Q2 2023 Aon PLC Earnings Call
Speaker 1: Good morning and thank you for holding. Welcome to Aon PLC's second quarter 2023 conference call.
At this time, all parties will be in a listen-only mode until the question-and-answer portion of today's call.
I would also like to remind all parties that this call is being recorded.
If anyone has any objection, you may disconnect your line at this time.
It is important to note that some of the comments in today's call may constitute certain statements that are forward looking in nature as defined by the Private Securities Reform Act of 1995.
Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated.
Information concerning risk factors that could cause such differences are described in the press release covering our second quarter 2023 results, as well as having been posted on our website.
Now it is my pleasure to turn the call over to Greg Case, CEO of Aon PLC.
Thanks, Rob, and good morning, everyone. Welcome to our second quarter conference call. I'm joined by Kristin Davies, our CFO , and Eric Anderson, our president.
As in previous quarters, for your reference, we posted a detailed financial presentation on our website.
We're pleased to report that our global team delivered another strong quarter of performance, results and momentum.
And we begin the call today by thanking our colleagues for everything they do to help our clients address immediate and long-term demands around the risk in people.
AN United, delivered by our colleagues, gives us the ability to meet this demand and balance across our portfolio, capitalizing on innovation and momentum, and investing to meet demand. This ensures we win more, retain more, and do more with our clients.
There is now almost universal agreement that client demand to address risk of human capital has never been greater. For example, our Catastrophe Insight report estimated global economic losses from natural disasters in the first half of 2023 were $194 billion.
notably above the 21st century average of 128 billion, and fifth highest on record.
Even more profound, in addition to economic costs, we know these disasters have tragic human costs that reinforces the high value in building resiliency and protection in advance of disaster.
To this end, we recently announced the placement of a parametric insurance program for the government of Puerto Rico. It's the single largest program of its kind that the U.S. Commonwealth has ever placed. This program was designed by our reinsurance and commercial risk teams. In the event of a sizable earthquake or hurricane, Puerto Rico will quickly receive liquidity and democracy. modeleditions.
enabling its government to focus on rapid recovery and reconstruction. This placement was the result of Aon's data, analytics, and capabilities from across our firm, cemented by our deep understanding of public entity demand, risk capital, and reinsurance markets, and really, really great work by our team.
Turning to financial performance, in the second quarter we delivered strong organic revenue growth across our solution line, including 10% growth in health solutions and 9% growth in re-insurance solutions.
contributing to 6% overall organic growth in the quarter and 7% in the first half.
in health solutions.
and growth of 10% on top of 11% last year was driven by strength in the core. Our team has done terrific work helping clients navigate the demands of their talent agendas balancing optimal benefits for their people with inflationary cost pressures while also taking steps to deliver on their people strategies at a time
when bringing total rewards, health, and wealth benefits together as human capital are more important than ever. In Reinsurance Solutions, our team delivered another very strong quarter at 9% organic growth on top of 9% last year.
We're also seeing capital come into the market, particularly in cap bonds, as our team has placed over $5 billion across 21 fields here today.
In Wealth Solutions, we deliver 2% organic growth, driven by ongoing trends in demand we've seen in project work around market volatility and regulatory changes, as well as the ongoing trend of pension de-risking, which we expect to continue in quarters coming ahead and given to market conditions.
We continue to see opportunity to help clients react and prepare for regulatory changes and market volatility with our data analytics and expertise.
And finally, Commercial Resolutions delivered 5% organic growth in the quarter.
Globally, we saw strong growth across most major geographies, with double digit growth in Asia and the Pacific. In the US, we saw strength in core retail brokerage, including from property casualty and construction.
As we've communicated previously, results were pressured by the impact of external M&A and IPO markets on M&A services.
Ahead when we now expect to continue in the back half of the year giving ongoing external conditions.
Overall, in the quarter, our strong performance was driven by the strengths of our AN United Strategy, an AN and Business Services platform.
In Q2, we translated 6% organic revenue growth into 110 basis points of operating margin expansion.
net of ongoing investment in the business for long-term growth.
These results contributed a first half financial performance of 7% organic revenue growth and 90 basis points of adjusted operating margin expansion.
And we remain very well positioned to maintain this momentum and to deliver our ongoing financial guidance.
of mid-single-digit or greater organic revenue growth, margin expansion, and double-digit free cash flow growth for 2023 and the long term.
This financial performance is ultimately the product of our ability to address client needs through AUN United. And this strength is foundational in supporting our ability to evolve in response to changing client demand, fully demonstrated by our move to risk capital and human capital. This focus is bringing our four solution lines more closely together to better address client needs and risk capital. Thank you for joining us today. We'll be back in a moment. Thank you for joining us. Thank you for joining us. Thank you for joining us. Thank you for joining us. Thank you for joining us. Thank you for joining us. Thank you for joining us.
and is already yielding meaningful client impact. Take human capital. Our clients are changing how they're thinking about their colleagues. They're facing an increasingly complex external environment with pressures around cost, growth, remote and hybrid work, and workforce composition.
