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AON PLC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY OF THIRD 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 third quarter of 2022 financial results.
•Revenue was flat at$2.7 billion compared to the prior year period due primarily to organic revenue growth of 5% and a 1% favorable impact from fiduciary investment income, offset by a 5% 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 nine months of 2022, revenue increased$236 million , or 3%, to$9.3 billion compared to the prior year period due primarily to organic revenue growth of 7%, partially offset by a 4% unfavorable impact from foreign currency translation. •Operating expenses were$2.1 billion , a decrease of$1.4 billion from the prior year period. The decrease was due primarily to the$1.0 billion Termination Fee payment and certain transaction costs incurred related to terminating the combination with WTW in the prior year period (together, the "transaction costs") and a$138 million favorable impact from foreign currency translation, partially offset by an increase in expense associated with 5% organic revenue growth and investments in long-term growth. Operating expenses for the first nine months of 2022 were$6.7 billion , a decrease of$1.3 billion compared to the prior year period primarily due to transaction costs incurred in the prior year period and a$271 million favorable impact from foreign currency translation, partially offset by an increase in expense related to 7% organic revenue growth. •Operating margin increased to 21.9% from (29.6)% in the prior year period. The increase was driven by a decrease in operating expenses as listed above and organic revenue growth of 5%. Operating margin for the first nine months of 2022 increased to 28.4% from 12.2% in the prior period. The increase was primarily driven by a decrease in operating expenses as listed above and organic revenue growth of 7%. •Due to the factors set forth above, Net income (loss) increased$1.3 billion to$418 million compared to the prior year period. For the first nine months of 2022, Net income increased$1.5 billion to$2.0 billion compared to the first nine months of 2021. •Diluted net income (loss) per share was$1.92 compared to$(3.99) per share for the prior year period. During the first nine months of 2022, diluted net income earnings per share was$9.00 compared to$1.72 per share for the prior period. •Cash flows provided by operating activities was$2.2 billion for the first nine months of 2022, an increase of$926 million from the prior year period, primarily due to the$1.0 billion Termination Fee payment and additional payments related to terminating the combination with WTW and related costs in the prior year period, and strong operating income growth, partially offset by higher receivables and incentive compensation payments following strong performance in 2021. 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 third 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 5% for the third quarter of 2022, driven by ongoing strong retention and net new business generation. Organic revenue growth was 7% for the first nine 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 23.1% for the third quarter of 2022 compared to 22.1% in the prior year period. The increase in adjusted operating margin primarily reflects strong organic revenue growth, partially offset by increased expenses and investments in long-term growth. For the first nine months of 2022, adjusted operating margin was 29 --------------------------------------------------------------------------------
30.0% compared to 29.2% for the prior year period. The increase in adjusted
operating margin primarily reflects strong organic revenue growth, partially
offset by increased expenses and investments in long-term growth.
•Adjusted diluted earnings per share, a non-GAAP measure defined under the caption "Review of Consolidated Results - Adjusted Diluted Earnings per Share," was$2.02 per share for the third quarter of 2022 and$9.51 per share for the first nine months of 2022, compared to$1.74 and$8.31 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," increased in the first nine months of 2022 by$902 million from the prior year period, to$2.1 billion , reflecting an increase in cash flows from operations, partially offset by a$24 million increase 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 nine months endedSeptember 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 ofSeptember 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.
