Aon plc Q1 2023 Earnings Call

Speaker 1: as you positions are as uniquely capable of helping clients go on off and make better decisions that mitigate risk to their business and maximize the impact and engagement of their people.

Speaker 1: Take ESG or environmental, social, and governance as an example. These are major interconnected categories that cut across traditional silos. Our clients need a broad strategic view to understand and assess all the risks around ESG and any targeted solutions and capabilities to solve for these risks.

Speaker 1: Our recently published ESG Impact Report describes our work hoping clients address these issues as well as the impact across our firm.

Speaker 1: And we're delighted to report on our own progress against long standing commitments in these essential areas.

Speaker 1: First, on environmental, we're making progress toward our goal of net zero emissions by 2030 and have reduced our overall scope one, two, and three emissions footprint by 16% from our 2019 baseline and by 4% in 2022, enabled by efforts like smart working and supplier centralization through AM Business Services. On social and specifically around our colleagues.

Speaker 1: and united is not just a strategy. It's our culture and it reflects our commitment to inclusion, diversity, and the wellbeing of our colleagues. This year, we're continuing to embed IMD principles and practices and to hold ourselves accountable with increased transparency and oversight at all levels of the organization, starting at the top with our board of directors.

Speaker 1: On diversity, for example, we reported progress in 2022 and the percentage of female people managers and U.S. ethnically and racially diverse managers.

Speaker 1: In 2022, we also enhanced focus on learning development engagement and well-being, because we know that supporting our colleagues is not only the right thing to do for them, but it also ensures we retain, grow, and develop the best talent to continue to support our clients.

Speaker 1: And finally, on governance, we highlighted board review of top ESG and climate-related risks and actions from our ESG steering committee, as well as steps on cybersecurity and privacy all aligned with our long-standing overall enterprise-resistant strategy.

Speaker 1: While we're proud to report on these steps in our report, they're still work to do, and at the same time we're even more excited about the work we're doing to help clients. As many risks connected to progress on ESG align with our core businesses.

Speaker 1: On the people side, for example, we continue to develop new solutions while bringing together existing capabilities across different markets and geographies to address specific needs.

Speaker 1: One recent client, they see significant organizational change, realize many of her employees were unsure and unclear about title, career ladders, compensation mechanics. At the same time, this client needed to reduce cost, increase efficiency and simplicity, which they knew would drive engagement.

Speaker 1: to address we brought expertise from around the firm.

Speaker 1: Our commercial risk team brought deep understanding of this client's strategy and desired culture. R&D's and services platforms served as a powerful example of how we could help them simplify their operations and reduce costs. Finally, our health and human capital teams brought us serious solutions, including optimization and global benefits.

Speaker 1: and a skills taxonomy strategy to increase employee alignment and engagement.

Speaker 1: While the solution leverages many existing offerings, the real innovation is bringing these pieces together along with our A&M Business Services team, who provided insight and change management activities around moving to a business service model, an essential piece of the puzzle for our client.

Speaker 1: The result, our client is driving increased engagement with a clear, more effective benefit structure and talent strategy and outsourcing capabilities that will help drive simplicity and efficiency, all enabled by our teams coming together as they ununited. And we see examples like this across the firm every day.

Speaker 1: whether we help our clients manage risk and support their people. They demonstrate the opportunity we have to continue delivering innovative solutions at scale to address our clients unmet needs at a time when doing so has never been more important. Turning to financial performance. In the first quarter we delivered very strong organic revenue growth across our solution line.

Speaker 1: With 9% growth in re-insurance, 8% growth in health solutions, and 6% growth in both wealth solution and commercial wealth solution.

Speaker 1: In reinsurance, our teams are exceptional in guiding our clients to the one-on-one renewal environment, demonstrating the strength of our teams' advice, data-driven analytics, modeling and execution capabilities.

Speaker 1: In health solutions, we saw strength in core HB and in doing capital in a seasonally larger quarter for European health renewal, as our team and health clients navigate the ongoing challenging environment for their people. Become the team employee health, rewards, engagement and wellbeing.

Speaker 1: In wealth solutions, our team delivered another very strong performance with 6% growth driven by ongoing trends around regulatory changes like GMP equalization, pension risk transfer, and the layering impacts of the fixed income market volatility as our teams help clients reassess and potentially adjust their strategy.

Speaker 1: We would note that after two very strong quarters, Q223 will be impacted by performance fees in the prior year period.

Speaker 1: And finally commercial resolutions grew 6% in the quarter with strength in Europe and the UK and their seasonally largest quarter.

