Aon plc. - Class A (AON) — Q4 2020 Earnings Call Transcript

Thank you, Catherine, and good morning, everyone. Welcome to our fourth quarter and full year 2020 conference call. I'm joined virtually by Christa Davies, our CFO; and Eric Andersen, our President. As in previous quarters, we posted a detailed financial presentation on our website. There are very few firms who can say they end in 2020 stronger than they began. And I want to thank our colleagues for making Aon one of those firms. Our team delivered a tremendous year set against the public health and economic impact of COVID-19 and an overall unprecedented level of global volatility punctuated by social unrest around the world. During the year, our colleagues came together to deliver results for clients, devote time and energy to getting to know the Willis Towers Watson team and the integration planning for our pending combination and to support each other through personal and professional challenges. One silver lining that we heard over and over from colleagues was that 2020 was a year of increased connection across our firm. We saw our colleagues respond to the virtual environment for replacing in-person connections by introducing experts and sharing thought leadership with clients. We felt the impact of that connectivity as our COVID-19 taskforce ramped up to share insights and best practices. And we saw it translate into client success as local teams won new business by seamlessly bringing together colleagues from across the globe. By all accounts, 2020 tested our firm. Looking back, it's clear that our colleagues not only passed, but this adversity actually accelerated our one-firm strategy. Seeing our colleagues come together and forge stronger connections in new ways was inspirational. We'll build on these positive learnings and practices in 2020 as we continue to reject the constraints of the so-called new normal and instead look forward to defining a new better on our terms as we begin 2021. Turning to financial performance in the fourth quarter, we delivered a great finish to the year with 2% organic revenue growth across the firm, including 12% growth in reinsurance solutions and 4% growth in commercial risk resolutions. As in recent quarters, organic revenue growth in the fourth quarter was driven by strength in the core areas of our business, reflecting the resilience of our firm in a challenging economic environment, overcoming ongoing unexpected pressure in the more discretionary areas. In particular, we would highlight growth in the core, driven by ongoing strong retention and net new business generation. We continue to deliver innovative solutions to our clients in a challenging environment. We saw increased organic revenue growth as compared to the third quarter despite a somewhat larger portion of more discretionary revenues in the fourth quarter. The strong results stem partially from improvements in economic factors and sentiment around the virus and vaccine, which drives client buying behavior and investment. For example, we saw positive impacts to our revenue from construction starts and M&A activity in the US, as well as from employment levels. I would also note that in more discretionary areas, we're seeing meaningful variation in revenue growth across our businesses, with some recovering more quickly and some more slowly, largely driven by external factors tied to economic reopening and recovery. For example, I would highlight strength in voluntary benefits in Health Solutions and construction and commercial risk. I would also note that more discretionary areas like travel and events within data analytics and even capital within retirement solutions continue to be impacted by economic and pandemic-related conditions. Our strong finish in Q4 contributed to full-year financial results that demonstrate the strength and resilience of our business in this uncertain economic environment. For the year, we delivered organic revenue growth of 1%, operating income growth of 4% with full-year operating margins of 28.5%, an increase of 100 basis points from 2019 and free cash flow growth of 64% to $2.6 billion, the highest free cash flow in the history of our firm. This outstanding progress against each of our key financial metrics is a direct result of our one-firm strategy, which guides everything we do in supporting colleagues, delivering value to clients, and driving shareholder value. We are well positioned to continue to build on this momentum. While we see many positive signs for the economy, significant uncertainty remains and we expect the recovery will remain inconsistent. We continue to monitor several key factors including GDP, asset values, corporate revenues, and employment. Looking at 2021 with significant uncertainty remains, we expect as economic conditions continue to stabilize and improve, we anticipate modest growth in Q1 with growth increasing toward mid-single digits as we continue through the year. Looking back, the challenges we faced in 2020 underscore the importance of our colleagues, our culture, and our commitment to inclusion and diversity. We've long observed that leaders who embody one-firm are the most successful leaders, both in delivering business results and driving colleague engagement. This year, we've seen that in such leadership traits result in even stronger engagement and competence in the combination, as measured in a January poll survey