Aon plc. - Class A (AON) — Q3 2022 Earnings Call Transcript

Good morning, everyone. Welcome to our third quarter conference call. I'm joined by Christa Davies, our CFO; and Eric Andersen, our President. As in previous quarters, we posted a detailed financial presentation on our website. We begin by thanking our Aon colleagues for delivering another strong quarter of top and bottom-line growth. Our recently concluded all-colleague engagement survey reinforces the resilience and commitment of our team as we continue to receive and benefit from exceptional colleague feedback, with overall engagement, ways of working, and brand strength all at 80% or greater. More than ever, colleagues understand the power of our Aon United strategy and have embraced the smart work and approach we developed to preserve flexibility in how and where we work while enabling them to be better connected and more capable of helping clients make better decisions to support their businesses. The importance of this support and the exceptional nature of our response is illustrated by our recently released executive survey and the tremendous leadership of our team on Hurricane Ian. Taken together, these two data points reinforce the relevance and return on our Aon United strategy. First, our 2022 Executive Risk survey, which surveyed 800 C-suite executives from global companies, underscores the volatility facing leading organizations and offers a window into their mindset and needs. A majority surveyed, 79%, anticipate increased volatility on the horizon, but only a third, just 35%, feel fully prepared to manage the impact of that volatility. Most importantly, those that feel very prepared share three fundamental leadership attributes that reinforce the relevance of our capabilities. First, they see embracing risk as a source of potential competitive advantage. Sixty-two percent of very prepared leaders agree that their company's appetite for risk has increased in response to the current economic conditions. Second, they're willing to invest in new approaches to address emerging risks. These leaders focus on long-tail risks and call out concerns around disruptive categories, such as cyber and supply chain. And third, they value expert insight and are looking for partners to help them make better business decisions. Prepared leaders are nearly twice as likely to seek counsel from an external advisor that can provide a more holistic enterprise perspective on decisions to protect and grow their businesses. Now these survey findings reinforce the relevance of our strategy, and Hurricane Ian highlights an excellent example of that value in action. To begin, we want to extend our deepest sympathies to those impacted by this event. In these times of challenges, communities endure the tragic loss of life and tremendous damage. We believe that our actions as a firm can help businesses and communities respond and recover. As always, our team took a holistic and united view toward serving our clients before, during, and after the event. Pre-event, we used our resource development models to ensure that our 1,800 promotional risk clients and colleagues around the world were prepared to respond to a surge in client needs. This was a collaborative global effort possible only because of our mindset and single P&L approach. In addition, we were able to use impact forecasting models from our reinsurance team to game out potential hurricane paths and share those insights with our commercial risk colleagues so they could alert clients to potential exposures, allowing for early activation of business continuity plans. During the event, we provided real-time insight on actual harm by leveraging satellite and drone imagery provided through technology partnerships enabled by our Aon Business Services team. This is another example of how our emphasis on technology-driven innovation is reshaping client service at scale. Post-event, we obviously focused on accelerating clients' resolution, but we're also stepping back with clients and taking an enterprise view of what the hurricane means for their benefit plans, leveraging our Health Solutions team and beginning new conversations around how they think about return to work, exploring how our Human Capital Solutions colleagues can apply learnings from our own smart working strategy to their workforce management. This is Aon United in action and only possible because of the decade-plus investment we've made to break down barriers across our business and build Aon Business Services into an engine that provides us the insight and skill necessary to meet client needs. Turning to performance. In the third quarter, our colleagues delivered excellent results demonstrating continued momentum and year-to-date progress against our key financial metrics. For Q3, organic revenue growth was 5% on top of 12% in the prior year quarter, adjusted operating margin was up 