Aon plc (AON) Earnings Call Transcript & Summary

Is there more effort that needs to be done now to place risk than there was a year ago, 2 years ago? Are there expenses associated with that? I know we focus a lot on the upside to the intermediaries [Technical Difficulty] on rising prices. I was hoping you could round out the picture for us in terms of the market conditions we're seeing.

There's definitely challenges because things have changed and unique, and you really do have to sort of look at this client by client. But Meyer, different than some, this is what we do, anyway. Part of it is the assets and the capability and the data analytics to look at a client's portfolio and then how they think about risk every year. And in a very bespoke way, think about how we can improve that, and we're doing more and more of that. You're seeing more change than ever before because of the conditions. But a lot of the time and energy and effort that our team has put in globally, we've always done, and we're continuing to do it. It's just that it's resulting in changes that are more dramatic in this time period given the circumstance you highlighted.

Great. I'm getting some questions that want to focus on short term. I guess it's an area of some interest. Can you walk us through, maybe, one, how is project work developing? And here, I guess we get insights on a weekly, monthly [Technical Difficulty] update in terms of what the pipeline looks like. Can you share with us what you're seeing with how your expectations for the back half of 2020 are crystallizing?

Maybe, Christa, start with the top line growth, sort of, piece we've talked about overall in terms of, sort of, general direction. But the overall pipeline, Meyer, as we're talking to clients, is exceptionally strong because the need is very high. My clients have all their traditional requests, but they're also asking questions around, "Listen, I'm now talking to my C-Suite daily, about not just pandemic or what comes after pandemic, what happens in climate change? What if we're held accountable for that? How do we think about Cyber? Are we adequately covered?" All the things that come with that, the intangible asset piece, as we talked about innovation before, all these things that our clients are asking about. So our conversations are extensive. We would also see by the way, Webex. These tools have been phenomenal in many respects because we're connected to clients more than ever before. We hosted a conference as an example, our Asian Insight Conference, which we do every year. It's fantastic. Team does a great job. We usually have 200 to 300 clients, who show up. It's a tour de force kind of overview. We did this last week. There were 1,000 clients, 1,000 strong. Not 200, 1,000. And so the connectivity opportunity is exceptional. And that's led to a lot of pipeline opportunity in the, call it, new existing -- new work with existing clients who know us and know our capabilities. So there's a lot going on, sort of, in the context of that. And the translation is we have a very resilient book of business, continues to be resilient. And we've described it before. And Christa, maybe you can describe kind of a little discretionary, nondiscretionary. It might be helpful for Meyer and the team here. But this is a very, very resilient book and it's served us exceptionally well.

Absolutely. And Meyer, we have said previously that 80% of our revenue is core and highly recurring. And even in economic times of distress, like what we've seen in Q2, et cetera, where, for example, some of our clients are retailers who filed for bankruptcy. A condition of bankruptcy is renewing their property coverage, their D&O coverage. An annual requirement every year is to do the actual valuation of your pension plan. And for your employees, you need to actually provide health care coverage. And so this is a very highly recurring regulated business and required. And so that's held up extremely well, remarkably resilient. And the other 20% of our revenue is more discretionary in nature. And we've outlined some of the areas there that have been impacted, whether that's on the health side with discretionary projects, whether that's on the travel and events business because obviously people aren't traveling or having events as much, our M&A business because there's less M&A going on or construction because there's less construction going on. And so they're really driven by activity, Meyer. And what we would say is we continue to monitor 3 things in the macroeconomic environment. The first is GDP and employment levels. The second is government stimulus because that's obviously a huge driver of what's happening in terms of resulting GDP and employment. And the third is the virus. And we see continued macroeconomic uncertainty in the second half of the year, less bad than what we saw at the beginning of the crisis in early March, but still a macroeconomic uncertainty. And so we continue to navigate through this. And as Greg said, the demand from clients has never been higher.

Is there a framework we can look at in terms of as these issues inflect, like hopefully, and I think this is consistent with your overall commentary, the risk of the worst-case scenario is fading. And at some point in time, we get to recovery, whether it's a V shape or U shape or any of the other letters people are using. And again, for the associated statistics with regard to the virus, with regard to government support, the timing of how that translates into recovering revenues, recovering demand on the project side?

