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AON PLC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY OF SECOND QUARTER 2022 FINANCIAL RESULTS
Aon plc is a leading global professional services firm providing a broad range of risk, health, and wealth solutions. Through our experience, global reach, and comprehensive analytics, we are better able to help clients meet rapidly changing, increasingly complex, and interconnected challenges. We are committed to accelerating innovation to address unmet and evolving client needs, so that our clients are better informed, better advised, and able to make better decisions to protect and grow their business. Management is focused on strengtheningAon and uniting the firm with one portfolio of capability enabled by data and analytics and one operating model to deliver additional insight, connectivity, and efficiency.
Financial Results
The following is a summary of our second quarter of 2022 financial results.
•Revenue increased$97 million , or 3%, to$3.0 billion compared to the prior year period due primarily to organic revenue growth of 8%, partially offset by a 4% unfavorable impact if prior year period results were translated at current period foreign exchange rates ("foreign currency translation") and a 1% unfavorable impact from acquisitions, divestitures, and other. For the first six months of 2022, revenue increased$242 million , or 4%, to$6.7 billion compared to the prior year period due primarily to organic revenue growth of 8%, partially offset by a 3% unfavorable impact from foreign currency translation and a 1% unfavorable impact from acquisitions, divestitures, and other. •Operating expenses were$2.3 billion , an increase of$69 million from the prior year period. The increase was due primarily to an increase in expense associated with 8% organic revenue growth, a$58 million charge related to certain legal settlements reached, and investments in long-term growth, partially offset by a$90 million favorable impact from foreign currency translation and a decrease in transaction costs incurred in the prior year period of$38 million . Operating expenses for the first six months of 2022 were$4.6 billion , an increase of$92 million compared to the prior year period primarily due to an increase in expense related to 8% organic revenue growth and a$58 million charge related to certain legal settlements reached, partially offset by a$133 million favorable impact from foreign currency translation and a decrease in transaction costs incurred in the prior year period of$73 million . •Operating margin increased to 23.5% from 23.3% in the prior year period. The increase was driven by organic revenue growth of 8%, partially offset by an increase in operating expenses as listed above. Operating margin for the first six months of 2022 increased to 31.1% from 29.9% in the prior period. The increase was primarily driven by organic revenue growth of 8%, partially offset by an increase in operating expenses as listed above. •Due to the factors set forth above, Net income increased$121 million , or 31%, to$514 million compared to the prior year period. For the first six months of 2022, Net income increased$236 million , or 18%, to$1,562 million compared to the first six months of 2021. •Diluted earnings per share was$2.33 compared to$1.66 per share for the prior year period. During the first six months of 2022, diluted earnings per share was$7.07 compared to$5.66 per share for the prior period.
•Cash flows provided by operating activities was
six months of 2022, a decrease of
primarily due to higher receivables and incentive compensation payments
following strong performance in 2021, partially offset by strong operating
income growth.
We focus on four key metrics not presented in accordance withU.S. GAAP that we communicate to shareholders: organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, and free cash flow. These non-GAAP metrics should be viewed in addition to, not instead of, our Condensed Consolidated Financial Statements. The following is our measure of performance against these four metrics for the second quarter of 2022: •Organic revenue growth is a non-GAAP measure defined under the caption "Review of Consolidated Results - Organic Revenue Growth." Organic revenue growth was 8% for the second quarter of 2022, driven by ongoing strong retention and net new business generation. Organic revenue growth was 8% for the first six months of 2022, driven by ongoing strong retention and net new business generation. •Adjusted operating margin, a non-GAAP measure defined under the caption "Review of Consolidated Results - Adjusted Operating Margin," was 26.2% for the second quarter of 2022 compared to 25.8% in the prior year period. The increase in adjusted operating margin primarily reflects strong organic revenue growth, partially offset by expense growth and investments in long-term growth. For the first six months of 2022, adjusted operating margin was 32.7% compared to 32.2% for the prior year period. The increase in adjusted operating margin primarily reflects strong organic revenue growth, partially offset by expense growth and investments in long-term growth. 28 -------------------------------------------------------------------------------- •Adjusted diluted earnings per share, a non-GAAP measure defined under the caption "Review of Consolidated Results - Adjusted Diluted Earnings per Share," was$2.63 per share for the second quarter of 2022 and$7.47 per share for the first six months of 2022, compared to$2.29 and$6.57 per share for the respective prior year periods. •Free cash flow, a non-GAAP measure defined under the caption "Review of Consolidated Results - Free Cash Flow," decreased in the first six months of 2022 by$212 million from the prior year period, to$1,063 million , reflecting a decrease in cash flows from operations, partially offset by a$2 million decrease in capital expenditures.
