AON Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 3, 2022

There are 8 speakers on the call.

Operator

Good morning and thank you for holding. Welcome to Aon Plc's 4th Quarter and Full Year 2021 Conference Call. At this time, all parties will be in a listen only mode until the question and conference 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.

Operator

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 has been posted on our website. Now it is my pleasure to turn the call over to Greg Case, CEO of Aon PLC. You may begin.

Speaker 1

Thank you, and good morning, everyone. Welcome to our Q4 conference call. I'm joined by Chris Sadavies, our CFO and Eric Anderson, our President. As in previous quarters for your reference, we posted a detailed financial presentation on our website. Our strong performance in 2021 is the direct result the deliberate steps we've taken that are enabling us to win more, do more and retain more with clients.

Speaker 1

We're driving top and bottom line results and are exceptionally well positioned to continue to deliver ongoing performance in 2022 and over the long term. Most important, We will express deep gratitude to our young colleagues around the world for their performance and results this year and for everything they've done for clients and for each other. Our colleagues delivered a fantastic Q4 and a very strong finish to an outstanding year. We achieved organic revenue growth of 10% in the 4th quarter with double digit growth in commercial risk and reinsurance, driven by net new business generation and client retention. Comp.

Speaker 1

In commercial risk, we saw strength across the world, driven by net new business and retention in the core. We also saw strength in more discretionary areas of the portfolio as economic growth and client activity continued to increase, including double digit growth in project related work and in transaction solutions as our teams responded to M and A deal flow and increased client demand. Within Health and Wealth Solutions, we saw double digit growth in priority areas that we've been disproportionately investing in the last several years, including voluntary benefits in health solutions and in delegated investment management and wealth solutions, which remains an essential part of our portfolio. Our full year organic revenue growth of 9% reflects the strength and momentum of our Aon United strategy, which is designed to drive top and bottom line results. To that point, operating income increased 17% year over year.

Speaker 1

Full year operating margins expanded 160 basis points to 30.1 percent with margin to 32.8% in the 4th quarter, reflecting ongoing efficiency improvements, net of investment and long term growth. Earnings per share increased 22% for the full year. Free cash flow exceeded 2,000,000,000 and we completed $3,500,000,000 of share buyback in 2021, a strong indication of our confidence in the long term value of the firm. Looking forward to 2022 and beyond, we continue to expect mid single digit or greater organic revenue growth, margin improvement and double digit free cash flow growth. Looking back on the year, we've been offered 3 observations that drove performance in 2021 and reinforce our continued strong momentum in 2022.

Speaker 1

First, as complexity and uncertainty have increased around the world, clients are demanding a partner capable of providing them greater clarity and confidence to make better decisions that will protect and grow their businesses. In 2021, organizations and individuals continue to face the regulatory changes, cyber and workforce resilience. Against that backdrop, our decade plus focus on Aon United and the content and capability it allows us to deliver has never been more relevant. 2nd, our colleagues feel that relevance and they take great pride in our ability to deliver existing and new sources of value to clients. They recognize that these external challenges facing our clients create opportunity for them to bring better solutions and grow professionally.

Speaker 1

We know this is what engages our colleagues and why we're feeling more relevant, more connected and more value. And we're seeing the impact of this focus. In our recent all colleagues survey engagement levels remain at all time highs in line with top quartile employers. Ultimately, we know that by creating an exceptional college experience, we're ensuring a better client experience, both of which translate into better performance for the firm. And third, we continue to accelerate our innovation strategy by using our Am United operating model to replicate successful solutions and applying those capabilities to new client bases paving the way for innovation at scale.

Speaker 1

We're incorporating our data, analytics and insight to direct existing capabilities to previously unmet client needs. This allows us to serve existing clients in new and customized bring existing solutions to new clients and expand our addressable market. Let me highlight a few examples to demonstrate how we scale innovation to help our clients both in new ways and from new sources. Historically, you heard us talk about Aon Client Treaty, pre underwritten insurance capacity we established at Lloyd's that we use to help our clients more easily and efficiently access capital comps. When we designed this program over 5 years ago, we analyzed every historic placement, quantified the risk parameters around business we placed in the Lloyd's and then prearranged capital to back those risks.