Yes, yes. So Meyer, I guess what I would say is we're not economic forecasters. So what we can say is it remains uncertain, and here are the variables we track. As it flows through to our business, what we would say is, our business has traditionally had a lag effect post GDP. In 2008/'09 as an example, we had a 4-quarter lag, which really matches up to an annual renewal cycle. And we expect that lag to be 2 to 4 quarters now, Meyer, because it did drop so quickly. And then you have an annual renewal cycle, which is mainly Q4, Q1 is how our business peaks. And so we would think about that, Meyer. But again, we continue to track GDP and employment levels and government stimulus as being the biggest input variables as to the recovery of the economy. What we would say though is on top of underlying GDP and employment levels, we continue to invest substantially, as you know, to drive brand-new areas of growth. And whether that's the work we've talked about intellectual property in Cyber or whether it's the health-wealth gap that Greg's talked about or elective benefits, an area of health we've invested in substantially and see substantial growth going forward. So we do look at the underlying drivers of the economic activity. But on top of that, we see huge areas where we can grow the market.

I have one final question, I think, depending on what comes in, focused again on short-term issues. And I don't want to exaggerate the importance of that relative to the long-term planning that's worked out so well. One would be with regard to share repurchase, because it appears that your comments on the second quarter call has been followed up by action. And I was hoping you could talk a little bit about the prospects of that. And second, I think there's a message that want to confirm that your comments with regard to, maybe pressure, on the nonrecurring revenues and the resumption of -- or the regression towards, normal expenses implies a little bit of margin pressure in the second half of the year. I was hoping you could talk us through those 2 issues.

Sure. So on the buyback question, Meyer, what we would say is, as we think about generating cash and the allocation of cash, as I said in our opening, return on capital is the metric we use, cash-on-cash return to allocate all cash across Aon. And because we have a discounted cash flow valuation of Aon, which values us substantially above where we're trading today, or in fact substantially above our all-time high, our primary use of cash is buyback. And we said that we would resume buyback post the shareholder vote on August 26 and commensurate with, obviously, the highest return on capital usage across Aon. We also said given the macroeconomic uncertainty, that we would continue to have elevated cash levels in the second half of the year, so that we can navigate through any level of macroeconomic uncertainty. Because Meyer, as you know, we made a commitment to protect all 50,000 Aon employees through COVID-19. And we're extremely proud of that commitment and very focused on making sure we can deliver on that commitment through any macroeconomic uncertainty. So that's, sort of, the first thing I'd say. And then your second question, sorry, Meyer, I've totally forgotten.

Second question was with regard to the trajectory -- the timing associated with non -- with project-related revenues or the nonrecurring revenues and resumption of normal expenditures.

Yes. So what we did say in the second half of the year, Meyer, is that second half expenses for 2020 will be similar to second half expenses for 2019, excluding restructuring. We did not give guidance on revenue, Meyer, given the macroeconomic uncertainty. And so therefore, we've not given guidance on margin. What we really have -- because I think it's very uncertain, obviously, depending on what happens on the macro side, revenue will do what it does, but what we can say is we can be much more precision estimate on expenses. And that's where we are, which is what we didn't want people to do, Meyer, was to take Q2 expenses and project forward. Because what happened in Q2 was extraordinary in terms of negative GDP, and the actions we took were extraordinary. And so what you're going to see in the second half of the year is a resumption of normal expenses like investments in Cyber, like investments in IT to run the company. And for small areas of investment in future growth opportunities, which we think is a just terrific return on capital.

So let me jump off that for another related question, both Aon as a company and Aon as a consultant. Can you talk about the expense savings opportunities that may be COVID-forced upon you, that have more sticking power than or represent things that you wouldn't have previously anticipated? And how do the various consulting units propagate that among your client base to generate value for them?

