Earnings Call Transcript
Aon plc (AON)
Earnings Call Transcript - AON Q4 2022
Operator, Operator
Good morning and thank you for holding. Welcome to Aon plc's Fourth Quarter and Full Year 2022 Conference Call. I would like to also remind 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 historic results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our fourth quarter and full year 2022 results as well as having been posted on our website. It is now my pleasure to turn the call over to Greg Case, CEO of Aon plc.
Greg Case, CEO
Thank you and good morning, everyone. Welcome to our fourth quarter conference call. I'm joined by Christa Davies, our CFO; and Eric Andersen, our President. As in previous quarters, for your reference, we posted a detailed financial presentation on our website. We begin today by thanking Aon colleagues around the world. Our strong performance in the fourth quarter and through 2022, as well as our strong momentum as we start 2023, continues to reflect tremendous dedication by our colleagues and the power of our Aon United strategy to support clients, both in their demands of today and as they plan to address their needs of tomorrow. 2022 was a year in which we continued to see clients focus on both the challenges and opportunities from increasing global risk, and the opportunities to engage clients continued to grow. In commercial risk, our latest Weather Climate and Catastrophe Insight report sized global economic losses from natural catastrophes at $313 billion, which is 4% over the 21st century average, and it was only 42% covered by insurance, resulting in a $190 billion protection gap. In Wealth Solutions, equity and fixed-income market volatility in the second half of the year created demand for our Wealth Solutions colleagues to help organizations reassess retirement readiness and financial well-being. In Health Solutions, which includes our human capital business, the continuation of broad trends around a changing workforce—encompassing health, culture, wellness, engagement, and inclusion—has grown in focus and importance across the C-suite, and the stakes have never been higher. In this environment of increasing risk and complexity across so many fronts, our colleagues are increasingly relying on Aon United. This enables them to bring the full force of our firm, including core offerings and innovative solutions at scale to address evolving client demand. Turning to financial performance, in the fourth quarter, we delivered organic revenue growth of 5%, highlighted by 9% growth in reinsurance, 7% growth in Health Solutions, and 6% growth in Wealth Solutions. In reinsurance, our teams were able to deliver strategic advice and data-driven analytics very early on in the renewal process to help clients navigate difficult market dynamics. This market leadership benefited our clients greatly in a challenging 1/1 renewal and reflects our strong performance. In Health Solutions, we saw strength in our core H&P and human capital, both of which benefited from enhancements to our offerings, tools, and platforms, and increased client focus on employee health, rewards, engagement, and well-being. In Wealth Solutions, our team delivered the strongest quarterly organic revenue growth in over 5 years as our teams worked tirelessly to respond to client demand resulting from market and interest rate volatility, particularly in the U.K., and we continue to help clients execute on pension risk transfer, strategic pension management, and respond to regulatory changes. Finally, commercial risk grew 4% in the quarter and 6% for the year. We delivered double-digit organic revenue growth in Canada and Latin America and strong growth in Europe, the U.K., and Asia Pacific. In the U.S., otherwise strong results continue to reflect the impact of the external M&A and IPO environment on M&A services, which reduced quarterly organic growth by 5% and annual growth by 2.5%. While this short-term pressure may continue into Q1, over the long term, we are very well positioned in this highly attractive business and have significant opportunities to contribute to long-term top and bottom-line growth. For the full year, our organic revenue growth of 6% is a direct result of our Aon United strategy and is a key driver of strong top and bottom line results for the full year. Notably, adjusted operating margins expanded by 70 basis points to 30.8%. Adjusted earnings per share grew 12% to $13.39, overcoming a 3% or $0.44 FX headwind. Free cash flow exceeded $3 billion, with free cash flow margins of 24.2%, both our highest ever, and we completed $3.2 billion of share buyback, demonstrating our confidence in the long-term value of the firm. Our team's performance positions us exceptionally well to deliver in 2023 and over the long term. Looking back since 2010, we've reported 4% average organic revenue growth, over 1,100 basis points of margin expansion, or about 90 basis points per year, while adjusted EPS and free cash flow increased at compound annual growth rates of 12% and 13%, respectively. More importantly, we view the go-forward opportunity and momentum higher now than any time in our history. Looking ahead, we continue to expect mid-single-digit or greater organic revenue growth for the firm, margin improvement, and double-digit free cash flow growth for the full year 2023 and over the long term. Reflecting on the year, we'd like to offer a few observations on how Aon United continues to deliver for clients. The steps we've taken over the past decade, including our single brand and single P&L, put us in an exceptionally strong position to deliver for clients and have a significant impact on some of the greatest opportunities and challenges they face. These ideas are not new; they are a continuation of over a decade of progress in areas highlighted in our Aon United blueprint: clients, colleagues, innovation at scale, and Aon business services that are increasingly interconnected and mutually reinforcing. On delivering innovation at scale, the platform we've built not only enables the innovation of new concepts, as we've demonstrated in areas like intellectual property solutions and climate, but also allows us to