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REVIEW OF CONSOLIDATED RESULTS
Summary of Results
Our consolidated results are as follows (in millions):
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue
Total revenue $ 2,696 $ 2,702 $ 9,349 $ 9,113
Expenses
Compensation and benefits 1,532 1,835 4,938 5,182
Information technology 133 130 371 359
Premises 71 98 216 251
Depreciation of fixed assets 37 56 115 138
Amortization and impairment of intangible assets 34 36 87 112
Other general expense 299 1,348 965 1,955
Total operating expenses 2,106 3,503 6,692 7,997
Operating income (loss) 590 (801) 2,657 1,116
Interest income 7 3 15 9
Interest expense (103) (80) (296) (237)
Other income (expense) 16 10 71 7
Income (loss) before income taxes 510 (868) 2,447 895
Income tax expense 92 23 467 460
Net income (loss) 418 (891) 1,980 435
Less: Net income attributable to noncontrolling
interests 10 9 48 43
Net income (loss) attributable to
$ (900) $ 1,932 $ 392 Diluted net income (loss) per share attributable to Aon shareholders$ 1.92
Weighted average ordinary shares outstanding - diluted 212.6 225.4 214.6 227.7 Revenue Total revenue was flat in the third quarter of 2022 compared to the third quarter of 2021. This reflects organic revenue growth of 5% and a 1% favorable impact from fiduciary investment income, offset by a 5% unfavorable impact from foreign currency translation and a 1% unfavorable impact from acquisitions, divestitures, and other. For the first nine months of 2022, revenue increased by$236 million , or 3%, compared to the prior year period. This increase reflects organic revenue growth of 7%, partially offset by a 4% unfavorable impact from foreign currency translation.Commercial Risk Solutions revenue decreased$23 million , or 2%, to$1.5 billion in the third quarter of 2022, compared to$1.5 billion in the third quarter of 2021. Organic revenue growth was 5% in the third quarter of 2022, driven by strong growth across most major geographies, reflecting strong retention, new business generation, and management of the renewal book portfolio. Strength in retail brokerage was highlighted by double-digit growth in theUK ,Asia , andLatin America , driven by continued strength in core P&C.U.S. retail brokerage was pressured primarily by transaction solutions, which declined primarily due to lower external deal volume. On average globally, exposures and pricing were modestly positive, resulting in a modestly positive market impact. For the first nine months of 2022, revenue increased$105 million , or 2%, to$4.9 billion , compared to$4.8 billion in the first nine months of 2021. Organic revenue growth was 7% in the first nine months of 2022, driven by growth across every major geography, including double-digit growth in EMEA,Asia and the Pacific, andLatin America , 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 primarily due to lower external deal volume. On average globally, exposures and pricing were modestly positive, resulting in a modestly positive market impact overall.
Reinsurance Solutions revenue increased
the third quarter of 2022, compared to
2021. Organic revenue growth was 7% in the third quarter of 2022, driven by
strong growth in treaty, reflecting strong retention and new business
generation, as well as solid growth in both facultative placements and the
31 --------------------------------------------------------------------------------Strategy and Technology Group . For the first nine months of 2022 revenue increased$134 million , or 8%, to$1.9 billion , compared to$1.8 billion in the first nine months of 2021. Organic revenue growth was 7% in the first nine months of 2022, driven by continued net new business generation in treaty, as well as solid growth in both facultative placements and theStrategy and Technology Group . Market impact was modestly positive on results for the three and nine months endedSeptember 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 decreased$3 million , or 1%, to$494 million in the third quarter of 2022, compared to$497 million in the third quarter of 2021. Organic revenue growth was 5% in the third quarter of 2022, driven by double-digit growth in Human Capital, driven by data and advisory solutions. Results also reflect growth globally in core health and benefits brokerage, driven by strong retention and management of the renewal book portfolio, partially offset by a negative impact from the timing of certain revenues, as described in the second quarter and prior year period. For the first nine months of 2022, revenue increased$43 million , or 3%, to$1.5 billion , compared to$1.5 billion in the first nine months of 2021. Organic revenue growth was 8% in the first nine 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$25 million , or 7%, to$326 million in the third quarter of 2022, compared to$351 million in the third quarter of 2021. Organic revenue growth was 2% overall in the third quarter of 2022, driven by growth in Retirement, reflecting higher utilization rates and project work related to pension de-risking and ongoing impacts of regulatory changes. In Investments, a decrease in AUM-based delegated investment management revenue was partially offset by growth in project-related work. For the first nine months of 2022, revenue decreased$48 million , or 5%, to$1.0 billion , compared to$1.1 billion in the first nine months of 2021. Organic revenue growth was 2% in the first nine months of 2022, reflecting growth in Retirement, primarily from higher utilization rates and project-related work. In Investments, growth in project-related work was offset by a decrease in AUM-based delegated investment management revenue. Compensation and Benefits Compensation and benefits expenses decreased$303 million , or 17%, in the third quarter of 2022 compared to the third quarter of 2021. This decrease was primarily driven by a$245 million decrease in transaction costs and a$106 million favorable impact from foreign currency translation, partially offset by an increase in expense associated with 5% organic revenue growth. For the first nine months of 2022, compensation and benefits decreased$244 million , or 5%, compared to the first nine months of 2021. The decrease was primarily driven by a$245 million decrease in transaction costs and a$214 million favorable impact from foreign currency translation, partially offset by an increase in expense associated with 7% organic revenue growth.