Speaker 1: Overall, we had served the property market, remains an area of increasing challenge and volatility. Market dynamics are causing ranchers to shift risk appetites regarding primary areas to accept more risks, which in turn means property placement is even more challenging for our clients.

Speaker 1: In this environment, our strength in analytics and the ability to respond to client's needs for cover in a capital agnostic way, bringing capability across re-insurance and commercial risk is essential.

Speaker 1: Our capabilities enable us to assess and analyze integrated broking options, including traditional risk places, wholesale, MGAs, faculty, captives, and insurance-like securities.

Speaker 1: By helping clients assess options across capital sources, we ensure they're able to optimize their own total cost of risk and risk appetite.

Speaker 1: For example, one client came to us looking to consolidate to a single property in terrorism program across 11 asset classes with over 80 billion in property values.

Speaker 1: Our team came together seamlessly across geographies and specialties to develop a program that leveraged traditional carriers around the world and a captive, successfully completing the program and driving significant cost savings for our clients, all enabled by the work we've done to break down barriers within our firm through Aon United.

Speaker 1: Overall, in the quarter, work please with performance of the strength of our A&U and the Strategy and A&U Business Services platform translated 7% organic revenue growth into 70 basis points of operating margin expansion.

Speaker 1: net of ongoing investment in the business for long-term growth.

Speaker 1: In this period of ongoing external volatility and increasingly interconnected risks, the opportunity for us to help clients is greater than ever. Physicians know it's very well to continue to drive a result in 2023 and over the long term. Now I'd like to turn the call over to Christopher or his thoughts on our financial performance from Long for Notlux for continued charitable value creation.

Speaker 2: Thanks so much Greg and good morning everyone. As Greg highlighted, we delivered strong operational performance in the first quarter highlighted by 7% organic revenue growth that translated into 70 basis points of adjusted margin expansion. This is a strong start to the year and we're very well positioned to continue driving results in 2023 and over the long term.

Speaker 2: As I reflect on the quarter, as Greg noted, organic revenue growth was 7% driven by ongoing strong retention and net new business generation.

Speaker 2: We continue to expect mid-single digital greater organic revenue growth for the full year 2023 and over the long term.

Speaker 2: I would also note that reported revenue growth of 5% includes an unfavorable impact from changes in effects of 3%, driven primarily by a weaker Euro versus the US dollar, as Q1 is our seasonly largest quarter for Euro-denominator revenues.

Speaker 2: I'd also highlight fiduciary investment income, which is not included in our organic revenue growth, was $52 million, or 1.4%.

Speaker 2: Moving to operating performance, we delivered strong operational improvement with adjusted operating margins of 38.7%, an increase of 70 basis points driven by organic revenue growth and efficiencies for May own business services, overcoming expense growth including some investments in colleagues and technology to drive long-term growth, and some ongoing results of T&E.

Speaker 2: especially compared to the prior period when business travel was still depressed by COVID-19.

Speaker 2: Looking forward, we expect to live a 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 RYC basis.

Speaker 2: As we previously communicated, we think about margins over the course of the full year, driven by three areas.

Speaker 2: The first is Top Line Revenue Bro.

Speaker 2: The second is portfolio mix shift to high margin businesses as we invest disproportionately in areas of increasingly client demand supported by Data Driven Solutions.

Speaker 2: And the third area is increased operating leverage from ongoing productivity improvements to our Amazon services platform.

Speaker 2: I'd highlight Ailders and Services continues to be a key contributor to margin expansion and represents a competitive advantage, especially in an emplacement market.

Speaker 2: Our Amazon Services platform continues to drive efficiency gains, improved quality and service, and increased innovation at scale.

Speaker 2: And related to A on Business Services, I'd like to highlight the essential role of A on Business Services in enabling our climate net zero goals.

Speaker 2: As a professional services firm, the biggest part of our own emissions is from our supply chain.

Speaker 2: Through the Aon Business Services organization, 90% of the spend is managed through preferred channels, which enables us to drive efficiency and also deploy decarbonization strategies.

Speaker 2: As Greg said, this resulted in a 4% reduction in emissions last year, while also allowing us to increase supply diversity utilization to 6% of our addressable US spend in support of our goal for run inclusion and diversity.

Speaker 2: Both meaningful accomplishments that are enabled by our United Strategy.

Speaker 2: Organic growth and margin expansion translated into adjusted EPS growth of 7%.