100 basis points, and adjusted EPS was up 16%. These results are consistent with our full-year ongoing financial guidance, and we would note that Q3 is our seasonally smallest quarter for revenue. Year-to-date, we delivered 7% organic revenue growth, adjusted operating margin expansion of 80 basis points, adjusted EPS growth of 14%, and generated over 2 billion in free cash flow. Turning to solution lines, Commercial risk delivered 5% organic revenue growth this quarter on top of 13% in the prior year quarter, contributing 7% organic revenue growth year-to-date, driven by ongoing strong retention, new business generation, and renewal highlighting the resilience of our core business as we continue to help clients protect and grow their businesses. As we previously mentioned, the significant decrease in M&A volume impacted our transaction solutions business, especially compared to last year's results, which was particularly strong in Q3 and Q4. Reinsurance delivered 7% organic revenue growth in the quarter, with 7% year-to-date, as our team continues to help clients in the current market by bringing new solutions and capabilities. For instance, our newly established Strategy and Technology Group provides our clients with strategic advice, data-driven consulting, analytics, and modeling tools, further strengthened by the capability we've gained through our acquisition of Tyche. This is all in a time where driving growth, efficiency, and resilience have never been more important. Health Solutions delivered 5% organic revenue growth in Q3 on top of 16% in the prior year quarter, contributing to 8% year-to-date growth, but particularly strong growth in Human Capital Solutions. Across health, we see clients assessing their people strategies to optimize for workforce scale and organizational structure while ensuring those employees feel valued and engaged. Finally, Wealth Solutions delivered 2% organic growth on top of 4% in Q3 last year and 2% year-to-date as our team continues to help clients address market volatility, talk of regulatory challenges, and execute ongoing pension risk transfers. In two exciting milestones, our team has advised over 200 billion in potential risk transfer transactions in the U.S. and UK as pension plans continue to derisk and take advantage of market conditions. And we reached the 1 billion mark in client assets and commitments for our pooled employer plan, which helps cover and lower costs while enhancing retirement security for employees at smaller organizations. Overall, our strong performance in Q3 and year-to-date reflects the strength of our Aon United strategy and Aon Business Services platform delivered for clients across regions and solution lines. For the full year, we remain confident in our commitment to mid-single-digit or greater organic revenue growth, margin improvement, and double-digit free cash flow growth. As our clients assess the impact of increased economic volatility on their businesses, many are looking to improve their own working capital and liquidity by accessing new sources of capital. In one recent example, an Aon United example, our client based in Asia was awarded a multi-billion dollar construction contract in Latin America for a manufacturing facility that incorporates innovative carbon reduction technologies. The client had a regulatory and contractual requirement to provide a financial performance guarantee, essentially drawing on their own credit facility. To address this, our local commercial risk team, which has a deep understanding of our client strategy and financial position, collaborated closely with our local credit experts in LatAm to design a bespoke surety bond solution for our client. Rather than using a bank guarantee facility, our client was able to access capital at a lower cost and better terms while maintaining their own balance sheet strength and flexibility. Just as we've done with intellectual property lending and pitching those transfer solutions, this is another example of how we help clients access new capital to reduce risk and achieve their growth objectives. In summary, we delivered a strong quarter with top and bottom-line results contributing to our year-to-date progress against key metrics. We continue to be strongly positioned to deliver on our full-year financial commitments of mid-single-digit or greater organic revenue growth, margin expansion, and double-digit free cash flow growth. We see increasing opportunities to help our clients, and the steps we've taken to operationalize Aon United and our Aon Business Services platform give us confidence in our ability to address our clients' existing and emerging needs as they continue to protect and grow their businesses. Now I'd like to turn the call over to Christa for her thoughts on our performance in the quarter and year-to-date, as well as our long-term outlook for continued shareholder value creation.

