$AON Aon plc Q2 2025 Earnings Conference Call

Morning and thank you for holding Aon PLC's second quarter 2025 conference call. At this time all parties will be in a listen-only mode until the question and answer portion of today's call. I would also like to remind all parties that this call is being recorded. If anyone has an objection, you may disconnect your line at this time. It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. For information concerning these risk factors, please refer to our earnings release for this quarter and to our most recent quarterly or annual SEC filing, all of which are available on our website. It is now my pleasure to turn the call over to Greg Case, CEO of AON PLC. Thank you. Please go ahead.

Thank you, Greg, and good morning, everyone. I'm excited to be here to discuss our second quarter results which reflect both execution and the growing momentum of our 3x3 plan. And before we get into the details of our second quarter results, I want to take a moment to elevate what matters most. There are three key proof points that best capture the momentum behind our strategy and the strength of our performance. These highlights provide the right context for the details that follow and underscore how our execution on the 3x3 plan is translating into tangible results. First, we see clear evidence that our financial model is delivering as designed. Our investments in revenue-generating hires equipped with the analytical tools and client experience enhancements enabled by Aon business services (ABS) are translating into sustainable mid-single-digit or greater organic revenue growth. Organic revenue growth was 6% for the quarter and we are winning new business, expanding our relationships with existing clients and doing so with greater client engagement. Second, these Q2 results are not just about topline performance. They reflect our ability to invest in growth and expand margins not through cost cutting but through operating leverage. The scale improvements powered by ABS along with our restructuring program savings created capacity to fund growth investments while still expanding margins by 80 basis points over last year in line with our long-term model. Third, the topline strength coupled with the operating leverage drove 19% adjusted EPS growth year-over-year and we converted those earnings into 59% free cash flow growth in the quarter. A clear demonstration of the strength of our earnings power and capital position. This performance reinforces our conviction in delivering double-digit free cash flow growth for the full year and it gives us the flexibility to execute across all dimensions of our capital allocation strategy. We remain on track to meet our leverage objective, continue our disciplined middle market M&A strategy and return 1 billion in capital to shareholders via share repurchases this year. Taken together, our first half performance—5% organic revenue growth and 8% adjusted EPS growth—reflects the strength and resilience of our business and financial model and the discipline of our execution in a macro environment that remains uncertain. We are delivering results by deepening client relationships and creating more value for clients through data insights and innovative capital solutions. We are driving growth through our investments in data capabilities, expanding margins through ABS and converting earnings into strong free cash flow. This gives us confidence in achieving our full year 2025 guidance. So now turning to the second quarter results in the financial summary on slide five, you see that we delivered 6% organic revenue growth in the second quarter and total revenue increased 11% to 4.2 billion. Adjusted operating margin was 28.2%, up 80 basis points for the quarter in line with our expectations, and this includes the impact from NFP as we lap the anniversary of the acquisition at the end of April resulting in a more normalized margin profile going forward. Adjusted EPS was $3.49. And finally, free cash flow increased to 732 million reflecting strong adjusted operating income growth and continued improvement in day sales outstanding. Let's get into the details of these results. Starting with organic revenue growth on slide six. Organic revenue growth in Q2 2025 was in line with our mid-single-digit or greater guidance range. Growth was broad-based with three of our four solution lines—commercial risk, reinsurance, and health—each delivering 6% organic revenue growth, reflecting strong new business performance and high retention. In commercial risk, the 6% organic revenue growth in Q2 reflected strong performance in our core PNC business with meaningful contributions from both North America and AMIA as well as strength in M&A services relative to prior year and double-digit growth in construction. Notably, construction and renewable energy projects remain key areas of focus for us with activity levels continuing to be robust. In reinsurance, organic revenue growth was 6% driven by double-digit growth in our insurance-linked securities business where we continue to lead the market in cat bond placements now totaling 50 billion outstanding. We saw double-digit growth in facultative placements in AMIA and Asia-Pacific, which helped offset softer April 1 property renewals, where rates declined 5 to 20%. Looking ahead, we continue to expect full-year organic revenue growth in line with our mid-single-digit or greater objective supported by higher limits at July 1 renewals, continued momentum in international facultative placements and strong demand for analytics from our strategy and technology group. Health Solutions also delivered 6% growth in the quarter and benefited from continued strength in our pooled health and benefits business, especially across international markets. Growth was fueled by net new business and market dynamics that continue to drive rising health care costs. We also saw a strong contribution from NFP most notably in executive benefits and pharmacy solutions where demand remains elevated. And finally, wealth generated 3% organic revenue growth on top of 9% growth in the prior year period. The performance this quarter was driven by regulatory work across the UK and AMIA. We also saw a meaningful contribution from NFP asset inflows and market performance. So let me take a moment now to walk through the components of our Q2 organic revenue growth on slide seven. As I shared at investor day, Aon has a consistent track record of generating new business and that continued in Q2. In the quarter, new business powered organic revenue growth and contributed 11 points with an equal contribution from both new clients and expansion with existing clients. Our investments in revenue-generating talent in high growth areas like construction and energy are delivering measurable