AON Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 14 speakers on the call.

Operator

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. 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.

Operator

Information concerning risk factors that could cause such differences are described in the press release covering our Q2 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, Aon Plc.

Speaker 1

Thanks, Rob, and good morning, everyone. Welcome to our Q2 conference call. I'm joined by Christa Davies, our CFO and Eric Anderson, our President. As in previous quarters, for your reference, we posted a detailed financial presentation on our website. Participants are in the line with our expectations.

Speaker 2

We are pleased to report

Speaker 1

that our global team delivered another strong quarter of performance, results and momentum. And we begin the call today by thanking our colleagues for everything they do to help our clients address immediate and long term demands around the risk in people. Aon United, delivered by our colleagues, gives us the ability to meet this demand participants are now almost universal agreement that client demand to address risk in human capital has never been greater. For example, Our catastrophe insight report estimated global economic losses from natural disasters in the first half of twenty twenty three were 194,000,000,000 participants are currently in the range of $128,000,000,000 and 5th highest on record. Even more profound, in addition to economic costs, participants are in the process of having a very strong financial position.

Speaker 1

We are very pleased with the results of the Q2 2020 3 Conference Call.

Speaker 2

At this time, all participants are in the process of the high value and building resiliency and

Speaker 1

protection in advance of disaster. Participants are in the position of the Parametric Insurance Program for the government of Puerto Rico. It's the single largest program of its kind that the U. S. Commonwealth has ever placed.

Speaker 1

This program was designed by our reinsurance and commercial risk teams. And in the event of a sizable earthquake or hurricane, Puerto Rico will quickly receive liquidity, enabling its government to focus on rapid recovery and reconstruction. This placement results of Aon's data, analytics and capabilities from across our firm, cemented by our deep understanding of public entity demand, risk capital and reinsurance markets participants are in the range of 2nd quarter. Turning to financial performance. In the Q2, we delivered strong organic revenue growth across our solution line, including 10% growth in Health Solutions and 9% growth in Reinsurance Solutions, contributing to 6% overall organic growth in the quarter and 7% in the first half.

Speaker 1

Participants are in Health Solutions. Organic revenue growth of 10% on top of 11% last year was driven by strength in the core.

Speaker 2

Participants are in

Speaker 1

the position of our business. Our team has done terrific work, helping clients navigate the demands of their talent agendas, balancing optimal benefits for their people with inflationary cost pressures, participants are also taking steps to deliver on their people strategy at a time when bringing total rewards, health and wealth benefits together as human capital are more important than ever. In Reinsurance Solutions, our team delivered another very strong quarter at 9% organic growth on top of 9% last year, Driven by strong net new business generation, our teams continue to help clients navigate a challenging and complex market and are already preparing data, analytics and insight As we help our clients understand and address ongoing volatility and capital considerations, we're also seeing capital come into the market, particularly in cat bonds, participants are in the range of $5,000,000,000 across 21 deals year to date. In Wealth Solutions, we delivered 2% organic growth Driven by ongoing trends in demand we've seen in project work around market volatility and regulatory changes, as well as the ongoing trend of pension derisking, which we expect to continue in the quarters coming ahead given the market conditions. We continue to see opportunity to help clients react prepared for regulatory changes and market volatility with our data analytics and expertise.

Speaker 1

And finally, Commercial Rest Solutions delivered 5% organic growth in the quarter. Globally, we saw strong growth across most major geographies with double digit growth in Asia and the Pacific. In the U. S, we saw strength in core retail brokerage, including from property for participants are in the back half of the year given ongoing external conditions. Overall, in the quarter, our strong performance was driven by the strength of our Aon United strategy and Aon Business Services platform.

Speaker 1

In Q2, we translated 6% organic revenue growth participants are now in the range of $1,000,000,000 in the quarter. These results contributed to first half financial performance of 7% organic revenue growth and 90 basis points of adjusted operating margin expansion. Participants are well positioned to maintain this momentum and to deliver on our ongoing financial guidance of mid single digit or greater organic revenue growth, margin expansion and double digit free cash flow growth for 2023 and the long term. This financial performance is ultimately the product of our ability to address client needs through Aon United. And this strength is foundational in supporting our ability to evolve in response to changing client demand, fully demonstrated by our move to risk capital and human capital.

Speaker 1

This focus is bringing our 4 solution lines more closely together to better address client needs And is already yielding meaningful client impact. Take human capital. Our clients are changing how they're thinking about their colleagues. Participants are facing an increasingly complex external environment with pressures around cost, growth, remote and hybrid work and workforce composition. Participants are in their own internal environment, their people strategies are increasingly complex, considering traditional total rewards and health benefits and newer additions around future skills and well-being.

