Aon Reports Third Quarter 2023 Results

Third Quarter Key Metrics

• Total revenue increased 10% to $3.0 billion, including organic revenue growth of 6%
• Operating margin increased 150 basis points to 23.4%, and operating margin, adjusted for certain items, increased 120 basis points to 24.3%
• EPS increased 16% to $2.23, and EPS, adjusted for certain items, increased 15% to $2.32
• For the first nine months of 2023, cash flows from operations was $2,174 million, and free cash flow decreased 4% to $1,971 million

Third Quarter Highlights

• Repurchased 2.6 million class A ordinary shares for approximately $850 million
• Announced the acceleration of its Aon United strategy across Aon Business Services, Risk Capital and Human Capital, and the Aon Client Leadership Model, including a cash restructuring charge of ~$900 million, which is expected to drive ~$350 million in annual, run-rate savings by the end of 2026
• Announced the acquisition of NGS Seguros and signed a definitive agreement to acquire Global Insurance Brokers, both expected to expand presence and Risk Capital capabilities in Latin America and India, respectively

DUBLIN, Oct. 27, 2023 /PRNewswire/ -- Aon plc (NYSE: AON) today reported results for the three months ended September 30, 2023.

Net income attributable to Aon shareholders increased 12% to $456 million, or $2.23 per share on a diluted basis, compared to $408 million, or $1.92 per share on a diluted basis, in the prior year period. Net income per share attributable to Aon shareholders, adjusted for certain items, increased 15% to $2.32 on a diluted basis, including an unfavorable impact of $0.01 per share if prior year period results were translated at current period foreign exchange rates ("foreign currency translation"), compared to $2.02 in the prior year period. Certain items that impacted third quarter results and comparisons with the prior year period are detailed in the "Reconciliation of Non-GAAP Measures - Operating Income, Operating Margin and Diluted Earnings Per Share" on page 10 of this press release.

"Our global team delivered strong operating results in the third quarter, including 6% organic revenue growth and 120 basis points of adjusted operating margin improvement, contributing to 7% organic revenue growth and 80 basis points of adjusted margin expansion year to date, demonstrating the strength of our Aon United strategy," said Greg Case, Chief Executive Officer. "We see an ongoing evolution in client demand that will require new and integrated solutions, powered by better analytics, and delivered through Aon Business Services across Risk Capital and Human Capital. To capture this opportunity, we are accelerating our strategy to take Aon Business Services to the next level to enable sustainable value creation for clients, colleagues, and shareholders."

THIRD QUARTER 2023 FINANCIAL SUMMARY

Total revenue in the third quarter increased 10% to $3.0 billion compared to the prior year period reflecting 6% organic revenue growth, a 2% favorable impact from fiduciary investment income and a 2% favorable impact from foreign currency translation.

Total operating expenses in the third quarter increased 7% to $2.3 billion compared to the prior year period due primarily to an increase in expense associated with 6% organic revenue growth, investments in long-term growth, and a $45 million unfavorable impact from foreign currency translation.

Foreign currency translation in the third quarter had a $2 million, or $0.01 per share, unfavorable impact on U.S. GAAP net income and a $2 million, or $0.01 per share, unfavorable impact on adjusted net income. If currency were to remain stable at today's rates, the Company would expect a favorable impact of $0.03 per share in the fourth quarter of 2023, and an unfavorable impact of approximately $0.17 per share, or an approximately $51 million decrease in adjusted operating income for full year 2023.

Effective tax rate was 16.6% in the third quarter compared to 18.0% in the prior year period. After adjusting to exclude the applicable tax impact associated with certain non-GAAP adjustments, the adjusted effective tax rate for the third quarter of 2023 was 17.2% compared to 19.1% in the prior year period. The primary drivers of the change in the adjusted effective tax rate were the geographical distribution of income and a net favorable impact from discrete items.

Weighted average diluted shares outstanding decreased to 204.6 million in the third quarter compared to 212.6 million in the prior year period. The Company repurchased 2.6 million class A ordinary shares for approximately $850 million in the third quarter. As of September 30, 2023, the Company had approximately $4.1 billion of remaining authorization under its share repurchase program.