COVID-19 PANDEMIC
The COVID-19 pandemic has resulted, and may continue to result, in significant economic disruption and volatility, although much progress has been made in the development and distribution of vaccines, contributing to overall improved economic conditions globally. We continue to closely monitor the situation and its impacts on our business. We continue to be fully operational and in compliance with governmental restrictions considering the impact on health and safety of our colleagues, their families, and our clients. We continue to deploy business continuity protocols and our Smart Working strategy to facilitate remote working capabilities to ensure the health and safety of our colleagues, to deliver results on behalf of clients, and to comply with public health and travel guidelines and restrictions. As the situation continues to evolve, the scale and duration of the disruption and impact of COVID-19 cannot be predicted, and COVID-19 may adversely affect our business and results of operations. However, for the three and six months endedJune 30, 2022 the impacts of COVID-19 on our business results have lessened and we have seen overall strength across the firm. We continue to monitor the situation closely.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
For many companies, the management of ESG risks and opportunities has become increasingly important, and ESG-related challenges, such as extreme weather events, supply chain disruptions and public health crises continue to create volatility and uncertainty for our clients.Aon offers a wide range of risk assessment, consulting and advisory solutions designed to address and manage ESG issues for clients, and to enable our clients to create more sustainable value. We view ESG risks as presenting an important opportunity forAon to work together as one firm to address client needs and improve our impact on ESG matters.
RUSSIAN WAR IN
The Russian war inUkraine , initiated onFebruary 24, 2022 , has resulted in certain sanctions being imposed by jurisdictions in which we operate, including theU.S. , the E.U., and theU.K. , onRussia and certain Russian companies and individuals. The Company's operations inRussia andUkraine continue to represent an immaterial portion of the Company's global operations and the war has not had a material impact on the Company's global operations as ofJune 30, 2022 .
The Company continues to monitor the potential impacts on the business and the
ancillary impacts that the military conflict could have on other global
operations.
29 --------------------------------------------------------------------------------
REVIEW OF CONSOLIDATED RESULTS
Summary of Results
Our consolidated results are as follows (in millions):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue
Total revenue $ 2,983 $ 2,886 $ 6,653 $ 6,411
Expenses 0
Compensation and benefits 1,639 1,628 3,406 3,347
Information technology 115 115 238 229
Premises 73 76 145 153
Depreciation of fixed assets 40 41 78 82
Amortization and impairment of intangible assets 25 36 53 76
Other general expense 391 318 666 607
Total operating expenses 2,283 2,214 4,586 4,494
Operating income 700 672 2,067 1,917
Interest income 5 3 8 6
Interest expense (102) (78) (193) (157)
Other income (expense) 30 (1) 55 (3)
Income before income taxes 633 596 1,937 1,763
Income tax expense 119 203 375 437
Net income 514 393 1,562 1,326
Less: Net income attributable to noncontrolling
interests 13 14 38 34
Net income attributable to Aon shareholders $ 501
Diluted net income per share attributable to
shareholders
$ 2.33
Weighted average ordinary shares outstanding - diluted 214.7 228.0 215.6 228.1 Revenue Total revenue increased$97 million , or 3%, in the second quarter of 2022 compared to the second quarter of 2021. This increase reflects organic revenue growth of 8%, partially offset by a 4% unfavorable impact from foreign currency translation and a 1% unfavorable impact from acquisitions, divestitures, and other. For the first six months of 2022, revenue increased by$242 million , or 4% compared to the prior year period. This increase reflects organic revenue growth of 8%, partially offset by a 3% unfavorable impact from foreign currency translation and a 1% unfavorable impact from acquisitions, divestitures, and other.Commercial Risk Solutions revenue increased$49 million , or 3%, to$1.7 billion in the second quarter of 2022, compared to$1.6 billion in the second quarter of 2021. Organic revenue growth was 7% in the second quarter of 2022, driven by growth across every major geography, reflecting strong retention and management