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered continued progress on our key financial metrics, both for the quarter and year-to-date. For the first nine months of the year, we translated 7% organic revenue growth into 80 basis points of adjusted margin expansion and 14% growth in adjusted earnings per share, and generated over 2 billion in free cash flow. We look forward to building on this momentum as we head into the last quarter of 2022. As I reflect on our performance year-to-date, as Greg noted, organic revenue growth was 5% in the third quarter and 7% year-to-date. We continue to expect mid-single-digit or greater organic revenue growth for the full year 2022 and over the long term. I would also note that flat reported revenue growth in Q3 and 3% year-to-date includes an unfavorable impact from changes in FX of 5% for Q3 and 4% year-to-date, primarily driven by a stronger U.S. dollar versus most currencies. And I’d highlight fiduciary investment income, which is not included in our organic revenue growth calculation, was $26 million in Q3 and $35 million year-to-date. Moving to operating performance, we delivered strong operational improvement through the first nine months of the year, with adjusted operating margins of 30%, an increase of 80 basis points, driven by organic revenue growth and efficiencies from Aon Business Services, overcoming expense growth, including investment in colleagues and technology to drive long-term growth and some ongoing resumption of travel and entertainment. Looking forward, we expect to deliver margin expansion in 2022 and over the long term as we continue our track record of cost discipline and manage investments in long-term growth on a return on invested capital basis. As we've previously communicated, we think about margins over the course of a full year, and we expect continued investment in colleagues and ongoing resumption of travel and entertainment, as well as ongoing investments in long-term growth like technology throughout the year. Aon Business Services is a key contributor to margin expansion and represents a competitive advantage, especially in a highly inflationary market. Our Aon Business Services platform continues to drive efficiency gains, improved quality and service, and increased innovation at scale. Let me share one fantastic example of how the Aon Business Services platform supports ongoing improvement as we automate day-to-day processes around the firm. Reinsurance has operated on a single global broking platform and client service model since 2017. Over the past five years, the team has digitized processes, automated workflows, and moved work to low-cost locations. Sixty-four percent of transactions are now processed digitally, increasing speed and accuracy, which has helped reduce the average number of days it takes to get claims from carriers paid to our clients by 22%, from 38 to 30 days. The increase in capacity enabled a 27% greater throughput, while costs are up just 9% over five years; a particularly impressive outcome when considering recent cost and wage inflation trends. The platform enables the team to provide enhanced services while dealing with more complex transactions, an Aon United outcome that allows our colleagues to better support each other and our clients. We continue to find and capture efficiency opportunities like this around the firm and expect Aon Business Services to continue being a driver of ongoing efficiency improvements, quality and service improvements, and increased innovation for clients. We translated strong operating income growth into double-digit adjusted EPS growth of 16% in Q3 and 14% year-to-date. As noted in our earnings materials, FX translation was an unfavorable impact of approximately $0.05 per share in Q3 and $0.34 per share year-to-date. If currency remains stable at today's rates, we would expect an unfavorable impact of approximately $0.11 per share or approximately $33 million decrease in operating income in the fourth quarter of 2022. Turning to free cash flow and capital allocation. Free cash flow increased 79% year-to-date to 2,051 million, reflecting an increase in cash flow from operations due primarily to the $1 billion termination fee payment in the prior year period. As we've communicated before, free cash flow can be lumpy quarter-to-quarter, and I’d note Q4 is our seasonally strongest for free cash flow generation. We continue to expect to deliver double-digit free cash flow growth for the full year and over the long term, driven by operating income growth and working capital improvements. Given our strong outlook for free cash flow growth in 2022 and beyond, we expect share repurchases to continue to remain our highest return on capital opportunity for capital allocation. We believe we are significantly undervalued in the market today, highlighted by the approximately 1.2 billion of share repurchases in the quarter and 2.5 billion year-to-date. We also expect to continue to invest organically and inorganically in content and capabilities to address unmet client needs. We've invested in expertise and content in our retirement business, where we're helping clients navigate regulatory changes such as GMP in the UK and utilizing higher interest rates to drive record levels of pension risk transfers. Our M&A pipeline is continuously 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 a return on capital balance basis. Now turning to our balance sheet and debt capacity, we remain confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile. We issued 500 million of 10-year senior notes in Q3. And as we've said before, we'll continue to add debt as EBITDA grows while maintaining our current investment-grade credit ratings. With respect to interest rates, I'd note that our term debt is all fixed rates, with a weighted average interest rate of approximately 3.8% and a weighted average maturity of approximately 12 years. I'd also note that our pension liability improves as interest rates increase, and historically we've taken steps to derisk this liability and reduce volatility. In summary, our strong financial results in the quarter and year-to-date demonstrate continued momentum and progress against our key financial metrics. While we're seeing signs of economic uncertainty, we remain confident in the strength of our firm and our financial guidance for '22. Overall, our business is resilient and our Aon United strategy gives us confidence in our ability to deliver results in any economic scenario. With that, I’ll turn the call back over to the operator and we’d be delighted to take your questions.