Information Technology
Information technology expenses, which represent costs associated with supporting and maintaining our infrastructure, increased$3 million , or 2%, in the third quarter of 2022 compared to the third quarter of 2021. This increase was primarily driven by an increase in expense associated with 5% organic revenue growth, partially offset by a$17 million decrease in transaction costs. For the first nine months of 2022, Information technology increased$12 million , or 3%, compared to the first nine months of 2021. The increase was primarily driven by an increase in expense associated with 7% organic revenue growth, partially offset by a$17 million decrease in transaction costs.
Premises
Premises expenses, which represent the cost of occupying offices in various locations throughout the world, decreased$27 million , or 28%, in the third quarter of 2022 compared to the third quarter of 2021. This decrease was primarily driven by a$22 million decrease in transaction costs and an$8 million favorable impact from foreign currency translation. For the first nine months of 2022, Premises expenses decreased$35 million , or 14%, compared to the first nine months of 2021. The decrease was primarily driven by a$22 million decrease in transaction costs and a$14 million favorable impact from foreign currency 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$19 million , or 34%, in the third quarter of 2022 compared to the third quarter of 2021. This decrease was primarily driven by a$16 million decrease in 32 --------------------------------------------------------------------------------
transaction costs. For the first nine months of 2022, Depreciation of fixed
assets decreased
The decrease was primarily driven by a
costs.
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$2 million , or 6%, in the third quarter of 2022 compared to the third quarter of 2021. For the first nine months of 2022, Amortization and impairment of intangibles decreased$25 million , or 22%, compared to the first nine months of 2021.
Other General Expense
Other general expense in the third quarter of 2022 decreased$1,049 million , or 78%, compared to the third quarter of 2021 due primarily to a decrease in transaction costs, partially offset by an increase in expense associated with 5% organic revenue growth, including an increase in travel and entertainment expense. For the first nine months of 2022, Other general expense decreased$990 million , or 51%, compared to the prior year period due primarily to a decrease in transaction costs, partially offset by an increase in expense associated with 7% organic revenue growth, including an increase in travel and entertainment expense. 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 third quarter of 2022, Interest income was$7 million , compared to$3 million in the third quarter of 2021. For the first nine months of 2022, Interest income was$15 million , compared to$9 million in the first nine months of 2021. Interest Expense Interest expense, which represents the cost of our debt obligations, was$103 million for the third quarter of 2022, an increase of$23 million , or 29%, from the third quarter of 2021. The increase primarily reflects an increase in total debt. For the first nine months of 2022, Interest expense was$296 million , an increase of$59 million , or 25%, from the prior year period. The increase primarily reflects an increase in total debt.
Other Income (Expense)
Other income was$16 million for the third quarter of 2022, compared to$10 million for the third quarter of 2021. Other income for the third quarter of 2022 primarily reflects net gains due to the favorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies. Other income was$71 million for the first nine months of 2022, compared to$7 million for the first nine months of 2021. Other income includes$53 million of gains from the disposal of businesses inCommercial Risk Solutions and Wealth Solutions, compared to$2 million in the prior year period.
