Aon PLC

NYSE:AON

Earnings Call Transcript 2022-Q4

[Operator]

Good morning and thank you for holding. Welcome to Aon plc's Fourth Quarter and Full Year 2022 Conference Call. [Operator Instructions] I would like to also remind parties that this call is being recorded. If anyone has an objection, you may disconnect your line at this time.

It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historic results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our fourth quarter and full year 2022 results as well as having been posted on our website.

It is now my pleasure to turn the call over to Greg Case, CEO of Aon plc.

[Greg Case, Chief Executive Officer]

Thank you and good morning, everyone. Welcome to our fourth quarter conference call. I'm joined by Christa Davies, our CFO; and Eric Andersen, our President. As in previous quarters, for your reference, we posted a detailed financial presentation on our website.

We begin today by thanking Aon colleagues around the world. Our strong performance in the fourth quarter and through 2022 and our strong momentum as we start 2023, continues to reflect tremendous dedication by our colleagues and the power of our Aon United strategy to support clients, both in their demands of today and as they plan to address their needs of tomorrow.

2022 was a year in which we continue to see clients focus on both the challenges and opportunities from increasing global risk and the opportunities to engage clients continues to grow. In commercial risk, our latest weather climate and Catastrophe Insight report sized global economic losses from natural catastrophes at $313 billion, 4% over the 21st century average and it was only 42% covered by insurance, $190 billion protection gap.

In Wealth Solutions, equity and fixed income market volatility in the back half of the year created demand for our Wealth Solutions colleagues to help organizations reassess retirement readiness and financial well-being. And in Health Solutions which includes our human capital business, the continuation of broad trends around a changing workforce, encompassing health, culture, wellness, engagement and inclusion, our growing and focus and importance across the C-suite and the stakes have never been higher.

In this environment of increasing risk and complexity across so many fronts, our colleagues are increasingly relying on Aon United. This would enable them to bring the full force of our firm, including core offerings and innovative solutions at scale to address evolving client demand.

Turning to financial performance. In the fourth quarter, we delivered organic revenue growth of 5%, highlighted by 9% growth in reinsurance, 7% growth in Health Solutions and 6% growth in Wealth Solutions. In reinsurance, our teams were able to deliver strategic advice and data-driven analytics very early on in the renewal process to help clients navigate difficult market dynamics. This market leadership benefited our clients greatly in a challenging 1/1 renewal and reflects our strong performance.

In Health Solutions, we saw strength in our core H&P and human capital. Both of which benefited from enhancements to our offerings, tools and platforms and increased client focus on employee health, rewards, engagement in well-being. In Wealth Solutions, our team delivered the strongest quarterly organic revenue growth in over 5 years. As our teams worked tirelessly to respond to client demand resulting from market and interest rate volatility, particularly in the U.K. and continue to help clients execute on pension risk transfer, strategic pension management and respond to regulatory changes.

And finally, commercial risk grew 4% in the quarter and 6% for the year. We delivered double-digit organic revenue growth in Canada and Latin America and strong growth in Europe, the U.K. and Asia Pacific. In the U.S., otherwise strong results continue to reflect the impact of the external M&A and IPO environment on M&A services. This impact reduced quarterly organic growth by 5%, an annual growth by 2.5%. And while this short-term pressure may continue into Q1, over the long term, we are very well positioned in this highly attractive business but has significant opportunity to contribute to long-term top and bottom line growth.

For the full year, our organic revenue growth of 6% is a direct result of our Aon United strategy and is a key driver of strong top and bottom line results for the full year. Noting adjusted operating margins expanded 70 basis points to 30.8%. Adjusted earnings per share grew 12% to $13.39, overcoming a 3% or $0.44 FX headwind. Free cash flow exceeded $3 billion with free cash flow margins of 24.2%, both our highest ever and we completed $3.2 billion of share buyback, demonstrating our confidence in the long-term value of the firm.

Our team's performance positions us exceptionally well to deliver in 2023 and over the long term. Looking back, since 2010, we've reported 4% average organic revenue growth. Over 1,100 basis points of margin expansion or about 90 basis points per year, while adjusted EPS and free cash flow increased at a compound annual growth rates of 12% and 13%, respectively. More important, we view the go-forward opportunity and momentum higher now than any time in our history. Looking ahead, we continue to expect mid-single-digit or greater organic revenue growth for the firm, margin improvement and double-digit free cash flow growth for the full year 2023 and over the long term.