In their own internal environment, their people strategies are increasingly complex, considering traditional total rewards and health benefits and newer additions around future skills and well-being.
Our connectivity across health, wealth, and talent enables us to bring data, analytics, and solutions to address this need.
In one great example, our team developed a diagnostic tool for clients that produces a Human Sustainability Index, or HSI. This tool combines individual and team assessments with peer data and analytics-based benchmarking to enable our clients to directly connect people strategy goals to execution.
The measurable results become the CP wellness pathways such as physical, emotional, and financial aspects, supports individuals and teams to assess exactly what's working and for whom, along key metrics so our clients can adjust or change their tactics to drive their people strategy and ultimately their bottom line.
In many respects, this work represents bringing next-level data science into talent development and leadership.
Ultimately, the HSI solution identifies gaps in what our clients offer to their people, encompassing health, wealth, rewards, and other wellness programs. And it provides a trackable plan to strengthen the company's talent strategy on their most significant, often external commitments, at a time when these commitments are more important than ever.
In summary, our strong performance is a direct result of our ability to help clients better understand their challenges and opportunities, and to take actions that protect their business and improve their performance.
Further, our recently announced enhanced focus on risk capital and human capital is already driving benefits in strengthening this capability.
Our strong year-to-date financial results, including 7% organic revenue growth and 90 basis points of margin expansion, are the direct outcome of this strategy and position us very well to continue to deliver it in 2023 and over the long term.
I'd like to turn the call over to Krista for her thoughts on our financial results and long-term outlook for continued shareholder value creation. Krista?
Thanks so much Greg and good morning everyone. As Greg highlighted, we continued delivering on our key financial metrics both in the quarter and year to date.
Through the first half, we translated 7% organic revenue growth into 90 basis points of adjusted operating margin expansion.
These results position us very well to continue to drive results in 2023 and over the long term and we look forward to building on this momentum.
As I reflect on our performance through the first half of the year, as Greg noted, organic revenue growth was 6% in Q2 and 7% year-to-date. We continue to expect mid-single digit or greater organic revenue growth for the full year 2023 and over the long term.
I would also note that reported revenue growth of 7% in Q2 and 6% in Q2, 7% in Q2 and 6% in Q2, including unfavorable impact from changes in the NFX of 1% for Q2 and 2% in Q2, primarily driven by a strong dollar versus most currencies.
I'd also highlight fiduciary investment income, which is not included in organic revenue growth, with 64 million in Q2 and 116 million year to date, or 2% of total revenue in both periods.
Moving to operating performance.
We delivered strong operational improvement with adjusted operating margins of 33.6% in the first half, an increase of 90 basis points driven by revenue growth and efficiencies from Aon Business Services, overcoming expense growth, including investments in colleagues and technology to drive long-term growth.
Looking forward, we expect to deliver sustainable 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've said previously, Aon Business Services remains one of our key drivers of margin improvement.
And this operating model has now reached an inflection point.
In response to client demand and the opportunity, we're evolving to an organization that drives efficiency, operating leverage and margin expansion, to one that's also increasingly driving improved client service delivery and accelerating innovation at scale.
This evolution of Aon Business Services requires investment in three areas which we expect to manage in line with our ongoing financial guidance.
and like we do for all investments in long-term growth, on a disciplined ROIC basis.
First, standardized platforms.
We're digitizing and connecting existing platforms and creating an ecosystem that encompasses technology and operations and brings our data, analytics and expertise together for our clients and our colleagues.
Second, standardized operation.
Across our solution lines, there are places where we have common processes. We see opportunity to continue to bring operations and expertise together across our firm, to support clients across all solution lines.
Bringing people and process together drives further efficiency and enables us to scale best practices.
Third, new product scale.
We see significant opportunity to deliver new data-driven products, which we can then effectively develop and scale. The work we've done to standardize platforms and operations enables us to rapidly develop, deliver and scale innovative solutions across the portfolio. In response, the client demands.
and to deliver content and capability to all clients, based on organic or inorganic investments.
Even more importantly, operating Aion Business Services as one organisation, with discipline prioritisation and governance around initiatives, ensures we can move quickly on opportunities that create value for our clients and colleagues.
such as the one we see on AI.
Just as a few examples, we see real opportunity here to enhance colleague productivity by leveraging the services of our technology partners in a protected environment to enhance existing offerings like our human capital assistance. $500,000,000 of the products with an impact upon poder work weights.
Just as a few examples, we see real opportunity here to enhance colleague productivity by leveraging the services of our technology partners in a protected environment, to enhance existing offerings like our human capital assistance, by building an AI risk framework for our clients.
And finally, to create complementary datasets to enhance our risk analytics, like the catastrophe modeling.
We translated strong adjusted operating income growth into adjusted EPS growth of 5% in Q2 and 6% year-to-date.
As noted in our earnings materials, FX translation was an unfavorable impact of approximately $0.0525 and $0.19 per share year to date.