of the renewal book portfolio. Strength in retail brokerage was highlighted by double-digit growth in EMEA, the Pacific, andLatin America , driven by continued strength in core P&C, as well as strong growth in project-related work, partially offset by a decline in transaction solutions due to lower external deal volume. Results also reflect solid growth globally in the affinity business across both consumer and business solutions, including growth in the travel and events practice. On average globally, exposures and pricing were modestly positive, resulting in a modestly positive market impact. For the first six months of 2022, revenue increased$128 million , or 4%, to$3.4 billion , compared to$3.3 billion in the first six months of 2021. Organic revenue growth was 8% in the first six months of 2022, driven by growth across every major geography, including double-digit growth inAsia and the Pacific, driven by strong retention and management of the renewal book portfolio. Results also reflect strong growth in project-related work, partially offset by a decline in transaction solutions due to lower external deal volume. On average globally, exposures and pricing were modestly positive, resulting in a modestly positive market impact overall. 30 -------------------------------------------------------------------------------- Reinsurance Solutions revenue increased$37 million , or 7%, to$537 million in the second quarter of 2022, compared to$500 million in the second quarter of 2021. Organic revenue growth was 9% in the second quarter of 2022, driven by double-digit growth in treaty, reflecting continued net new business generation globally and strong retention, as well as strong growth in facultative placements. For the first six months of 2022 revenue increased$91 million , or 6%, to$1.5 billion , compared to$1.4 billion in the first six months of 2021. Organic revenue growth was 8% in the first six months of 2022, driven by continued net new business generation in treaty and strong growth in facultative placements. Market impact was modestly positive on results for the three and six months endedJune 30, 2022 . The majority of revenue in our treaty portfolio is recurring in nature and is recorded in connection with the major renewal periods that take place throughout the first half of the year, while the second half of the year is largely driven by facultative placements and capital markets that are more transactional in nature.Health Solutions revenue increased$23 million , or 6%, to$414 million in the second quarter of 2022, compared to$391 million in the second quarter of 2021. Organic revenue growth was 11% in the second quarter of 2022, driven by double-digit growth across every major geography. Growth in core health and benefits brokerage was driven by strong retention and management of the renewal book portfolio, as well as a positive impact from the timing of certain revenues. Strength in health and benefits included continued growth in advisory work related to wellbeing and resilience. Results also reflect double-digit growth in Human Capital, driven by data and advisory solutions. For the first six months of 2022, revenue increased$46 million , or 5%, to$1,052 million , compared to$1,006 million in the first six months of 2021. Organic revenue growth was 9% in the first six months of 2022, reflecting growth globally in core health and benefits brokerage, driven by strong retention and management of the renewal book portfolio. Strength in health and benefits included growth in advisory work related to wellbeing and resilience. Results also reflect double-digit growth in Human Capital, driven by data and advisory solutions. Wealth Solutions revenue decreased$13 million , or 4%, to$343 million in the second quarter of 2022, compared to$356 million in the second quarter of 2021. Organic revenue growth was 3% overall in the second quarter of 2022, driven by growth inRetirement Consulting , driven by higher utilization rates and project-related work related to pension de-risking and ongoing impacts of regulatory changes. Results also reflect growth in Investments, driven by performance fees, partially offset by a decline in AUM-based delegated investment management revenue. For the first six months of 2022, revenue decreased$23 million , or 3%, to$688 million , compared to$711 million in the first six months of 2021. Organic revenue growth was 2% in the first six months of 2022, reflecting growth in delegated investment management, as well as growth inRetirement Consulting , primarily from higher utilization rates and project-related work.