Income (Loss) before Income Taxes
Due to the factors discussed above, Income (loss) before income taxes for the third quarter of 2022 was$510 million , a 159% increase from$(868) million in the third quarter of 2021, and Income before income taxes was$2,447 million for the first nine months of 2022, a 173% increase from$895 million for the first nine months of 2021. Income Taxes The effective tax rates on Net income (loss) were 18.0% and (2.6)% for the third quarter of 2022 and 2021, respectively. The effective tax rates on Net income were 19.1% and 51.4% for the first nine months endedSeptember 30, 2022 and 2021, respectively. For the three and nine months endedSeptember 30, 2022 , the quarter-to-date tax rate was primarily driven by the geographical distribution of income and certain discrete items. The year-to-date tax rate was primarily driven by the geographical distribution of income and certain discrete items, primarily the favorable impacts of share-based payments. For the three and nine months endedSeptember 30, 2021 , the quarter-to-date tax rate was primarily driven by the impact of the Termination Fee. The year-to-date tax rate was primarily driven by the Termination Fee, theU.K. tax rate increase, and the tax benefit of share-based payments. TheU.K. enacted legislation onJune 10, 2021 which increased the corporate income tax rate from 19% to 25% with effect fromApril 1, 2023 and we remeasured ourU.K. deferred tax assets and liabilities accordingly. 33 --------------------------------------------------------------------------------
Net Income (Loss) Attributable to
Net income (loss) attributable toAon shareholders for the third quarter of 2022 increased to$408 million , or$1.92 per diluted share, from$(900) million , or$(3.99) per diluted share, in the prior year period. Net income attributable toAon shareholders for the first nine months of 2022 increased to$1.9 billion , or$9.00 per diluted share, from$392 million , or$1.72 per diluted share, in the prior year period. 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, adjusted net income attributable toAon shareholders, adjusted net income per share, other income (expense), as adjusted, adjusted effective tax rate, 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 September 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$ 1,482 $ 1,505 (2) % (5) % 1 % (3) % 5 % Reinsurance Solutions 396 353 12 (4) 3 6 7 Health Solutions 494 497 (1) (4) - (2) 5 Wealth Solutions 326 351 (7) (6) - (3) 2 Eliminations (2) (4) N/A N/A N/A N/A N/A Total revenue$ 2,696 $ 2,702 - % (5) % 1 % (1) % 5 % Nine Months Ended September 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$ 4,893 $ 4,788 2 % (4) % - % (1) % 7 % Reinsurance Solutions 1,909 1,775 8 (3) 1 3 7 Health Solutions 1,546 1,503 3 (3) - (2) 8 Wealth Solutions 1,014 1,062 (5) (4) - (3) 2 Eliminations (13) (15) N/A N/A N/A N/A N/A Total revenue$ 9,349 $ 9,113 3 % (4) % - % - % 7 % (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 endedSeptember 30, 2022 and 2021, was$26 million and$2 million , respectively. Fiduciary investment income for the nine months endedSeptember 30, 2022 and 2021, was$35 million and$6 million , respectively. (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. 34 --------------------------------------------------------------------------------
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.
A reconciliation of this non-GAAP measure to the reported operating margin is as
follows (in millions, except percentages):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue $ 2,696 $ 2,702 $ 9,349 $ 9,113
Operating income (loss) - as reported $ 590 $ (801) $ 2,657 $ 1,116
Amortization and impairment of intangible
assets 34 36 87 112
Transaction costs and other charges related
to the combination and resulting
termination (1) - 1,363 - 1,436
Legal settlements (2) - - 58 -
Operating income - as adjusted $ 624 $ 598 $ 2,802 $ 2,664
Operating margin - as reported 21.9 % (29.6) % 28.4 % 12.2 %
Operating margin - as adjusted 23.1 % 22.1 % 30.0 % 29.2 %
(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 third 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, as well as certain compensation expenses and expenses related to
further steps on our Aon United operating model as a result of the termination.
Additionally, this includes the $1 billion Termination Fee paid in connection
with the termination of the combination.
