AON PLC – 10-Q – Management’s Discussion And Analysis Of Financial Condition And Results Of Operations – InsuranceNewsNet


EXECUTIVE SUMMARY OF FIRST QUARTER 2022 FINANCIAL RESULTS

Aon plc is a leading global professional services firm providing a broad range
of risk, health, and wealth solutions. Through our experience, global reach, and
comprehensive analytics, we are better able to help clients meet rapidly
changing, increasingly complex, and interconnected challenges. We are committed
to accelerating innovation to address unmet and evolving client needs, so that
our clients are better informed, better advised, and able to make better
decisions to protect and grow their business. Management is focused on
strengthening Aon and uniting the firm with one portfolio of capability enabled
by data and analytics and one operating model to deliver additional insight,
connectivity, and efficiency.

Financial Results

The following is a summary of our first quarter of 2022 financial results.

•Revenue increased $145 million, or 4%, to $3.7 billion compared to the prior
year period due primarily to organic revenue growth of 8%, partially offset by a
3% unfavorable impact if prior year period results were translated at current
period foreign exchange rates ("foreign currency translation") and a 1%
unfavorable impact from acquisitions, divestitures, and other.

•Operating expenses were $2.3 billion, an increase of $23 million from the prior
year period. The increase was due primarily to an increase in expense associated
with 8% organic revenue growth and investments in long-term growth, partially
offset by a $43 million favorable impact from foreign currency translation and a
decrease in transaction costs incurred in the prior year period of $35 million.

•Operating margin increased to 37.2% from 35.3% in the prior year period. The
increase was driven by organic revenue growth of 8%, partially offset by an
increase in operating expenses as listed above.

•Due to the factors set forth above, Net income increased $115 million to $1,048
million
compared to the prior year period.

•Diluted earnings per share was $4.73 compared to $4.00 per share for the prior
year period.

•Cash flows provided by operating activities was $463 million, a decrease of $98
million from the prior year period, primarily due to higher incentive
compensation payments following strong performance in 2021, partially offset by
strong operating income growth.

We focus on four key metrics not presented in accordance with U.S. GAAP that we
communicate to shareholders: organic revenue growth, adjusted operating margin,
adjusted diluted earnings per share, and free cash flow. These non-GAAP metrics
should be viewed in addition to, not instead of, our Condensed Consolidated
Financial Statements. The following is our measure of performance against these
four metrics for the first quarter of 2022:

•Organic revenue growth is a non-GAAP measure defined under the caption "Review
of Consolidated Results - Organic Revenue Growth." Organic revenue growth was 8%
for the first quarter of 2022, driven by ongoing strong retention and net new
business generation.

•Adjusted operating margin, a non-GAAP measure defined under the caption "Review
of Consolidated Results - Adjusted Operating Margin," was 38.0% for the first
quarter of 2022 compared to 37.4% in the prior year period. The increase in
adjusted operating margin primarily reflects strong organic revenue growth,
partially offset by expense growth and investments in long-term growth.

•Adjusted diluted earnings per share, a non-GAAP measure defined under the
caption "Review of Consolidated Results - Adjusted Diluted Earnings per Share,"
was $4.83 per share for the first quarter of 2022, compared to $4.28 per share
for the respective prior year period.

•Free cash flow, a non-GAAP measure defined under the caption "Review of
Consolidated Results - Free Cash Flow," decreased in the first three months of
2022 by $92 million from the prior year period, to $440 million, reflecting a
decrease in cash flows from operations, partially offset by a $6 million
decrease in capital expenditures.

