Q1 2022 Aon PLC Earnings Call
Good morning, and thank you for holding welcome to Aon Plc's first quarter 2022 conference call. At this time, all parties will be in a listen only mode until the question and answer portion of today's call I would also like to remind all parties that this call is being recorded if anyone has an objection you may disconnect at this time.
It is important to note that some of the comments in today's call may constitute certain statements that are forward looking in nature I've defined by the private Securities Reform Act of 1995, such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated information concerning risk factors that.
Could cause such differences are described in the press release, covering our first quarter 2022 results as well as having been posted on our website now it is my pleasure to turn the call over to Greg case CEO of Aon plc.
Thank you and good morning, everyone welcome to our first quarter conference call I'm joined by Christa Davies, our CFO and Eric Anderson, our president I've been previous quarters, we posted a detailed financial presentation on our website.
We'd like to start by acknowledging the tremendous work of our colleagues across the firm. They continue to exhibit remarkable leadership supporting clients in a challenging environment.
We also want to thank our colleagues for their inspiring support of our team their families and others, who have been impacted by the Russian War in Ukraine.
This is a tragic example of increasing global volatility, adding to the challenges. It's facing organizations had been struggling every day, including continued effects of COVID-19, especially in Asia inflation climate change capital availability and connected impact to supply chain intellectual property work force resilience and retirement readiness in this environment, helping her.
Clients protect and grow their businesses support their employees their communities and their stakeholders has never been more important.
Turning to financial performance, our team delivered an excellent first quarter and start to the year with 8% organic revenue growth and increase from a strong prior year performance of 6% in Q1 2021.
Top line strength translate into a 38% adjusted operating margin an increase of 60 basis points and 13% adjusted EPS growth demonstrating the power of our Aon business services platform to drive sustainable margin expansion as well as support growth.
Within our solution lines, we would highlight.
Much of a risk we delivered 9% organic revenue growth with growth in every major geography and particular.
There is strength across renewals and retention.
Teams are working incredibly hard to make sure our clients have the right coverage, that's fully consider the impact of inflation and other economic factors.
Reinsurance solutions organic revenue grew 7% driven by continued strength in retention and new business generation around the world as we help clients navigate a complicated and challenging risk environment.
In health solutions organic revenue grew 8%, reflecting global strength in core health and benefits and advisory work, especially around well being and resilience.
We also saw double digit growth in consumer benefit solutions in human capital and we would note particular strength in our rewards in corporate governance and ESG practices.
As we see our clients increasingly focused on talent compensation and risks and opportunities related to ESG.
And finally, what solutions organic revenue growth was flat in the quarter. Our retirement investments team continues to do excellent work, helping our clients address ongoing opportunities as well as regulatory changes and challenges.
Third a development areas like delegated investment management and growth in pools employer plans were a highlight in the quarter.
Looking ahead and fully recognize and increasing uncertainty in global complexity for the full year of 2022 and over the long term, we continue to expect mid single digit or greater organic revenue growth.
We also continue to expect margin improvement and double digit free cash flow growth for the full year 2022 and over the long term.
As we reflect on the strong combination of organic revenue growth and margin expansion in the quarter and our expectations for the year, we would highlight that our Aon business services platform is becoming an increasingly powerful tool for our client servicing growth. In addition to driving ongoing efficiency gains for.
For example in recent discussions with the multinational chemical company, our Aon business services client dashboard changed the game on how we interacted with them on their M&A growth strategy.
A dataset easily acceptable to our team enable them to bring insights around the value of the claims intellectual property as a driver of their priority M&A activity. This has created great value for them and opened up substantial opportunities for us in many areas including transaction liability.
Actual property solutions.
Simply these analytics helped us identify innovative opportunities and what we might be underpenetrated today by geography or by solution line.
In another example, Aon business services is equally powerful supporting our work with clients in ESG.
An increasingly wide ranging topic for our clients.
E S D practice with a human capital solutions specializes in assessing the prioritizing risks and opportunities for our clients across their stakeholder base and their business.
Our USG risk assessment tool allows clients to monitor key risks in real time, and it's focused on specific client priorities you have in there.
Their business geography industry and competitive landscape the.