Compensation and Benefits
Compensation and benefits expenses increased$11 million , or 1%, in the second quarter of 2022 compared to the second quarter of 2021. This increase was primarily driven by an increase in expense associated with 8% organic revenue growth, partially offset by a$71 million favorable impact from foreign currency translation. For the first six months of 2022, compensation and benefits increased$59 million , or 2%, compared to the first six months of 2021. The increase was primarily driven by an increase in expense associated with 8% organic revenue growth, partially offset by a$108 million favorable impact from foreign currency translation. Information Technology Information technology expenses, which represent costs associated with supporting and maintaining our infrastructure, was flat in the second quarter of 2022 compared to the second quarter of 2021. For the first six months of 2022, Information technology increased$9 million , or 4%, compared to the first six months of 2021. The increase was primarily driven by an increase in expense associated with 8% organic revenue growth, partially offset by a$5 million favorable impact from foreign currency translation.
Premises
Premises expenses, which represent the cost of occupying offices in various
locations throughout the world, decreased
quarter of 2022 compared to the second quarter of 2021. This decrease was
primarily driven by a
translation. For the first six months of 2022, Premises expenses decreased
million
primarily driven by a
translation.
Depreciation of Fixed Assets
Depreciation of fixed assets primarily relates to software, leasehold improvements, furniture, fixtures, and equipment, computer equipment, buildings, and automobiles. Depreciation of fixed assets decreased$1 million , or 2%, in the second quarter of 2022 compared to the second quarter of 2021. For the first six months of 2022, Depreciation of fixed assets decreased$4 million , or 5%, compared to the first six months of 2021. 31 --------------------------------------------------------------------------------
Amortization and Impairment of Intangible Assets
Amortization and impairment of intangible assets primarily relates to finite-lived tradenames and customer-related, contract-based, and technology assets. Amortization and impairment of intangible assets decreased$11 million , or 31%, in the second quarter of 2022 compared to the second quarter of 2021. For the first six months of 2022, Amortization and impairment of intangibles decreased$23 million , or 30%, compared to the first six months of 2021.
Other General Expense
Other general expense in the second quarter of 2022 increased$73 million , or 23%, compared to the second quarter of 2021 due primarily to an increase in expense associated with 8% organic revenue growth, including an increase in travel and entertainment expense, and a$58 million charge in connection with certain legal settlements reached, partially offset by a$38 million decrease in transaction costs. For the first six months of 2022, Other general expense increased$59 million , or 10%, compared to the prior year period due primarily to an increase in expense associated with 8% organic revenue growth, including an increase in travel and entertainment expense, and a$58 million charge in connection with certain legal settlements reached, partially offset by a$73 million decrease in transaction costs.
Interest Income
Interest income represents income earned on operating cash balances and other income-producing investments. It does not include interest earned on funds held on behalf of clients. During the second quarter of 2022, Interest income was$5 million , compared to$3 million in the second quarter of 2021. For the first six months of 2022, Interest income was$8 million , compared to$6 million in the first six months of 2021. Interest Expense Interest expense, which represents the cost of our debt obligations, was$102 million for the second quarter of 2022, an increase of$24 million , or 31%, from the second quarter of 2021. The increase was driven primarily by higher outstanding term debt. For the first six months of 2022, Interest expense was$193 million , an increase of$36 million , or 23%, from the prior year period. The increase was driven primarily by higher outstanding term debt.