Speaker 1

Aon Client Treaty provides more efficient access to capital for clients and insurers and we see ongoing opportunity to apply this concept to different geographies and risk classes using the same proprietary data and analytics backbone supported by AM Business services. One new offering drawing directly from this capability is a solution that team designed called Marilla, which enables reinsurers and investors to invest across our global reinsurance client portfolio. This provides a broad entry point into global reinsurance risk and benefits our clients by enabling capital to access markets more efficiently. This first of its kind solution could not have been designed without a proprietary analytic capability and we see important opportunities to build on this platform for future growth across Aon. Another example to highlight is with involuntary benefits, where we're developing innovative solutions at scale and driving double digit growth.

Speaker 1

The offering combines user insight around enrollment from our comps, active healthcare exchanges and capabilities from acquisitions like Universe and Farmington. Our analytics platform and dashboards assess and illustrate plan features, product usage, claims experience and overall plan performance, providing insight into employee demand and satisfaction. This work is informed by 20 years enrollment data from over 4,000,000 participants, which enables us to rapidly develop bespoke solutions for our clients that strengthen their total rewards offering and reinforce their human capital strategy at a time when this has never been more essential. These examples demonstrate how we help our clients access capital and markets in ways that never existed before. We can set backdrop of increasing and changing risk.

Speaker 1

We're not only bringing our clients better solutions, but also working more closely with them to understand their biggest challenges, which in turn guides further innovation. Our focus on building innovative capabilities that scale across ION to better meet our clients' needs is also highlighted by our recent appointment of Jillian Slyfield as our Chief Innovation Officer. Jillian's digital experience and deep connections at Aon and across the industry position us exceptionally well to ensure that we're rapidly distributing new solutions to clients. To summarize, 2021 was a year of incredible performance and a year that positions us for growth, innovation and momentum in 2022. As we look forward, this momentum is further reinforced by global economic and societal trends and the resulting challenges and opportunities for our clients, which means that our Aon United strategy becomes even more relevant as we help clients make better decisions to protect and grow their businesses.

Speaker 1

The capability and track record that we've built gives us confidence in our ability to provide further value for our clients, colleagues, Society and Shareholders. Now I'd like to turn the call over to

Speaker 2

Christa for her thoughts on

Speaker 1

our financial progress in Q4 and 2021 and our long term outlook. Christa?

Speaker 3

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 delivered 10% organic revenue growth, the 3rd consecutive quarter of double digit organic growth, which translated into double digit adjusted operating income adjusted earnings per share growth, continuing our momentum as we head into 2022. As I reflect on full year results, first, Organic revenue growth was 9%, including double digit growth in Commercial Rest Solutions and Health Solutions. I would note that total revenue growth of 10% includes a modest favorable impact from changes in FX, partially offset by the impact of certain divestitures completed within the year, most notably the retiree healthcare exchange business, as we continue to shift our portfolio towards our highest growth and return opportunities.

Speaker 3

As we look to 2022, we're continuing to monitor various macroeconomic factors, including the underlying drivers of GDP, asset values, corporate revenues and employment, inflation, government stimulus and the impacts of COVID variants, all of which impact our clients and our business. We continue to expect mid single digit or greater organic revenue growth for 2022 and over the long term. Moving to operating performance. We delivered stands for operational improvement with adjusted operating income growth of 17% and adjusted operating margin expansion of 160 basis to a record 30.1 percent margin. The investments we've made in Aon Business Services give us further confidence in our ability to expand margins, building on our track record of approximately 100 basis points average annual margin expansion over the last decade.

Speaker 3

We previously described the repatterning expenses that incurred within 2021, which have no impact on year over year margins. While certain expenses may move from quarter to quarter, we do not expect further comps. We expect to be the right quarterly patterning going forward before any expense growth. During the year, as we previously communicated, we saw revenue growth outpaced expense growth and investments. While we do expect expenses to increase in 2022 due Certain factors such as increased investments in colleagues and a modest resumption of T and E, we think about growing margins over the course of a full year.