The tool Leach those risks to Aon insight expertise and solutions to drive sustainability model their climate risks better navigate the D&O or cyber landscape and reinforces our culture, which has strengthened our people strategy.
And specifically on environmental risks, we're using our proprietary climate analytics to quantify the impacts of climate change on our clients' physical assets, which then helps inform risk mitigation and improved resilience.
The power of this capability is not just in developing innovative solutions, while the ways in which it helps colleagues better inform and advise our clients. It's also in our ability to connect and scale distribution of these solutions across the firm, including in our acquisitions, where we bring in expertise with the express intent to scale new capabilities in the late.
As an example, we recently announced the acquisition of a U K based technology company.
And we're delighted to welcome our new colleagues to a.
The actuarial software platform, they've built enhances our balance sheet modeling capability, especially in reserving and pricing and allows us to enhance our analytics offering to a broad base of reinsurance clients in commercial risk clients with complex balance sheets Ickes differentiator is the strength and speed of simulations, enabling our teams to model complex risk transparently helped.
Our clients better understand global risks and meet evolving regulatory requirements.
Palin a formidable capability he brings reinforces our broader strategy.
Enhancing our analytical tools and actuarial modeling capabilities. This will enable us to advise and execute across the insurance industry with clients and help them meet their goals of ongoing growth capital management and ultimately economic returns.
In summary, our strong first quarter results reinforce continued momentum and position us well to deliver on our key metrics over the whole year, while we continue to anticipate that volatility of all kinds and its impact on organizations will continue to grow in this environment, our aon United strategy and business services platform both become.
More relevant.
Capability and track record that we built gives us confidence in our ability to drive further value for our clients colleagues society and shareholders now I'd like to turn the call over to Christopher for his thoughts on our performance and long term outlook.
Thanks, so much Greg and good morning, everyone.
Greg highlighted we delivered a strong operational and financial performance in the first quarter to stop yet.
Got it by 8% organic revenue growth that translated into 60 basis points of margin expansion.
One digit growth in earnings per share.
We look forward to building on this momentum through the rest of 2020 shapes.
First on the quarter.
But organic revenue growth was 8% driven by strong retention and net new business generation I would not the total revenue growth of 4% includes an unfavorable impact from changes in FX, driven primarily by a weaker euro versus the dollar.
One is our seasonally largest quarter, so euro denominated revenues.
As we look to the rest of 2022 are continuing to monitor various macroeconomic factors, including the underlying drivers of GDP inflation and interest rates, which all impact our clients and our business.
In particular I would note a few interrelated impacts on GDP, we've noticed there's a correlation between our revenue and GDP growth, particularly the underlying driver of GDP, such as asset values corporate revenues unemployment levels.
We've recently seen decreases in global GDP growth forecast yet.
A lot of factors such as ongoing impacts of Covid related restrictions the war in Ukraine, rising inflation unexpected increases in interest rates.
As we've communicated previously I'll, let me base is very resilient.
And in part from GDP, it's on shelf in the more discretionary portion of our business such as project related work across the portfolio.
These portions of our business was strong in Q1, though as Greg mentioned Mustang increased uncertainty in overall trends.
I would also note there are many ways in which we can help clients in times of challenging economic circumstances or increased volatility.
On inflation, we see impacts to our revenue and expense base on.
On revenue inflation increases underlying exposures across our business for instance in property values in health care costs.
As Greg mentioned, we're working with our clients to ensure they are appropriately to protect it against states, increasing values and optimizing that total cost of risk.
Unexpected as we're continuing to invest in our colleagues and our hiring to support growth, especially in priority areas.
Does increase overall compensation costs, although Amazon services strategy continues to drive efficiency in operations and support our goal of ongoing margin expansion.
And on interest rates, there are puts and takes the place, but generally we are very well positioned for higher interest rates.
While revenue in some areas of that business like construction and transaction liability is often dependent on client that's what behavior, which may be impacted by rising interest rates I would highlight three main points on how we benefit from higher interest rates.
First we see investment income increases of short term interest rates rise.
Over the course of a year 100 basis point increase in short term interest rates such as the U S. Federal funds rate and E C being deposit facility rate translate to an impact of about $60 million in total revenue and operating income.
