Today's Viewpoint: A MarshBerry Publication

Aon plc (NYSE: AON) reported second quarter 2021 results today with adjusted earnings per share (EPS) of $2.29 on revenue of $2.89 billion, above consensus estimates of $1.85 on $2.69 billion, but below 1Q21’s $4.28 on $3.5 billion. Total revenue in the second quarter increased 16% year over year. 2Q21 adjusted operating margin decreased 100 basis points to 25.8%, driven by a negative impact of 470 basis points from the timing of expenses moving from Q4 to Q2.

Here are highlights from the earnings release.

  • AON reported 2Q21 organic growth of 11%, an improvement from 6% organic growth in 1Q21, driven by mid-single-digit or higher organic growth from every segment. Growth was driven by ongoing strong retention, new business generation, and strength in the more discretionary segments of its business. AON continues to expect “mid-single-digit or greater” organic growth for full-year 2021 and over the long term based on current economic conditions and client buying behavior.
  • AON and Willis Towers Watson (WLTW) mutually agreed to terminate their merger agreement recently. As a result of the termination, AON paid a $1 billion fee to Willis Towers Watson. In addition, AON projects about $350 million to $400 million of additional charges in 3Q related to transaction costs and compensation expenses and a few actions related to further steps on the Aon United operating model. These charges are related to costs to terminate and conclude the merger.
  • CEO Gregory Clarence Case said of the termination: “The demands made by the U.S. Department of Justice on our U.S. business stifled innovation and reduced our client-serving capability… Our decision to end the combination and pay the termination fee creates certainty and clarity about how we move forward.” According to AON management, the options to either alter their business model to meet the DOJ’s demands or to litigate the matter for the next year or more were both unacceptable, and thus the determination was made to cancel the merger.
  • AON’s largest business segment, Commercial Risk Solutions, posted 14% organic growth in the quarter, up from 9% in 1Q21. This reflects growth across every major geography driven by strong new business generation and double-digit growth in transaction liability, human capital and project-related work within the segment. Pricing continued to be modestly positive from the first quarter, resulting in relatively positive market fundamentals.
  • Reinsurance Solutions and Health Solutions grew at 9% and 14% in the second quarter, up from 6% and 4% in the first quarter. Retirement Solutions grew at 5% organically, flat compared the prior quarter, driven by double-digit growth in Human Capital and improvement in the core Retirement business, which benefited from higher utilization rates. AON’s Data & Analytic Services had organic revenue growth of 5%, following 1Q21’s decline of 2%. This return to growth was driven by global strength in the affinity business across both consumer and business solutions; the travel and expense practice was flat.
  • Free cash flow increased 13% year-to-date to $1.3 billion, primarily driven primarily by strong operating income growth and a decline in structural use of cash. Management stated they expect free cash flow growth to remain strong in 2021 and going forward, excluding the termination fee related to the merger with Willis Tower Watson (WLTW). AON still projects capital expenditures to increase modestly year over year with investments in technology to drive business growth.

In sum, management sees macroeconomic conditions continuing to improve, with client buying behavior remaining strong. While management is disappointed about the termination of the merger with Willis Towers Watson, CFO Christa Davies noted that: “Our disciplined approach to return on capital, combined with our expected long-term free cash flow growth and increased debt opportunity, provides financial flexibility to unlock significant shareholder value creation over the long term.”

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