hold and invest in that team.

Christa Davies:

So we haven't given specific guidance on the timing. What we have said is that we absolutely expect long-term free cash flow growth. We run the firm on free cash flow. We are extremely bullish on long-term free cash flow growth driven by operating income growth and working capital improvements. And so this will absolutely contribute to that. And so we're very, very excited about the outlook for free cash flow growth long-term.

Eric Andersen:

Listen, I would say from a best view -- go ahead Christa, I'm sorry.

Eric Andersen:

I would just say best view is one of the many parties that have been involved in the business whether it's reinsurance, whether it's other areas. And we continue to monitor the situation very carefully working with our clients helping them to provide options to replace that lost capital. And we continue to see that work being done and our expectation is, it will continue to evolve as their bankruptcy process works its way through.

Operator:

Our next question is from David Motemaden with Evercore ISI. Please proceed.

Greg Case:

David, I would come back and just think about literally. This is about client relevance as Eric described I think very well. What this is going to do is help us, innovate and be more relevant to clients on the issues that matter most to them that will have impact over time. What we want to be clear though is in terms of sort of the progress. We're staying mid-single digit or greater organic revenue growth, continuing margin expansion and double-digit free cash flow growth. For us, that will be the validation and this accelerates that strategy and certainly increase its probability and success against that in every way shape or form. And if there's opportunity beyond that fantastic, but you start with that. We love that story. And we're incredibly excited about what this does with that story which is just really delivers on it.

Greg Case:

Well, this is very important, because we obviously track and look at this all the time. This is why as we described in the opening, we came to a level of conviction that said we're not going to evolve this. We're doing it now. We're moving now. We're going to make the investments now to accelerate faster than we would have before because the track that we've laid this continues to get more relevant to clients. If you think about it 10 years ago, we talked about increasing risk. It turns out 10 years later, my God you might have been right on that. There's risk everywhere around the world interconnected climate is real, all the everything is real, cyber everything. And so our clients are asking for more and the fundamental aspect that everybody can talk about delivering it but unless you're a connected firm, truly supporting each other around the globe you cannot deliver on it and you certainly can't innovate at a level that equates to what client demand is. And so that's what Aon United has given us. What you've seen us do over the last bit of time is really structurally double down on that. Risk capital and human capital only five, six, seven months ago, structurally really connected how we bring analytics across the entire risk spectrum, not just in commercial risk reinsurance but also the risk spectrum on talent, on health, et cetera. All these things come together and that's the next step sort of in the process. So for us, it isn't about -- it equated to a $1 value here or there or revenue or margin here or there. It's fundamental D&A. This connectivity around Aon United allowed us to do risk capital and human capital. It allowed us to do on business services. That's an impossibility without Aon United. And what we've got now with Eric and the team leading risk capital and human capital is a chance to accelerate it into the market with innovation. Under Christa's leadership with Aon Business Services a chance to really enable it structurally in ways we've never done before. So this for us is a natural step that we would have evolved in the process. And all you're hearing about today is that excitement level is higher than ever before, not because of us but because the clients and our colleagues saying we need this we want to deliver it. And what you see us doing today is saying, okay, we're going to accelerate and drive it. And that's really what the investment is about.

Operator:

Our next question is from Yaron Kinar with Jefferies. Please proceed.

Christa Davies:

Thanks so much for the question Charlie. So you're right. For the last 12 years, we've delivered 1,120 basis points of margin expansion so approximately 90 basis points a year. And what we've said with this program is the $350 million of savings in the year and 2026 will fall to the bottom line. They are incorporated into and a part of our long-term sustainable margin expansion where we will deliver margin expansion in 2023, full year 2024 and over the long-term. And as I mentioned earlier, what we're really doing Charlie is, we are investing in the business in client-facing innovation and content and capability and data analytics to help solve client needs and provide more innovative solutions to clients to help provide better colleague technology and to drive long-term productivity. And that's really the heart of the Aon Business Services strategy, which is really the catalyst for us investing here today.

Christa Davies:

We have not given specific guidance on the $900 million, Charlie. So what we will do is report charges and savings each quarter.

Operator:

Our last question is from Meyer Shields with KBW. Please proceed.

Eric Andersen:

Listen, I wouldn't think about it that way. I would think about what can we do with the talent while there's a downturn. And so the skills that those -- that that team has in terms of client coverage and product expertise, we can redeploy that across the firm and put them to work today while we're waiting out the market certainly, still working those clients and trying to innovate with new products and opportunities but at the same time they bring skill sets around client coverage, industry knowledge, product knowledge that we can use across the firm. So they're not just sitting there, if that was what you're thinking, but we're deploying them into the client base.

Christa Davies:

Thanks very much for the question, Meyer. Look, it is of the 2023 baseline. That's the right answer. And I would note, that we're really excited about free cash flow growth in 2023. It's high single digits. And so we'll report 2023 free cash flow and you should grow double-digit long term from there. But what I would say Meyer is, as you think about the free cash flow growth long term it's exceptional. We've delivered 13% CAGR in free cash flow over the last 12 years. And we'll continue to drive mid-single-digit organic -- mid-single-digit or greater organic revenue growth long term margin expansion in 2023 2024 and long term, and double-digit free cash flow growth long term and we're really excited about our free cash flow growth long term.

Operator:

Thank you. I would now like to turn the call back over to Greg Case for closing remarks.

Operator:

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

Operator:

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 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 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 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's my pleasure to turn the call over to Greg Case, CEO of Aon Plc.

Christa Davies:

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 FX 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 May on 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 Aon 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 that 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, drive further efficiency 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 enable 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 both from organic or inorganic investments. Even more importantly, operating Aon Business Services as one organization with disciplined 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 nonoperating expense had a $0.25 per share or 10% unfavorable impact in Q2, and a $0.44 per share or 6% unfavorable impact year-to-date. This reflects an unfavorable impact from increase in noncash 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 from operations was flat year-over-year and free cash flow decreased 7% to $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 million to $250 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 improvement. Given our strong outlook for free cash flow growth in 2023 and beyond, we expect share repurchase 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 repurchase 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 need. 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 growth 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 for the quarter and year-to-date reflects strong operational performance driven by our Aon 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.

Charlie Lederer:

You mentioned continued headwinds in M&A services in the back half of this year in your prepared remarks. When should we think about that dynamic lapping? And is it more of a pricing issue? Or can you comment on what's driving that?

Eric Andersen:

Yes, Greg, I would just say that while the deal volume is down, as you're saying, we have been spending time with the team expanding the potential client base. The historic nature of the product has been driven more towards private equity-type buyers. But we've been spending time working with the corporate clients, making sure they're aware of the capabilities and how those products and services get used. So that when the market does come back, and it will come back, we'll be situated to lead that market as we do today.

Charlie Lederer:

And then I'm wondering if you can comment on the momentum in your IP business, intellectual properties. How meaningful is that to organic revenue growth? And there have been some articles in the press about it recently. So just trying to understand how you see that business affecting second half results, if at all?

Eric Andersen:

Yes, maybe two things, Greg. One, as a percent of revenue, it's still -- the market is still in its infancy. So I wouldn't overly rotate on it other than the potential that we see down the road. And to your other question, about some of the activity in the market. Obviously, we're not going to comment on specific third parties. But I would say, as part of our fundamental role of matching risk to capital, we work with many of parties that bring capital to the marketplace. Some of them use let us a credit to backstop the capital, used by the third parties. But it does provide the kind of capital and that we need that the clients need to deploy to gain reinsurance capital that they're looking for. So it's just one of the ways that we match risk of capital together on behalf of our clients.

Mike Zaremski:

I guess back to the organic growth environment. Just curious, you mentioned some headwinds on the M&A side. There's probably some tailwinds, too, which we can see. But would you say you were clear to about 5% or greater is still the outlook. But would you say growth is kind of thinking back to the back half of the year is kind of steady or accelerating or decelerating? Or any trends you'd like to point out in any of your businesses in terms of momentum or tailwinds other than the M&A call out that we should be considering into the back half of the year?

Eric Andersen:

Sure, Greg. And you mentioned 2 of them in your written remarks around the Parametric that we did for Puerto Rico as well as the Human Sustainability Index. Those are just 2 examples of the Aon United teams working together. But I think I would also say that the client demand is evolving, and it's getting more complicated, I think as the world gets more complicated. And so our strategy of evolving to risk capital and human capital, I think, uniquely positions us to take advantage of that capital to drive growth -- I'm sorry, take advance of that situation to drive growth. And when I think about it, just to put a little clarity on it, from a risk capital standpoint, I think it gives us a couple of things. It gives us access to global capital no matter what form. So insurance, reinsurance, ILS parametrics to help clients transfer the risk that they want to transfer, and also create more dynamic markets. And I think it also helps us to create and deliver the analytics that have historically driven our reinsurance business over to the large corporate clients who have a more acute need today, to understand their risk from property exposure, to climate change, as well as the cyber liability exposures. And it also gives our leaders client leaders and brokers, the best insight of the market dynamics. So that's on the risk capital side. On the human capital side, bringing health, wealth and talent together is effectively meeting clients where they are today. Clients are looking for a holistic view for their employee relationships, both from hiring, training, health wellness all the way through to retirement. And we're seeing that. We're really excited to see that strong growth in our core health and benefit business globally. Winning new clients, expanding the relationship with them across all aspects of that employee life cycle is gratifying and exciting. So we see a lot of opportunity with both risk capital and human capital, both in our strong core but also as we develop sort of new capabilities. But Christa, anything you could add to that?

Mike Zaremski:

And my quick follow-up is curious on the expense efficiency side, a number of competitors have kind of talked about leaning in to be able to kind of find more ways to be efficient over the last, I guess, in this post-pandemic world and there's different nuances to each company's strategy, but it feels like some of them are taking off of the and United Playbook, which you guys were a first mover on. Just curious, is there anything you want to call out in terms of -- do you see incrementally more opportunities today for expense efficiencies or nothing really to call out that's getting you guys even more excited about kind of some margin levers in the coming year.

