Q4 2022 Aon PLC Earnings Call
Speaker 1: Music
Speaker 2: Good morning and thank you for holding. Welcome to Aeon PLC's fourth quarter and full year 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 like to also remind parties that this call is being recorded. If anyone has an objection, you may disconnect your line at this time.
Speaker 3: It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature, as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historic results or those anticipated.
Speaker 4: Information concerning risk factors that could cause such differences are described in the press release covering our fourth quarter and full year 2022 results, as well as having been posted on our website.
Speaker 5: It is now my pleasure to turn the call over to Greg Case, CEO of AMPLC. Good morning everyone. Welcome to our fourth quarter conference call. I'm joined by Chris Todayvis, our CFL and Eric Anderson, our president. As in previous quarters, for your reference, we posted a detailed financial presentation on our website.
Speaker 6: as we start 2023, continues to reflect tremendous dedication by our colleagues and the power of our United Strategy to support clients.
Speaker 7: and if they plan to address their needs of tomorrow.
Speaker 8: 2022 was a year in which we continue to see clients focus on both the challenges and opportunities for increasing global risk. And the opportunities to engage clients continues to grow. The commercial risk, our latest weather requirement and catastrophe insight report, sized global economic losses for natural catastrophes at 313 billion.
Speaker 9: 4% over the 21st century average. And with only 42% covered by insurance, 190 billion protection gaps.
Speaker 10: In wealth solutions, equity and 15-come market volatility in the back half of the year, creating demand for our wealth solutions colleagues, sale program stations, reassess retirement readiness, and financial well-being. And in health solutions, which includes our human capital business, the continuation of broad trends around the changing workforce.
Speaker 11: Become a seat health culture, wellness, engagement, and inclusion are growing and focused on importance across the T-suite and the states have never been higher.
Speaker 12: In this environment of increased risk and complexity across so many fronts, our colleagues are increasingly relying on ANU-NITED, which would enable them to bring the full force of our firm, including core offerings and innovative solutions of scale to address evolving client demand. Turning to financial performance.
Speaker 13: In the fourth quarter, we delivered organic revenue growth to 5%.
Speaker 14: Highlighted by 9% growth and reinsurance, 7% growth and health solutions, and 6% growth and wealth solutions.
Speaker 15: In Reinsurance, our teams were able to deliver strategic advice and data-driven analytics very early on in the renewal process to help clients navigate difficult market dynamics. This market leadership benefited our clients greatly in a challenging 1-1 renewal and reflects our strong performance.
Speaker 16: In Health Solutions, we saw strength in our core H&B and in Human Capital, both of which benefited from enhancements to our offerings, tools, and platforms, and increased client focus on employee health, rewards, engagement, and well-being.
Speaker 17: In Wealth Solutions, our team delivered the strongest quarterly organic revenue growth in over five years, as our teams worked tirelessly to respond to client demand resulting from market and interest rate volatility, particularly in the UK, and continue to help clients execute on pension risk transfer, strategic pension management, and respond to regulatory changes.
Speaker 18: And finally, commercial risk grew 4% in the quarter and 6% for the year. We delivered double-digit organic revenue growth in Canada and Latin America and strong growth in Europe , the UK and Asia Pacific. In the US, otherwise strong results continued to reflect the impact of the external M&A and IPO environment on M&A services.
Speaker 19: This impact reduced quarterly organic growth by 5%, and annual growth by 2.5%. And while this short-term pressure may continue into Q1, over the long term, we are very well positioned in this highly attracted business.
Speaker 20: but have significant opportunities to contribute to long-term top and bottom line growth.
Speaker 21: revenue growth of 6% is a direct result of our AN United strategy, and is a key driver of strong top and bottom line results for the full year. The adjusted operating margin has expanded 70 basis points to 30.8%.
Speaker 22: The justice areas for share grew 12% to 1339. Overcoming a 3% or 44% effects headwind.
Speaker 23: Free cash flow exceeded 3 billion with free cash flow in margins of 24.2 percent. Both are highest ever. And we completed 3.2 billion of share buybacks, demonstrating our confidence in long-term value of the firm.
Speaker 24: Our team's performance positions us exceptionally well to deliver in 2023 and over the long term.
Speaker 25: Looking back, since 2010, we've reported 4% average organic revenue growth.
Speaker 26: over 1100 basis points of margin expansion, or about 90 basis points per year, while adjusted EPS and free cash flow increased to the compound annual growth rates of 12% and 13% respectively.
Speaker 27: More important.
Speaker 28: We view the Go Forward opportunity and momentum higher now than any time in our history.
Speaker 29: Looking ahead, we continue to expect mid-single-digit or greater organic revenue growth for the firm, margin improvement, and double-digit free cash flow growth for the four-year 2023 and over the long term.
Speaker 30: Reflecting on the year, we would offer a few observations on how AN United continues to deliver for clients.
Speaker 31: The steps we've taken over the past decade, including our single brand and single P&L, put us in an exceptionally strong position to deliver for clients and have significant impact on some of the greatest opportunities and challenges they face.
