Aon plc (AON) Earnings Call Transcript & Summary

Good morning, and thank you for holding. Welcome to Aon plc's conference call. [Operator Instructions] 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 our most recent quarterly or annual SEC filings, all of which are available on our website. It is now my pleasure to turn the call over to Greg Case, President and CEO of Aon plc. Thank you. Please go ahead.

Thank you, Donna. Good morning, everyone, and I appreciate you joining us today. I'm here with Nadin Virani, Interim CFO; Andy Marcell, Deputy CEO and responsibility for Risk Capital and Human Capital; and Michael Sicard, Chairman and CEO of USI. For reference, we published slides on our website that supplement our discussion. Today marks an important milestone for Aon and for the standard of client value and client service available to U.S. middle market companies. As risk and complexity continues to rise, middle market companies are not always offered the breadth and depth of solutions available to the large and enterprise market. Nor do they have access to a full range of capital sources to find world-class solutions. This is why we are very excited to announce that we've entered a definitive agreement to acquire USI, a leading U.S. middle market broker with deep expertise in specialized solutions for property and casualty, employee benefits, personal risk and retirement. The addition of USI builds on our successful acquisition of NFP. Together, USI, NFP and Aon established the premier U.S. middle market platform. The combined platform extends the reach of Aon's differentiated capabilities across the middle market, which has already proven highly impactful to the client leadership of NFP. USI also substantially expands our direct access to E&S and specialty segments and deepens our capability advantage by meaningfully expanding U.S. middle market flow insight in our ABS analytics engine. Post close, we're very excited to bring a new standard of capability and service to the middle market through our exceptional client leaders. The purchase price of $17 billion and $16.7 billion net of tax attributes represents a 14.5x synergized EBITDA multiple, and we expect the transaction to be EPS accretive beginning in 2028. Nadin will provide more financial details on the transaction in a few minutes, but I want to emphasize that USI enables us to create significant value across our entire middle market platform that we could not otherwise capture. This is a truly unique asset that strengthens our capabilities in areas we've historically been underrepresented and accelerates growth across Aon. But before we discuss the strategic rationale in more detail, it's my privilege to introduce Mike Sicard. We long admired the exceptional business Mike and the USI team have built. And in every conversation we've had with Mike, our teams walk away more energized about what we will accomplish together. I'm also pleased to note that following the transaction close, Mike will be appointed President of Aon and Global CEO of Middle Market, leading Aon's combined platform with a team of leaders from USI, NFP and Aon. Welcome, Mike.

Thank you so much, Greg. I am thrilled to be here today. This combination represents the natural next step for USI to capture the significant and growing opportunity in the U.S. middle market, positioning us to accelerate our momentum as part of the Aon United platform. We already share a common culture, a client-first mindset and a belief that the best results come from operating as one team. Aon means one in Gaelic and similarly, USI emphasizes the USI ONE Advantage. These similarities are a strong foundation, but what excites me most is what Aon enables us to do next. Together, we will accelerate growth, broaden our capabilities and harness the combined strengths of an integrated platform. I'm excited to lead what will be the premier U.S. middle market platform, delivering greater value for our clients by setting a new standard of content, capabilities and service.