COVID-19 PANDEMIC

The outbreak of the coronavirus, which causes COVID-19, was declared by the
World Health Organization to be a pandemic and has impacted almost all
countries, in varying degrees, creating significant public health concerns, and
significant volatility, uncertainty, and economic disruption in every region in
which we operate. The COVID-19 pandemic has resulted, and may continue to
result, in significant economic disruption and volatility, although much
progress has been made in the development and distribution of vaccines,
contributing to overall improved economic conditions globally. We continue to
closely monitor the situation and its impacts on our business, liquidity, and
capital planning initiatives. We continue to be fully operational and to
reoccupy certain offices, where deemed appropriate and in compliance with
governmental restrictions

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considering the impact on health and safety of our colleagues, their families,
and our clients. We continue to deploy business continuity protocols and our
Smart Working strategy to facilitate remote working capabilities to ensure the
health and safety of our colleagues, to deliver results on behalf of clients,
and to comply with public health and travel guidelines and restrictions.

As the situation continues to evolve, the scale and duration of disruption
cannot be predicted, and it is not possible to quantify or estimate the full
impact that COVID-19 will have on our business. While we continue to focus on
managing our cash flow to meet liquidity needs, our results of operations may be
adversely affected. However, for the three months ended March 31, 2022 the
impacts of COVID-19 on our business results have lessened and we have seen
overall strength across the firm. We continue to monitor the situation closely.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE

For many companies, the management of ESG risks and opportunities has become
increasingly important. Aon offers a wide range of consulting and advisory
solutions designed to address and manage ESG issues for clients. We view ESG
risks as presenting an important opportunity to help clients and improve our
impact on ESG matters.

RUSSIAN WAR IN UKRAINE

The Russian war in Ukraine, initiated on February 24, 2022, has resulted in
certain sanctions being imposed by jurisdictions in which we operate, including
the U.S., the E.U., and the U.K., on Russia and certain Russian companies and
individuals. The Company's operations in Russia and Ukraine represent an
immaterial portion of the Company's global operations and the war has not had a
material impact on the Company's global operations as of March 31 2022.

The Company continues to monitor the potential impacts on the business and the
ancillary impacts that the military conflict could have on other global
operations.

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REVIEW OF CONSOLIDATED RESULTS

Summary of Results

Our consolidated results are as follows (in millions):

Three Months Ended March 31,

                                                                                    2022                 2021
Revenue
Total revenue                                                                 $        3,670$  3,525
Expenses
Compensation and benefits                                                              1,767             1,719
Information technology                                                                   123               114
Premises                                                                                  72                77
Depreciation of fixed assets                                                              38                41
Amortization and impairment of intangible assets                                          28                40
Other general expense                                                                    275               289
Total operating expenses                                                               2,303             2,280
Operating income                                                                       1,367             1,245
Interest income                                                                            3                 3
Interest expense                                                                         (91)              (79)
Other income (expense)                                                                    25                (2)
Income before income taxes                                                             1,304             1,167
Income tax expense                                                                       256               234

Net income                                                                             1,048               933
Less: Net income attributable to noncontrolling interests                                 25                20
Net income attributable to Aon shareholders                                   $        1,023$    913
Diluted net income per share attributable to Aon shareholders               

$ 4.73 $ 4.00

Weighted average ordinary shares outstanding - diluted                                 216.4             228.1


Revenue

Total revenue increased $145 million, or 4%, in the first quarter of 2022
compared to the first quarter of 2021. This increase reflects organic revenue
growth of 8%, partially offset by a 3% unfavorable impact from foreign currency
translation and a 1% unfavorable impact from acquisitions, divestitures, and
other.

Commercial Risk Solutions revenue increased $79 million, or 5%, to $1.7 billion
in the first quarter of 2022, compared to $1.6 billion in the first quarter of
2021. Organic revenue growth was 9% in the first quarter of 2022, driven by
growth across every major geography, reflecting strong retention, new business
generation, and management of the renewal book portfolio. Strength in retail
brokerage was highlighted by double-digit growth in the U.S., Canada, Asia, and
the Pacific, driven by continued strength in core P&C, as well as strong growth
in construction and project-related work. Results also reflect solid growth
globally in the affinity business across both consumer and business solutions,
including growth in the travel and events practice. On average globally,
exposures and pricing were modestly positive, resulting in a modestly positive
market impact.