If currency is to remain stable at today's rates, we would expect no impact in the third quarter and a favorable impact of 5 cents per share in the fourth quarter for an unfavorable impact of 14 cents per share for full year 2023.
I'd also note other non-operating expense had a 25 cent per share or 10% unfavourable impact in Q2 and a 44 cent per share or 6% unfavourable impact year to date.
This reflects an unfavourable impact from increase in non-cash net periodic pension expense.
as well as a gain on sale of businesses in the prior period, and balance sheet effects remeasurement in the current period.
Turning to free cash flow and capital allocation. Cash flow operations was flat year over year and free cash flow decreased 7% to $986 million primarily driven by a $77 million increase in CapEx.itton.com
As we've communicated before, free cash flow can be lumpy quarter to quarter, and free cash flow generation in the second half of the year is seasonally stronger than the birth top.
We continue to expect to deliver double-digit free cash flow growth for the full year.
CAPEX was elevated in the first half of the year compared to the prior year period as we initiated a number of projects we would spend heavily waiting in the first half across technology to drive long-term growth, like the investments we are making to evolve Aon Business Services.
CAPEX was elevated in the first half of the year compared to the prior year period as we initiated a number of projects which spend heavily wasted in the first half across technology to drive long-term growth, like the investments we're making to evolve Aon Business Services. I'd note CAPEX can be lumpy quarter to quarter.
We expect CapEx to moderate in the back half of the year and now expect an investment of $220 to $215 million in CapEx in 2023. As we've said before, we manage CapEx like all of our investments.
on a disciplined ROIC basis. Our outlook for free cashflow growth in 2023 and beyond remains strong, and we continue to expect to deliver double-digit free cashflow growth for the full year and over the long term, driven by operating income growth and working capital improvements.
Given our strong outlook for free cash flow growth in 2023 and beyond, we expect share approaches to continue to remain our highest return on capital opportunity for capital allocation.
We also expect to continue to invest organically and inorganically in content and capability that we can scale to address unmet client need.
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 portfolio and assess all capital allocation decisions on an ROIC basis.
Now turning 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.
As we've said before, we expect to add incremental debt as EBITDA grows over the long term, while maintaining a strong investment-grade credit profile.
I'd note our term debt is all fixed rate with an average weighted interest rate of approximately 4% and an average weighted maturity of approximately 11 years.
In summary, our strong financial results in the quarter and year-to-days reflect strong operational performance driven by our Aon United strategy and our Aon Business Services platform.
We expect to continue to make progress on our key financial metrics and our commitments 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.
Thank you. At this time we'll now be conducting a question and answer session.
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One moment please while we poll for questions. Thank you.
Thank you and our first question comes from the line of Charlie Lederer with City. Please receive your questions.
Hey, thanks. Good morning. You mentioned continued headwinds and M&A services in the back half of this year in your prepared remarks.
When should we think about that dynamic laughing? And is it more of a pricing issue or can you comment on what's driving that?
Really appreciate the question, Charlotte. Just start overall, just commercial fundamentals generally, that's part of the real question. Very strong, retention very strong, new business exceptional, a lot of strength around geographies around a core P&C. It really is this one area in M&A services.
which is a particular strengths of ours, but as you know, deals, you'll count and volumes down, you know, 30 to 40%. You know, we expect that, you know, first half of the year, we expect to see it in the second half of the year. As that comes back, we will come back with an absolute vengeance, just given our overall position. But Eric, anything else you'd add to that?
Yeah, Greg, I would just say that while the deal volume is down, as you're saying, we have been spending time with the team, expanding the potential client base, the historic nature of the product has been driven more towards private equity type buyers. But we've been spending time working with the corporate clients, making sure they're aware of the capabilities and how those products and services get used.
so that when the market does come back and it will come back, we'll be situated to lead that market as we do today. And Charlie, I would just say that while we've lapped the downturn, we do expect the pressure to continue in the second half as the external outlook has continued to be soft.
Got it, thanks. And then I'm wondering if you can comment on the momentum in your IP business, intellectual property. How meaningful is that to organic revenue growth? And there have been some articles in the press about it recently. So just trying to understand how you see that business affecting second half results, if at all.
And if you go back to 2016, we started with an amazing investment, bringing in 601 West to Aon. It's 20, 25 colleagues. And we've now invested in hundreds of colleagues with a truly unique market leading platform to really help understand this opportunity and these risks and the value of these assets.
And we built a marketplace with so many insurers, 26, 27, almost 30 insurers sort of in the marketplace, 2 billion in aggregate insured transaction value. And by the way, demand stronger than ever. And we're evolving the market and there are always so many different third parties on the marketplace and different things that affect that.
But, you know, we love that. We love the position. We love the progress we made and we are, you know, feel stronger than ever about the future opportunity. Eric anything else you have. Yeah, maybe, maybe two things Greg one as a percent of revenue, it's still a, you know, the market is still in its infancy, so I wouldn't overly rotate on it other than the potential that we see down the road and
capital, but you know, used by the third parties, but it does provide the kind of capital and that we need that the clients need to deploy, you know, to gain reinsurance capital that they're looking for. So it's just one of the ways that we match risk of capital together, you know, on behalf of our clients.