Eric Andersen:

Yes, one comment on it because we -- I know the question was on efficiency, but the ability to leverage the analytics that we have inside of ABS helped us develop the human Sustainability Index, helped us create the insight that we're able to bring to corporate clients. As they think about managing their climate exposure from a property standpoint, how all of that comes together is part of the ABS strategy and how we execute it. So while there is efficiency, there is great opportunity, I think, to drive new products, new solutions and better solutions that our larger clients are looking for us to help them.

Operator:

Our next question comes from the line of Weston Bloomer with UBS. Please proceed with your question.

Christa Davies:

And so maybe I'll start with sort of the math of just -- if you think about this, and again, we look at the sort of over a full year. But if you just did year-to-date, you'd see organic revenue growth of 7% year-to-date. Comp and ben is up 4% year-to-date. And so there's lumpiness in every quarter. And so what we would say is we feel good about that. And in terms of attrition, we would note that attrition in 2023 is below 2019 or below pre-pandemic levels. And so we feel really good about where attrition is across the board. And we also would note that engagement levels are at the highest they've ever been in the firm's history. And so we feel really good about the talent we're attracting. But Eric, you may want to jump in here just in terms of the talent side.

Weston Bloomer:

And then my second question is on wealth solutions organic. I know you had highlighted difficult comp on performance fees in the quarter. I was wondering if you could maybe quantify that impact? And then is wealth solutions a business where you could see mid-single-digit organic growth over the next year, maybe more in line with the rest of Aon. That growth had been lower single digits over the past few years. So curious if we're seeing maybe momentum there.

Operator:

Our next questions are from the line of Bob Huang with Morgan Stanley. Please proceed with your question.

Christa Davies:

Yes. Look, thank you so much for the question, Bob. And we are super excited about AI more broadly and how it can apply to our business. And we would say we think about this in terms of everything from really basic machine learning, robotic process automation, all that stuff that helps us drive automation and efficiency at the sort of very low end, very cheap and super scalable, and we're really looking to implement that broadly across our business, to help our colleagues get out of the sort of day-to-day cutting and pasting and inefficient processes that they're doing today and equally to make things much easier for clients to interact with us and do business. And so that's sort of the low end. And then you could say at the high end, sort of generative AI, it's really helping us drive insight and impact in the analytical areas that Eric was describing around risk capital and human capital. Catastrophe modeling, helping us add data sets, the human capital assistant, helping clients interact with human capital assistants, much like they would an expert in human capital today. And so Bob, we're very thoughtful about the cost of this, and where it's best to use basic technology, machine learning, robotic process automation, because it's just cheaper and more efficient and more scalable broadly. And where we're really trying to have insight and impact with clients and use generative AI. So we're sort of scaling it depending on the impact and opportunity.

Bob Huang:

My second question, maybe just to go back to the line of questioning regarding Commercial Risk Solutions, right? And obviously, you've talked in depth about why the U.S. segment is the way it is. But you also -- one of the things we noticed is that Asia has been strong for a few quarters. In the last quarter, you also saw strength in Latin America and rest of the world. Just as we gradually come back to a more normal M&A market in the U.S., how durable is the growth in the rest of the world. I'm just trying to think down to next year, how we should think about Commercial Risk Solutions growth going forward?

Eric Andersen:

Yes. Maybe the only other angle I would say, Greg, is the sophistication of the products that are entering into places like Asia-Pacific and Latin America continue to evolve as the clients evolve. So whether it's risk financing techniques, whether a specialty products, whether it's the international as those organizations expand outside their home countries. So as those economies continue to develop, whether it's India, whether it's other parts of Asia, we're able to grow with them and help them as they need more sophisticated products. So we are very excited about the platforms that we have in Latin America and Asia-Pacific, and we do see good growth opportunities over the long term.

Operator:

Our next question comes from the line of Rob Cox with Goldman Sachs. Please proceed with your question.

Eric Andersen:

Sure. Greg, let me take that one. So on the first half, listen, we are really proud, excited whatever word we can use on our reinsurance capabilities, really great first half, great second quarter, a great first half coming off of a couple of great years. Just remember that most of the treaty business happens in the first half, and so a lot of that is now finished. But I would say that as clients have been dealing with the changing reinsurance market, they've made their own decisions. Sometimes they don't buy certain layers, sometimes they buy less, sometimes they buy differently. And so that's always a decision that we help our clients make as they think through how they want to use reinsurance capital for their business. It does, by the way, explain a little bit of what's going on in the primary market around property, as more of the risk is now sitting on the primary insurers they are now dealing with how do they price it and what kind of risk do they take. So it is an interconnected system of reinsurance and insurance. So just to point that out. And I think on the second half, tends to be more around the ILS business and facultative business. And I do think we had a very strong first half, in fact. And our expectation is that should continue as the primary clients now may have less low-level reinsurance protection on property catastrophe or secondary perils like wildfires or hailstorms or what have you. And so the ability for the insurers to manage that exposure, the tool that they would use now is facultative reinsurance on an individual risk basis. And the last point I'll make, and Greg, maybe I'll throw it to you is facultative reinsurance is also being used on things like captives or large corporates where they're also repaying more of the risk themselves. So don't just think about it as a reinsurance tool. You should also start to think about it as large corporates that are trying to access, not just traditional insurance markets, but also reinsurance markets. But in fact, is the way they do that. But Greg, maybe anything you'd add on that?

Rob Cox:

And maybe moving back to commercial risk. If we exclude these external factors on the M&A services business, is it fair to assume that the remainder of the business accelerated sequentially, kind of along with the accelerated renewal premium change that we saw in the market this quarter?

Rob Cox:

And maybe just one last question on health solutions. Really strong growth. Just you guys pointed to the growth outside of the United States being particularly strong. And I'm just curious what's driving that? Is that market share gains, medical inflation? Any color you could provide there?

Operator:

Our next question is from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

Christa Davies:

Elyse, we actually have increased our CapEx guidance to be $220 million to $250 million for 2023 and that's really driven by the investments we're making across Aon Business Services platforms and applications. to drive future growth. And so we're really excited about that. The improvement in free cash flow and the double-digit free cash flow growth for the year is going to be driven by operating income growth and working capital. And I did note that second half free cash flow growth is always significantly stronger than first half.

Christa Davies:

Elyse, I'll try and do this again because I probably didn't explain this well the first time. What we -- we are lapping the comps that's absolutely right. But what we're seeing in the external market is continued pressure into the second half of the year in the M&A environment. So we expect that trend to continue.

Greg Case:

Listen, overall, Elyse, and Eric to comment on this, for sure. Look, there's still pressure here. There continues to be pressure on the capital side, we're incredibly vigilant about finding options, matching capital risk in terms of what we do for our clients every day. We're navigating through it. You're seeing movement on the ILS side. We talked about $5 billion we've done in 21 deals year-to-date, which has been phenomenal. So we see an opportunity there. But it's still constrained. There's still pressure. Eric, what else are you add to that?

Operator:

Next question is coming from the line of David Motemaden with Evercore ISI. Please proceed with your question.

Christa Davies:

So we have not disclosed that detail. We did, as you mentioned, disclosed it in Q4 and we haven't disclosed it going forward. What I can say is we're the leader in the space, and we're incredibly excited about our capabilities, as Greg and Eric have described. and this having a real impact on our business. But we're continuing to invest in it because we know as M&A volume comes back, this business is incredibly well positioned to do fantastically well.

David Motemaden:

And also just to clarify, so tough comps in this business in the second half of '22 -- or I guess the comps are definitely easier. I think second half of '22 is very depressed. So -- is it that you guys -- you guys aren't expecting it to be down again off of that depressed base, but it's more just you don't see a recovery off of that depressed base? Is that the right way to put it?

David Motemaden:

And then just on the continued investment in tech and talent, and it also sounds like even with the increased outlook on CapEx for the year, it's going to tick down in the back half of the year. And I'm just trying to just compare that to the continued investment in talent that it sounds like you guys are making. Should I take that to mean that more of the expenses are going to be coming through OpEx, instead of running through CapEx and then there could be a little bit more of a headwind to margin improvement in the second half.

Operator:

The next question is from the line of Meyer Shields with KBW. Please proceed with your question.

Christa Davies:

Yes. So thank you so much, Mark. What I would tell you is we are on track for full year margin expansion. And the margin in this business we continue to manage the business as an overall portfolio. And I would say they're not particularly different to the rest of the business. We are focused on continuing to invest our entire portfolio in higher-revenue growth, higher-margin areas supported by -- and as a services with the analytical impact. And what I would say is, as you think about margin expansion long term, it's really just another way to measure the value we create for clients, which is why our data analytics and insight matter so much because that's increasingly what drives value as our clients look to understand forward-looking risk. And so it's those areas of the business that generate more value for clients. And then obviously, with Aon Business Services, we're driving to create that value more efficiently, which is why we're really investing in Aon Business Services to get it to the next level around driving operational excellence, better customer service and increased innovation at scale. And so we're really confident about driving sustainable margin expansion in 2023 and each year beyond that.

Christa Davies:

So Meyer, as you exactly predicted, we are not giving guidance on the tax rate going forward. As I look back historically, exclusive of the impact of discrete items, which can be positive or negative, and historic underlying rate over the last 5 years was 18%. So we feel really good about our overall global capital structure, our global cash structure and our ability to navigate regulation and legislative changes going forward.

Jimmy Bhullar:

So first, I just had a question for Christa on how you think about the impact of inflation on your results? Obviously, it helps on the revenue side. But to the extent there's competition for talent or higher IT expenses than it hurts on margins. But assuming inflation stays high, is that a positive for you overall? Or is it a negative or a push?

Eric Andersen:

Yes. Listen, I think how asset values are repriced. I think that is something that's been sort of re-put into the business in a more consistent way, especially on the property side. I think inflation around verdicts on the liability side. So I think it is that you're saying, impacting pricing from an insurer standpoint. I would say it also creates sort of decision-making that the client will make. So the clients may take higher retentions, they may use captives that requires different support. It may -- they may take things on their own balance sheet versus transferring it. So it's not a straight line and often, it will turn into other capabilities that we can provide clients service for, rather than just straight up insurance pricing. So the clients are reacting to inflation the way any business would. And so that gives us an opportunity to provide a broader suite of capabilities to them as they're managing it.