Speaker 32: These ideas are not new. They're a continuation of over a decade of progress on the areas highlighted in our AMUnited Blueprint.
clients, colleagues, innovation at scale, and Aon business services that are increasingly interconnected and mutually reinforcing.
On delivering innovation at scale, the platform we built not only enables innovation of new concepts as we've demonstrated in areas like intellectual property solutions in climate, but increasingly enable us to bring together our analytics and expertise for new solution development, both come within solutions minds and connected across our business.
For example, our Health Solutions team has developed an Aon Health Analytics Platform supported by hundreds of data scientists and credentialed health actuaries, as well as experts from Human Capital and AI Business Services.
It's designed to help clients assess and improve their employees' health, which in turn helps deliver well-being, productivity, and lower cost.
Within this offering, driven by proprietary analytics, we can assess data around employee health information, insurance and claims, workplace safety, absence and engagement data, and external data on health trends and solutions, which together form a robust view of employee physical well-being. Within this offering, CakeCLJ's
With this insight, our teams can recommend individualized solutions, including better insurance offerings and target programs.
As an example, one manufacturing client wanted to improve employee's physical well-being and reduce costs.
Together, we designed a comprehensive long-term well-being strategy and a customized health program that includes 12 vendors.
and targeted specific health and wellbeing programs for employees based on individual factors correlated to success.
The results were impressive. In our target group, as compared to non-participants, we saw meaningful improvements in selected health metrics at 24% lower cost per person.
Further, the platform allows for rapid scale and distribution of the solution that help our clients drive workforce health, wealth, and productivity.
Equally important, our colleagues love having this kind of impact, which is an important driver of our very high Aeon colleague engagement.
And we see examples like this across the firm every day as we help our clients manage risks and support their people. And this demonstrates the opportunity to continue delivering innovative solutions at scale to address our clients' biggest challenges.
To summarize, we begin 2023 in a position of strength. Our firm is more connected than ever before. Needless to deliver better solutions for clients and to better support our colleagues. A.N. United will continue to deliver results now and over the long term for our clients, colleagues and shareholders, and is reflected in our progress to achieve key financial objectives. Now I'd like to turn the call of the minister for a process on our financial progress in 2022 and a long-term outlook.
Thanks so much Greg and good morning everyone. As Greg highlighted, we delivered another strong quarter of performance across our key metrics to finish the year.
In the quarter, we translated five percent organic revenue growth into 40 basis points of adjusted margin expansion and strong growth in adjusted earnings for share.
So the 40th 2022 organic revenue growth was 6% adjusted operating margins increased 70 basis points to 30.8%
And we've generated over $3 billion in free cash flow, an all-time high.
We look forward to building on the momentum as we head into 2023.
I would also note that reported revenue growth of 2% in both Q4 and the full year includes an unfavorable impact from changes in FX of 4% in both periods, primarily driven by a stronger US seller versus most currencies. I'd also highlight that fiduciary investment income, which is not included in our organic revenue growth, was $41 million in Q4 and $76 million for the full year, or 1% in both periods.
Moving to operating performance, we delivered strong operational improvement in Q4 with adjusted operating margins of 33.2% and increase of 40 basis points to mild organic revenue grows and efficiencies from Amazon's services. Overcoming expense growth, including investments in colleagues and technology to drive long-term growth.
and some ongoing resumption of T&E.
Looking forward, we expect to deliver margin expansion in 2023 and over the long term, as we continue our track record of cost discipline and managing investments in long-term growth on an ROIC basis. As we previously communicated, we think about margins over the course of the four-year, driven by three areas. The first is top line revenue growth.
The second is portfolio, Nick Schiff, to hire margin businesses as we invest disproportionately in areas of increasing client demand, supported by data-driven solutions to deliver the insights and advice that help our clients protect and grow their organisations.
And the third area is increased operating leverage from ongoing productivity improvements from our Aon Business Services Platform.
I'd highlight that Aon Business Services continues to be a key contributor to margin expansion.
and represents a competitive advantage, especially in a high-inflationary market.
Our AMDF Services platform continues to drive efficiency gains, improved quality and service, and increased innovation at scale.
During 2022, we continue to make progress on our own business services and driving efficiencies and enhanced services, particularly through process improvement, automation, and the use of artificial intelligence.
For instance, our captives business has clients with hundreds of legal entities to each require multiple policies.
Previously, the process of checking policies was manual and inefficient.
We've now moved to a digital solution that could identify differences quickly and accurately until we leave the clients much more quickly.
Similarly, the use of AI is increasingly enabling us to deliver better solutions to clients.
For example, we delivered a new solution for our human capital clients using an AI-powered search engine that provides them with insights on technology talent globally, including geography-based pay differentials.
This is essential for finding the best technology talent and optimizing within the client's existing workforce, a keyer of growth for many firms.
