Aon plc (AON) Earnings Call Transcript & Summary

We are going to move ahead so that we say on schedule. And also, I imagine that this session is going to be incredibly informative. I want to welcome Greg Case, CEO at AON.

To kick off, I guess, the most obvious and immediate question, I just say, USI. But obviously, this was big news. And I was hoping you could talk through the thinking and the expectations of the deal.

Terrific. I'm happy to do it. Mr. First, I want to say to you, to KBW. Thank you very much for hosting Aon. We are very much appreciated and very much support the discussion today. I -- when you think about USI, you have to start first and foremost with Aon and the foundation of Aon over the last number of years, in particular, what we've done over the last 3 years. So you start with a foundational approach and understand this thing we call the 3x3 plan, which were some massive big bets on structural change in our firm, risk capital and human capital to understand what that means. And Aon matters to you dig in and understand it. That is a structural change, the organizational change, which means commercial risk and reinsurance, are in the same conversation, not combined, but in the same conversation. -- talent, health and wealth are also part of the same conversation. This sounds trivial. It's not trivial. When you show up with a client and you understand sort of integrated risk, you may have different solutions. -- and you get different outcomes and clients know it. So it's something we looked at in 2002 and 2003 and felt like we had to do to structurally strengthen and align our firm. So what we could deliver One of the other pillars of the 3 by 3, 3 initiatives over 3 years, and that's data analytics and what we do in Business Services. And the engine around the analytics, our analyzers, our capabilities is all around Aon Business Services, connected data in ways no and our industry has ever connected to it before, through our team, risk capital and human capital to our clients. And that's enabled us to win and be very, very fortunate across a number of different fronts. Data centers as being one of the great examples and what we've been able to do there. When you show up with the client and you actually have that integrated view, they get different answers. Trillion dollar market cap companies get different answers on how they build them, how they manage risk and the stakes are massive. And we'll come back and hopefully talk about that a little bit. That's the strength of Aon. That's the foundation. In our view, if you think about the last 4 quarters, 2 of the last 4 quarters, we applied this mostly in commercial risk, U.S. commercial risk, 2 last 4 quarters, U.S. commercial risk and an was greater than 10% organic. -- greater than 10% organic in a market that was challenged supposedly. So from our standpoint, we're making massive progress. That's the strength of our firm. That's a number that we believe is multiples of our current share price in terms of what the possibilities might be. There were 2 opportunities for us that mattered. 2 big opportunities that mattered and 1 is U.S. middle market and the second was the E&S marketplace. And so our view was if we can continue to make progress on the platform and address those 2 areas of potential opportunity, this is even a stronger platform. So this is about strength on strength, and that was the goal. U.S. middle market, we spent 20 years watching U.S. Middle Market Myer, as you know, and others sort of accumulated EBITDA -- they had EBITDA multiple arbitrage decost debt. That's a good gig. If you can get it. And in the end, that persisted for a while. We did not enter the space with a engine because our view was we couldn't create better. All we can do is get bigger and better came along with Aon Business Services. And Aon Business Services, again, 16,000 of the 60,000 Aon colleagues. We can now invest into the middle market and create better, not just bigger, NFP. So NFP was the first major step to do that with our current Aon middle market assets, we made great progress. That's been 2 years Myer in 4 months, give or take, it's been phenomenal. What does that mean? Well, top 20 -- top 100 producers or up 22% new business. So literally, top 400 producers up 22% new business. Client retention. We think there's a 500 basis point opportunity. We've captured 200 basis points in the first 2 years. produce our retention. -- producer retention is higher now than it was pre-deal. Why? Not because we're a bunch of nice guys, but necessarily, they're getting more content and capability to do with clients more than ever had before. And that was the thesis. If we can bring the enterprise insight large commercial insight into the middle market, that's better than we could be bigger. And so that platform of NFP has worked exceptionally well, but we still weren't as relevant as we needed to be. My counterparts would tell me time and time again, great work, Greg, that's fantastic, but it is not really relevant for us in the U.S. middle market. And so that's why