Speaker 1

Our connectivity across health, wealth and talent enables us to bring data, analytics and solutions to address this need. Participants are in one great example, our team developed a diagnostic tool for clients that produces a human sustainability index or HSI. This tool combines individual and team assessments with peer data and analytics based benchmarking to enable our clients to directly connect people strategy goals execution. The measurable results encompassing 8 wellness pathways such as physical, emotional and financial aspects supports individuals and teams participants are ready to discuss exactly what's working and for whom along key metrics so our clients can adjust or change their tactics to drive their people strategy and ultimately participants are in the same position. In many respects, this work represents bringing next level data science into talent development and leadership.

Speaker 1

Participants are in the line with the HSI solution. The HSI solution identifies gaps in what our clients offer to their people, encompassing health, wealth, rewards and other wellness programs. And it provides a trackable plan to strengthen the company's talent strategy on their most significant often external commitments at a time when these commitments are more important than ever. Participants are in the range of $1,000,000,000. In summary, our strong performance is a direct result of our ability to help clients better understand their challenges and opportunities participants are ready to take actions that protect their business and improve their performance.

Speaker 1

Further, our recently announced enhanced focus on risk capital and human capital is already driving benefits and strengthening this capability. Our strong year to date financial results, including 7% organic revenue growth and 90 basis points of margin expansion now would like to turn the call over to Christa for her thoughts on our financial results and long term outlook for continued shareholder value creation. Christa?

Speaker 2

Participants are ready to take questions. Thanks so much, Greg, and

Speaker 3

good morning, everyone. As Greg highlighted, we continued delivering on our key financial metrics both in the quarter year to date. Through the first half, we translated 7% organic revenue growth into 90 basis points of adjusted operating margin expansion. Participants are ready to take questions.

Speaker 2

These results position us

Speaker 3

very well to continue to drive results in 2023 and over the long term, and we look forward to building on this momentum. Participants are in the range of $1,000,000,000. 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% participants are in Q2 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.

Speaker 3

Participants are in the range of $1,000,000 in Q2 $116,000,000 year to date participants are in the range of 2% of total revenue in both periods. Moving to operating performance. We delivered strong operational improvement With adjusted operating margins of 33.6 percent in the first half, an increase of 90 basis points, driven by revenue growth participants are in the range of $1,000,000 and $1,000,000,000 overcoming expense growth, including investments in colleagues and technology to drive long term growth. Participants are in the line with our expectations. Looking forward, we expect to deliver sustainable margin expansion in 2023 and over the long term as we continue our track record participants are in line with our expectations.

Speaker 3

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. Participants. In response to client demand and the opportunity, we're evolving from an organization that drives efficiency, operating leverage and margin expansion participants are now ready to introduce our customers to the 1 that's also increasingly driving improved client service delivery and accelerating innovation at scale. Participants are ready to take questions. This evolution of Aon Business Services requires investment in 3 areas, which we expect to manage in line with our ongoing financial guidance participants are in line with our expectations.

Speaker 2

Participants are participating in the process

Speaker 3

of expanding our platform. We are digitizing and connecting existing platforms and creating an ecosystem that encompasses technology and operations participants are ready

Speaker 2

to take questions.

Speaker 3

2nd, standardized operations. Participants are in the process of providing a clear understanding of our business. We see opportunities to continue to bring operations and expertise together across our firm participants are ready to support clients across all solution lines. Bringing people and process together drives further efficiency enables us to scale best practices. Participants are in the same store.

Speaker 3

We see significant opportunity to deliver new data driven products, participants are in the range of $1,000,000 which we can then effectively develop and scale. The work we've done to standardize platforms and operations enables us to rapidly develop, participants deliver and scale innovative solutions across the portfolio in response to client demand and to deliver content and capability to all clients, participants are participating in the process of providing value to our shareholders. Even more importantly, operating Aon Business Services as one organization participants with disciplined prioritization and governance around initiatives ensures we can move quickly on opportunities that create value for our clients and colleagues, participants are participating in the call to discuss our Q2 2020 conference call. Such as the one we see on AI. Just as a few examples, we see real opportunity here to enhance colleague productivity participants are ready to take questions.