As we've said before, these improvements not only improve accuracy and client service delivery, they also help free up our colleagues' time for more valuable client activities and drive better outcomes for our clients.
Organic growth and margin expansion translated into adjusted EPS of 5% in Q4 and double digit growth of 12% for the full year.
As noted in our earnings materials, FX translation was an unfavorable impact of approximately 0.09% and 0.44% for the full year 2022.
If currency remains stable at today's rate, we would expect an unfavorable impact of approximately 13 cents per share in the first quarter of 2023 and 12 cents per share for the full year 2023.
heading to free cash flow and capital allocation.
We generated over $3 billion in free cash flow in 2022, contributing to our long-term track record of growing free cash flow at 13% KAGA since 2010.
Our outlook for free cash flow in 2023 and beyond remains strong, and we continue to expect to deliver double-digit free cash flow growth for the full year and over the long term, driven by operating income growth and working capital improvements.
I've note CapEx returned to a more normalised level in 2022 as we made ongoing investments in ADS, enabled platform and technology to drive long-term growth.
As we've said before, we manage cat-backs like all of our investments on a disciplined return on capital basis.
Given our strong outlook for free cashflow growth in 2023 and beyond, we expect sharer purchase to continue to remain our highest otherwise the opportunity for capital allocation.
We believe we're significantly undervalued in the market today, highlighted by the approximately $675 million of share approaches in the quarter and $3.2 billion of share approaches for the full year.
We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address unmet client needs.
We've invested in expertise and content to help meet our clients' needs, such as our Q4 acquisition of ERM, a Mexico-based leader in risk assessment modelling, which expands our catastrophe modelling and consulting capabilities in reinsurance.
Our M&A pipeline continues to be focused on our highest priority areas that will bring scalable solutions to our clients' growing and evolving challenges.
We will continue to actively manage the book, folio and a safe, all capital allocation decisions on an ROIC basis.
We ended 2022 with an ROIC of 30.6 percent, an increase of nearly 1900 basis points over the last 12 years.
Now turning to our balanced sheets and dip capacity.
We remain confident in the strength of our balance sheet and manage liquidity risks through a well-latted debt maturity profile.
We expect to add incremental debt as EBITDA grows over the long term while maintaining our current investment grade credit ratings.
With respect to interest rates, I know that our term debt is all fixed rate, with a weighted average interest rate of approximately 4%, and a weighted average maturity of approximately 12 years.
I've known our pension liability improved as interest rates increased.
As a continuation of our pension D risking effort, I'd highlight that we completed an annuity settlement transaction in the fourth quarter, resulting in approximately 300 million reduction in our pension benefit obligation.
This continues to be an incredibly attractive environment for our clients to do pension risk transfers and we continue to see very strong demands from clients.
We've done substantial numbers of pension-risk transfers in the US and the UK, and they're a leader in the space.
In summary, 2022 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 over 3.6 billion shareholders through share of purchase and dividends.
The success we achieved this year continues to provide momentum as we head into 2023. While we're seeing signs of economic uncertainty, we remain confident in the strength of our firm and after natural guidance for 2023. Overall our business is resilient and our AM United strategy gives us confidence and our ability to deliver results in any economic scenario.
is in the question can.
You may press star 2 if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we ask that you each keep to one question and one follow-up. Thank you.
Our first question comes from the line of a least green spent with Wells Fargo. Please proceed with your question.
Hi, thanks. Good morning. My first question is on your margins. So if we look in the quarter, it seems like your margin declined, excluding the benefit of fiduciary investment income. So I'm just trying to get a sense of the drivers and outlook you see for your margin, excluding the NII benefitting.
in the full year of which 40 basis points came from fiduciary investment income. And we really think about margin expansion over the long term. Our margin growth has been 1120 basis points over the last 12 years or 90 basis points a year for 12 years. And it's really driven by revenue growth, the portfolio mix shift to higher margin areas.
and the productivity benefit we are getting from Aon Business Services. So we are extremely confident with that track record Elise, for our financial guidance which is mid-single digital greater organic revenue growth, margin expansion for the full year 2023, and double digit free cash flow growth for the full year 2023.
So assuming we continue to get a tailwind from fiduciary investment income, I guess in 23 you'll probably, you know, balance letting that all fall to the bottom line and making some of the investments similar to what you did in the fourth quarter.
I think that's fair. We are continuing to drive margin expansion each and every year, overcoming investments we're making in the business, because you saw in Q4, we substantially invested in IT. So our IT expenses up. We're investing in platforms and technology to drive innovative solutions for clients.
and we'll continue to invest in our colleagues and we'll continue to invest in M&A and we'll continue to invest in a lot of areas to drive long-term growth. But we really think about this over the course of a full year, which is really what matters
Thanks. And then my second question, you know, we've heard a lot about a lot of strong pricing coming out of the January 1 We Insurance Renewals. Can you give us a sense of the outlook for your We Insurance business? I'm not sure if you've highlighted in the past what the concentration is in to property lines, but can you give us a sense of just...