Thank you, Mike. We'll start with a little background. For Aon overall, it's important to understand that this combination builds on our already strong momentum across global Aon, grounded in the strategy we've executed for nearly 2 decades. We have taken deliberate steps to build what we believe is the industry's most differentiated model. Our context advantage is underpinned by 3 foundational pillars. First, our cultural advantage. Aon United is the product of more than 15 years building a truly connected global firm that enables colleagues to bring the full breadth of Aon to every client relationship. Second, our organizational advantage. We fundamentally reshaped Aon, putting clients in the center of everything we do. We integrated our risk capital and human capital capabilities across the firm, powered by our Aon Business Services operating and technology engine. This structure allows our colleagues to serve clients with greater connectivity, consistency and impact. And third, our data and analytics advantage provides us with a platform uniquely capable of applying AI at scale. Proprietary data and AI-enabled analytics equip our colleagues with greater tools and capabilities, converting insight into actionable solutions to help clients make better decisions. Importantly, these 3 advantages reinforce one another, enabling Aon to create innovative solutions, access new sources of capital and expand the universe of insurable risk for our clients. That is the power of our connected and context advantage, increasing what we can do for clients, expanding our relevance, reducing the protection gap and growing the overall placement opportunity. The strength of this model is demonstrated in our performance through the 3x3 plan. We're winning and retaining more clients, innovating faster and operating more efficiently. Together, these outcomes are driving sustained through-the-cycle performance, and we are just getting started. Looking ahead, we see two significant opportunities to reinforce our context advantage, and USI uniquely unlocks both. The first is to advance our leading platform in the large and growing U.S. middle market. And the second is to expand direct access to the fast-growing E&S segment, where Aon today has a limited footprint. Consider that the middle market opportunity represents approximately 1/3 of the U.S. commercial P&C market with more than 200,000 companies in the U.S., employing roughly 48 million people. The addressable market is over $40 billion. These companies are a critical engine of the economy, and there is greater opportunity to meet their increasingly complex needs. The same interconnected forces of trade, technology, weather and workforce that are reshaping the risk and people environment for our largest clients are creating even greater volatility in the middle market. But when compared to our large organizations, middle market companies have less access to the analytics, insights and capital solutions required to address these challenges and build resilience. That creates a meaningful protection gap between the complexity of the decisions these clients must make, the risks they're exposed to and the solutions available to address their needs. Aon is changing that. Our investments in technology and talent, enhanced by our proprietary data and analytics enable our firm to bring capabilities traditionally available at the largest end of the market to middle market clients in a way that's tailored, timely and relevant. And over the last 2 years with NFP, we have seen tangible results of applying our context advantage in the middle market, which reinforces our conviction that we are well positioned to accelerate our momentum with the addition of USI. I would add the opportunity is equally compelling in the excess and surplus segment, which represents 26% of U.S. commercial P&C premiums and is growing at an 18% compound annual rate, fueled by the need for increasingly specialized risk solutions. Today, we're only able to provide clients with limited direct access to E&S and wholesale distribution, largely through our Totalis Specialty business. Turning to USI. This addition advances our platform and brings a unified culture and track record of growth, highly developed producer organization and demonstrated leadership. With approximately $11 billion of P&C premium placement and 2,800 producers, USI builds on the middle market foundation we strengthened through NFP. Together, Aon, NFP and USI will establish the premier $6.5 billion U.S. middle market platform. With USI, we'll have deeper direct access to the E&S segment and wholesale distribution. Both the middle market and wholesale channels are increasingly sources of new client relationships, emerging risk and additional data and insights. In recent years, USI has invested significantly in its people, platform and technology, which positions the business for accelerated growth going forward. Building on the success of NFP, USI allows us to apply our institutional knowledge across a larger platform, bringing the best of Aon to more clients and more producers, while extending USI's differentiated capabilities into a broader Aon platform. And importantly, we have a clear line of sight and a proven action plan to deliver significant revenue and cost synergies that we believe will drive long-term value creation across our combined Aon, NFP and USI platform. We've been rigorous in identifying where we can accelerate growth through greater producer productivity and retention, broader cross-selling across risk capital and human capital and expanded access to the E&S segment. We also see meaningful opportunities to improve efficiency by extending ABS across the combined platform, simplifying technology and operations and leveraging our shared services infrastructure. These are tangible identified opportunities grounded in the capabilities we have today and key learnings from the successful integration of NFP and enabled by this transaction. They give us confidence in the growth outlook and long-term value creation potential of the combined platform, and we look forward to providing updates on our progress and performance against the commitments we've outlined today. With that overview, let me turn the call over to Nadin to discuss the transaction terms and financials. Nadin, over to you.