Second our pension liability improves or increases in interest rates resulted in higher discount rates used to value our pension obligations.
But I'll turn that is all fixed rate with an average rate of three 8%.
Interest expense associated with our existing term debt does not increase.
Overall, our business is resilient now aon United strategy gives us confidence in our ability to deliver results in any economic scenario as Greg said, we do see increased external volatility. However, we continue to expect mid single digital greater organic revenue growth for 2020 , two and over the long term.
Moving to operating performance.
We delivered strong operational improvement with adjusted operating margins of 38% an increase of 60 basis points, driven by organic revenue growth and efficiencies from our Aon business services platform overcoming a negative impact of FX and expense growth, which includes investment in colleagues and technology to drive long term.
And some resumption of G&A.
As we've previously communicated we think about margins over the course of a full year, which.
We expect continued investment in colleagues and ongoing adoption of G&A dropped yet.
We expect to live with margin expansion in 2022 as we continue our track record of cost discipline and knowledge.
<unk> investments and longtime grows on an ROIC basis.
We translated strong adjusted operating income growth into double digit adjusted EPS growth, especially into set for the quarter.
As noted our earnings material FX translation was an unfavorable impact of approximately 19 cents per share in the quarter.
If constantly remain stable at today's rates would expect an unfavorable impact of approximately eight cents per share or approximately $24 million decrease in operating income in the second quarter of 2022.
Turning to free cash flow and capital allocation.
Free cash flow decreased 17% to 448 million.
Primarily driven by higher incentive compensation payouts, given our strong 2021 financial results.
I would note that we had strong growth in the prior year period like Q1 has historically been a seasonally smaller schools off from a cash flow standpoint, due primarily to incentive compensation payments.
As we've communicated before free cash flow can be lumpy from quarter to quarter. We continue to expect to deliver double digit free cash flow growth for the full year 2022.
Looking forward, we expect to drive free cash flow growth over the long term driven by operating income growth working capital improvements and reduced structural uses of cash enabled by Aon business services.
Given our strong outlook for free cash flow growth in 2022, and beyond we expect share repurchase to continue to remain our highest return on capital opportunity the capital allocation.
We believe we're significantly undervalued in the market today.
Even at all time highs highlighted by approximately $800 million of share repurchase in the first quarter.
We also expect to continue to invest organically and inorganically and content and capabilities to address unmet client need as we've done with talking.
Our M&A pipeline is focused on high priority areas that will bring scalable solutions to our clients growing and evolving challenges.
As I said in the past, we continue to assess all capital allocation decisions and manage our portfolio on a return on capital basis.
Now turning to our balance sheet and debt capacity.
We remain confident in the strength of our balance sheet and manage liquidity risk throw well a lot of debt maturity profile.
In Q1, we issued $1 5 billion of senior notes, we estimate our leverage ratios would be within the range as expected for our current investment grade credit ratings.
As we said before we'll continue to evaluate the opportunity to add debt as EBITDA grows while maintaining our current investment grade credit ratings.
In summary, our first quarter results reflect strong top and bottom line performance driven by our new United strategy.
We start the year in a position of strength and expect to continue to make progress on our key financial metrics and drive shareholder value creation.
With that I'll turn the call back over to the operator, and we'd be delighted to take your questions.
Thank you as we begin the question and answer session. If he would like to ask a question over the phone. Please dial star one and record your name when prompted your name is just required. So we can introduce your question. If you need to cancel your question for any reason you can dial star two.
Again, that's star one to ask a question over the phone. Our first question today comes from Elyse Greenspan with Wells Fargo. Your line is now open.
Hi, Thanks. Good morning. My first question is on the reinsurance business I saw 7% organic growth.
You know that is a deceleration whether you guys have been over the past few quarters was just hoping to get a little bit more color just because it didn't have to buy something during the January one renewals is there just some timing I'm just kind of you know what you saw within that seven and how we should think about growth within that business for the rest of the year.
Well first of all the thanks for the question I'm, just cut back and think about what our colleagues have accomplished over the last number of years in the reinsurance and it's really been extraordinary.