How you think that business should perform in an environment where we're seeing as robust catastrophe, reinsurance price increases that we saw January 1?
Thanks, Leif. This is Eric Anderson. Why don't I take that one to kick us off? It's great to be with you this morning. Listen, the reinsurance business continues to be a very strong performer for us as we go through the year. And I would say certainly a lot of attention spent on PropertyCat for good reason. Certainly the losses, the interest rate moves.
the restructures of the programs that were happening throughout the season. I would say property tech continues to be a dominant part of the business, but it's not a whole business. Certainly casualties, specialty and others continue to be a big part of it. So I would say as I think through the future of what's going to happen over the next 12 months.
We continue to see a very robust opportunity for the team. They're spending a lot of time with data analytics, better insight to help our primary clients figure out their positioning. But the end game, I think when you think through the one-one renewals, is that there's more risk, more volatility has been pushed to the primary insurers.
And the outcome of that for them will be either risk appetite. They're going to have to be very disciplined on the risk that they assume. The property space in particular, they'll use other methods like facultative reinsurance. They'll probably be selected by and throughout the year. And so I would say the one one season, a little different than yours past, which I think is what you're alluding to.
And ultimately, they're going to continue to manage their portfolio as the year progresses. And I might just add to that, at least, the theme was exceptional. I'll tell you, the one-line renewal had a unique market dynamic and taking the analytics and capability we have in place and what we're able to do and how we deliver to the market.
well before anyone else was truly unique and helped our clients tremendously as they navigated through the marketplace. And as Eric highlighted, more risk is really more opportunity to demonstrate value added.
Thank you.
Thank you. Our next question comes in line of Andrew Clegramman with Credit Suisse. Please proceed with your question.
Hey, thank you. In your slides you describe the impact on organic revenues from the market as modest, positiveitter vision of hand- toolbar. We also Laguna Woods,arian Practice System Analysis.
Impact in both commercial risk and reinsurance.
risk and reinsurance.
Can you give a little more color on that market impact and maybe discuss the issue of commissions versus fees and whether your fees were level year over year or whether commissions were driven down in each of those two segments?
After two end, we'll start, Eric, you can chime in as well here. First, Andrew, we'll come back to the idea. We talked about market impact. This is a function of price as you're highlighting, but also insured values over time. Obviously, a lot's happening on the insured value front. And this year, we'll be broadly getting this property.
really think about it on the employees side and all aspects, just sort of, you know, what's driven by changes in those values. And that actually has much more impact than just price per se. As we've highlighted, you know, step back, it really is modest impact, you know, over time. We saw that in this recording. We think we'll see that throughout the year.
And it really for us is about value. We deliver value for clients, and we get benefit from that because they get benefit. And we are very, very clear about that. And as Eric highlighted on Alisa's question, in an environment with greater risk, the opportunity to provide greater value is real and meaningful. And we are doing it, and we are benefiting from it. So that's what you are seeing overall.
different tools to manage that market dynamic. They use captives, they use retention, they use limits purchased. So it's not a direct line from what a carrier would say about a property market rate versus what a client actually assumes. So there's a lot of tools that they have and we spend an awful lot of time, as Greg was saying, trying to add additional value for them using financial modeling and techniques.
to try and limit that exposure. The other products, casualties, cyber, financial products, etc. around the globe, I would say are more stable. We're a good 3.5, 4 years into a market cycle, but I think those products are coming more to an equilibrium.
And the last thing I would say about your question on commission fees and ties back to what Greg said, is one of the benefits of being a fully transparent broker where we engage our clients in.
and what we get paid for the value that we provide, we don't really care whether it's a commission or whether it's a fee. What we really are driven by is are we providing value to clients and are we being paid fairly for that value? And so whether the cycle is up or down, it doesn't really matter to us. We engage in those conversations in a fully transparent way.
I think we have great relationships with our clients because of it. Okay. So maybe just so I can interpret it that the 4% plus revenue growth in commercial risk, the 9 plus in reinsurance, both of them were more a function of what Aon was delivering as opposed to...
inflationary impacts on exposures and kind of a very firm pricing environment. I should think about it as more and very little of these market issues played through. Is that the right answer? If you think about it, I'll just use reinsurance as an example. It's historically our smallest quarter.
and it's not treaty driven. It's driven around faculty replacement.
banking, our technology consulting group. So not really market driven issues, but more value issues in terms of usage of those tools to help clients manage their exposures.
Okay, and then, you know, just quick one on the tax rate at 9%. Is that a sustainable tax rate or should we be thinking about it kind of drifting up a little bit toward, you know, say 12 last year in the quarter?
So what we would say is we don't give forward guidance on tax, but as I look back historically, exclusive of the impact of discrete items, which can be positive and negative in any one quarter, our historical underlying rates in the last five years was 18%. And that's the result of us being a global company, domiciled in Ireland.
with a global cash management structure and a global capital structure. And so we're really confident about where we are.
Confident. And.