Speaker 3

We expect to deliver margin expansion in 2022 as we continue our track record of cost discipline and managing investments in long term growth on ROIC basis. We translated strong adjusted operating income growth into double digit adjusted EPS growth of 22% for the full year, building on our track record of double digit adjusted EPS growth over the last decade. As noted in our earnings materials, FX translation was an unfavorable impact of approximately $3 in the Q4 and with a favorable impact of approximately $0.23 per share for the full year. If currency remains stable at today's rates, we would expect an comps. We expect unfavorable impact of approximately $0.16 per share or approximately $48,000,000 decrease in operating income in the Q1 of 2022.

Speaker 3

In addition, we expect non cash pension expense of approximately $11,000,000 for full year 2022 based on current assumptions. This compares to the $21,000,000 of non cash pension income recognized in 2021. Turning to free cash flow and capital allocation. We continue to expect to drive free cash flow growth over the long term based on operating income growth, working capital improvements and structural uses of cash enabled by Aon Business Services. In 2021, free cash flow decreased 23% to $2,000,000,000 reflecting strong revenue growth, margin expansion and improvements in working capital, which were offset by a $1,000,000,000 termination fee payment and other related costs.

Speaker 3

I'd observe that excluding the $1,000,000,000 termination fee payment, Free cash flow grew $400,000,000 or approximately 15% from $2,600,000,000 in 2020. Our outlook for free cash flow growth in 2022 and beyond remains strong. Given this outlook, we share repurchase to continue to remain our highest return on capital opportunity for capital allocation as we believe we are significantly undervalued in the market today, highlighted by the approximately $2,000,000,000 of share repurchase in the quarter and $3,500,000,000 of share repurchase in 2021. Over the last decade, we've repurchased over a third of our total shares outstanding on a net basis. In 2022, we expect to return to more normalized levels of CapEx as we invest in technology and smart working.

Speaker 3

We expect an investment of $180,000,000 to $200,000,000 As we've said before, we manage CapEx like all of our investments on a disciplined return on capital basis. We also expect to invest organically and inorganically in content and capabilities to address unmet client needs. Our M and A pipeline is focused on our highest priority areas that will bring scalable solutions to our clients' growing and evolving challenges. We continue to assess all capital allocation decisions and manage our portfolio on a return on capital basis. We ended 2021 with a return on capital of 27.4%, an increase of more than 1500 basis points over the last decade.

Speaker 3

Turning now to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet and manage liquidity through a well laddered debt maturity profile. In addition, we issued $500,000,000 of senior notes in Q4. As we said before, Growth in EBITDA combined with improvements in our year end pension and lease liability balances increases the capacity we have to issue incremental debt while maintaining our current investment grade credit ratings. Our net unfunded pension balance improved by nearly 5 100,000,000 in 2021, reflecting continued progress and a result of the steps we've taken over the last decade to derisk this liability and reduce volatility.

Speaker 3

This reduction in volatility is significant for many of our clients who still have pension obligations on their balance sheets. Current market conditions and funding status are giving many clients a chance to reduce the risk of future volatility related to funding status or regulatory changes. Our retirement teams insight transfer, creating long term opportunity for us to help our clients manage their balance sheet risk effectively. In summary, 2021 was another year of strong top and bottom line performance, driven by the strength of our Aon United strategy and Aon Business Services. We returned nearly 4,000,000,000 shareholders through share repurchase and dividends in 2021.

Speaker 3

The success we achieved this year provides continued momentum as we head into 20 22. We believe our disciplined approach to return on invested capital combined with expected long term free cash flow growth will unlock substantial shareholder value creation over the long term. With that, I'll turn the call back over to the operator, and we'd be delighted to take your

Operator

comp. It looks like our first question will come from Elyse Greenspan from Wells Fargo. Please go ahead.

Speaker 4

Hi, thanks. Good morning. My first question goes back to some of Christa's comments. You guys mentioned investing organically and inorganically over the coming year. So just trying to get a sense of the increase in expenses that you expect in 2022 and if you have a thought on how the margin expansion could trend relative to that 100 basis points coverage you mentioned over the past decade.

Speaker 3

Thanks so much, Elyse. As we stated previously, our goal is to grow margins each and every year, including in 2022. And we expect 2022 margins to be driven by accelerating revenue growth, portfolio mix shift to higher growth, higher margin businesses and leverage from Aon Business Services. You've seen our track record as you mentioned of driving 100 basis points of margin expansion a year over the past decade with some years a little more and some years a little less. We did deliver above average margin expansions of 160 comps in 2021.