Other Income (Expense)
Other income was$30 million for the second quarter of 2022, compared to Other expense of$1 million for the second quarter of 2021. Other income for the second quarter of 2022 primarily reflects a gain on sale of a business inCommercial Risk Solutions . Other income was$55 million for the first six months of 2022, compared to$3 million of Other expense for the first six months of 2021. Other income includes$47 million of gains from the disposal of businesses inCommercial Risk Solutions and Wealth Solutions, compared to$1 million in the prior year period. Income before Income Taxes Due to the factors discussed above, Income before income taxes for the second quarter of 2022 was$633 million , a 6% increase from$596 million in the second quarter of 2021 and Income before income taxes was$1.9 billion for the first six months of 2022, a 10% increase from$1.8 billion for the first six months of 2021. Income Taxes
The effective tax rates on Net income were 18.8% and 34.1% for the second
quarter of 2022 and 2021, respectively. The effective tax rates on Net income
were 19.4% and 24.8% for the first six months ended
respectively.
For the six months endedJune 30, 2022 , the tax rate was primarily driven the geographical distribution of income and certain discrete items, primarily the favorable impacts of share-based payments. For the six months endedJune 30, 2021 , the tax rate was primarily driven by the geographical distribution of income and certain discrete items, primarily the unfavorable impact of theU.K. tax rate increase offset by the favorable impact of share-based payments. TheUK enacted legislation onJune 10, 2021 , which increases the corporate income tax rate from 19% to 25% with effect fromApril 1, 2023 . As a result, the Company remeasured itsU.K. deferred tax assets and liabilities based on the tax rate in effect when the deferred tax assets and liabilities are expected to be realized.
Net Income Attributable to
Net income attributable toAon shareholders for the second quarter of 2022 increased to$501 million , or$2.33 per diluted share, from$379 million , or$1.66 per diluted share, in the prior year period. Net income attributable toAon shareholders for the first six months of 2022 increased to$1,524 million , or$7.07 per diluted share, from$1,292 million , or$5.66 per diluted share, in the prior year period. 32 --------------------------------------------------------------------------------
Non-GAAP Metrics
In our discussion of consolidated results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. Management believes that these measures are important to make meaningful period-to-period comparisons and that this supplemental information is helpful to investors. Management also uses these measures to assess operating performance and performance for compensation. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Condensed Consolidated Financial Statements.
Organic Revenue Growth
We use supplemental information related to organic revenue growth to help us and our investors evaluate business growth from existing operations. Organic revenue growth is a non-GAAP measure that includes the impact of certain intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. This supplemental information related to organic revenue growth represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Condensed Consolidated Financial Statements. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. A reconciliation of this non-GAAP measure to the reported Total revenue is as follows (in millions, except percentages): Three Months Ended June 30, Less: Fiduciary Organic Less: Currency Investment Income Less: Acquisitions, Revenue Growth 2022 2021 % Change Impact (1) (2) Divestitures & Other (3)
Revenue
Commercial Risk Solutions$ 1,692 $ 1,643 3 % (4) % - % - % 7 % Reinsurance Solutions 537 500 7 (5) - 3 9 Health Solutions 414 391 6 (3) - (2) 11 Wealth Solutions 343 356 (4) (5) - (2) 3 Eliminations (3) (4) N/A N/A N/A N/A N/A Total revenue$ 2,983 $ 2,886 3 % (4) % - % (1) % 8 % Six Months Ended June 30, Less: Fiduciary Organic Less: Currency Investment Income Less: Acquisitions, Revenue Growth 2022 2021 % Change Impact (1) (2) Divestitures & Other (3) Revenue Commercial Risk Solutions$ 3,411 $ 3,283 4 % (3) % - % (1) % 8 % Reinsurance Solutions 1,513 1,422 6 (3) - 1 8 Health Solutions 1,052 1,006 5 (3) - (1) 9 Wealth Solutions 688 711 (3) (3) - (2) 2 Eliminations (11) (11) N/A N/A N/A N/A N/A Total revenue$ 6,653 $ 6,411 4 % (3) % - % (1) % 8 % (1)Currency impact represents the effect on prior year period results if they were translated at current period foreign exchange rates. (2)Fiduciary investment income for the three months endedJune 30, 2022 and 2021, respectively, was$7 million and$2 million . Fiduciary investment income for the six months endedJune 30, 2022 and 2021, respectively, was$9 million and$4 million . (3)Organic revenue growth includes the impact of certain intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges.