Thanks, guys. Thank you. Our next question is from the line of Mike Siremski with BMO Capital Markets.
Thank you. Our next question is from the line of Mike Zaremski with BMO Capital Markets. Please proceed with your questions. Please proceed with your questions.
Thanks, good morning. I guess back to the organic growth environment. Just curious, you mentioned some headwinds on the M&A side. There's probably some tailwinds too, which we can see. Do you say you were clear too about 5% or greater is still the outlook?
But would you say growth is kind of thinking back to the back after the year is kind of steady or accelerating or decelerating or any trends you'd like to point out in any of your businesses in terms of momentum or tailwinds other than the M&A call out that we should be considering into the back after the year. Yeah, literally, I can love this question. If you step back and think about sort of a growth platform and health of...
You see momentum around, meaning our full year 2020 three objectives. So this is mid-Syml digiger-grader, you know, across the board. Look at the strengths and health, which were exceptional for the first half, and certainly for the quarter in re-insurance and other areas too, even in commercial risk with the headwind that we just, we just highlighted. So very strong on the solution line side, and then you also saw exceptional movement on margin expansion.
We think about the growth here to 110 basis points for the queue and 90 basis points for the first half and most important year, Krista, you know, reemphasize double digit free cash flow growth for the year. So for us, we see this trend, you know, continuing to turn where we are. And there's a lot that goes behind that maybe Eric, you know, additional context around that foundation and what's driving that.
Sure, Greg. And you mentioned two of them in your written remarks around the parametric that we did for Puerto Rico, as well as the human sustainability index. Those are just two examples of the AI United teams working together. But I think I would also say that the client demand is evolving and it's getting more complicated.
I think as the world gets more complicated. And so our strategy of evolving to risk capital and human capital, I think, uniquely positioned us to take advantage of that capital to drive growth. I'm sorry, take advantage of that situation to drive growth. And what I think about it, just to put a little clarity on it, from a risk capital standpoint, I think it gives us a couple of things. It gives us access to global capital, no matter what form.
from property exposure to climate change as well as the cyber or liability exposures. And it also gives our leaders, client leaders and brokers the best insight of the market dynamics. So that's on the risk capital side. On a human capital side, bringing health, wealth, and talent together is effectively meeting clients where they are today.
Clients are looking for a holistic view for their employee relationships, both from hiring, training, health, wellness, all the way through to retirement.
And we're seeing that. We're really excited to see that strong growth in our core health and benefit business globally. Winning new clients, expanding the relationship with them across all aspects of that employee life cycle is gratifying and exciting. So we see a lot of opportunity with both risk capital and human capital, both in our strong core, but also as we develop.
sort of new capabilities. But Krista, anything you'd add to that? Well, I mean, Mike, you also did just ask about second half outlook. And we would say year-to-date growth of 7%. We do think about our results over the course of a full year. And we are on track for our full year guidance, with single digital greater organic revenue growth.
Margin expansion and double digit free cash flow growth. And so we're really excited about the momentum in the first half and that continuing into the second half. And I think just each quarter we have different seasonality of revenue but we really do think about over the course of a full year and so mid single digital greater organic revenue growth for the full year.
Great, and my quick follow-up is, is curious on the expense efficiency side, a number of competitors have kind of talked about leaning in to be able to kind of find more ways to be efficient over the last, you know, I guess in this post pandemic.
and there's different nuances to each company's strategy. But it feels like some of them are taking off of the United Playbook, which you guys were a first mover on. Just curious, is there anything you'd want to call out in terms of do you see incrementally more opportunities today for...
expense efficiencies or nothing really to call out that's getting you guys even more excited about some margin levers in the coming year.
Look, we do actually, Mike, so thank you for the question. Look, we are on the next evolution of Aon Business Services. And as I mentioned in my opening remarks, expanding from just driving efficiency to really improve customer service delivery and innovation at scale, helping us accelerate growth. And so as we think about margins, we think about margins again over the course of the full year, sustainably.
And you saw CapEx up as well, again, driving long-term, you know, margin expansion through the continued investments around standardized operations, standardized platforms, and innovation at scale, which we are really excited about in Aon Business Services. Hey, Kristin, maybe one comment. Yeah. Yeah, one comment on it, because I know the question was on efficiency, but... Thanks, mater there.
The ability to leverage the analytics that we have inside of ABS helped us develop the human sustainability index, helped us create the insight that we're able to bring to corporate clients as they think about managing their climate exposure from a property standpoint. How all of that comes together is part of the ABS strategy and how we execute it.
actually prior to that, but 2017. We have literally with the leadership under Krista, our new CEO and others have brought an India tremendous amount of capability to bear. And now we're on kind of the next wave, building on a very, very strong platform that we pulled together. So it's the corrupts, we're very excited about this.
for both the efficiency reasons that Krista described very well and the effectiveness outcomes that Eric described. And that really is the muscle and the foundation of Aon Business Services. Very excited about it.