Speaker 2

By leveraging the services of

Speaker 3

our technology partners in a protected environment to enhance existing offerings like our human capital assistance,

Speaker 2

participants are in the process of evaluating our risk framework for our clients

Speaker 3

and finally, to create complementary datasets to enhance our risk analytics like the catastrophe modeling. We translated strong adjusted operating income growth participants are in the range of $2,000,000,000 in Q2 and 6% year to date. As noted in our earnings materials, FX translation was an unfavorable impact participants are in the range 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 3rd quarter and a favorable impact of $0.05 per share in the 4th quarter participants are in the range of $0.14 per share for full year 2023. I'd also note participants are in the range of $0.25 per share or 10% unfavorable impact in Q2 participants are in the range of $0.44 per share or 6% unfavorable impact year to date.

Speaker 3

This reflects an unfavorable impact from increase in non cash net periodic pension expense, as well as a gain on sale of businesses in the prior year period and balance sheet effects remeasurement in the current period.

Speaker 2

Participants are now ready to take questions.

Speaker 3

Turning to free cash flow and capital allocation. Cash from operations was flat year over year and free cash flow decreased 7% to $986,000,000 primarily driven by a $77,000,000 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. Participants are in the range of $1,000,000,000 in the Q1 of 2019. We continue to expect to deliver double digit free cash flow growth for the full year.

Speaker 3

CapEx was elevated in the first half of the year compared to for 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, participants are ready to take questions. Like the investments we're making to evolve Aon Business Services, I'd note CapEx could be lumpy quarter to quarter. Participants are ready to take questions. We expect CapEx to moderate in the back half of the year and now expect an investment of $220,000,000 to $215,000,000 in CapEx in 2023. Participants are in the line with our expectations.

Speaker 2

As we've said before, we manage CapEx

Speaker 3

like all of our investments on a disciplined ROIC basis. Participants are in the range of $1,000,000,000 Our outlook

Speaker 2

for free cash flow growth in 2023 and beyond remains

Speaker 3

strong, and we continue to expect to deliver double digit free cash flow growth for the full year for cash flow growth in 2023 and beyond, we expect share repurchase to continue to remain our highest return on capital opportunity for capital allocation. Participants are in the market today, highlighted by approximately 1,100,000,000 of share repurchase year to date. Participants are in the position of our customers. We also expect to continue to invest organically and inorganically in content and capability that we can scale to address unmet client needs. Participants are in the range of $1,000,000,000.

Speaker 3

Our M and A pipeline continues to be focused on our highest priority areas that will bring scalable solutions to our clients' growing and evolving challenges. Participants will continue to actively manage the portfolio and assess all capital allocation decisions on an ROIC basis. Participants are now ready to take questions. Now turning to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet and manage liquidity risk participants are well laddered debt maturity profile.

Speaker 3

As we've said before, we expect to add incremental debt as EBITDA grows over the long term, participants are participating in the process of providing a strong investment

Speaker 2

grade credit profile.

Speaker 3

I'd note our term debt is all fixed rate participants are in line with an average weighted interest rate of approximately 4% and an average weighted maturity of approximately 11 years. Participants are in the range of $1,000,000,000 in the quarter year to date reflect strong operational performance driven by our Aon United strategy participants are participating in the process of executing on our key financial metrics participants are ready to take questions.

Operator

Participants are ready to take questions.

Speaker 2

Participants are ready to

Operator

take questions. Thank you. And our first question comes from the line of Charlie Lederer with Citi. Please proceed with your questions.

Speaker 4

Hey, thanks. Good morning. You mentioned continued headwinds in M and A Services in the back half for 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 participants are in the line with the Q2 2020

Speaker 2

conference call.

Speaker 1

What's driving that? Really appreciate the question, Charlie. I'll just start overall, just commercial fundamentals generally, obviously that's part of the real question. Very strong retention, very strong new business, exceptional with a lot of strength around geographies around and at core P and C. It really is this one area and M and A services, which is a particular strength of ours.

Speaker 1

But as you know, deals deal count and volume is down 30% to 40%. Participants are in the first half of the year. We expect to see it in the second half of the year. As that comes back, we will come back with an absolute vengeance, just given our overall position. But Eric, anything else you'd add to that?

Speaker 5

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, participants will be situated to lead that market as we do today.

Speaker 3

And Charlie, I would just say that while we've lapped participants The downturn, we do expect the pressure to continue in the second half as the external outlook has continued to be soft.

Speaker 2

Participants are in the line with us.

Speaker 4

Got it. Thanks. And then I'm wondering if you can comment on the momentum in your IP business, intellectual property. For how meaningful is that to organic revenue growth? And there have been some articles in the press about it recently.

Speaker 4

So just trying to understand how you see that business Affecting second half results, if at all.

Speaker 1

Love this question, Charlie. Really appreciate you raising it. We love this business. It is a phenomenal it's been a phenomenal opportunity for us. You think about intellectual property overall, this is just hugely significant.