Hi. Good morning. So first, I just had a question on the commercial risk business. Your organic growth slowed sequentially. Obviously, comps were more difficult as well. But you mentioned that Asia, Latin America, and the UK grew at a pretty strong pace and there was a slowdown in the U.S. retail business because of lower transaction volumes. Can you sort of elaborate on that and what you're seeing in the U.S. business?

Yes, Jimmy, thanks for the question. Listen, as we highlighted again on commercial specifically, but it really plays out for the firm overall, 7% organic year-to-date, 11% year-to-date last year, and then 13% in the quarter, as you highlight, and really gets strong across the board, across all geographies and real strength in core P&C and Affinity, and we really want to highlight that. The only thing we highlighted that was a little different was obviously the M&A transaction levels last year were extraordinary. Our capability there is just exceptional. Eric, maybe can talk a little bit about that. And that's really what’s not going to repeat this year, but overall very, very strong momentum as we finish the year this year and move into next year. But Eric, any thoughts on that?

Sure, Greg, that's a great question. Overall, commercial risk in the U.S. showed very strong new business figures and retention rates, as you noted earlier. Regarding transaction services, we are supporting the private equity and corporate sectors during their acquisitions and divestitures. During this slower period, we are engaging with the reinsurance markets and clients to develop our strategy for the eventual market recovery. I believe we have an exceptional team in place that is diligently working with clients to ensure we have the next generation of products ready for when the economic conditions improve.

Okay. And I think you mentioned modestly positive benefit from pricing the last few quarters and this quarter as well. And if we think about the reinsurance business, there's obviously a lot of dislocation there. Can you talk about how do you expect that to affect your results? And should there be a greater tailwind from pricing, at least on the reinsurance side?

Maybe I'll start with the overall, and then Eric just pick up on the reinsurance front, in particular. Overall, as you highlighted, we look at market impact. That's how we think about it. Obviously, it includes insured values and price. We highlight modest impacts in the quarter and expect for the year. Over time, you can expect insured value will begin to creep up. That will actually have a sustained lasting impact over time. And we'll see how the pricing piece changes out. But overall market impact is kind of modest as we think about the impact here. The reinsurance dynamic is important and is evolving. Eric, you want to pick up on that?

Sure, Greg. I'd like to comment on the general pricing environment on the primary side. You've made some good points, and we've previously discussed how we dedicate considerable time to working with our clients to use data and analytics to understand their necessary decisions. Even though inflation and pricing might be challenging for them, they are proactive. They’re evaluating aspects like captive utilization, retentions, deductibles, and limits, and we assist them in determining the best strategies as they navigate the economic changes affecting their businesses. As you've mentioned, Greg, while there are inflation and pricing effects in the market, we are actively working with our clients to support their decision-making. Regarding reinsurance, there are significant developments occurring. Our primary goal remains to assist our insurance company clients in aligning risk with capital. This is a global perspective, considering where capital is sourced and deployed, which varies across different regions. As we move past Hurricane Ian, we are beginning to understand the ultimate losses and who ultimately bears those losses. Geographically, European clients expect to receive the necessary supply of property catastrophe coverage, but this will involve negotiating pricing and structure, taking into account the inflation impacts and losses from the past three years, like the German floods and French hailstorms. The European marketplace has its unique challenges. In North America, however, the property catastrophe market faces more hurdles. The effects of inflation, supply issues, and residual uncertainties related to Hurricane Ian will present challenges. Nonetheless, we remain committed to creating capital options for our clients so they can secure the protection they need going forward. Additionally, this situation influences facultative reinsurance and our other tools, as insurers must adopt higher retentions. They will continue to seek ways to derisk but will approach it differently. They will focus on specific primary portfolio clients needing assistance and may opt for facultative coverage instead of treaty. Although the market is changing, there are still options available for our clients to help them reduce risk and obtain the necessary protection.

And the last thing I just want to highlight on this, Jimmy, before we leave this point, this is tremendous for us. This is where we live. There is more activity going on with a ton of capabilities that are unique in the world today. What our colleagues have built on the reinsurance side is extraordinary, and we've just added to it with data and analytics and all that we've done with our strategy and technology effort, now added with psyche that I mentioned before. So Eric described the market perfectly, but boy, this is our wheelhouse. We love it. It creates tremendous opportunity to support clients, and we're bringing all the solutions to bear. In many respects, helping our clients manage challenging times. And for us, it's a great opportunity for the next 12 to 24 months.

Thank you.

Hi, thanks. Good morning. My first question is on the margin side. So in the quarter, you guys saw 100 basis points of margin improvement. If I assume that all the fiduciary investment income fell to the bottom line, that could give you a tailwind of 90 basis points. I'm just trying to get a sense of that 100. Can you give us a sense of the split between how much in the margin improvement came from the pickup in fiduciary investment income versus core margin improvement in operating leverage?