Thank you, Greg. I'm truly honored to be here for this landmark moment, discussing a transaction that says so much about the strength of Aon's strategy and the opportunity ahead. I've been leading Aon's corporate planning and solution line finance team for almost 2 years now, and I'm looking forward to playing a key role in helping bring this transaction to life and delivering its full potential. This is a transaction that accelerates our U.S. middle market strategy and unlocks the full capabilities of our platform for our clients, colleagues and our shareholders. Over the next few minutes, I'm going to share some key details on the transaction structure and the significant value creation opportunity this represents. There are three points I would like you to take away from this discussion. First, USI is a unique asset that establishes the premier U.S. middle market platform and materially expands Aon's direct access to the E&S segment, 2 of the most attractive and fast-growing areas in U.S. commercial insurance. Second, we are strongly positioned to capture significant value through this transaction. We've done extensive work and identified $395 million in net EBITDA synergies with defined work streams that we are ready to execute upon from day 1. Third, as a result of the expansion in our total addressable market and the meaningful synergies we have identified, we have high conviction that this is an acquisition that will generate compelling long-term shareholder value. So let me begin with an overview of the terms of the agreement. Aon will acquire USI in an all-cash transaction for approximately $17 billion or $16.7 billion net of certain tax attributes. We have a high degree of confidence in our ability to deliver both revenue and cost synergies, and we believe the synergized EBITDA multiple of 14.5x is an attractive valuation for this unique asset. We plan to fund the acquisition with new debt raised across a range of maturities and expect the transaction to close in Q4 '26, subject to regulatory approvals and customary closing conditions. Our confidence in execution is grounded in the context advantage, along with the strong middle market foundation that we have built through our successful acquisition of NFP. This has led to stronger new business generation, higher win rates and sustained margin expansion. Let me now take you through the value creation opportunity in more detail. Overall, we have identified $395 million in adjusted EBITDA impact from revenue and cost synergies that we expect to realize across the full middle market platform. Starting with the revenue synergies, we've identified 23 individual work streams that we believe will generate $321 million in net revenue synergies. This translates to $115 million EBITDA contribution or 29% of our EBITDA synergy target. Specifically, we see a meaningful opportunity across 3 primary areas. First, through our producers and client leaders. As Greg noted, we expect to unlock greater producer productivity, including embedding Aon's tools and capabilities across the expanded platform. We expect to drive accelerated cross-sell across risk capital and human capital products and solutions. At the same time, we will implement best practices to increase producer retention, building on our proven playbook from the NFP integration. The second area of opportunity is through client retention and growth. Through Aon, NFP and USI's capabilities, the client base will have access to a broader set of solutions and channels. For example, we will optimize premium placement by leveraging Aon's existing retail network along USI's own wholesale capability. This allows us to optimize across the expanded platform and capture more opportunities we could not fully address previously. Finally, increased distribution opportunities. Last week, we reaffirmed our commitment to Totalis Specialty by bringing together the capabilities of NFP and Aon. Using this platform, we will further extend the availability of relevant USI solutions. We also expect to optimize wholesale distribution to market partners and expand access into specialty risk markets through our London and Bermuda market relationships. Now let me move to the cost side. We expect to capture $280 million in synergies or 71% of our EBITDA synergy target through 10 identified work streams. You've heard us talk about the proven capabilities of ABS, and we will leverage these to enhance service levels while reducing cost to serve and the administrative load on our producers. We expect to also capture efficiencies and the benefits of integrating technology systems, simplifying and modernizing the technology stack and leveraging our AI capabilities to drive productivity across the platform. Importantly, these initiatives will do more than lower the cost base. Underpinned by the scale of ABS and our disciplined expense management, we will improve the client experience and create additional investment capacity for growth. As I mentioned, we have a high degree of confidence in our ability to achieve these synergy targets. As the integration proceeds, we will provide regular updates on our progress against the annual and total EBITDA contribution we have identified. To enable deal success, we anticipate transaction and integration costs of $160 million and $550 million, respectively, most of which will be completed by the end of '28. In addition, we expect retention cost of up to $400 million spread over 3 years. In total, USI will add $3.3 billion in revenue and $1.2 billion in adjusted EBITDA on a fully synergized trailing 12-month basis. We expect the transaction to be dilutive to EPS in '27 and accretive in '28 and thereafter. Importantly, Aon's business performance remains on track. Regarding implications for financial guidance on the acquisition, we will provide further updates at close. We are pursuing this opportunity while maintaining our financial strength and disciplined capital allocation. We expect to maintain our current credit ratings and to return to our leverage objective of 2.8 to 3x approximately 24 months after close. The principles of our balanced capital allocation model remain the same: deleveraging our balance sheet, funding a stable and growing dividend, investing in attractive growth opportunities and returning excess capital to shareholders. Consistent with this strategy, we do not expect to repurchase shares in the near term as we prioritize debt repayment. Overall, this transaction is a significant strategic step forward for Aon. USI is one of the market's premier assets and adding it to Aon enhances our reach, our data platform and our addressable market, deepening the context advantage we deliver to our clients. The rationale is clear and compelling, allowing us to expand future growth, margin potential, EPS accretion and free cash flow generation over time. Most importantly, we believe this transaction is a unique opportunity that will allow us to deliver more for our clients, colleagues and shareholders. I'll now pass you back to Greg for a few closing thoughts before we take your questions.