Speaker 1

This is representative. We talked before 85% of the value of the S and P 500 It's really tied back to intangible assets. And if you go back to 2016, we started with an amazing investment bringing in 601 West to Aon, its 20, 25 colleagues. We've now invested in hundreds of colleagues with a truly unique market leading platform to really help understand this opportunity and these risks participants are in the value of these assets. And we built a marketplace with so many insurers, 26, almost 30 insurers sort of in the marketplace, $2,000,000,000 in aggregate insured transaction value.

Speaker 1

And by the way, demand is stronger than ever. And we're evolving the market And there are always so many different third parties out in the marketplace and different things that affect that. But we love the position, we love the progress we've made and we participants feel stronger than ever about the future opportunity. Eric, anything else you'd add?

Speaker 5

Yes. Maybe 2 things, Greg. 1, 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.

Speaker 5

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 letters of credit to backstop the capital participants are using the 3rd parties, but it does provide the kind of capital that we need, that the clients need to deploy to gain reinsurance capital that they're looking participants are in the range of $1,000,000 So it's just one of the ways that we match risk of capital together on behalf of our clients.

Speaker 2

Participants are ready for

Operator

questions. Our next question is from the line of Mike Zaremski with BMO Capital Markets. Please proceed with your questions.

Speaker 6

Hey, thanks. Good morning. I guess back to the organic growth environment. Participants are in the Q2. Just curious, you mentioned some headwinds on the M and A side, probably some tailwinds too, which we can see.

Speaker 6

But what do you say, you were clear too about 5% or greater is still the outlook. But would you say growth participants are in the back half of the year. It's kind of steady or accelerating or decelerating or any trends you'd like to point out participants in any of your businesses in terms of momentum or tailwinds other than the M and A call out that we should be considering into the back half of the year?

Speaker 1

Yes. Literally, I love this question. If you step back and think about sort of the growth platform and how it's evolved, first, just for context, we put all participants We think about growth and really all the benchmark objectives over the course of the year. So if you think about it, for us, growth is organic revenue and growth is by the way margin improvement and growth is absolutely translation into free cash flow. And we would say, if you think about this performance in Q2 and really the first half, it's really reinforced our confidence and You see momentum around meeting our full year 2023 objectives.

Speaker 1

So this is mid single digit or greater across the board. Look at the strengths in health, which were exceptional for the first half and certainly for the quarter in reinsurance and other areas too, even in commercial risk with the headwind that we just highlighted. So very strong on the solution line side. And then you also saw exceptional movement on margin expansion. When you think about the growth here too, 110 basis points for the Q and 90 basis points for the first half.

Speaker 1

And most important, you heard Christa reemphasize double digit free cash flow growth for the year. So for us, we see this trend continuing in terms of where we are, And there's a lot that goes behind that. Maybe, Eric, additional context around that foundation and what's driving that.

Speaker 5

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 two 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,

Speaker 2

participants are in the same position. I think as the world gets

Speaker 5

more complicated. And so our strategy of evolving to risk capital and human capital, I think, uniquely positions us to take advantage of that for capital to drive growth I'm sorry, take advantage 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 participants will be able to help clients transfer the risk that they want to transfer and also create more dynamic markets.

Speaker 5

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 or 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. Participants are 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.

Speaker 5

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 relationships 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?

Speaker 3

Well, I mean, Mike, you also did just ask about second half outlook. And we would say year to date growth of 7%. Participants are on track for our full year guidance, mid single digit or greater organic revenue growth, margin expansion and double digit free cash flow growth. And so we're really excited about the momentum in the first half and that continuing into the second half. And I think just each quarter, we have different seasonality of revenue, but we really do think about it over the course of a full year.

Speaker 3

And so mid single digit or greater organic revenue growth for the full year. Great.

Speaker 6

And my quick follow-up is curious on the expense efficiency side. A number of competitors have participants have 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 for the quarter was a little bit different. And there's different nuances to each company's strategy, but it feels like some of them are taking off of the 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 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.

Speaker 3

Look, we do actually, Mike. So thank you for the question. Participants. Look, we are on the next evolution of Aon Business Services. And as I mentioned in my opening remarks, expanding from just driving efficiency participants are ready to take questions.

Speaker 3

To really improve customer service delivery and innovation at scale, helping us accelerate growth. And so as we think about margins, We think about margins again over the course of the full year sustainably and over the long term. And year to date, we saw 90 basis points of margin expansion particularly you saw an increased investment in IT 13% year to date and the majority of this is around our core business platforms to help clients and support revenue growth. And you saw CapEx up as well, again, driving long term margin expansion through the continued investments around standardized Congratulations, standardized platforms and innovation at scale, which we are really excited about, in Aon Business Services.