Speaker 2: As loaded in our earnings materials, FX translation was an unfavorable impact to approximate 14 cents per share.

Speaker 2: If currency remains stable at today's rates, we would expect an unfavorable impact of approximately four cents per share on the second quarter and 14 cents per share for the full year 2023.

Speaker 2: I'd also note other expense had a 19 cent per share unfavourable impact in the quarter, including a 5 cent per share unfavourable impact from an increase in non-cash net periodic pension cost in line with what we communicated previously.

Speaker 2: as well as an unfavorable impact on the gain on sale of business in the prior period and balance sheet FX remeasurement in the current period.

Speaker 2: We expect the $0.05 per share unfable impact from increased net periodic pension costs to continue for each quarter this year.

Speaker 2: And we currently expect gains from divestitures to be immaterial for the full year.

Speaker 2: expect gains from divestitures to be immaterial for the full year. Cutting to pre-cash flow and capital allocation.

Speaker 2: I've known Q1 has historically been our seasonally smallest quarter from the cash flow standpoint, two primarily to incentive compensation payments, and as we've communicated before free cash flow can be lumpy from quarter to quarter.

Speaker 2: Free cash flow decreased 17% to $367 million, primarily driven by higher cash tax payments and a $53 million increase in capex.

Speaker 2: Trap X was elevated in the first quarter compared to the prior period as we initiated a number of projects to spend heavily weighted in Q1 across technology to drive long-term growth.

Speaker 2: real estate aligned with our smart working strategy.

Speaker 2: I've known Capac's going to be lumpy across to quarter and we expect an investment of 200 to 225 million to 2023.

Speaker 2: As we've said before, we manage CapEx like all of our investments on a disciplined ROIC basis.

Speaker 2: Our outlook for free cash flow growth in 2023 and beyond remains strong and we can tend to expect double digit free cash flow growth for the full year and over the long term by operating income growth and working capital improvements.

Speaker 2: Given our strong outlook for free cashflow growth in 2023 and beyond, we expect share approaches to continue to remain our highest ROIC opportunity for capital allocation.

Speaker 2: We believe we're significantly undervalued in the market today, highlighted by approximately 550 million of share of purchase in the quarter. We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address on that client needs.

Speaker 2: Our M&A pipeline continues to be focused on our priority areas that will bring scalable solutions to our clients' growing and evolving challenges. We will continue to actively manage the portfolio and assess all capital allocation decisions on an ROIC basis.

Speaker 2: Turning now to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet and manage liquidity risk through a well-latted debt maturity profile.

Speaker 2: In Q1, we issued 750 million of 10 years in your notes, consistent with our past practice. An expectation to add incremental debt is EBITDA grows over the long term, while maintaining our current investment grade credit ratings.

Speaker 2: Factoring in this issuance, I've note that I've turned it is all fixed rate with a weighted average interest rate of approximately 4% and a weighted average maturity of approximately 11 years.

Speaker 2: Our first quarter results reflect strong operational performance from my own United strategy.

Speaker 2: We start the year in a position of strength and expect to continue to make progress on our key financial metrics and our commitment to drive long-term shareholder value creation. With that, I'll turn the call back over to the operator and we'd be delighted to take your questions.

Speaker 3: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue.

Speaker 3: for participants using speaker equipment and maybe necessary to pick up your handset to be full pressing the star keys. Our first question comes from the line of Jimmy Boulard with JP Morgan, please proceed with your questions. Hey, good morning. So first just to add a question on your expectations for the tax rate.

Speaker 4: for 2023. It was high. I think it was around 19.5% in the first quarter that's higher than the 17 to 18% range you've had the last few years. But what drove that and what are your expectations for the tax rate for this year?

Speaker 2: Thanks so much for the question, Jimmy. As you know, we don't get garnered from attacks right going forward, but I look back historically exclusive to the impact of discrete items, which can be positive or negative in any quarter. Our historical underlying rate has been 18% to the last five years.

Speaker 4: And then the changes in Singapore and a few other places, should those have a material impact or –Music

Speaker 2: Is there any reason to expect the rate to be different this year than in the past? Jimmy, we feel really confident about our overall capital structure with the company. We're domiciled in Ireland, we run a global capital pool, and we run a global cash pooling structure, and that gives us enormous flexibility as we think about any future legislation.

Speaker 4: Okay. And then just lastly, on fiduciary investment income, assuming rates stay where they are, is there for the ramp up in that that you'd expect as your portfolio sort of resets to where rates have gone, or has the full impact of the rise in rates over the past several quarters, is it already reflected in your numbers?

