Aon 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-7933

Aon plc

(Exact Name of Registrant as Specified in Its Charter)

Metropolitan Building, James Joyce Street, Dublin 1, Ireland D01 K0Y8

(Address of principal executive offices) (Zip Code)

+353 1 266 6000

(Registrant’s Telephone Number,

Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of class A ordinary shares of Aon plc, $0.01 nominal value, outstanding as of October 28, 2021: 220,332,406

Securities registered pursuant to Section 12(b) of the Act:

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

This report contains certain statements related to future results, or states our intentions, beliefs, and expectations or predictions for the future, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent management’s expectations or forecasts of future events. Forward-looking statements are typically identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “project,” “intend,” “plan,” “probably,” “potential,” “looking forward,” “continue,” and other similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will,” and “would.” You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. For example, we may use forward-looking statements when addressing topics such as: market and industry conditions, including competitive and pricing trends; changes in our business strategies and methods of generating revenue; the development and performance of our services and products; changes in the composition or level of our revenues; our cost structure and the outcome of cost-saving or restructuring initiatives; the outcome of contingencies; dividend policy; the expected impact of acquisitions, dispositions, and other significant transactions or the termination thereof, such as the termination of the Combination (as defined in Note 6 “Acquisitions and Dispositions of Businesses” of this report) and the divestitures planned in connection with the Combination; litigation and regulatory matters, including potential litigation relating to the Combination; pension obligations; cash flow and liquidity; expected effective tax rate; future actions by regulators; and the impact of changes in accounting rules. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results depending on a variety of factors. Potential factors, which may be revised or supplemented in subsequent reports filed or furnished with the Securities and Exchange Commission (the “SEC”), that could impact results include:

• changes in the competitive environment or damage to our reputation;

• fluctuations in currency exchange and interest rates that could impact our financial condition or results;

• changes in global equity and fixed income markets that could affect the return on invested assets;

• changes in the funded status of our various defined benefit pension plans and the impact of any increased pension funding resulting from those changes;

• the level of our debt and the terms thereof reducing our flexibility or increasing borrowing costs;

• rating agency actions that could limit our access to capital and our competitive position;

• our global tax rate being subject to a variety of different factors, which could create volatility in that tax rate;

• changes in our accounting estimates and assumptions on our financial statements;

• limits on our subsidiaries’ ability to pay dividends or otherwise make payments to us;

• the impact of legal proceedings and other contingencies, including those arising from the termination of the Combination and divestitures planned in connection with the Combination, errors and omissions and other claims against us;

• the impact of, and potential challenges in complying with, laws and regulations of the jurisdictions in which we operate, particularly given the global nature of operations and the possibility of differing or conflicting laws and regulations, or the application or interpretation thereof, across such jurisdictions;

• the impact of any regulatory investigations brought in Ireland, the United Kingdom (the “U.K.”), the United States (the “U.S.”). and other countries;

• failure to protect intellectual property rights or allegations that we have infringed on the intellectual property rights of others;

• general economic and political conditions in the countries in which we do business around the world, including the withdrawal of the U.K. from the European Union (the “E.U.”);

• the failure to retain, attract and develop experienced and qualified personnel;

• international risks associated with our global operations;

• the effects of natural or man-made disasters, including the effects of the COVID-19 and other health pandemics;

• the potential for a system or network disruption or breach to result in operational interruption or improper disclosure of confidential, personal, or proprietary data;

• our ability to develop and implement new technology;

• damage to our reputation among clients, colleagues, markets or third parties;

• the actions taken by third parties that perform aspects of our business operations and client services;

• the extent to which we are exposed to certain risks, including lawsuits, related to our actions we may take in acting in a being responsible for making decisions on behalf of clients in our investment consulting business or in other advisory services that we currently provide, or will provide in the future;

• our ability to continue, and the costs and risks associated with, growing, developing and integrating acquired business, and entering into new lines of business or products;

• changes in commercial property and casualty markets, commercial premium rates or methods of compensation;

