Conference Transcript - AON 2026-06-09

Bob, Analyst — Interviewer

All right. Good morning, everybody. We're honored to have Edmund Rees, the CFO of Aon, to join us today. Thank you, Edmund, for taking your time. This is actually a very exciting time to talk about insurance in general, especially the brokers. Maybe with that, let's get started. Maybe the first thing, if we want to look at a broader environment, this is your second year at Aon, and it's probably two of the most exciting years in recent memory. So from that perspective, maybe can you help us talk about going forward, what are the things that you're most excited about for Aon and also the broker's industry in general?

Edmund Reese, CFO

Yeah, well, first, let me just thank you for having me this morning. This is always a very high-quality conference with great investors, so thanks for having me, Bob. Yeah, it has been an exciting two years, and there's a lot to look forward to moving forward. When I stepped into the CFO role of Aon two years ago, almost exactly today, the company was lagging, prior to 24, lagging on organic growth relative to the other peers. It had just done an acquisition as a percentage of its market cap, the largest of all time. And, of course, that had an impact on capital as well. So those were the three priorities, organic revenue growth, re-underwriting that large acquisition, NFP, and focusing on capital. And where are we now? Organic revenue growth has been accelerating, and the most recent data point, you know, it's 150 basis points better than the industry average. Commercial risk itself is 440 basis points better than the industry average. So the decisions that we've been making, the investments that we've been making, really have us in a strong position in terms of accelerating and leading the industry in organic revenue growth. So NFP, that acquisition, you notice at the end of the fourth quarter, we made the call to accelerate the integration into ABS. We've learned how to drive the revenue synergies, how to integrate. Retention is better than it was when we first acquired the company, and we're executing on the inorganic component as well. We brought in over $42 million in EBITDA last year. And then from a capital standpoint, I joined or I looked at this company. It was over 30% ROIC leading the industry. That was obviously impacted by the acquisition, but a year, certainly two years later, we're again from an ROIC level at the top of the industries. Those were the priorities. That's what we've been focused on, and that's what the progress has been. Now we really are just executing on the three-by-three plan. You asked about moving forward, and it's showing up in the results. These are differentiated results relative to the peers right now. The balance sheet is stronger than ever with free cash flow back at the double-digit level with leverage actually below the objectives that we set. And I am sure we will talk about AI right now, but the industry itself, I would say with the increasing risk, the increasing demand and the investments that we've been making in our capabilities, it's a great outlook for us moving forward. And so I would just say that we've just become much more relevant to the client given our Aon United model, and then the investments that we've been making, I think, make the business much more valuable going forward. So an exciting two years, but we're really excited about what comes next.

Bob, Analyst — Interviewer

Okay. Yeah, that's pretty amazing. And also for what it's worth, right? organic growth, you have one of the best organic growth thus far within the industry. Maybe actually on that point, one of the key debates in the investment community is the fact that we have a softer market environment and then the growth potentially slowing down for the industry. That seems to be less of a case for you guys so far. But maybe can you help us think about just the impact of organic going forward in various segments, and how can you kind of arrive to that mid-single-digit or greater organic growth?