So should I be thinking more toward the 18?
Again, we don't give guidance going forward on tax rate, but I can tell you that as we look back historically our historical underlying rate for the last five years was 18%.
Okay, all right, thanks a lot.
Thank you. Our next question comes to mind of Jimmy Buhler with JP Morgan. Please proceed with your question.
Good morning. So first is that a question on your some of your comments on the reinsurance market. You mentioned a challenging environment for your clients, especially in property reinsurance. Are you expecting a similar trend before mid- year renewals as well or do you expect any sort of shifts in capacity?
entering the market. So Jimmy, right now we have not seen a lot of new capacity enter the marketplace, although there is certainly a lot of whispers and discussion about, you know, whether there's opportunity for additional capital to enter. So I would say as we go into the April 1 property renewals, which are dominated by Japan.
and then June , which is dominated by Florida. I think as we sit here today, you would have to think that those market dynamics would continue. Okay, and then just similarly on commercial lines, obviously pricing's been pretty good for a while. It seems like it's softening a little bit, given the results that some of the carriers have reported.
of exposures that are being covered, but again, on a macro basis.
Certainly property, I think, continues to be the firmest as the primary carriers now deal with the effects of higher retained risk that they were traditionally passing on to reinsurers. But whether it's the casualty lines, you know, general liability, cyber, financial lines, DNO, professional, that type of thing, we're definitely seeing a stabilizing of that market.
as more capital has come into those areas and clients are being given more choices in what they're doing. And I would also say that the insurers are four years into remediating their portfolios.
And so there are much more specific as to the areas that they choose to compete in and the kind of business that they want to write, which does give clients a more targeted choice of potential and consumer partners.
Jimmy, in the context of this, if you step back and think about the implications for insurers, Eric has highlighted very well kind of in a product by product basis. As I described in my comments and Krista amplified very well, this is really about a client leadership approach for us and fundamental demand is going up. The opportunity to talk to clients about risk out there in the world and how it's going to help them. All right, so let's take that video on the risk side, go ahead and Gulch over the et f vis.
On taxes, do you see anything in terms of like a minimum global tax or something that based on what's out there right now and do you have any views on how it would impact your financials?
Jimmy, we don't comment on any future legislation. We run a global tax structure and we've had an underlying rate of 18% for the last five years and we feel really good about where we are.
Okay, thank you. Thank you. Our next question comes in line of Rob Cox with Goldman Sachs. Please proceed with your question.
Hey, thanks. And first, maybe just a longer term question.
You've talked about getting margins up into the 40% plus area. I know you don't disclose margins by segment, but curious if you could give us some color on which of your businesses have some of the most opportunity there and its commercial risk could ever get to that level.
Well, I'll just take a step back for a second. As we've talked about, it really is about the ticket to greater organic growth, improving margins over time, and really driving double digit free cash flow growth for the firm and all aspects contribute. And as you're hearing in our commentary, more and more are connected.
The solutions we're providing, some of the most innovative solutions we're providing really are a function of how our commercial risk business, our reinsurance business, health, wealth, and talent businesses come together. And so we're confident about continuing to drive margin improvement as we've described, organic revenue growth mid-single-digit or greater and pre-cash flow growth double-digit.
and obviously strong growth in the quarter. I was wondering if that was more driven by the pension risk transfers or some of the regulatory changes we're seeing particularly in Europe . And if your outlook considers continued tail wind from these areas.
I just would start overall and I'd love to have that additional color here. Look to tea center phenomenal job. There's a lot going on out there for our clients in the arena. A lot of complexity is we've described before and whether it's on the interest rate side of the overall, you know, the general state of the overall economy and what's happening.
with potential risk transfers as you described. So the team has just done an exceptional job really on a global basis helping our clients navigate across very, very challenging marketplaces. And you saw it show up in the year. You certainly saw it show up in the quarter. Eric, what else did you add to that?
Listen, I think the regulatory changes with the global minimum pensions is such a big part of the business in the retirement side. So we saw a lot of growth there, especially out of the UK, but also a piece of growth in the US as well. There were some headwinds with the investment business because of AUM being down with the market.
But overall, we're really well positioned. And I think, Chris, that you mentioned in your opening comments about the pension risk transfer piece. Also, I think we're an industry leader in that space and really have a great team to do it.
And look, I just finished with what we're doing on the A on-site. We're following the same advice we give clients. And over the last 15 years, we've reduced the risk in our pension substantially through steps to close the plans for new insurance, freeze benefit accrual, match-ups with liabilities and purchasing mulees to settle a portion of the pension liabilities. And it's resulted in much less economic risk.
and much reduced cash contributions. And so our remaining plans are well funded and hedged. And we're really managing on a cash basis. And you can see that our cash contributions have come down substantially over time. With only 65 million, we're contributing in 2023 in cash.
a continued downward trend in cash. And so we're really excited about the progress we continue to make on our own plans in de-risking as you saw in Q4 with the 300 million of pension benefit obligation coming off the balance sheet and in the decreased cash contributions.
new downward trend in cash. And so we're really excited about the progress we continue to make on our own plans in de-risking as you saw in Q4 with the $300 million of pension benefit obligation coming off the balance sheet and in the decreased cash contributions. Great. Thanks for the call.