reflecting high engagement and consistently lower voluntary attrition, which decreased by 35% year-over-year from 2020 with strength in every major region and solution line. Further, we know that diverse talent, expertise, and insights of our colleagues are vital to the success of our firm and our clients. We continue to invest to attract, grow, and retain the best talent. We supported this priority; we announced the expansion of our apprenticeship program, including an investment of $30 million over the next five years, and the development of a nationwide network of employers to create 10,000 apprenticeships by 2030. With this expansion, we're building on our already successful program, which bridges the gap from education to employment by bringing high school graduates into the workforce while they complete their college education. This program provides a fantastic pipeline of diverse talent and embodies our commitment to inclusion and diversity. In addition to emphasizing the importance of our colleagues and our culture, the events of 2020 expose the interconnected nature of risks and vulnerabilities in many companies. Our recently published 2020 risk report highlights the increasing likelihood of connected extremes and reinforces that leading organizations of the future will be defined by their ability to manage the global implications of long tail risks. In the survey of over 500 organizations, across geographies and industries, 82% did not have a pandemic in their top 10 risks before COVID-19 struck, and only 30% had a pandemic plan in place. Looking forward, respondents overwhelmingly agreed on the need for an enterprise-wide approach to risk. We know that existing and emerging long tail risks will continue to challenge organizations across all industries and geographies. Organizations must prioritize strategies to address risk and resilience. Our strategy enabled us to support clients in this changing landscape because it allowed us to understand their biggest challenges and bring world-class content capability and innovative solutions to bear. While we didn't architect our pending combination with Willis Towers Watson with the pandemic in mind, we see that the pandemic and its associated economic impacts increased our conviction and the need to accelerate innovation to address client demand. On the topic of Willis Towers Watson, our excitement about the combination as well as the leadership and talent from both sides continues to grow. Last week, we reached another important milestone with the announcement of the combined executive committee that will be in place once the combination is closed. This team embraces the commitment to a one-firm mindset and brings together the best expertise, talent, and leadership from both organizations. This team also brings an exceptional set of experiences and capabilities, reinforcing the power of inclusion. As we've said before, our culture is built to bring the best of our firm to clients. It's an essential part of how we operate our firm and drive results. At Willis Towers Watson, their culture is equally focused on putting clients first; this newly announced team will blend the best of those cultures. That client-focused mindset will guide everything we do. In summary, 2020 was a momentous year. Our performance and actions throughout the year reflect exceptional resilience. The results of structural steps and investments we've made ensure we're ready to not only take on but grow stronger in the face of these challenges. Further, we've demonstrated momentum that will accelerate in combination with Willis Towers Watson. We begin 2021 in a position of strength to continue executing our strategy and making progress on our key financial metrics, both as standalone Aon and in our pending combination with Willis Towers Watson, creating significant growth opportunities for clients, colleagues, and shareholders. Now, I'd like to turn the call over to Christa for her thoughts on our financial progress this year and long-term outlook. Christa?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered a strong operational and financial performance in Q4 to finish the year despite continuing macroeconomic challenges, demonstrating the resiliency and strength of our business in any economic environment. Turning to our results, we delivered organic revenue growth of 2% in the fourth quarter, and 1% for the full year, driven by ongoing strength in our core business, offset by pressure in our more discretionary areas. I would note total reported revenue was up slightly overcoming nearly $100 million headwind from the unfavorable impact of changes in foreign exchange rates as well as low fiduciary investment income due to the lower interest rates globally. We also delivered operational improvement for the full year with operating income growth of 4% and operating margin expansion of 100 basis points to 28.5%, continuing our trajectory of long-term sustainable margin expansion. For the full year, adjusted operating expenses declined 1% due to expense discipline, and a reduction in travel and entertainment, offset by increased compensation costs. Adjusted operating expenses increased 4% in the fourth quarter. Putting Q4 in context, due to the significant uncertainty we saw during the year, we tightly controlled our expense base and the level of long-term investment in the business. During 2020, our organic revenue growth