And we just see so much opportunity in this space by the way Tyche that I described on the call that Crystal followed up on is a real direct sort of investment in content and capability that will even enhance so we're doubling down on the opportunity sort of in this category and really this quarter doesn't reflect the continued momentum by the way 7%.
The strong first quarter, great capability, but we see tremendous momentum in this business and just great opportunity, but Eric specifics around excuse me.
Sure, Greg and I would say listen it was a very strong quarter for the team we had fantastic growth in the ILS business.
With the Cat bond issuance very strong in fact, a lot of great work with clients as they look to reposition their portfolios going into the January 1st renewal cycle. So I would say it was very strong start for the year has high expectations for them as they continue to work through the through the existing insurance cycles, but.
Really strong start for them.
And then on the margin side, you know last year Candy, we started to see that pick up in the back half of the year. So given just that you know kind of comps related to TNT get a little bit easier in the back half of this year do you think that you know we're positioned to see stronger margin improvement in the back.
And perhaps on what I see in the first half or is there anything else that you need to think about what the cadence of expenses this year.
Thanks for the question of late so I would say, we think about margins over the course of a full year and don't really give specific guidance by quarter, but what I would say is we've delivered 1100 basis points of margin expansion over the last 10 years. So approximately 100 basis points, a year and will continue to grow margins in 2022, driven by three key things.
Strong revenue growth portfolio mix shift to higher revenue growth high margin areas and leverage from Aon business services, where we're getting productivity each and every year.
But those sort of drivers of margin expansion will be offset by our continued investment in colleagues increased G&A and investments to grow the business long term and I would note that we did deliver 160 basis points of margin expansion in 2020 one.
Very strong comparable and we do expect to deliver margin expansion for the full year 2022. So we're very excited about that.
Thanks for the color.
Our next question comes from Jimmy Blair. Your line is now open.
Hi, good morning.
Greg I just wanted to see if you could comment on how you think the operating environment for your business has changed in the past few months.
I think obviously pricing is still a tailwind, but it seems like it's slowing the economic outlook is less clear than it was maybe a few months ago, but how have your views changed on how our business trends are.
Well, there's no doubt I appreciate the question there's no doubt, there's obviously a lot going on out there in terms of sort of more complexity.
And volatility, which is showing up all the things you described I don't want to start with we're very confident when you look across that take all that into consideration.
Christian I emphasize mid single digit growth or greater in 2022 and over the long term. So it would start with that but.
But we've just got great momentum and the uncertainty in many respects. These clients are asking us and talking about how they manage the volatility in their business, but do you think about the momentum coming out of 2021 clients to annual growth in a couple of decades, and we just delivered a Q1 2022 and it was higher than the Q1, 2021 and that comparable quarters.
The highest year ever so we feel very very good about where we are in the context of the.
[noise] uncertain world, but it really shows up kind of clients with client sitting across the table day to day, maybe Eric quite a couple of examples cutting isn't really where it comes to life.
Sure, Greg and I would say that the results of the core had been very strong and just the work that we're doing each day across all of our solution large but I'd also say there's a couple of key risks that the teams are engaged in that are very much on the clients' mind todays topics like supply chain with what's going on in the world colleague resilience climate cyber a pandemic.
Is that honestly three years ago four years ago, we're not a big deal for them because they are very much on their focus so we feel good about the growth prospects and our ability to help clients work on those emerging issues as we go forward.
And I would also maybe add one other comment that the issues that people are talking about today really do merge for a specific client so whether it's inflation or GDP or political risk score or what have you. We just came out of our rooms conference, where we had you know dozens of client meetings and the.
Themes across them, we're very much as clients were thinking about investing in their business, whether it was building a plant, making an acquisition expanding into new areas. You know they they were thinking about GDP growth you were thinking about inflation, but they were also thinking about labor cost and colleague impacted resilience and so.
Having that ability to have a holistic conversation with them as they strategically plan for their future recognizing all of those things that risk today is more heightened than it has been historically.
It really does play well to us and lets us have real impact for those clients.
Yeah.
Okay and Relatedly there were concerns around disruption in your business given the merger and the fallout from that last year and I think you had some high profile departures as well, but it doesn't seem like you were seeing that in your results, but if you could just talk about employee retention and how it's trended over the past several months.
And do you expect any sort of slowdown in their business and because of people you might have lost.