Thank you. Our next question comes in line of a similar with UBS. Please proceed with your question.
Mr. Bloomer, your line is live.
Sorry about that, I was on mute. My first question is on the margin. I was hoping you could kind of expand on your margin outlook away from fiduciary income. I guess would you be able to still expand margins in the core business away from the fiduciary income benefit in 2023?
And then where could we potentially see that margin improvement? I would assume lower real estate would be a component of that.
So Weston, thanks so much for the question. As we think about Margin expansion, we think about it holistically over the course of a year at the Aon level.
we've grown margins as I mentioned 1120 basis points over the last 12 years or 90 basis points a year for 12 years
And it's driven by revenue growth, a portfolio mix of shift as we disproportionately invest in higher revenue growth, higher margin businesses organically and inorganically, and productivity benefit from ABS.
So we don't look at it separately from you know investment income or frankly the underlying investments We're making in the business each and every year to drive long-term growth and innovation for our clients
Great, thank you. My second question, I know you highlighted that you were seeing some signs of economic uncertainty in your prepared remarks. Can you just... pl company, you were explaining how these ideas or more widely used in terms of attention perhaps, like, groups per se.
expand on kind of where you're seeing those signs of weakness and then what economic backdrop does your guidance assume? I appreciate the question. We are seeing uncertainty or complexity or inner connectivity. Everybody want to describe it really everywhere around the world. We do want to emphasize this is not just risk, it's opportunity.
around a changing environment. But we are seeing it really around the globe, the impact of interest rate changes, inflation, geopolitical challenges, really the fundamental issues I described in the opening comments around things like health and wealth and talent, the evolution from just engagement to now wellness and all things that come with that, all aspects of that, how you think about managing that, sort of using reinsurance analytics and commercial risk analytics in the context of people. All these things are coming together to create opportunity for us. And we are really seeing it everywhere in addition to the challenges you described.
Great, thank you. My last one, a follow up on tax. I believe you had a tax holiday in Singapore that ran through September of 2022. Was that extended going forward?
Our operations in Singapore, including our investment, center and local business are on a central part of operations today and we expect the relevant important part of our global strategy going forward. We did finalise our negotiations with the Economic Development Board in Singapore and we'll provide an update in disclosure and our 10-year arrangement in our 10K.
Great, thank you for taking my questions.
Thank you. Our next question comes from the line of David Mote-Levin with Evercore ISI. Please complete your question.
Hi, thanks. Good morning. I had a question on commercial risk. Greg, you mentioned there was a five point drag from the lower transaction volume in the quarters organic growth. I guess I'm wondering if that is going to be a similar sized drag as we think about first quarter or.....
Is it going to be lower or higher? I guess how should we think about that as we progress through the 323?
Yeah, and David, thanks for the question. Really, we were underlined. Our commercial risk colleagues working across the firm have done a tremendous job and drove growth as I described everywhere around the world, including in the US with the exception of the external M&A and IPO environment, which created the headwind that we described. But even in the context of that, they've just done a magnificent job that you know that's an amazing business.
and we are incredibly well positioned in the context of it. And we'll see how it plays out. We highlighted, maybe dragged into the first quarter and we'll see what happens on the M&A Services front, but overall it's an exceptionally strong performance in terms of what we've done overall. And this is just one piece, and as we described before, this is really about overall global Aion and what we can do.
Where did that stand at the end of 2022? Did that grow at all? No.
Listen, I'm not sure how much we disclose on a specific people because it isn't about the individuals for us from the standpoint of how we help them become more effective, more capable, greater abilities to deliver the firm. And I would tell you as we look at that, we've been incredibly pleased with the progress when you think about overall and United and all the aspects around it.
and great progress, but obviously we continue to invest tremendously in our colleagues and bringing colleagues on and you saw that in 22. You'll see it again in 23 and 24.
Got it. Thanks. And I guess just to follow up on that, Greg, you mentioned, I guess it sounded like just productivity enhancement of your existing employee base. Is, is, are there any metrics that you guys track that you can help us think about that? You know, David, there are lots of metrics. We have them. We don't disclose them.
and United Strategy plays in that. And it is fundamental. And I think it's worth a couple of minutes here, David, to your question. If you think about it, we've been at this for 10 years plus. We saw back then client need was changing. We saw that we need to help them make better decisions to protect and grow their business.
We saw, you know, frankly, this is across all aspects of risk, not just commercial risk, all aspects of what we're doing, workforce, health, talent, etc. We also saw we had great capability, but like everyone around the world, it wasn't joined up and it wasn't driving innovation at scale. We saw that loud and clear, David, in terms of where we are.