Reflecting on the year, we would offer a few observations on how Aon United continues to deliver for clients. The steps we've taken over the past decade, including our single brand and single P&L, put us in an exceptionally strong position to deliver for clients and have significant impact on some of the greatest opportunities and challenges they face. These ideas are not new. There are a continuation of over a decade of progress on the areas highlighted in our Aon United blueprint, clients, colleagues, innovation at scale and Aon business services that are increasingly interconnected and mutually reinforcing.

On delivering innovation at scale, the platform we've built not only enables innovation of new concepts as we've demonstrated in areas like intellectual property solutions and climate but increasingly enables us to bring together our analytics and expertise for new solution development, both from within solution lines and connected across our business. For example, our Health Solutions team has developed an Aon health analytics platform, supported by hundreds of data scientists and credential health actuaries, as well as experts from human capital and ad business services. It's designed to help clients assess and improve their employees' health which in turn helps deliver well-being, productivity and lower cost.

Within this offering, driven by proprietary analytics, we can assess data around employee health information, insurance and claims, workplace safety, absence engagement data and external data on health trends and solutions which together form a robust view of employee physical well-being. With this insight, our teams can recommend individualized solutions, including better insurance offerings and targeted program. As an example, 1 manufacturing client wanted to improve employee physical well-being and reduce costs. Together, we designed a comprehensive long-term well-being strategy and a customized health program that includes 12 vendors and targeted specific health and well-being programs for employees based on individual factors correlated success. The results were impressive.

In our target group as compared to nonparticipants, we saw meaningful improvement in selected health metrics at 24% lower cost per person. Further, the platform allows for rapid scale and distribution of a solution to help our clients drive workforce health, wealth and productivity. Equally important, our colleagues while having this kind of impact which is an important driver of our very high Aon colleague engagement. And we see examples like this across the firm every day as we help our clients manage risk and support their people. And this demonstrates the opportunity to continue delivering innovative solutions at scale to address our clients' biggest challenges across the backdrop of rapid change and ongoing volatility.

To summarize, we began 2023 in a position of strength. Our firm is more connected than ever before, enabling us to deliver better solutions for clients and to better support our colleagues. Aon United will continue to deliver results now and over the long term for our clients, colleagues and shareholders and is reflected in our progress to achieve key financial objectives.

Now, I'd like to turn the call over to Christa for her thoughts on our financial progress in Q4 and 2022 and our long-term outlook. Christa?

[Christa Davies]

Thanks so much, Greg and good morning, everyone. As Greg highlighted, we delivered another strong quarter of performance across our key metrics to finish the year.

In the quarter, we translated 5% organic revenue growth into 40 basis points of adjusted margin expansion and strong growth in adjusted earnings per share. For the full year 2022, organic revenue growth was 6%. Adjusted operating margins increased 70 basis points to 30.8% and we generated over $3 billion in free cash flow, an all-time high. We look forward to building on this momentum as we head into 2023.

As I reflect on results, as Greg noted, organic revenue growth was 5% in the fourth quarter and 6% for the full year. We continue to expect mid-single digital greater organic revenue growth for the full year 2023 and over the long term. I would also note that reported revenue growth of 2% in both Q4 and the full year includes an unfavorable impact from changes in FX of 4% in both periods. Primarily driven by a stronger U.S. dollar versus most currencies.

I'd also highlight that fiduciary investment income which is not included in our organic revenue growth, was $41 million in Q4 and $76 million for the full year or 1% in both periods.

Moving to operating performance. We delivered strong operational improvement in Q4 with adjusted operating margins of 33.2% an increase of 40 basis points driven by organic revenue growth and efficiencies from Aon Business Services, overcoming expense growth, including investments in colleagues and technology to drive long-term growth and some ongoing resumption of T&E.

For the full year, adjusted operating margin of 30.8% reflects margin expansion of 70 basis points year-over-year. And I'll note over the past 12 years, we delivered 90 basis points of margin expansion a year.

Looking forward, we expect to deliver margin expansion in 2023 and over the long term as we continue our track record of cost discipline and managing investments in long-term growth on an ROIC basis. As we've previously communicated, we think about margins over the course of the full year, driven by 3 areas: the first is top line revenue growth. The second is this portfolio mix shift to higher margin businesses as we invest disproportionately in areas of increasing client demand, supported by data-driven solutions to deliver the insights and advice that help our clients protect and grow their organizations. And third area is increased operating leverage from ongoing productivity improvement from our Aon Business Services platform.