YEAR TO DATE 2023 CASH FLOW SUMMARY

Cash flows provided by operations for the first nine months of 2023 decreased $3 million to $2,174 million compared to the prior year period, primarily due to higher cash tax payments and a negative impact to working capital due to temporary invoicing delays associated with the implementation of a new system, partially offset by strong operating income growth.

Free cash flow, defined as cash flows from operations less capital expenditures, decreased 4%, to $1,971 million for the first nine months of 2023 compared to the prior year period, reflecting a decrease in cash flows provided by operations and a $77 million increase in capital expenditures. Capital expenditures were elevated compared to the prior year period as we executed a number of projects across technology to drive long-term growth.

THIRD QUARTER 2023 REVENUE REVIEW

The third quarter revenue reviews provided below include supplemental information related to organic revenue growth, which is a non-GAAP measure that is described in detail in "Reconciliation of Non-GAAP Measures - Organic Revenue Growth and Free Cash Flow" on page 9 of this press release.

Total revenue increased $257 million, or 10%, to $2,953 million, compared to the prior year period, with organic revenue growth of 6%, driven by ongoing strong retention, management of the renewal book, and net new business generation, a 2% favorable impact from fiduciary investment income and a 2% favorable impact from foreign currency translation.

Commercial Risk Solutions organic revenue growth of 4% reflects solid growth across most major geographies driven by strong retention, management of the renewal book, and net new business generation. Growth in retail brokerage was highlighted by strong growth in EMEA and the Pacific, driven by continued strength in core P&C. The U.S. grew modestly driven by strength in the construction business and strong new business generation, partially offset by the impact of the external M&A and IPO markets. On average globally, exposures and pricing were positive, resulting in a modestly positive market impact.

Reinsurance Solutions organic revenue growth of 11% reflects strong growth in treaty, driven by strong retention and continued net new business generation, as well as strong growth in facultative placements and double-digit growth in Strategy and Technology Group. Market impact was modestly positive on results in the quarter. The majority of revenue in our treaty portfolio is recurring in nature and is recorded in connection with the major renewal periods that take place throughout the first half of the year, while the second half of the year is typically driven by facultative placements, capital markets activity and advisory work that is more transactional in nature. 

Health Solutions organic revenue growth of 10% reflects strong growth globally in core health and benefits brokerage primarily from net new business generation and management of the renewal book. Strength in the core was highlighted by double-digit growth in almost all major geographies. Results also reflect double-digit growth in Consumer Benefit Solutions and strong growth in Talent, driven by data and advisory solutions.

Wealth Solutions organic revenue growth of 4% reflects strong growth in Retirement, driven by advisory demand and project-related work related to pension de-risking and ongoing impact of regulatory changes. Investments was flat as strong advisory demand and project-related work was offset by declines in the real estate portion of our portfolio driven by real estate market movements.

THIRD QUARTER 2023 EXPENSE REVIEW

Compensation and benefits expense increased $153 million, or 10%, compared to the prior year period due primarily to an increase in expense associated with 6% organic revenue growth and a $37 million unfavorable impact from foreign currency translation.

Information technology expense increased $2 million, or 2%, compared to the prior year period due primarily to ongoing investments in technology platforms, particularly client facing technology.

Premises expense increased $3 million, or 4%, compared to the prior year period.

Depreciation of fixed assets increased $5 million, or 14%, compared to the prior year period due primarily to recent investments in ABS-enabled technology platforms to drive long-term growth.

Amortization and impairment of intangible assets decreased $14 million, or 41%, compared to the prior year period due primarily to a decrease associated with assets fully amortized in the prior year period and assets held for sale as part of ongoing portfolio management.

Other general expense had a net increase of $1 million, or less than 1%, compared to the prior year period.

Accelerating Aon United Program expenses were $6 million reflecting restructuring charges associated with the Program announced in the third quarter of 2023. The company expects to incur ~$900 million in total cash charges and ~$100 million of non-cash charges over a three-year period. The charges are expected to include technology-related costs for streamlining and simplifying operations, headcount reduction costs, and costs associated with asset impairments, including real estate consolidation costs.