Christa Davies:

Yes. So Jimmy, what we would tell you is we think about allocating cash based on return on capital, cash on cash return and our highest return on capital opportunity remains share repurchase. And so as we generate cash, you can think about us allocating it disproportionately to buy back. Because it sets the bar for all other uses of cash. And look, what we would say is we don't actually forecast buyback by quarter. But you can see in any calendar year, it's the highest use of cash across the firm. And so whether that cash is coming from debt or operating cash flow, as we generate that cash, we'll utilize it to buyback or M&A or organic investment, depending on the ROIC return. And we definitely see a huge opportunity to invest in buyback given we are substantially undervalued today, based on the way we value our business on a DCF basis.

Greg Case:

I just want to say that thank you, everyone, for joining, and we look forward to the discussion next quarter. Have a great day.

Operator:

Good morning and thank you for holding. Welcome to Aon plc's First Quarter 2023 Conference Call. [Operator Instructions] I would like to also remind 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 historic results or those anticipated. Information concerning risk factors that could cause such differences are described in the press 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.

Christa Davies:

Thanks so much, Greg. And good morning, everyone. As Greg highlighted, we just have a 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 both by ongoing strong retention and net new business generation. 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 5% includes an unfavourable impact from changes in FX of 3%, driven by primarily by a weaker Euro versus the U.S. 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 Aon 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 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 for the full year, driven by three areas. The first is top line revenue growth. The second is portfolio mix shift for 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. Our highlight, Aon Business Services continues to be a key contributor to margin expansion, and represents a competitive advantage, especially in inflationary markets. 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 decarbonisation strategies. As Greg said, this resulted in a 4% reduction in emissions last year, while also allowing us to increase supply diversity utilization to 6% of our addressable U.S. spend in support of our goals around inclusion and diversity, both meaningful accomplishments that are enabled by our Aon United strategy. Organic growth and margin expansion translated into adjusted EPS growth of 7%. As noted in our earnings material, FX translation was an unfavourable impact of approximately $0.14 per share. If current data remain stable at today's rates, we would expect an unfavourable impact of approximately $0.04 per share in the second quarter and $0.14 per share for the full year 2023. I'd also note other expense had a $0.19 per share unfavourable impact in the quarter, including a $0.05 per share unfavourable impact from an increase in non-cash net periodic pension costs, in line with what we communicated previously, as well as an unfavourable 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 unfavourable impact from increased net periodic pension costs to continue for each quarter this year, and we currently expect gains on 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'd note, CapEx can be lumpier quarter-to-quarter, and we expect an investment of $200 million 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 repurchase to continue to remain our highest ROIC opportunity for capital allocation. We believe we're significantly undervalued in the market today, highlighted by approximately $550 million of share repurchase 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, and 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 rate, 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, driven by our Aon 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.

Jimmy Bhullar :

Hey, good morning. So first, I just had a question on your expectations for the tax rate for 2023. It was high. I think it was around 19.5% in the first quarter. That's higher than the 17% to 18% range you've had the last few years. But what drove that? And what are your expectations for the tax rate for this year?

Jimmy Bhullar:

And then the changes in Singapore and a few other places, should those have a material impact? Or is there any reason to expect the rate to be different this year than in the past?

Jimmy Bhullar:

Okay. And then just lastly, on fiduciary investment income, assuming rates stay where they are, is there further ramp-up in that, that you'd expect as like your portfolio sort of resets to where rates have gone? Or has the full impact of the rise in rates over the past several quarters, is it already reflected in your numbers?

Jimmy Bhullar:

Okay. Thank you.

Andrew Kligerman:

Hey, good morning. You mentioned in the release that the U.S. grew modestly in terms of organic revenue growth in Commercial Risk Solutions. And transaction in M&A was probably with a very tough comp. So it looks like as we get into the second quarter and the rest of the year, that's really not a tough comp anymore. Could you give any sense of what that impact was in the quarter? And should we expect going into the next three quarters that we could see a significant contribution to organic growth?

Eric Andersen:

No, Greg, I think you covered it well. I think it's still foundationally very strong. The work that we're doing for our clients today on the commercial risk side with all that's happening in the market, whether it's risk analytics, captives, the broad suite of capabilities we can help them with as they're navigating the market dynamics, are still very strong. And so pretty positive on it.

Eric Andersen:

I would say the first quarter last year was a very strong quarter for commercial risk. The Transaction Solutions business, I think, as Greg said, great capability subject to, obviously, some outside market dynamics that -- but we feel really strongly about that team. And when that comes back, certainly holding that skill set for us is such a great value driver for clients that we're excited about it.

Christa Davies:

I mean, the CapEx that I mentioned, the $200 million to $225 million, Andrew, I would say, is primarily focused on IT investments to drive long-term growth. So whether that's scale investments in our platforms to help clients innovate or whether that's in security and infrastructure to keep our clients better protected and the firm better protected, and so we're investing a lot in our Aon Business Services platform, better connectivity, better data analytics, better insight. And it's really helping our clients deliver great value to our clients -- our colleagues deliver great value to our clients.

Christa Davies:

Yes. Thanks for the question. We have a fantastic M&A pipeline, and it is focused on our highest growth, highest margin, highest return on capital opportunities. And it reflects the areas we continue to invest in, areas of content and capability that we can scale across the firm. In areas like data analytics, you saw us do Tyche and ERM last year in that data analytic intensive area, areas like health and wellness and human capital, areas like our core risk offerings and helping our clients be able to model and manage risk better. And so we've got lots of areas of great opportunity around the globe, and we're really excited about it.

Operator:

Our next question comes from the line of Robert Cox with Goldman Sachs. Please proceed with your question.

Christa Davies:

So what I would tell you is, if you look at that other general expense, which is up 20%, that is primarily driven by T&E. And the thing I would note is you're comparing it against Q1 2022, which was an unusually low year in terms of -- usually a low quarter in terms of T&E, because of COVID.

Christa Davies:

It's exactly the same as always. So what we would say is we grow margins each and every year. And our margin expansion for the last 12 years has been 1,120 basis points or approximately 90 basis points a year. And that 90 basis points a year over the last 12 years has been a gross margin expansion higher than that, and then it nets to 90 basis points, net of the investments we're making in long-term growth. So that is consistent with the way we drive margins each and every year.

Greg Case:

Listen, as you highlight, Robert, teams have done a terrific job in really over multiple years. We look at the last two quarters, the overall performance exceptional, really reflecting a lot of what's going on in the world out there. The regulatory changes we highlighted around GMP and others, pension risk transfer, and they were just uniquely well positioned to sort of address that. So that's really what's driving the demand from the client standpoint, and the team has done a terrific job. We did highlight in the opening comments, listen, the comp for next quarter is going to be particularly challenging in terms of sort of where we are. But fundamentals, exceptionally strong, and the Wealth has done a terrific job. Eric, what else would you add to that?

Robert Cox:

Great. Thanks for the color.

Weston Bloomer:

Hi, thanks. Good morning. My first question, I noticed real estate costs were up year-over-year for the first time, I guess, since 2021. Is that primarily just a function of the investments you're making in smart working? And just given the investments in CapEx that you've made, is it fair to assume that, that should continue to grow year-over-year throughout the course of 2023?

Weston Bloomer:

Great. Thank you. And a follow-up on the Wealth performance fees. You highlighted a 2Q headwind there. Is there an associated headwind in the back half of the year as well? Or is it just isolated to the second quarter? And is there a margin impact from that as well?

Weston Bloomer:

Great. Thank you.

Elyse Greenspan:

Hi, thanks. Good morning. My first question, I guess, goes back to tying together some of the prior discussion on margins, right? So Christa, you guys -- you mentioned the historical 90 basis points of margin expansion that Aon has seen over the past 12 years. So I'm just trying to understand why we shouldn't expect that level, so the 90 basis points, in addition to the benefit that you guys are getting from fiduciary investment income, which I calculate was around 80 basis points this quarter? Or are you choosing to reinvest more in the business because of the strong tailwind we have from higher fiduciary investment income?

Elyse Greenspan:

Thanks. And then my second question on reinsurance, right, 9% organic in the quarter. That was stable with the fourth quarter, but I might have thought that just with the really strong rates that we saw during the January one renewals that, that growth might have picked up sequentially. Can you just give us a little bit of a -- just some of the trends that you saw in the reinsurance business that impacted that 9% in the quarter and how we should think about the balance of the year.

Eric Andersen:

Yes, Greg, thanks. Look, I would say, Elyse, that reinsurance has been a strength-to-strength story for us over the last couple of years. It was a 7% growth in Q1 '22. And honestly, the work that's been done was nothing short of spectacular around the 1/1 renewals. We had double-digit growth, in fact, double-digit growth in our STG Advisory business, significant new wins in Treaty. We feel really good about the performance of the team year-to-date. And looking forward, the work that the team is doing with their insurer clients and others is in demand, right? What the carriers are trying to do to manage their own portfolios as they navigate this marketplace has really -- our team is providing real value to them as they think through that. So really proud of the work that, that team has done, not only this quarter but over the last several years, and the future looks bright for it.

Christa Davies:

Yes, it's simply about the performance fee. As you know, Elyse, performance fees are lumpy as we communicated.

Operator:

Our next question comes from the line of David Motemaden with Evercore ISI. Please proceed with your question.

Eric Andersen:

Sure. I would say, our health business had a very solid first quarter. The Consumer Solutions part of that was up 9%. Core health and benefits was up significantly. Global Benefits, Human Capital double-digit, both in the analytics and the advisory and data solution spaces. So really solid start for the year for them with a strong pipeline as they go through the rest of the year.

Christa Davies:

Thanks so much for the question, David. I would say, we expect $200 million to $225 million for 2023. And then it's reasonable to think going forward, 2024 and beyond, that CapEx will grow in line with expenses. So you're absolutely right that 2020 and 2021 will lower, really just because of the COVID situation. And as we return to more normalized levels of CapEx, 2023 is a right normalized level to start with and then grow from there based on overall expense growth.

