Aon Reports Fourth Quarter and Full Year 2019 Results

Total revenue increased 2% to $11.0 billion, including organic revenue growth of 6%...

Fourth Quarter Key Metrics From Continuing Operations and Highlights

• Total revenue increased 4% to $2.9 billion, including organic revenue growth of 7%
• Operating margin increased to 18.2%, and operating margin, adjusted for certain items, increased 210 basis points to 27.9%
• EPS increased to $1.58, and EPS, adjusted for certain items, increased 17% to $2.53
• Repurchased 2.3 million Class A Ordinary Shares for approximately $450 million
• Subsequent to the close of the fourth quarter, the Company completed its acquisition of CoverWallet, expanding its position in the fast-growing commercial insurance market for small and medium-sized businesses, as well as the opportunity to leverage CoverWallet's platform to develop and scale innovative digital client experiences

Full Year Key Metrics From Continuing Operations and Highlights

• Total revenue increased 2% to $11.0 billion, including organic revenue growth of 6%
• Operating margin increased to 19.7%, and operating margin, adjusted for certain items, increased 250 basis points to 27.5%
• EPS increased to $6.37, and EPS, adjusted for certain items, increased 12% to $9.17
• Cash flows from operations increased 9% to $1,835 million and free cash flow increased 11% to $1,610 million
• Repurchased 10.5 million Class A Ordinary Shares for approximately $2.0 billion
• Completed all charges related to the restructuring program. The Company expects to deliver $580 million of annualized savings in 2020, reflecting a 39% return on investment prior to any reinvestment

Aon plc (NYSE: AON) today reported results for the three and twelve months ended December 31, 2019.

Net income from continuing operations attributable to Aon shareholders in the fourth quarter was $374 million, or $1.58 per share, compared to $276 million, or $1.13 per share, in the prior year period. Net income per share from continuing operations, adjusted for certain items, increased 17% to $2.53, including an unfavorable impact of $0.04 per share if the company were to translate prior year period results at current period foreign exchange rates ("foreign currency translation"), compared to $2.16 in the prior year period. Certain items that impacted fourth quarter results and comparisons with the prior year period are detailed in the "Reconciliation of Non-GAAP Measures - Operating Income from Continuing Operations and Diluted Earnings Per Share" on page 10 of this press release.

"Our fourth quarter results reflect strong operational and financial performance to finish the year, highlighted by organic revenue growth of 7%, including growth of 5% or greater in four of the five solutions lines, and substantial operating margin improvement of 210 basis points. For the full year, we delivered our strongest level of organic revenue growth in over 15 years and adjusted operating margin of 27.5%," said Greg Case, Chief Executive Officer. "Our strong performance reflects continued momentum as we strategically position the firm to bring the best of global Aon to clients and execute against our Aon United strategy. We enter 2020 in a position of strength to continue to improve the long-term growth profile of the firm that we believe will unlock significant value for clients and shareholders."

FOURTH QUARTER 2019 FINANCIAL SUMMARY
The fourth quarter financial results discussed herein represent performance from continuing operations unless otherwise noted.

Total revenue in the fourth quarter increased 4% to $2.9 billion compared to the prior year period driven by 7% organic revenue growth, partially offset by a 2% unfavorable impact from divestitures, net of acquisitions, and a 1% unfavorable impact from foreign currency translation.

Total operating expenses in the fourth quarter increased 4% to $2.4 billion compared to the prior year period due primarily to an increase in expense associated with 7% organic revenue growth, an increase in investments supporting growth initiatives across the portfolio, and a $51 million increase in restructuring charges, partially offset by $54 million of incremental savings from restructuring and other operational improvement initiatives, a $27 million favorable impact from foreign currency translation, and a $12 million decrease in expenses related to divestitures, net of acquisitions.

Restructuring expenses were $170 million in the fourth quarter, primarily driven by workforce reductions and other costs associated with restructuring and separation initiatives. All charges associated with the program have been completed as of the fourth quarter of 2019. In total, the Company incurred $1,433 million of expense, including $1,318 million of cash charges and $115 million of non-cash charges. In addition to the restructuring charges, the Company incurred $167 million of incremental capital expenditures, for a total cash investment of approximately $1,485 million associated with the three-year program. An analysis of restructuring and related costs by type is detailed on page 15 of this press release.