impact. Revenue-generating headcount is up 6% through the first half and these colleagues are equipped with advanced data analytics and capabilities from ABS enabling them to win more business. We continue to expect these investments to support sustainable organic revenue growth with the 2024 cohort projected to contribute 30 to 35 basis points to full-year organic revenue growth. Q2 2025 retention improved by one point year-over-year, driven by continued gains in commercial risk as we expand enterprise client leader coverage and deploy our risk capital analyzer. Net new business contributed five points to organic revenue growth in the quarter. Net market impact, which captures the impact of rate and exposure, contributed approximately one point to organic revenue growth, consistent with our 0 to 2 point estimated range. Reinsurance was down from rate declines and higher retentions and rate pressure in commercial risk was offset with limit and coverage increases across our book. Health and wealth both benefited from positive net market impact with rising health care costs and favorable asset performance supporting growth. And one final point on revenue. Second quarter fiduciary investment income was 66 million in the quarter, down 12% versus the prior year. While average balances increased, lower interest rates more than offset that benefit. On slide eight, adjusted operating income was up 14% year-over-year to 1.2 billion and adjusted operating margin was up 80 basis points to 28.2%. This margin expansion reflects the impact of the four components that we highlighted when we provided full-year guidance: NFP, fiduciary investment income, restructuring, and operating leverage. All of which are in line with our expectations. While we absorbed a one-month margin headwind from NFP given the April 2024 closing, our margin continued to benefit from the scale improvement driven by ABS and the savings from our restructuring program. Specifically, restructuring savings totaled 35 million in the quarter, contributing approximately 83 basis points to adjusted operating margin. We remain on track to deliver 150 million in restructuring savings for the full year and are progressing well toward our goal of 350 million in run rate savings by 2026. Given our strong progress in the first half of the year, we remain confident in our ability to drive full-year adjusted operating margin expansion of 80 to 90 basis points consistent with our long-term model. Moving to interest, other income and taxes on slide nine. As we indicated last quarter, interest income was negligible in the second quarter and 31 million lower than last year when we earned interest on funds held ahead of the NFP acquisition. Interest expense of 212 million was lower by 13 million versus the prior year primarily due to lower average debt balances. We expect interest expense to be approximately 210 million in Q3 2025. Other expense rose by 17 million year-over-year to 32 million primarily due to the remeasurement of balance sheet items in nonfunctional currencies and higher non-cash pension expense. We estimate Q3 2025 other expense to range between 25 million and 32 million. And finally, the Q2 tax rate was 16.5% reflecting a favorable impact related to discrete items. While we expect variability in the quarterly rate, our year-to-date rate of 19.3% is in line with our expectations and our full-year tax outlook remains unchanged at 19.5% to 20.5%. Turning now to free cash flow. On slide 10, we generated 732 million in free cash flow in the second quarter, up 59% year-over-year. On a year-to-date basis, free cash flow is up 13%. And this growth reflects strong adjusted operating income, including contributions from NFP and continued improvements in day sales outstanding. This free cash flow performance gives us the flexibility to execute across all dimensions of our capital allocation strategy and we continue to expect double-digit free cash flow growth in 2025. Turning to capital allocation on the right side of the page, we remain focused on executing our disciplined and balanced capital allocation. We continued to make progress on deleveraging, lowering our leverage ratio to 3.4 times in the second quarter. We remain on track to achieve our target range of 2.8 times to 3.0 times by the fourth quarter of 2025, consistent with the objective we set when we announced the NFP acquisition. We also remained active in M&A, continuing our targeted tuck-in acquisitions across priority areas, including middle market deals through NFP. Through June, NFP has closed eight acquisitions representing 20 million of IBITA with 80% of the IBITA connected to PNC deals. Finally, we returned 411 million in capital to shareholders this quarter through the dividend and 250 million in share repurchases, keeping us on track for 1 billion in capital return through share repurchases for the full year. Each of these actions, underpinned by strong free cash flow generation, reflects our disciplined capital allocation model in action: reducing leverage, investing in high-return growth, and returning capital to shareholders. So, I'll conclude my prepared remarks on slide 11 with some thoughts on our financial objectives and 2025 guidance. Our second quarter results and our performance through the first half of 2025 reflect the strength of our financial model and our execution on our 3x3 plan. We are delivering sustainable organic revenue growth by investing in the capabilities that fuel growth: client-facing talent, differentiated analytics, and seamless client experience through ABS. Our organic revenue growth combined with the initiatives we're executing across ABS to standardize operations and integrate platforms is creating capacity to fund our growth investments while strengthening the foundation for ongoing margin expansion. This combination is enhancing our earnings power and positioning us to deliver on our full-year commitments and long-term financial objectives. As a result, we are reaffirming our full-year guidance, including mid-single-digit or greater organic revenue growth, 80 to 90 basis points of margin expansion, including 260 million in cumulative annual savings from our Aon United restructuring initiative, strong earnings growth, and double-digit free cash flow growth in 2025, and a double-digit three-year CAGR for 2023 through 2026. We are executing with focus. We have momentum and we remain confident in our ability to deliver long-term value for our shareholders. So with that, let's jump into your questions. Donna, back to you.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that you please limit yourself to one question and one follow-up. Again, that's star one to register a question at this time. Our first question this morning is coming from Jimmy Bolar of JP Morgan. Please go ahead.