Reinsurance Solutions revenue increased $54 million, or 6%, to $976 million in
the first quarter of 2022, compared to $922 million in the first quarter of
2021. Organic revenue growth was 7% in the first quarter of 2022, driven by
strong growth in treaty, reflecting strong retention and continued net new
business generation, as well as strong growth in facultative placements and
double-digit growth in capital markets transactions. Market impact was modestly
positive on results in the quarter.

Health Solutions revenue increased $23 million, or 4%, to $638 million in the
first quarter of 2022, compared to $615 million in the first quarter of 2021.
Organic revenue growth was 8% in the first quarter of 2022, driven by strong
growth globally in core health and benefits brokerage, reflecting strong
retention and management of the renewal book portfolio. Strength in health and
benefits brokerage included solid growth in project-related work, driven by
advisory work related to wellbeing and resilience. Results also reflect
double-digit growth in Consumer Benefit Solutions and double-digit growth in
Human Capital, driven by rewards and advisory solutions.

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Wealth Solutions revenue decreased $10 million, or 3%, to $345 million in the
first quarter of 2022, compared to $355 million in the first quarter of 2021.
Organic revenue growth was flat overall in the first quarter of 2022. Retirement
was flat, reflecting modest growth in the core portion of the business,
partially offset by a modest decline in project-related work. Investments grew
modestly driven by new business generation and project-related work.

Compensation and Benefits

Compensation and benefits expenses increased $48 million, or 3%, in the first
quarter of 2022 compared to the first quarter of 2021. This increase was
primarily driven by an increase in expense associated with 8% organic revenue
growth, partially offset by a $37 million favorable impact from foreign currency
translation.

Information Technology

Information technology expenses, which represent costs associated with
supporting and maintaining our infrastructure, increased $9 million, or 8%, in
the first quarter of 2022 compared to the first quarter of 2021. This increase
was primarily driven by an increase in expense associated with 8% organic
revenue growth, partially offset by a $2 million favorable impact from foreign
currency translation.

Premises

Premises expenses, which represent the cost of occupying offices in various
locations throughout the world, decreased $5 million, or 6%, in the first
quarter of 2022 compared to the first quarter of 2021. This decrease was
primarily driven by a reduction in rent expense associated with our Smart
Working strategy, which gives colleagues flexibility in where they work.

Depreciation of Fixed Assets

Depreciation of fixed assets primarily relates to software, leasehold
improvements, furniture, fixtures, and equipment, computer equipment, buildings,
and automobiles. Depreciation of fixed assets decreased $3 million, or 7%, in
the first quarter of 2022 compared to the first quarter of 2021 due primarily to
a $1 million favorable impact from foreign currency translation.

Amortization and Impairment of Intangible Assets

Amortization and impairment of intangible assets primarily relates to
finite-lived tradenames and customer-related, contract-based, and technology
assets. Amortization and impairment of intangible assets decreased $12 million,
or 30%, in the first quarter of 2022 compared to the first quarter of 2021.

Other General Expense

Other general expense in the first quarter of 2022 decreased $14 million, or 5%,
compared to the first quarter of 2021 due primarily to a decrease in transaction
costs incurred in the prior year period of $35 million, partially offset by an
increase in expense associated with 8% organic revenue growth and an increase in
travel and entertainment expense.

Interest Income

Interest income represents income earned on operating cash balances and other
income-producing investments. It does not include interest earned on funds held
on behalf of clients. During the first quarter of 2022, Interest income was $3
million, and flat compared to the first quarter of 2021.

Interest Expense

Interest expense, which represents the cost of our debt obligations, was $91
million for the first quarter of 2022, an increase of $12 million, or 15%, from
the first quarter of 2021. The increase was driven primarily by higher
outstanding term debt.

Other Income (Expense)

Other income was $25 million for the first quarter of 2022, compared to Other
expense of $2 million for the first quarter of 2021. Other income for the first
quarter of 2022 primarily reflects a gain from the sale of a business in Wealth
Solutions.

Income before Income Taxes

Due to the factors discussed above, Income before income taxes for the first
quarter of 2022 was $1,304 million, a 12% increase from $1,167 million in the
first quarter of 2021.