Sure. Thanks for the question, Elyse. And look, what we would say as we think about this in terms of year-to-date, we had a $35 million benefit from investment income. So it's about a 20 basis point impact on full-year margins. And so it's not nearly as big as the numbers you highlighted, Elyse. And so for us, as we think about growing margin expansion for the full year, which we are completely committed to doing, it's really about continuing to drive organic revenue growth, the portfolio mix in higher revenue growth, higher margin areas, and the productivity benefits we're getting from Aon Business Services. And so we're fully on track to deliver full-year margin expansion.

As we think about rates continuing to rise, right, so that fiduciary investment income should go higher from here. So we're not just thinking Q4, but '23 as well. Do you guys think most of the benefits will fall to the bottom line, or how do you balance letting it fall versus looking to take some extra dollars to invest internally?

Yes. So first of all, Elyse, what I would say is we manage 6 billion of fiduciary investment income, and every 100 basis points of increase is 60 million top line and bottom line. But, Elyse, we're doing a lot of work for clients to actually manage that. We're actually doing all the insurance accounting and transaction processing in the middle on paying premiums on the way in and then paying claims on the way out. Just one correction, Elyse. The impact of fiduciary investment income in the quarter is 70 basis points, not 90.

Okay. Thanks. And then my last question was going back to the comments on transactions within commercial risk. I know you guys highlighted lower transaction volume. Was the third quarter of last year heavier for that business or will we also potentially see that impact the growth there in the fourth quarter as well?

Yes, if we take a moment to reflect, I want to highlight that our overall performance this quarter has been outstanding, showing a 7% growth year-to-date, compared to over 9% last year, indicating strength across all areas. The M&A activity we've discussed was particularly strong in Q3 and Q4, and while this has been significant, it doesn't alter our position. As Christa mentioned, we remain focused on achieving mid-single-digit or greater margin expansion and double-digit free cash flow growth for the year. I also want to emphasize Eric's observation regarding the remarkable capabilities of our team. Their performance has been extraordinary and has evolved impressively, placing them in a strong position as the market recovers.

Thank you.

Hi. Good morning. Happy Friday. Maybe thinking about free cash flow, last year, as you guys helped us out with, there's clearly a bit of noise this year. Are there any items that you feel you want to call out maybe on the working capital improvement side? You mentioned, Christa, that Q4 is usually a pretty strong quarter. So I'm looking at free cash flow this year as a percentage of revenues, for example. It's a very healthy level. I just want to make sure I'm not missing something.

Mike, I don't think you're missing anything. So free cash flow 2,051 million year-to-date, up 79%. Nothing particularly unusual. We did mention in Q1 and Q2 that we had lower levels of free cash flow because of higher incentive comp based on extraordinary performance in 2021. That's the only thing I would note. And then I would say, in general, we're going to continue to drive free cash flow growth double digits based on continued acceleration in revenue growth, margin expansion, and then working capital improvements. You did see, if you look at the external receivables divided by revenue on the balance sheet, that DSO improved by two days from Q3 '21 to Q3 '22. It went from 91 days down to 89 days. And so we're very pleased with our continued progress in working capital.

And if you stated as the goal to get down low below 89 over time, or is that the main lever for the working capital over the next few years?

Yes. So what we have said, Mike, is that we have essentially 500 million of excess receivables sitting on our balance sheet. And that over time, we will continue to improve DSO to get that 500 million to zero. And so that is a big upside in free cash flow growth over the coming years.

Okay, great. That’s helpful. And maybe switching gears, curious if cyber insurance, you guys are one of the leaders in the marketplace. Clearly, rates are up a lot, but clients are still, we're seeing still buying just as much or more. Maybe you can comment on the cyber market. But I’d also be curious to hear about whether the intellectual property market, which I think you guys are one of the pioneers of, is gaining any traction? Thank you.

Sure. This is Eric. Maybe I'll take a shot at it. So on the cyber market, we continue to see great growth in the business. And I would say what has changed if anything over the last several months is really the renewed focus on quality underwriting. And so if you remember at the very beginning of that product, it was all about risk management, risk identification, risk management, and then risk transfer. I think what happened to the market is they went immediately to risk transfer without enough focus on the quality of the risk mitigation and the risk management. As the market has reacted due to losses, they essentially went back to basics. And I think ultimately the market will be healthier for it. So we continue to see great growth. We invest globally in our capability there and really like our position and the work that we're doing for clients. I would say in intellectual property, very similar. I couldn't be more excited about where we are with that. Continue to see great deal flow, getting markets to join the product. We actually did our first IP reinsurance treaty this quarter. Certainly not big dollars, but a real symbol of how we're bringing a broader market to bear on supporting that product as it develops. So really excited about both of them and think we've got a great lead in the market with our capability. And we're going to continue to invest and push to develop those markets in a broader way.