This is really an opportunity that we're pretty excited about, given the capabilities we've built over time. Aon business services and all that has come with that, Meyer, has put us in a very unique position. As I described before, the ability to kind of connect with clients has really been -- has been astounding. And in many respects, demonstrating Aon United on a screen, we can put 16 faces on it. It doesn't mean -- that means all of them don't have to go to the meeting. You don't have to have to travel around the world. And so clients are watching us interact in ways that they've never seen before and seeing the benefit of the work over the last decade on Aon United. That's been incredibly powerful. It means we're actually having conversations with clients around their businesses as an outcome of COVID-19. So not just what are the new risks on the horizon and how you deal with those, but also how do you think about work from home? How do you think about remote working overall? How do you think about the health challenges and changes that come with that, the retirement changes and challenges that come with that? How do you think about training? How do you think about engagement? All these things are, sort of, playing out. We're seeing opportunities as a result of, sort of, the change over the last 6 to 7 months, in almost every aspect of our solution lines. And it turns out the benefit of Aon United, the strength of Aon United is fully reinforced, sort of, in this net new environment. If you think about what we did with the coalitions we created, and you can see the press releases around the world. We created a set of coalitions, by city, in which the leading companies, by city, around the world, in Chicago, in New York, in London, in Singapore, in Madrid, all have come together to say, how do we actually think about comparing notes with each other, comparing notes with each other on how to not just react to what was called the new normal. We reject that. We call it the new better. How do you actually do better? By the way, new better doesn't mean easy. It means more effective. More effective in how you connect with employees, how you connect with clients, how you do what you do. And it turns out, that's a relevant conversation for virtually all of our clients. So again, nothing good maybe out of the pandemic, but if there was a silver lining, it created possibilities for the new better, no one knew existed at the time. And we see that possibility now and the potential now.

And maybe -- sorry, one addition from me, Meyer, which is as we think about Aon Business Services where we've, over the last 3 years, as you know, on the IT side, moved our applications and data centers to the cloud; on the real estate side, consolidated and had an open footprint; and on the shared services side, moved shared services to Centers of Excellence in Poland and India. We see that Aon Business Services model accelerating, as a result of COVID-19 because we've all proved that we can actually work from home and be remarkably productive over a 6-month period of time. And so therefore, we can actually -- and frankly the investments we made in our IT platform over the last 3 years, have had stunning returns over the last 6 months because we've actually been able to access all of our corporate systems because they're on the cloud. All of our broking systems, retirement systems, health systems because they're on the cloud. We've been able to have all of our call center employees work from home because we have a call center platform in the cloud. I mean it's been remarkable. And so for us, being able to accelerate that move in Aon Business Services to drive obviously efficiency and productivity, but actually just much greater effectiveness for clients, is certainly one of the big things we see, Meyer.

Excellent. Thank you. That was very thorough. This is a broad question. It's maybe unfairly broad. But I was hoping you could talk about Aon as an insurtech company? And maybe give us some examples of competitive advantages that you've built in really across brokers, consulting all the different units [indiscernible] that can highlight maybe capabilities that are underappreciated by investors.

Sure. Christa, you want to start? And I…

Yes. I mean, Meyer, that's such a good question because -- Yes. So Meyer, what we would say is insurtech is obviously growing substantially in terms of the dollars that go into it. We track it really carefully, and we partner with a number of institutions that actually incubate insurtech startups. And then one of the things we've done is we formed commercial partnerships with over 20 insurtech firms, so that we can actually really learn. Because one of the things we have recognized over time and they have too, Meyer, is that we actually bring data and distribution and access to product and they bring amazing marketing, digital marketing capabilities, amazing technology capabilities. And actually, it's a really good match. And so as we develop these commercial partnerships over time, Meyer, what we'd say is some of them work, and they culturally work with us, and it works extremely well. And some of them don't. And so that, sort of, partnership means we're learning and we're innovating with the community. And not all innovation has to happen at Aon. And so it's -- actually it's a great way to learn from around the world. And CoverWallet was one of these partnerships. And so we obviously acquired CoverWallet in Q1 this year. And it was a partnership where we partnered with them in Europe, we partnered with them in Australia, we partnered with them in the U.S. And they bring amazing capability to help us in that small commercial space where we are tiny today. But we see substantial opportunity for growth, as a result of the digital marketing and technology capabilities they have. But Greg, what would you add in this area?

I think you captured it very well. I think, Meyer, CoverWallet is the perfect example. There are many others, but it's a perfect example. What Christa is highlighting is this isn't about insurtech. It's about actually accessing more clients, more effectively, in a more innovative, cost-effective way, and by the way, using a digital capability, technology to do that. And it's -- there's a tremendous amount out there. And we see huge opportunity in that connection. And that's what we're excited about. It's yet and yet another piece of content capability that we added to the Aon family that frankly lets us scale innovation more effectively. And as Christa highlighted, CoverWallet was -- we did a test for over a year in Australia and the U.S. And now it really is permeating across our entire system, as we're helping big companies and small, just medium-sized companies and accessing direct-to-consumer through this kind of capability. So this is a big, big opportunity for us, and we're very excited about it.