• our ability to implement initiatives intended to yield cost savings and the ability to achieve those cost savings;

• the effects of Irish law on our operating flexibility and the enforcement of judgments against us; and

• the impact of the termination of the Combination and divestitures planned in connection with the Combination, the resolution of potential litigation relating to the termination of the Combination and divestitures planned in connection with the Combination, the inability to realize the expected benefits from the Combination, the payment of the Termination Fee (as defined in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations) in connection with the termination of the Combination, significant transaction costs in connection with the terminated Combination, and divestitures that had been planned in connection with the Combination; the potential impact of the termination of the Combination, and divestitures planned in connection with the Combination, on relationships, including with suppliers, customers, employees and regulators.

Any or all of our forward-looking statements may turn out to be inaccurate, and there are no guarantees about our performance. The factors identified above are not exhaustive. We and our subsidiaries operate in a dynamic business environment in which new risks may emerge frequently. Accordingly, readers should not place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement that we may make from time to time, whether as a result of new information, future events or otherwise. Further information about factors that could materially affect Aon, including our results of operations and financial condition, is contained in the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.

These factors may be revised or supplemented in our subsequent periodic filings with the SEC.

Table of Contents

Part I Financial Information

Aon plc

Condensed Consolidated Statements of Income

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Aon plc

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

Aon plc

Condensed Consolidated Statements of Financial Position

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EXECUTIVE SUMMARY OF THIRD QUARTER 2021 FINANCIAL RESULTS

Aon plc is a leading global professional services firm providing a broad range of risk, health, and wealth solutions. Through our experience, global reach, and comprehensive analytics, we are better able to help clients meet rapidly changing, increasingly complex, and interconnected challenges. We are committed to accelerating innovation to address unmet and evolving client needs, so that our clients are better informed, better advised, and able to make better decisions to protect and grow their business. Management is leading a set of initiatives designed to strengthen Aon and unite the firm with one portfolio of capability enabled by data and analytics and one operating model to deliver additional insight, connectivity, and efficiency.

Financial Results

The following is a summary of our third quarter of 2021 financial results.

• For the third quarter of 2021, revenue increased $317 million to $2.7 billion compared to the prior year period due primarily to organic revenue growth of 12% and a 2% favorable impact if prior year period results were translated at current period foreign exchange rates (“foreign currency translation”), partially offset by a 1% unfavorable impact from acquisitions, divestitures, and other. For the first nine months of 2021, revenue increased $1.0 billion, to $9.1 billion compared to the prior year period due primarily to organic revenue growth of 9% and a 3% favorable impact from foreign currency translation.

• Operating expenses for the third quarter of 2021 were $3.5 billion, an increase of $1.6 billion from the prior year period. The increase was due primarily to a $1.3 billion increase in charges related to terminating the combination with WTW and related costs, increased expenses associated with 12% organic revenue growth, a $65 million negative impact from the repatterning of discretionary expenses within the year, as previously described, and a $36 million unfavorable impact from foreign currency translation, partially offset by a $10 million decrease in amortization and impairment of intangible assets that occurred in the prior period. Operating expenses for the first nine months of 2021 were $8.0 billion, an increase of $2.0 billion compared to the prior year period primarily due to a $1.4 billion increase in charges related to terminating the combination with WTW and related costs, increased expenses associated with 9% organic revenue growth, a $207 million unfavorable impact from foreign currency translation, and a $200 million negative impact from the repatterning of discretionary expenses within the year, as previously described, partially offset by a $72 million decrease from accelerated amortization related to certain tradenames that were fully amortized in the second quarter of 2020.

• Operating margin decreased to (29.6)% in the third quarter of 2021 from 18.5% in the prior year period. The decrease was driven by an increase in operating expenses as listed above, partially offset by organic revenue growth of 12%. Operating margin for the first nine months of 2021 decreased to 12.2% from 25.5% in the prior year period. The decrease was driven by an increase in operating expenses as listed above, partially offset by organic revenue growth of 9%.

