Earnings Call Transcript
Aon plc (AON)
Earnings Call Transcript - AON Q1 2023
Operator, Operator
Good morning and thank you for joining us. Welcome to Aon plc's First Quarter 2023 Conference Call. I would like to remind everyone that this call is being recorded. If you have any objections, please disconnect. It is important to mention that some of the comments today may be forward-looking statements as defined by the Private Securities Reform Act of 1995. These statements are subject to risks and uncertainties that could result in actual outcomes differing significantly from historical results or expectations. Information about these risk factors is available in the press release regarding our first quarter 2023 results and on our website. Now, I will hand the call over to Greg Case, CEO of Aon plc.
Greg Case, CEO
Thanks very much and good morning, everyone. Welcome to our first 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. Before we begin, as always, we want to thank our colleagues for the great work they're doing every day around the world, to help our clients and each other. We continue to live in a world where volatility, complexity and uncertainty are increasing. And in this environment, our clients are being asked to make decisions faster than ever. And as a result, we see strong and ongoing demand for our advice and solutions, as many of our clients realize that remaining in defensive or reactive mode is not sufficient. And in fact, a pivot to offense is ultimately necessary to win and achieve their objectives. Clients are telling us, there are two primary areas where they're urgently looking for a competitive advantage, risks and people. Addressing these challenges requires that we bring this out from across our firm, to enable our clients to make better decisions, which is the core Aon United. Given these ongoing demands our strategy positions Aon as uniquely capable, of helping clients go on offense and make better decisions that mitigate risk to their business and maximize the impact and engagement of their people. Take ESG or Environmental Social and Governance as an example. These are major interconnected categories that cut across traditional silos. Our clients need a broad strategic view to understand and assess all the risks around ESG. And any targeted solutions and capabilities to solve for these risks. Our recently published ESG impact report describes our work helping clients address these issues as well as the impact across our firm. And we're delighted to report on our own progress against long-standing commitments in these essential areas. First, on environmental, we're making progress toward our goal of net zero emissions by 2030. And reduced our overall Scope 1, 2, and 3 emissions footprint by 16% from our 2019 baseline, and by 4%, in 2022, enabled by efforts like smart working and supplier centralization through Aon Business Services. On Social and specifically around our colleagues, Aon United is not just a strategy, it's our culture, and it reflects our commitment to inclusion, diversity, and the well-being of our colleagues. This year, we're continuing to embed I&D principles and practices and to hold ourselves accountable with the increased transparency and oversight at all levels of the organization. Starting at the top with our Board of Directors. On Diversity, for example, we reported progress in 2022, and the percentage of female people managers, in U.S. ethnically and racially diverse managers. In 2022, we also enhance focus on learning, development, engagement and well-being, because we know that supporting our colleagues is not only the right thing to do for them, but it also ensures we retain grow and develop the best talent to continue to support our clients. And finally, on Governance. We've highlighted Board review of top ESG and climate-related risks and actions from our ESG senior committee, as well as steps on cybersecurity and privacy that all align with our long-standing overall enterprise risk management strategy. While we're proud to report on these steps in our report, there's still work to do. And at the same time, we're even more excited about the work we're doing to help clients as many risks connected to progress on ESG align with our core businesses. On the people side for example, we continue to develop new solutions while bringing together existing capabilities across different markets and geographies, to address specific needs. One recent client, facing significant organizational change realized many of our employees were unsure and unclear about titles, career ladders, compensation mechanics, and at the same time, this client needed to reduce costs, increase efficiency and simplicity, which they knew would drive engagement. To address. We brought expertise from around the firm. Our commercial risk team brought deep understanding of this client strategy and desired culture. Our Aon Business Services platform served as a powerful example of how we could help them simplify their operations and reduce costs. Finally, our health and human capital teams brought a series of solutions, including optimization and global benefits, and skills taxonomy strategy to increase employee alignment, and engagement. Now the solution leverages many existing offerings, so real innovation was bringing these pieces together, along with our Aon Business Services team, who provided insight and change management expertise around moving to a business services model, an essential piece of the puzzle for our clients. The result, our client is driving increased engagement with a clearer more effective benefit structure and talent strategy, and outsourcing capabilities that will help drive simplicity and efficiency all enabled by our teams coming together as Aon United. And we see examples like this across the firm every day, that we help our clients manage risks and support their people. They demonstrate the opportunity we have to continue delivering innovative solutions at scale to address our client’s unmet needs at a time when doing so has never been more important. Turning to financial performance. In the first quarter, we delivered very strong organic revenue growth across our Solution line, with 9% growth