Mike, I want to highlight that the progress we've made with our intellectual property has been remarkable. Four years ago, we started with about 25 or 30 team members focused on this area, and now we have grown to 200. No one had previously assessed an IP stack in a manner that allowed it to be secured against loan borrowers, but we have successfully completed over 15 deals. As we mentioned last quarter, we surpassed $1 billion in lending in this sector. As Eric pointed out, we now have several markets participating, including reinsurance. This is a significant development, although it is still in the early stages. The team has done an excellent job of expanding this opportunity.

Thank you. Best of luck.

Hi. Thanks. Good morning. I just had a question on the Wealth Business. Just on the AUM, the AUM base delegated investment management that was cited as a headwind. Could you give us an idea of how much the AUM base was down and how we should think about that going forward as markets remain under pressure?

It was down, David. We didn't give the impact of it. But you're absolutely right. The way in which we earn fees in that delegated business is percentage on AUM. And so it really depends on how the markets go as to how we see that progressing going forward. But I would say offsetting that decline on the investment management side was fantastic growth on the retirement side, as Greg and I talked about in our prepared remarks. We've got enormous growth dealing with regulatory change, particularly GMP in the UK; fantastic work going on there by the team. And then, as global interest rates rise, it's one of the best environments to do pension risk transfers that have happened in the last 15 years. And we are the global leader in this. We're very, very excited about our position in that space. And then, as we mentioned on the call, our PEP product in the U.S. is doing exceptionally well. And so there are so many areas on the retirement side where we have great opportunities for growth. But Eric, what else would you add here?

No, because I think you've covered all of it. We're just really excited about watching the retirement business in particular really add great value to our clients. The UK, certainly some great activity going on there and the U.S. as well. But that PEP product, which is the pooled employer plan, really is a great expense solution for our smaller clients as they look to manage the retirement assets. So you've covered it well, and really a solid quarter for them.

Got it. That's helpful. I was wondering if you could discuss the growth excluding the tougher U.S. retail comp and how that compares to last quarter. Did we notice any slowdown sequentially, or was it mainly influenced by the challenging U.S. retail comp?

David, as we described, listen, if we would step back, really tremendous progress across the board. And if you think about sort of what's happening on the commercial restaurant we highlighted, but really it's an opportunity where we see over time that’s going to be tremendous on the transaction solution side. But overall, really strong across the board and just continues to build momentum as we described before.

Okay, great. Thank you.

Thanks. Two quick questions, if I can. First, Eric, I was hoping you could talk a little bit more about capacity shortfalls in the U.S. in the context of the impact of rising interest rates on capital? And how much more work does that actually entail for the reinsurance unit?

If you’re referring to property catastrophe reinsurance, it’s worth noting that while not often discussed, this sector is significant within the industry. Reinsurers are dealing with their own inflation challenges and are working on pricing long-tail products. Although the market faces challenges, they primarily relate to pricing structures rather than supply issues. In the U.S., property catastrophe reinsurance continues to face challenges due to various reasons, including substantial losses from traditional causes like hurricanes, as well as from secondary perils such as wildfires and storms, which have significantly impacted reinsurers over the last five years. This has resulted in a crisis of confidence in underwriting and capital deployment for our clients. Therefore, improving models is essential, focusing on risk identification to ensure clarity in offerings and potential return scenarios over time. The influence of interest rates is notably felt in the ILS market, which currently faces two headwinds: trapped capital due to assessments of losses from events like Hurricane Ian, and the challenge of finding alternative assets as interest rates rise. This situation is leading to repricing in the ILS market. For us, this doesn’t create additional workload but rather enhances our understanding of market dynamics and returns as we approach the significant renewal seasons in January, April, and July.

And, Meyer, I know you've got another question, and I'll come to that. But this really does, as Eric described, reinforces the opportunity. When you can pick apart the market the way Eric has described and have the analytics to really do something about it, driving solutions on behalf of clients, this is what puts us in such a unique position against the rest of the world on this topic. So again, a lot going on out there, and we love it every day because it puts us in a very, very unique position.