Edmund Reese, CFO

Yeah, you're right. It has been less of a case for us. We did 6% top-line organic growth for the last two years, both in 24 and 25, and as I just said, the most recent data point was another quarter of strong organic with 7% in commercial risk. So that means for us that the business is resilient. That means that the drivers of growth are stable. And your question is about what those drivers of growth are. For us, it begins with new business. And we've been trending at very healthy levels relative to the objectives that we've set. We've set nine to 11 points of contribution from new business. We're at 10 points of contribution the last two years, nine in this most recent quarter. The things that are driving that are the investments that we've been making in revenue-generating hires in priority areas like data center, construction, energy, health. I mentioned last quarter, in fact, that the contribution from those priority hires was 75 basis points to overall revenue growth. So that's helping drive the new business. Our Aon Client Leadership Program is driving that new business, the pipeline, and the new business growth where we have Aon Client Leaders, particularly on our large global accounts, is now at a double-digit level. So that's driving that new business as well. And we continue to see this contribution from middle market as well on the new business. So that's one big driver. New business growth from existing and new clients is the largest contributor for us. That's where we've been focused, and that's what's been driving it. But I'd also mention as a second item, retention. That's been up 50 basis points last year, 20 basis points in this most recent quarter, and a couple of contributors there. One, the analytics. We present them, we win more. RFP rates are up over 40%, and so presenting that more. What we've been doing in Aon Client Leadership, that means we have the relationships with the CHROs, with the CFOs, this higher-level relationships, which make the relationship with the companies stickier, and the client service through ABS has been helping there. Lastly, I'll just say that the net market impact, pricing and exposure, again, what we've been doing to help clients take advantage of this opportunity has led to one-point contribution from pricing and exposures. Well, on top of those things, there's some tailwinds that further support the business. The tailwind in M&A, acquisitions by a company, It was up over 25% in the first quarter. The data center spend by the hyperscalers, that's a big tailwind for us as well. And I'd also mention specialty. The MGA, the MGU business, we've been seeing growth. We have a specialty business in NFP and one in our legacy business, and we've been seeing strong growth there. You asked about the trends, and I'll end on that. You know, I look at our solution lines. In commercial risk, you might have lower property rates, but growth in the core, growth in M&A and construction those things are helping commercial risk and reinsurance again rate pressure there but our international facultative business is strong, our STG business is strong and health global benefits from new accounts has been big and then the regulatory environment and wealth has been strong again so the plans are clear for us, the business resilient, the plans are clear, we're executing on that, that's what allows us to have this continued type of growth, and we continue to feel confident in it.

Bob, Analyst — Interviewer

Really just firing all cylinders, basically.

Edmund Reese, CFO

And they're compounding. I mean, we're very specific about the areas where we're going to invest, and we're seeing results from each one of them, so they should compound and lead to that kind of growth. Excellent. Yeah, I really appreciate that.

Bob, Analyst — Interviewer

So one thing you did touch on is the pricing environment for property is softening, and for casualty, it seems decelerating. If you look at your carrier partners, would you say that, like, have their appetite between property and casualty changed? Are they more willing to perhaps focus on casualty side? I'm curious as your view on how your partners on the carrier side are reacting to the current pricing environment.

Edmund Reese, CFO

Yeah, I mean, pricing, remember, I have to just step back and say pricing's impact to us, and then I'll talk about the carrier's impact for us as well. It is just low correlation and a low explanation of variance. We shared a stat during Investor Day that said that the R-squared of pricing to our organic growth was 0.11. Nominal GDP, on the other hand, is 0.67. That's more important to us. And you're right. We don't look at pricing as sort of like one cycle. We look at it as a collection of micro markets. really that vary by geography, that vary by product, which is what you're asking about now when you ask about property and pricing, and vary by client segment as well. So I think you are seeing more underwriting focus driving less aggressive price competition as well. I think you are seeing the structural trends that are impacting these underwriters, primarily loss severity, arguing against an extended and prolonged pricing environment. And really, even coming back to these micro markets, you think about them, property to your specific question, that is where you see, particularly large property, that's where you've seen over the last five years the highest increases. And therefore, you're now seeing 15% decline in rate in that area for the large market. It's more muted, to my point earlier about being different in client segments, is more muted in the middle market. Casualty, you might see some decelerating, but it's still growing at a high single-digit rate. So I think you're still seeing the underwriters to your question lean in on that. And it varies by the other products as well. For us, it really is the value is not in the rate for us. The value is in placing complex insurance and designing the solutions for And that's why we've still been able to drive results that are one point of contribution from this environment and why we feel good that we'll be able to continue our mid-single-digit growth in all pricing environments.

Bob, Analyst — Interviewer

Okay. No, that's very helpful. Yeah. I think one thing you talked about that's very interesting, the value add of the brokers, right? And this wouldn't be a financial conference if you don't talk about AI and tech. So from that perspective, one of the things that people tend to talk about is that AI could potentially be a disintermediating force within the broker space. Can you maybe talk about, is that one sensible? And then maybe to the folks that feel that AI is a disintermediating force, what would be your messaging to those folks? For brokers, or for AI specifically, actually.