bring together our analytics and expertise for new solution development, both from within solution lines and connected across our business. For example, our Health Solutions team has developed an Aon health analytics platform, supported by hundreds of data scientists and credentialed health actuaries, as well as experts from human capital and Ad business services. It's designed to help clients assess and improve their employees' health, which in turn helps deliver well-being, productivity, and lower costs. Within this offering, driven by proprietary analytics, we can assess data around employee health information, insurance and claims, workplace safety, absence engagement data, and external data on health trends and solutions which together form a robust view of employee physical well-being. With this insight, our teams can recommend individualized solutions, including better insurance offerings and targeted programs. For example, one manufacturing client wanted to improve employee physical well-being and reduce costs. Together, we designed a comprehensive long-term well-being strategy and a customized health program that includes twelve vendors and targeted specific health and well-being programs for employees based on individual factors correlated to success. The results were impressive. In our target group as compared to nonparticipants, we saw meaningful improvement in selected health metrics at 24% lower cost per person. Further, the platform allows for rapid scale and distribution of a solution to help our clients drive workforce health, wealth, and productivity. Equally important, our colleagues are having this kind of impact, which is an important driver of our very high Aon colleague engagement. We see examples like this across the firm every day as we help our clients manage risk and support their people. This demonstrates the opportunity to continue delivering innovative solutions at scale to address our clients' biggest challenges across the backdrop of rapid change and ongoing volatility. To summarize, we began 2023 in a position of strength. Our firm is more connected than ever before, enabling us to deliver better solutions for clients and to better support our colleagues. Aon United will continue to deliver results now and over the long term for our clients, colleagues, and shareholders and is reflected in our progress to achieve key financial objectives. Now, I'd like to turn the call over to Christa for her thoughts on our financial progress in Q4 and 2022 and our long-term outlook.
Christa Davies, CFO
Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered another strong quarter of performance across our key metrics to finish the year. In the quarter, we translated 5% organic revenue growth into 40 basis points of adjusted margin expansion and strong growth in adjusted earnings per share. For the full year 2022, organic revenue growth was 6%. Adjusted operating margins increased by 70 basis points to 30.8%, and we generated over $3 billion in free cash flow, hitting an all-time high. We look forward to building on this momentum as we head into 2023. Reflecting on results, as Greg noted, organic revenue growth was 5% in the fourth quarter and 6% for the full year. We continue to expect mid-single-digit or greater organic revenue growth for the full year 2023 and beyond. I would also note that reported revenue growth of 2% in both Q4 and for the full year includes an unfavorable impact from changes in FX of 4% in both periods, primarily driven by a stronger U.S. dollar against most currencies. I'd also highlight that fiduciary investment income, which is not included in our organic revenue growth, was $41 million in Q4 and $76 million for the full year, which is 1% in both periods. Moving to operating performance, we delivered strong operational improvements in Q4, with adjusted operating margins of 33.2%, an increase of 40 basis points driven by organic revenue growth and efficiencies from Aon Business Services, which overcame expense growth, including investments in colleagues and technology to drive long-term growth, and some ongoing resumption of travel and entertainment expenses. For the full year, the adjusted operating margin of 30.8% reflects margin expansion of 70 basis points year-over-year. Notably, over the past 12 years, we delivered 90 basis points of margin expansion a year. Looking forward, we expect to deliver margin expansion in 2023 and over the long term as we continue our track record of cost discipline and managing investments in long-term growth on a return on invested capital basis. As we've previously communicated, we think about margins over the course of the full year, driven by three areas: the first is top-line revenue growth. The second is the portfolio mix shift to higher-margin businesses as we invest disproportionately in areas of increasing client demand, supported by data-driven solutions to deliver the insights and advice that help our clients protect and grow their organizations. The third area is increased operating leverage from ongoing productivity improvement from our Aon Business Services platform. I'd highlight that Aon Business Services continues to be a key contributor to margin expansion and represents a competitive advantage, especially in a high inflationary market. Our Aon Business Services platform continues to drive efficiency gains, improved quality and service, and increased innovation at scale. During 2022, we continued to make progress on Aon Business Services, driving efficiencies in enhanced services, particularly through process improvement, automation, and the use of artificial intelligence. For instance, our captives business has clients with hundreds of legal entities, each requiring multiple policies. Previously, the process of checking policies was manual and inefficient. We've now moved to a digital solution that can identify differences quickly and accurately and deliver these to clients much faster. Similarly, the use of AI is increasingly enabling us to deliver better solutions to clients. For example, we delivered a new solution for our human capital clients using an AI-powered search engine that provides them with insights on