Speaker 5

Hey, Christa, maybe one comment. Yes. Yes. One comment on it because I know the question was on efficiency, but participants are in the range of $1,000,000,000. 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.

Speaker 5

All How all of that comes together is part of the EBS 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 with.

Speaker 1

Just to remind you, Mike, we brought in we've been working on this since 2017, actually prior to that by 2017. We have literally with the leadership under Christa, our new CEO and others have brought, maybe, a tremendous are not of capability to bear. And now we're on kind of the next wave building on a very, very strong platform that we pulled together. So it's for us, we're very excited about this for For both the efficiency reasons that Christa described very well and the effectiveness outcomes that Eric described, and that really is the muscle and the foundation

Operator

participants come from the line of Weston Blumart with UBS. Please proceed with your questions.

Speaker 7

Hi, good morning. My first question is on for comp and benefits, it looks like that picked up pretty meaningfully over the last 5 quarter trend and you highlighted investments in colleagues and there's a pretty high competition for talent. Can you maybe comment on the pace of hiring you're seeing more broadly? And was there maybe a pickup in retention based comp in the quarter? Would be curious on maybe attrition rates in commercial risk and reinsurance as well.

Speaker 7

Thank you.

Speaker 3

Sure, Weston. And so maybe I'll start with sort of the math participants If you think about this, and again, we look at this over a full year, but if you just did year to date, you'd say organic revenue growth is 7% year to date, Compliment 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.

Speaker 3

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 in terms of the talent side.

Speaker 5

Yes, sure, Christa. And I always think that the industry spends a lot of time reading the headlines on some of the industry rags about people move here and there, and I think it gets over rotated. As Christy, you shared some of the great stats. I will say we are making some pretty significant talent investments in our core health and benefit business, in our strategy and technology group inside of reinsurance, Some of our key geographies where we're seeing great growth opportunities. So a lot of great things happening there, Christa, and you shared the metrics of engagement and for attrition and things like that.

Speaker 5

But I would one last comment I would make on it is on our risk capital and human capital platforms. It actually allows us to increase the flexibility of where we deploy talent to opportunities. So being able to take reinsurance analytics and help a commercial client think about analytics like an insurance company does, I I think gives us a real competitive advantage. But other than that, we continue to invest pretty heavily in our talent and we would expect to do so in the future.

Speaker 7

Great. Thank you. 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 here may be more in line with the rest of AAON.

Speaker 7

That growth had been lower single digits over the past few years. So curious if we're seeing may be momentum there.

Speaker 5

Yes. Maybe I'll take that one, Greg. Look, I think the Wealth Solutions business is a great business for us, and we do see growth opportunities over the mid and long term. If you think about the pieces of it, the retirement piece, which is the pension actuarial work, continues to be a solid business for us. There's a whether it's in the pension derisking that Christa mentioned or whether it's just regulatory changes that drive activity.

Speaker 5

The U. K, EMEA, very solid this quarter. And then there's the Investment Management business. The advisory business continued to be pretty strong. The delegated part of it continued to have some impact from the AUM movements from in the U.

Speaker 5

K. And North America that We talked about last time, but overall, really bullish on the business and expect that it will hit mid single digits for us as we go down the road.

Speaker 7

Great. Thank you.

Operator

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

Speaker 8

Hi, thank you. I know that you talked quite a bit about tech innovation for efficiency. Maybe if I can just dig a little bit deeper on the cost of AI implementation, right? Obviously, tremendous potential down the road, But from what we've seen recently, for example, Microsoft just announced that their AI enabled products are twice as expensive as non AI enabled products. Just going down that line of thinking, can you maybe help us think about how your AI investments fits into the cost of that fits into your three areas of investing with the AI business right now.

Speaker 3

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 fab 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.

Speaker 3

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 datasets, participants are helping clients interact with the human capital system 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 clients are new generative AI. And so we're sort of scaling it depending on the impact and opportunity.

Speaker 1

And I just had two observations, Bob, to this. First, we've been doing AI, as Christa described, really for a decade. So it's not as we haven't been incorporating this. It's one of the reasons we drove AND as a services. That's my second observation.

Speaker 1

Because we have Aon Business Services, because we've been working this since 2017, we actually have a platform to scale these ideas. Absent Aon Business Services, literally, the ability to kind of get this moved around the 120 countries around the world is basically 0. So you can come up with a good idea on a geography, but how do you actually systematically move it around the world? So one of the reasons we're excited about our ability to do this And do it cost effectively is Aon Business Services.