improved sequentially in the second quarter through the fourth quarter, as internal and external factors contributed to a strong finish to the year. This led to a year-over-year increase in compensation benefits spent in the fourth quarter, a portion of which was variable compensation. This resulted in a full-year increase in adjusted compensation and benefit expenses of 1%. I would also note the compensation expense increase in part because of our commitment during 2020 to retain all 50,000 colleagues, as well as lower voluntary attrition, which Greg described. As we said before, we make decisions on expenses and margins in the context of each full year and expect to continue to drive margin expansion in 2021. For the full year, we translated strong operational performance into EPS growth of 7%, overcoming a headwind from foreign exchange translation. If it continued to remain stable at today's rates, we expect a favorable impact of approximately $0.20 per share, or approximately $60 million of operating income in the first quarter of 2021 due to a weaker dollar versus the euro. A key driver of our operational success has been the history of investment in our Aon Business Services platform, which has undergone significant transformation over the last several years. The journey began with an initial group of 4,000 colleagues after the divestiture of our outsourcing business in 2017. By centralizing activities, eliminating inefficiencies, and promoting standardization, we delivered higher quality self-service levels and cost savings with better scalability, flexibility, and enhanced colleague experience. Today, approximately 13,000 of Aon's 50,000 colleagues are part of Aon Business Services, focused on driving operational improvement and enhancing how we serve clients. In 2020, for instance, we completed our data center consolidation program in the Americas, closed an additional 10 data centers, and achieved $23 million of annual savings. We increased usage of our digital signatures tool by over 110%, saving more than 65,000 hours annually. We renewed 90% of the nearly 9,000 US Commercial risk licenses paperlessly, and we improved our global operations and share capabilities by delivering over a million hours of automation, freeing colleague capacity for high value activities with clients. Looking forward, we expect to leverage our Aon Business Services platform to continue to drive sustainable margin expansion. In addition, we see opportunities to embed best practices around agility and productivity into how and where we operate, ultimately reducing our overall real estate footprint over the long term. Heading to cash and capital allocation, free cash flow increased 64% to $2.6 billion, primarily driven by working capital improvements, improved collections, a decrease in restructuring cash outlays, and strong operational improvements. We remain focused on maximizing the translation of revenue into the highest level of free cash flow, as highlighted by our free cash flow margin of 23.9%, up substantially from last year. We allocate capital based on return on invested capital and cash on cash returns. We continue to maximize shareholder value creation, highlighted by the $800 million of share repurchase in the quarter, and nearly $1.8 billion in 2020. In 2021, we expect to continue to allocate capital according to this framework, and we expect share purchase will continue to be our highest return on capital investment given our free cash flow evaluation and outlook. We expect to remain highly focused on closing and then successfully integrating our combination with Willis Towers Watson. Following that, we expect to continue to invest organically and inorganically in innovative content and capabilities in our priority areas. We remain very confident in the strength of our balance sheet and manage liquidity risk through a well laid debt maturity profile. Historically, we've looked to increase debt as EBITDA grows while maintaining leverage ratios. However, due to uncertain macroeconomic conditions, we expect to continue to manage our leverage ratios conservatively in the near future and return to our past practice of growing debt as EBITDA grows over the long term. As I look towards 2021 and our pending combination with Willis Towers Watson, I'd like to reiterate how excited we are about the newly announced leadership team and the significant shareholder value creation potential we see in bringing together our two complementary businesses, both from a top-line growth driven by accelerated innovation for clients and from the bottom-line impact of $800 million in cost synergies. We continue to work collaboratively with the appropriate regulators to gain approval and are focused on achieving a result that optimizes shareholder value. We remain committed to an expected close in the first half of 2021. In summary, our business has shown resiliency through the challenges of 2020. Our Aon united strategy, underpinned by our Aon Business Services operational platform, has enabled historically high free cash flow of $2.6 billion and allowed us to return nearly $2.2 billion of capital to shareholders in 2020. As we head into 2021, through our pending combination with Willis Towers Watson, this momentum will continue to enable long-term shareholder value creation. With that, I'll turn the call back over to the operator and will be delighted to take your questions.