Edmund Reese, CFO

I'm going to break it up into two. I hear two parts in your question. One is the question on disintermediation. The other part that I heard in your question is the naysayers, those who think that the impact is going to be negative. So first, when I think about the disintermediation point, this is an insurance brokerage for sure is a network business in my mind. And in network businesses, there's always this fear that technology will disrupt it, will disintermediate it or disrupt it. What we've actually seen is fragmented point solutions that come in and impact a slice of the process, disrupt that, or actually even amplify a slice of the process. The strongest players, the most resilient players, own or play across the entire end-to-end process. That's an important point. They own or play across the entire end-to-end process. In an insurance, that means onboarding, that means placement, policy management, invoicing, cash and collections, claims, policy renewal. If I were to try to summarize the process, that's the entire process. In addition to owning that process or playing across that entire process, there are advantages that protect against disintermediation for the large brokers. We know what they are. They're very obvious. The proprietary data, the scale and the negotiating leverage with the carrier relationships, the claims advocacy and resolution. And for some of us, given the investments that we've made, the analytics that support bringing capital into the market, those are obvious advantages. So playing across the process with these sort of advantages here, I would say those things protect against disintermediation, but I'd also add that there's a less obvious advantage that is unique to Aon as well, and that is our organizational structure. We've been transforming the organization for the last 15 years to be more client, more centered on the client. And so that means Aon United in 2010 bringing together our geographies and our solutions, no boundaries. That means 2018 Aon Business Services or ABS bringing together our operations and technology. And by the way, we amplified that with a billion three investment in technology and in the organizational structure. What that means is that we are ready to embrace the technology. So not disintermediate. We see AI as a strategic enabler. And in an AI-enabled world, value accrues to the network integrator, integrating those processes. So that's my point on the disintermediation. In terms of disproving the negative, the naysayers here, the first thing, I mean, we are less focused on the if scenario, will it the industry or not, but more focused on the scenario outcomes and the assumptions within those outcomes that drive growth or drive productivity in there. When I think about the top line, you want to consider what's the client segment you're playing in, what's the consulting percentage of your business and how that's impacted. But very importantly, and what I think a lot of folks miss is, what is the opportunity to increase the addressable market? And data center is a great example of that because that is a capital-constrained market. There's not enough in traditional insurance, and we're bringing in other players like PE. So what can you do to increase the addressable market? That's a key assumption. And then are you making the investments to increase your share in an expanding market? On the revenue side, on the productivity and efficiency side, we're already seeing tangible proof of the benefits there across the workflows and claims, invoicing, policy management. Those things are already coming through. So we believe, for those who have a question about it, focus on the companies that have the right organizational structure in place, that have started to make the investments in the technology capabilities that drive revenue. You do those things, and we believe you'll have an expanding addressable market, then the content, the structure that we have in place, and the investments that we've been making will help us expand our share in that market. That means a more valuable company, a more durable company, a more scalable company when you think about it.

Bob, Analyst — Interviewer

Yeah, that's actually a very interesting point, right? Would you say that within the AI opportunities, which he kind of laid out right there, are they different between the commercial risk solutions, the health or the wealth, or would you say they're kind of similar in that regard? I'm just curious of your long-term opportunities there within each division.

Edmund Reese, CFO

Well, there's opportunities that are AI-driven that we're taking advantage of now across those solution lines, and there's a longer-term opportunity as well, and hit them both. In the immediate term, as I just mentioned, we are already seeing benefits in construction, and in particular, data center, right? Companies are spending over $800 billion in CapEx on this. That, as I just mentioned, is a capital-constrained opportunity that if we don't bring in other capital, it really will bypass insurance and make us less relevant. As I mentioned, we've been bringing in other forms of capital for that. That's on the commercial risk side. We have a facility for data centers that was a billion dollars less than a year ago. It's now $3.5 billion, and we expect to expand that even more as we bring in more capital associated with it, traditional and nontraditional. That's in commercial risk to your question. In health, the workforce opportunity is a big driver of growth for us now and that we expect moving forward as companies look to upskill and reskill their employee base as they transition and adopt AI that's happening right now. And then I'd also call out one other area, because you asked about construction and health, but I'd call out the middle market as well. The opportunity is big for us to use our capabilities for the middle markets who really don't have risk management teams in place. They look for us to come and be their risk manager, talk to their CFO. So we're diagnosing the risk, understanding their exposure, understanding the P&L impact. Those things are benefiting us today, and I would say is largely being driven by this environment. As we move forward, though, it is all about embedding AI in our capabilities to scale innovation across our suite of analyzers, both in commercial risk and health, to increase sort of client service and retention and to continue to get the productivity and efficiency benefits as well. We see that as a huge opportunity for us moving forward. We're making the investment in that. It is what gives us confidence that this is an opportunity and not a risk moving forward for us.