Adjusted Operating Margin
We use adjusted operating margin as a non-GAAP measure of our core operating performance. Adjusted operating margin excludes the impact of certain items, as listed below, because management does not believe these expenses are the best indicators of our core operating performance. This supplemental information related to adjusted operating margin represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Condensed Consolidated Financial Statements. 33 --------------------------------------------------------------------------------
A reconciliation of this non-GAAP measure to the reported operating margin is as
follows (in millions, except percentages):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue $ 2,983 $ 2,886 $ 6,653 $ 6,411
Operating income - as reported $ 700 $ 672 $ 2,067 $ 1,917
Amortization and impairment of intangible
assets 25 36 53 76
Transaction costs and other charges related
to the combination and resulting
termination (1) - 38 - 73
Legal settlements (2) 58 - 58 -
Operating income - as adjusted $ 783 $ 746 $ 2,178 $ 2,066
Operating margin - as reported 23.5 % 23.3 % 31.1 % 29.9 %
Operating margin - as adjusted 26.2 % 25.8 % 32.7 % 32.2 %
(1)As part of the proposed combination with WTW, which was subsequently
terminated in the third quarter of 2021, certain transaction costs were incurred
by the Company through the first and second quarter of 2021. These costs
included advisory, legal, accounting, valuation, and other professional or
consulting fees related to the combination, including planned divestitures, some
of which were terminated.
(2)In connection with certain legal settlements reached, a $58 million charge
was recognized in the second quarter of 2022.
Adjusted Diluted Earnings per Share
We use adjusted diluted earnings per share as a non-GAAP measure of our core operating performance. Adjusted diluted earnings per share excludes the items identified above, along with certain pension settlements, when applicable, and related income taxes, because management does not believe these expenses are representative of our core earnings. This supplemental information related to adjusted diluted earnings per share represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Condensed Consolidated Financial Statements. A reconciliation of this non-GAAP measure to reported diluted earnings per share is as follows (in millions, except per share data and percentages): Three Months Ended June 30, 2022 Non-GAAP U.S. GAAP Adjustments Adjusted Operating income$ 700 $ 83$ 783 Interest income 5 - 5 Interest expense (102) - (102) Other income (expense) 30 - 30 Income before income taxes 633 83 716 Income tax expense (1) 119 19 138 Net income 514 64 578 Less: Net income attributable to noncontrolling interests 13 - 13 Net income attributable to Aon shareholders$ 501 $ 64$ 565
Diluted net income per share attributable to
$ 0.30 $ 2.63 Weighted average ordinary shares outstanding - diluted 214.7 - 214.7 Effective tax rates (1) 18.8 % 19.3 % 34
--------------------------------------------------------------------------------
Three Months Ended June 30, 2021
Non-GAAP
U.S. GAAP Adjustments Adjusted
Operating income $ 672 $ 74 $ 746
Interest income 3 - 3
Interest expense (78) - (78)
Other income (expense) (1) - (1)
Income before income taxes 596 74 670
Income tax expense (1) 203 (68) 135
Net income 393 142 535
Less: Net income attributable to noncontrolling interests 14 - 14
Net income attributable to Aon shareholders $ 379 $ 142 $ 521
Diluted net income per share attributable to
$ 0.63 $ 2.29 Weighted average ordinary shares outstanding - diluted 228.0 - 228.0 Effective tax rates (1) 34.1 % 20.1 % Six Months Ended June 30, 2022 Non-GAAP U.S. GAAP Adjustments Adjusted Operating income$ 2,067 $ 111 $ 2,178 Interest income 8 - 8 Interest expense (193) - (193) Other income (expense) 55 - 55 Income before income taxes 1,937 111 2,048 Income tax expense (1) 375 25 400 Net income 1,562 86 1,648 Less: Net income attributable to noncontrolling interests 38 - 38 Net income attributable to Aon shareholders$ 1,524 $ 86$ 1,610
Diluted net income per share attributable to