we took the step with USI. And USI gets us to a place where we have a platform, do not think about this as U.S. That's not the bet we're making. The bed is USI, plus NFP plus the Aon assets. That's a $6.5 billion platform revenue, that's relevant. That's relevant. Relevant and also better because we're going to bring the content in that we prove with NFP into USI, our view is that is a great, strong platform. Again, not the integrated strategy of Aon. That's what I described at the beginning, but it's a pillar that we think has real vibrancy. And USI was picked with a very specific reason. Because USI spent the last 15 years like we did trying to connect their firm. They're going to run to that mission, not run away from it. They believe in content following relationship. Relationship first with content. That's exactly where we are. Complementary to what we've done with NFP. And Mike Sicard is going to run the integrated program, the platform. And Mike cart, if you know him, has done a phenomenal job in U.S. He's excited about taking that mission to now a bigger platform and bringing better to the middle market, better to the middle market than what we have now. That's why we loved USI and the opportunity with USI and Mike Sicard. We could stop there, and we'd be good Meyer good. But they also invested in the other area as it turns out. And they have 300 appointments into the E&S world. And so for us, that was a real unique benefit. And if you think about it, a good example, when we complete a major data center and the opportunity, it's often the top 10%, 15% of that gets done into the wholesale market in the E&S market because the admitted market just can't -- not enough capacity, we'll come to that at some point. And if we actually had access -- direct access to the E&S market, we would finish the placement. That opportunity is very real. And there are many, many other opportunities we can get into on the USI side. So USI brings an integrated view. They bring the platform to complete the platform. They bring the ability to actually access the E&S market directly. And yes, one other thing. That machine we described, Aon Business Services at 16,000 colleagues, the content behind that is literally our secret sauce. Our AI understanding and drive, which we've been doing for 10 years, is really around first starts with content. And the content we now have in the U.S. middle market is substantially greater with the $11 billion of premium flow that comes with USI on top of what we have. So the platform, check, E&S, check, data, content, check; Mike Sicard can run and he's excited to do it. We felt really good about sort of USI overall. And then finally, you get the price. And you need to understand, price for us is very different than what we typically have done with the U.S. middle market. That's a thesis we all know well. I'm sorry for the long-winded answer. We're just going to get it on the table and you can hit it then from that point. It's a tried and true opportunity. You decide you're going to sell a year from now, you work your EBITDA for a year and you massage it however you're going to massage it in beautiful ways. And then you suggest to the seller that they have 20% or 30% or 40% of add-ons they should make. Everybody agrees to that. They all think the price to that looks good, and everybody walks here and says it's good. We didn't do that. Sorry, didn't do that. USI really wasn't looking to sell -- they're part of KKR, the balance sheet opportunity, fantastic. A lot of time with Scott Noddle on this, absolutely. By the way, in the end, there wasn't a data room. There was no pristine opportunity. We essentially stripped this back and said, "Tell us what you think, they did. You see it in the exhibits. The number, 990 and change, therefore, or thereabouts, and we basically accepted nothing on the add-backs, basically 10% maybe fraction. And then we built up a set of synergies. And if you get in the side meetings, our interim CFO, Nadin Virani who's here, has done a brilliant job. He's run this for months and months and months. ran the entire architecture on the synergy piece. And for us, the $395 million, by the way, it's EBITDA synergy. We're not talking about revenue and cost is tradable tracking. We'll talk about the split. We feel very, very good about -- this is a set of operators around the table with the in in the budget, locking down the synergies. So for us, this is a 14.5x multiple gig to get the benefits I just described. We love this platform as a value creation opportunity, which is also why we did this on the balance sheet. We wanted our current shareholders to benefit from what we're up to. So that's a long-winded answer, Meyer, but it really was an attempt to say, what were we thinking about, and we know everybody in the space. We know every opportunity. For us, personally, I've been doing this for a little while. I think this may be 1 of the highest value creation opportunities we have seen at Aon over the next few years that I've seen maybe in my tenure. So that was -- that's the background.