Really quite the opposite of it.
Unfortunate this quarter as we've reported the last number of quarters, we have exceptionally high retention and in fact voluntary attrition isn't levels better than they were pre COVID-19 .
And engagement levels are 80% plus so this is about as strong as you got in terms of sort of where we are from a talent standpoint, and again you know the momentum coming out of 2021, and how that momentum going into 2022. So those are all I think our our exceptionally positive. There's a point here that's important in terms of like how we support our colleagues. So they can support our clients and then yes it.
We're investing in new types of talent for sure, but also new generic talked about this earlier, we're investing in and developing our colleagues. The talent, we have now and supporting them and we've got to do it and I guess with talk it's it's really supporting them with content capability, enabling technology, we'll you know evolving advanced analytics it accelerated.
And what we do for clients. So this is a critically important unless you really come back into the business services platform is really a central Oh. This is something as you know been underway for for four years. It really has driven helped drive the margin improvement that Christa described but more more than that and it's created surplus and invest in innovation things like IP et cetera.
And you know we've got 200 colleagues in IP right now that we're working through very very positively. So a lot going on there and that combination puts us in a very very good spot.
Okay, maybe if I could just add as well because I do think you raise a great point about attrition and engagement and alike, but where we're investing in talent is really where we see the business going over the next couple of years and like I mentioned to the previous question climate ESG colleague resilient cyber. These are areas that had that require deep expertise.
And so when we're making investments either in capability or in talent, we're focusing it there, but once you get them into firm the key through this delivering aon United strategy that we've been appointed how do you bring them together so that they understand the client need working with our other experts to be able to deliver to the client that the solution that they need or the advice.
They want.
And so there is.
A great opportunity for us to continue to invest but we're also investing substantially in the core to making sure that what we do for clients today have the right amount of expertise the right service teams and the like so I think.
We feel pretty good about our sound strategy and where we are.
And are optimistic about the future with them.
Thank you.
As a reminder.
Wonder if you would like to ask a question over the phone. Please dial star one and record your name when prompted our next question comes from Mayor Shields with K VW. Your line is now open.
Thanks. Good morning, one technical question as I had said at the language you used for stopping operations in Russia spending rather than I guess terminating them because I think if there's any offsets to organic growth in our problem.
Can you give us some services right now.
And you highlighted.
Kristian covered it perfectly there was not.
It's really in the end are very very.
Minimal impact overall in terms of our core business, obviously, a lot going on and says we support clients and are in the processing suspending operations, but minimal.
Minimal impact.
Okay no it takes off like a.
Second question could relate.
Related to what's been asked already but right now there seems to be a I don't know what great where does the frenzy of.
Newly formed or do we strengthened reinsurance brokers that want to rapidly become I guess the number four in the marketplace and I wonder, whether that's actually impacting the competitive environment for reinsurance brokerage.
Listen as you step back.
We see opportunity on the reinsurance side as we said before.
Love this opportunity and it isn't just with our insurance clients and by the way its formidable there and and what we're doing with tyche and our teams really coming together as a capability that really addresses client need it's exactly what I was talking about before and that's what we're about and we see tremendous opportunity. There also suddenly capabilities on the reinsurance side, what we do for insurers.
Coming more and more applicable in the commercial marketplace.
The most sophisticated companies in the world are are required to kind of analytics.
A decade ago, only insurers, who really look to receive and so for us we see a tremendous tremendous opportunity and a lot of what you see us doing is not just competing in the existing market as it stands today, but it is truly creating net new markets.
And what we're doing across the board in climate in that new market. Some of the work we're doing in IP. Its core market, but also net net new market and so what we're essentially saying is we're going to increase the size of the pie with the content and the analytics, we have and the capability and colleagues we have in place and we see tremendous tremendous opportunity over time, it's a big contributor as we think about minting will do.
Or greater over time, Eric anything else you'd add to that cause the detail you know maybe Greg the only thing I would add because I think you said it well is having a global capability, having deep analytical insight being able to deal with clients needs using the global marketplace. All critical to the core of what we do today for our reinsurance clients and we'll continue to do.
But I do say you hit it well a lot of the issues that the.