in reinsurance, 8% growth in Health Solutions and 6% growth in both Wealth Solutions and Commercial Risk Solutions. In reinsurance, our teams were exceptional in guiding our clients to the 1/1 renewal environment, demonstrating the strength of our team's advice, data-driven analytics, modeling, and execution capabilities. In Health Solutions, we saw strength in core health and human capital in a seasonally larger quarter for European health renewals. As our team has helped clients navigate the ongoing challenging environment for their people, encompassing employee health, rewards, engagement, and well-being. In Wealth Solutions, our team delivered another very strong performance with 6% growth driven by ongoing trends around regulatory changes, like GMP Equalization, pension risk transfer, and the lingering impact of the fixed income market volatility. As our teams help clients reassess and potentially adjust their strategies. We would note that after two very strong quarters, Q2 '23 will be impacted by performance fees in the prior year period. And finally, Commercial Risk Solutions grew 6% in the quarter with strength in Europe and the UK and is our seasonally largest quarter. Overall, we observe the property market remains an area of increasing challenge and volatility. Market dynamics are causing reinsurers to shift risk appetites regarding primary carriers who look at more risk, which in turn means property placements are even more challenging for our clients. In this environment, our strength and analytics and the ability to respond to clients' need for coverage in a capital agnostic way, bringing capability across reinsurance, and commercial risk is essential. Our capabilities enable us to assess and analyze integrated working options, including traditional risk placing, wholesale, MGA, facultative, captives, and insurance-like securities. By helping clients assess options across capital sources, we ensure that we’re able to optimize their own total cost of risk, and risk appetite. For example, one client came to us looking to consolidate to a single property insurance program across 11 asset classes. With over 80 billion in property values, our team came together seamlessly across geographies and specialties, to develop a program that leveraged traditional carriers around the world and accounted for, successfully completing the program and driving significant cost savings for our clients. All enabled by the work we've done to break down barriers within our firm through Aon United. Overall, in the quarter, we're pleased with performance of the strength of our Aon United strategy and our business services platform translated 7% organic revenue growth, resulting in 70 basis points of operating margin expansion, net of ongoing investment in the business for long term growth. In this period of ongoing external volatility, and increasingly interconnected risks, the opportunity for us to help clients is greater than ever, positioning us very well to continue driving results in 2023 and over the long term. Now I'd like to turn the call over to Christa for a thought on our financial performance and long term outlook for continued shareholder value creation.
Christa Davies, CFO
Thanks so much, Greg. And good morning, everyone. As Greg highlighted, we just have a strong operational performance in the first quarter highlighted by 7% organic revenue growth that translated into 70 basis points of adjusted margin expansion. This is a strong start to the year and we're very well positioned to continue driving results in 2023 and over the long term. As I reflect on the quarter, as Greg noted, organic revenue growth was 7%, driven both by ongoing strong retention and net new business generation. We continue to expect mid-single digit or greater organic revenue growth for the full year 2023 and over the long term. I would also note that reported revenue growth of 5% includes an unfavorable impact from changes in FX of 3%, driven primarily by a weaker Euro versus the U.S. dollar, as Q1 is our seasonally largest quarter for Euro-denominated revenues. I'd also highlight fiduciary investment income, which is not included in our organic revenue growth was $52 million, or 1.4%. Moving to operating performance, we delivered strong operational improvement with adjusted operating margins of 38.7%, an increase of 70 basis points driven by organic revenue growth and efficiencies from Aon Business Services. Overcoming expense growth, including some investments in colleagues and technology to drive long-term growth, and some ongoing resumption of T&E, especially compared to the prior period when business travel was still suppressed by COVID-19. 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 an ROIC 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 portfolio mix shift towards high-margin businesses as we invest disproportionately in areas of increasingly client demand, supported by data-driven solutions. And the third area is increased operating leverage from ongoing productivity improvements from our Aon Business Services platform. Our highlight, Aon Business Services continues to be a key contributor to margin expansion, and represents a competitive advantage, especially in inflationary markets. Our Aon Business Services platform continues to drive efficiency gains, improved quality and service and increased innovation at scale. And related to Aon Business Services, I'd like to highlight the essential role of Aon Business Services in enabling our climate net-zero goals. As a professional services firm, the biggest part of our own emissions is from our supply chain. Through the Aon Business Services organization, 90% of the spend is managed through preferred channels, which enables us to drive efficiency and also deploy decarbonization strategies. As Greg said, this resulted in a 4% reduction in emissions last year, while also allowing us to increase supply diversity utilization to 6% of our addressable U.S. spend in support of our goals around inclusion and diversity, both meaningful accomplishments that are enabled by our Aon United strategy. Organic growth and margin expansion translated into adjusted EPS growth of 7%. As noted in our earnings