$ 0.40 $ 7.47 Weighted average ordinary shares outstanding - diluted 215.6 - 215.6 Effective tax rates (1) 19.4 % 19.5 % 35
--------------------------------------------------------------------------------
Six Months Ended June 30, 2021
Non-GAAP
U.S. GAAP Adjustments Adjusted
Operating income $ 1,917 $ 149 $ 2,066
Interest income 6 - 6
Interest expense (157) - (157)
Other income (expense) (3) - (3)
Income before income taxes 1,763 149 1,912
Income tax expense (1) 437 (57) 380
Net income 1,326 206 1,532
Less: Net income attributable to noncontrolling interests 34 - 34
Net income attributable to Aon shareholders $ 1,292 $ 206 $ 1,498
Diluted net income per share attributable to
$ 0.91 $ 6.57 Weighted average ordinary shares outstanding - diluted 228.1 - 228.1 Effective tax rates (1) 24.8 % 19.9 % (1)Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with certain transaction costs and other charges related to the combination and resulting termination and certain legal settlements, which are adjusted at the related jurisdictional rate. In addition, income tax expense for the three and six months endedJune 30, 2021 was adjusted to exclude the impact of remeasuring the net deferred tax liabilities in theU.K. as a result of the corporate income tax rate increase enacted in the second quarter of 2021.
Free Cash Flow
We use free cash flow, defined as cash flow provided by operations less capital expenditures, as a non-GAAP measure of our core operating performance and cash-generating capabilities of our business operations. This supplemental information related to free cash flow represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Condensed Consolidated Financial Statements. The use of this non-GAAP measure does not imply or represent the residual cash flow for discretionary expenditures. A reconciliation of this non-GAAP measure to the reported Cash provided by operating activities is as follows (in millions): Six Months EndedJune 30, 2022
2021
Cash provided by operating activities$ 1,131 $ 1,345 Capital expenditures (68) (70) Free cash flow$ 1,063 $ 1,275
Impact of Foreign Exchange Rate Fluctuations
Because we conduct business in over 120 countries and sovereignties, foreign exchange rate fluctuations may have a significant impact on our business. Foreign exchange rate movements may be significant and may distort true period-to-period comparisons of changes in revenue or pretax income. Therefore, to give financial statement users meaningful information about our operations, we have provided an illustration of the impact of foreign currency exchange rates on our financial results. The methodology used to calculate this impact isolates the impact of the change in currencies between periods by translating the prior year quarter's revenue, expenses, and net income using the current quarter's foreign exchange rates. Currency fluctuations had an unfavorable impact of$0.09 and an unfavorable impact of$0.28 on net income per diluted share during the three and six months endedJune 30, 2022 , respectively, if prior year period results were translated at current period foreign exchange rates. Currency fluctuations had a favorable impact of$0.02 and a favorable impact of$0.19 on net income per diluted share during the three and six months endedJune 30, 2021 , respectively, if 2020 results were translated at 2021 rates. Currency fluctuations had an unfavorable impact of$0.10 and an unfavorable of$0.29 on adjusted net income per diluted share during the three and six months endedJune 30, 2022 , respectively, if prior year period results were translated at current period foreign exchange rates. Currency fluctuations had a favorable impact of$0.04 and a favorable impact of$0.22 on adjusted net income per diluted share during the three and six months endedJune 30, 2021 , respectively, if 2020 results were 36 --------------------------------------------------------------------------------
translated at 2021 rates. These translations are performed for comparative and
illustrative purposes only and do not impact the accounting policies or
practices for amounts included in our Condensed Consolidated Financial
Statements.