(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 net income (loss) per share is as follows (in millions, except per share data and percentages):
Three Months Ended
Non-GAAP
U.S. GAAP Adjustments Adjusted
Operating income $ 590 $ 34 $ 624
Interest income 7 - 7
Interest expense (103) - (103)
Other income (expense) 16 - 16
Income before income taxes 510 34 544
Income tax expense (1) 92 12 104
Net income 418 22 440
Less: Net income attributable to noncontrolling interests 10 - 10
Net income attributable to Aon shareholders $ 408 $ 22 $ 430
Diluted net income per share attributable to
$ 0.10 $ 2.02 Weighted average ordinary shares outstanding - diluted 212.6 - 212.6 Effective tax rates (1) 18.0 % 19.1 % 35
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Three Months Ended September 30, 2021
Non-GAAP
U.S. GAAP Adjustments Adjusted
Operating income (loss) $ (801) $ 1,399 $ 598
Interest income 3 - 3
Interest expense (80) - (80)
Other income (expense) 10 - 10
Income (loss) before income taxes (868) 1,399 531
Income tax expense (1) 23 104 127
Net income (loss) (891) 1,295 404
Less: Net income attributable to noncontrolling interests 9 - 9
Net income (loss) attributable to Aon shareholders $
(900)
Diluted net income (loss) per share attributable to
shareholders
$
(3.99)
Weighted average ordinary shares outstanding - diluted (2) 225.4 1.5 226.9
Effective tax rates (1) (2.6) % 23.9 %
Nine Months Ended
Non-GAAP
U.S. GAAP Adjustments Adjusted
Operating income $ 2,657 $ 145 $ 2,802
Interest income 15 - 15
Interest expense (296) - (296)
Other income (expense) 71 - 71
Income before income taxes 2,447 145 2,592
Income tax expense (1) 467 37 504
Net income 1,980 108 2,088
Less: Net income attributable to noncontrolling interests 48 - 48
Net income attributable to Aon shareholders $ 1,932 $ 108 $ 2,040
Diluted net income per share attributable to
$ 0.51 $ 9.51 Weighted average ordinary shares outstanding - diluted 214.6 - 214.6 Effective tax rates (1) 19.1 % 19.4 % 36
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Nine Months Ended
Non-GAAP
U.S. GAAP Adjustments Adjusted
Operating income $ 1,116 $ 1,548 $ 2,664
Interest income 9 - 9
Interest expense (237) - (237)
Other income (expense) 7 - 7
Income before income taxes 895 1,548 2,443
Income tax expense (1) 460 47 507
Net income 435 1,501 1,936
Less: Net income attributable to noncontrolling interests 43 - 43
Net income attributable to Aon shareholders $ 392 $ 1,501 $ 1,893
Diluted net income per share attributable to
$ 6.59 $ 8.31 Weighted average ordinary shares outstanding - diluted (2) 227.7 - 227.7 Effective tax rates (1) 51.4 % 20.8 % (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 and pension settlements, which are adjusted at the related jurisdictional rate. In addition, income tax expense for the nine months endedSeptember 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. (2)The dilutive effect of potentially issuable shares was excluded from the calculation of theU.S. GAAP Weighted average ordinary shares outstanding for the three months endedSeptember 30, 2021 due to the net loss recognized in the period. 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): Nine Months Ended
2022
2021
Cash provided by operating activities $ 2,177$ 1,251 Capital expenditures (126) (102) Free cash flow $ 2,051$ 1,149
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 a favorable impact of$0.04 and an unfavorable impact of$0.24 on net income per diluted share during the three and nine months endedSeptember 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$0.13 on net income (loss) per diluted share during the three and nine months endedSeptember 30, 2021 , respectively, if 2020 results were translated at 2021 rates. Currency fluctuations had an unfavorable impact of$0.05 and an unfavorable impact of$0.34 on adjusted diluted earnings per share during the three and nine months endedSeptember 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$0.24 37 -------------------------------------------------------------------------------- on adjusted diluted earnings per share during the three and nine months endedSeptember 30, 2021 , respectively, if 2020 results were 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 atSeptember 30, 2022 andDecember 31, 2021 , respectively, and fiduciary receivables of$8.2 billion and$8.3 billion atSeptember 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. AtSeptember 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
CHUBB LTD – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Property Insurance from Kelly Insurance Group – An Independent Insurance Agency in Phoenixville, Collegeville, Limerick, Skippack, Royersford, Trappe, and the Surrounding
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