Aon Plc's CEO, Greg Case, welcomed everyone to their second quarter conference call, and was joined by Christa Davies, the CFO, and Eric Andersen, the President. They reported that their global team had a strong quarter, with performance, results, and momentum. They thanked their colleagues for helping their clients address risk and human capital demands, and for investing to meet the demand. It was noted that client demand to address risk and human capital has never been greater.

Aon's Catastrophe Insight Report estimated that global economic losses for natural disasters in the first half of 2023 were $194 billion, significantly higher than the 21st century average. To help build resiliency and protection, Aon recently announced the Parametric Insurance Program for the government of Puerto Rico. In the second quarter, Aon delivered strong organic revenue growth in Health Solutions and Reinsurance Solutions, with 10% and 9% growth respectively. This was driven by their team helping clients navigate the demands of their talent agendas and providing optimal benefits for their people.

Aon's teams have been helping clients navigate a complex market, and there has been an influx of capital into the cat bond market. Wealth solutions saw 2% organic growth, driven by demand for project work related to market volatility and regulatory changes. Commercial risk solutions saw 5% organic growth, with double-digit growth in Asia and the Pacific and strength in core retail brokerage in the U.S. Aon's Aon United strategy and Al Business Services platform have contributed to 6% organic revenue growth and 110 basis points of operating margin expansion in Q2, and 7% organic revenue growth and 90 basis points of adjusted operating margin expansion in the first half of the year.

Aon United is well-positioned to continue its strong financial performance and has been able to respond to changing client demands with its four solution lines. Aon has developed a diagnostic tool, the Human Sustainability Index, which combines individual and team assessments with peer data and analytics-based benchmarking to help clients better assess their people strategies and adjust their tactics to drive their bottom line. This work represents bringing next level data science into talent development and leadership.

HSI Solutions provides a trackable plan to help clients better understand their challenges and opportunities, and to take actions to protect their business and improve their performance. The strategy has been successful, resulting in 7% organic revenue growth and 90 basis points of margin expansion in the first half of the year. HSI Solutions expects mid-single-digit or greater organic revenue growth for the full year 2023 and over the long term.

Aon reported revenue growth of 7% in Q2 and 6% year-to-date, with an unfavorable impact from changes in FX of 1% for Q2 and 2% year-to-date. The company also reported fiduciary investment income of $64 million in Q2 and $116 million year-to-date. Aon has achieved strong operational improvement with adjusted operating margins of 33.6% in the first half, driven by revenue growth and efficiencies. Going forward, the company expects to invest in standardized platforms, operations, and client service delivery to drive margin expansion and long-term growth.

Aon Business Services is leveraging its technology partners to enhance existing offerings and create data sets to enhance their risk analytics. This has translated into strong adjusted operating income growth and adjusted EPS growth of 5% and 6% respectively in the second quarter and year-to-date. Currency translation has had an unfavorable impact of approximately $0.05 in the quarter and $0.19 per share year-to-date, but if it remains stable, it will have a favorable impact of $0.05 per share in the fourth quarter, resulting in an unfavorable impact of $0.14 per share for the full year 2023.

Nonoperating expenses had an unfavorable impact on the second quarter and year-to-date. Free cash flow decreased 7% due to increased capital expenditure, but is expected to increase in the second half of the year. CapEx is expected to be between $220 and $250 million in 2023 and free cash flow growth is expected to remain strong. Share repurchase is expected to remain the highest return on capital opportunity for capital allocation due to the company's current undervaluation in the market.

Greg Case explains that the M&A services sector is experiencing headwinds in the back half of the year, which is likely due to strong commercial fundamentals, such as high retention and new business, as well as strong performance in core P&C. He also notes that they remain confident in the strength of their balance sheet and their debt maturity profile, and they plan to continue to invest in content and capability to meet client needs.

Greg Case and Eric Andersen discuss the decrease in M&A services due to the external outlook being soft. They have been expanding the potential client base to include corporate clients, and have seen success with their IP business. This business has been significant in terms of the value of the S&P 500, and they have invested in 601West to help with this.

Eric Andersen and Greg have discussed the progress they have made in their marketplace, which now has 26-30 insurers and has seen $2 billion in aggregate insured transaction value. Eric adds that the market is still in its infancy and they are working with many third parties to match risk to capital. Mike Zaremski inquires about the organic growth outlook, to which Greg responds that they are still aiming for 5% or greater, although the growth rate may be steady, accelerating, or decelerating.

Greg Case and Eric Andersen discussed how Aon United's growth platform has been reinforced by the performance in Q2 and the first half of the year, with mid-single digit or greater growth and margin expansion. They attribute this to the strength in health, reinsurance, and commercial risk, as well as the Parametric and Human Sustainability Index initiatives. Additionally, they note that client demand is becoming more complicated, which is driving the growth of Aon United.

Mike talks about the strategy of evolving to risk capital and human capital and how it gives them access to global capital no matter what form, as well as the analytics to help large corporate clients understand their risk and the best insight of the market dynamics. On the human capital side, they are meeting clients where they are today in terms of their employee relationships. Christa adds that year-to-date growth was 7% and they are expecting full-year results.

Christa Davies explains that Aon is on track for their full year guidance of mid-single-digit or greater organic revenue growth, margin expansion, and double-digit free cash flow growth, and that they are investing in their people and technology to help support revenue growth. She also mentions that they have seen 90 basis points of margin expansion year-to-date, and an increased investment in IT of 13%.

Aon Business Services has invested in standardized operations, platforms, and innovation to drive long-term margin expansion. They have also leveraged analytics to create the Human Sustainability Index and help corporate clients manage their climate exposure. This strategy has been in place since 2017, and is now on the next wave of development. Aon is also investing in their colleagues with increased compensation and benefits, and there is a high competition for talent.