Hi there. Good morning. Thanks for the question. I want to just circle back on your 2021 comments and appreciate the color there on the organic revenue cadence, which seems to make sense. I did want to ask a little bit more about the margin expansion opportunity. I know you talked about still having an ability to expand margins this year, of course. And in that context, it's still going to be tough to achieve 70 to 80 basis points of margin expansion towards your long-term target, given that you still might not have fully returned to the normalized cost base, or are there other efficiencies that you've been able to realize through COVID? More work from home or other efficiencies, lower travel and expenses that still might make that range feasible this year?

Thanks so much for the question, Dave. We are certainly committed to margin expansion in 2021. And we don't give specific margin guidance in terms of how much we would grow each year. But today, we've driven long-term margins of 880 basis points over the last 11 years. So 88 basis points a year on average. We believe that is really driven by accelerating organic revenue growth, the portfolio mix shift to higher revenue growth, higher margin areas. As you noted, the Aon Business Services platform continues to drive productivity and efficiency for us. That will continue to occur in 2021. We're really excited, as Greg highlighted, about accelerating growth year-over-year, trending towards mid-single digits in the second half of the year. The margin expansion will be a result of that growth, the portfolio mix shift, and the productivity from Aon Business Services.

Okay, thanks. And then just on the free cash flow, stepping off point from the $2.6 billion, had some easier tailwinds of things that weren't going to recur in 2020. As you jump off from that, though, is there anything to note that's unusual in the 2020? Is that basically a clean number to go from there? And then a related question to that. I know you've been continuing to make progress towards your $500 million of working capital improvement over time. How far into that? How much of that have you achieved so far?

Yes, so Dave, first of all, the $2.6 billion is a clean number. There's nothing unusual about that number. In terms of working capital, we obviously made some progress on working capital, as you saw in 2020. But we've actually said that the $500 million is still the right long-term target for Aon on working capital. The $500 million is just the number that gets you to working capital neutral. There are several countries in which we operate where working capital is positive, we think that is entirely reasonable for a professional services firm. A $500 million is a conservative number. We're definitely targeting underlying free cash flow growth over the long term in the double-digit range.

Okay, great. And then maybe a question for Greg and Eric, just about client engagement and retention. How bad is this looking as you go forward into the year and new opportunities that continue to emerge from COVID? Maybe any changes in client demand or services that Aon can bring to the table better than peers that you would highlight?

Maybe I'll start with that, Dave, and then Eric can share a number of examples we could draw from. We say, listen, as client need and pressure continues to increase, it really does give us a great opportunity to connect with them. For all of its challenges and issues that COVID has brought to us—and there have been many—one of the things that has allowed us to connect with clients even more effectively. Even yesterday, I was on a call that would have been a client meeting a year ago with 100 clients; we had 1,000 clients on yesterday. Our ability to actually connect with clients and demonstrate the full capability of the firm at a time of high need is actually going up. You're seeing more and more examples of our ability to drive new business as well as do more with existing clients, given the capabilities we've gotten really, it's happening all across the firm. But maybe, Eric, a couple of examples from your standpoint to bring it forward.

Sure, Greg. I think it's really based on the Aon united model that we've been working on, where you have to be excellent in each of our subject matter capabilities and topics. You have to work together to manage the client in a more holistic way. Topics like health, retirement, and talent are all critical as our clients are looking to manage their colleagues through this pandemic, not to mention the return to workplace. As we look out in 2021, we see a lot of opportunity to really help our clients during this challenging time.

Hi, thanks and good morning. My first question, you guys had pointed to the larger discretionary piece of your business in the fourth quarter serving to pressure organic. You guys came in positive too, so it seems like there was much better strength across many of your businesses probably than you expected three months ago. Maybe you could help us understand that. Additionally, with that same discretionary piece, given that reinsurance is a bigger component of Q1, I'm assuming that would serve as a tailwind to Q1 organic, just given that more of the reinsurance business comes on in the first quarter. Is that factored into your guide?