Speaker 8

Okay. Thank you. That was extremely helpful. All participants. My second question, maybe just to go back to the line of questioning regarding commercial risk solutions, right?

Speaker 8

And obviously, you've talked in-depth about for 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 and A market in the U.

Speaker 8

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?

Speaker 1

Participants. Listen, we as we have described, we feel very good about the progress. So back to kind of the overall Aon United strategy, the core fundamentals, As you highlighted well geographically very strong. Even in North America, retention very good, I mean business very good, Corp E and C exceptional. Participants are in the same store.

Speaker 1

We just have a wonderfully strong business capability in the area of M and A Services, which by the way, We're feeling now, but we embrace completely because as the market comes back as Eric described, we benefit from that as well. But the fundamentals, the track is everything we've described around Literally, winning more clients have been doing more with them and keeping them longer for all the reasons that we talked about around our overall annualized strategy. All participants. We're feeling very, very good about trajectory and momentum, recognizing there are market conditions out there, but good about that overall. Eric, what else would you add to that perspective?

Speaker 5

Yes. Maybe the only other angle I would say, Greg, is the sophistication of the products that are entering into places like Asia Pacific in Latin America continue to evolve as the clients evolve. So whether it's risk financing techniques, work specialty products, We're 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, participants 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.

Speaker 1

One other point on that, Bob, this is sort of Meghan. I was in Singapore with Christa a month ago, opening our global climate hub phenomenal. And we had the opportunity to go around and see so many different clients in that perspective. It really reflected exactly what Eric is describing. Participants are coming to the Q2 2020 conference call.

Speaker 1

Their needs are becoming more global and more interconnected. They want to see global Aon sort of in their backyard. That was a very, very positive sort of overall kind of finding as participants are thinking about that. It really does bode well for what the opportunities are. And then if you take that and some of Eric's other comments around risk for capital and what it really means bringing reinsurance analytics into the commercial space in an effective way also something that was very, very positive.

Speaker 1

So Just a specific example, in a region, as you highlighted, where we see particular opportunity, same is true in Latin America.

Operator

Participants are in the line of Rob Cox with Goldman Sachs. Please proceed with your questions. Participants.

Speaker 9

Hey, good morning. Thanks for taking my questions. So in Reinsurance Solutions, a really strong result, Obviously, but I would have thought you would see more acceleration or sequential sequential acceleration given for the Aon Benfield exposure to property cat in the U. S, can you provide some color there? And then, also on the prospects for growth in the back half of the year in reinsurance as we've seen some news articles regarding kind of an above average chunk of the facultated business being hired by a competitor.

Speaker 5

Sure. Greg, you want me to take that one? So on the first half, listen, we're participants are really proud, excited, whatever word we could use on our reinsurance capabilities. Really great first half, great second quarter, 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.

Speaker 5

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 for today's call. 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.

Speaker 5

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 because 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 are also retaining more of the risk themselves.

Speaker 5

So participants are in the same store. 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, it's the way they do that. But Greg, maybe anything you'd add on that?

Speaker 1

You summarized it very well, Eric. I would add a couple of things for the talent point overall and in reinsurance. Look, reinsurance, our colleagues, this has been strength to strength, really over the last 5 years. It's been a tour de force. It's also one of the areas we've invested heavily in continuing content and capability, not just core reinsurance, but if you think about what we're doing in cat bonds and And ILS, we lead the world in this.

Speaker 1

The work we've done in Strategy and Technology Group, Eric described before, this is just a substantial investment. And with this core and reinsurance, we now have this incorporated into the overall risk capital effort. And so this is really for us, participants We're very we're excited about the possibilities and the capability we have to help clients and it continues to build, which is why we feel so strongly positive about the second half of the year and the ongoing is all

Speaker 9

here. Thanks for the color. And maybe moving back to for commercial risk. If we exclude these external factors on the M and A Services business, Is it fair to assume that the remainder of the business accelerated sequentially kind of along with the accelerating renewal premium change

Operator

that we saw in for

Speaker 3

the quarter. I mean, Rob, we're not giving specific guidance on commercial risk at that level. What we would say is we're extremely excited about year to date growth of 7% overall for Aon and on track for mid single digit or greater organic revenue growth the full year. And obviously, we've had a real headwind in this M and A area given transaction volume, as Greg described, is down 30% to 40%, And we expect that softness to continue into the second half of the year.

Speaker 9

Okay. Thanks. 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.