I'd highlight that Aon Business Services continues to be a key contributor to margin expansion and represents a competitive advantage, especially in a high inflationary market. Our Am business services platform continues to drive efficiency gains, improved quality and service and increased innovation at scale.

During 2022, we continue to make progress on Aon Business Services and driving efficiencies in enhanced services. Particularly through process improvement, automation and the use of artificial intelligence. For instance, our captives business has clients with hundreds of legal entities who each require multiple policies. Previously, the process of checking policies was manual and inefficient. We've now moved to a digital solution that can identify differences quickly and accurately and deliver these to clients much more quickly.

Similarly, the use of AI is increasingly enabling us to deliver better solutions to clients. For example, we delivered a new solution for our human capital clients using an AI-powered search engine that provides them with insights on technology talent globally including geography-based pay differentials. This is essential for finding the best technology talent and optimizing within the client's existing workforce, a key area of growth for many firms.

As we've said before, these improvements not only improve accuracy and client service delivery, they also help free up our colleagues time for more valuable client activities and drive better outcomes for our clients.

Organic growth and margin expansion translated into adjusted EPS of 5% in Q4 and double-digit growth of 12% for the full year. As noted in our earnings materials, FX translation was an unfavorable impact of approximately $0.09 per share in Q4 and $0.44 per share for the full year 2022. If currencies are remained stable at today's rate, we would expect an unfavorable impact of approximately $0.13 per share in the first quarter of 2023 and $0.12 per share for the full year 2023.

Turning to free cash flow and capital allocation. We generated over $3 billion in free cash flow in 2022, contributing to our long-term track record of growing free cash flow at 13% CAGR since 2010. Our outlook for free cash flow in 2023 and beyond remains strong and 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.

I'd note CapEx returned to a more normalized level in 2022 as we made ongoing investments in ABS enabled platforms and technology to drive long-term growth. As we've said before, we manage CapEx like all of our investments, on a disciplined return on capital basis.

Given our strong outlook for free cash flow growth in 2023 and beyond, we expect share repurchases to continue to remain our highest ROIC opportunity for capital allocation. We believe we're significantly undervalued in the market today, highlighted by the approximately $675 million of share repurchases in the quarter and $3.2 billion of share repurchase for the full year.

We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address unmet client needs. We've invested in expertise and content to help meet our clients' needs such as our Q4 acquisition of ERM, a Mexico-based leader in risk assessment modeling which expands our catastrophe modeling and consulting capabilities in reinsurance.

Our M&A pipeline continues to be focused on our highest 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 an ROIC basis. We ended 2022 with an ROIC of 30.6%, an increase of nearly 1,900 basis points over the last 12 years.

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 expect to add incremental debt as EBITDA growth over the long term while maintaining our current investment-grade credit ratings. With respect to interest rates, I'd note our term debt is all fixed rate, with a weighted average interest rate of approximately 4% and a weighted average maturity of approximately 12 years. I'd note our pension liability improved as interest rates increase.

As a continuation of our pension derisking efforts, I'd highlight that we completed an annuity settlement transaction in the fourth quarter, resulting in approximately $300 million reduction in our pension benefit obligation. This continues to be an incredibly attractive environment for our clients to do pension risk transfers and we continue to see very strong demand from clients. We've done substantial numbers of pension risk transfers in the U.S. and the U.K. and are a leader in the space.

In summary, 2022 was another year of strong top and bottom line performance, driven by the strength of our Aon United Strategy and Aon Business Services. We returned over $3.6 billion to shareholders through share repurchase and dividends. The success we achieved this year continues to provide momentum as we head into 2023. While we're seeing signs of economic uncertainty, we remain confident in the strength of our firm and our financial guidance for 2023.

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.

[Operator]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo.

[Elyse Greenspan, Wells Fargo]

My first question is on your margins. So if we look in the quarter, it seems like your margin declined excluding the benefit of fiduciary investment income. So I'm just trying to get a sense of the drivers and outlook you see for your margin, excluding the NII benefit in 2023?