Income Taxes

The effective tax rates on Net income were 19.6% and 20.1% for the first quarter
of 2022 and 2021, respectively.

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For the three months ended March 31, 2022 and March 31, 2021, the tax rate was
primarily driven by the geographical distribution of income and certain discrete
items.

Net Income Attributable to Aon Shareholders

Net income attributable to Aon shareholders for the first quarter of 2022
increased to $1,023 million, or $4.73 per diluted share, from $913 million, or
$4.00 per diluted share, in the prior year period.

Non-GAAP Metrics

In our discussion of consolidated results, we sometimes refer to certain
non-GAAP supplemental information derived from consolidated financial
information specifically related to organic revenue growth, adjusted operating
margin, adjusted diluted earnings per share, free cash flow, and the impact of
foreign exchange rate fluctuations on operating results. 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. This non-GAAP supplemental information should be
viewed in addition to, not instead of, our Condensed Consolidated Financial
Statements.

Organic Revenue Growth

We use supplemental information related to organic revenue growth to help us and
our investors evaluate business growth from existing operations. Organic revenue
growth is a non-GAAP measure that includes the impact of intercompany activity
and excludes the impact of changes in foreign exchange rates, fiduciary
investment income, acquisitions, divestitures, transfers between revenue lines,
and gains or losses on derivatives accounted for as hedges. This supplemental
information related to organic revenue growth represents a measure not in
accordance with U.S. GAAP and should be viewed in addition to, not instead of,
our Condensed Consolidated Financial Statements. Industry peers provide similar
supplemental information about their revenue performance, although they may not
make identical adjustments. A reconciliation of this non-GAAP measure to the
reported Total revenue is as follows (in millions, except percentages):

                                        Three Months Ended March 31,
                                                                                                                       Less: Fiduciary                                       Organic
                                                                                                Less: Currency        Investment Income        Less: Acquisitions,        Revenue Growth
                                           2022              2021            % Change             Impact (1)                 (2)             
Divestitures & Other             (3)
Revenue
Commercial Risk Solutions               $  1,719$ 1,640                   5  %                  (3) %                    -  %                       (1) %                 9  %
Reinsurance Solutions                        976              922                   6                     (2)                      -                           1                    7
Health Solutions                             638              615                   4                     (3)                      -                          (1)                   8
Wealth Solutions                             345              355                  (3)                    (2)                      -                          (1)                   -
Eliminations                                  (8)              (7)                   N/A                    N/A                     N/A                         N/A                  N/A
Total revenue                           $  3,670$ 3,525                   4  %                  (3) %                    -  %                       (1) %                 8  %


(1)Currency impact represents the effect on prior year period results if they
were translated at current period foreign exchange rates.
(2)Fiduciary investment income for the three months ended March 31, 2022 and
2021 was $2 million in each period.
(3)Organic revenue growth includes the impact of intercompany activity and
excludes the impact of changes in foreign exchange rates, fiduciary investment
income, acquisitions, divestitures, transfers between revenue lines, and gains
or losses on derivatives accounted for as hedges.

Adjusted Operating Margin

We use adjusted operating margin as a non-GAAP measure of our core operating
performance. Adjusted operating margin excludes the impact of certain items, as
listed below, because management does not believe these expenses are the best
indicators of our core operating performance. This supplemental information
related to adjusted operating margin represents a measure not in accordance with
U.S. GAAP and should be viewed in addition to, not instead of, our Condensed
Consolidated Financial Statements.

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A reconciliation of this non-GAAP measure to the reported operating margin is as
follows (in millions, except percentages):

Three Months Ended March 31,

                                                                             2022                 2021
Revenue                                                                $       3,670$  3,525

Operating income - as reported                                         $       1,367$  1,245
Amortization and impairment of intangible assets                                  28                 40

Transaction costs and other charges related to the combination
and resulting termination (1)

                                                      -                 35
Operating income - as adjusted                                         $       1,395$  1,320

Operating margin - as reported                                                  37.2   %           35.3  %
Operating margin - as adjusted                                                  38.0   %           37.4  %


(1)As part of the terminated combination with WTW, certain transaction costs
were incurred by the Company in the first quarter of 2021. These costs may
include advisory, legal, accounting, valuation, and other professional or
consulting fees related to the combination, including planned divestitures that
have been terminated, as well as certain compensation expenses and expenses
related to further steps on our Aon United operating model as a result of the
termination.