material, FX translation was an unfavorable impact of approximately $0.14 per share. If current data remains stable at today's rates, we would expect an unfavorable impact of approximately $0.04 per share in the second quarter and $0.14 per share for the full year 2023. I'd also note other expenses had a $0.19 per share unfavorable impact in the quarter, including a $0.05 per share unfavorable impact from an increase in non-cash net periodic pension costs, in line with what we communicated previously, as well as an unfavorable impact from a gain on sale of business in the prior year period and balance sheet FX remeasurement in the current period. We expect the $0.05 per share unfavorable impact from increased net periodic pension costs to continue for each quarter this year, and we currently expect gains on divestitures to be immaterial for the full year. Turning to free cash flow and capital allocation. I'd note Q1 has historically been our seasonally smallest quarter from a cash flow standpoint, due primarily to incentive compensation payments. And as we've communicated before, free cash flow can be lumpy from quarter-to-quarter. Free cash flow decreased 17% to $367 million, primarily driven by higher cash tax payments and a $53 million increase in CapEx. CapEx was elevated in the first quarter compared to the prior year period as we initiated a number of projects, with spend heavily weighted in Q1 across technology to drive long-term growth and real estate aligned with our smart working strategy. I'd note, CapEx can be lumpier quarter-to-quarter, and we expect an investment of $200 million to $225 million for 2023. As we've said before, we manage CapEx like all of our investments on a disciplined ROIC basis. Our outlook for free cash flow growth in 2023 and beyond remains strong, and we continue to expect double-digit free cash flow growth for the full year and over the long term, driven by operating income growth and working capital improvements. Given our strong outlook for free cash flow growth in 2023 and beyond, we expect share repurchase to continue to remain our highest ROIC opportunity for capital allocation. We believe we're significantly undervalued in the market today, highlighted by approximately $550 million of share repurchase in the quarter. We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address unmet client needs. Our M&A pipeline continues to be focused on our 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 ROIC basis. Turning now 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. In Q1, we issued $750 million of 10-year senior notes, consistent with our past practice, and expectations to add incremental debt as EBITDA grows over the long term, while maintaining our current investment-grade credit ratings. Factoring in this issuance, I'd note that our term debt is all fixed-rate, with a weighted average interest rate of approximately 4% and a weighted average maturity of approximately 11 years. Our first quarter results reflect strong operational performance, driven by our Aon United strategy. We start the year in a position of strength and expect to continue to make progress on our key financial metrics and our commitment to drive long-term shareholder value creation. With that, I'll turn the call back over to the operator, and we'd be delighted to take your questions.
Operator, Operator
Our first question comes from Jimmy Bhullar with JPMorgan. Please go ahead with your question.
Jimmy Bhullar, Analyst
Hey, good morning. So first, I just had a question on your expectations for the tax rate for 2023. It was high. I think it was around 19.5% in the first quarter. That's higher than the 17% to 18% range you've had the last few years. But what drove that? And what are your expectations for the tax rate for this year?
Christa Davies, CFO
Thanks so much for the question, Jimmy. As you know, we don't give guidance on the tax rate going forward. But if I look back historically, exclusive of the impact of discrete items, which can be positive or negative in any quarter, our historical underlying rate has been 18% for the last five years.
Jimmy Bhullar, Analyst
And then the changes in Singapore and a few other places, should those have a material impact? Or is there any reason to expect the rate to be different this year than in the past?
Christa Davies, CFO
Jimmy, we feel really confident about our overall capital structure for the company. We're domiciled in Ireland, we run a global capital pool, and we run a global cash pooling structure, and that gives us enormous flexibility as we think about any future legislation.
Jimmy Bhullar, Analyst
Okay. And then just lastly, on fiduciary investment income, assuming rates stay where they are, is there further ramp-up in that, that you'd expect as like your portfolio sort of resets to where rates have gone? Or has the full impact of the rise in rates over the past several quarters, is it already reflected in your numbers?
Christa Davies, CFO
Yes. We observed an increase in fiduciary investment income in the third quarter of last year. You will notice a positive trend in the second quarter, followed by a decline as the year progresses. It's important to highlight that we have an average of $6.5 billion in fiduciary assets. For every 100 basis point increase in short-term interest rates, this translates to an impact of $65 million on both top line and bottom line. You should consider these fiduciary assets as being approximately evenly divided between the U.S. and international markets.
Jimmy Bhullar, Analyst
Okay. Thank you.
Operator, Operator
Our next question comes from the line of Andrew Kligerman with Credit Suisse. Please proceed with your question.
Andrew Kligerman, Analyst
Hey, good morning. You mentioned in the release that the U.S. grew modestly in terms of organic revenue growth in Commercial Risk Solutions. And transaction in M&A was probably with a very tough comp. So it looks like as we get into the second quarter and the rest of the year, that's really not a tough comp anymore. Could you give any sense of what that impact was in the quarter? And should we expect going into the next three quarters that we could see a significant contribution to organic growth?