• Due to the factors set forth above, Net income (loss) decreased $1.2 billion to $(891) million for the third quarter of 2021 compared to the prior year period. During the first nine months of 2021, net income decreased $1.0 billion to $435 million compared to the first nine months of 2020.

• Diluted net income (loss) per share was $(3.99) for the third quarter of 2021 compared to $1.18 per share for the prior year period. During the first nine months of 2021, diluted earnings per share was $1.72 compared to $6.18 per share for the prior year period.

• Cash flows provided by operating activities was $1.3 billion for the first nine months of 2021, a decrease of $772 million from the prior year period, primarily due to the $1 billion termination fee payment and additional payments related to terminating the combination with WTW and related costs, partially offset by strong revenue growth and a $86 million decrease in restructuring cash outlays. The prior year period included near-term actions taken due to uncertainty surrounding COVID-19.

We focus on four key metrics not presented in accordance with U.S. GAAP that we communicate to shareholders: organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, and free cash flow. These non-GAAP metrics should be viewed in addition to, not instead of, our Financial Statements. The following is our measure of performance against these four metrics for the third quarter of 2021:

• Organic revenue growth is a non-GAAP measure defined under the caption “Review of Consolidated Results — Organic Revenue Growth.” Organic revenue growth was 12% for the third quarter of 2021. Organic revenue growth reflects growth in the core, driven by net new business generation and ongoing strong retention, as well as double-digit growth overall in the more discretionary portions of the business. Organic revenue growth was 9% for the first nine months of 2021, reflecting growth in the core, driven by ongoing strong retention and net new business generation, as well as growth overall in the more discretionary portions of the business.

• Adjusted operating margin, a non-GAAP measure defined under the caption “Review of Consolidated Results — Adjusted Operating Margin,” was 22.1% for the third quarter of 2021 compared to 22.4% in the prior year period. The decrease in adjusted operating margin primarily reflects a $65 million negative impact from the repatterning of discretionary expenses within the year, as previously described, partially offset by strong organic revenue growth that significantly outpaced investment. For the first nine months of 2021, adjusted operating margin was 29.2% compared to 29.0% for the prior year period. The increase in adjusted operating margin primarily reflects strong organic revenue growth, partially offset by a $200 million negative impact from the repatterning of discretionary expenses within the year, as previously described.

• Adjusted diluted earnings per share, a non-GAAP measure defined under the caption “Review of Consolidated Results — Adjusted Diluted Earnings per Share,” was $1.74 per share for the third quarter of 2021 and $8.31 for the first nine months of 2021, compared to $1.53 and $7.19 per share for the respective prior year periods.

• Free cash flow, a non-GAAP measure defined under the caption “Review of Consolidated Results — Free Cash Flow,” decreased in the first nine months of 2021 by $755 million from the prior year period, to $1.1 billion, reflecting a decrease in cash flows from operations, partially offset by a $17 million decrease in capital expenditures.

BUSINESS OVERVIEW

In the third quarter of 2021, we announced a realignment of our principal service lines to the following: Commercial Risk Solutions, Reinsurance Solutions, Health Solutions, and Wealth Solutions. Realignment to these four solution lines results in the following changes in the presentation of our principal service line reporting:

• Data & Analytic Services’ revenue and organic revenue results, which were previously reported as a separate principal service line and include Affinity, Aon Inpoint, CoverWallet, and ReView, are included within Commercial Risk Solutions.

• Human Capital, which was previously reported within Retirement Solutions, is included within Health Solutions’ revenue and organic revenue results.

• Wealth Solutions includes revenue and organic revenue results for all businesses previously reported within Retirement Solutions, excluding Human Capital.

The changes in the solution line structure affect only the manner in which our revenue and organic revenue results for our principal service li

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We are exposed to potential fluctuations in earnings, cash flows and the fair value of certain of our assets and liabilities due to changes in interest rates and foreign exchange rates. To manage the risk from these exposures, we enter into a variety of derivative instruments. We do not enter into derivatives or financial instruments for trading or speculative purposes.