Bob, Analyst — Interviewer

So it's really like as long as we're continuously investing in these opportunities.

Edmund Reese, CFO

And really focus on those companies that are structurally set up and making the investment in the technology capabilities that don't just help productivity but drive top-line revenue growth as well.

Bob, Analyst — Interviewer

Thank you for that. That was like a very great detail in terms of how to think about this. Really appreciate it. If we pivot a little bit to capital allocation, you have a very strong balance sheet, $7 billion of available capacity. Now, that being said, the broader broker's valuation have come down because of all the things we talked about before. But at the same time, you have a very strong pipeline on the M&A side as well. Could you maybe give us an update on capital priorities and where do you think is the most attractive use of capital right now?

Edmund Reese, CFO

Yeah. I mean, whether you're thinking about share repurchases or acquisition, for us, the capital model begins with free cash flow generation. So I have to start there because we've had very strong free – double digit. In a quarter, it was over 332%. That is what has enabled us to execute our capital allocation model. So leverage, as I just mentioned, is actually in a very strong position relative to our objectives. It was 2.6 times. We again increased the dividend at a double-digit level here. And if you look at Q1, it is a great demonstration of our discipline model. We deployed $349 million towards tuck-in M&A in the middle market, primarily through our NFP platform. But to the question you asked, the largest deployment of capital was actually share repurchases, where we deployed $500 million. That's twice what it's been over the last eight quarters, and that's because we definitely think that the market does not currently recognize the intrinsic value of the firm. So we take advantage of that. So this tradeoff between a market that is dislocated right now and below the intrinsic value of the firm and M&A opportunities that might not yet reflect public market valuations is what we're constantly balancing. But we'll continue to be disciplined on that. You know, when you look at our M&A over the last 10 years, the acquisitions that we've made, roughly 150 of them, after the first year of ownership, they're over 10% growth. The IRRs are over 20%, and as I said at the beginning of this conversation, our ROIC continues to lead the industry. Those are our objectives. And when I think about those objectives, the pipeline is still strong, though I don't think the valuations fully reflect the current market. But we are focused on middle market, particularly in commercial risk in the U.S., tuck in and further. We're focused on some of the international countries, places like France, Germany, Japan, and even some of the countries in Latin America, I think, have some opportunities for us. And increasingly, we've brought together our specialty business that we purchased as part of NFP in our legacy business, and there are some MGA, MGU opportunities for us as well. But again, it really is about the highest return for shareholders here. We're very disciplined about that. That means balancing investment for growth with capital return to shareholders, and we're just in a great position to do it with the strength of our balance sheet and the flexibility we have.

Bob, Analyst — Interviewer

Sounds like a wonderful time to have a strong balance sheet. So another thing you kind of touched on earlier on the strategy side, right, this is the final year of the 3x3 plan, and the program is obviously successful, but what's next? Can you give us a little bit of a preview of how we should think about this going forward?

Edmund Reese, CFO

I think our CEO, Greg, said this best, that the three-by-three plan was never a destination for us. It was never a destination. The goal was to exit 2026, the final year of our three-by-three plan, with momentum. And that's exactly what we're doing here. We have the ABS Foundation, that growth engine in place, which allows us to have operating leverage to both invest and drive margin expansion through our core operating business, through the core business here. That's very important for us as we move next. We have the suite of analyzers across commercial risk and human capital and reinsurance that's always been in place, really helping us with win rates and with retention. And so as we go into the next phase after the three-by-three, which, again, is an evolution, not a reset, it's an evolution, not a reset, we want to scale those analyzers, make sure that they're presented in every client interaction, because we see stronger results when they are presented. Aon client leadership, I mentioned that earlier. When we have an Aon client leader on the account, which we now have for nearly 750 global accounts, we see the best retention in the portfolio. We see product penetration that's twice what it is for accounts that don't have it. We see higher new business, and we see the highest retention in the portfolio as well. So we want to get these Aon client leaders across the other client segments as well. We want to continue doing that. And we now have this beachhead in middle market. We know how to attack the middle market when it comes to integrating, when it comes to going after the revenue synergies that's there as well. So as we get into this next phase, we're going to focus more and more on that. But the organization has said that we're making the investments in our technology capabilities that's helping us win. And so that means that we are in a great place coming out of the three-by-three plan to really scale and enhance and have these decisions that we've been making compound and potentially be at the right end of our overall objectives here.