Greg Case, CEO
So first of all, Andrew, thanks very much for the question. We appreciate it. We would observe, by the way, across the board, as you think about sort of growth for the quarter, it's been a strong quarter for us, 6% organic across all the solution lines. I think it may be the first time we've accomplished that in a long time, and it's really been terrific. On the U.S. side, it's an exceptionally strong business. You highlighted a very strong comp last year and then just very strong capability in the specialty areas that a few of which have been under pressure. But we continue to invest in them because we know they're going to be terrific long term. So for us, listen, continued momentum across the board. And as the market shifts a bit on the M&A and transaction side, we're going to obviously benefit from that. Eric, anything else you'd add?
Eric Andersen, President
No, Greg, I think you covered it well. I think it's still foundationally very strong. The work that we're doing for our clients today on the commercial risk side with all that's happening in the market, whether it's risk analytics, captives, the broad suite of capabilities we can help them with as they're navigating the market dynamics, are still very strong. And so pretty positive on it.
Andrew Kligerman, Analyst
So basically, just tell me if I'm interpreting it right, with all these amazing things you're doing, you had a pretty big drag from transaction M&A., that goes away, we could see potentially an even better organic growth quarter next quarter?
Eric Andersen, President
I would say the first quarter last year was quite strong for commercial risk. The Transaction Solutions business has great capabilities, influenced by some external market factors, but we have a lot of confidence in that team. When market conditions improve, the skills we have will be a significant value driver for our clients, and we are excited about it.
Andrew Kligerman, Analyst
Got it. Okay. And then Christa mentioned about $200 million to $225 million of CapEx expenditure targeted for this year. You're doing so many interesting things with ABS and other technologies. Anything stand out that you're investing in right now that will drive future growth?
Christa Davies, CFO
The CapEx I mentioned, which is between $200 million and $225 million, is mainly aimed at IT investments to promote long-term growth. This includes scale investments in our platforms to assist clients in innovating, as well as security and infrastructure enhancements to better protect both our clients and the firm. We are making significant investments in our Aon Business Services platform, focusing on improved connectivity, enhanced data analytics, and deeper insights. This approach is enabling our colleagues to provide exceptional value to our clients.
Andrew Kligerman, Analyst
Got it. Great. And then just last quickly, M&A pipeline and any areas of interest right now? Should we expect anything as the year progresses?
Christa Davies, CFO
Yes. Thanks for the question. We have a fantastic M&A pipeline, and it is focused on our highest growth, highest margin, highest return on capital opportunities. And it reflects the areas we continue to invest in, areas of content and capability that we can scale across the firm. In areas like data analytics, you saw us do Tyche and ERM last year in that data analytic intensive area, areas like health and wellness and human capital, areas like our core risk offerings and helping our clients be able to model and manage risk better. And so we've got lots of areas of great opportunity around the globe, and we're really excited about it.
Andrew Kligerman, Analyst
Got it. Thank you.
Operator, Operator
Our next question comes from the line of Robert Cox with Goldman Sachs. Please proceed with your question.
Robert Cox, Analyst
Hey, thanks for taking my question. Curious if there's any way you can help us quantify or help better understand the impact that higher T&E and inflation is having on the expense base?
Christa Davies, CFO
I want to highlight that the increase in other general expenses, which is up 20%, is mainly due to travel and entertainment. It's important to note that this is being compared to Q1 2022, a quarter that saw unusually low travel and entertainment expenses due to COVID.
Robert Cox, Analyst
Okay. Got it. Is there anything to look into regarding the margin expansion for this year, which is net of investment in long-term growth? Is it just highlighting the investments you're making, or is there something more significant to consider?
Christa Davies, CFO
It's exactly the same as always. So what we would say is we grow margins each and every year. And our margin expansion for the last 12 years has been 1,120 basis points or approximately 90 basis points a year. And that 90 basis points a year over the last 12 years has been a gross margin expansion higher than that, and then it nets to 90 basis points, net of the investments we're making in long-term growth. So that is consistent with the way we drive margins each and every year.
Robert Cox, Analyst
Okay. Perfect. And then maybe just shifting to the Wealth segment, very strong and above-average growth in Wealth for a second straight quarter kind of despite some headwinds in the investment business. Curious how long you expect these tailwinds could play out? Is it quarters? Is it a year? How long should we be thinking about that?
Greg Case, CEO
Listen, as you highlight, Robert, teams have done a terrific job in really over multiple years. We look at the last two quarters, the overall performance exceptional, really reflecting a lot of what's going on in the world out there. The regulatory changes we highlighted around GMP and others, pension risk transfer, and they were just uniquely well positioned to sort of address that. So that's really what's driving the demand from the client standpoint, and the team has done a terrific job. We did highlight in the opening comments, listen, the comp for next quarter is going to be particularly challenging in terms of sort of where we are. But fundamentals, exceptionally strong, and the Wealth has done a terrific job. Eric, what else would you add to that?