Restructuring savings in the fourth quarter from restructuring and other operational improvement initiatives are estimated to be $162 million, before any reinvestment, an increase of $54 million compared to the prior year period. Before any reinvestment of savings, restructuring and other operational improvement initiatives delivered estimated annualized savings of $529 million in 2019 and are expected to deliver estimated annualized savings of $580 million in 2020, an increase of $45 million from the previous estimated savings of $535 million in 2020. Incremental savings in 2020 are expected to be realized throughout the year and will be reported as part of overall operating performance.

Foreign currency exchange rates in the fourth quarter had a $7 million, or $0.03 per share, unfavorable impact on U.S. GAAP net income and an $8 million, or $0.04 per share, unfavorable impact on adjusted net income if the Company were to translate prior year quarter results at current quarter foreign exchange rates. The Company also incurred $6 million, or $0.02 per share, of net losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies recorded in other expense. If currency were to remain stable at today's rates, we would expect an unfavorable impact of approximately $0.05 per share, or approximately $15 million reduction of operating income, in the first quarter of 2020.

Effective tax rate used in our U.S. GAAP financial statements for the fourth quarter was 13.4%, compared to 32.5% in the prior year period. After adjusting to exclude the applicable tax impact associated with certain non-GAAP adjustments, the adjusted effective tax rate for the fourth quarter of 2019 decreased to 15.7% compared to 16.5% in the prior year period, primarily driven by changes in the geographical distribution of income and a net favorable impact from discrete items. The prior year period also included a net favorable impact from discrete items. These adjustments are discussed in the "Reconciliation of Non-GAAP Measures - Operating Income from Continuing Operations and Diluted Earnings Per Share" on page 10 of this press release.

Weighted average diluted shares outstanding decreased to 237.0 million in the fourth quarter compared to 245.0 million in the prior year period. The Company repurchased 2.3 million Class A Ordinary Shares for approximately $450 million in the fourth quarter. As of December 31, 2019, the Company had approximately $2.0 billion of remaining authorization under its share repurchase program.

FULL YEAR 2019 CASH FLOW SUMMARY
The full year 2019 cash flow summary provided below includes supplemental information related to free cash flow, which is a non-GAAP measure that is described in detail in "Reconciliation of Non-GAAP Measures - Organic Revenue Growth and Free Cash Flow" on page 9 of this press release.

Cash flows from operations for 2019 increased 9%, or $149 million, to $1,835 million compared to the prior year primarily driven by strong operational improvement, partially offset by approximately $130 million of net cash payments related to certain litigation settlements.

Free cash flow for 2019, defined as cash flow from operations less capital expenditures, increased 11%, or $164 million, to $1,610 million compared to the prior year, reflecting an increase in cash flow from operations and a $15 million decrease in capital expenditures.

FOURTH QUARTER 2019 REVENUE REVIEW
The fourth quarter revenue reviews provided below include supplemental information related to organic revenue, which is a non-GAAP measure that is described in detail in "Reconciliation of Non-GAAP Measures - Organic Revenue Growth and Free Cash Flow" on page 9 of this press release.

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Total revenue increased $115 million, or 4%, to $2,885 million, compared to prior year period, including organic revenue growth of 7%, primarily driven by strong new business generation globally across the portfolio and improved retention and penetration of existing clients within the renewal book.

Commercial Risk Solutions organic revenue growth of 7% was driven by growth across every major geography, highlighted by double-digit growth in the U.S., driven by strong new business generation and management of the renewal book portfolio, as well as double-digit growth in Latin America. On average globally, exposures and pricing were both modestly positive, resulting in a modestly positive market impact overall.

Reinsurance Solutions organic revenue growth of 17% was driven by double-digit growth across every major business, highlighted by continued net new business generation globally and strong growth in catastrophe bonds within capital markets transactions. In addition, market impact was modestly positive on results in the fourth quarter.

Retirement Solutions organic revenue growth of 3% was driven by growth across every major business, highlighted by particular strength in our rewards and assessment businesses within the Human Capital practice, as well as double-digit growth in delegated investment management. Results also reflect modest growth in core retirement driven by strong retention and project-related work.

Health Solutions organic revenue growth of 5% was driven by strong growth globally in health and benefits brokerage, with growth across every major geography and highlighted by particular strength internationally. In the U.S., we saw strong new business generation and double-digit growth in voluntary benefits, a specific area of continued investment driven by increased client demand. Results were partially offset by a decline in project-related work within the health care exchange business.

Data & Analytic Services organic revenue growth of 6% was driven by growth globally across our affinity business, with particular strength in the U.S. driven by double-digit new business generation. Results also reflect solid growth in the Aon Inpoint and ReView businesses driven by strong retention.

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