technology talent globally, including geography-based pay differentials. This is essential for finding the best technology talent and optimizing within the client's existing workforce, which is a key area of growth for many firms. As we've said before, these improvements not only boost accuracy and client service delivery, but they also help free up our colleagues' time for more valuable client activities, driving better outcomes for our clients. Organic growth and margin expansion translated into adjusted EPS of 5% in Q4 and double-digit growth of 12% for the full year. As noted in our earnings materials, FX translation was an unfavorable impact of approximately $0.09 per share in Q4 and $0.44 per share for the full year 2022. If currencies remain stable at today's rates, we would expect an unfavorable impact of approximately $0.13 per share in the first quarter of 2023 and $0.12 per share for the full year 2023. Turning to free cash flow and capital allocation, we generated over $3 billion in free cash flow in 2022, contributing to our long-term track record of growing free cash flow at 13% CAGR since 2010. Our outlook for free cash flow in 2023 and beyond remains strong, and we continue to expect to deliver double-digit free cash flow growth for the full year and over the long term, driven by operating income growth and working capital improvements. I'd note that capital expenditures returned to a more normalized level in 2022 as we made ongoing investments in Aon Business Services enabled platforms and technology to drive long-term growth. As we've said before, we manage capital expenditures like all of our investments, on a disciplined return on capital basis. Given our strong outlook for free cash flow growth in 2023 and beyond, we expect share repurchases to continue to remain our highest ROI opportunity for capital allocation. We believe we're significantly undervalued in the market today, highlighted by approximately $675 million of share repurchases in the quarter and $3.2 billion of share repurchase for the full year. We also expect to continue investing organically and inorganically in content and capabilities that we can scale to address unmet client needs. We've invested in expertise and content to help meet our clients' needs, such as our Q4 acquisition of ERM, a Mexico-based leader in risk assessment modeling, which expands our catastrophe modeling and consulting capabilities in reinsurance. Our M&A pipeline continues to be focused on our highest priority areas that will bring scalable solutions to our clients' growing and evolving challenges. We will continue to actively manage the portfolio and assess all capital allocation decisions on an ROI basis. We ended 2022 with an ROI of 30.6%, an increase of nearly 1,900 basis points over the last 12 years. Turning to our balance sheet and debt capacity, we remain confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile. We expect to add incremental debt as EBITDA grows over the long term while maintaining our current investment-grade credit ratings. Regarding interest rates, I'd note our term debt is all fixed rate, with a weighted average interest rate of approximately 4% and a weighted average maturity of approximately 12 years. Notably, our pension liability improved as interest rates increased. As a continuation of our pension derisking efforts, we completed an annuity settlement transaction in the fourth quarter, resulting in approximately $300 million reduction in our pension benefit obligation. This continues to be an incredibly attractive environment for our clients to execute pension risk transfers, and we continue to see very strong demand from clients. In summary, 2022 was another year of strong top and bottom line performance, driven by the strength of our Aon United strategy and Aon Business Services. We returned over $3.6 billion to shareholders through share repurchases and dividends. The success we achieved this year continues to provide momentum as we head into 2023. While we're seeing signs of economic uncertainty, we remain confident in the strength of our firm and our financial guidance for 2023. Overall, our business is resilient, and our Aon United strategy gives us confidence in our ability to deliver results in any economic scenario. With that, I'll turn the call back over to the operator, and we'd be delighted to take your questions.
Operator, Operator
Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Elyse Greenspan with Wells Fargo.
Elyse Greenspan, Analyst
My first question is on your margins. So if we look in the quarter, it seems like your margin declined excluding the benefit of fiduciary investment income. So I'm just trying to get a sense of the drivers and outlook you see for your margin, excluding the NII benefit in 2023?
Christa Davies, CFO
Yes. Thanks so much for the question, Elyse. That is correct. We saw 40 basis points of margin expansion and a 90 basis points of impact from fiduciary investment income. I would note, we really think about margins over the course of the full year. So we had 70 basis points of margin expansion for the full year, of which 40 basis points came from fiduciary investment income. We're extremely confident with that track record, at least for our financial guidance which is mid-single-digit or greater organic revenue growth, margin expansion for the full year 2023, and double-digit free cash flow growth for the full year 2023.
Elyse Greenspan, Analyst
So assuming we continue to get a tailwind from fiduciary investment income, I guess in '23, you'll probably balance letting that all fall to the bottom line and making some of the investments similar to what you did in the fourth quarter?
Christa Davies, CFO
I think that's fair. We are continuing to drive margin expansion each and every year amidst the investments we're making in the business because you saw in Q4 we substantially invested in IT. Our IT expenses are up as we invest in platforms and technology to drive innovative solutions for clients. We'll continue to invest in our colleagues, in M&A, and in many areas to drive long-term growth, but we really think about this over the course of a full year, which is what matters to us.