Speaker 2: of fiduciary assets and every hundred basis point increase in the short end of the interest rate curve is $65 million top line and bottom line. You should think about those fiduciary assets, Jimmy, as split roughly 50-50 between the US and international.

Speaker 2: and every hundred basis point increase in the short end of the interest rate curve is $65 million top line and bottom line. You should think about those fiduciary assets, Jimmy, as split roughly 50-50 between the US and international. Thank you.

Speaker 3: Thank you. Our next question comes from mine. Andrew Cleaverment with Credit Suisse. Please proceed with your question. Good morning. You mentioned in the release that the US grew modestly in terms of organic revenue growth and commercial risk solutions.

Speaker 3: And transaction in M&A was.

Speaker 3: was probably the very tough calm. So it looks like as we get into the second quarter and the rest of the year, that's...

Speaker 3: a tough calm. So it looks like as we get into the second quarter and the rest of the year, that's really not a...

Speaker 3: a tough company more. Could you give any sense of what that impact was in the quarter and should we expect going to the next three quarters that we could see a significant contribution to organic growth? So we first all, Andrew, thanks very much for the question.

Speaker 1: highlighted a great, very, very strong comp last year and then just very, very strong capability in the specialty areas that a few of which have been under pressure, but we continue to invest in them because we know they're going to be terrific long term. So for us, listen, continue the momentum across the board and, you know, as the market shifts a bit on the M&A and transaction side, we're going to obviously benefit from that. Eric, anything else you'd add?

Speaker 3: So basically, just tell me if I'm interpreting it right. With all these amazing things you're doing, you had a pretty big drag from transaction and M&A. That goes away, we could see potentially an even better organic growth quarter next quarter. I would say the first quarter last year was a very strong quarter for commercial risk. The Transaction Solutions business, I think it's Greg said, great capability, subject to obviously some outside market dynamics bet, but we feel really strongly about that team. And when that comes back, certainly holding that skill set for us.

Speaker 3: They said such a great value driver for clients that we're excited about it. Got it. Okay. And then, you know, Christin mentioned about 200 to 225 million of CAPEX expenditure targeted for this year. You're doing so many interesting things with...

Speaker 3: ABS and other technologies. What do you think stand out that you're investing in right now that will drive future growth?

Speaker 2: I mean, the capex that I mentioned, the 225 million, Andrew, I would say is primarily focused on IT investments to drive long-term growth. So whether that scale investments in our platforms to help clients innovate or whether that's in security and infrastructure to keep our clients.

Speaker 2: better protected and the firm better protected. And so we're investing a lot in the A&B Business Services platform, better connectivity, better data analytics, better insight. And it's really helping our clients to live a great value to our clients, our colleagues to live a great value to our clients.

Speaker 3: Got it, great. And then just last quickly, M&A pipeline and any areas of interest right now, should we expect anything as the year progresses?

Speaker 2: Yeah, thanks for the question. We have a fantastic M&A pipeline and it is focused on our highest growth, highest margin, highest return on capital opportunities. And it reflects the areas we continue to invest in, areas of content and capability that we can scale across the world in areas like data analytics. You saw us do Tiki and ERN last year.

Speaker 5: Thank you. Thank you. Our next question comes from the line of Robert Cox with Goldman Sachs. Please proceed with your question.

Speaker 6: Hey, thanks for taking my question.

Speaker 6: Curious if there's any way you can help us quantify or help better understand the impact that higher T.V. and inflation is having on the expense base? So what I would tell you is if you looked at that other general expense, which is up 20 percent. I would say that you can help us quantify or help better understand the impact that higher T.V. and inflation is having on the expense base.

Speaker 2: that is primarily driven by T&E. And the thing I would note is you're comparing it against Q1 2022, which was an unusually low year in terms of T usually low quarter in terms of T&E because of COVID.

Speaker 6: Okay, got it. And is there anything to sort of look into – I noticed in the presentation that you added that the margin expansion for this year is net of investment in long-term growth. Is that more of just calling out that – Oh, yeah.

Speaker 6: you know, the things you guys are doing in terms of investing, or is there something to look into that?

Speaker 2: It's exactly the same as always. So what we would say is we grow margins each and every year and our margin expansion for the last 12 years has been 1120 basis points or approximately 90 basis points a year. And that 90 basis points a year over the last 12 years has been a gross margin expansion higher than that.

Speaker 2: then it nets the 90 basis points net of the investments we're making in long-term growth. So that is consistent with the way we drive margins each and every year.