We also saw, however, there were pieces and pockets when our colleagues worked together. We win more clients, we do more with them, we retain them longer, and we also deliver better and faster innovation at scale across the firm. And this fundamental truth, you know, 10 years ago, for us created a great deal of excitement, but it also created a real challenge, which was, okay, that sounds great. Everybody talks about this.
How do you do it? How do you accomplish that? And that's the Aon United strategy. And this is back to your critical question, how do we maintain performance and drive it over time? It is Aon United. The challenge has been as we've evolved it, and the opportunity is this required a fundamental design of organization around serving clients.
training, learning, how we think about leadership development, A on business services, fundamental to that, and some real, frankly, price of admission to really do this, single brand, single P&L, single leadership team, etc. And we are really bringing that online. You heard from both Kristin and I and Eric's comments as well.
is what we've done with AUnited is fundamentally to put us in a position to not just serve clients by a pollution line that really cutting across pollution lines to bring better capability to them. And in the current environment, the more difficulty becomes for clients, the more opportunity we have to bring value. And that's frankly what you're seeing, which is why we are confident in our ability to frankly not just make progress over the last decade as good for highlighted, but
why we are so excited about to go forward. Hey Greg, maybe I can give a little bit of color with regard to a client example just to bring it to life because I can't stress how important this is for us and what we do for our clients. We were recently engaged by a global firm in a specialized industry and was looking for...
just better risk advisory services around the world for their risk strategy, both globally and as well as locally. And to do this, we use resources from all of our solution lines in multiple spots. And on the surface, I would say this is the kind of work that we love to do for clients, but it's like, you know, just thinking about what you were just saying, Greg, when I think back.
to what we used to do, right? When we were operating under these sub-brands of Aon Risk Services, Aon Benfield, Aon Hewitt, and the others, it would have been a pretty disjointed process for us. There would have been all sorts of internal barriers within the firm that would have distracted us from the focus on the client. We would have internal P&L issues, like resource allocation, revenue sharing, etcetera, discussions.
I think you all get the point. But today with the AN United structure, we have five region leaders, four global solution-line leaders, who are focused solely on delivering for that client under the AM brand, with one P&L operating under the world, and it is powered by the AM Business Services model, which allows us to actually deliver that paper.
of the client, as we continue to find applications of solutions developed in one area, and then scale it to clients globally. We can't do that without AMBOR's and services enabling seamless connectivity across the globe. Second, AMBOR is not a field of story. It's designed to enable our colleagues in every way to deliver better results for clients, which translates into stronger top and bottom line performance.
And ultimately, that translates into free cashflow growth, as evidenced by our billion and free cashflow, and 24% free cashflow margin, as we put our highest imbest use to the capital, which we believe will continue to drive long-term value creation for shareholder.
Translating revenue into free cash flow is a scaled operational outcome and it's done at scale globally in over 100 countries tracking by day, by country with great accuracy. This is not possible without Aon United and the detailed operating model we've got powered by Aon Business Services.
It makes us all really excited about the 2023 Go Forward momentum and how we scale its operation to deliver innovation for our clients.
So David, that was way more than you asked for on the initial piece, but you asked a very important specific question. What we are trying to convey is that the answer to that is key, but it really is fundamental to how the integrated approach happens and how it drives performance, and how we are not complete with the journey. There is a lot more opportunity ahead of us.
And it also connects with our colleagues because they love driving the solutions to Eric as Christ. It creates engagement. It creates excitement around it. If you can wow a client, you've done something that is truly kind of makes the week and the month. So it's a huge opportunity and we stress it here because it's so fundamental to our work.
to our success with our clients and obviously with all of our investors as partners as well. So hopefully that's helpful. Thanks so much for the thorough answer. I really appreciate it.
Thank you. Our next question comes in line of Michael Ward with City. Please proceed with your question.
Hey guys, this is Charlie on from Mike. I guess first, in human capital organic growth has been really strong for many quarters. Now, wondering what the pipeline looks there, the mid macro uncertainty and camps being challenging. And you mentioned tech talent in your opening remarks, does that business, and if it's coming from front of the job market dislocation in tech?
So why don't I take the first one? Certainly Human Capital has been a very robust business for us over the last 24 months and we still see it. The data sales, the information around comp, the competitive account engagement assessment, all still very critical to the agendas of our clients. So we feel really good about that business and what it's done over the last 24 months and confident about it.
literally on the next 12 to 24 months as well. And on the text halos, go, go, go, go, go, go, please, please go. Sorry, on the text halos, we've got one of the most fabulous brands in the text space, Radford. And that was the example I gave on the opening remarks around using AI to actually be able to match.
and find the optimal tech talent at the right price anywhere around the world. And then to be able to also figure out where your tech talent is within your existing organization to be able to optimize your workforce. And so we do see that the tech dislocations being a fabulous time to utilize this AI technology.
to make sure that our clients get access to the best talent and optimize it in the right way. Got it. Thank you. And then you mentioned cyber pricing kind of being more in equilibrium now. I'm wondering how Aon's role in the marketplace has evolved over time as that market has grown a lot over the last several years.