Elyse Greenspan, Analyst
And then my second question, we've heard a lot about strong pricing coming out of the January 1 reinsurance renewals. Can you give us a sense of the outlook for your reinsurance business? I am not sure if you highlighted it in the past, but the concentration is in the property lines. Can you give us a sense of how you think that business should perform in an environment where we're seeing robust catastrophe reinsurance price increases that we saw at January 1?
Eric Andersen, President
This is Eric Andersen, why don't I take that one to kick us off. It's great to be with you this morning. The reinsurance business continues to be a very strong performer for us as we go through the year. I would say certainly, a lot of attention is spent on property CAT for good reason. Certainly, the losses, the interest rate moves, and the restructurings of the programs that were happening throughout the season. I would say Property CAT continues to be a dominant part of the business but it's not the whole business. Certainly, casualty, specialty, and others continue to be a big part of it. Thinking through the future and what's going to happen over the next 12 months, we continue to see a very robust opportunity for the team. They're spending a lot of time with data analytics and better insight to help our primary clients figure out their positioning. The endgame when you consider the 1/1 renewals is that there's more risk, more volatility which has been pushed to the primary insurers. The outcome of that for them will be either risk appetite; they're going to have to be very disciplined on the risk that they assume in the property space particularly. They'll use other methods like facultative reinsurance; they'll probably do selective buying throughout the year. The 1/1 season was a little different than years past, which I think is what you're alluding to. Ultimately, they'll continue to manage their portfolio as the year progresses.
Greg Case, CEO
I might just add to that, at least, the theme was exceptional. The 1/1 renewals had a unique market dynamic. Taking the analytics and capability we have in place and what we're able to do and how we were able to deliver it to the market well before anyone else was truly unique and helped our clients tremendously as they navigated through the marketplace. As Eric highlighted, more risk means more opportunity to demonstrate value added.
Operator, Operator
Our next question comes from the line of Andrew Kligerman with Credit Suisse.
Andrew Kligerman, Analyst
In your slides, you described the impact on organic revenues from the market as a modest positive impact in both commercial risk and reinsurance. Can you give a little more color on that market impact and maybe discuss the issue of commissions versus fees and whether your fees were kind of level year-over-year or whether commissions were driven down in each of those two segments?
Greg Case, CEO
Andrew, maybe I'll start and Eric, you can chime in as well here. First, Andrew, we always come back to the idea we talk about market impact. This is a function of prices you're highlighting but also insured values over time. Obviously, a lot is happening on the insured value front. This is really broadly beyond just property, but really as you think about it on the employee side and all aspects of sort of what's driven by changes in those values. That actually has much more impact than just price per se. As we've highlighted, you step back, it really is a modest impact over time. We saw that in this quarter, and we think we'll see that throughout the year. For us, this is about value. We deliver value for clients and can benefit from that because they receive benefit. We're very clear about that. As Eric highlighted on Elyse's question, in an environment with greater risk, the opportunity to provide more value is real and meaningful and we're doing it and benefiting from it. That's what you're seeing overall. Eric, maybe you want to dive a bit more into the specific pricing.
Eric Andersen, President
Sure. Listen, I think on the property market perspective, certainly property is getting a lot of attention and you continue to see that market be challenging for our primary clients. It is worth noting that clients use a variety of different tools to manage that market dynamic. They use captives, they use retention, and they purchase limits. So it's not a direct line from what a carrier would say about a property market rate versus what a client actually assumes. They're managing their exposures well. We spend a lot of time, as Greg has mentioned, trying to add additional value for them using financial modeling and techniques. The other products—casualty, cyber, and financial products—around the globe, I would say, are more stable. We're about 3.5 to 4 years into a market cycle, and I think those products are coming more to an equilibrium. Lastly, I would say regarding your question on commission fees, ties back to what Greg said is one of the benefits of being a fully transparent broker where we engage our clients on what we get paid for the value that we provide. We don't really care whether it's a commission or a fee. What we're really driven by is if we provide value to clients and whether we're being paid fairly for that value. So whether the cycle is up or down, it honestly doesn't really matter to us. We engage in those conversations openly, and I believe we have strong relationships with our clients because of it.
Andrew Kligerman, Analyst
Okay. So maybe just to interpret, the 4%-plus revenue growth in commercial risk and 9%-plus in reinsurance were more a function of what Aon was delivering as opposed to inflationary impacts on exposures and a very firm pricing environment. Is that correct?
Eric Andersen, President
If you think about it—I'll just use reinsurance as an example. It's historically our smallest quarter, and it's not treaty-driven. It's driven around facultative placements, banking, and our technology consulting group. So not really market-driven issues, but more value issues in terms of usage of those tools to help clients manage their exposures.