Adjusted Diluted Earnings per Share

We use adjusted diluted earnings per share as a non-GAAP measure of our core
operating performance. Adjusted diluted earnings per share excludes the items
identified above, along with pension settlements and related income taxes,
because management does not believe these expenses are representative of our
core earnings. This supplemental information related to adjusted diluted
earnings per share represents a measure not in accordance with U.S. GAAP and
should be viewed in addition to, not instead of, our Condensed Consolidated
Financial Statements. A reconciliation of this non-GAAP measure to reported
diluted earnings per share is as follows (in millions, except per share data and
percentages):

                                                                              Three Months Ended March 31, 2022
                                                                                                                 Non-GAAP
                                                                       U.S. GAAP            Adjustments          Adjusted
Operating income                                                    $     1,367           $         28          $ 1,395
Interest income                                                               3                      -                3
Interest expense                                                            (91)                     -              (91)
Other income (expense)                                                       25                      -               25
Income before income taxes                                                1,304                     28            1,332
Income tax expense (1)                                                      256                      6              262

Net income                                                                1,048                     22            1,070
Less: Net income attributable to noncontrolling interests                    25                      -               25
Net income attributable to Aon shareholders                         $     1,023           $         22          $ 1,045

Diluted net income per share attributable to Aon shareholders $ 4.73

           $       0.10$  4.83

Weighted average ordinary shares outstanding - diluted                    216.4                      -            216.4
Effective tax rates (1)                                                    19.6   %                                19.7  %



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                                                                              Three Months Ended March 31, 2021
                                                                                                                 Non-GAAP
                                                                       U.S. GAAP            Adjustments          Adjusted
Operating income                                                    $     1,245           $         75          $ 1,320
Interest income                                                               3                      -                3
Interest expense                                                            (79)                     -              (79)
Other income (expense)                                                       (2)                     -               (2)
Income before income taxes                                                1,167                     75            1,242
Income tax expense (1)                                                      234                     11              245

Net income                                                                  933                     64              997
Less: Net income attributable to noncontrolling interests                    20                      -               20
Net income attributable to Aon shareholders                         $       913           $         64          $   977

Diluted net income per share attributable to Aon shareholders $ 4.00

           $       0.28$  4.28

Weighted average ordinary shares outstanding - diluted                    228.1                      -            228.1
Effective tax rates (1)                                                    20.1   %                                19.7  %


(1)Adjusted items are generally taxed at the estimated annual effective tax
rate, except for the applicable tax impact associated with certain transaction
costs and other charges related to the combination and resulting termination,
which are adjusted at the related jurisdictional rate.

Free Cash Flow

We use free cash flow, defined as cash flow provided by operations less capital
expenditures, as a non-GAAP measure of our core operating performance and
cash-generating capabilities of our business operations. This supplemental
information related to free cash flow represents a measure not in accordance
with U.S. GAAP and should be viewed in addition to, not instead of, our
Condensed Consolidated Financial Statements. The use of this non-GAAP measure
does not imply or represent the residual cash flow for discretionary
expenditures. A reconciliation of this non-GAAP measure to the reported Cash
provided by operating activities is as follows (in millions):

                                                    Three Months Ended 

March 31,

                                                          2022              

2021

Cash provided by operating activities      $           463                        $ 561
Capital expenditures                                   (23)                         (29)
Free cash flow                             $           440                        $ 532

Impact of Foreign Exchange Rate Fluctuations

Because we conduct business in over 120 countries and sovereignties, foreign
exchange rate fluctuations may have a significant impact on our business.
Foreign exchange rate movements may be significant and may distort true
period-to-period comparisons of changes in revenue or pretax income. Therefore,
to give financial statement users meaningful information about our operations,
we have provided an illustration of the impact of foreign currency exchange
rates on our financial results. The methodology used to calculate this impact
isolates the impact of the change in currencies between periods by translating
the prior year quarter's revenue, expenses, and net income using the current
quarter's foreign exchange rates.