Eric Andersen, President
Yes, I would say that it's a global answer. We're experiencing growth in the U.K., particularly related to the guaranteed minimum pension, as well as in North America and Europe. The retirement segment of Wealth has been very strong for us, and you've also pointed out the investment consulting and investment advisory business. The challenges there will eventually ease, but you've accurately described the situation.
Operator, Operator
Our next question comes from the line of Weston Bloomer with UBS. Please proceed with your question.
Weston Bloomer, Analyst
Hi, thanks. Good morning. My first question, I noticed real estate costs were up year-over-year for the first time, I guess, since 2021. Is that primarily just a function of the investments you're making in smart working? And just given the investments in CapEx that you've made, is it fair to assume that, that should continue to grow year-over-year throughout the course of 2023?
Christa Davies, CFO
Yes. So the real estate is up 4%. It's reflecting back to office, in fact, reflecting the investments we made in smart working, as you said. Last year was impacted by FX. But look, I would put this in the context, Weston, of we're going to grow margins each and every year. And as I mentioned, that margin expansion over the last 12 years has been 90 basis points a year. And that margin expansion reflects a gross margin expansion much higher than 90 basis points, offset by investments in the business. And then again, on the CapEx point, we've guided to CapEx for the full year of $200 million to $225 million for the full year. That includes the CapEx investments in IT, in long-term growth and in real estate, in our smart working initiatives. And you should expect CapEx to grow each and every year in line with overall expense growth.
Weston Bloomer, Analyst
Great. Thank you. And a follow-up on the Wealth performance fees. You highlighted a 2Q headwind there. Is there an associated headwind in the back half of the year as well? Or is it just isolated to the second quarter? And is there a margin impact from that as well?
Christa Davies, CFO
It is just a Q2 impact. And no, there's not an associated margin impact.
Operator, Operator
Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.
Elyse Greenspan, Analyst
Hi, thanks. Good morning. My first question is about connecting some earlier discussions on margins. Christa, you mentioned that Aon has experienced a historical margin expansion of 90 basis points over the past 12 years. I’m trying to understand why we shouldn’t expect a similar level, particularly the 90 basis points, along with the benefit from fiduciary investment income, which I estimate was around 80 basis points this quarter. Are you opting to reinvest more in the business because of the favorable conditions from increased fiduciary investment income?
Christa Davies, CFO
Thank you for your question, Elyse. We do consider margins throughout the year. As you mentioned, we've achieved an average of 1,120 basis points over the last 12 years, which is about 90 basis points annually. This annual figure indicates that our gross margin expansion is significantly higher when accounting for the investments we make in the business each year. In Q1, we experienced a 70 basis points margin expansion, driven by an 80 basis points positive impact from fiduciary investment income, as you pointed out, which was tempered by our investments in areas such as personnel and technology, along with a returning headwind from travel and entertainment expenses. We manage all these elements carefully, guided by our return on invested capital (ROIC). We take into account factors like revenue growth, expense growth, team investments, travel and entertainment, as well as fluctuations in fiduciary investment income and foreign exchange rates. We assess all these factors collectively throughout the year and anticipate margin expansion over the full complement of 2023.
Elyse Greenspan, Analyst
Thanks. My second question is about reinsurance, which showed 9% organic growth in the quarter. This was consistent with the fourth quarter, but I expected that with the strong rates from the January renewals, the growth might have increased sequentially. Can you share some insights on the trends in the reinsurance business that influenced that 9% growth in the quarter and how we should approach the rest of the year?
Greg Case, CEO
Eric, I want to acknowledge the remarkable work our reinsurance colleagues have done over the past few years. They have truly excelled in delivering exceptional performance for clients worldwide on a unique platform. It's important to note that our initiatives are related to rate but not solely dependent on it. We're focused on helping clients understand, measure, and mitigate risk, which allows us to implement distinctive programs and utilize advanced analytics to facilitate better decision-making. Our goal is to achieve client growth, which we have already observed in terms of top-line growth and its tangible effects. I want to emphasize this long-term perspective, which we anticipate will continue to develop throughout the year. Eric, do you have any additional insights for the quarter?
Eric Andersen, President
Yes, I would say that reinsurance has been a strong area for us over the past few years. We experienced a 7% growth in the first quarter of 2022. The efforts put forth around the January 1 renewals were impressive. We achieved double-digit growth in our STG Advisory business and secured significant new wins in Treaty. We are very pleased with the team's performance so far this year. Looking ahead, the work the team is doing with their insurer clients is in high demand. The carriers are trying to manage their portfolios effectively in this market, and our team is offering them valuable support. I'm really proud of what the team has accomplished, not only this quarter but over the past several years, and the future prospects look positive.