Elyse, I really appreciate the question. As Eric has highlighted, there's so many opportunities that continue to emerge to help clients in times of need, and they just continue to emerge around the world. Some of them are happening faster than we thought they would. I think about the momentum into the fourth quarter, which really was in the core, we continued to perform well there. In the discretionary pieces, as there was some promise on the recovery front, the vaccine front, etc., we saw some of those discretionary areas like transaction liability, construction, and employment levels beginning to come up. Other areas we still saw the pressure; I mentioned travel and events, as an example, and some others. It remains mixed but the trend is positive. You're really seeing us interact in a very positive way with clients, and that’s built into Q4, and you're also seeing it in our opportunities in 2021. On the reinsurance front, again, the team's fantastic. Eric, you can talk about that sort of as we end Q4, see implications, and the thoughts for the first quarter and 2021 on the reinsurance side, which was great work by the team.

Yes, for sure. Certainly, Q4 has always been our smallest quarter in reinsurance, dominated by Fac and investment banking historically. There were some good treaty wins that happened, certainly, there's a lot of action going on in that space, in the third and fourth quarter, in terms of new clients, new company creation, and the like, until we were there to help those new and existing clients reposition their portfolios as they went into 2021. That momentum has carried into the first quarter of this year.

The only other thing I'd add, Elyse, is that Q1 2020 was a very strong comparable for us because it largely was completed before COVID hit. While we've had terrific momentum coming into 2021, as Eric and Greg described, that difficult comparable means Q1 is likely to be a lower growth quarter than developed to the year.

Okay, that's helpful. Then in terms of expenses, right, I think you guys alluded to right, higher expenses in the fourth quarter, just obviously, the year came in better than you expected. Just tying back to comp and then lower employee turnover, I think you said, but look at the quarters, right? The coupon expenses were close to flat last year. Is there anything seasonally that you can point out with the expenses as anything to 2021? Recognizing that you don't give a guide so margin for the quarter, but anything within the expense space that we should be thinking about?

No, Elyse, really isn't. We would encourage you to step back and think about it. 2020 was truly exceptional, literally, if you think about COVID-19. We grew organically by 1% versus last year 6%, which was one of our all-time highs, expanded margin by 100 basis points to 28.5%, and free cash as Christa described to the highest level in our history growing 60 plus percent. The momentum we built throughout the year in 2020 we believe is going to carry over into 2021. There really isn't anything we would focus on Q4 that you would really over-rotate on. But it does reflect the great work of our colleagues and improving external factors which impacted the client operations we described. We wanted to really recognize the performance of our colleagues in the year. That certainly shows up. We've encouraged you to think about the overall year and the overall momentum built and how it's been carrying into 2021.

Great. And then one last one, you guys laid out right to mid-single digit or greater organic later in the year. I'm assuming that factors in that you will close this merger at some point in the first half of the year, obviously, undergoing some regulatory review. Can you just give us an update? I think you said to close this year to update timing-wise and things where you expect from a regulatory front, and I'm assuming you still expect this deal to close at some point in the first half of 2021.

So thanks so much for the question, Elyse. What I would start with is saying the guidance we gave for our revenue was we were moving towards mid-single digit over the course of the year, so not greater. The second thing I'd say is the guidance is Aon only. We wouldn't give guidance to the combined until we close. Third, we are on track to close in the first half of the year as we outlined when we announced a deal.

Hi, good morning. So first, I just had a question on the transaction and the Willis deal. You've already obviously put together a management team. It seems like you're confident that the deal will go through. What are your views on potential dispositions as you go through the regulatory approval process? I think you've said in the past that you wouldn't have to do much. Has that changed now as you've had more time?

Thanks for the question, Jimmy. We remain incredibly committed to our combinations with Willis Towers Watson. Watson is thrilled about the newly announced leadership team, as described, to lead up and accelerating innovation on behalf of clients and creating shareholder value. The businesses are complementary and operate in competitive areas of the economy. We believe we've got the arguments and evidence to ensure a positive outcome. We continue to work collaboratively with the appropriate regulators to gain approvals in a timely manner. Since we announced the deal, we expect to close in the first half of 2021, and we're on track to do that.

I want to come back to the audience for a second, if I could. Obviously, we're going to operate completely separately until we close, no question about that. We have in every way, shape, or form. But we've had a chance to get this group together and begin the planning process. It's been incredibly extraordinary, very gratifying to see this kind of talent come together to think about what the possibilities are for the future of the firm, both in helping clients in the here and now, but also thinking about how we can help them with some of the most important issues as they come forward. The pandemic has highlighted a number of those. Think about climate on the horizon, things like intellectual property, cyber, and all these things. This team is really beginning to come together, thinking about a one-firm approach to how we deliver the best of our capability to them. It's been extraordinary and very invigorating for all of us as we come together.