[Christa Davies]

Yes. Thanks so much for the question, Elyse. That is correct. We saw 40 basis points of margin expansion and 90 basis points of impact from fiduciary investment income. And I would note, we really think about margins over the course of the full year. So 70 basis points of margin expansion in the full year, of which 40 basis points came from fiduciary investment income. And we really think about margin expansion over the long term. Our margin growth has been 1,120 basis points over the last 12 years or 90 basis points a year for 12 years. And it's really driven by revenue growth, the portfolio mix shift to higher margin areas and the productivity benefit we're getting from Aon Business Services.

And so we're extremely confident with that track record at least for our financial guidance which is mid-single-digit or greater organic revenue growth, margin expansion for the full year 2023 and double-digit free cash flow growth for the full year 2023.

[Elyse Greenspan, Wells Fargo]

So assuming we continue to get a tailwind from fiduciary investment income, I guess, in '23, you'll probably balance letting that all fall to the bottom line and making some of the investments similar to what you did in the fourth quarter?

[Christa Davies]

I think that's fair. We are continuing to drive margin expansion each and every year, overcoming investments we're making in the business because you saw in Q4 we substantially invested in IT. So our IT expense is up. We're investing in platforms and technology to drive innovative solutions for clients. And we'll continue to invest in our colleagues and we'll continue to invest in M&A and we'll continue to invest in a lot of areas to drive long-term growth but we really think about this over the course of a full year which is really what matters to us.

[Elyse Greenspan, Wells Fargo]

And then my second question, we've heard a lot about a lot of strong pricing coming out of the January 1 reinsurance renewals. Can you give us a sense of the outlook for your reinsurance business? I am not sure if you highlighted it in the past but the concentration is in the property lines. But can you give us a sense of just how you think that business should perform in an environment where we're seeing as robust catastrophe reinsurance price increases that we saw at January 1?

[Eric Andersen, President]

This is Eric Andersen, why don't I take that one to kick us off. It's great to be with you this morning. The reinsurance business continues to be a very strong performer for us as we go through the year. And I would say certainly, a lot of attention spent on property CAT [ph] for good reason. Certainly, the losses, the interest rate moves, the restructurings of the programs that were happening throughout the season. I would say Property CAT [ph] continues to be a dominant part of the business but it's not the whole business. Certainly, casualty, specialty and others continue to be a big part of it. But so I would say, as I think through the future of what's going to happen over the next 12 months, we continue to see a very robust opportunity for the team. They're spending a lot of time with data analytics, better insight to help our primary clients figure out their positioning. But the endgame, I think when you think through the 1/1 renewals is that there's more risk, more volatility has been pushed to the primary insurers.

And the outcome of that for them will be either risk appetite. They're going to have to be very disciplined on the risk that they assume in the property space in particular. They'll use other methods like facultative reinsurance, they'll probably do selective buying throughout the year. And so I would say the 1/1 season, a little different than years past which I think is what you're alluding to. And ultimately, they're going to continue to manage their portfolio as the year progresses.

[Greg Case, Chief Executive Officer]

And I might just add to that, at least, the theme was exceptional. I'd tell you, the 1/1 renewals had a unique market dynamic and taking the analytics and capability we have in place and what we're able to do and how we deliver it to the market well before anyone else was truly unique and helped our clients tremendously as they navigated through the marketplace. As Eric highlighted, more risk means more opportunity to demonstrate value added.

[Operator]

Our next question comes from the line of Andrew Kligerman with Credit Suisse.

[Andrew Kligerman, Credit Suisse]

In your slides, you described the impact on organic revenues from the market as modest positive impact in both commercial risk and reinsurance. Can you give a little more color on that market impact and maybe discuss the issue of commissions versus fees and whether your fees were kind of level year-over-year or whether commissions were driven down in each of those 2 segments?

[Greg Case, Chief Executive Officer]

Andrew, maybe I'll start and Eric, you can chime in as well here. First, Andrew, we always come back to the idea we talk about market impact. This is a function of prices you're highlighting but also insured values over time. Obviously, a lot is happening on the insured value front. And this is really broadly beyond this property but really as you think about on the employee side and all aspects of sort of what's driven by changes in those values. And that actually has much more impact than just price per se.