Currency fluctuations had an unfavorable impact of $0.19 on net income per
diluted share during the three months ended March 31, 2022 if prior year period
results were translated at current period foreign exchange rates. Currency
fluctuations had a favorable impact of $0.17 on net income per diluted share
during the three months ended March 31, 2021, respectively, if 2020 results were
translated at 2021 rates.

Currency fluctuations had an unfavorable impact of $0.19 on adjusted net income
per diluted share during the three months ended March 31, 2022 if prior year
period results were translated at current period foreign exchange rates.
Currency fluctuations had a favorable impact of $0.18 on adjusted net income per
diluted share during the three months ended March 31, 2021, respectively, if
2020 results were translated at 2021 rates. These translations are performed for
comparative and illustrative purposes only and do not impact the accounting
policies or practices for amounts included in our Condensed Consolidated
Financial Statements.

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LIQUIDITY AND FINANCIAL CONDITION

Liquidity

Executive Summary

We believe that our balance sheet and strong cash flow provide us with adequate
liquidity. Our primary sources of liquidity in the near-term include cash flows
provided by operations and available cash reserves; primary sources of liquidity
in the long-term include cash flows provided by operations, debt capacity
available under our credit facilities and capital markets. Our primary uses of
liquidity are operating expenses and investments, capital expenditures,
acquisitions, share repurchases, pension obligations, and shareholder dividends.
We believe that cash flows from operations, available credit facilities,
available cash reserves, and the capital markets will be sufficient to meet our
liquidity needs, including principal and interest payments on debt obligations,
capital expenditures, pension contributions, and anticipated working capital
requirements in the next twelve months and over the long-term. Although there
continues to be uncertainties around future economic conditions due to COVID-19,
we have largely returned to normal levels of liquidity and will continue to
monitor our needs as economic conditions change.

Cash on our balance sheet includes funds available for general corporate
purposes, as well as amounts restricted as to their use. Funds held on behalf of
clients in a fiduciary capacity are segregated and shown together with
uncollected insurance premiums in Fiduciary assets in our Condensed Consolidated
Statements of Financial Position, with a corresponding amount in Fiduciary
liabilities.

In our capacity as an insurance broker or agent, we collect premiums from
insureds and, after deducting our commission, remit the premiums to the
respective insurance underwriters. We also collect claims or refunds from
underwriters on behalf of insureds, which are then returned to the insureds.
Unremitted insurance premiums and claims are held by us in a fiduciary capacity.
The levels of funds held on behalf of clients and liabilities can fluctuate
significantly depending on when we collect the premiums, claims, and refunds,
make payments to underwriters and insureds, and collect funds from clients and
make payments on their behalf, and upon the impact of foreign currency
movements. Funds held on behalf of clients, because of their nature, are
generally invested in very liquid securities with highly rated, credit-worthy
financial institutions. Fiduciary assets include funds held on behalf of clients
comprised of cash and cash equivalents of $6.7 billion and $6.1 billion at
March 31, 2022 and December 31, 2021, respectively, and fiduciary receivables of
$8.6 billion and $8.3 billion at March 31, 2022 and December 31, 2021,
respectively. While we earn investment income on the funds held in cash and
money market funds, the funds cannot be used for general corporate purposes.

We maintain multicurrency cash pools with third-party banks in which various Aon
entities participate. Individual Aon entities are permitted to overdraw on their
individual accounts provided the overall global balance does not fall below
zero. At March 31, 2022, non-U.S. cash balances of one or more entities may have
been negative; however, the overall balance was positive.

The following table summarizes our Cash and cash equivalents, Short-term
investments, and Fiduciary assets as of March 31, 2022 (in millions):





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