Speaker 3

And there will always be lumpiness from quarter to quarter, which we did see this year in terms of the timing of investment and discretionary expenses. So we're going to expand margins in 2022? Absolutely. And as we look to 2022, we also expect investments in colleagues, some ongoing resumption of T and E and investments in long term growth. So we expect to drive margin expansion net of investments over the course of the full year.

Speaker 4

Okay, thanks. And then on the capital side, you guys bought back $2,000,000,000 a pretty robust number in comps. As we think about going forward, I know you guys don't provide guidance on buybacks, but is the right way to think about the potential level of capital return thinking about expectations for free cash flow as as well as incremental leverage that you guys could have as your EBITDA growth. Can you just help us think about the capital firepower We'd have in 2022 beyond. Absolutely.

Speaker 4

And look, we do expect double digit free

Speaker 3

First starting point is expectations free cash flow, which is double digit over the long term and incremental debt capacity. So as EBITDA grows, you should expect us to add debt keeping our leverage ratios in line with our current investment grade ratings. And then what we would say is we continue to follow a very disciplined return on capital approach to allocate that capital. And you saw that with share buybacks remaining the highest return on capital opportunity across Aon, dollars 3,500,000,000 repurchased in 2021 and $2,000,000,000 in Q4, giving you a sense of how undervalued we think the stock currently is. But in addition to investing in share buyback, at least, we have a substantial M and A pipeline and we expect to do M and A during 2022 in areas of high growth and high demand from clients.

Speaker 3

We also expect to invest organically in our colleagues, in technology to scale innovation across the globe. And so we're really excited about the $4,000,000,000 of capital return to shareholders in 21, an increase of over 1500 basis points over the last 10 years.

Speaker 4

Thanks for the color.

Operator

Our next question comes from Mike Zaremski from Wolfe Research. Please go ahead.

Speaker 5

Comp. Hey, good morning. This is Charlie on for Mike. So Anne has been ahead of the curve building collaborative workplaces, VLS Real Estate. Does Aon expect to undergo any cost cutting measures similar to some peers who have announced formal expense saving initiatives?

Speaker 1

We start, I think, with our entire design, our entire approach is really around, as it always is today, around client delivery, we're trying to accomplish, supporting our colleagues to do that. So we will 1st and foremost really optimize around that approach and that perspective. And we've done, as you've described, a number of innovative things to sort of reinforce that. It's actually worked exceptionally well on the client side and for our colleagues as well. So you'll continue to to do that.

Speaker 1

The outgrowth on the expense side will be what it will be. We'll make investments, as Krista just described, on a return on invested capital basis and that's actually worked exceptionally well for us. And where there's opportunities to create optimization, we'll do that. Where there's opportunities to invest to create a better outcome for clients and colleagues, we'll do So that's really how we thought about it and it's worked exceptionally well for us, especially as the environments continue to evolve.

Speaker 5

Okay, great. And then you noted in your slide deck that exposures and pricing on the P and C side were modestly positive. Can you talk to us about what you're seeing in terms of momentum there and whether you have an outlook on the P and C pricing environment for 'twenty two?

Speaker 1

Go ahead, Eric. Sure, Greg. Thanks. Listen, I would say and I think I've said this on a couple of these calls, the pricing environment really is just factor. You also have to look at exposure to growth and the like.

Speaker 1

And listen, our role in this when we work with our client is really about first, How they do risk identification, risk management. So there's a lot that they do that doesn't go into the market. And then ultimately, they also finance, Right. So what can they do on their own balance sheets and how can they protect themselves using their own resources. But when they get to a point where they actually want to do risk transfer, comps.

Speaker 1

They have a number of tools at their ability. They look at retentions, they look at coinsurance, they look at deductibles, They look at terms and conditions, they look at limits, all these various aspects. And we try and bring all of our insight, our data and analytics to them to help them make those best choices. And so when you see discussions around market rates, it's different than what clients actually buy. So it's It's not a direct line from the carrier who may say the market is going up, the market is going down versus what they do for their own portfolio.