I'm going to focus in on couple of -- just because it's an important issue. Do -- what is the trajectory of willingness to -- I'm focused mostly on small commercial, maybe that's an inaccurate focus, small commercial enterprises to buy digitally distributed insurance products. How is that changing? Has the pandemic impacted that at all, that willingness?

Well, listen, this is back to the opportunity to access clients big, medium and small, but with different access points through digital needs like this. And we're seeing greater receptivity. You have to have the goods. You have to have the goods. You have to have a high-quality offering, a quality offering that's durable, that stands up in any environment. Whether you're a big client, a medium-size client or a small client, you want a high-quality solution. And as you pull that together, we certainly could provide access to those end consumers or those end clients to do that. So yes, this has opened up possibilities and created acceleration in many respects in the digital world, the likes of which we've never seen before. In some respects, we've done more in the last year on digital than maybe we've done, Christa, in the last 5 or 6 years in terms of, sort of, receptivity and opportunity. And it's created a real point of acceleration.

And Meyer, we would say, absolutely, it's accelerated the move online for small business buying of all kinds of risk management. Because -- and it's made it very clear, who has the technology capabilities to deliver online, whether it's in a Zoom call like this to large complex clients or whether it's online end-to-end to small commercial clients. And having those capabilities in place at both ends of the spectrum, for Aon, has been incredibly valuable, as we drive new business through this environment.

Great. I've got one question in on the submission asking about what the hurdles are to improving penetration of intellectual property protection mechanisms that you've been devising. What makes that hard to sell? Let me stop there.

Well, this is a real point of innovation. You start back and saying, this is just a normal gestation period, as you sort of take a concept, develop a solution and a product to talk to clients about it. But boy, do we -- are we excited about? You start with the fundamentals, supply and demand. And you ask yourself, where is value derived from, and realize that 85% of the market value of the companies in the world is now derived from intangible assets. Then you ask the question, what have we done as an industry to help clients understand that asset class and to defend that asset class, much like you defend property or defend casualty or defend your directors and officers. And the answer is, Meyer, as you know, the industry hasn't done a lot. You say, why can't we do it? Well, there is no actuarial table. You can't look in the rearview mirror. You can't do what we've done traditionally in our industry. You have to look for data analytics content. In essence, we have taken efforts with 601 West and other assets we brought into Aon to literally look at the valuation and be able to value the patent portfolios all around the world. Never been done before, and do it in a way in which we can actually have capital come in and create coverage, which we're now doing for intellectual property. And that's actually just beginning. That cycle is just beginning. But if you say to yourself and you ask yourself, if it's 85% of the value of the world's market cap, what is the opportunity if we can help clients understand and measure and mitigate that risk? It is immense. And so we've already made great progress. We're very optimistic about what the opportunity is, and we are very clear about what's required in order to make this happen. And we're on the journey. We think this is going to be much more substantial than virtually almost any other net new area that's out there right now.

Great, and then I've got one final question in the minute-or-so that we have left. You recently announced, I'm going to get the terminology wrong, virtual reinsurance renewal season. Can you talk about what that is? Does that imply more flexibility for reinsurance renewal dates? What does that mean for the reinsurance market?

It's been great. I mean, listen, back to kind of the new better. In essence -- by the way, for those who don't keep track of the reinsurance world, this is the world that we -- that usually the reinsurance world's in Monte Carlo. And instead of that, we're actually connecting with our clients all around the world for the last few days. So I have had daily calls with our leadership team, with our reinsurance clients, point after point after point, bringing global capability to bear. So we've essentially just said we're making the process virtual. We can start earlier. We can actually interact more often. It's been very -- it's been exceptionally -- it's been great. It's been very well received, creating possibilities on the market side as well as on the client side. And so for us, it was just a way to take the capability we've built over time, create more connectivity on behalf of clients. And we've also kept track of areas of potential innovation that we're going to continue to drive in the next renewal cycle. So we're never going back to the way it was -- I mean back to the idea of new better. We may absolutely sit across the table from time-to-time, but we also have a muscle we didn't have before on this virtual approach, which has [ definitely ] gone exceptionally well.

Thanks. I'm just going to ask if you have any final comments, but this was a tremendously informative session. And thank you very much again for participating in the conference and sharing your thoughts.

Meyer, we just want to say the same thing. We truly appreciate the opportunity to here with you today. And thank you again for hosting, and look forward to our next discussion.

Thanks so much, Meyer.

Thank you both very much.