Speaker 6: Okay, perfect. And then maybe just shifting to the wealth segment, very strong and above average growth in wealth for a second straight quarter kind of despite some headwinds in the investment business.

Speaker 1: Curious how long you expect these tailwinds could play out. Is it quarters? Is it a year? How long should we be thinking about that? Listen, as you highlight, Robert, the team has done a terrific job in really over multiple years of looking at the last two quarters. The overall performance exceptional, really reflecting a lot of what's going on in the world out there. The regular

Speaker 1: really challenging in terms of sort of where we are, but fundamentals, exceptionally strong and the last new kind of terrific job. Eric, what else would you add to that?

Speaker 3: You know, the minor point I would say, Greg, is that it's a global answer. We're seeing growth in the UK in particular, especially around the guaranteed minimum pension piece, but also in North America and in Europe . And so the retirement side of wealth has been very strong for us.

Speaker 3: I really like it. And you called out the investment consulting, investment advisory business. So the challenges there will lap eventually, but you've described it right.

Speaker 5: Great, thanks for the call. Thank you. Our next question comes from the line of Weston Bloomer with UBS. Please proceed with your question.

Speaker 6: Hi, thanks. Good morning. My first question, I noticed real estate costs were up year over year for the first time, I guess, since 2021. Is that primarily just a function of the investments you're making in smart working and...

Speaker 7: Just given the investments in CapEx that you've made, is it fair to assume that that should continue to grow year over year throughout the course of 2023?

Speaker 2: Yes, so the real estate is up 4%, it's reflecting back to us, it's in fact reflecting the investments we made in smart working as you said. Last year was impacted by FX, but look I would put this in the context Weston of we're going to grow margins each and every year and as I mentioned that margin expansion over the last.

Speaker 2: 12 years has been 90 basis points a year. And that margin expansion reflects a gross margin expansion much higher than 90 basis points offset by investments in the business.

Speaker 2: And then again, on the CAPEX point, we've guided to CAPEX for the full year of 200 to 225 million for the full year. That includes the CAPEX investments in IT in long-term growth and in real estate and our smart working initiatives. And you should expect CAPEX to grow each and every year in line with overall expense growth. Copyright holes in part of IT's 2021 Cort DSRE??E Csteps

Speaker 7: Great, thank you. And a follow-up on the wealth performance fees, you highlighted a 2Q headwind there. Is there an associated headwind in the back half of the year as well, or is it just isolated to the second quarter? And is there a margin impact?

Speaker 7: A follow-up on the wealth performance fees. You highlighted a 2Q headwind there. Is there an associated headwind in the back half of the year as well, or is it just isolated to the second quarter? And is there a margin impact from that as well?

Speaker 5: It is just a Q2 impact and no, there's not an associated margin impact. Great. Thank you. Thank you. Our next question comes from the line of Elise Greenspan with Wells Fargo. Please proceed with your question. We will hear from our community.

Speaker 8: Hi, thanks. Good morning. My first question, I guess, goes back to tying together some of the prior discussion on margins, right? So, Krista, you mentioned the historical 90 basis points of margin expansion that Anna has seen over the past 12 years. So, I'm just trying to understand why we shouldn't expect that level. So, the 90 basis point.

Speaker 2: Thanks so much for the question, Elise. And look, we do think about margins over the course of each year. And as you said, we've driven 1,120 basis points over the last 12 years, or 90 basis points a year. And that 90 basis points a year is reflecting a gross margin expansion much higher net of investments we make in the business each and every year.

Speaker 2: And we did see in Q1, 70 basis points of margin expansion with 80 basis points of favorable impact from producer investment income, Elise, just as you said, offset by investments in the business, including in our people, technology and an ongoing headwind from resumption of T&E, all of which we manage in a disciplined way based on ROIC.

Speaker 2: And we think about margins balancing a number of factors, revenue growth, underlying expense growth, investment in our team, P&E, and then the puts and takes around fiduciary investment income and FX. And we look at them all together and over the course of a full year and expect to drive margin expansion over the full course of 2023. Thanks. And then my second question on reinsurance, right?

Speaker 1: and reinsurance business that impacted that 9% in the quarter and how we should think about the balance of the year. Eric, we'll go to you with one disclaimer here. I just want to highlight, as you think about what our reinsurance colleagues have done over the last number of years, it's really been extraordinary. And at least they've really driven the level of performance with clients around the globe on a very unique platform that's been terrific. And remember, again, our efforts aren't...