Operator

Next, we'll go to Paul Newsome from Piper Sandler. Please go ahead.

Speaker 2

Good morning. Thanks for the call, everyone. Comp. I was hoping you could give us a little bit more on the relationship between organic growth comp margin expansion over time. The rule of thumb in the industry has been sort of 3% to 4% organic growth comp.

Speaker 2

Most brokers allows for margin expansion. But there's been some folks who've been talking maybe Because of the pandemic, that relationship has broken down and we want to see what your thoughts were on.

Speaker 1

We've continued to improve that profile strengthen that profile as we serve clients legally more and more effectively over comps against their demands, which are changing and increasing. And we see that opportunity obviously achieved in 2021, we see that opportunity in 2022 and beyond, again, certainly existing demand that's out there, but also net comps. New addressable market in terms of what we're trying to accomplish and doing. We just also observed, and Christa described very well Our perspectives on margin and what rates will accomplish. If you think about over the last 10 years, it's been under a variety of different growth How do we connect it globally?

Speaker 1

How do we make sure we're bringing new solutions within our existing business? And then areas where we find growth where we're actually connecting the different capabilities that we have across what have historically been business units, where you might free up insight that comps inside of a reinsurance business and bring it to corporate clients or how you bring human capital capability to match with our directors and officers capability on the risk side. So how you bring those new how you bring existing capabilities together in new ways to solve clients' problems. And then you've obviously got the net new growth that we're so focused on, whether it's cyber, where it's no longer just Certainly, climate, how you drive better insight to give our clients an opportunity to try and manage today the issues that they're facing with Quadbit while also investing in the future to provide new opportunities to help manage those risks. So there are issues that are happening that would be have been considered horizon risks that are today on everybody's front door, as we've said in the past, but also how we use our existing capabilities in new ways to drive better outcomes for clients.

Speaker 1

So we see an opportunity for growth Certainly today and in the future.

Speaker 2

Great. My second question, I'd like to ask about comp. Is interested in just about everything brokerage and there seems to be just a tremendous supply of new Roll up companies, probably back roll up companies. But it's hard to be outsiders to know if that environment really is getting a lot comp. Competitive and valuations are rising or if it's more of a stable view.

Speaker 2

What's your take on the current environment?

Speaker 3

So Paul, one of the things we do is we look at we start from client need and we then build our M and A pipelines around the highest growth, highest margin, highest return on capital opportunities, which are really aligned with the biggest areas client needs, whether that's health and associated benefit, comp, whether that's delegated investment management, whether that's data analytics. And so a lot of the areas that we're actually focused in, we're actually building relationships with companies well before they go through a process. So we're not actually competing with others. And so we're building relationships with companies in areas like cyber, in areas like intellectual property, in a lot of analytics intensive businesses, which we're really thrilled to be bringing that capability into Aon and we expect to do a lot more of that in 2022.

Speaker 2

Okay. Thank you very much for all the help. Appreciate

Operator

it. Next, we'll go to the line of Yaron Kinar from Jefferies. Please go ahead.

Speaker 6

Comp. Good morning and thanks for taking my question. Actually it's only one question that I have here. If I look at the actual common shares outstanding, I think you ended the year was $250,000,000 just under another $2,000,000 of dilutive equivalents. And yet you call out beginning of Q1 2022, a diluted share count of 224,000,000 almost.

Speaker 6

Can you maybe provide some color as to why that share count will be going up?

Speaker 3

So we have actual shares outstanding in Q4 2021 of 221.4. And then we have a few diluted shares, which get you to 2 to 3.7 is the estimated Q1 2022 diluted shares.

Speaker 6

Okay. So it's apples to oranges. Okay. And maybe could you just remind me the stock based compensation. Does that flow into adjusted EPS?

Speaker 3

Yes, of course. Comp when you issue related stock based compensation. And so if you think about the actual shares issued each year for the last couple of years, it's been going down substantially, while the dollar amount of stock we issue has been remained the same. So we've been very disciplined about the granting amounts we're giving out, but obviously the stock price increases, the diluted impact decreases. So in 2021, as an example, we issued 1,700,000 shares.

Speaker 6

Thank you.