Bob, Analyst — Interviewer

So it's really expanding into your existing advantage and really having technology also enable a lot of that.

Edmund Reese, CFO

Enabling that.

Bob, Analyst — Interviewer

So maybe that's actually an interesting point on the technology side, right? When a lot of people talk about AI, they feel like it's a miracle drug, but people kind of ignore the cost aspect of this. AI is a variable cost. It's not a fixed cost, based on our understanding. Someone can spend a lot of money on that. With today's capability, how do you think about the ROI of the technology you're implementing, and how do you think about cost measures overall for all the capabilities that you're introducing to the firm?

Edmund Reese, CFO

Yeah, that's an interesting question and one that me and our COO, who leads our technology and AI team, connect on and discuss constantly. First thing that I'd say is I don't look at the cost of AI as this high-risk, high-visibility, separate line-item bet. We really look at it as part of our ongoing tech dev investment and product innovation. We look at it increasingly as part of our day-to-day workflows as well. As I said, we use AI as a strategic enabler to scale our innovation. That's our suite of analyzers to drive client service, better enhanced service and retention, and to drive productivity and efficiency. And so we measure those things in terms of the contribution to revenue growth from the products that have it embedded in it. We measure it on the contribution to margin expansion from the productivity and efficiency that we have as well. So that's overall how we discuss the measurement. But specifically on the cost side of it, this is, again, a place where I think our organizational structure and how we think about it is helping us. We've tiered the organization. It's just our terminology where tier one is broad tools that's primarily a licensing fixed cost. Tier two is more of a hybrid model, but tier three is the high consumption, high variable cost, expert outcomes. And we're really looking at measurable outcomes from those. That structure, tier one, two, and three, that have different tools with different cost structures, fixed versus variable in them is how we think about it. That allows us to have discipline on the cost, not stifle the innovation as we move forward and be balanced about the overall cost of it moving forward. And we'll just continue to monitor the innovation, the technology, as it continues to evolve here.

Bob, Analyst — Interviewer

So it's very much a balanced approach. Balanced approach. No, very helpful. We do have some time for questions. If anybody has any questions, we'll have the mic around. Anybody want to raise their hand and go ahead? If not, maybe I can squeeze one more. Let's go for it. GDP, obviously, one of the bigger components when we think about growth, right? Now, obviously, there has been a lot of volatility globally. If you think about the U.S. business and the international business, curious as to how you feel the opportunities between inflation, between GDP growth, and then various parts of the world. Curious if you have a view on that.

Edmund Reese, CFO

I mean, certainly in the U.S., the levels of inflation has increased property and asset values. That means more exposure. That's a benefit for insurance and insurance brokers as well. In the international regions, I would say the inflation is more uneven, but that's not disruptive to our business at all. It's not disruptive because the regulatory environment, the geopolitical environment, that increases risk and increases the demand, which is a benefit to our business. I'd also say that our global footprint, which means a diversified portfolio, we're operating in over 120 countries, really moderates the impact from any individual region. And when we look at our international business right now, particularly EMEA and LATAM, we have seen strong contribution to our overall growth. You asked about inflation and GDP. If you look in EMEA, our specialty business and commercial risk, the move from public to private markets and health, the regulatory environment impacting wealth and health, the global benefit expansion from our existing clients, those are things that in this macro environment are actually bolstering risk in the demand for our services and driving the contribution in EMEA. And LATAM, GDP, I would say, is lower but more stable, but foreign direct investment is growing at multiples of the GDP in those markets. That is a benefit to the overall industry and to us as well. There you see medical inflation being impacted by the pressure on the private health care systems. And the big countries for us, places like Mexico, you know, the last three years has been growing at a double-digit level for us as well. And so these international markets might have more uneven macro environments, but they've been resilient and strong contributors to our overall growth as well.

Bob, Analyst — Interviewer

A really very strong diversified portfolio.

Edmund Reese, CFO

Yeah, diversified portfolio.

Bob, Analyst — Interviewer

Well, I think anybody have any questions here? If not, I think, Edmund, thank you for your time.

Edmund Reese, CFO

I really appreciate it. It was very enlightening. Thank you. Thank you.