Okay, I guess we'll find out when the approvals come through, but on that. And then related to cost savings, as you've looked more into the business, do you feel like the $800 million targets you've outlined versus historical deals is somewhat conservative? Have your views on that change at all?

We would say that we remain at the place we've been, which is the $800 million, we feel really confident in achieving. It is 5.5% of the combined cost base compared to 11% of the combined cost base we achieved today on Hewitt and 18% of the combined cost base we achieved today in Benfield. The components of that are our people, IT, and real estate. As we've gone into the integration planning, we feel extremely confident about achieving the $800 million. This year, we're confident about achieving that through the strength of Aon Business Services platform, which is allowing us to bring together the operations of Aon and drive improved quality, consistency, and efficiencies over time.

Good morning. Thank you for taking my questions. My first question is, you've had a lot of time, obviously to study the Willis Towers operations. One area where I feel like the company hasn't delivered the full benefit of margin improvement would be in their corporate risk and broking business. As you've looked at that business, can you walk us through how you think you can deliver the margin improvement when it's combined with Aon?

Greg, let me just offer a couple of thoughts on that. First, I'll step back and say we have had a lot of time in the planning process over the course and since we announced in March. I will tell you, we continue to compare notes on the possibilities. We can't operate together until we close in any way, shape, or form. Our excitement continues to build. It really is about multiple areas, just core content and capabilities that exist across both organizations. We have very high expectations when we announced on March 9; they've been exceeded substantially in multiple categories. We believe the opportunity to drive growth on behalf of clients is significant. This comes together to reinforce opportunities to drive both top-line growth as well as margin improvement, which we see front and center for Aon before getting to anyplace else.

Great. The second question, I'll pivot back to the organic revenue growth. We’re watching and listening to all the carriers that have reported, discussing how the strong pricing environment has helped improve their margins and revenue growth. It seems like Aon has experienced a tailwind benefit on pricing. Can you reconcile the benefit from pricing and the actual benefit to organic from unit count growth, if that makes sense?

It certainly does. We would say that from an overall pricing standpoint, we look at market impact, which is a function of how you describe price and insurance values and all the things that come with that. It's really client behavior. Pricing impacts have had modest impact on performance. It's really around what we're doing fundamentally with clients. Maybe I can ask Eric to give a couple of examples. From our standpoint, this is when Aon can really show up and help clients succeed during times of need. They do a lot of reconfiguring as we think about how the environment changes.

Sure. Greg, it's never a straight line between what the carriers point out is the unit price versus what a client actually does. When we sit with a client, we start with risk identification, helping them understand exactly what risks they're trying to protect, can they mitigate it themselves through contracts or changes in behavior? They also think about whether they can finance it themselves through a captive or just using their balance sheet. A lot happens with a client before they even risk transfer. When they decide to risk transfer, they certainly go into a marketplace, and we help them with insight regarding options and structures. Clients make their trade-offs based on their budgets. So it isn't a straight line as to unit costs to client behavior.

Thanks. Good morning. One question we get a lot from investors is thinking about the combination with Willis, but some of your clients may want to limit their concentration to one broker, one advisor. Can you provide some color on how you're thinking about that? Maybe influenced by the conversations you’re having with your clients.

Hey, Suneet. I'll start with the following. As you know, we've gotten tremendous amounts of client feedback. We call it voice with the client. We've done it for the last decade and have continued to probe into that. Since the March 9th announcement, we've done a tremendous amount of work for clients to get their insights and guidance. The feedback has been overwhelmingly positive. Clients understand that we're focused on bringing them the best capabilities in the current environment. They're asking questions about addressing long tail risks. Their need has never been higher, and they see our combination as a chance to reverse the trend in which overall relevance has declined as a percentage of risk in relation to GDP over the last 30 years. Our feedback has been overwhelmingly positive across the globe on what this combination can mean for them, and we're excited to work hard to meet their needs.