The following discussion describes our specific exposures and the strategies we use to manage these risks. There have been no changes in our critical accounting policies for financial instruments and derivatives as discussed in our 2020 Annual Report on Form 10-K.

Foreign Exchange Risk

We are subject to foreign exchange rate risk. Our primary exposures include exchange rates between the U.S. dollar and the euro, the British pound, the Canadian dollar, the Australian dollar, the Indian rupee, and the Japanese yen. We use over-the-counter options and forward contracts to reduce the impact of foreign currency risk to our financial statements.

Additionally, some of our non-U.S. brokerage subsidiaries receive revenue in currencies that differ from their functional currencies. Our U.K. subsidiaries earn a portion of their revenue in U.S. dollars, euro, and Japanese yen, but most of their expenses are incurred in British pounds. At September 30, 2021, we have hedged approximately 45% of our U.K. subsidiaries’ expected exposures to U.S. dollar, euro, and Japanese yen transactions for the years ending December 31, 2021 and 2022, respectively. We generally do not hedge exposures beyond three years.

We also use forward and option contracts to economically hedge foreign exchange risk associated with monetary balance sheet exposures, such as intercompany notes and short-term assets and liabilities that are denominated in a non-functional currency and are subject to remeasurement.

The translated value of revenues and expenses from our international brokerage operations are subject to fluctuations in foreign exchange rates. If we were to translate prior year results at current quarter exchange rates, diluted earnings per share would have a favorable $0.02 impact and a favorable $0.13 impact during the three and nine months ended September 30, 2021, respectively. Further, adjusted diluted earnings per share, a non-GAAP measure as defined and reconciled under the caption “Review of Consolidated Results — Adjusted Diluted Earnings Per Share,” would have a favorable $0.02 impact and a favorable $0.24 impact during the three and nine months ended September 30, 2021, respectively, if we were to translate prior year results at current quarter exchange rates.

Interest Rate Risk

Our fiduciary investment income is affected by changes in international and domestic short-term interest rates. We monitor our net exposure to short-term interest rates and, as appropriate, hedge our exposure with various derivative financial instruments. This activity primarily relates to brokerage funds held on behalf of clients in the U.S. and in continental Europe. A decrease in global short-term interest rates adversely affects our fiduciary investment income.

Evaluation of disclosure controls and procedures. We have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report of September 30, 2021. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective such that the information relating to Aon, including our consolidated subsidiaries, required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in appropriate statute, SEC rules and forms, and is accumulated and communicated to Aon’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. No changes in Aon’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2021 that have materially affected, or that are reasonably likely to materially affect, Aon’s internal control over financial reporting.

Part II Other Information

Item 1. Legal Proceedings

See Note 15 “Claims, Lawsuits, and Other Contingencies” to our Financial Statements contained in Part I, Item 1 of this report, which is incorporated by reference herein. See also the information disclosed under the heading “Termination of Business Combination Agreement” contained in Part I, Item 2 of this report, which is incorporated herein by reference.

The risk factors set forth in the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 reflect certain risks associated with existing and potential lines of business and contain “forward-looking statements” as discussed in “Information Concerning Forward-Looking Statements” elsewhere in this report. Readers should consider them in addition to the other information contained in this report as our business, financial condition or results of operations could be adversely affected if any of these risks actually occur.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities.

The following information relates to the purchase of equity securities by Aon or any affiliated purchaser during each month within the third quarter of 2021:

(1)Does not include commissions or other costs paid to repurchase shares.

(2)The Repurchase Program was established in April 2012 with $5.0 billion in authorized repurchases, and was increased by $5.0 billion in authorized repurchases in each of November 2014, June 2017, and November 2020 for a total of $20.0 billion in repurchase authorizations.

Unregistered Sales of Equity Securities

We did not make any unregistered sales of equity in the third quarter of 2021.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Not Applicable.

Exhibits — The exhibits filed with this report are listed on the attached Exhibit Index.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Exhibit Index