Elyse Greenspan, Analyst
And one last question regarding the Wealth comparison from Q2. Last Q2, you reported a 3% organic growth in Wealth. Were the performance fees unusually high, and were there other areas that countered that growth? It doesn't appear to be a challenging comparison, so I want to ensure I'm not overlooking anything.
Christa Davies, CFO
Yes, it's simply about the performance fee. As you know, Elyse, performance fees are lumpy as we communicated.
Operator, Operator
Our next question comes from the line of David Motemaden with Evercore ISI. Please proceed with your question.
David Motemaden, Analyst
Thank you. Good morning. I have a question regarding the discretionary segments of the business, which seemed to perform well this past quarter. Specifically, I noticed that Travel and Events, Commercial Risk Solutions, and Human Capital and Health were highlighted in both the press release and the slides. Could you share insights on the pipeline for these areas, considering they are typically more sensitive to economic changes?
Eric Andersen, President
Sure. I would say, our health business had a very solid first quarter. The Consumer Solutions part of that was up 9%. Core health and benefits was up significantly. Global Benefits, Human Capital double-digit, both in the analytics and the advisory and data solution spaces. So really solid start for the year for them with a strong pipeline as they go through the rest of the year.
David Motemaden, Analyst
Thank you. I'm looking at the capital expenditures and appreciate the outlook for this year, which is forecasted to be between $200 million and $225 million. If I reflect on the period before COVID, expenditures were at or above that level, while in 2020 and 2021, it was around $100 million less. There was an increase in the second half of 2022. I am curious if we should anticipate a larger increase as we approach 2024, considering that some investments planned during the COVID years may be picking up again as we move forward.
Christa Davies, CFO
Thanks so much for the question, David. I would say, we expect $200 million to $225 million for 2023. And then it's reasonable to think going forward, 2024 and beyond, that CapEx will grow in line with expenses. So you're absolutely right that 2020 and 2021 were lower, really just because of the COVID situation. And as we return to more normalized levels of CapEx, 2023 is a right normalized level to start with and then grow from there based on overall expense growth.
David Motemaden, Analyst
Got it. Okay. Okay. And then maybe if I could just sneak one more in. You mentioned a lot, Greg and Christa, just on Aon Business Services. And I was just wondering, taking a step back, how many employees do you have located in Aon Business Services? And where do you think you can get that to over the next couple of years? And what sort of margin implications that might have?
Christa Davies, CFO
Yes. Look, thank you for the question. And what we would say is we're incredibly excited about Aon Business Services as a core part of Aon business strategy. It's bringing together the firm in one organization led by Mindy Simon, our fantastic COO, and bringing together an organization to drive efficiency, to drive improved service and quality and to drive innovation at scale. Because a lot of the investments we're making, David, you saw in these IT platforms and security and infrastructure, are helping us scale insights and data analytics to clients to actually deliver impact. And so we're really excited about the potential to drive productivity and margin expansion from ABS, but equally to drive improved service and quality to clients and to allow us to accelerate innovation in one area of the business across all of our countries and all of our clients immediately. And so it's proven to be an amazing competitive advantage for us over the next many years.
David Motemaden, Analyst
Okay. Thank you.
Operator, Operator
Our next question comes from the line of Mike Zaremski with BMO Capital Markets.
Unidentified Analyst, Analyst
Good morning. This is Jack on for Mike. Just had one follow-up regarding the M&A outlook. First quarter M&A volumes in the brokerage space are down over 25% according to some media reports. So wondering, would Aon consider moving downmarket in terms of employer size into the U.S. or European insurance brokerage, middle-market area where Aon currently isn't a major player, given that some of the private equity players are being less aggressive?
Greg Case, CEO
I would say Jack, from our standpoint, as Christa highlighted before, we've got a terrific pipeline, lots of opportunities we see. We're always going to be looking at them in terms of how they're going to strengthen and build our business. So this is really content capability we can scale around the firm. So you might imagine, we look across the entire spectrum, and we continue to do that, looking for these kinds of opportunities at a return on invested capital criteria that sort of meets the benchmark, which is really buying back, which has the standard. So we're looking broad-based and looking for opportunities around the world.
Unidentified Analyst, Analyst
Got it. And then maybe a follow-up on the more discretionary parts of your business. Some competitors have said that clients are acting as if some project work, which used to be maybe viewed as more discretionary, is now viewed as more necessary in today's world. I guess just any thoughts on that. Is that something that you're also seeing?
Greg Case, CEO
Yes, absolutely. First, I want to emphasize that when you look at the overall picture of discretionary versus nondiscretionary spending, a very small portion of our business is truly discretionary. Sometimes timing affects this, but it's more relevant next year rather than this year. However, what you mentioned is spot on. The complexity and urgency in the market are driving demand. Analytics play a significant role here, as what would have previously been considered nice-to-have is now becoming essential, especially in connection with risk and human capital dynamics. Eric, do you have anything to add?