Andrew Kligerman, Analyst
Okay. And then just a quick one on the tax rate at 9%. Is that a sustainable tax rate? Or should we be thinking about it drifting up a little bit towards, say, 12% from last year in the quarter?
Christa Davies, CFO
We don't give forward guidance on tax. But historically, our underlying rate for the last five years was 18%. That's the result of being a global company domiciled in Ireland with a global cash management structure. So we're really confident about where we are.
Andrew Kligerman, Analyst
Confident. So should I be thinking more towards the 18%?
Christa Davies, CFO
Again, we don't give guidance on the tax rate going forward, but as I look back historically, our previous rate for the last five years has been 18%.
Operator, Operator
Our next question comes from the line of Jimmy Bhullar with JPMorgan.
Jimmy Bhullar, Analyst
So first, just had a question on your comments on the reinsurance market. You mentioned a challenging environment for your clients, especially in property reinsurance. Are you expecting a similar trend for midyear renewals as well? Or do you expect any sort of shifts in capacity entering the market?
Eric Andersen, President
Right now, we have not seen a lot of new capacity enter the marketplace, although there are certainly whispers and discussions about whether there's an opportunity for additional capital to enter. As we go into the April 1 property renewals, which are dominated by Japan, and then June which is dominated by Florida, I think as we sit here today, you would have to think that those market dynamics will continue.
Jimmy Bhullar, Analyst
Okay. And then just similarly on commercial lines, obviously, pricing has been pretty good for a while. It seems like it's softening a little bit, given the results that some of the carriers have reported. Are you seeing something similar in the market, too?
Eric Andersen, President
Yes, I would say it depends on where you are and on the segment, the industry. I think we like to say there's a million little markets out there depending on each individual client and the business they're in and the type of exposures being covered. On a macro basis, certainly, property continues to be the firmest as the primary carriers now deal with the effects of higher retained risk that they were traditionally passing on to reinsurers. However, whether it's casualty lines, general liability, cyber, financial lines, D&O, or professional, we're definitely seeing a stabilizing of that market. More capital has come into those areas, and clients are being given more choices in what they're doing. Lastly, I would also say that insurers are four years into remediating their portfolios, making them more specific about the areas in which they choose to compete and the kind of business they want to write, giving clients a more targeted choice of potential insurer partners.
Greg Case, CEO
Jimmy, in the context of this, if you step back and think about the implications for insurers, as Eric highlighted very well, kind of on a product-by-product basis. As I described in my comments, and Christa amplified well, this really is about a client leadership approach for us and fundamental demand increasing. The opportunity to talk to clients about risk in the world and how it's connected is increasing. So irrespective of the individual pricing environment which is prescribed well, the opportunity for us to engage clients and help them protect their business and grow is continuing to increase.
Jimmy Bhullar, Analyst
Okay. And just lastly for Christa. On taxes, do you see anything in terms of a minimum global tax or something out there right now? And do you have any views on how it would impact your financials?
Christa Davies, CFO
Jimmy, we don't comment on any future legislation. We run a global tax structure and we've had an underlying rate of 18% for the last five years, feeling good about where we are.
Operator, Operator
Our next question comes from the line of Rob Cox with Goldman Sachs.
Rob Cox, Analyst
And first, maybe just a longer-term question. I think in the past, you've talked about getting margins up into the 40% plus area. I know you don't disclose margins by segment. But curious if you can give us some color on which of your businesses have some of the most opportunities there and if commercial risk could ever get to that level?
Greg Case, CEO
Rob, just take a step back for a second. As we've talked about, it really is about mid-single-digit or greater organic growth improving margins over time and ultimately driving double-digit free cash flow growth for the firm. All aspects contribute. As you're hearing in our commentary, more and more are connected. The solutions we are providing and some of the most innovative solutions we're providing really are a function of how our commercial risk business, our reinsurance business, health, wealth, and talent business have come together. We're confident about continuing to drive margin improvement. Organic revenue growth, mid-single digit or greater, and free cash flow growth, double-digit. That's how we want you to think about it. That engine is coming together, and we're confident we can achieve that for our clients.
Rob Cox, Analyst
Okay, got it. And maybe just switching to the wealth segment. Obviously, strong growth in the quarter. I was wondering if that was more driven by the pension risk transfers or some of the regulatory changes we're seeing, particularly in Europe. And if your outlook considers a continued tailwind from these areas?
Greg Case, CEO
I just would start overall, and Eric, I'd love to add some additional color here. Look, the team has done a phenomenal job. There's a lot going on for our clients in this arena, a lot of complexity as we described, whether it's on the interest rate side or the overall state of the economy and what's happening on pension risk transfer, as you've described. The team has just done an exceptional job on a global basis, helping our clients navigate across challenging marketplaces. You saw a drop in the year; you certainly saw a drop in the quarter. Eric, what else would you add?