THIRD QUARTER 2023 INCOME SUMMARY

Certain noteworthy items impacted adjusted operating income and adjusted operating margin in the third quarters of 2023 and 2022, which are also described in detail in "Reconciliation of Non-GAAP Measures - Operating Income, Operating Margin and Diluted Earnings Per Share" on page 10 of this press release.

Operating income increased $101 million, or 17%, and operating margin increased 150 basis points to 23.4%, each compared to the prior year period. Operating income, adjusted for certain items detailed on page 10 of this press release, increased $93 million, or 15%, and operating margin, adjusted for certain items, increased 120 basis points to 24.3%, each compared to the prior year period. The increase in operating income reflects organic revenue growth and increased fiduciary investment income, partially offset by increased expenses and investments in long-term growth.

Interest income increased $2 million compared to the prior year period. Interest expense increased $16 million to $119 million compared to the prior year period, reflecting an overall increase in total debt and higher interest rates. Other income (expense) decreased $37 million compared to the prior year period primarily due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and an increase in non-cash net periodic pension cost.

Conference Call, Presentation Slides and Webcast Details

The Company will host a conference call on Friday, October 27, 2023 at 7:30 a.m., central time. Interested parties can listen to the conference call via a live audio webcast and view the presentation slides at www.aon.com.

About Aon

Aon plc (NYSE: AON) exists to shape decisions for the better — to protect and enrich the lives of people around the world. Our colleagues provide our clients in over 120 countries and sovereignties with advice and solutions that give them the clarity and confidence to make better decisions to protect and grow their business.

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Any or all of Aon's forward-looking statements may turn out to be inaccurate, and there are no guarantees about Aon's performance. The factors identified above are not exhaustive. Aon and its subsidiaries operate in a dynamic business environment in which new risks may emerge frequently. Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. In addition, results for prior periods are not necessarily indicative of results that may be expected for any future period. Further information concerning Aon and its businesses, including factors that potentially could materially affect Aon's financial results, is contained in Aon's filings with the SEC. See Aon's Annual Report on Form 10-K for the year ended December 31, 2022 for a further discussion of these and other risks and uncertainties applicable to Aon and its businesses. These factors may be revised or supplemented in subsequent reports filed with the SEC. Aon is not under, and expressly disclaims, any obligation to update or alter any forward-looking statement that it may make from time to time, whether as a result of new information, future events or otherwise.

Explanation of Non-GAAP Measures

This communication includes supplemental information not calculated in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), including organic revenue growth, free cash flow, adjusted operating income, adjusted operating margin, adjusted earnings per share, adjusted net income attributable to Aon shareholders, adjusted diluted net income per share, adjusted effective tax rate, adjusted other income (expense) – pensions, adjusted other income (expense), and adjusted income before income taxes that exclude the effects of intangible asset amortization and impairment, pension settlements, Accelerating Aon United Program expenses, capital expenditures, and certain other noteworthy items that affected results for the comparable periods. Organic revenue growth includes the impact of intercompany activity and excludes foreign exchange rate changes, acquisitions, divestitures, transfers between revenue lines, fiduciary investment income, and gains or losses on derivatives accounted for as hedges. Currency impact represents the effect on prior year period results if they were translated at current period foreign exchange rates. Reconciliations to the closest U.S. GAAP measure for each non-GAAP measure presented in this communication are provided in the attached appendices. Supplemental organic revenue growth information and additional measures that exclude the effects of certain items noted above do not affect net income or any other U.S. GAAP reported amounts. Free cash flow is cash flows from operating activity less capital expenditures. The adjusted effective tax rate excludes the applicable tax impact associated with expenses for estimated intangible asset amortization and impairment, and certain other noteworthy items. Management believes that these measures are important to make meaningful period-to-period comparisons and that this supplemental information is helpful to investors. Management also uses these measures to assess operating performance and performance for compensation. Non-GAAP measures should be viewed in addition to, not in lieu of, Aon's Consolidated Financial Statements. Industry peers provide similar supplemental information regarding their performance, although they may not make identical adjustments.

SOURCE Aon Corporation