As we've highlighted, you step back, it really is a modest impact over time. We saw that in this quarter. We think we'll see that throughout the year. And it really for us is about value. We deliver value for clients and we could benefit from that because they get benefit. And we're very, very clear about that. And as Eric highlighted on Elyse's question, in an environment with greater risk, the opportunity to provide greater value is real and meaningful and we're doing it and we're benefiting from it. So that's what you're seeing overall. But Eric, maybe you want to dive a bit more into the specific pricing.

[Eric Andersen, President]

Sure. Listen, I think on the property on the market perspective, certainly property is getting a lot of attention and you continue to see that market be challenging for our primary clients. It is worth noting though that clients use a lot of different tools to manage that market dynamic. They use captives, they use retention. They limits purchase. So it's not a direct line from what a carrier would say about a property market rate versus what a client actually assume. So there's a lot of tools that they have and we spend an awful lot of time, as Greg was saying, trying to add additional value for them using financial modeling and techniques to try and limit that exposure. The other products, casualty, cyber, financial products, etcetera, around the globe, I would say, are more stable. We're a good 3.5, 4 years into a market cycle and I think those products are coming more to an equilibrium.

And the last thing I would say about your question on commission fees and ties back to what Greg said is one of the benefits of being a fully transparent broker where we engage our clients in what we get paid for the value that we provide, we don't really care whether it's a commission or whether it's a fee. What we really are driven by is are we providing value to clients and are we being paid fairly for that value. And so whether the cycle is up or down, it doesn't really matter to us. We engage in those conversations in a fully transparent way and I think we have great relationships with our clients because of it.

[Andrew Kligerman, Credit Suisse]

Okay. So maybe just so I can interpret it that the 4%-plus revenue growth in commercial risk, 9%-plus in reinsurance. Both of them were more a function of what Aon was delivering as opposed to inflationary impacts on exposures and kind of a very firm pricing environment. I should think about it as more Aon [ph] and the very little of these market issues played through. Is that right [ph]?

[Eric Andersen, President]

If you think about it -- I'll just use reinsurance as an example. It's historically our smallest quarter and it's not treaty driven. It's driven around facultative placements, banking, our technology consulting group. So not really market-driven issues but more value issues in terms of usage of those tools to help clients manage their exposures.

[Andrew Kligerman, Credit Suisse]

Okay. And then just a quick one on the tax rate at 9%. Is that a sustainable tax rate? Or should we be thinking about it kind of drifting up a little bit towards, say, 12% last year in the quarter?

[Christa Davies]

So what we would say is we don't give forward guidance on tax. But as I look back historically, exclusive of the impact of discrete items which can be positive or negative in any 1 quarter, our historical underlying rate for the last 5 years was 18%. And that's the result of us being a global company domiciled in Ireland with a global cash management structure and a global capital structure. And so we're really confident about where we are.

[Andrew Kligerman, Credit Suisse]

Confident. So should I be thinking more towards the 18% [ph]?

[Christa Davies]

Again, we don't give guidance going forward on tax rate but I can tell you that as we look back historically, our historical underlying rate for the last 5 years was 18%.

[Operator]

Our next question comes from the line of Jimmy Bhullar with JPMorgan.

[Jimmy Bhullar, JPMorgan]

So first, just had a question on your -- some of your comments on the reinsurance market. You mentioned a challenging environment for your clients, especially in property reinsurance. Are you expecting a similar trend for midyear renewals as well? Or do you expect any sort of shifts in capacity entering the market?

[Eric Andersen, President]

So Jimmy, right now, we have not seen a lot of new capacity enter the marketplace, although there is certainly a lot of whispers and discussion about whether there's opportunity for additional capital to enter. So I would say as we go into the April 1 property renewals which are dominated by Japan and then June which is dominated by Florida. I think as we sit here today, you would have to think that those market dynamics will continue.

[Jimmy Bhullar, JPMorgan]

Okay. And then just similarly, on commercial lines, obviously, pricing has been pretty good for a while. It seems like it's softening a little bit, given the results that some of the carriers have reported. Are you seeing something similar in the market, too?

[Eric Andersen, President]

Yes, I would say it depends where you are and it depends on the segment, it depends on the industry. I think we like to say there's a million little markets out there depending on each individual client and the business they're in and the type of exposures that are being covered. But then on macro basis, certainly, property, I think, continues to be the firmest as the primary carriers now deal with the effects of higher retained risk that they were traditionally passing on to reinsurers. But whether it's the casualty lines, general liability, cyber, financial lines, D&O, professional that type of thing, we're definitely seeing a stabilizing of that market. As more capital has come into those areas and clients are being given more choices in what they're doing. And I would also say that the insurers are 4 years into remediating their portfolios. And so they're much more specific as to the areas that they choose to compete in and the kind of business that they want to write which does give clients sort of a more targeted choice of potential insurer partners.