Eric Andersen, President
Listen, I think the regulatory changes with the global minimum pensions are an important part of the business on the retirement side. So we are seeing significant growth there, especially out of the U.K., but also decent growth in the U.S. as well. There were some headwinds with the investment business due to AUM being down with the market. But overall, we feel really well positioned. I believe Christa mentioned in your opening comments about the pension risk transfer piece, and we are a leading player in that space, with a great team driving those results.
Christa Davies, CFO
To finish, on the Aon side, we're following the same advice we give clients. Over the last 15 years, we've reduced the risk in our pension substantially through steps to close the plans, freeze benefit accrual, match up liabilities, and purchase annuities to settle a portion of the pension liabilities. It's resulted in much less economic risk and reduced cash contributions. Our remaining plans are well funded and hedged. We're managing on a cash basis, and you can see our cash contributions have drastically decreased over time, with only $65 million being contributed in 2023, continuing the downward trend in cash. We're really excited about the progress we've made in derisking, as you saw in Q4, with $300 million of pension benefit obligation coming off the balance sheet and in the decreased cash contributions.
Operator, Operator
Our next question comes from the line of Weston Bloomer with UBS.
Weston Bloomer, Analyst
Sorry about that. I was on mute. My first question is on the margin. I was hoping you could expand on your margin outlook away from fiduciary income. Would you be able to still expand margins in the core business away from the fiduciary income benefit in 2023? And then where could we potentially see that margin improvement? I would assume lower real estate would be a component of that.
Christa Davies, CFO
Weston, thanks for the question. We think about margin expansion holistically over the course of the year at the Aon level. We've grown margins, as I mentioned, 1,120 basis points over the last 12 years, or 90 basis points a year for 12 years. It's driven by revenue growth, a portfolio mix shift as we disproportionately invest in higher revenue growth and higher-margin businesses organically and inorganically, and the productivity benefit from Aon Business Services. We don't look at it separately from investment income or the underlying investments we're making in the business each year to drive long-term growth and innovation for our clients.
Weston Bloomer, Analyst
Great. My second question, I know you highlighted that you were seeing some signs of economic uncertainty in your prepared remarks. Can you just expand on where you're seeing those signs of weakness? And what economic backdrop does your guidance assume?
Greg Case, CEO
I appreciate the question. We're seeing uncertainty, complexity, or interconnectivity, however you want to describe it, everywhere around the world. We want to emphasize though that this is not just risk; it's opportunity. It's an opportunity to engage clients in ways to help them understand these risks more effectively. Our clients want to get on the offensive. They want to understand that risk and deal with how they can grow their businesses in this context. This is about more connectivity around a changing environment. We're seeing the impact of interest rate changes, inflation, geopolitical challenges—fundamental issues I described in the opening comments around health, wealth, and talent. The evolution from just engagement is now wellness and all aspects that come with it. The interconnectivity across the firm presents us with significant opportunities.
Weston Bloomer, Analyst
Great. And then my last one, a follow-up on tax. I believe you had a tax holiday in Singapore that ran through September of 2022. Was that extended going forward?
Christa Davies, CFO
Our operations in Singapore, including our investment center and local business, are an essential part of our operations today and we expect that to remain an important part of our global strategy going forward. We finalized our negotiations with the Economic Development Board in Singapore and will provide an updated disclosure on our 10-year arrangement in our 10-K.
Operator, Operator
Our next question comes from the line of David Motemaden with Evercore ISI.
David Motemaden, Analyst
I had a question on commercial risk. Greg, you mentioned there was a 5-point drag from the lower transaction volume in the quarter's organic growth. I guess I'm wondering is that going to be a similar size drag as we think about the first quarter? Or is it going to be lower or higher? How should we think about that as we progress through 2023?
Greg Case, CEO
Thanks for the question, David. Our commercial risk colleagues across the firm have done a tremendous job and have driven growth, as I described, really everywhere around the world, including in the U.S. with the exception of the external M&A and IPO environment which created the headwind I described. Even in the context of that, our performance has been magnificent. That's an amazing business, and we are incredibly well positioned within it. We highlighted that it may drag into the first quarter with Q2, but overall, it's exceptionally strong performance overall. This is just one piece and really about global Aon and what we can do to grow the firm, and we're very confident about how that will proceed in '23.
David Motemaden, Analyst
Got it. Okay. And then I think you usually give an update on the calling count at the end of every year. I think it was 50,000 at the end of 2021. Where did that stand at the end of 2022? Did that grow at all?
Greg Case, CEO
Listen, I'm not sure how much we disclose on a specific people because it isn't about the individuals for us; it's about how we help them become more effective and capable to deliver for the firm. We've been incredibly pleased with the progress made. When you think about Aon United and all the aspects around it, we've made great progress. We'll continue to invest tremendously in our colleagues and bringing on new talent, which you saw in '22, and will see again in '23 and '24.