Listen, I think the cyber market is continuing to evolve and will continue to do so as the threat actors change over time. I would say we're a leading provider of both risk management when you think about data security and the strategy to prevent cyber attacks, certainly with our straws free bird brand.
very strong in terms of its work with clients and then obviously the risk transfer aspect. I would say when you think about the cyber market today and where it's going, I would say the insurers have actually gone back to basics.
the way the quality of the underwriting, the in-depth understanding of what the real cyber exposures are, have allowed them to price it better, to understand the real risks, and frankly it's allowed us to distinguish and differentiate our clients and the work that they're doing around cyber protection, to be able to bring them to market in a way that gives them individual views, but...
It's become quite a market in terms of size, probably approaching about $10 billion to premium and both from an insurance and a reinsurance side, I consider it a market leader in this space.
Thanks for the call. Thank you. Our next question comes from line of Derek Hahn with KBW. Please proceed with your question.
My first question is on buybacks. It looks like buybacks float a little bit in the fourth quarter. Was there anything unusual driving that? I was a little surprised given the strong operating cash flows. The easy
No, we would just say that we continue to see across the firm that we deploy cash based on the highest return on capital opportunity. Buyback is top of the list, even at today's prices Derek. And so we that's why we bought 3.2 billion back in in calendar year, you know, 2022. And we expect buyback to remain the highest return on capital opportunity going forward.
Got it. That's helpful. And then my second question is on M&A. We've heard chatter about the M&A market kind of cooling a little bit. Are you kind of seeing that in the market and how does that impact your M&A appetite for this year?
From our standpoint, we see tremendous opportunity around the marketplace overall, and it's been from market stress and it even creates more opportunity. It's good to describe the art institutions are made around literally with the cash pool. It's a return of capital cash on cash return, and we've seen lots of opportunities out there. We also see lots of opportunities that are organically in our business, and we've been doing that with great success.
And the pipeline we see is as strong as ever before, but as Krista described, it's got to really add value. For us it's about content we can scale effectively, and that really drives sort of an outside of outcomes that are very powerful. Krista, anything else you'd add to that?
Yeah, I'm not going to just add, we've found some terrific companies that are invested in those this year. I mean, Tai Chi, fantastic capability in the capital modeling and analytics space and ERN in the modeling space in Mexico. And so we continue to invest in areas of high growth.
Okay, great. Just a follow up on the M&A landscape.
Can you remind us, you know, we know that Anne has moved in some of the M&A with cover wallet into the small commercial marketplace. Any ambitions to get into the Main Street US retail marketplace?
I know you just mentioned there were some market stresses. I believe there's some market stresses for some of the private equity rollups there. Just curious if that's any ambitions to get into kind of Main Street, retail, small, mid-commercial. Listen, as we step back, I want to make sure I understand the market segments that you're thinking about them. We, you know, we love the segments we operate in, which is really the large market, the middle-sized marketplace and the small commercial market. And you're absolutely right, Pete.
bringing cover wallow to the phenomenal is a capability much like many that we can scale. The scale not just in the small commercial market, but do you think about B2B to see in large companies with bringing that capability in the context of that? You know, think about kind of distributed businesses, franchises, things like that, phenomenal sort of opportunities. So we love the scale.
I guess we're a Marshall County agency or, um, you know, Brown and Brown, AG Gallagher, what were the, the sandbox that they're competing in and the, the smaller, uh, uh, size businesses versus the kind of fortune 5,000. We're looking a little bigger. We are cover cover ball.
We're absolutely active across the board. The question is how and how with content capability that lets us scale in those arrangements. And we've been very successful across all of those segment pieces. Not necessarily in the roll-up because of that size, that's supposed to have more capability. But it really has been, we love the segments. We great opportunity to cover while it was a great addition to the A-ON.
where we're able to provide distinct value to the clients. I would also say with our office, our 500 offices around the world, we engage with clients across all segments. There are only 500, 400 clients. We do an awful lot in the middle market and the small commercial. Our strategy is to bring product solutions.
using the expertise that we have across all of our capabilities and package them and deliver them in a way where we're providing the real value of using AOM as your advisor. So you get that product expertise, but delivered in a way where it's efficient and cost effective for them to be able to use our capabilities. Okay, it's interesting and helpful. My left follow-up is on.
club? Yes. So what I would tell you is, what we saw in 2022 was an interest rate stepped up in Q3 and Q4 of 2022. And so if interest rates stay where they are today, you'll see a similar impact to Q4 in Q1 and Q2. And so we would expect, you know, that...
increase if interest rates say where they are. And then for modeling going forward, every 100 base point increase in interest rates is approximately $65 million in fiduciary investment income. And there's no delay between interest rate increases and it impacting our fiduciary investment income.
Thank you. Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn this over back to Mr. Case for any final comments. This one to say thanks everybody for joining us today. We appreciate it and look forward to the next call.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Thank you for your participation.