Our next questions come from the line of Weston Bloomer with UBS. Please proceed with your questions.
Hi, good morning. My first question is on comp and benefits. It looks like that picked up pretty meaningfully over the last five quarter trend and you highlighted investments in colleagues and there's a pretty high competition for talent. Can you maybe comment on the pace of hiring you're seeing more broadly and was there maybe a pickup in retention based comp in the quarter?
We'd be curious on maybe attrition rates and commercial risk and reinsurance as well. Thank you.
Sure Weston and so maybe I'll start with sort of the math of just you know if you think about this and again we look at this over a full year but if you just did year-to-date you'd say organic revenue growth is 7% year-to-date compliment is up 4% year-to-date and so there's lumpiness in every quarter and so what we would say is you know we feel good about that.
And in terms of, you know, attrition, we would note that attrition in 2023 is below 2019 or below pre-pandemic levels. And so we feel really good about where attrition is across the board. And we also would note that engagement levels are at the highest they've ever been in the firm's history. We feel really good about the...
great stats. I will say we are making some pretty significant talent investments.
in our core health and benefit business, in our strategy and technology group inside of reinsurance, some of our key geographies where we're seeing great growth opportunities. So a lot of great things happening there, Kristin, you shared the metrics of engagement and attrition and things like that. But I would, one last comment I would make on it is on our risk capital and human capital platforms, it actually allows us to increase the flexibility of where we deploy talent to opportunity.
question is on Wealth Solutions Organic. I know you had highlighted difficult comp on performance fees in the quarter. I was wondering if you could maybe quantify that impact and then is Wealth Solutions a business where you could see mid-single digit organic growth over the next year maybe more in line with.
The rest of Aeon, that growth had been lower single digits over the past few years, so curious if we're seeing maybe momentum there.
Maybe I'll take that one, Greg. Look, I think the wealth solutions business is a great business for us, and we do see growth opportunities over the mid and long term. If you think about the pieces of it, the retirement piece, which is the pension actuarial work, used to be a solid business for us.
whether it's in the pension derisking that Krista mentioned, or whether it's just regulatory changes that drive activity. The UK EMEA, very solid this quarter. And then there's the investment management business. The advisory business continued to be pretty strong. The delegated part of it continued to have some impact from the AUM movement.
from in UK, North America that we talked about last time, but overall really bullish on the business and expect that it will hit mid single digits for us as we go down the road.
Great, thank you.
Our next questions are from the line of Bob Huang with Morgan Stanley . Please
Hi, thank you. I know that you talked quite a bit about tech innovation and efficiency. Maybe if I can just dig a little bit deeper on the cost of AI implementation. Obviously, tremendous potential down the road, but from what we've seen recently, for example, Microsoft just announced.
that their AI-enabled products are twice as expensive as non-AI-enabled products. Just going down that line of thinking, can you maybe help us think about how your AI investments, the cost of that fits into your three areas of investing with AI business right now.
Yes, look, thank you so much for the question, Bob. We are super excited about AI more broadly and how it can apply to our business. We would say we think about this in terms of everything from really basic machine learning, robotic process automation, all that stuff that helps us drive automation and efficiency at the very last moment.
with us and do business. And so that's sort of the low end. And then you could say, you know, at the high end, sort of, you know, generative AI, it's really helping us drive insight and impact in the analytical areas that Eric was describing around risk capital and human capital. The task remodeling, helping us add data sets, the human capital assistant, helping clients interact with.
human capitalist system much like they would an expert in human capital today. And so Bob we're very thoughtful about the cost of this and where it's best to use basic technology you know machine learning robotic process automation because it's just cheaper and more efficient and more scalable broadly.
and where we're really trying to have insight and impact with clients and use generative AI. So we're sort of scaling it depending on the impact and opportunity.
And I just had two observations about this. First, we've been doing AI as Krista described really for a decade, so it's not as we haven't been incorporating this. It's one of the reasons we drove and as a services. That's my second observation because we have and as a services because we've been working this since 2017. We actually have a platform to scale these ideas.
Absent Aon Business Services, literally, the ability to kind of get this moved around 120 countries around the world is basically zero. So you can come up with a good idea and a geography, but how do you actually systematically move it around the world? So one of the reasons we're excited about our ability to do this and do it cost effectively is Aon Business Services.
Okay, thank you. That was extremely helpful. My second question may be just to go back to the line of questioning regarding commercial risk solutions. Obviously, you've talked in depth about why the U.S. segment is the way it is, but you also, one of the things we notice is that
Asia has been strong for a few quarters and the last quarter you also saw strength in Latin America and the rest of the world. Just as we gradually come back to a more normal M&A market in the US, how durable is the growth in the rest of the world? I'm just trying to think down to next year how we should think about commercial risk solutions going forward.