Hey, good morning. So first just a question for Greg on the contribution to growth from capital markets activities and new hires. On new hires I think Edmund had outlined at investor day that the contribution should pick up as you go through this year. So assuming that hasn't changed and but you could comment if it has. And then on capital markets, um not sure if you're seeing um or expecting a greater impact um in the third and the fourth quarters versus what you've seen in the first half given that it looks like M&A IPO activity across the board is picking up in several industries.

Just on the M&A point, Greg, just reiterating your point. It strengthened in Q1, Jimmy, and in Q2. That was modest growing over a low base. There's modest growth in our second half outlook for M&A. We still expect to maintain our mid-single-digit growth levels despite that. If it comes in stronger, then that'll be a tailwind for us. The point I want to emphasize is the point that Greg made about broad-based growth. M&A falls into our commercial risk segment which was at 6% for the quarter again right in line with our expectations we weren't surprised by that was strength driven by what I mentioned in my prepared remarks: our core PNC business in North America, double-digit growth in construction that means the priority hires what you the next part of your question is contributing right in line with our expectations. M&A was a tailwind but not the key driver. I'll also point out in construction our international markets particularly in the AMIA and Latam and again there the growth was driven by new business and the impact of us hiring in those markets. So the growth was broad-based across our different solution lines coming from new business and new hires. And on your second question, Greg, do you want to should I start there?

Thanks. And maybe just a question on your preferred uses of free cash flow. you mentioned deleveraging as you had outlined at the NFP with the NFP deal, but just maybe comment on your interest in large M&A. It seems like the antitrust environments better than it was before and some of your peers have done larger deals since you did the NFP acquisition, but just your interest in large scale M&A as a use of capital.

Yeah, maybe I'll make a few points about where we are in our position, which is strength, a position of strength, and then I'll turn it to Greg to talk a little bit broader about the environment. But I start the answer to this question with just the free cash flow growth. 59% in the quarter, 13% year-to-date coming from our operating income, coming from NFP, coming from integration and transaction costs winding down as we called out through investor day. And so the confidence in double-digit free cash flow is very high. And that means that we are in a position of strength with flexibility. And on that point about flexibility, the priority of course is getting that leverage ratio down. We're well on track to be able to do that. We're paying the dividend, but we will continue to evaluate assets that meet our strategic and financial criteria. We're very diligent on ensuring that our M&A decisions are accretive to returns. I put up a slide during investor day that said 12% revenue growth after one year of ownership, over 20% of IRR and industry-leading ROIC. So my point is that we are in a position of strength with the free cash flow. We have the flexibility. We're going to use the right criteria to evaluate as we continue to invest for growth. But Greg, maybe a little bit on the environment.