Okay. And in no way do I want to minimize that? We have another 30 minutes.

For any question, go for it. Anything you want to go.

Okay. So let's talk about integration. Integration was highlighted as one of the focal points. Obviously, actually mean? What are the challenges and opportunities? I want to jump off maybe a point you made about using up new business production at NFP by 22%. Can you talk about how integration -- the integration plan will replicate that?

So integration for us is paramount. You will eventually see an already integrated integration plan fully developed, ready to go. Again, the synergies were done in a very unique way. we've never seen them done the way we did them very operationally. We probably have of the $395 million we described, 23 specific revenue initiatives, 10 specific cost initiatives, all of which are to track the revenue initiatives are on traditional but we also have those associated with E&S and all the opportunities around wholesale. So for us, it is very much around that integrated view. -- again, with our overall team kind of at the helm, does the steering committee, Sucarday-to day, all the content going up through an in to our board. So we actually are all tracking exactly what we're doing and mostly understand this is an integrated team. This is an Aon United team. Sicard, but also you watch the CEO, Doug Hamman, I think talks about this very positively. This is something Doug and I have had a great deal of conversation around around how do you complete the platform? One other thing I should probably say -- when we brought in a P&A on, we were asked a couple of times, maybe a couple of times a day. Are you buying another platform? Now we never answered that. We just said we want to have relevance and we want to have meaning for our clients. And make no mistake about if you miss everything else, don't miss that emission. We are flat out going to have better content for our clients. And the analyzers, better content, cyber analysis, better content, service, better content. We prove what we can do with NFP, now we're going to scale it with this platform. It's a platform. I just want to be clear. The platform is done. So I want to say no, no new platform acquisitions in the middle market in the U.S. We're done. So $6.5 billion, good platform. We don't need to be the biggest. We need to be the best, and we have a good platform, we're relevant, and we are going to run that play. So I just want to be clear it from that standpoint. But the integration is going to be USI NFP, colleagues from NFP Mike Schneider sort of Ethan Foxman. These guys have really been part of NFP and now been elevated, will be part of Mike's team. Doug Hammond still playing a role as Executive Chairman. All of this is good, very, very focused. And if you don't want to think about cigar, this is an operator. So we've got the best operator in the world on a mission that he's incredibly excited about with an integrated team with a set of synergies we know, and we're going to actually begin enacting the day after we close.

Fantastic. I'm going to jump on the point you made in terms of synergies. A couple of points. You had a lot of precision in terms of the revenue, EBITDA and -- or revenue expense and EBITDA synergies that you're expecting. What are the key challenges? Where do you see the opportunity for upside?

All the challenges are real. We accept them. We know what they are. We've been through the movie multiple times before. and the same watch the history, every time we bring someone in, there's always a concern and a reaction and then there's our reaction. And our view is, Meyer, we've got to work the expense opportunities, and we are doing that, 10 initiatives laid out very specifically. This is Mindy Simon, our COO and our teams, and then soon to be our efforts across USI, NFP and Aon assets as well. The ones we're most excited about other revenue opportunities, and they're meaningful. Again, I would just tell you, we are committed to the $395 million. Those who know Aon, know what that means in our world -- that also means the opportunity is great. It is great. I mean just a few examples. So USI, essentially $11 billion, it's sort of a premium into the market. Like many, many middle market companies, they utilize wholesalers on 30%, 35% to sort of do those placements. By the way, just for reference, we put $26 billion and we maybe do $1 billion, a little over $1 billion. And ours are maybe some of the most complex placements. So the capability we have now, even before the wholesale comes on board, might be able to address the $3 billion that go to wholesale. And if you one could think about that, that's a real opportunity to serve clients better, that's the mission, but also that comes with a lot of other pieces, too. So there are multiple angles here that are -- from our view, are very clear and very apparent when you get a bunch of operators around the table, risk human capital and you talk about what they are. there's a tremendous amount that goes into London. Our capability in London is second to none. Aon Client Treaty, very unique, nonduplicated in most fronts. So for us -- those are very specific synergies that aren't 2 years away or 1 year away. They're 1 week away after close. So for us, a whole series of synergies from that standpoint. The other place you're going to see is spending a huge amount of time is with our producers. And no doubt, as you have all heard, everyone will hear, "Oh, my God, everybody is going to do this and that and the other. " Look, all I can tell you is this, we'll do our level best on retention, just like we did with NFP, again, Remind you, higher retention now than pre-deal that's unheard of. And it isn't because we're a bunch of nice guys. It's because they get more stuff. -- sorry, and we're not changing compGrid. Therefore, they might accidentally don't more stuff, same -- they might get paid more. They get to wow their clients. So for us, we're going to do our level best to sort of make sure that's right. And that's also a big part of the synergies, too. And our view is the new business impact we had at NFP, why can't we have that at a minimum at USI. And by the way, even with Aon. Because remember, at AON, the assets inside of Aon were kind of embedded inside of Alon, they were called out as a platform, and they were phenomenal, but they can be better and better as part of an integrated platform in terms of what we're trying to accomplish. So for us, this -- the idea of the retention synergies, all that go with it, revenue cost side, we think there's lots of upside. But what we are clear is the absolute primacy of delivering 395.