Speaker 1: are connected to rate but not tied to rate. We're helping clients understand, measure, and mitigate risk, which means we're shifting programs, doing things that are unique, flexing the muscle around analytics to help them make better decisions. So what we want to see is client growth, which we have seen, top-line growth, which we've seen, and translate into real impact, which we've seen. So I just want to highlight that long-term piece, and we see that...

Speaker 3: renewals. We had double digit growth in fact, double digit growth in our STG advisory business, significant new engine treaty. Feel really good about the performance of the team year to date. And looking forward, the work that the team is doing with their insurer clients and others is in demand, right? What the carriers are trying to do to manage their own portfolios as they navigate this marketplace has really...

Speaker 1: our team is providing real value to them as they think through that. So really, really proud of the work that that team has done not only this quarter, but over the last several years and the future looks bright for it. Thanks. And one last one going back to that wealth, tough Q2 comment. You guys saw.

Speaker 8: 3% organic and wealth last Q2. So is it just that these performance fees were elevated and there were just other businesses that you know offset that it just it doesn't seem like a tough comp so I just want to make sure I'm not missing something. Yeah it's simply about the performance fees you nailed it Elise. Performance fees are lumpy as we communicated.

Speaker 1: So I just had a question. It looked like more of the discretionary, some of the discretionary parts of the business had a good quarter. Travel and events and commercial risk solutions and human capital and health were both singled out in the press release and in the slides. I'm wondering if you could just talk about how the pipeline looks in those businesses, just given they do tend to be a little bit more economically sensitive. Sure, I would say our health business had a very solid first quarter.

Speaker 1: Okay, thanks. And then I'm just looking at the CapEx and appreciate the outlook this year, the 200 to 225 million. If I just look back pre-COVID, it was running at that level or above that level, and it's been forever improved.

Speaker 1: You know, around 100 million less than that in 2020 and 2021 picked up in the second half of 2022. I guess I'm wondering is there.

Speaker 1: Should we be thinking about a bigger ramp, I guess, as we enter into 2024? Just maybe some of those investments that would have occurred during the COVID years sort of ramp up here as we exit?

Speaker 2: Thanks so much for the question, David. I would say we expect 200 to 225 million for 2023. And then it's reasonable to think going forward 2024 and beyond that CapEx will grow in line with expenses.

Speaker 2: So you're absolutely right that 2020 and 2021 will lower really just because of the COVID situation and as we return to more normalized levels of capex 2023 is a right normalized level to start with and then grow from there based on overall expense growth Got it. Okay.

Speaker 1: Okay, and then maybe if I could just sneak one more in. You mentioned a lot, Greg and Krista just done Aon Business Services. And I was just wondering, taking a step back, how many employees you have located in Aon Business Services?icking

Speaker 1: and where you think you can get that to over the next couple years and what sort of margin implications that might have.

Speaker 2: Yeah, look, thank you for the question. And what we would say is we're incredibly excited about AI Business Services as a core part of our AI- to strategy. It's bringing together the firm in one organization led by Mindy Simon, our fantastic COO, and bringing together an organization to drive efficiency, to drive improved service and quality.

Speaker 2: and to drive innovation at scale because a lot of the investments we're making David that you saw in these IT platforms and security and infrastructure are helping us scale insights and data analytics to clients to actually deliver impact and so we're really excited about the potential to drive productivity and margin expansion from ABS.

Speaker 2: but equally to drive improved service and quality to clients and to allow us to accelerate innovation in one area of the business across all of our countries and all of our clients immediately. And so it's proven to be an amazing competitive advantage for us over the next many years.

Speaker 5: Great. Thank you. Thank you. Our next question comes from line of Mike Zyrmsky with BMO Capital Markets. Please pursue either question.

Speaker 3: Good morning, this is Jack on for Mike just had 1 follow up regarding the M and a outlook. 1st quarter in the brokerage space are down over 25% according to some media reports.

Speaker 3: So wondering would Aon consider moving down market in terms of employer size into the US or European insurance brokerage middle market area where Aon currently isn't a major player given that some of the private equity players are being less aggressive. I would take that from our standpoint is Krista highlighted before we've got a terrific pipeline lots of opportunities we see.

Speaker 3: we're always going to be looking at them in terms of how they're going to strengthen and build our business. So this is really content capability we can scale around the firm. So you might imagine we look across the entire spectrum and we continue to do that looking for these kinds of opportunities at a return to the capital criteria that sort of meets the benchmark which is really buyback which that's the standard. So we're looking broad-based and looking for opportunities around the world.