Listen, we, as we described, we feel very good about the progress back to kind of the overall am united strategy, the core fundamentals, as you highlighted well, geographically very strong, even in North America, retention, very good new business, very good, scorpion see exceptional are
We, you know, we just have a wonderfully strong business capability in the area of M&A services, which by the way, we're feeling now that we embrace completely because as the market comes back, as Eric described, we benefit from that as well. But the fundamentals, the track is everything we've described around literally winning more clients and doing more with them and keeping them longer for all the reasons.
places like Asia Pacific and Latin America continue to evolve as the clients evolve. So whether it's risk financing techniques, work specialty products, whether it's the international as those organizations expand outside their home countries. So as those economies continue to develop, whether it's India, whether it's other parts of Asia.
you know, we're able to grow with them and help them as they, you know, need more sophisticated products. So, you know, we're, we are very excited about the platforms that we have in Latin America and Asia Pacific and we do see good growth opportunities over the long term.
One other point on that, Bob, just to sort of make it, I was in Singapore with Krista a month ago opening our global climate hub, phenomenal. And we had the opportunity to go around and see so many different clients in that perspective. It really reflected exactly what Eric is describing. Their needs becoming more global, more interconnected. They want to see global Aon put it in their backyard.
That was a very, very positive sort of overall kind of finding as much as we're standing and thinking about that. It really does bode well with the opportunities are going to be take that and some of Eric's other comments around risk capital and what it really needs. Bringing a reinsurance analytics into the commercial space in an effective way. Also something that was very, very positive. Just a specific example in a region as you highlighted.
where we see particular opportunities. Same is true in Latin America. Okay, thank you. That was tremendously helpful. Our next questions come from the line of Rob Cox with Goldman Sachs. Please, see you with your questions.
Hey, good morning. Thanks for taking my questions. In Reinsurance Solutions, a really strong result.
Obviously, but I would have thought you would see more acceleration or sequential acceleration given the Aeon-Bentfield exposure to PropertyCat in the US. You provide some color there. And then also on the prospects for growth in the back half of the year in Reinsurance. We've seen some news articles regarding...
kind of an above average chunk of the faculty to business being hired by a competitor. Sure, Greg, you want me to take that one? So on the first half, listen, we're really proud, excited, whatever word we could use on our reinsurance capabilities. Really great first half, great second quarter, great first half.
coming off of a couple of great years. Just remember that most of the treaty business happens in the first half, and so a lot of that is now finished. But I would say that as clients have been dealing with the changing reinsurance market, you know, they've made their own decisions. Sometimes they don't buy certain layers, sometimes they buy less, sometimes they buy differently.
And so that's always a decision that we help our clients make as they think through how they want to use Reinsurance Capital for their business. It does, by the way, explain a little bit of what's going on in the primary market around property. As more of the risk is now sitting on the primary insurers, they are now dealing with how do they price it and what kind of risk do they take. So.
it is an interconnected system of reinsurance and insurance, so just to point that out. I think on the second half, tends to be more around the ILS business and faculty to business. I do think we had a very strong first half in fact, and our expectation is that should continue as the primary clients.
now may have less low level reinsurance protection on property catastrophe or secondary perils like wildfires or hail storms or what have you. And so the ability for the insurers to manage that exposure, the tool that they would use now is facultative reinsurance on an individual risk basis. And the last point I'll make, and Greg maybe I'll throw it to you, is
But, facultative reinsurance is also being used on things like captives or large corporates where they're also retaining more of the risk themselves. So don't just think about it as a reinsurance tool. You should also start to think about it as large corporates that are trying to access not just traditional insurance markets, but also reinsurance markets. But in fact is the way they do that. Greg, maybe anything you'd add on that?
You summarized it very well, Eric. I would do that a couple of things on the talent point overall and in reinsurance, reinsurance, our colleagues. This has been strength to strength really over the last five years. It's been a tour de force. It's also one of the areas we've invested heavily in continuing content and capability, not just core reinsurance, but if you think about what we're doing in cap ons and feat that we're building, there's really a lot of community flavoration there, right strap yard, right brand reader, right card recipient. So that's our, that's our workflow for getting more money from the
and ILS, you know, we lead the world in this, the work we've done in strategy and technology group Eric described before, this is just substantial investment. And with this core and reinsurance, we now have this incorporated into the overall risk capital effort. And so this is really for us, you know, we're very, we're excited about the possibilities and the capability we have to help clients and it continues to build.
factors on the M&A services, business.
Is it fair to assume that the remainder of the business accelerated sequentially kind of along with the accelerating renewal premium change that we saw in the market this quarter?
I mean Rob we're not giving specific guidance on commercial risk at that level. What we would say is you know we're extremely excited about year-to-date growth of 7% overall for Aon and on track to mid-single digit or greater organic revenue growth for the full year.
And obviously we've had a real headwind in this M&A area given transaction volume as Greg described is down 30 to 40 percent. And we expect that softness to continue into the second half of the year.