Christa Davies:

Yes. Look, thank you for the question. And what we would say is we're incredibly excited about Aon Business Services as a core part of Aon business strategy. It's bringing together the firm in one organization led by Mindy Simon, our fantastic COO, and bringing together an organization to drive efficiency, to drive improved service and quality and to drive innovation at scale. Because a lot of the investments we're making, David, you saw in these IT platforms and security and infrastructure, are helping us scale insights and data analytics to clients to actually deliver impact. And so we're really excited about the potential to drive productivity and margin expansion from ABS, but equally to drive improved service and quality to clients and to allow us to accelerate innovation in one area of the business across all of our countries and all of our clients immediately. And so it's proven to be an amazing competitive advantage for us over the next many years.

Operator:

Our next question comes from the line of Mike Zaremski with BMO Capital Markets.

Greg Case:

I would say Jack, from our standpoint, as Christa highlighted before, we've got a terrific pipeline, lots of opportunities we see. We're always going to be looking at them in terms of how they're going to strengthen and build our business. So this is really content capability we can scale around the firm. So you might imagine, we look across the entire spectrum, and we continue to do that, looking for these kinds of opportunities at a return on invested capital criteria that sort of meets the benchmark, which is really buying back, which has the standard. So we're looking broad-based and looking for opportunities around the world.

Greg Case:

Yes. We would -- absolutely. So first, I just want to highlight, if you look back in kind of overall, what's discretionary and nondiscretionary as the baseline, very limited amounts of our business is really discretionary when you get down to it. There's sometimes timing is effective, not this year, but it's not this year, it's next year. And so a very low level from that standpoint. But what you're highlighting is exactly correct. Complexity is driving demand, and complexity and urgency is driving demand. And analytics around that at which we have make some of the -- some of these what would have been really would be nice to do almost necessary to do, particularly as you think about risk connecting with human capital and the dynamic that comes with that. Eric, why don't you add to that?

Unidentified Analyst:

Thank you.

Meyer Shields:

Great. Thanks. Two quick ones. First, can we get a little color on what actually drove the performance fees last year? Like what are the -- what was the performance that led to that fee? And when can we expect that sort of thing to recur?

Meyer Shields:

Okay. Fantastic. That's perfect. And second question, Greg, I think this is for Greg. So we saw almost 200 basis points of improvement in the comp ratio. Should we think about that as improved efficiency? Or is there a concern maybe that there are some roles that need to be filled?

Christa Davies:

The thing I would say, Meyer, is you're observing lumpiness in expenses in any one quarter, and we really think about margin expansion over the course of a full year. And we commit to drive margin expansion in 2023 and every year after that. And we think about margins over the course of the full year. And we're balancing a number of factors, including investments in people, T&E and IT as well as the impacts of FX and fiduciary investment income, all with the overall goal of delivering adjusted margin expansion net of sustainable investment and long-term growth. And that's exactly what's happening in Q1 and will happen for the rest of 2023.

Operator:

Our next question comes from the line of Michael Ward with Citigroup. Please proceed with your question.

Christa Davies:

Michael, we don't give margin expansion guidance for the full year. What we can say is over the last 12 years, we've driven 1,120 basis points of margin expansion or approximately 90 basis points per year. It is -- we expect to drive margin expansion each and every year. It's not neatly 90 basis points per year because it's lumpy. And it really what it is. It's us driving gross margin expansion net of investments. And the amount we invest every year is dependent upon our opportunities for long-term growth. I would say, specifically on your T&E point, T&E was a bigger headwind this quarter because Q1 '22 had a very low T&E expense, given what was going on with COVID.

Greg Case:

Michael, first of all, thanks for raising it. I'm happy to address it. And Eric and I can give both -- give his color commentary on this, too. But this is a phenomenal area. If you think about sort of things we do every day to move to the market, this is an area in which you step back, I think, total addressable market, what could that be? Well, start at zero right now and what could it build to? 85% of the world's value is connected back in tangible assets. So my gosh, what should this be? By the way, what has our industry done to defend those assets? Nothing today, until we started to really understand how to value IP such that it could be insured, which means it's a real tradable asset, which means you can borrow against it. And you're right, we've done a number of deals over the course of the last 18, 24 months, which has amounted to $1 billion of debt, which is fantastic. It means these entrepreneurs are raising growth capital without giving up ownership. But just think about that, raising growth capital without giving up ownership, who's interested in doing that if you're an entrepreneur? And the answer is that market is massive. It's going to take time to develop. It takes time to build markets as it always does. And we love the momentum, and we love the possibilities and potential. We're not going to quantify what it needs. We'll see it will play out over time, but it really does have a very specific application, and we're quite excited about the progress. Eric, what else would you add to that?

Michael Ward:

Thanks so much, guys.

Josh Shanker:

Thank you all for taking my questions. And good morning to you. First quarter is the strongest quarter for the reinsurance segment, obviously. In the back half of last year, you had a lot of acquisition-related growth in reinsurance not so much in 1Q, I mismodelled it, I'm just looking at 2Q which is a smaller quarter for revenues and reinsurance. Are you going to help me think about the acquisition revenue piece for 2Q later in the year? But given that volatility over the last three quarters, trying to be smart about it?

Josh Shanker:

In terms of the acquisition, is there a property cat in that acquisition?

Josh Shanker:

I'm saying that your 9% boost to revenues in the back half of '22 in the reinsurance segment due to acquisitions and only 1% in 1Q, I assume there's a 12-month impact on any acquisitions you make. It was less pronounced because of the volumes, I guess, in 1Q. I'm trying to think -- yes, yes.

Josh Shanker:

Okay. And then I want to follow up a little bit on...

Josh Shanker:

Yes, go ahead.

Josh Shanker:

That's perfect. Thank you, Christa. And I just wanted to follow up on Mike's question about T&E just a little bit. Clearly, there's a variance between 1Q '23 T&E and 1Q '22. But in my mind, I would imagine the variance would have been greater between 4Q '22 and 4Q '21. And maybe I’ll tell us a little something about the business cycle and whatnot. If you're spending more on T&E now, is that a broad situation with regards to a resumption of how your clients are spending? And two, should we expect that T&E headwind is really a '23 event more so than a '22 event?

Josh Shanker:

Well, I appreciate you staying on message. And thank you very much, Christa.

Greg Case:

Thanks very much. Just want to say to everyone, we really appreciate you joining the call and look forward to our discussion next quarter. Thanks very much.

Operator:

Good morning and thank you for holding. Welcome to Aon plc's Fourth Quarter and Full Year 2022 Conference Call. [Operator Instructions] I would like to also remind 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 historic 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 2022 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.

Christa Davies:

Thanks so much, Greg and good morning, everyone. As Greg highlighted, we delivered another strong quarter of performance across our key metrics to finish the year. In the quarter, we translated 5% organic revenue growth into 40 basis points of adjusted margin expansion and strong growth in adjusted earnings per share. For the full year 2022, organic revenue growth was 6%. Adjusted operating margins increased 70 basis points to 30.8% and we generated over $3 billion in free cash flow, an all-time high. We look forward to building on this momentum as we head into 2023. As I reflect on results, as Greg noted, organic revenue growth was 5% in the fourth quarter and 6% for the full year. 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 2% in both Q4 and the full year includes an unfavorable impact from changes in FX of 4% in both periods. Primarily driven by a stronger U.S. dollar versus most currencies. I'd also highlight that fiduciary investment income which is not included in our organic revenue growth, was $41 million in Q4 and $76 million for the full year or 1% in both periods. Moving to operating performance. We delivered strong operational improvement in Q4 with adjusted operating margins of 33.2% an increase of 40 basis points driven by organic revenue growth and efficiencies from Aon Business Services, overcoming expense growth, including investments in colleagues and technology to drive long-term growth and some ongoing resumption of T&E. For the full year, adjusted operating margin of 30.8% reflects margin expansion of 70 basis points year-over-year. And I'll note over the past 12 years, we delivered 90 basis points of margin expansion a year. 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 the full year, driven by 3 areas

Elyse Greenspan:

My first question is on your margins. So if we look in the quarter, it seems like your margin declined excluding the benefit of fiduciary investment income. So I'm just trying to get a sense of the drivers and outlook you see for your margin, excluding the NII benefit in 2023?

Elyse Greenspan:

So assuming we continue to get a tailwind from fiduciary investment income, I guess, in '23, you'll probably balance letting that all fall to the bottom line and making some of the investments similar to what you did in the fourth quarter?

Elyse Greenspan:

And then my second question, we've heard a lot about a lot of strong pricing coming out of the January 1 reinsurance renewals. Can you give us a sense of the outlook for your reinsurance business? I am not sure if you highlighted it in the past but the concentration is in the property lines. But can you give us a sense of just how you think that business should perform in an environment where we're seeing as robust catastrophe reinsurance price increases that we saw at January 1?

Greg Case:

And I might just add to that, at least, the theme was exceptional. I'd tell you, the 1/1 renewals had a unique market dynamic and taking the analytics and capability we have in place and what we're able to do and how we deliver it to the market well before anyone else was truly unique and helped our clients tremendously as they navigated through the marketplace. As Eric highlighted, more risk means more opportunity to demonstrate value added.

Andrew Kligerman:

In your slides, you described the impact on organic revenues from the market as modest positive impact in both commercial risk and reinsurance. Can you give a little more color on that market impact and maybe discuss the issue of commissions versus fees and whether your fees were kind of level year-over-year or whether commissions were driven down in each of those 2 segments?

