Aon plc — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Aon is a global professional services firm focused on risk, retirement, and health, operating as one reportable segment through five principal service lines.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2,886 | $2,497 | $6,411 | $5,716 |
| Operating income | $672 | $594 | $1,917 | $1,627 |
| Net income | $393 | $411 | $1,326 | $1,202 |
| Net income attributable to Aon shareholders | $379 | $398 | $1,292 | $1,170 |
| Diluted EPS | $1.66 | $1.70 | $5.66 | $5.00 |
| Reported operating margin | 23.3% | 23.8% | 29.9% | 28.5% |
| Adjusted operating margin (non-GAAP) | 25.8% | 26.8% | 32.2% | 31.8% |
| Adjusted diluted EPS (non-GAAP) | $2.29 | $1.96 | $6.57 | $5.65 |
Q2 revenue rose 16%, reflecting 11% organic growth, 4% favorable foreign-exchange translation, and 1% from acquisitions, divestitures, and other items. First-half revenue rose 12%, including 8% organic growth and 4% favorable currency translation. Q2 operating income increased 13%, but Aon shareholders’ net income fell 5% and diluted EPS declined, principally amid higher income taxes; the Q2 effective tax rate was 34.1%, versus 17.1% a year earlier. For the first half, shareholders’ net income increased 10% and diluted EPS increased 13%.
Revenue by service line
| Q2 2021 revenue | Year-over-year change | Organic growth |
|---|---|---|
| Commercial Risk Solutions: $1,349 | 20% | 14% |
| Reinsurance Solutions: $500 | 12% | 9% |
| Retirement Solutions: $440 | 12% | 5% |
| Health Solutions: $307 | 19% | 14% |
| Data & Analytic Services: $294 | 7% | 5% |
Management cited strong retention and new-business generation, core property-and-casualty demand, and recovery in some more discretionary project-related work. Q2 expense growth included a $135 million expense-repatterning impact, unfavorable currency translation, costs associated with organic growth, and $20 million of additional costs related to the proposed WTW combination. Lower amortization of certain tradenames partly offset expense increases.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow: $1,345, up 10% from $1,219. Capital expenditures were $70, producing reported free cash flow of $1,275 (non-GAAP), up 13% from $1,130.
- Cash and short-term investments: $1,380 at June 30, 2021, including $1,091 cash and $289 short-term investments. Cash and investments restricted from use totaled $108.
- Debt: Approximately $7.3 billion at June 30, down approximately $0.4 billion from year-end 2020. Aon had no commercial paper outstanding at quarter-end and no borrowings under its $1.65 billion committed credit facilities; it reported compliance with facility covenants.
- Balance sheet: Total assets of $34,580, total liabilities of $30,013, and total equity of $4,567. Fiduciary assets and liabilities were each $15,804; fiduciary funds are segregated and unavailable for general corporate use.
- Capital returns: Aon repurchased $292 of shares in the first half and paid $219 in shareholder dividends. The Q2 dividend was $0.51 per share.
Management said cash flows, available cash, credit facilities, and commercial-paper capacity should meet liquidity needs over the next 12 months and beyond. It expected 2021 operating cash flow to support debt service, capital expenditures, pension obligations, and dividends.
Material developments, outlook, and risks
- WTW transaction termination: On July 26, 2021, after the DOJ sued to block the proposed combination, Aon and WTW terminated their agreement. Aon paid WTW a $1 billion regulatory termination fee on July 27; this was a post-quarter event and is not reflected in Q2 cash flows. The fee is expected to appear as a Q3 operating cash outflow. Aon also expected approximately $350–$400 million of additional Q3 transaction-related costs.
- Planned divestitures: The Gallagher and Aquiline agreements ended following termination of the combination. The Alight agreement for the Retiree Health Exchange business was amended so it no longer depended on closing the combination, but remained subject to approvals and other conditions. A German retirement-business sale agreement remained contingent on the terminated combination; Aon did not expect it to close.
- Tax and pension: A U.K. law enacted in June raises the corporate tax rate from 19% to 25% effective April 1, 2023. Aon remeasured U.K. deferred tax balances, contributing to the higher 2021 tax rate. It reported $62 million of first-half pension contributions and expected approximately $38 million more during the remainder of 2021, subject to plan requirements and currency changes.
- COVID-19 and business outlook: Management said pandemic effects on results had lessened and described overall strength across the firm, while noting that some discretionary business had not fully recovered. The duration and full effect of the pandemic remained uncertain. The filing provides no specific full-year earnings or revenue guidance.
- Legal contingencies: Aon estimated a reasonably possible loss range of $0–$0.8 billion, above amounts accrued and exclusive of insurance, for matters where a loss estimate was possible. Significant matters include claims concerning investment-advisory services, insurance placements, and the 2016 aircraft crash. Aon said it believed it had meritorious defenses; unfavorable outcomes could materially affect results or cash flows in a particular period.
- Other exposures: Maximum potential payments under guarantees associated with a previously divested business were $47 million for leases and $78 million for performance obligations. Client premium-payment guarantees were approximately $130 million. Management also cited currency, interest-rate, market, regulatory, cyber, talent, and litigation risks.
Important facts for investors to verify
- Q3 cash-flow and earnings effects of the $1 billion WTW termination fee and the expected $350–$400 million of additional transaction costs.
- Whether organic revenue growth—particularly in discretionary and previously pandemic-affected work—remains durable across service lines.
- Subsequent developments in the disclosed litigation and the estimated loss range, including insurance coverage and any changes to accruals.
- The effects of the U.K. tax-rate increase, discrete tax items, and foreign-exchange movements on future effective tax rates and earnings.
- Debt levels and liquidity after the termination-fee payment, while distinguishing corporate liquidity from fiduciary assets unavailable for general use.