Okay, thanks. And maybe just one last question on health solutions.
You know, really strong growth, just you guys pointed to the growth outside of the United States.
being particularly strong. And I'm just curious what's driving that? Is that market share gains, medical inflation, any color you could provide there?
So I would say more of market share gains and the ability of the team to work together globally through global benefits. Remember, the health systems are different everywhere in the world. So when you look at the U.S. system versus the U.K. versus Europe or anywhere in Asia Pacific or Latin, they're very different. But the needs are often.
of one organization expanding globally, they need that expertise. And so our global team really well connected, working together to really help global clients as well as local clients. So we think it's market share gains in the local countries and really excited about what they've been doing over the course of the last year or two.
Thank you.
Thank you.
Our next question is from the line of Elise Greenspan with Wells Fargo. Please proceed with your questions.
Hi, thanks. Good morning. My first question, Krista, I think last quarter you had pointed to CAPEX of around 200 to 225 million for the year. I just want to confirm that that's still your best estimate there.
So with the improvement in free cash flow in the back half, I guess it's going to come from a combination of lower cap-acts and just growth in operating cash flow.
So Elise, we actually have increased our CapEx guidance to be 220 to 250 million for 2023 and that's really driven by the investments we're making across our business services platforms and applications to drive future growth and so we're really excited about that.
The improvement in free cash flow and the double digit free cash flow growth for the year is going to be driven by operating income growth and working capital. And I did note that second half free cash flow growth is always significantly stronger than first half.
Thanks. And then my second question, going back to commercial risk, I recognize that you guys do have a good market share within the M&A business that has slowed, but you will have easier comps in the back half of the year. So even recognizing that there'll be some headwinds from just
still low M&A volume, wouldn't you expect sequentially commercial risk to show better growth in the back half relative to the first half of the year?
So Elise, I'll try and do this again because I probably didn't explain this well the first time. But what we are lapping the cops, that's absolutely right, but what we're seeing in the external market is continued pressure into the second half of the year in the M&A environment. So we expect that trend to continue.
Okay, and then in Reinsurance Solutions, Greg, I think you highlighted just kind of robust cap on activity you guys have seen. How do you, you know, what are you seeing on the capital side within the reinsurance market and, you know, thoughts, you know, just for the potential opportunities over, you know, the rest of the year and then also into 2024?
5 billion we've done in 21 deals year-to-date, which has been phenomenal. So we just need an opportunity there, but it's still constrained. It's still pressure. Eric, what else are you going to do? Yeah, look, Greg, I would say I'll do the the ILS side first is ultimately we're seeing investors that have historically invested in cat bombs, either allocate more to it. So they see opportunity.
Investors that had walked away from the area have sort of returned as well as new. So you're seeing some expanded sort of market opportunity, which is why I think that market has been so dynamic in the first six months. I think on the overall capital provision of the reinsurance market, you're starting to see an equilibrium. You're seeing the big players get more active.
who see opportunities, especially on the property cat side. And so, and you're seeing investors look to participate in support either through their funds or other ways, not necessarily in new company creation, which is sort of what would normally happen in this cycle, but more in support of existing players.
who are already leaders in the industry. So we're getting to an equilibrium around pricing of property cat. Certainly as you go into the one-one renewals, you know, in five months, there'll be talk of inflation. There'll be talk of, you know, what happens over the hurricane season in the summer and other events.
I do think that as the market has moved, it has found an equilibrium in property cat, as well as on the casualty side of the business.
market has moved, it has found an equilibrium in property cat, as well as on the casualty side of the business. Thank you.
Next question is coming from the line of David Monomeddon with Evercore ISI. Please go over to your questions.
Hi, good morning. Just had a follow-up question on commercial risk. You guys spoke about this a couple quarters ago. I believe it was the fourth quarter. You said the capital markets activity had a five-point drag on the organic growth and commercial risk.
Could you size how much of a drag that had on organic growth and commercial risk this quarter?
So we have not disclosed that detail. We did, as you mentioned, disclose it in Q4 and we haven't disclosed it going forward. What I can say is we're the leader in this space and we're incredibly excited about our capabilities as Greg and Erica described and this having a real impact on our business, but we're continuing to invest in it because we know as M&A volume comes back, this business is incredibly well positioned.
And also just to clarify, so, you know.
So it is it that you guys you guys aren't expecting it to be down again off of that depressed space, but it's more just you don't see a recovery off of that depressed space. Is that the right way to put it? It's literally as simple as you almost listen to the investment bank calls. We can talk to the CEOs of those institutions as that activity comes back. We are incredibly well positioned not just in the core areas we've done before but also the broader commercial applications are described before so we just gotten stronger literally as the transactions come back and the volume comes back. We're there and so you can predict as well as anyone all we're trying to do is declare.
Got it. That's helpful. And then, just on the continued investment in tech and talent, and it also sounds like even with the increased outlook on CapEx for the year, it's going to tick down in the back half of the year.