Eric Andersen:

Sure. Listen, I think on the property on the market perspective, certainly property is getting a lot of attention and you continue to see that market be challenging for our primary clients. It is worth noting though that clients use a lot of different tools to manage that market dynamic. They use captives, they use retention. They limits purchase. So it's not a direct line from what a carrier would say about a property market rate versus what a client actually assume. So there's a lot of tools that they have and we spend an awful lot of time, as Greg was saying, trying to add additional value for them using financial modeling and techniques to try and limit that exposure. The other products, casualty, cyber, financial products, etcetera, around the globe, I would say, are more stable. We're a good 3.5, 4 years into a market cycle and I think those products are coming more to an equilibrium. And the last thing I would say about your question on commission fees and ties back to what Greg said is one of the benefits of being a fully transparent broker where we engage our clients in what we get paid for the value that we provide, we don't really care whether it's a commission or whether it's a fee. What we really are driven by is are we providing value to clients and are we being paid fairly for that value. And so whether the cycle is up or down, it doesn't really matter to us. We engage in those conversations in a fully transparent way and I think we have great relationships with our clients because of it.

Eric Andersen:

If you think about it -- I'll just use reinsurance as an example. It's historically our smallest quarter and it's not treaty driven. It's driven around facultative placements, banking, our technology consulting group. So not really market-driven issues but more value issues in terms of usage of those tools to help clients manage their exposures.

Christa Davies:

So what we would say is we don't give forward guidance on tax. But as I look back historically, exclusive of the impact of discrete items which can be positive or negative in any 1 quarter, our historical underlying rate for the last 5 years was 18%. And that's the result of us being a global company domiciled in Ireland with a global cash management structure and a global capital structure. And so we're really confident about where we are.

Christa Davies:

Again, we don't give guidance going forward on tax rate but I can tell you that as we look back historically, our historical underlying rate for the last 5 years was 18%.

Jimmy Bhullar:

So first, just had a question on your -- some of your comments on the reinsurance market. You mentioned a challenging environment for your clients, especially in property reinsurance. Are you expecting a similar trend for midyear renewals as well? Or do you expect any sort of shifts in capacity entering the market?

Jimmy Bhullar:

Okay. And then just similarly, on commercial lines, obviously, pricing has been pretty good for a while. It seems like it's softening a little bit, given the results that some of the carriers have reported. Are you seeing something similar in the market, too?

Greg Case:

Jimmy, in the context of this, if you step back and think about the implications for insurers, as Eric highlighted very well kind of on a product-by-product basis. As I talked, described in my comments and Christa amplified very well, this is really about a client leadership approach for us and fundamental demand is going up. The opportunity to talk to clients about risk out there in the world and how it's connected, it's going up. So irrespective of sort of the individual pricing environment which are prescribed well, the opportunity for us to engage clients and help them how to protect their business and grow is actually continuing to increase.

Christa Davies:

Jimmy, we don't comment on any future legislation. We run a global tax structure and we've had an underlying rate of 18% for the last 5 years and we feel really good about where we are.

Rob Cox:

And first, maybe just a longer-term question. I think in the past, you've talked about getting margins up into the 40% plus area. I know you don't disclose margins by segment. But curious if you can give us some color on which of your businesses have some of the most opportunity there and if commercial risk could ever get to that level?

Rob Cox:

Okay, got it. And maybe just switching to the wealth segment. Obviously, strong growth in the quarter. I was wondering if that was more driven by the pension risk transfers or some of the regulatory changes we're seeing, particularly in Europe. And if your outlook considers a continued tailwind from these areas?

Eric Andersen:

Listen, I think the regulatory changes with the global minimum pensions is such a big part of the business in the retirement side. So we saw a lot of growth there, especially out of the U.K. but also decent growth in the U.S. as well. There were some headwinds with the investment business because of AUM being down with the market. But overall, I think we're really well positioned. And I think, Christa, you mentioned in your opening comments about the pension risk transfer piece. Also, I think we're an industry leader in that space and really have a great team to do it.

Operator:

Our next question comes from the line of Weston Bloomer with UBS. [Operator Instructions]

Christa Davies:

So Weston, thanks so much for the question. As we think about margin expansion, we think about it holistically over the course of the year at the Aon level. And we've grown margins, as I mentioned, 1,120 basis points over the last 12 years or 90 basis points a year for 12 years. And it's driven by revenue growth a portfolio mix shift as we disproportionately invest in higher revenue growth, higher-margin businesses organically and inorganically and productivity benefit from ABS. So we don't look at it separately from investment income or frankly, the underlying investments we're making in the business each and every year to drive long-term growth and innovation for our clients.

Greg Case:

Excellent. Listen, I appreciate the question. We are seeing uncertainty or complexity or interconnectivity, however you want to describe it, really everywhere around the world. We do want to emphasize, though, this is not just risk, it's opportunity. It's an opportunity to engage clients in ways to help them understand these risks more effectively. And candidly, our clients want to get on the offensive. They want to understand that risk and then actually deal with how they can actually grow their businesses in the context of it. So for us, this is about more connectivity around a changing environment but we're seeing it really over around the globe, the impact of interest rate changes, inflation, geopolitical challenges, really the fundamental issues I described in the opening comments around things like health and wealth and talent. The evolution from just engagement is now wellness and all things that come without all aspects of that. How you think about managing that sort of using reinsurance analytics and commercial risk analytics in the context of people, all of these things are coming together to create opportunity for us and we're really seeing it everywhere in addition to the challenges you described.

Christa Davies:

Look, our operations in Singapore, including our investment center and local business are an essential part of our operations today and we expect that will mean an important part of our global strategy going forward. We did finalize our negotiations with the Economic Development Board in Singapore and we'll provide an updated disclosure on our 10-year arrangement in our 10-K.

David Motemaden:

I had a question on commercial risk. Greg, you mentioned there was a 5-point drag from the lower transaction volume in the quarter's organic growth. I guess I'm wondering is that going to be a similar size drag as we think about first quarter? Or is it going to be lower or higher? I guess, how should we think about that as we progress through the 2023?

David Motemaden:

Got it. Okay. And then I think you guys usually give an update on the calling count at the end of every year. So I think it was 50,000 at the end of 2021. Where did that stand at the end of 2022? Does that grow at all?

David Motemaden:

Got it. And I guess just a follow-up on that, Greg. You mentioned, I guess, it sounded like just productivity enhancement of your existing employee base. Is -- are there any metrics that you guys track that you can help us think about that?

Eric Andersen:

Greg, maybe I can give a little bit of color with regard to a client example just to bring it to life because I can't stress how important this is for us and what we do for our clients. We were recently engaged by a global firm and a specialized industry who is looking for just better risk advisory services around the world for their risk strategy, both globally and as well as locally. And to do this, we use resources from all of our solution lines in multiple spots. And on the surface, I would say this is the kind of work that we love to do for clients but just thinking about what you were just saying, Greg, when I dig back to what we used to do, right? When we were operating under these sub brands of Aon Risk services, Aon Benfield, Aon Hewitt and the others, it would have been a pretty disjointed process for us. There would have been all sorts of internal barriers within the firm that would have distracted us from the focus on the client. We had internal P&L issues, like resource allocation, revenue sharing, incentive discussions. I think you all get the point. But today, with the Aon United structure, we have 5 region leaders, 4 global solution line leaders who are focused solely on delivering for that client under the Aon brand. With 1 P&L operating around the world. And it is powered by the Aon Business Services model which allows us to actually deliver that capability in a uniform way globally.

Greg Case:

So David, that was way more than you asked for on the initial piece that you asked a very important specific question. What we're trying to convey is the answer to that is key but it really is fundamental to sort of how the integrated approach happens and how it drives performance. And how we're not complete with the journey. There's a lot more opportunity ahead of us. And it also connects with our colleagues because they love driving the solutions that Eric described. It creates engagement. It creates excitement around. If you can wow a client, you've done something that is truly kind of makes the week in the month. So it's a huge opportunity and we stress it here because it's so fundamental to our success with our clients and obviously, with all of our investors as partners as well. So hopefully, that's helpful.

Operator:

Our next question comes from the line of Michael Ward with Citi.

Eric Andersen:

So why don't I take the first one. Certainly, human capital has been a very robust business for us over the last 24 months. And it's still -- we still see it. The data sales, the information around comp the competitive talent engagement assessment also very critical to the agendas of our clients. So we feel really good about that business and what it's done over the last 24 months and are confident about it literally over the next 12 to 24 months as well.

Christa Davies:

All right. On the tech talent, we've got one of the most fabulous brands in the tech space, Radford. And that was the example I gave on the opening remarks around using AI to actually be able to match and find the optimal tech talent at the right price, anywhere around the world. And then to be able to also figure out where your tech talent is within your existing organization to be able to optimize your workforce. And so we do see that the tech dislocations being a fabulous time to utilize this AI technology to get -- to make sure that our clients get access to the best talent and optimize it in the right way.

Eric Andersen:

Listen, I think the cyber market is continuing to evolve and we'll continue to do so as the threat actors change over time. I would say we're a leading provider of both risk management. When you think about data security and the strategy to prevent cyber attack, certainly with our Stroz Friedbeg client -- brand, very strong in terms of its work with clients and then obviously, the risk transfer aspect. I would say when you think about the cyber market today and where it's going, I would say the insurers have actually gone back to basics. The way the quality of the underwriting, the in-depth understanding of what the real cyber exposures are have allowed them to price it better to understand the real risk. And frankly, it's allowed us to distinguish and differentiate our clients and the work that they're doing around cyber protection to be able to bring them to market in a way that gives them individual views but it's become quite a market in terms of size, probably approaching about $10 billion of premium and both from an insurance and a reinsurance side, I consider Aon a market leader in the space.

Derek Han:

So my first question is on buybacks. It looks like buybacks slowed a little bit in the fourth quarter. Was there anything unusual driving that? I was a little surprised just given the strong operating cash flows.

Derek Han:

Got it. That's helpful. And then my second question is on M&A. We've heard chatter about the M&A market kind of cooling a little bit. Are you kind of seeing that in the market? And -- how does that impact your M&A appetite for this?

Christa Davies:

Yes. And look, I would just add, we've found some terrific companies and invested in those this year. I mean, Tyche, fantastic capability in the capital modeling and analytics space and ERM in the modeling space in Mexico. And so we continue to invest in areas of high growth and client need which we're really excited about.