Thank you. The next question is coming from Elise Greenspan of Wells Fargo. Please go ahead.

Hi. Thanks. Good morning. My first question is also on the M&A transactional book. I was just wondering is it overweight any geography or industry vertical or is it pretty diversified and then directionally is the margin better or worse than the core PNC margin within the commercial risk segment?

Yeah and I think first on the first question your operative word there is broad-based so the growth is a tailwind but modest but we saw that growth across all of our regions was strong Asia Pacific was strong just like US as well in the M&A space. On the margin, I think your question is about margins in the components of commercial risk versus the other areas. I think the key thing for us is that commercial risk has a slightly higher margins but the margins are in line. I don't pay too much attention to a particular we're an annual company so the margin in a particular quarter isn't where I'd focus but most importantly the key area of focus should be the expansion in both margins on the commercial risk side and on the human capital side and we're seeing that expansion across both the segments because it's driven by the operating leverage and the scale improvements that we get through ABS and we're seeing it across our solutions.

Thanks. And then my second question, I was hoping you could spend a little bit more time on what drove the pretty strong free cash flow growth in the quarter and then I know the full-year guide is for 300 million from NFP free cash flow. Where do we sit through the first half of the year?

Yeah. So I call that I mean you're answering the question within the question there. Those are the drivers. Like I think there are four areas to keep your eyes on when you think about our free cash flow growth and how we get to double-digit. One is the operating income growth including NFP. Both of those items were a contributor for us in the quarter. So we feel very good about the 300 million in 2025 free cash flow contribution from NFP on that question. The second area for us is the continued working capital improvements and in particular day sales outstanding. I called that out in the prepared remarks that we continue to focus on that by region within our procurement teams. So we continue to see benefit from that as well. The third area that I'd focus on is restructuring. The Aon United restructuring program that continues to be a degradation to free cash flow as we go through 2026 in line with our plans on that. The benefit that we saw in addition to those three items in the quarter was through lower NFP transaction and integration costs just as I said at investor day. So operating income including NFP, the working capital improvements and the lower transaction and integration costs from NFP that are the drivers for 13% year-to-date and just continued strength in those drivers is what will have us on track for double digits in 2025.

Thank you. The next question is coming from Andrew Claerman of TD Cowan. Please go ahead.

Hey, good morning. So back when you closed on the NFP deal about a year plus, talk was of the expectation of generating about 175 million synergies coupled with about 60 million in cost synergies and I think Edmund you mentioned that this year you're on track for 80 million in revenue synergy. So looking out to 2026 how are you progressing there? What can we expect along these numbers? Any specific numbers you could provide around these metrics as we look to the incremental upside in 2026?

Yeah Andrew on this question the first thing that Greg and I both highlight is producer retention. That's because without that you're not going to have any of the revenue synergies come through. It's better than it was pre-acquisition and in 2025 we continue to be as strong as we were in 24 on producer retention as well and that's driven by the independent and connected strategy that Greg was just talking about. So first step is minimizing any revenue leakage. To date, you're right with the numbers that you mentioned, 80 million in 2025, 175 million in synergies through 2026. To date, we've bound several million in new business from joint activity across the business units. But as we think about specific areas that we're focused on, as we look at the pipeline of what we've accomplished to date and what's going to help us meet that 80 million number and 175 million number, I maybe highlight two or three things for you. One is transitioning from third-party wholesale to Aon expertise capability that we have. That was exactly what we thought when we thought about opening up the Aon store to the NFP population. Two is using our Aon global broking center for international placements and specialized placements. That has been an area of growth and strength that NFP is taking advantage of and contributing to the synergies thus far. And then we have middle market panels in places like marine and terrorism and builder risk places that are even certainly relevant in the macro environment that we're in right now. So those are areas that we're focused on to be able to meet the 80 million commitment in 2025 and 175 million in 2026 which we continue to be confident in.

Got it. And then just second question is around reinsurance solutions. You talked about double-digit increases in ILS and facultative placements. How should we think about the dynamic with treaty? Is that kind of taking from treaty or do you see kind of an uplift in both? Like how should we think about that dynamic between the two product areas ILS and treaty?