Eric Andersen, President
Yes. I would maybe offer two examples. One is around wellness and the human capital business that historically would have been considered discretionary. You can't have a conversation today with a Chief People Officer who is thinking about health overall, including wellness as people think about return to work, how they engage their own colleagues. And so that is becoming more of a blended discussion than ever before. And the other piece, I think, Greg, that jumps out is the risk analytics and the advisory work around the commercial risk business that you would have historically said would have been more discretionary in nature. Today, as the clients are thinking through how they navigate this challenging market, whether it's captives, whether it's risk studies, trying to understand their total cost of risk and how they can actually manage the process better. Those skills that we're able to bring to clients are in significant demand and feel more a part of the process going forward than maybe on a project-by-project basis, just to give you two examples.
Unidentified Analyst, Analyst
Thank you.
Operator, Operator
Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.
Meyer Shields, Analyst
Thanks. I have two quick questions. First, can you provide some insight into what contributed to the performance fees last year? Specifically, what was the performance that resulted in that fee? Also, when can we anticipate seeing something similar in the future?
Eric Andersen, President
I would look at it as an asset under management discussion in terms of the volatility of the market. And so as that comes back around, you'll begin to see more of a stable platform on that. But that's what drove it in the second quarter.
Meyer Shields, Analyst
Okay. Fantastic. That's perfect. And second question, Greg, I think this is for Greg. So we saw almost 200 basis points of improvement in the comp ratio. Should we think about that as improved efficiency? Or is there a concern maybe that there are some roles that need to be filled?
Greg Case, CEO
Overall, as we consider where we are in the process, we are taking a holistic look at what we are doing. We are continuing to make investments across the business to strengthen it. Aon Business Services contributes to this by driving efficiency, as Christa explained. However, I want to stress that Aon Business Services is much more than just efficiency. It encompasses innovation at scale and offers better service and capability while also enhancing efficiency. This helps individual colleagues serve clients more effectively and enables groups of colleagues to do the same. You can see this reflected throughout the organization. We have consistently made substantial investments in talent and content capabilities and will continue to do so. Christa, is there anything else you would like to add?
Christa Davies, CFO
The thing I would say, Meyer, is you're observing lumpiness in expenses in any one quarter, and we really think about margin expansion over the course of a full year. And we commit to drive margin expansion in 2023 and every year after that. And we think about margins over the course of the full year. And we're balancing a number of factors, including investments in people, T&E and IT as well as the impacts of FX and fiduciary investment income, all with the overall goal of delivering adjusted margin expansion net of sustainable investment and long-term growth. And that's exactly what's happening in Q1 and will happen for the rest of 2023.
Meyer Shields, Analyst
Okay, perfect. Thank you very much.
Operator, Operator
Our next question comes from the line of Michael Ward with Citigroup. Please proceed with your question.
Michael Ward, Analyst
Thanks, guys. Good morning. I think you guys implied that the T&E headwind was much larger in the first quarter. I was wondering if that means you expect more margin expansion over the balance of the year.
Christa Davies, CFO
Michael, we don't provide guidance on margin expansion for the full year. However, over the past 12 years, we have achieved 1,120 basis points of margin expansion, which averages about 90 basis points annually. We anticipate driving margin expansion every year. It's not a consistent 90 basis points each year due to variability. Essentially, it's about increasing gross margins after accounting for our investments. The amount we invest annually depends on our long-term growth opportunities. Regarding your point about T&E, it was a more significant challenge this quarter since Q1 '22 had very low T&E expenses due to COVID.
Michael Ward, Analyst
Got it. Okay. I have a different question regarding the IT solutions business, which I understand is relatively small for you. I think you've mentioned around $1 billion in lending that you've facilitated in this area. Could you please discuss this business and provide any earnings or revenue figures, if possible, and perhaps discuss the size of the market for this business?
Greg Case, CEO
Michael, thank you for bringing this up. I'm glad to discuss it. Eric and I can provide additional insights as well. This area is incredibly promising. When considering our daily activities in the market, it's important to step back and think about the total addressable market and its potential growth. Currently, we can start from zero, but 85% of the world’s value is linked to tangible assets. So, the question arises, what should this market look like? Until now, our industry hasn't done much to protect those assets. However, we've begun to figure out how to assign value to intellectual property, making it insurable and thus a viable tradable asset, which can even lead to leveraging it for loans. Over the past 18 to 24 months, we've completed several deals that amount to $1 billion in debt, which is remarkable. This allows entrepreneurs to secure growth capital without relinquishing ownership. Consider the appeal of raising growth capital without giving up ownership for entrepreneurs; the market for this is enormous. While it will take time to develop, as market building always does, we are excited about the momentum and the opportunities ahead. We won't specify how it will unfold just yet, but it has a clear application, and we are enthusiastic about the progress. Eric, do you have anything to add?