Mike Zaremski:

Great. Just a follow-up on the M&A landscape. Can you remind us -- we know that Aon has moved in some of M&A with cover wallet into the small commercial marketplace. Any ambitions to get into kind of the main street U.S. retail marketplace. I know you just mentioned there were some market stresses. I believe there's some market stresses for some of the private equity roll-ups there. Just curious if that's any ambitions to get into kind of Main Street retail, small mid-commercial?

Mike Zaremski:

Yes. I just wanted to confirm that you -- there is no strategic initiative that kind of operates more kind of in the here I guess, for a marshaling agency or what were the sandbox that they're competing in. The smaller size businesses versus the kind of Fortune 5000, little bigger cover wallet.

Eric Andersen:

Yes, Greg. I would say in our Affinity businesses, we serve specialized groups of small. So we're very active in the small space but really where we can bring distinct value, whether it's in the travel space or museums, that type of thing, where we actually have a product or capability where we're able to provide distinct value to the clients. I would also say with our office -- our 500 offices around the world, we engage with clients across all segments. I mean, there are only 500 Fortune 500 clients. We do an awful lot in the middle market and the small commercial. Our strategy is to bring product solutions using the expertise that we have across all of our capabilities and package them and deliver them in a way where we're providing the real value of using Aon as your adviser, so you get that product expertise but delivered in a way where it's efficient and cost effective for them to be able to use our capabilities.

Christa Davies:

Yes. So what I would tell you is what we saw in 2022 was that interest rate stepped up in Q3 and Q4 of 2022. And so if interest rates stay where they are today, you'll see a similar impact to Q4 in Q1 and Q2. And so we would expect that increase in interest rates stay where they are. And then for modeling going forward, every 100 basis point increase in interest rates is approximately $65 million in fiduciary investment income. And there's no delay between interest rate increases and it impacting our fiduciary investment income.

Greg Case:

I just want to say thanks, everybody, for joining us today. We appreciate it and look forward to the next call.

Operator:

Good morning and thank you for holding. Welcome to the Aon plc's Third Quarter 2022 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 2022 results as well as having been posted on our Web site. Now it is my pleasure to turn the call over to Greg Case, CEO of Aon plc.

Christa Davies:

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered continued progress on our key financial metrics, both the quarter and year-to-date. For the first nine months of the year, we translated 7% organic revenue growth into 80 basis points of adjusted margin expansion and 14% growth in adjusted earnings per share, and generated over 2 billion in free cash flow. We look forward to building on this momentum as we head into the last quarter of 2022. As I reflect on our performance year-to-date, as Greg noted, organic revenue growth was 5% in the third quarter and 7% year-to-date. We continue to expect mid-single digit or greater organic revenue growth for the full year 2022 and over the long term. I would also note that flat [ph] reported revenue growth in Q3 and 3% year-to-date includes an unfavorable impact from changes in FX of 5% for Q3 and 4% year-to-date, primarily driven by a stronger U.S. dollar versus most currencies. And I’d highlight fiduciary investment income, which is not included in our organic revenue growth calculation, was $26 million in Q3 and $35 million year-to-date. Moving to operating performance. We delivered strong operational improvement through the first nine months of the year, with adjusted operating margins of 30%, an increase of 80 basis points driven by organic revenue growth and efficiencies from Aon Business Services, overcoming expense growth, including investment in colleagues and technology to drive long-term growth and some ongoing resumption of T&E. Looking forward, we expect to deliver margin expansion in 2022 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. And we expect continued investment in colleagues and ongoing resumption of T&A as well as ongoing investments in long-term growth like technology throughout the year. Aon Business Services is a key contributor to margin expansion and represents a competitive advantage, especially in a highly inflationary market. Our Aon Business Services platform continues to drive efficiency gains, improved quality and service and increased innovation at scale. Let me share one fantastic example of how Aon Business Services platform supports ongoing improvement, as we automate day-to-day processes around the firm. Reinsurance has operated on a single global broking platform and client service model since 2017. Over the past five years, the team has digitized processes, automated workflows and moved work to low cost locations. 64% of transactions are now processed digitally, increasing speed and accuracy, which has helped reduce the average number of days it takes to get claims from carriers paid to our clients by 22% from 38 to 30 days. Increase in capacity enabled 27% more throughput, while costs are up just 9% over five years, a particularly impressive outcome when considering recent costs and wage inflation trends. And the platform enables the team to provide enhanced services while dealing with more complex transactions, an Aon United outcome that allows our colleagues to better support each other and our clients. We continue to find and capture efficiency opportunities like this around the firm and expect Aon Business Services will continue to be a driver of ongoing efficiency improvements, quality and service improvements and increased innovation for clients. We translated strong operating income growth into double digit adjusted EPS growth of 16% in Q3 and 14% year-to-date. As noted in our earnings materials, FX translation was an unfavorable impact of approximately $0.05 per share in Q3 and $0.34 per share year-to-date. If currency to remain stable at today's rates, we would expect an unfavorable impact or approximately $0.11 per share or approximately $33 million decrease in operating income in the fourth quarter of 2022. Turning to free cash flow and capital allocation. Free cash flow increased 79% year-to-date to 2,051 million, reflecting an increase in cash flow from operations due primarily to the $1 billion termination fee payment in the prior year period. As we've communicated before, free cash flow can be lumpy quarter-to-quarter, and I’d note Q4 is our seasonally strongest for free cash flow generation. 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 2022 and beyond, we expect share repurchases to continue to remain our highest return on capital opportunity for capital allocation. We believe we are significantly undervalued in the market today, highlighted by the approximately 1.2 billion of share repurchases in the quarter and 2.5 billion year-to-date. We also expect to continue to invest organically and inorganically in content and capabilities to address unmet client needs. We've invested in expertise and content in our retirement business, where we're helping clients navigate regulatory changes such as GMP in the UK, and utilizing higher interest rates to drive record levels of pension risk transfers. Our M&A pipeline continuously 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 a return on capital balance 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. We issued 500 million of 10-year senior notes in Q3. And as we've said before, we'll continue to add debt as EBITDA grows while maintaining our current investment grade credit ratings. With respect to interest rates, I'd note that our term debt is all fixed rates, with a weighted average interest rate of approximately 3.8% and a weighted average maturity approximately 12 years. I'd also note that our pension liability improves as interest rates increase, and historically we've taken steps to derisk this liability and reduce volatility. In summary, our strong financial results in the quarter and year-to-date demonstrate continued momentum and progress against our key financial metrics. While we're seeing signs of economic uncertainty, we remain confident in the strength of our firm and our financial guidance for '22. Overall, our business is resilient and our Aon United strategy gives us confidence in our ability to deliver results in any economic scenario. With that, I’ll turn the call back over to the operator and we’d be delighted to take your questions.

Jimmy Bhullar:

Hi. Good morning. So first, I just had a question on the commercial risk business. Your organic growth slowed sequentially. Obviously, comps were more difficult as well. But you mentioned that Asia, Latin America and UK grew at a pretty strong pace and there was a slowdown in U.S. retail business because of lower transaction volumes. Can you sort of elaborate on that and what you're seeing in the U.S. business?

Eric Andersen:

Sure, Greg, and a great question. I would say, from an overall perspective, commercial risk in the U.S. had very solid new business numbers, very solid retention and rollover numbers, Greg, as you mentioned in your prepared remarks. And I would just say, look, on transaction services, we are serving the private equity industry and the corporate industry as they make acquisitions and divestitures. And so we -- during a period like this where it's a little bit slower, we are spending time with the markets, with the reinsurance markets, with the clients building out our strategy for when it ultimately comes back and feel like the team that we have today is fantastic. But they're also working very hard with their clients, making sure we've got the next generation or product ready when the economic environment changes.

Greg Case:

Maybe I'll start with the overall, and then Eric just pick up on the reinsurance front, in particular. Overall, as you highlighted, we look at market impact. That's how we think about it. Obviously, it includes insured values and price. We highlight modest impacts in the quarter and expect for the year. Over time, you can expect insured value will begin to creep up. That will actually have a sustained lasting impact over time. And we'll see how the pricing piece changes out. But overall market impact kind of modest as we think about the impact here. The reinsurance dynamic is important and is evolving. Eric, you want to pick up on that?

Greg Case:

And last thing I just want to highlight on this, Jimmy, before we leave this point, this is tremendous for us. This is where we live. There is more activity going on with a ton of capabilities that are unique in the world today. What our colleagues have built on the reinsurance side is extraordinary, and we've just added to it with data and analytics and all that we've done with our strategy and technology effort now added with psyche that I mentioned before. So Eric described the market perfectly, but boy, this is our wheelhouse. We love it. It creates tremendous opportunity to support clients, and we're bringing all the solutions to bear. And in many respects, helping our clients manage challenging times. And for us, it's a great opportunity for the next 12 to 24 months.

Operator:

Thank you. Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

Christa Davies:

Sure. Thanks for the question, Elyse. And look, what we would say as we think about this in terms of year-to-date, and year-to-date, we had a $35 million benefit from investment income. So it's about a 20 basis point impact on full year margins. And so it's not nearly as big as the numbers you highlighted, Elyse. And so for us, as we think about growing margin expansion for the full year, which we are completely committed to doing, it's really about continuing to drive organic revenue growth, the portfolio mix in higher revenue growth, higher margin areas, and the productivity benefits we're getting from Aon Business Services. And so we're fully on track to deliver full year margin expansion.

Christa Davies:

Yes. So first of all, Elyse, what I would say is we manage 6 billion of fiduciary investment income, and every 100 basis points of increase is 60 million top line and bottom line. But, Elyse, we're doing a lot of work for clients to actually manage that. We're actually doing all the insurance accounting and transaction processing in the middle on paying premiums on the way in and then paying claims on the way out. Just one correction, Elyse. The impact of fiduciary investment income in the quarter is 70 basis points, not 90.