David Motemaden, Analyst
Got it. And I guess just a follow-up on that, Greg. You mentioned productivity enhancement of your existing employee base. Are there metrics that you track that you can help us think about that?
Greg Case, CEO
David, there are a lot of metrics. We have them, but we don't disclose them. I think it's worth understanding and taking a minute to step back. Our ability to drive organic growth, margin improvement, and free cash flow improvement fundamentally relies on the Aon United strategy. It's fundamental, and it's worth stressing here because it's so tightly connected to our success with our clients and all of our investors as partners. We've been on this journey for over ten years. We saw back then that client needs were changing. We needed to help them make better decisions to protect and grow their business. We recognized this accrued across all aspects of risk—not just commercial risk, but all aspects of what we're doing in workforce health, talent, etc. We also saw we had great capability, but like many around the world, it wasn't joined up and wasn't driving innovation at scale. However, we saw that when our colleagues worked together, we win more clients, do more with them, and retain them longer, enabling better and faster innovation for them. This fundamental truth created excitement as well as a challenge for us, which was how to accomplish this. The Aon United strategy is designed to meet that challenge. Today we're in a great position to deliver solutions that cut across solution lines and bring the clients better capabilities. As the environment becomes harder for clients, the opportunity to bring more value is crucial. We're very confident in our ability to continue addressing this decade-long strategy.
Eric Andersen, President
Greg, maybe I can give a little color with regard to a client example just to bring it to life. A recent engagement by a global firm from a specialized industry sought better risk advisory services around the world for their risk strategy, both globally and locally. To achieve this, we utilized resources from all of our solution lines in multiple spots. I would say this is the kind of work that excites us about serving clients, especially since in the past, this would have been a disjointed process. Internal barriers would have distanced us from focusing on the client, with a lot of internal P&L issues, resource allocation, and revenue-sharing discussions. But today, with the Aon United structure, we have five region leaders and four global solution line leaders focused solely on delivering for that client under the Aon brand, with one P&L operating globally—powered by Aon Business Services.
Christa Davies, CFO
I agree with everything you've said, Eric. Aon United sets the stage for Aon Business Services to be successful. Innovation at scale is essential to our ability to deliver results for clients as we continually find applications and solutions developed in one area that we can scale globally. Aon United is designed to enable our colleagues to deliver better results for clients, converting that into stronger performance. Our free cash flow has demonstrated this as evidenced by our $1 billion cash flow and 24% free cash flow margin. It illustrates our application of our highest and best capital for long-term value creation for shareholders. Translating revenue into free cash flow is an operational outcome executed at scale globally in over 100 countries, enabling accurate tracking. This would not be possible without Aon United, underpinned by our detailed operating model powered by Aon Business Services. It excites us about the 2023 go-forward momentum and how we can scale this operation to deliver innovation for our clients.
Greg Case, CEO
So David, that was way more detail than you asked for on an important specific question. Our goal is to convey that confidence really connects to our performance and our clients. There's a lot more opportunity ahead of us. It connects with our colleagues because they enjoy driving the solutions as Eric described and creates excitement. If you can impress a client, you've achieved something that makes the week and month worthwhile. We're sharing this openly with you, as it's fundamental to our success with our clients and investors.
David Motemaden, Analyst
Thanks so much for the thorough answer. I really appreciate it.
Operator, Operator
Our next question comes from the line of Michael Ward with Citi.
Unidentified Analyst, Analyst
This is Charlie on for Mike. I guess, first, in human capital, organic growth has been really strong for many quarters now. Wondering what the pipeline looks like there. Amid macro uncertainty and comps being challenging, you mentioned tech talent in your opening remarks. Is that business benefiting from some of the job market dislocation in tech?
Eric Andersen, President
So, human capital has been a strong business for us over the last 24 months, and we see that continuing. The data sales, information on compensation, and competitive talent engagement assessments are all very critical to our clients' agendas, so we feel very optimistic about this business in the next 12 to 24 months as well.
Greg Case, CEO
On the tech talent side—go ahead, Christa.
Christa Davies, CFO
We have one of the most recognized brands in the tech space, Radford. The example I provided in the opening remarks is about utilizing AI to match and find the optimal tech talent at the right price, anywhere globally. Additionally, we can also determine where tech talent is within your existing organization to optimize your workforce. Thus, dislocations in the tech market offer us a fabulous opportunity to utilize this AI technology to ensure our clients access the best talent and employ it efficiently.
Unidentified Analyst, Analyst
Got it. And you mentioned cyber pricing kind of being more in equilibrium now. Wondering how Aon's role in the marketplace has evolved over time as that has grown a lot.