Speaker 3: Got it. Thank you. And then maybe a follow up on the more discretionary part of your business. Some competitors have said that client you're acting is at some project work, which used to be the beauty of this more discretionary. Is now viewed as more necessary in today's world. I guess it's just any thoughts on that. Is that something that you're also seeing?

Speaker 3: We would absolutely, firstly I just want to highlight, you can look back and kind of overall what's discretionary and not discretionary as a baseline. Very limited amounts of our business is really discretionary when you get down to it. There's sometimes timings affected, not this year, but it's not this year, it's next year. It's a very low level from that standpoint, but what you're highlighting is exactly correct.

Speaker 3: complexity is driving demand and complexity and urgency is driving demand. And analytics around that at which we have, you know, make some of these, what would have been really nice to do, almost necessary to do, particularly if you think about risk connecting with human capital and the dynamic that comes with that. Eric, why don't you add to that? Yeah, I would maybe offer two examples. One is around wellness.

Speaker 3: and the human capital business that historically would have been considered discretionary. You can't have a conversation today with a chief people officer who is thinking about health overall, including wellness, as people think about return to work, how they engage their own colleagues. And so that is becoming more of a blended discussion than ever before.

Speaker 3: And the other piece, I think Greg, that jumps out is the risk analytics and the advisory work around the commercial risk business that you would have historically said would have been more discretionary in nature. Today is the clients are thinking through how they navigate this challenging market, whether it's captives, whether it's risk studies, trying to understand their total cost of risk and

Speaker 3: how they can actually manage the process better. Those skills that we're able to bring to clients are in significant demand and feel more a part of the process going forward than maybe on a project-by-project basis.

Speaker 5: Just to give you two examples. Thank you. Thank you. Thank you. Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question. Great. Thanks. Two quick ones. First, I'm going to ask you to give us a quick overview of the

Speaker 3: Can we get a little color on what actually drove the performance fees last year? Like what are the, what was the performance that led to that fee and when can we expect that sort of thing to recur? I would look at it as an assets under management discussion in terms of the volatility of the markets. And so as that

Speaker 3: comes back around, you'll begin to see more of a stable platform on that, but that's what drove it in the second quarter. Okay, fantastic, that's perfect. And second question, Greg. I think that's for Greg. So we saw almost 200 basis points of improvement in the ComprehCO. Should we think about that as improved efficiency or is there a concern maybe that?

Speaker 3: there are some rules that need to be filled. So overall, as you think about, Meyer, where we are in the process, we were looking at this across holistically, what we're doing, continuing to, as Krista said, make investments across the business to strengthen the business. Whether you're a business

Speaker 3: Aon Business Services underneath that drives efficiency, which Krista described. I do want to emphasize it's not just efficiency. Aon Business Services is so much more than efficiency. It is innovation at scale and it is better service and capability, but it does drive efficiency. Let's be clear, it helps individual colleagues be more effective in serving clients and groups of colleagues more effective serving clients. You're seeing that reflected.

Speaker 2: and we commit to drive margin expansion in 2023 and every year after that. And we think about margins over the course of a full year and we're balancing a number of factors including investments in people, T&E and IT, as well as the impacts of FX and fiduciary investment income, all with the overall goal of delivering adjusted margin expansion, meta-sustainable investment and long-term growth and that's exactly what's happening.

Speaker 3: I think you guys implied that the TNA headwind was much larger in the first quarter. I was wondering if that means you expect more margin expansion over the balance of the year.

Speaker 2: Michael, we don't give margin expansion guidance for the full year. What we can say is over the last 12 years, we've driven 1120 basis points in margin expansion or approximately 90 basis points per year. It is, you know, we expect to drive margin expansion each and every year. It's not neatly 90 basis points per year because it's lumpy. And it really what it is, is us driving gross margin expansion net of investments.

Speaker 2: the amount we invest every year is dependent upon our opportunities for long-term growth. I would say specifically on your T&E point, T&E was a bigger headwind this quarter because Q1-22 had a very low T&E expense given what was going on with COVID. Got it.

Okay, and then a somewhat different question. I wanted to ask about the IP solutions business. I believe it's somewhat small for you guys. I think you've quoted like a billion dollars of lending that you've helped achieve there. So I was just hoping you could maybe discuss this business and maybe quantify its earnings or revenues.

the market. No, this is an area in which you step back and think total addressable market. What could that be? Well start to zero right now. What could it build to 85% of the world's values connected back to tangible assets? So my gosh, what should this be bother? What is our industry done to defend those assets? Nothing today until we started to really understand.

how to value IP such that it could be insured which means it's a real the tradable asset which means you can borrow against it.

