Aon plc — Form 10-Q Summary
Business context and reporting period
Aon is a global professional services firm providing risk, health, and wealth solutions. This unaudited filing covers the quarter and nine months ended September 30, 2021; amounts are in U.S. dollars unless noted. Aon reports as one operating segment and presents revenue across Commercial Risk, Reinsurance, Health, and Wealth Solutions.
Financial results and liquidity
- Revenue: Q3 revenue was $2.702 billion, up 13% year over year, including 12% organic growth and a 2% favorable currency effect. Nine-month revenue was $9.113 billion, up 12%, with 9% organic growth and a 3% favorable currency effect.
- Q3 solution-line organic growth: Commercial Risk 13%; Reinsurance 8%; Health 16%; Wealth 4%. Nine-month growth was 11%, 7%, 11%, and 3%, respectively.
- Profit and margins: Q3 operating loss was $801 million versus operating income of $441 million a year earlier; Aon-attributable net loss was $900 million, or $3.99 per diluted share, versus net income of $275 million, or $1.18 per share. Reported operating margin was (29.6)% versus 18.5%. Adjusted operating margin, a non-GAAP measure, was 22.1% versus 22.4%; adjusted diluted EPS was $1.74 versus $1.53.
- Nine-month earnings: Operating income was $1.116 billion versus $2.068 billion; Aon-attributable net income was $392 million versus $1.445 billion. Diluted EPS was $1.72 versus $6.18. Reported operating margin was 12.2% versus 25.5%; adjusted operating margin was 29.2% versus 29.0%, and adjusted diluted EPS was $8.31 versus $7.19.
- Cash flow: Nine-month operating cash flow was $1.251 billion, down from $2.023 billion. Free cash flow, defined as operating cash flow less capital expenditures, was $1.149 billion versus $1.904 billion. The filing attributes the decline primarily to the termination fee and related payments, partly offset by revenue growth. Q3-only cash flow is not provided in the filing text.
- Debt and liquidity: Total debt was approximately $8.4 billion at September 30, up $0.7 billion from year-end 2020. Cash and cash equivalents were $609 million, with $310 million of short-term investments; $150 million of commercial paper was outstanding. Aon had $1.75 billion of undrawn committed credit facilities and reported covenant compliance. Management said cash, operating cash flow, credit facilities, and capital-market access should meet liquidity needs, including over the next 12 months.
- Other balance-sheet items: Total assets were $31.8 billion and total equity was $2.3 billion. Fiduciary assets and matching liabilities were each $14.0 billion; fiduciary funds are segregated and unavailable for general corporate purposes.
Material changes and unusual items
- Aon and Willis Towers Watson (WTW) terminated their proposed combination on July 26, 2021 after the U.S. Department of Justice filed an antitrust suit seeking to block it. Aon paid WTW a $1.0 billion termination fee on July 27. Q3 included $1.363 billion of combination- and termination-related charges; nine-month charges were $1.436 billion. These costs explain the sharp divergence between reported and adjusted results.
- The nine-month effective tax rate rose to 51.4% from 19.3%, driven principally by the termination fee, the U.K. tax-rate increase enacted in 2021, and the tax benefit of share-based payments. The U.K. corporate tax rate is scheduled to rise from 19% to 25% beginning April 1, 2023.
- Aon issued $1.0 billion of senior notes in August 2021: $400 million at 2.05% due 2031 and $600 million at 2.90% due 2051. It also replaced a $900 million facility with a $1.0 billion facility maturing in 2026.
- Aon repurchased 5.7 million shares for $1.543 billion during the first nine months, including 4.4 million shares for $1.251 billion in Q3. Approximately $3.7 billion remained authorized for repurchases at quarter-end.
- The company realigned how it presents its service lines; prior periods were reclassified, with no effect on previously reported consolidated results or total organic growth. Certain businesses, including Aon Retiree Health Exchange, were classified as held for sale; that business was sold October 1, 2021.
Management commentary, risks, and contingencies
- Management cited strong retention, new-business generation, and growth in discretionary services, and said pandemic impacts on results had lessened during the first nine months. It nevertheless noted that COVID-19, including the Delta variant, could continue to affect economic conditions and discretionary revenue.
- Management described liquidity as adequate and said 2021 operating cash flow was expected to cover debt service, contractual obligations, capital expenditures, and dividends. The filing provides no specific earnings or revenue guidance.
- Risks include currency and interest-rate movements, market and economic conditions, competition, talent retention, cyber and technology disruptions, regulation, and the ability to sustain growth and execute cost initiatives. Aon also identifies uncertainty around litigation and other contingencies.
- For described legal matters where losses are estimable, reasonably possible losses in excess of amounts accrued were estimated at $0 to $0.7 billion, excluding insurance. Matters include a Christchurch City Council claim of about NZD 320 million, a client claim seeking $45–$85 million, aviation-crash litigation with claims of varying amounts, and a Blue Cross/Blue Shield-related investment lawsuit alleging losses exceeding $2 billion. Aon said it believes it has meritorious defenses; it cautioned that unfavorable outcomes could materially affect results or cash flows in a particular period.
- Aon disclosed $43 million of maximum potential payments under lease guarantees and $65 million under performance guarantees related to a previously sold business. It also reported $105 million of maximum exposure under contingent client premium-payment guarantees.
Important facts for investors to verify
- How much of reported versus adjusted earnings reflects recurring operations, and whether further costs arise from the terminated WTW transaction.
- Whether organic growth and adjusted margins remain sustainable, particularly in discretionary services and the lower-growth Wealth Solutions line.
- Debt, commercial-paper use, liquidity and credit-facility covenant headroom after the termination payment, share repurchases, and new bond issuance.
- The eventual cash, tax, and earnings effects of the U.K. tax-rate change and the unusually high 2021 effective tax rate.
- Updates to material claims, the estimated contingency range, and the outcomes of held-for-sale dispositions.