[Greg Case, Chief Executive Officer]

Jimmy, in the context of this, if you step back and think about the implications for insurers, as Eric highlighted very well kind of on a product-by-product basis. As I talked, described in my comments and Christa amplified very well, this is really about a client leadership approach for us and fundamental demand is going up. The opportunity to talk to clients about risk out there in the world and how it's connected, it's going up. So irrespective of sort of the individual pricing environment which are prescribed well, the opportunity for us to engage clients and help them how to protect their business and grow is actually continuing to increase.

[Jimmy Bhullar, JPMorgan]

Okay. And just lastly for Christa. On taxes, do you see anything in terms of like a minimum global tax or something that -- based on what's out there right now? And how -- do you have any views on how it would impact your financials?

[Christa Davies]

Jimmy, we don't comment on any future legislation. We run a global tax structure and we've had an underlying rate of 18% for the last 5 years and we feel really good about where we are.

[Operator]

Our next question comes from the line of Rob Cox with Goldman Sachs.

[Rob Cox, Goldman Sachs]

And first, maybe just a longer-term question. I think in the past, you've talked about getting margins up into the 40% plus area. I know you don't disclose margins by segment. But curious if you can give us some color on which of your businesses have some of the most opportunity there and if commercial risk could ever get to that level?

[Greg Case, Chief Executive Officer]

Rob, just take a step back for a second, as we've talked about, it really is about mid-single-digit or greater organic growth improving margins overtime and really driving double-digit free cash flow growth for the firm and all aspects contributed. And as you're hearing in our commentary, more and more are connected. The solutions we are providing, some of the most innovative solutions we're providing really are a function of how our commercial risk business, our reinsurance business, health, wealth and talent business has come together. And so we're confident about continuing to drive margin improvement.

As we described, organic revenue growth mid-single digit or greater and free cash flow growth double digit. That's how we want you to think about it. That engine is really what's coming together and we're confident we can achieve that on our and our clients' behalf.

[Rob Cox, Goldman Sachs]

Okay, got it. And maybe just switching to the wealth segment. Obviously, strong growth in the quarter. I was wondering if that was more driven by the pension risk transfers or some of the regulatory changes we're seeing, particularly in Europe. And if your outlook considers a continued tailwind from these areas?

[Greg Case, Chief Executive Officer]

I just would start overall and Eric, I love to add some additional color here. Look, the teams done a phenomenal job. There's a lot going on out there for our clients in this arena, a lot of complexity as we described before and whether it's on the interest rate side or the overall -- general state of the overall economy and what's happening, the pension risk transfer as you've described. So the team has just done an exceptional job really on a global basis helping our clients kind of navigate across very, very challenging marketplaces. And you saw a drop in the year, you certainly saw a drop in the quarter. Eric, what else would you add to that?

[Eric Andersen, President]

Listen, I think the regulatory changes with the global minimum pensions is such a big part of the business in the retirement side. So we saw a lot of growth there, especially out of the U.K. but also decent growth in the U.S. as well. There were some headwinds with the investment business because of AUM being down with the market. But overall, I think we're really well positioned. And I think, Christa, you mentioned in your opening comments about the pension risk transfer piece. Also, I think we're an industry leader in that space and really have a great team to do it.

[Christa Davies]

Look, I'll just finish with what we're doing on the Aon side. We're following the same advice we give clients. And over the last 15 years, we've reduced the risk in our pension substantially through steps to close the plants, new entrants, freeze benefit accrual, matchup liabilities and purchased annuities to settle a portion of the pension liabilities. And it's resulted in much less economic risk and much reduced cash contributions. And so our remaining plans are well funded and hedged. And we're really managing on a cash basis and you can see that our cash contributions have come down substantially over time, with only $65 million we're contributing in 2023 in cash, a continued downward trend in cash. And so we're really excited about the progress we continue to make on our own plans in derisking, as you saw in Q4, with the $300 million of pension benefit obligation coming off the balance sheet and in the decreased cash contributions.