But the insurance company clients have today are these future risk trying to handle cyber as a product trying to think through climate, if you're a homeowners insurer. If your P&C insurer, how do you deal with life from a mortality risk of its pandemic. So the opportunities for US there are very strong and so I'm not surprised that it's drawing call.
Petition that's okay. The reality is we feel good that our franchise and the team very closely aligned and we continue to make investments to make sure they have cutting edge capabilities.
Okay, great. Thank you very much.
Our final question comes from David Miller Tamaddon. Your line is now open.
Hi, Thanks, good morning, all.
Had a question Oh I'm, Greg you spoke about voluntary attrition you know continuing to be Oh at favorable levels to a pre COVID-19 levels.
But I guess I'm wondering if you could just talk about how new head count adds have trended up over the last few quarters over the last year or two compared to compared to pre 19 or pre COVID-19 levels.
I'll offer an observation, but you know we don't talk about head count per se for us. It's just not how we think about talent. We're investing as we described before and it really in content and capability. So that our colleagues get better they see opportunity differently. They they grow professionally and literally just adding someone is very different than develop.
Organic capability and help.
Going to call it get better so we're gambling analytics heard just talk about reinsurance are all forward analytics. They are no longer looking in the rearview mirror and thinking about what was there they're thinking about how you've modeled what's going to happen you put that in the hands of your colleagues is extremely extremely powerful and it really is a new way to an evolving way to compete and we've been adding capability in the form of colleagues to do that.
Absolutely and we've been adding organically in terms of investment.
More analytics to support our colleagues. So it has been trending very very positively. It's led to as you can see seen US report topline growth, which is a record for us operating performance record for US and you know trends in free cash flow a record for US and this is aon business services platform in the context of that is is really is really unique. It is you know it is.
It's the next chapter because it's not just about efficiency. It really is about how we work more effectively with our clients on behalf for a call with our colleagues.
Got it okay that that that's helpful. Thanks for that color and then just a follow up question in commercial risk solutions in the press release I saw I mentioned double digit growth in the U S, Canada Asia Pac, but didn't see a comment on EMEA and the U K.
So I guess I'm wondering if you could just elaborate on how growth trended there throughout the quarter.
And also you know how expectations are there given what looks like a potential us severe slowdown and in the economy in that region.
Sure, Greg maybe I'll, maybe I'll take this one this is Eric from a commercial risk standpoint, our U K and EMEA business actually had very solid quarters, both from a client retention and new business development and the like.
I would say certainly the war in Ukraine is closer to home for them and it's certainly a topic of their clients' discussion.
Topics like supply chain political risk credit are all sort of front of mind for a number of those clients.
It is an opportunity in the end for us to provide real value for those clients on those topics and so I would say we're focused very much on the wellbeing of our colleagues that were affected that are often familiar personally too a lot of our EMEA colleagues.
We're doing all the right things, there, which I think ultimately helped build the culture, but certainly the work and the need from our clients on our European clients in our U K clients.
<unk> is almost more heightened than it is in other parts of the world because they're so close to it but they had very strong first quarter is expected to have a very solid year as we go through 'twenty two.
Yeah.
Okay, great. Thanks, and maybe if I could just sneak one more in.
The.
The line item I look at when I when I look through the results of day on that I'm not totally sure how to think about is the other income line item, which has bounced around a lot.
$25 million this quarter.
Is there a way I should think about that going forward is there any help you can provide me as I think about the earnings power of of a on going forward.
Sure.
Sure.
Well.
Oh, well, it's just continued portfolio management. So you should think about our business. We continue to manage the portfolio on a ROIC basis, and we divested some lower gross Laura 10 businesses and we model that other income line is zero ourselves, but you know what we would say is.
As you know as you continue to Ah think about Aon will continue to improve performance driving revenue growth higher revenue growth higher margin investments organically and Inorganically and continue to divest our lower revenue gross margin portions of our portfolio and so that's what you saw again this quarter.
Got it okay. That's helpful. Thanks for the color.
There are no further questions in queue now back to Greg case for closing remarks.
I wanted to say, thanks, very much everyone for joining the call. We appreciate it and look forward to talking to you next quarter.
That concludes today's conference. Thank you all for participating you may disconnect at this time.