LIQUIDITY AND FINANCIAL CONDITION
Liquidity
Executive Summary
We believe that our balance sheet and strong cash flow provide us with adequate liquidity. Our primary sources of liquidity in the near-term include cash flows provided by operations and available cash reserves; primary sources of liquidity in the long-term include cash flows provided by operations, debt capacity available under our credit facilities, and capital markets. Our primary uses of liquidity are operating expenses and investments, capital expenditures, acquisitions, share repurchases, pension obligations, and shareholder dividends. We believe that cash flows from operations, available credit facilities, available cash reserves, and the capital markets will be sufficient to meet our liquidity needs, including principal and interest payments on debt obligations, capital expenditures, pension contributions, and anticipated working capital requirements in the next twelve months and over the long-term. Although there continues to be uncertainties around future economic conditions due to COVID-19, we have largely returned to normal levels of liquidity and will continue to monitor our needs as economic conditions change. Cash on our balance sheet includes funds available for general corporate purposes, as well as amounts restricted as to their use. Funds held on behalf of clients in a fiduciary capacity are segregated and shown together with uncollected insurance premiums in Fiduciary assets in our Condensed Consolidated Statements of Financial Position, with a corresponding amount in Fiduciary liabilities. In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance underwriters. We also collect claims or refunds from underwriters on behalf of insureds, which are then returned to the insureds. Unremitted insurance premiums and claims are held by us in a fiduciary capacity. The levels of funds held on behalf of clients and liabilities can fluctuate significantly depending on when we collect the premiums, claims, and refunds, make payments to underwriters and insureds, and collect funds from clients and make payments on their behalf, and upon the impact of foreign currency movements. Funds held on behalf of clients, because of their nature, are generally invested in very liquid securities with highly rated, credit-worthy financial institutions. Fiduciary assets include funds held on behalf of clients comprised of cash and cash equivalents of$6.5 billion and$6.1 billion atJune 30, 2022 andDecember 31, 2021 , respectively, and fiduciary receivables of$10.4 billion and$8.3 billion atJune 30, 2022 andDecember 31, 2021 , respectively. While we earn investment income on the funds held in cash and money market funds, the funds cannot be used for general corporate purposes. We maintain multicurrency cash pools with third-party banks in which variousAon entities participate. IndividualAon entities are permitted to overdraw on their individual accounts provided the overall global balance does not fall below zero. AtJune 30, 2022 , non-U.S. cash balances of one or more entities may have been negative; however, the overall balance was positive.
The following table summarizes our Cash and cash equivalents, Short-term
investments, and Fiduciary assets as of
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- Iowans voice concerns that HMO tax bill could raise health insurance costs
- House panel votes to raise certain taxes, transfer money to offset Medicaid shortfall
- Iowa Medicaid temporary tax plan draws sharp public opposition
- High-risk assets gaining attention from many Americans
More Advisor NewsAnnuity News
- We can help find a loved one’s life insurance policy
- 2025: A record-breaking year for annuity sales via banks and BDs
- Lincoln Financial launches two new FIAs
- Great-West Life & Annuity Insurance Company trademark request filed
- The forces shaping life and annuities in 2026
More Annuity NewsHealth/Employee Benefits News
- Providence weighs sale of health plan amid financial pressures
- Health insurance jargon can be frustrating and confusing – here’s how to navigate it
- California should pause new health insurance mandates amid rising costs | Opinion
- Iowa Medicaid temporary tax plan draws sharp opposition
- What Americans are giving up to afford ACA health insurance, according to a new poll
More Health/Employee Benefits NewsLife Insurance News
- AM Best Affirms Credit Ratings of PVI Insurance Corporation
- Securian Financial Study Finds Americans Are Falling Into Workplace Benefits “Affordability Trap,” With Many Taking Financial Risks for Bigger Paychecks
- Zocks Launches AI Assistant for Life Insurance to Help Producers Get Policies Issued Faster
- We can help find a loved one’s life insurance policy
- Record 2025 Results Underscore New York Life’s Financial Strength and Mutual Advantage
More Life Insurance News