[Operator]

Our next question comes from the line of Weston Bloomer with UBS. [Operator Instructions]

[Weston Bloomer, UBS]

Sorry about that. I was on mute. My first question is on the margin. I was hoping you could kind of expand on your margin outlook away from fiduciary income. I guess, would you be able to still expand margins in the core business away from the fiduciary income benefit in 2023? And then where could we potentially see that margin improvement? I would assume lower real estate would be a component of that.

[Christa Davies]

So Weston, thanks so much for the question. As we think about margin expansion, we think about it holistically over the course of the year at the Aon level. And we've grown margins, as I mentioned, 1,120 basis points over the last 12 years or 90 basis points a year for 12 years. And it's driven by revenue growth a portfolio mix shift as we disproportionately invest in higher revenue growth, higher-margin businesses organically and inorganically and productivity benefit from ABS. So we don't look at it separately from investment income or frankly, the underlying investments we're making in the business each and every year to drive long-term growth and innovation for our clients.

[Weston Bloomer, UBS]

Great. My second question, I know you highlighted that you were seeing some signs of economic uncertainty in your prepared remarks. Can you just expand on kind of where you're seeing those signs of weakness? And then what economic backdrop does your guidance assume?

[Greg Case, Chief Executive Officer]

Excellent. Listen, I appreciate the question. We are seeing uncertainty or complexity or interconnectivity, however you want to describe it, really everywhere around the world. We do want to emphasize, though, this is not just risk, it's opportunity. It's an opportunity to engage clients in ways to help them understand these risks more effectively. And candidly, our clients want to get on the offensive. They want to understand that risk and then actually deal with how they can actually grow their businesses in the context of it. So for us, this is about more connectivity around a changing environment but we're seeing it really over around the globe, the impact of interest rate changes, inflation, geopolitical challenges, really the fundamental issues I described in the opening comments around things like health and wealth and talent.

The evolution from just engagement is now wellness and all things that come without all aspects of that. How you think about managing that sort of using reinsurance analytics and commercial risk analytics in the context of people, all of these things are coming together to create opportunity for us and we're really seeing it everywhere in addition to the challenges you described.

[Weston Bloomer, UBS]

Great. And then my last one, a follow-up on tax. I believe you had a tax holiday in Singapore that ran through September of 2022. Was that extended going forward?

[Christa Davies]

Look, our operations in Singapore, including our investment center and local business are an essential part of our operations today and we expect that will mean an important part of our global strategy going forward. We did finalize our negotiations with the Economic Development Board in Singapore and we'll provide an updated disclosure on our 10-year arrangement in our 10-K.

[Operator]

Our next question comes from the line of David Motemaden with Evercore ISI.

[David Motemaden, Evercore ISI]

I had a question on commercial risk. Greg, you mentioned there was a 5-point drag from the lower transaction volume in the quarter's organic growth. I guess I'm wondering is that going to be a similar size drag as we think about first quarter? Or is it going to be lower or higher? I guess, how should we think about that as we progress through the 2023?

[Greg Case, Chief Executive Officer]

Yes. And David, thanks for the question. Really, we were underlying our commercial risk colleagues working across the firm has done a tremendous job and drove growth, as I described, really everywhere around the world, including in the U.S. with the exception of the external M&A and IPO environment which created a headwind that we described. But even in the context of that, we've just done a magnificent job. As you know, that's an amazing business and we are incredibly well positioned in the context of it. And we'll see how it plays out. We highlighted, maybe it drags into the first quarter with Q2, what happens on the M&A services front. But overall, it's an exceptionally strong performance in terms of what we've done overall. And this is just one piece and as we described before, this is really about overall global Aon and what we can do to grow the firm and we're very excited and confident about how that's going to proceed in '23.

[David Motemaden, Evercore ISI]

Got it. Okay. And then I think you guys usually give an update on the calling count at the end of every year. So I think it was 50,000 at the end of 2021. Where did that stand at the end of 2022? Does that grow at all?

[Greg Case, Chief Executive Officer]

Listen, I'm not sure how much we disclose on a specific people because it isn't about the individuals for us from the standpoint, it's how we help them become more effective, more capable -- greater ability to deliver to the firm. And I would say, as we look at that, we've been incredibly pleased with the progress. When you think about overall Aon United and all the aspects around it. And great progress. But I would say we continue to invest tremendously in our colleagues and bringing colleagues on it and you saw that in '22, you'll see it again in '23 and '24.