Speaker 9

And I'm just curious what's driving that? Is that market share gains, medical inflation, any color you could provide there?

Speaker 5

So I would say more of market share gains and the ability of the team to work together globally through global benefits. Remember, the health systems are different everywhere in the world. So when you look at the U. S. System versus the U.

Speaker 5

K. Versus Europe or anywhere in for Asia Pacific or LatAm, they're very different. But the needs are often of one organization expanding globally. They need that expertise. And so our global team really well connected working together to be able to help global clients as well as local clients.

Speaker 5

So we think it's market share gains in the local countries and really excited about what they've been doing over the course of the last year or 2.

Speaker 2

Participants are

Operator

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

Speaker 10

Hi, thanks. Good morning. My first question, Christa, I think Last quarter, you had pointed to CapEx of around $200,000,000 to $225,000,000 for the year. All I just want to confirm that that's still your kind of best estimate there. And so with the improvement in free for cash flow in the back half, I guess it's going to come from a combination of lower CapEx and just growth in operating cash flow.

Speaker 3

So, Elyse, we actually have increased our CapEx guidance to be $220,000,000 to $250,000,000 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

Speaker 2

participants.

Speaker 10

Thanks. And then my second question, going back to commercial risk, all participants I recognize, right, that you guys do have a good market share within the M and A business, right, that has slowed. But You will have easier comps in the back half of the year. So even recognizing that there'll be some headwinds from just Still low M and A volume. Wouldn't you expect sequentially commercial risk to show Better growth in the back half relative to the first half of the year?

Speaker 3

So, Elyse, I'll try and do this again because I probably didn't explain this well the first time. What we are lapping the COPs, 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 and A environment, so we expect that trend to continue.

Speaker 10

Okay. And then, in Reinsurance Solutions, Greg, I think you highlighted just kind of robust cap on activity you guys have seen. How do you what are you seeing on the capital side within the reinsurance market and thoughts just for the potential opportunities over the rest of the year and then also into 2024?

Speaker 1

Listen, overall, at least, and Eric should comment on this for sure. Look, there is 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.

Speaker 1

We talked about $5,000,000,000 we've done in 21 deals year to date, which has been phenomenal. So we are seeing an opportunity there, but it's still constrained. There's still pressure. Eric, what else do you add to that?

Speaker 5

Yes. Look, Greg, I would say I'll do for the ILS side first is, ultimately, we're seeing investors that have historically invested in cat bombs either allocate more to it, so they see opportunity. Investors that had walked away from the area have sort of returned as well as new. So you're seeing some expanded Sort of market opportunity, which is why I think that market has been so dynamic in the 1st 6 months. I think on the overall capital provision of the reinsurance market, You're starting to see an equilibrium.

Speaker 5

You're seeing the big players get more active, who see opportunities, especially on the property cat side. And so and you're seeing investors look to participate in support either through their funds or other ways, not necessarily in new company creation, which is Sort of what would normally happen in this cycle, but more in support of existing players who are already leaders in the industry. So We're getting to an equilibrium around pricing of property cat. Certainly, as you go into the oneone renewals in 5 months, There'll be talk of inflation. There'll be talk of what happens over the hurricane season in the summer and other events.

Speaker 5

But participants are in the same position. I do think that as the market has moved, it has found an equilibrium in proper cat as well as on the casualty side of the business.

Speaker 10

Thank you.

Operator

Next question is coming from the line David Monomedon with Evercore ISI. Please go ahead with your questions.

Speaker 11

Hi, good morning. Just had a follow-up question on commercial risk. You guys spoke about this a couple of quarters ago. I believe it was the Q4. You said the capital markets activity had a 5 point drag on the organic growth participants are in commercial risk.

Speaker 11

Could you size how much of a drag that had on organic growth in commercial risk this quarter?

Speaker 2

Participants are in the

Speaker 3

same store. We have not disclosed that detail. We did, as you mentioned, disclose it in Q4, and we haven't 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 is having a real impact on our business, but we're continuing to invest in it because we know as M and A volume comes back, this business is incredibly well positioned to do fantastically well.

Speaker 1

And David, we continue to reinforce literally the exact guidance we had before. And as we think about where we are at mid single digit or greater for the year overall for the business, Even in the face of this challenge that Krista described.

Speaker 11

Got it. And also just to clarify, so tough comps in this business in the second half of all I guess the comps are definitely easier. I think second half of twenty twenty two is very depressed. So participants are 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.