Thank you, Nadin. This is a landmark moment for Aon, establishing the premier U.S. middle market platform, enabling us to deliver better choice, superior solutions and greater value for our clients. Importantly, we believe the advantages of our platform will expand over time as we bring more innovative capabilities to clients, create greater opportunities for colleagues and generate long-term value for our shareholders. Now Mike, Nadin, Andy and I will be happy to take your questions. Back to you, Donna.

[Operator Instructions] Today's first question is coming from David Motemaden of Evercore ISI.

Greg, a few times you had mentioned that the deal is expected to accelerate the organic growth of Aon. Maybe you could just elaborate on how much? Is that something that can break you guys out of the mid-single-digit or greater organic growth range? And where do you see that coming from mostly? Because it looks like USI actually grew 4% in 2025, which was below Aon.

David, I love the question. It's exactly the perfect one to start with because fundamentally, this is about serving clients more effectively and serving more of them. This is about organic growth. And look for our opportunities and organic growth to continue to increase over time. Again, step back and think about Aon before we get to the premier middle market platform we're talking about. We have with the 3x3 and all the capability we built, just continue to double down on our ability to bring better solutions, help clients make better decisions. You've seen it show up in our growth rates. By the way, we had 2 of the last 4 quarters, we had 10% organic growth in the U.S. here in commercial risk, for example. This -- the 3x3, the capability behind it is working unbelievably well. It creates great, great opportunity and leverage for us, which we're now bringing with the premier platform to the middle market. So step back, with USI, with NFP, with the capability we've got in Aon, when we talk about mid-single digit or greater, or greater. This is the opportunity for greater, right? In the end, we're going to continue to sort of build and create here and that combination is giving us great expectations around overall organic growth. So not about NFP by itself or USI by itself or Aon by itself with that platform, and that will be accretive to what will be a more accretive overall Aon. And that's -- we've proven it, David. We've seen it inside of NFP, bringing that advantage in a very specific way. Now we're scaling it to more clients in a way that we have high confidence will be compelling. But listen, hearing from me is interesting. If you don't mind, I think Mike just talked about this. We talked about this at length in terms of sort of what this might mean and the opportunity in the middle market. And then we get Andy to chime in on the E&S opportunity because that's a net new piece right? That's something that hasn't been in the game before. Now we're talking about it in the game. And it really does provide clarity as well on the overall synergy capture. But Mike, your thoughts on organic growth?

Yes, Greg, I appreciate that and a few thoughts and comments. I've spent my career in this industry and understand and appreciate the true power of the relationships our producers and client team members have with clients and prospective clients. Relationships powerfully and importantly matter. Historically, in the middle market, in particular, relationship has been always important, and it's been relationship-driven. But relationship alone, relationship stop is just not enough. It's got to be relationship plus. And the plus here is the combination of our firms, and it's truly extraordinary. Our combined context advantage, as Greg described, starts with that shared one culture, a similar integrated organizational structure of risk capital and human capital, property and casualty and employee benefits and leveraging the power of data analytics brings an enterprise-grade insight into the middle market. I see an exciting opportunity to leverage the data analytics AI and a prime example of this as I've seen and you may have as well, the Aon Risk Analyzers. And just couldn't be more excited about the organic growth potential that's going to come as part of this platform that our producers, our client team members can now leverage and deliver to clients and prospective clients.

So think about it, David, that's literally the ABS analytics and that platform package tailored to the middle market sort of in the main. So that's classic middle market opportunity that Mike talking about a game-changing opportunity for us. And we have a net new area that we haven't been playing in, and that's the E&S opportunity. Andy, can you talk about that, too, and kind of an additional piece on the organic growth profile?

Sure. Thanks, Greg. USI gives us 2 things. One is the direct access to the E&S market, and I'll come to that. And also Aon to USI gives the USI clients and brokers access to a global retail network, and that's important, and I'll come to that second. Firstly, on the E&S business, which is a growing segment of the market, having direct access for our clients fulfills the risk capital promise of agnostic access to capital, which we've been focused on for the last 3 years. And if you think about -- Greg mentioned Totalis Specialty, which is our program MGU business that has $5.5 billion of premium flow through it, we trade in that platform with 21,000 independent agents. When those policies get rejected by the program, it goes back to those independent agents and is then distributed through wholesale channels. So we have that business, and we actually want to serve it fully and serve all those independent clients in the best ways that we can and give better choice. So having this direct access will fulfill that. And there'll be other specialty ways in which we can do that. And then the other point, for USI, our learnings with NFP in enabling a mid-market broker to have full access to a global retail network, Bermuda, London, helps give clients choice, and there are some direct revenue benefits for Aon, which are managed and articulated in within.