Operator

Next, we'll go to the line of Jimmy Bhullar from JPMorgan. Please go ahead.

Speaker 7

Hi, good morning. So just I think there were a lot of questions about just or concerns about the fallout from the Willis deal And based on your organic growth, doesn't seem to be impacted a lot. But if you could just talk about that. And then relatedly, it Seems like if I look at your expenses, the comp and benefits line is the only one that's actually up from a couple of years ago, all the other ones are down. So not Sure, if you're having to pay a little bit more to retain talent, whether because of inflation or just because of the deal breaking up?

Speaker 1

Jimmy, appreciate the question. Both of them. In fact, let's start with the first one. And When you consider and think about our ability to maintain momentum over 2022, 2023, 2024 and really over time And with the final momentum, by the way, just to be very specific, is grow revenue, improve margins and grow free cash flow double digits. We believe the opportunity for AAON is is very strong, in fact unique at this point in time.

Speaker 1

And we'd start I think Jimmy, just to answer your question on sort of where we're going in our future, Start with our current position and our financial performance. You saw 9% organic, margin at 30%, free cash flow double digit. More important colleague engagement 80 percent voluntary attrition by the way is below pre COVID levels. And then client need as Eric was describing is high and getting higher, but it's also evolving. And to think about this, Damian, is here, look, the momentum we have going to 2022 is exceptional.

Speaker 1

And it really is on all these conference. But most important, as you ask the question, you get behind what's driving that. And the actions that drove this performance are the exact same actions that build momentum. And it really is the reasons we performed now and why we're going to continue to perform in 'twenty two, comps. And it really built on the decade of work on Aon United and especially the continued refinement and amplification over the last 6 months.

Speaker 1

And this is on the blueprint we've talked about before and around AM Business Services, what we're doing on innovation, And I recall Zillory and United very, very systematic around the globe and our people leadership. Really the operating model we've got really not as a lot, maybe comp. Our brand and talent all fit together and it really is an amplification of the strategy we've had. And the final point I'd say on this in terms of go forward, As you think about client demand in all traditional areas, they're requiring more and more capability, but this mix, this approach, the need they have requires a more integrated approach. And who would have known that Aon United, while compelling for the last 10 years, becomes more compelling comp.

Speaker 1

In a post COVID world, when clients are really thinking about volatility more than ever before. And then finally, the college opportunity and career path in the context of this is more exciting. It's more compelling. And you think about it, we're getting to make a difference in all these areas that matter for clients. And that means it's a better career path, it's a greater opportunity for development and more wealth creation for them.

Speaker 1

And that's why we would say, look, we are comps are fortunate. We believe Aon's positioned to win now and in the future and we've got really strong momentum. Is this Florida going? Yes, Greg, I think you covered it really well. I think comp with the clients on their risk today and help plan around the risk of the future, it really is an opportunity for us to show the value of our operating As we can bring the capabilities of our firm to a client in the way that they want to use it and provide the insight that looks at a risk holistically, not just as an insurance risk, not just as a talent risk, but really pull all of it together at one comp point and you see that in the results we talked about.

Speaker 1

But the operating model, I think, provides us with a competitive advantage that is different from what you see in the marketplace, Connecting globally by using our ability to talk to clients, segments with industry backgrounds, really understanding their issues and then bringing that capability, Anybody can say it. It is absolutely critical to do it to be able to meet these needs of the future, but also having an Aon Business Services as the backbone of the firm where we're able to leverage the data and analytics, be able to leverage our scale, provide the level of service that clients are comps in a way that drives efficiency that allows us to invest back in the talent that you need, the new talent that you need to draw into a firm to be able to handle issues like cyber, comp like climate, like resilience and such. So we feel really good that the model that we put in place really does give us an ability to meet those needs going forward.

Speaker 3

Comps are going up. We are absolutely investing in our colleagues. We're investing in our current colleagues in talent and development, in wealth creation and in hiring great new talent serve unmet client needs and we're excited about being able to continue to do that into 2022, continuing to invest in growth areas across our business in the context of driving margin expansion for the full year.

Speaker 7

Okay. And how do you think about inflation affecting your business? Obviously, to the extent the premiums go up, that helps you. But are you seeing evidence of If you could just comment on the positive net, the pickup in inflation?