Greg Case:

Yes, Elyse, if we take a step back, again, I just emphasize really look at the quarter overall for us sort of year-to-date, it seems to have been a tremendous job year-to-date, 7% overall, over 9% last year, really strength across the board. The M&A activity that we described and talked about was really Q3 and Q4, both levels of activity exceptionally strong. But it didn't -- hasn't changed in any way, shape, or form, as Christa described, exactly where we are now as we think about mid-single digit or greater for the year, margin expansion and double digit free cash flow growth. And I just would highlight Eric's points around the strength of our team, it's really extraordinary and what they've been able to do and how that's evolved over time. So they're exceptionally well positioned as the market comes back.

Operator:

Thank you. Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please proceed with your question.

Christa Davies:

Mike, I don't think you're missing anything. So free cash flow 2,051 million year-to-date, up 79%. Nothing particularly unusual. We did mention in Q1 and Q2 that we had lower levels of free cash flow because of higher incentive comp based on extraordinary performance in 2021. That's the only thing I would note. And then I would say, in general, we're going to continue to drive free cash flow growth double digits based on continued acceleration in revenue growth, margin expansion, and then working capital improvements. You did see, if you look at the external receivables divided by revenue on the balance sheet, that DSO improved by two days from Q3 '21 to Q3 '22. It went from 91 days down to 89 days. And so we're very pleased with our continued progress in working capital.

Christa Davies:

Yes. So what we have said, Mike, is that we have essentially 500 million of excess receivables sitting on our balance sheet. And that over time, we will continue to improve DSO to get that 500 million to zero. And so that is a big upside in free cash flow growth over the coming years.

Eric Andersen:

Sure. This is Eric. Maybe I'll take a shot at it. So on the cyber market we continue to see great growth in the business. And I would say what has changed if anything over the last several months is really the renewed focus on quality underwriting. And so if you remember at the very beginning of that product, it was all about risk management, risk identification, risk management, and then risk transfer. I think what happened to the market is they went immediately to risk transfer without enough focus on the quality of the risk mitigation and the risk management. As the market has reacted due to losses, they essentially went back to basics. And I think ultimately the market will be healthier for it. So we continue to see great growth. We invest globally in our capability there and really like our position and the work that we're doing for clients. I would say in intellectual property, very similar. I couldn't be more excited about where we are with that. Continue to see great deal flow, getting markets to join the product. We actually did our first IP reinsurance treaty this quarter. Certainly not big dollars, but a real symbol on how we're bringing a broader market to bear on supporting that product as it develops. So really excited about both of them and think we've got a great lead in the market with our capability. And we're going to continue to invest and push to develop those markets in a broader way.

Michael Zaremski:

Thank you. Best of luck.

David Motemaden:

Hi. Thanks. Good morning. I just had a question on the Wealth Business. Just on the AUM, the AUM base delegated investment management that was cited as a headwind. Could you give us an idea of how much the AUM base was down and how we should think about that going forward as markets remain under pressure?

Eric Andersen:

No, because I think you've covered all of it. We're just really excited about watching the retirement business in particular, really add great value to our clients. The UK, certainly some great activity going on there and the U.S. as well. But that PEP product, which is the pooled employer plan, really is a great expense solution for our smaller clients as they look to manage the retirement assets. So you've covered it well, and really a solid quarter for them.

Greg Case:

David, as we described, listen, if we would step back, really tremendous progress across the board. And if you think about sort of what's happening on the commercial restaurant we highlighted, but really it's an opportunity where we see over time that’s going to be tremendous on the transaction solution side. But overall, really strong across the board and just continues to build momentum as we described before.

Operator:

Thank you. Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.

Eric Andersen:

So if you think about -- I'm assuming you're talking about property cat at this point [indiscernible] basis on the reinsurance which people don't tend to talk about, but is a substantial part of the industry. They're continuing to battle their own inflation understanding as they price long tail products. I do think that market is much -- while it's challenged, it is more around pricing structure, not about supply. So listen, I think as property cat in the U.S. continues to be challenged for a couple of reasons. One, you've got significant losses both on the traditional things like hurricane, but also as you think about wildfire or storms, the secondary perils have been a substantial hit to reinsurers over the last five years. So there is certainly a crisis of confidence in underwriting and how they deploy their capital for our clients. And so models have to be better. We really have to focus hard on making sure risk identification. They understand exactly what they're offering and what the sort of return scenarios are for them over time. The effects of interest rates really affect the ILS market, which has two -- I would say two headwinds right now. One is there's some trapped capital with Ian as people are trying to figure out exactly where the losses are, what the damage is. And there's also the relative investment question of as interest rates go up, their ability to find other assets that don't risk their capital is something that essentially just creates a repricing I think at the ILS market, which is happening. And so for us, I think it doesn't necessarily create work. It creates understanding of the market dynamics and the returns. But we're in the middle of that right now as we lead up to the big 1/1 renewal season and then again in April and July.

Meyer Shields:

No, that's very helpful. I understand that. Thanks. And then I guess a question for Christa maybe. So you talked about how there's more pension risk transfer going on. You also mentioned how higher interest rates benefit Aon’s pension funding. And I'm wondering, I understand that there's more willingness to take pension liabilities from people in a higher interest rate environment, but wouldn't there be less demand for transfer if interest rates are higher?

Meyer Shields:

Okay, phenomenal. Thank you so much.

Joshua Shanker:

Yes. Thank you for getting me in at the end here. You spoke in the prepared remarks about higher expenses from T&E resumption, both as a consultant and protector of the risk of your clients as well as internally. Can you talk about the shape that's happening? Where we are relative to where we were two and a half years ago? And if we go into recession, whether we're topping out here on T&E and whatnot?

Eric Andersen:

Yes, Christa, I think that's great. And I think it drives productivity of our colleagues, it drives engagement, as you said, really being able to use the technology that we've been investing in through our Aon Business Services model over a number of years. And just there's something that happened a week or two ago, just came to mind, as you were talking, Christa. We do these insight series across the world with our clients. And normally, historically, we would have flown everybody in from around the world. And this one happened to be in Australia. So it would have been a week of time for the team basically off the grid as they went to present an hour slot for whatever topic they were asking for. And so on this one in particular, we had our climate team, which is based in London that's been working on building the climate strategy for us. Essentially WebEx into the insight series meeting did the question-and-answer, actually gave a great presentation. And then when they were finished, they were home. And they were back on to the next topic and continuing to work. So we were able to bring that capability without the big expense of travel and entertainment. We were able to deliver the capability and we gained the hours that we would have lost to the flights and the jetlag and everything else that we all know about in a way that drives more productivity. So that's just one example. There are many of them that follow the similar path. We just did a big renewal meeting, for example, for a big U.S. client where we used the immersion room in our New York office and brought in the European insurers and reinsurers and the London European insurers and reinsurers and essentially did what would have been a three-week trip, turned it into a five-hour session in one location. And so again, saves time, saves money. But more importantly, the clients are finding value in it. They actually feel like they're getting that connection with the markets that they want. And our colleagues -- it absolutely allows us to show off our global colleagues in a way that you don't really get to do when you're traveling place to place and so focused on schedule. So we're really excited about it. And as Christa said, it's driving engagement and more importantly productivity. And I think the clients are really enjoying the time they get back as well.

Eric Andersen:

So I would say our Human Capital Business spends a lot of time working with our clients on how to do smart working. And so I think as we come -- the pandemic is further and further in the rearview mirror, people are finding their new normal and our teams are doing I think a great job helping them structure and engage with our clients in a way that they're able to do the same thing, because our clients are also looking to get productivity. They're also looking to manage D&E [ph]. And they want to leverage the technology that we all use so much during the pandemic in ways that actually create the outcomes that they're looking for.

Joshua Shanker:

Thank you very much.

Greg Case:

Just want to say thanks to everybody for joining us. We appreciate it and look forward to talking next quarter. Thanks very much.

Operator:

Good morning, and thank you for holding. Welcome to Aon plc's Second Quarter 2022 Conference Call. [Operator Instructions] 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 second quarter 2022 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. Thank you, sir. You may begin.

Christa Davies:

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered continued progress in both the quarter and year-to-date. Through the first half of the year, we translated 8% organic revenue growth into 50 basis points of adjusted margin expansion and double-digit adjusted earnings per share growth. We look forward to building on this momentum through the rest of 2022, as I reflect on our performance through the first half of the year. As Greg noted, organic revenue growth was 8% in both Q2 and year-to-date. We continue to expect mid-single digit or greater organic revenue growth for full year 2022 and over the long term. I would also note that reported revenue growth of 3% in Q2 and 4% year-to-date includes an unfavorable impact from changes in FX, primarily driven by a stronger U.S. dollar versus most currencies and fiduciary investment income of $7 million in Q2 and $9 million year-to-date. Further, I note we are uniquely well positioned with respect to current economic conditions. Inflation increases insured values, which has a positive impact on our business, and we've continued to see modest tailwinds from insurance pricing, which remains strong. Interest rate increases benefit costs through fiduciary investment income and reduced pension liabilities. Broadly, as Greg mentioned, volatility makes the solutions and advice we offer around risk and people even more valuable to our clients, for instance, in areas like workforce resilience and pension derisking. Moving to operating performance. We delivered strong operational improvement through the first half of the year, with adjusted operating margins of 32.7%, an increase of 50 basis points, driven by organic revenue growth and efficiencies from our Aon Business Services platform; overcoming expense growth, which includes investment in colleagues, technology to drive long-term growth and some ongoing resumption of T&E. Looking forward, we expect to deliver margin expansion in 2022 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 the full year. And we expect continued investment in colleagues and ongoing reduction of T&E throughout the year. Our Aon Business Services platform continues to be a key contributor to margin expansion and represents a competitive advantage, especially in a high inflationary markets. While our Aon Business Services platform continues to enhance our ability to scale innovation and unlock growth opportunities, it also supports continuous improvement as we automate day-to-day processes around the firm. For instance, our Aon Business Services and commercial risk teams saw automation opportunities specific to insurance. We're now using automation to locate, extract and validate the data, rather than manually pulling it from e-mails and attachments. Over the years, this will save our North American team 83,000 work hours, representing a 30% reduction in total time spent processing service requests with certificates of insurance before further enhancements. We're delivering high-quality client service and enabling our colleagues to spend more time on higher value-added activities and improving colleague engagement. Our Aon Business Services platform enables us to find and capture efficiency opportunities like this around the firm and remains a key driver of ongoing efficiency improvements and margin expansion. We translated strong adjusted operating income growth into double-digit adjusted EPS growth of 15% in Q2 and 14% year-to-date. As noted in our earnings materials, FX translation was an unfavorable impact of approximately $0.10 per share in Q2 and $0.29 per share year-to-date. It's considered remain stable at today's rates, we'd expect an unfavorable impact of approximately $0.11 per share in the second half or approximately $0.04 in Q3 and $0.07 in Q4 of 2022. Turning to free cash flow and capital allocation. Free cash flow decreased 17% year-to-date to $1,063 million, primarily driven by higher receivables as well as higher incentive compensation payments given our strong 2021 financial results as we described in Q1, offset by strong operating income growth. 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 2022. Looking forward, we continue to expect to drive free cash flow growth over the long term, driven by operating income growth and working capital improvement. Given our strong outlook for free cash flow growth in 2022 and beyond, we expect share repurchase to continue to remain our highest return on capital opportunity for capital allocation. We believe we are significantly undervalued in the market today, highlighted by approximately $500 million of share repurchase in the quarter and $1.3 billion year-to-date. We can also expect to continue to invest organically and inorganically in content and capabilities to address unmet client needs. Our M&A pipeline continues to be focused on our priority areas that will bring scalable solution 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'll continue to add debt as EBITDA grows, while maintaining our current investment-grade credit ratings. Thinking about interest rates. I'd note that our term debt is all fixed rate with an average interest rate of approximately 3.8% and a weighted average maturity of approximately 12 years. I'd also note that our pension liability improves as interest rate increase. And historically, we've taken steps to derisk this liability and reduce volatility. In summary, our strong financial results in the quarter and year-to-date demonstrate continued momentum and progress against our key financial metrics. While we're seeing signs of economic uncertainty, we remain confident in the strength of our firm and our financial guidance for 2022. Overall, our business is resilient, and our Aon United strategy gives us confidence in our ability to deliver results in any economic scenario. With that, I'll turn the call back over to the operator, and we'd be delighted to take your questions.