Got it. On the regulatory approval front, there was a bill introduced yesterday about potential changes to antitrust reform. I know your deal was announced a while ago. Do you see anything from the new administration that could impact the timing of approvals?

We appreciate the question, Suneet, but we'd say we expect to close in the first half of 2021. We're on track to do that. We're excited about the combination with Willis Towers Watson and our newly announced leadership team who will help us accelerate innovation for clients.

Thanks. Two questions, I understand the outlook for organic growth is for Aon alone. I was hoping you could help us at least think about directionally whether the combination with Willis and the associated innovation would outpace the necessary distractions of integration. Should we expect some slowdown in organic growth in the earliest parts of the combination post-close?

Meyer, one way to answer this is, when we announced the combination on March 9, we gave guidance to the combined firm of mid-single digit or greater, which is higher than what Willis Towers Watson had produced historically. We did this for year one. So that gives you a sense of how confident we are in the new areas of unmet client needs in our existing business, and in brand new areas of demand, whether or not they are products and solutions today.

That's very helpful. Second question, Christa, in your opening comments you talked about inorganic growth after closing on Willis Towers Watson. I know I was hoping you could flush that out in terms of whether we should think about that in your current business lines or maybe new opportunities for Business Services.

Meyer, we’re really excited about the potential to invest organically and inorganically in content and capabilities in areas like digital, where we acquired CoverWallet earlier in 2020; in intellectual property, in climate, and in multiple areas across our business. There are many priority areas where we focus on high revenue growth, high margin high return on capital businesses. We're really excited about investing to develop new solutions for clients to meet their unmet needs.

Yes, thanks in discussing debt leverage. It feels like the plan is to keep it low versus historical leverage at this point. Was this a structural shift downwards in what you think the appropriate debt leverage is at this point? Or is there some kind of debt issuance catch-up coming in the out years as the uncertainties of the current environment abate?

Thanks for the question, Phil. What I would say is, it's really about the fact that we're managing conservatively our cash levels, given the macroeconomic uncertainty that still remains. We're heading into Q1, which is our seasonally lowest, free cash flow quarter of the year. We're fully committed to maintaining our current credit ratings. Longer-term, we will look to increase our debt-to-EBITDA ratio while maintaining leverage ratios.

For the FX impact, you highlighted a $0.20 impact in the first quarter of 2021. Can you frame what this could look like at current exchange rates for the full year or even looking past the first quarter?

We haven't given that guidance. What I would say is Q1 is the majority of the impact for the year. It's primarily driven by a higher euro versus US dollar. Q1 is our Euro-centric quarter.

And just one quick follow up on that. I was hoping you could talk a little bit about ESG and the strategy there. Some carriers have stepped away from certain products like coal and are not going to ensure projects like that anymore. When I think of AI, I think of a solution for unmet needs and being strategic in how you help clients place that risk. But if carriers are stepping away from things like that, is there a conflict? Am I thinking about this right?

Phil, it isn't philosophical at all. It's a terrific question. We're absolutely committed to implementing ESG best practices internally for sure and to promote resiliency. The role the industry can play relating to climate is one of the greatest opportunities for us. This is a massive, massive challenge around increased volatility that clients will face. Our ability to help reduce that over time is substantial. The combination with Willis Towers Watson, we believe we will be formidable. We think we can make a real difference, helping clients make better decisions as they address climate challenges and opportunities.

Thanks. I guess part of the question is - is there a conflict? Is there an unmet need that you might not be able to meet because of your own ESG framework and certain pieces of environmentally risky business that you might want to get away from?

At the individual level, there's always different circumstances that may come up. When you take a step back and consider the implications of climate change overall, this is the global economy, which is a massive challenge around increased volatility that companies encounter as they address this challenge. Our ability to help reduce it over time is substantial. The combination is key in addressing these types of issues. This is a high priority for us inside of Aon. We've got an upcoming impact report detailing our commitment to carbon neutrality. The opportunity here is what we can do on behalf of clients, and there are many categories of unmet client needs that are growing over time that we've got to bring solutions to.

Just wanted to say to everyone, thanks so much for joining us this quarter. We look forward to our discussion next quarter. Have a great day.