Speaker 3

Yes. We do see wage inflation in our business. We saw that Q3, we expect that to continue into 2022. But what we would say is, while we continue to invest in our colleagues, which we think is terrific, we expect to offset that with efficiencies driven by Aon Business Services at scale. And so that offset and continued sort of efficiency there allows us to continue to drive margin expansion.

Speaker 3

One of the other macro things I might add just while you're on inflation is interest rates. So if interest rates were to comp continues to rise. That is a very positive for us in 3 key ways. Fiduciary investment income increases every 100 basis points in short term interest rate, there is an increase of $60,000,000 top line and bottom line for Aon. The second is pension liability comes down.

Speaker 3

And then the 3rd, which you may think is a negative, but is not, interest expense and our entire debt portfolio has fixed interest, fixed rate interest. So there's no impact on debt. So inflation, we do expect longer term to comps. So, we do think

Speaker 7

Thank you.

Operator

And for our last question, We'll go to the line of Adam Klauber from William Blair. Please go ahead.

Speaker 6

Good morning. Thanks. Historically, you've been able to increase the margin in part. I think you said you focused on a high comp business mix perspective, but also you divest both lower margin businesses. So on the second part, as we look at 20 22, 20 23, growth or margin parts of the business that you could divest?

Speaker 3

I mean, what we would say is, we continue to manage the portfolio actively and continue to invest in high comp, lower revenue growth, lower margin, lower return on capital. So, we're seeing a few of them left in the portfolio. So you saw us do that with the retiree healthcare exchange business in Q4. Comps and improve the efficiency and therefore increase the margins of the existing businesses to help them scale globally comps fully in much more efficient ways and to scale innovation in more ways. Business service is probably a much bigger leave it for us in driving margin expansion going forward.

Speaker 1

This is also a very dynamic conversation. Every year, every situation evolves over time and it's led to a 30% margin, which we believe, as Kristi described comps, particularly with real, real upside over time as we move through that. But also, as you did call out return of this to capital. This process has led to 27% and change return on invested capital, which is really a phenomenal outcome in terms of comps. So, it's served us well and businesses that you know, if you look at the category 2 or 3 years ago, we have to continue to improve and we're looking for ways to do that.

Speaker 1

So this is really not just about the static, but about the dynamic and how it evolves over time. And that's the process that Chris and the team have set out that truly served us well. I think Chris is probably like we're like we're trying to listen capital side almost like 1500 basis points over the last 10 years, surpassing even what we've done on margin.

Speaker 6

Okay. And then just one follow-up. On the Health Solutions business, you did quite I understand that business has been a lot of the business across the market, has HR managers being very, very busy during COVID and not always having the time to more offensive to more discretionary projects. Are you seeing sort of that macro environment beginning to turn, our HR managers getting more engaged with do more for the workforces? The activity has been kinetic and this continues to increase.

Speaker 1

And whether it results in sort of revenue now or revenue in the future, the opportunity to work with people leaders and our clients around the world is just Yes, it's just exceptional. And as you highlight, the demand is tremendous, not just for the literally the here and the now and what you do day to day to for employees, but also as you think about resilience in all things workforce and talent. So we love the space overall from a talent and comp standpoint. It also ties into what's going on, on the retirement side and helping employees really be more effective as leaders, as humans in terms of what they do every day beyond just a very specific benefit line. So we see tremendous opportunity on the outside everywhere around the world, not just in the U.

Speaker 1

S. And as Eric described before, it connects with demand in other areas that touch employees like retirement and all aspects of that. Comp. Hi, Greg. Maybe one just quick comment.

Speaker 1

I think the when we talk about not just the professional side, but certainly comps, the well-being side that all of our clients. There's also a desire to understand on a global base to harmonize those. And this global benefit strategy that incorporates time to free up talent to be able to move talent across borders to meet the opportunities. And so that is a building part of what a human resource person is looking at. For the individual for career opportunities as well.

Speaker 6

Thank you very much.

Operator

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

Speaker 1

Thanks

Operator

conference call. Thank you for joining and have a great rest of your day.

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Earnings Conference Call
AON Q4 2021
00:00 / 00:00