Eric Andersen, President
The cyber market continues to evolve and will keep doing so as threat actors change over time. We are a leading provider of both risk management as it pertains to data security and strategy to prevent cyber attack, especially with our strong brand, Stroz Friedberg. When considering the cyber market today and its trajectory, I would say insurers have reverted to basics. The quality of underwriting and an in-depth understanding of the real cyber exposures have allowed them to price it better, understanding the tangible risk. This has allowed us to distinguish and differentiate our clients and the work they're executing around cyber protection to bring them to market in a way that articulates individual views effectively. Cyber is nearing a $10 billion premium market, both from insurance and reinsurance perspectives, and I consider Aon a market leader in that sector.
Operator, Operator
Our next question comes from the line of Derek Han with KBW.
Derek Han, Analyst
My first question is on buybacks. It looks like buybacks slowed a little bit in the fourth quarter. Was there anything unusual driving that? I was a little surprised just given the strong operating cash flows.
Christa Davies, CFO
No, we continue to see across the firm that we deploy cash based on the highest return on capital opportunity. Buybacks are at the top of that list even at today's pricing, Derek. That's why we bought back $3.2 billion in calendar year 2022. We expect buybacks to remain the highest return on capital opportunity going forward.
Derek Han, Analyst
Got it. That's helpful. And then my second question is on M&A. We've heard chatter about the M&A market cooling a little bit. Are you seeing that in the market? How does that impact your M&A appetite?
Greg Case, CEO
From our standpoint, we see tremendous opportunity in the marketplace overall. As the market strategy has shifted, it creates more opportunity. As Christa described, our decisions are made focusing on cash pool and return on capital, and we're excited by the numerous opportunities out there. We also see ample opportunities to invest organically in our business, which we've successfully achieved. Our pipeline for M&A is stronger than ever as Christa mentioned. For us, it's all about scalable solutions that bring value to our clients.
Christa Davies, CFO
Yes, I would just add that we've found some terrific companies and invested in those this year. For instance, Tyche has fantastic capability in capital modeling and analytics, while ERM offers valuable modeling capabilities in Mexico. We continue to invest in areas of high growth and client demand, which excites us.
Operator, Operator
Our final question this morning comes from the line of Mike Zaremski with BMO Capital Markets.
Mike Zaremski, Analyst
Just a follow-up on the M&A landscape. Can you remind us—Aon has moved in M&A with CoverWallet into the small commercial marketplace. Any ambitions to get into the main street U.S. retail marketplace? I know you just mentioned that there were market stresses for some of the private equity roll-ups there. Just curious if there are any ambitions to get into Main Street retail, small mid-commercial?
Greg Case, CEO
As we step back, I want to ensure I understand the market segments. We love the segments we operate in—the large market, the middle market, and the small commercial market. Bringing in CoverWallet has been phenomenal. It offers capabilities like many others that we can scale; scale not just in small commercial but also in B2B and B2C with distributed businesses and franchises. It's a phenomenal opportunity. We love the sector, and we've enjoyed tremendous success within it.
Mike Zaremski, Analyst
I just wanted to confirm that you have no strategic initiative operating more in the smaller size businesses versus the more substantial Fortune 5000, especially with CoverWallet.
Greg Case, CEO
We're active across the board. It's about how we integrate the capabilities we have. We've been successful across all those segments, and CoverWallet has been a great addition to Aon. Eric, anything else to add?
Eric Andersen, President
In our Affinity businesses, we serve small specialized groups, so we are very active in the small space. Here, we can offer distinct value, such as in the travel sector, but also in other markets where we develop unique products or capabilities for clients. Additionally, with our 500 offices globally, we are engaging clients across all segments. There are only 500 Fortune 500 clients, but we operate significantly within the middle market and in small commercial markets, capitalizing on our expertise to provide tailored solutions.
Mike Zaremski, Analyst
Okay. That's interesting and helpful. And my last follow-up was on fiduciary investment income. I know there's some nuances and that make it tougher for us to model exactly, but should we expect a quarterly step-up and a material step-up in '23 based on the current global interest rates?
Christa Davies, CFO
What I can tell you is that we saw interest rates step up in Q3 and Q4 of 2022. If interest rates stay where they are today, you'll see a similar impact in Q1 and Q2. So we expect that increase in interest rates to remain. For modeling going forward, every 100 basis point increase in interest rates equates to approximately $65 million in fiduciary investment income, with no delay between interest rate increases and their effect on our fiduciary investment income.
Operator, Operator
Ladies and gentlemen, this concludes our question-and-answer session. I'll now turn the floor back to Mr. Case for any final comments.
Greg Case, CEO
I just want to say thanks, everybody, for joining us today. We appreciate it and look forward to the next call.
Operator, Operator
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.