Eric Andersen, President
Yes. Maybe just to go a little bit on it. Certainly, the CPI lending piece is what we have been talking about the most that's probably the most advanced in terms of the valuation process. But you've also got M&A due diligence around IP. You've got traditional IP liability where a corporate is not actually trying to lend against it but want us to protect it. But to make all that happen, you need a couple of things, right, which is what we've been building over the last period of time. You need the valuation, right? How do you actually value IP, both in an upmarket and a stressed market? How do you liquidate it? How do you get insurer partners to devote capital to it to understand the risk themselves, to trust the valuation process, to understand how you would liquidate an example? So there's a whole ecosystem that we've been building that we are very optimistic about. And as Greg said, we've been building it a little bit each time. And the team is focused or connected in with our commercial risk partners as they build market. They're connected into understanding how to get it in front of clients and build the financial institution relationships. So there's a lot to it that has been happening for us. And we're excited about the future of it and started to see a little bit of progress last year.
Michael Ward, Analyst
Thanks so much, guys.
Operator, Operator
Our next question comes from the line of Josh Shanker with Bank of America. Please proceed with your question.
Josh Shanker, Analyst
Thank you all for taking my questions. And good morning to you. First quarter is the strongest quarter for the reinsurance segment, obviously. In the back half of last year, you had a lot of acquisition-related growth in reinsurance not so much in 1Q, I mismodeled it, I'm just looking at 2Q which is a smaller quarter for revenues and reinsurance. Are you going to help me think about the acquisition revenue piece for 2Q later in the year? But given that volatility over the last three quarters, trying to be smart about it?
Eric Andersen, President
The reinsurance business can be viewed in two distinct halves. The first half is primarily focused on Treaty business, as is usually the case. There is still some strong facultative business, and with the acquisition of Tyche, we are able to provide advisory services throughout the year. In the second half, the focus shifts more toward capital market transactions, such as catastrophe bonds, along with facultative reinsurance and some casualty reinsurance that continues throughout the year. If you're considering the distribution of business for the year, property catastrophe, which is a major area of focus for many, tends to be largely wrapped up by the end of June.
Josh Shanker, Analyst
In terms of the acquisition, is there a property cat in that acquisition?
Eric Andersen, President
I'm not exactly sure by what you mean by acquisition.
Josh Shanker, Analyst
Your revenue increase of 9% in the second half of 2022 in the reinsurance segment due to acquisitions, compared to just 1% in the first quarter, suggests that there is a 12-month effect from any acquisitions made. The difference in performance seems less noticeable in the first quarter due to lower volumes.
Eric Andersen, President
So the acquisition around Tyche was much more advisory services, less property cat, but more pricing support and data and analytics support for those clients. A lot of the activity in the second half of last year was driven by FAC and cat bonds. So I would say that's how I would think about it.
Josh Shanker, Analyst
Okay. And then I want to follow up a little bit on...
Christa Davies, CFO
And, Josh...
Josh Shanker, Analyst
Yes, go ahead.
Christa Davies, CFO
Well, sorry, Josh, we closed Tyche in Q1. And so you will see Tyche growth included in organic growth from Q2 onwards. It will be under, as Eric said, our strategy and technology group with be advisory part of reinsurance.
Josh Shanker, Analyst
That's perfect. Thank you, Christa. And I just wanted to follow up on Mike's question about T&E just a little bit. Clearly, there's a variance between 1Q '23 T&E and 1Q '22. But in my mind, I would imagine the variance would have been greater between 4Q '22 and 4Q '21. And maybe I’ll tell us something about the business cycle and whatnot. If you're spending more on T&E now, is that a broad situation with regards to a resumption of how your clients are spending? And two, should we expect that T&E headwind is really a '23 event more so than a '22 event?
Christa Davies, CFO
Great question, Josh. And so what we would say is, look, we wouldn't overly read into any one quarter. It's lumpy quarter-to-quarter. And what we would say is think about margin expansion for the full year, which is driven by a lot of things. It's been driven by our investment in people and technology to drive long-term growth, offset by some investments in T&E, a headwind from FX. There's a lot of things going into this charge. But really, that's why we come back to margin expansion for the full year 2023, similar to the margin expansion we've driven over the last 12 years of 1,120 basis points or approximately 90 basis points a year.
Josh Shanker, Analyst
Well, I appreciate you staying on message. And thank you very much, Christa.
Operator, Operator
Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Greg Case for closing comments.
Greg Case, CEO
Thanks very much. Just want to say to everyone, we really appreciate you joining the call and look forward to our discussion next quarter. Thanks very much.
Operator, Operator
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.