Okay. Fantastic. I will be sort of body in the room to see if there are questions there. I want to make sure that everyone is getting their questions answered. One important topic that I want to focus on, though, is on the E&S marketplace or reentering ES reentering wholesale. For those of us that were around in 2004 and 2005. This is not a small issue. Clearly, not a legal problem, but it was a big deal once upon a time. I was hoping you could talk through how you're viewing that marketplace and maybe a little bit more color on the opportunities.

Well, listen, we've been so fortunate at Aon. Our team has been really wonderful and all the effort I described at the beginning. We have the platform. And that platform has been curated and worked damn hard. -- risk capital, human capital -- in business services, this is a fundamental machine, and it actually should get better and better and better on behalf of clients, huge right? It served us reasonably well. And by the way, we see massive opportunity ahead. And the AI piece, I know you had the session on yesterday. We've been doing machine learning and AI for a number of years. I have said on a few calls. We put an early generation NVIDIA chip into an Aon solution called Path wise in 2009. And as before it was cool to be doing this stuff, okay? And so for us, we love it. AI is not a strategy, but it is an accelerant to a strategy, and it's helped us accelerate massively sort of around that. and you watch the middle market and now what we're doing in the middle market. You watch E&S. E&S is now 26% of the flow in the U.S. 2 -- and but we have great access, but it's indirect access. And it's through a great group of wholesalers and this is not about going after our wholesale partners at all. I've had conversations with CEOs of all of them. I mean this is -- we're going to -- this is a massive area. And now we have direct access to it. We also have direct access through MGUs and MGAs. You saw us also announce the Tuesday before USI, Total Specialty. That is not Aon brand, but totalis, this is where all this is going to come from and drive awesome, a guy named Kip Kelly, who ran our affinity business and Tom Gillingham, who ran the business at NFP have come together to sort of form to tell us specialty beautiful. So E&S for us is a real opportunity to access market. Again, think about it, you finish what is a $5 billion, $10 billion, $15 billion opportunity in data centers. And again, I hope we get a chance to talk a little bit about those -- and in doing so, you have to top it off because the admitted market is tapped out. And you hand it to the E&S market, you hand it to a wholesaler. There's no more content than Aon as you don't have that right now, but we need the capacity and we need to sort of get it filled. That's all going to go away Meyer, the high end. And then think about the opportunities. Total specialty, by the way, now serves -- and this is an $800 million or $900 million revenue business. Just reference. This is not a startup. We have 21,000 independent agents that access through Total specialty, our programs in MGUs and MGAs, 21,000 -- we probably have 40% of their submissions each year, 40% that don't apply to those programs directly. We dump them. How do you guys feel about that? -- feeling good about the fact that you literally -- we got 40%. This is a circa call it, 16,000 applications in which we say, "No, I don't want you today. That's what we do. That's stopped. That's now going to be addressed. So for us, this isn't a one-off thing. It's a very, very specific. And by the way, we have it all laid out in the first year, in the first 24 months in what we're doing. But our view is there are very specific things we can do right now. And then there are a whole series of things over time. Again, benefit to client, you get a better solution, better coverage, better analytics, and we're going to be able to do it, and we couldn't have done it before. And so we literally took the 16,000 and gave them back to the market. We game to wholesalers. We're not going to do that. So these are, again, very explicit pieces and places that we know we can apply and then we'll see what happens. But again, it's a massive market. So please don't walk out the room and think this is not about Amwins or Ryan or CR. It's not at all. It's -- these are great partners, and they'll be great partners for a long time, hopefully, even better. But we are going to access the E&S market, it's 26% of the flow. Our clients and we're doing it. So the fact that we had 300 appointments as part of USI was a big wow. And Mike's worked that for 3 years, and they were just beginning to think about how they were going to apply them. By the way, the revenue is de minimis. So don't go look for the revenue of USI because it's just starting. The 300 appointments is what we heard. That's what got us excited. -- and that gave us the access. Because if you think about it, for us to get that kind of access and buying somebody, the breakage is high because we have a whole series of competitors who are placing into those groups do, you really can't buy one. So you have to do it organically. This was the most elegant opportunity around organic we've ever seen.