Speaker 1

It's really as simple as you almost listen to the Investment Bank calls. We can talk to the CEOs of those institutions. As that activity comes back, we are incredibly well positioned, not just in the core areas we've done before, but also with the broader commercial application as Eric before, so we've just gotten stronger. Literally, as the transactions come back and the volume comes back, we're there. And so you can predict as well as anyone.

Speaker 1

All we're trying to do is be clear.

Speaker 11

Got it. That's helpful. And then Yes. Just on continued investment in tech and talent, and it also sounds like participants Even with the increased outlook on CapEx for the year, it's going to tick down in the back half of the year. Participants are in the same store.

Speaker 11

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 participants 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?

Speaker 3

Participants So what we really said was we've given guidance on CapEx $220,000,000 to $250,000,000 Yes, you're absolutely right. CapEx is a little front loaded with how the projects worked out this year, but we do think about it over the course of a full year CapEx CAD 220,000,000 to CAD 250,000,000 for 2023. Participants are in the range of 2nd quarter 2023 conference call. At this time, all participants are in the range of 2nd

Speaker 2

quarter 2023 conference call. At this time, all participants are in the

Speaker 3

range of 2nd quarter 2023 conference call.

Speaker 2

At this time, all participants are in the range of 2nd

Speaker 3

quarter, mid single digit or greater organic revenue growth, Margin expansion for the full year and double digit free cash flow growth. And so, yes, things are patterning slightly more in the first half in terms of some expense growth and CapEx growth, but really you should think about these things over the course of the full year.

Speaker 11

Okay, great. Thank you.

Operator

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

Speaker 12

Great. Thanks so much and good morning. I guess we're all digesting just how significant the M and A practice for the quarter is in terms of revenues. I was hoping you could give us some guidance through the kind of think about the margin impact, whether it's what you've seen In recent quarters or what that implies for margin expansion when this business line recovers?

Speaker 3

Participants are on track for full year margin expansion and participants 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, participants are in the range of $1,000,000,000 supported by Aon Business Services with the analytical impact. And what I would say is, as you think about margin expansion long term, it's

Speaker 2

participants are in the same store. It's really just another way to measure the value we

Speaker 3

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

Speaker 2

participants are in the range

Speaker 3

of $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000,000 to $1,000,000,000,000 Better customer service and increased innovation at scale. And so we're really confident about driving sustainable margin expansion in 2023 participants are in the line with us.

Speaker 12

Okay, understood. Second question, I know you typically don't disclose expected tax rates and unless you want to change the approach now. I was just hoping if you could let us know, given OECD minimum tax reform internally, should you are you expecting the tax rate to go up?

Speaker 3

So, Maja, as you exactly predicted, we are not giving guidance on tax rate going forward. As I look back historically, exclusives of the impact of discrete items, which can be positive or negative, Our historic underlying rate over the last 5 years was 18%. So we feel really good about our overall global capital structure,

Speaker 12

participants Okay, fair enough. Thank you.

Operator

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

Speaker 13

Hey, good morning. So first, 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, then it hurts on margins. But assuming inflation stays high, Is that a positive for you overall or is it a negative or a push?

Speaker 3

Thank you very much, Jimmy. So what we would say is Inflation overall is good for our business. And what we've seen so far is the inflationary impact on our expense base. You saw compensation impacted in 2021, 2022 participants are doing again in the first half of twenty twenty three. We've seen that come through on the expense base.

Speaker 3

What we're starting to see come through is inflation impacts on the revenue side, Whether that's increased asset values or whether that's medical and health care inflation, so it's impacting commercial risk and health, Insurance prices and therefore, our revenue lines. And we expect that impact on inflation participants are ready to come through in our revenue over the next 12 to 24 months. And so we would expect that positive side of inflation to start coming through. But Eric, anything else you'd add here on inflation?

Speaker 5

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, as you're saying, impacting pricing from an insurer standpoint. I would say it also creates sort of decision making that the client will make.

Speaker 5

So the clients may take higher retention, they may use captives that requires different support, they may take things participants are 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 client 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.

Speaker 13

Okay. And then on share buybacks, the last few years, they've been heavier in the second half than in the first half. Should we assume a similar pattern this time? And Especially considering that your free cash flow is going to be higher as well or does the buyback activity thus far this year already incorporate the higher free cash flow in the second half?

Speaker 3

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 buyback 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 for cash is coming from debt or operating cash flow.

Speaker 3

As we generate that cash, we'll utilize it to opportunity to invest in buyback given we are substantially undervalued today based on the way we value our business on a DCF basis.

Speaker 2

Participants are ready.

Operator

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

Speaker 1

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

Operator

Participants will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.

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Earnings Conference Call
AON Q2 2023
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