And I'm just trying to just compare that to the continued investment and talent that it sounds like you guys are making. Should I take that to mean that more of the expenses are going to be coming through OpEx instead of running through CapEx and then there could be a little bit more of a headwind to margin improvement in the second half?
So what we really said was we've given guidance on capex 220 to 250 million. Yes, you're absolutely right. capex is a little spot loaded with how the projects worked out this year. But we do think about it over the course of a full year capex 220 to 250 million for 2023.
In terms of margin expansion, we expect full year margin expansion. We are on track for mid-single digit or greater organic revenue growth, margin expansion for the full year and double digit free cash flow growth. And so yes, things are patterning slightly, you know, more in the first half in terms of some expense growth and capex growth. But really you should think about these things over the course of a full year.
Okay, great. Thank you. Thank you. The next question is from the line of Meyer Shields with KBW. Please proceed with your questions.
Great. Thanks so much and good morning. I guess we're all digesting just how significant the M&A practice is in terms of revenue. So I thought you could give us some guidance through the kind of think about the margin impact, whether it's what you've seen in recent quarters or what that implies for margin expansion when this fitness line recovers.
Yeah, so thank you so much, Maya. What I would tell you is we are on track for full year margin expansion and you know the margin in this business, you know, we continue to manage the business as an overall portfolio. And I would say they're not particularly different to the rest of the business. We are focused on continuing to invest our entire...
analytics and insight matter so much because that's increasingly what drives value as our clients look to understand forward-looking risk and so it's those areas of the business that generate more value for clients.
And then obviously with Aon Business Services, we're driving to create that value more efficiently, which is why we're really investing in Aon Business Services to get it to the next level around driving operational excellence, better customer service and increased innovation at scale.
And so we're really confident about driving sustainable margin expansion in 2023 and each year beyond that. Okay understood. Second question. I know you typically don't disclose expected tax rates and unless you want to change the approach now, I was hoping you could let us know given OECD minimum tax reform.
historic underlying rate over the last five years was 18%. So we feel really good about our overall global capital structure, our global cash structure, and our ability to navigate regulation and legislative changes going forward.
over the last five years was 18%. So we feel really good about our overall global capital structure, our global cash structure, and our ability to navigate regulation and legislative changes going forward. Okay, fair enough. Thank you.
Our last question is from the line of Jimmy Bueller with JP Morgan.
Our last question is from the line of Jimmy Bueller with JP Morgan. Please proceed with your questions.
Hey, good morning. So first, I just had a question for Krista on how you think about the impact of inflation on your results. Obviously, it helps on the revenue side, but to the extent there's competition for talent or higher IT expenses, then it hurts on margins. But assuming inflation stays high, it's going to be a little bit more difficult to get the results.
Is that a positive for you overall or is it a negative or a push? Thank you very much, Jimmy. So what we would say is inflation overall is good for our business. And what we've seen so far is the inflationary impact on our expense base. You saw compensation impacted in 2021, 2022 and again in the first half of 2023.
We've seen that come through on the expense base. What we're starting to see come through is inflation impacts on the revenue side, whether that's increased asset values or whether that's medical and healthcare inflation. So it's impacting commercial risk and health, you know, insurance prices and therefore our revenue lines. And we expect that impact on inflation.
be put into the business in a more consistent way, especially on the property side. I think inflation around verdicts on the liability side. So I think it is, as you're saying, impacting pricing from an insurer standpoint. I would say it also creates sort of decision making that the client will make. So the clients may take higher retention.
They may use captives that requires different support. They may take things on their own balance sheet versus transferring it. So it's not a straight line and often it will turn into other capabilities that we can provide clients service for rather than just straight up insurance pricing. So you know the clients are reacting to inflation the way any business would.
And so that gives us an opportunity to provide a broader suite of capabilities to them as your manager.
So that gives us an opportunity to provide a broader suite of capabilities to them as your manager.
And then on share buybacks, the last few years, they've been heavier in the second half than in the first half. Should we assume a similar pattern this time, and especially considering that your free cash flow is gonna be higher as well, or does the buyback activity thus far this year already incorporate the higher free cash flow in the second half? Yeah, so Jimmy, what we would tell you is we...
think about allocating cash based on return on capital, cash on cash return, and our highest return on capital opportunity remains share approaches. And so as we generate cash, you can think about us allocating it disproportionately to buyback because it sets the bar for all other uses of cash. And look, what we would say is we don't actually forecast buyback by quarter.
But you can see in any calendar year it's the highest use of cash across the firm. And so, you know, whether that cash is coming from debt or operating cash flows, as we generate that cash, we'll utilize it to buy back or M&A or organic investment, depending on the ROIC return. We...
definitely see a huge opportunity to invest in buyback given we are substantially undervalued today based on the way we value our business on a DCF basis.
Thank you.
Thank you. I would now like to turn the call back over to Greg Case for closing remarks.
I just want to say thank you everyone for joining and we look forward to the discussion next quarter. Have a great day. This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.