Okay. I'm going to follow up on the organic side because I think this question I've gotten a lot and that is with all of the tools you've provided, Aon producers, you've had really, really strong organic growth that's outpaced what USI has been doing. What's the pathway and time line not for generating organic growth through the wholesale side that benefits Aon, but for individual producers at USI to match Aon.

So one -- excellent question. Thank you. you should do all the analysis you need to do in any way you want to do it. The analysis focused on USI and USI growth, I would say, is an interesting one that has modest relevance. Why? It isn't USI. It's USI and NFP and Aon together is that platform. By the way, if Nadin were up here, he would commit to mid-single-digit or greater organic growth over time, just as we have been forever. By the way, we believe -- this platform is going to reinforce the time for or greater, mid-single digits, nice or greater is better. So we're going to -- we really -- our view is we know the -- listen, we know the formula now. So the CEO going on is really slow. It's taken a long time. We did unit productivity forever. And by the way, we got pretty good at it. We didn't actually hire that many people over a long period of time. Better than unit productivity is unit productivity in more units, someone told us that and that we're right. And so if we do all those things, that's part of what we have in the context of it. By the way, USI, like NFP is going to benefit hugely. That's going to be good. Also, Mike Sicard has done fewer and fewer acquisitions over the last 3 years. He has instead diverted to a pure hiring engine. And by the way, he probably have -- one of our add backs could have been, let's take the x percent high percent of producers who you brought in over the last year, produced nothing have 0 revenue. We have that in the till. We say we won't accept that. But by the way, is that an opportunity? Yes. In fact, the hiring engine that USI has, we love. I can see us putting that across the platform in terms of where we are. Point being literally in the end, you should expect from us mid-single digit or greater period. Soft market, whatever that means, hard market, whatever that means, we don't really -- doesn't really matter. And we're going to literally have to deliver that. That's going to be -- that is our focal point. Our view is, over time, this helps us do that more effectively. So be clear, we're not going backward in mid-single-digit or greater period -- under did we with NFP and NFP was supposedly lower too. We got the exact same questions. We just want to work. And in the end, during the time we owned NFP the last 24 months, greater than 10% organic in 2 of the 4 quarters in U.S. commercial risk. Like I'm not saying -- I know you guys are thinking about it going your probably asking what I asked, which is why not 4 quarters out of the 4 quarters. But 2 out of the 4 quarters is unique. And that's part of why this formula, in our view, is a good add to what that chassis was what I started with.

I was going to ask 1 about 15%, but different questions.