Aon plc — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Aon is a global professional services firm providing risk and human-capital solutions through Commercial Risk, Reinsurance, Health, and Wealth. It reports as one operating segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3.177 billion | $2.983 billion | $7.048 billion | $6.653 billion |
| Operating income | $842 million | $700 million | $2.315 billion | $2.067 billion |
| Net income attributable to Aon shareholders | $560 million | $501 million | $1.610 billion | $1.524 billion |
| Diluted EPS | $2.71 | $2.33 | $7.79 | $7.07 |
| Reported operating margin | 26.5% | 23.5% | 32.8% | 31.1% |
- Q2 reported revenue rose 7%; organic revenue growth was 6%. For the first half, reported revenue rose 6% and organic growth was 7%. Q2 growth included a 2% benefit from fiduciary investment income and a 1% foreign-currency headwind.
- Q2 organic growth by solution line: Commercial Risk 5%, Reinsurance 9%, Health 10%, and Wealth 2%. Reinsurance and Health were the strongest growers.
- Management’s non-GAAP adjusted operating margin was 27.3% in Q2 and 33.6% for the first half, versus 26.2% and 32.7%, respectively, in 2022. Adjusted diluted EPS was $2.76 for Q2 and $7.93 for the first half. These are non-GAAP measures.
- Operating cash flow was $1.131 billion in the first half, unchanged year over year. Free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $986 million, down from $1.063 billion, principally reflecting capital expenditures of $145 million versus $68 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $952 million and short-term investments were $200 million. Total debt was approximately $11.3 billion, up $0.6 billion from year-end; reported short- and long-term debt were $1.338 billion and $9.989 billion.
- Aon had approximately $1.8 billion of committed credit capacity available and no borrowings under its two primary facilities. It reported compliance with financial covenants. Commercial paper outstanding was $382 million.
- Fiduciary assets and matching liabilities were each $18.193 billion. Client funds are held in a fiduciary capacity and are not available for general corporate purposes.
- Aon said operating cash flow, cash reserves, credit facilities, and capital markets should be sufficient for liquidity needs, debt service, capital expenditures, pension contributions, and dividends. It expected 2023 operating cash flow to support these needs; no quantified full-year revenue or EPS guidance is provided in the filing text.
Changes, commentary and unusual items
- Q2 net income attributable to shareholders increased 12% and diluted EPS rose from $2.33 to $2.71. Operating margin improved, helped by organic growth and the absence of a $58 million legal-settlement charge recorded in Q2 2022.
- Interest expense increased to $130 million in Q2 from $102 million, reflecting higher debt and rates and an $11 million non-recurring charge. Q2 other expense was $59 million, including a $27 million non-cash pension settlement charge and unfavorable foreign-currency remeasurement.
- The effective tax rate was 12.6% for Q2 and 17.3% for the first half, versus 18.8% and 19.4% in 2022. Management cited geographic income mix and discrete tax items, including share-based payment benefits and the anticipated sale of certain assets and liabilities held for sale. Aon was evaluating the potential impact of OECD Pillar Two minimum-tax rules expected to take effect in 2024.
- Aon completed a Chilean benefits brokerage and administration acquisition for approximately $9 million. It classified assets of $288 million and liabilities of $35 million as held for sale.
- Management cited strong retention, renewal-book management, and new-business generation as growth drivers, while noting ongoing investment in technology and long-term growth. The filing identifies foreign exchange, interest rates, debt costs, competition, talent retention, cyber and technology risks, regulation, and litigation among the risks to results.
Contingencies and other notable disclosures
- In July 2023, allegations arose that fraudulent third-party bank letters of credit were used in transactions involving Vesttoo, a third party that identified capital providers for certain client and counterparty reinsurance obligations. Aon reported client/counterparty legal actions and Bermuda regulatory inquiries, said it was investigating, and stated that potential loss was not clearly quantified in the filing.
- Aon faces other legal matters, including aviation-crash-related claims with substantial stated demands. It says it has defenses and maintains that the matters are not expected to materially adversely affect its consolidated financial position, while acknowledging that unfavorable outcomes could materially affect future-period results or cash flows. The Fourth Circuit affirmed judgment for Aon in the Lowe’s 401(k) case on July 17, 2023.
- Aon noted that some errors-and-omissions insurance coverage has been exhausted or materially depleted, leaving the company self-insured or materially self-insured for some claims.
Most important facts for investors to verify
- Whether organic growth and margin gains persist when fiduciary investment income and prior-year legal-settlement comparisons normalize.
- Debt refinancing and interest costs, particularly the $600 million of 3.50% notes due June 2024 and the $350 million of 4.00% notes due November 2023.
- Developments, potential financial exposure, and regulatory outcomes related to the Vesttoo allegations and other legal claims.
- Cash conversion and capital spending trends, and the distinction between corporate liquidity and fiduciary client funds.
- The eventual tax impact of Pillar Two and the anticipated asset sale, and the assumptions underlying management’s liquidity outlook and non-GAAP measures.