Thank you. The next question is coming from Rob Cox of Goldman Sachs. Please go ahead.

Hey, thanks. Good morning. Yeah, just a question first on talent. The revenue generating headcount seems like it's up 6% year to date and you know, this push has been successful. I'm curious, you know, has this changed your mind at all about the sort of run rate future investments in talent and is this 4 to 8% increase annually sort of the right level to think about going forward?

And I'll start by emphasizing your point Greg. This is about meeting client need. If you do that then you draw and we're very specific about this word Rob sustainable organic revenue growth. If you meet the client need then you can drive the sustainable organic revenue growth. You do that by making these hires. We have the capacity to make the hires primarily because of the Aon business services ABS and the scale improvements that we get there. I'll refer you back to the slide at investor day on margin expansion and growth and investment and growth where we drive this margin expansion through Aon business services. We get some benefit from expense discipline and then we invest 40 to 60 basis points in revenue-generating hires and other capabilities. The objective there is to meet our near-term objectives, double-digit free cash flow growth in the current year here and invest for ongoing sustainable topline growth. If we can get more from the scale improvements, then we'll invest more. If we can deliver in the current year and are outperforming, then we'll invest more. If we find the investments in the right areas, in areas that we think are growth, it's not about quantity. We keep saying here it's about quality talent in the growth area. So that is the model for us is to create the capacity to both grow and expand margins that allow us to hit our immediate near-term financial objectives but have sustainable growth in the long term as well. And if we can create more opportunity to invest more then we're going to do that with that in mind.

That's great. Thanks for all the color there. And if I could just follow up on, maybe a broader question on the economy, broad strokes, what are you hearing from clients and how are you thinking about growth and exposures in the back half of the year?

Thank you. The next question is coming from David Mimmatum of Evercore ISI. Please go ahead.

Hey, thanks. Good morning. Edmund, I was wondering if you could just size the tailwind to organic growth from the M&A services for both the total company and then specifically within commercial risk and then maybe help us think about it. I understand it's not back yet, but if it were back, how much of a contribution could it have?

Yeah, David, thanks for the question. I mean there certainly is a ton of emphasis on M&A right now. I don't I'd prefer to stay focused on what the drivers are today here and M&A is providing a tailwind for you. I've said before growing off of the base that we have for M&A right now. We have objectives of mid-single-digit or greater you would need M&A to be multiples of that. You would need it to be four, five times that before it becomes a significant contribution to the overall organic growth rate that we have. The items that are driving it right now really is the core PNC business, the investment hires that we're making, the double-digit growth in construction, those investment hires driving new business right now. And so we're going to continue to be focused on new business and retention. The other big thing in commercial risk, we talked about retention being up one point year-over-year, and this is an opportunity to even call it our North American retention in commercial risk, which was up substantially given what we're doing with our priority accounts, with our premier accounts, what we're doing in terms of expanding coverage. So, M&A, I get the focus on that. Right now, it's a bit of a tailwind. I think our outlook is for it to be modest in the second half of the year. If it comes in higher, then that gives us more confidence in being at the mid-single-digit or greater levels in our balance. We're not dependent on that. We're more focused on recurring organic revenue growth. We'll maintain our fair share as Greg said earlier of M&A services particularly with PE and we're focusing on expanding with corporates but our focus is on recurring revenue growth and those are the drivers.

Understood thank you for that. And totally understand on just a follow-up on the 6% increase in the revenue generating roles through the first half. You're already at halfway through the full year the midpoint of the full-year goal. Maybe you could just talk about the talent pipeline and if you think there's maybe the potential to get above that 8% growth in revenue generating roles that you guys had targeted for this year.

Thank you. Our final question today is coming from Mayor Shields of KBW. Please go ahead.

Great. Thanks so much and good morning. I was hoping to get an update on how sensitive clients of different sizes are to elevated social inflation or legal risk in the US. I know on the insurance side obviously it's a major concern but I'm wondering whether it's penetrating the broader consciousness.

Okay. Fantastic. That's very helpful. And I want to go back to the talent question just one more time because we've gone through, I think, these many waves in the industry where company X is hiring, and so on. I think it's great, but I'm wondering what's Aon doing to not so much recruit talent as to train it from scratch or to grow it from scratch.

Thank you. At this time I'd like to turn the floor back over to Mr. Case for closing comments.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off at this time and enjoy the rest of your day.