And literally, if you think about it, David, we now got the core business. We've got E&S, but I hope you take away from this, and we won't spin around all 4 of us on every question. But on this one, it is about organic growth. Organic growth unlocks the value of our clients. And just to be clear, it's the shareholder value key. We grow organically, it unlocks everything. And what I hope you pick up here is very specific understanding of what it's going to take. We know the answer, now scaling. Andy just described the opportunity. It doesn't require new clients. It requires us doing more with existing clients. That's a beautiful thing. By the way, we'll get new clients as well. We're going to get both. But it really is -- it opens the door to kind of the synergy idea that all hinges back on the synergies and the opportunity to capture the revenue and cost synergies. And just a comment from the Nadin on literally how we have line of sight into the synergies which drive exactly what Mike and Andy have just talked about.

Yes. Let me get back to those comments. So if I echo what we're really excited about, this deal increases our presence in the middle market and access to E&S, which are 2 of the fastest-growing segments in U.S. commercial insurance. And as you mentioned, Greg, when we think about this specific transaction, this allows us to offer more products and services to a larger base of clients, which will support the organic growth. And as I mentioned earlier, the synergies that we have calculated as part of this transaction amount to $321 million of additional revenue growth opportunities. And so ultimately, if we think about this, expanding our addressable market, strengthening our ability to achieve organic revenue growth of mid-single digits or greater part of this deal and importantly, through the cycle.

Our next question is coming from Elyse Greenspan of Wells Fargo.

My first question, I guess, is on the financing on the transaction. I recognize that you guys have a plan to take up the leverage, right, and then bring it back down over the next couple of years. Is there any way once we see how this plays out as we get closer to close that you guys would consider an equity component to this transaction? Or are you fully committed to funding this all via debt?

Elyse, I'll start an overview and then when you talk specifically about some of the mechanics, it's more helpful for you. Listen, we are very pleased to sort of take this on the balance sheet and literally preserve the shareholder value creation, which we believe is going to be quite substantial for our existing shareholders. Very much pleased to be able to do that and fully ready to attack this opportunity in that way. You saw us do it exactly the same way with NFP where we moved up and we moved down in a very short period of time faster than we even thought we would. Look for us to sort of push that in any way we possibly can as we drive this, but we're very comfortable with the structure that's going to drive a greater shareholder value creation for our shareholders. Nadin?

Yes. I'll add that we're pursuing this opportunity from a position of strength. And we will maintain our disciplined capital allocation approach, which we've talked about before. And as part of this transaction, we'll maintain our current credit rating, and we expect to return to our leverage objective of 2.8 to 3x in approximately 24 months of close. So I just want to reiterate that our principles around balanced capital allocation model remain unchanged, deleveraging our balance sheet, funding a stable and growing dividend, investing in attractive growth opportunities and returning excess capital to shareholders. And again, as we talked about, we did this with NFP. We had a higher leverage ratio and we were able to bring it down. And so we have a track record of demonstrating that.

And then my follow-up question, there is some adjustments to revenue. I think it's around $60 million, which I'm assuming is revenue dis-synergies here. How did you guys come up with that as being the right figure when bringing together right two sizable organizations?

Again, Elyse, we took a very conservative view going back to the baseline core on literally what we're going to build off of as we thought about the synergies. And so these adjustments reflect really making sure we're all counting revenue in exactly the same way. So we're being very careful about that, and we're very stringent on how we develop that baseline. And then in addition to making sure we build in what is always natural leakage that occurs. But I would say, if you think about this in the NFP case, our NFP colleagues working together were tremendous. We had incredible experience, producer retention exceptionally strong, stronger post-deal than pre-deal that's unheard of. The overall leadership Doug Hammond and Mike Goldman, all these guys are phenomenal in terms of what we were trying to do with our team. Now we've got a next generation of leaders stepping up in the NFP world to work with Mike. We're incredibly excited about that's going to look like. So we've seen this movie multiple times and certainly saw it in NFP, learned a lot and feel very, very good about our ability to sort of maintain the platform as we then strengthen the platform.

The next question is coming from Pablo Singzon of JPMorgan.