Elyse Greenspan:

Last quarter on your conference call, you guys had alluded to, if you go into a recession, there could be an impact on the discretionary pieces of your business, which I believe is around 20% of your revenue. I was just hoping for you guys to expand just upon, if we do go into recession later this year or '23, how that could impact revenue in Aon. And I'm assuming like right now, given the growth you saw in the quarter, you're not seeing any signs of a slowdown just yet.

Eric Andersen:

Sure, Greg. I would say, look, Elyse, it's a great question. And areas of growing risks, like climate change, geopolitical uncertainty, all have a major impact, changing regulation on areas like wealth the focus on workforce resilience, well-being, challenging talent market, you go on and on, health care costs, all issues that our clients are facing irrespective of broader economic conditions. I would also say, the Aon United model that we've built is actually built for moments like this, where our teams are integrating together trying to come up with innovative solutions for clients in a way that pulls all the different capabilities of the firm and can deliver it in one unified fashion. So we think the world isn't getting any less risky. And so the opportunity is there for us to continue to grow our business.

Elyse Greenspan:

That's helpful. And then my second question, Christa, in your prepared remarks, you talked about the slowdown in free cash flow to start the year and mentioned like receivables as part of the reason. So as you think about the back half of the year, do you think cash flow is going to be strong enough that you'll hit the double-digit target this year? I think right decided it's still double-digit growth for 2022.

Elyse Greenspan:

Great. And one last quick following thing. The other income line, you did see gains a couple of quarters in a row in some business sales. Should we model that going forward? I know in the past, you told us just to assume kind of 0 for that line on an ongoing basis.

Operator:

Our next question comes from the line of Jimmy Bhullar with JPMorgan.

Christa Davies:

Thank you so much for the question. We absolutely agree that we are focused and committed to expanding margins for the full year 2022. We don't give margin guidance right here. We've certainly seen very strong 50 basis points of margin expansion in the first half of the year, and we expect to see full year margin expansion, driven by organic revenue growth; our portfolio mix shift to higher revenue growth, higher-margin areas; and our continued productivity benefits through Aon Business Services, which I mentioned specifically in our prepared remarks. So again, completely committed to full year 2022 margin expansion.

Christa Davies:

Yes. So as I mentioned in my prepared remarks, every 100 basis point increase in interest rates, and this is the short end of the curve, is $60 million top line and bottom line for us. I note that our assets in terms of investments on behalf of plans are about 55% in the U.S. and 45% outside the U.S. Our fiducial investment income for Q2 was $9 million. And so it is increasing as interest rates rise.

Paul Newsome:

I wanted to follow up on Elyse's question about the economic sensitivity. And maybe you could just kind of remind us in contrast with sort of the Aon of today versus the end of past recessions, if we look back. And why would the business mix be -- why is it materially different? And how should we think about sort of the relative sensitivity today versus not? So any sort of magnitude that would be very helpful. And then kind of as a follow-up, as we think further into M&A, does the M&A strategy change in any way because of the recession or the desire to change your economic sensitivity?

Christa Davies:

Thanks so much, Greg. And Paul, what I would add is if you go back to 2008 to 2010, that was really the worst economic environment you could design for a company like Aon. It was a global economic recession without inflation and without interest rates, which is pretty unusual. And during 2008 to 2010, Aon grew organically over those two years, our reported revenue grew 6% CAGR over those two years. We expanded margins by 250 basis points, and we grew free cash flow very strongly. And we would say in this environment, there are 3 things that make us stronger than that performance. The first is inflation, which has a positive impact on our revenue, as I described, increasing asset values, employment levels, revenue, et cetera. The second is interest rates, which has a positive impact on fiduciary investment income, as I mentioned, $60 million top line and bottom line for a 100 basis point increase in interest rates. And the third, as Greg highlighted, is our investments -- and Eric highlighted, is our investment in Aon United, which allows us to bring together capability to serve clients who, in times of volatility, need us more, whether that's workforce resilience, pension derisking, supply chain, climate, a number of different areas. So we feel very good about our ability to navigate through, which is why we're reiterating the guidance we have for full year 2022 and beyond, with single-digit organic revenue growth, margin expansion for the full year and double-digit free cash flow growth.

Eric Andersen:

Christa, would you like to…

Eric Andersen:

Sure, Christa. And maybe I'll just touch on the Tyche platform that we acquired just as a way to tie some of these pieces together. And for those that remember, Tyche was really about enhancing the capability around capital modeling that we do around reserving and pricing, predominantly for the life and non-life business on the reinsurance side. But ultimately, where we see it going over time is how we extend the platform beyond insurers to corporate clients as many of these large corporates with big balance sheets are looking to optimize their own risk strategies across insurance, captive, self-insurance, etcetera and need better information to be able to do it. So the ability to add that team and that talent to be able to provide that existing impact to our insurance clients from reinsurance angle, but then use that capability across the broader firm is one of the areas of why we were so interested in Tyche. And it's also just worth saying that once you acquire an asset like that, getting them involved in the Aon United mindset, how we actually integrate them and leverage their capabilities across a broader firm has been what we've been working on over the last couple of months and I think just build confidence in our ability to use that kind of capability across the broader firm.

David Motemaden:

Christa, last quarter, you made some commentary around the discretionary parts of your business. I was just wondering if you can talk about what you're seeing in terms of leading indicators of demand on those discretionary businesses, specifically in the second quarter?

David Motemaden:

Got it. Okay. That's helpful. And Greg, last question I'd ask -- or last quarter, I had asked a question around just new headcount, and you spoke more about focusing on productivity. And I think on this call, Christa, you made some interesting comments on just how Aon Business Services is helping enhance productivity. So I'm wondering if you could just help me think about -- are there any metrics you look at internally just on producer productivity? And maybe you can just share how much those have increased over the last several years and sort of the outlook going forward, just on producer productivity.

Eric Andersen:

Thanks, Greg. It's a great question and one that's really important to us and we spend a lot of time on. And we have been making investments, which are really exciting. I would say they come in like 3 buckets. The first is we're investing in client leadership, especially people who have industry focus and deep understanding of client-specific challenges. We're also investing organically in some of the areas we've been talking about, like climate, cyber, IP, analytics, all the areas where we think we can add real value to clients and need expertise to be able to provide that value. And then the third, and we talked a little bit about it with Tyche, but CoverWallet, the same through M&A, we're bringing in expertise not only from a people perspective but a technology perspective as well. And then critical to, I think, Greg, just picking up on your last point, making sure that we embed that talent in the firm, so that the broader firm can use it and leverage it with their clients, using that Aon United model to get that talent across all types of clients around the world is critical, but really focused on making sure we've got the best talent in the industry. And I think we're making great progress.

Christa Davies:

Yes. Look, a really important part of our talent strategy is Aon Business Services. As you've heard us say before, it's not just driving efficiency but enabling us to increase growth and scale innovation much faster. And for the power of Aon Business Services will enable to drive efficiency in our core operations, which helps offset the trends we see around wage inflation, enabling us to continue to invest in talent and people, which drive long-term margin expansion. So we're really excited about Aon Business Services, helps us accelerate Aon United.

Meyer Shields:

Study aside, I guess, the Symantec game right now. I don't mean you, I mean, politically. We've gone through 2 quarters of contracting real GDP growth. Can you talk about how that impacted your first half results relative to expectations?

Christa Davies:

Yes. So look, I would start with, we've seen really strong revenue growth, 8% in Q1, 8% in Q2, 8% year-to-date. And we continue to reiterate guidance for the full year exactly as we did at the beginning of the year, mid-single digital, greater organic revenue growth, margin expand for the full year and double-digit free cash flow growth. So we're seeing opportunities, Meyer, whether it's installation, which positively impacts our revenue in driving up asset values, driving up employment levels, driving up corporate revenues; whether it's interest rates, which obviously positively impact, both on the revenue side in terms of fiduciary investment income; or whether it's volatility and clients needing us more on the supply chain, workforce resilience, pension derisking in times of increased volatility. But Greg, what would you say?