No, that's very helpful. I understand that. Thanks. And then I guess a question for Christa maybe. So you talked about how there's more pension risk transfer going on. You also mentioned how higher interest rates benefit Aon’s pension funding. And I'm wondering, I understand that there's more willingness to take pension liabilities from people in a higher interest rate environment, but wouldn't there be less demand for transfers if interest rates are higher?

So there's always been capacity. The real challenge, Meyer, is the economics haven't made it make sense to actually be able to buy out because you haven't been able to execute the transfers without being able to add the cash necessary to get to fully funded. The increase in interest rates is getting plans fully funded, which means that they can actually do this transfer. So the capacity has always been there. It's more that the pension plans haven't been funded enough to be able to make this work. And I would say we're seeing more demand for buy-ins and buyouts from clients than we have in the last 10 plus years. And we have done substantial numbers of pension transfers in the U.S. and the UK. And I'm very, very well positioned to do it. So it's a very exciting growth area for us.

Okay, phenomenal. Thank you so much.

Yes. Thank you for getting me in at the end here. You spoke in the prepared remarks about higher expenses from travel and expenses resumption, both as a consultant and protector of the risk of your clients as well as internally. Can you talk about the shape that's happening? Where we are relative to where we were two and a half years ago? And if we go into recession, whether we're topping out here on travel and expenses and whatnot?

Yes. Thanks for the question, Josh. So I would say travel and entertainment is obviously up from 2020 and 2021 levels. It's not at 2019 levels, really because we're actually very thoughtful about how we do the work. And we've implemented smart working, which I know Greg talked about in relation to our engagement survey. It's one of the things that's driving employee engagement to the highest levels in our history, because we're very thoughtful about where is the best place, and there are a number of areas, and Eric you might want to talk about them, where we're doing work in different ways and it has a higher impact on clients. Eric?

Yes, Christa. That's excellent. It enhances the productivity of our team and boosts engagement by allowing us to utilize the technology we've invested in through our Aon Business Services model over the years. A recent event comes to mind as you spoke. We conduct these insight series globally with our clients, and traditionally, we would fly everyone in from various locations. This time, it was in Australia, which would typically mean a week of downtime for the team to present for just one hour on their topic. However, during this event, our climate team from London, who is developing our climate strategy, used WebEx for the meeting, handling the Q&A and delivering a great presentation. Afterwards, they were immediately back to their work, unlike the usual lengthy travel time and fatigue. This allowed us to utilize our resources efficiently without incurring high travel costs. We saved precious hours that would have been lost to flights and jet lag, ultimately boosting productivity. This is just one example, as we recently held a significant renewal meeting for a major U.S. client using the immersion room in our New York office. We connected with European insurers and reinsurers, efficiently transforming what would have been a three-week trip into a five-hour session in one location. We saved time and money, but more importantly, our clients appreciate the value they receive and feel connected to the markets they want. It also allows us to showcase our global team in a way that traditional traveling doesn’t permit, as it often focuses more on scheduling than interaction. We're truly excited about these developments, as they are enhancing engagement and productivity. I believe our clients are also enjoying the time they recover through this process.

Can you share if your understanding aligns with Aon’s experience regarding whether your clients' costs are rising faster than what your team of spend managers can handle?

Our Human Capital Business dedicates significant effort to assist clients in implementing smart working strategies. As the effects of the pandemic lessen, people are discovering their new routines, and our teams are effectively supporting clients in structuring their operations to enhance engagement and productivity. Clients are eager to optimize their travel and entertainment spending and are looking to utilize the technology that became essential during the pandemic to achieve their desired results.

Josh, the phenomenon you're highlighting is incredibly significant for us and even more for our clients. Eric described it well; it combines wellness issues and challenges, connecting with our health group in a way that it hasn't before. It's a comprehensive response that spans multiple solution lines. It’s a great example of Aon United in action, as we assist clients in understanding how to effectively address the work environment, which we refer to as smart working. More broadly, it impacts their engagement and their efforts in talent acquisition, retention, and enrichment. This presents a real opportunity for us. The beauty of it is that it connects across various solution lines, which exemplifies Aon United from our perspective.

Thank you very much.

Just want to say thanks to everybody for joining us. We appreciate it and look forward to talking next quarter. Thanks very much.