And you're right, we've done a number of deals over the course of the last 18, 24 months, which has amounted to a billion dollars of debt, which is fantastic. It means these entrepreneurs are raising growth capital without giving up ownership. So just think about that, raising growth capital without giving up ownership. Who's interested in doing that if you're an entrepreneur? And the answer is that market is massive.

It's going to take time to develop, take time to build markets as it always does. And we love the momentum and we love the possibilities and potential. We're not going to quantify what it means. You know, we'll see if we'll play out over time, but it really does have very specific application and we're quite excited about the progress. Eric, what else would be under that? Beautiful, not so bad.

Yeah, maybe just to go a little bit on it, certainly the CPI lending piece is what we have been talking about the most. That's probably the most advanced in terms of the valuation process. But you've also got M&A due diligence around IP. You've got traditional IP liability where a corporate is not actually trying to lend against it but wants to protect it. But to make all that happen, you need a couple things.

which is what we've been building over the last period of time. You need evaluation, right? How do you actually value IP, both in an upmarket and a stressed market? How do you liquidate it? How do you get insurer partners to devote capital to it, to understand the risk themselves, to trust the valuation process, to understand how you would liquidate an example? So there's a whole ecosystem that we've been building that we are very optimistic about. And as Greg said, we've been building it a little bit each time.

Thanks so much, guys. Thank you. Our next question comes from line of Josh Schenker with Bank of America. Please proceed with your question.

Thank you all for taking my question. Good morning to you. You know, first quarter is the strongest quarter for the reinsurance segment, obviously. In the back half of last year, you had a lot of acquisition-related growth in reinsurance, not so much in one queue. I mis-modeled it. I'm just looking at two queue, which is a smaller quarter for revenues and reinsurance.

weren't you going to help me think about the acquisition revenue piece for 2Q? It really won't matter later in the year, but given that volatility over the last three quarters, trying to be smart about it. Why don't I take a crack at it? Listen, the re-insurance business is kind of almost a tale of two halves. Certainly, the first half is much more dominated by treaty business.

Think about that through the first half of this year as always. Still some good faculty to business and obviously with the acquisition of Ticke, the ability to do those advisory services throughout the year. The second half is much more weighted to capital market transactions, i.e. cat bombs, as well as faculty to reinsurance. And then some casualty reinsurance that tends to go through the year as well..

If you're trying to think through the waiting of the year, property cat, which is what a lot of people focus on, is largely done by the end of June , if that helps. In terms of the acquisition, is the property cat in that acquisition?

I'm not exactly sure by what you mean by acquisition. I'm saying that your 9% boost to revenues in the back half of 22 in the reinsurance segment due to acquisitions and only 1% in one queue. I assume there's a 12 month impact on any acquisition.

clients. A lot of the activity in the second half of last year was driven by fact and cat bombs. So I would say that's how I would think about it.

Okay, and I want to follow up on that. Yeah, go ahead. Well, sorry, Josh, we closed Tichey in Q1. And so you will see Tichey growth included in organic growth in Q2 onwards. It'll be under as Eric said, our strategy and technology group will be advisory part of reinsurance. We'll see other things to do to get more stock or value or

Thank you, Krista. I just wanted to follow up on Mike's question about T&E just a little bit. Clearly there's a variance between 1Q23 T&E and 1Q22, but in my mind I would imagine the variance would have been greater between 4Q22 and 4Q21. And maybe it will tell us a little something about the business cycle.

and whatnot. If you're spending warranteeing now, is that a broad situation with regards to a resumption on how your clients are spending? And two, should we expect that teeny headwind is really a 23 event more so than a 22 event?

Great question Josh and so what we would say is look we wouldn't overly read into any one quarter it's lumpy quarter to quarter and what we would say is think about margin expansion for the full year which is driven by a lot of things it's driven by investment in people and technology to drive long-term growth

offset by some investments in T&E, a headwind from FX. There's a lot of things going into this, Josh, but really that's why we come back to margin expansion for the full year 2023. Similar to the margin expansion we've driven over the last 12 years of 1,120 basis points over approximately 90 basis points.

to Greg Case for closing comments.

Thanks very much. Just wanted to say to everyone, we really appreciate you joining the call and look forward to our discussion next quarter. Thanks very much. Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.