Christa Davies and Eric Andersen discussed the organic revenue growth of 7% year-to-date, the fact that attrition is below pre-pandemic levels, and the high engagement levels of their firm. They also highlighted their investments in core health and benefit business, strategy and technology, and key geographies. Finally, they discussed how their risk capital and human capital platforms allow them to be flexible with where they deploy talent.

Eric Andersen discussed Aon's wealth solutions business, which includes retirement and investment management. He noted that the retirement piece is a solid business, and the advisory business is strong. He also mentioned that the delegated part of the business is affected by AUM movement, but that Aon is still bullish on the business and expects it to hit mid-single digit growth. He then answered a question from Bob Huang about the cost of AI implementation, noting that products with AI capabilities are twice as expensive as those without.

Christa Davies explains that AI investments are broken down into two categories: basic machine learning, robotic process automation, and generative AI. These investments are used to drive automation and efficiency and create easier client interactions, as well as provide insight and impact in analytical areas such as risk capital and human capital. Greg Case adds that AI has been incorporated for a decade, and is one of the reasons they have driven an business services.

Aon Business Services has enabled the company to scale ideas across 120 countries. In terms of Commercial Risk Solutions, the company has seen strong growth in Asia, Latin America, and the rest of the world, and they feel confident that they will continue to benefit from the rebound in the M&A market. The company is focusing on winning more clients and doing more with them, and keeping them longer with their overall strategy.

Eric Andersen and Greg Case are both excited about the growth opportunities in Latin America and Asia-Pacific due to the increasing sophistication of the products being offered and the need for more global solutions. They recently visited Singapore to open their global climate hub and found that clients are increasingly interested in global solutions that can be adapted to their local needs. They are also optimistic about the potential for risk capital and reinsurance analytics in the commercial space.

Eric Andersen explains that reinsurance clients have been making decisions to buy less or differently due to the changing reinsurance market. He also notes that this could explain the changes in the primary market, as more of the risk is now sitting on primary insurers. He then goes on to say that the second half of the year tends to be more around ILS and facultative business, and that they had a strong first half that they expect to continue.

Reinsurance has been a strength for the company over the last five years, and they have invested heavily in cat bonds, ILS, strategy, and technology. This has been incorporated into the overall risk capital effort, and Christa Davies explains that they are not giving specific guidance on the commercial risk at a certain level. Greg Case adds that they are excited about the possibilities and capabilities they have to help clients, and they feel strongly positive about the second half of the year and the ongoing results.

AON is on track for mid-single-digit or greater organic revenue growth for the full year, despite a 30-40% decrease in transaction volume. Eric Andersen attributes the strong growth outside the United States to market share gains and the ability of their global team to work together to help global and local clients. Christa confirmed that CapEx is estimated to be around $200 million to $225 million for the year and that the improvement in free cash flow in the back half will come from lower CapEx and growth in operating cash flow.

Christa Davies and Greg Case discuss the increased CapEx guidance for 2023 and the free cash flow growth for the year. They mention that M&A activity is still low and that there is pressure on the capital side in the reinsurance market. They are looking for options to match capital risk for their clients.

Eric Andersen discussed the ILS side of the reinsurance market, noting that historically investors in cat bonds have either increased their allocations or returned to the area, creating a dynamic market in the first 6 months of the year. He also commented that the overall capital provision of the reinsurance market has reached an equilibrium, with big players getting more active and investors looking to participate in support of existing players in the industry. Andersen mentioned that pricing of property cat and casualty side of the business have found an equilibrium, though inflation and hurricane season could affect the market in the coming 5 months. He was responding to a question about the impact of capital markets activity on organic growth in commercial risk, which had a 5-point drag on growth in the fourth quarter.

Christa Davies and Greg Case discussed the organic growth in commercial risk for the quarter, which has not been disclosed. Greg Case reinforced the guidance they had before, and David Motemaden clarified that the comps in the second half of 2022 are expected to be easier due to the depressed base. They are also continuing to invest in technology and talent, and the CapEx for the year is expected to tick down in the back half of the year.

Christa Davies stated that the company is on track for full year margin expansion and that the margins in the M&A practice are not particularly different from the rest of the business. They are focusing on investing in higher-revenue growth, higher-margin areas supported by services and analytical impact. CapEx is expected to be between $220 million and $250 million for 2023.

Christa Davies does not provide guidance on tax rate expectations for the future, but she does note that the average tax rate over the past five years has been 18%. She also believes that the company is well-positioned to navigate any regulatory or legislative changes. When asked about the impact of inflation on results, she believes it can be a positive overall, as it helps on the revenue side, but there may be competition for talent and higher IT expenses that could hurt margins.

Christa Davies and Eric Andersen discuss how inflation impacts their business, both on the expense and revenue sides. They mention how asset values are repriced and how verdicts on the liability side may affect pricing. They also note that clients may react to inflation in different ways, such as taking higher retentions or using captives, which may create opportunities for the company to provide additional services. Finally, Jimmy Bhullar inquires about the pattern of share buybacks, which have been heavier in the second half in recent years and may be higher this time due to increased free cash flow.

Christa Davies explains that the company allocates cash based on return on capital, and that buyback is the highest use of cash across the firm. She states that the company is undervalued and that they will use cash generated from debt or operating cash flow for buyback, M&A, or organic investment based on the ROIC return. Greg Case then closes the call by thanking everyone for joining and looking forward to the discussion next quarter.

This summary was generated with AI and may contain some inaccuracies.