[David Motemaden, Evercore ISI]

Got it. And I guess just a follow-up on that, Greg. You mentioned, I guess, it sounded like just productivity enhancement of your existing employee base. Is -- are there any metrics that you guys track that you can help us think about that?

[Greg Case, Chief Executive Officer]

David, there are lots of metrics. We have them. We don't disclose them. I do think it's worth on this point, in particular, understanding and maybe taking a minute to step back and say, listen, when you think about our ability to drive organic growth, to drive margin improvement, to drive free cash flow improvement, fundamentally, Christa and I both highlighted the role the Aon United strategy plays in that. And it is fundamental and I think it's worth a couple of minutes here, David, to your question. Look, if you think about it, we've been at this for 10 years plus. We saw back then client need was changing. We saw that we need to help them make better decisions to protect and grow their business. We saw, frankly, this accrued across all aspects of risk, not just commercial risk, all aspects of what we're doing, workforce health, talent, etcetera. We also saw we had great capability. But like everyone around the world, it wasn't joined up and it wasn't driving innovation at scale. And we saw that loud and clear, David, in terms of where we are.

We also saw, however, there were pieces and pockets when our colleagues work together. We win more clients, we do more with them. We retain them longer and we also deliver better and faster innovation at scale across the firm. And this fundamental truth, 10 years ago for us, created a great deal of excitement but it also created a real challenge which was, okay, that sounds great. Everybody talks about this. How do you do it? How do you accomplish that? And that's the Aon United strategy. And this is back to your critical question, how do we maintain performance and drive it over time. It is in Aon United. The challenge has been as we've evolved it and the opportunity is this required a fundamental design of organization around serving clients, training, learning, how we think about leadership development. Aon Business Service is fundamental to that and some real, frankly, price of admission to really do this, single brand, single P&L, single leadership team, etcetera and we are really bringing that online.

And what you heard from both Christa and I and Eric's comments as well is what we've done with Aon United is fundamentally to put us in a position to not just serve clients by solution lines that really cutting across solution lines to bring better capability to them. And in the current environment, the more difficult it becomes for clients, the more opportunity we have to bring value. And that's frankly what you're seeing which is why we are confident in our ability to, frankly, not just make progress over the last decade as Christa highlighted but why we are so excited about the go forward.

[Eric Andersen, President]

Greg, maybe I can give a little bit of color with regard to a client example just to bring it to life because I can't stress how important this is for us and what we do for our clients. We were recently engaged by a global firm and a specialized industry who is looking for just better risk advisory services around the world for their risk strategy, both globally and as well as locally. And to do this, we use resources from all of our solution lines in multiple spots. And on the surface, I would say this is the kind of work that we love to do for clients but just thinking about what you were just saying, Greg, when I dig back to what we used to do, right? When we were operating under these sub brands of Aon Risk services, Aon Benfield, Aon Hewitt and the others, it would have been a pretty disjointed process for us. There would have been all sorts of internal barriers within the firm that would have distracted us from the focus on the client.

We had internal P&L issues, like resource allocation, revenue sharing, incentive discussions. I think you all get the point. But today, with the Aon United structure, we have 5 region leaders, 4 global solution line leaders who are focused solely on delivering for that client under the Aon brand. With 1 P&L operating around the world. And it is powered by the Aon Business Services model which allows us to actually deliver that capability in a uniform way globally.

[Christa Davies]

And Eric, I would just say that Aon United sets the stage for Aon Business Services to be successful, I agree with everything you both said. And I would add 3 things. The first is innovation at scale is an essential part of our ability to deliver results for clients as we continue to find applications and solutions developed in 1 area and then scale it to clients globally. We can't do that without Aon Business Services enabling seamless connectivity across the globe. Second, Aon United is not a field of story. It's designed to enable our colleagues in every way, deliver better results for clients which translates into stronger top and bottom line performance. And ultimately, that translates into free cash flow growth, as evidenced by our billion in free cash flow and 24% free cash flow margin as we put our highest and best use of the capital which we believe will continue to drive long-term value creation for shareholders.

Translating revenue into free cash flow is a scaled operational outcome and it's done at scale globally in over 100 countries, tracking by day, by country with great accuracy. This is not possible without Aon United and the detailed operating model we've got powered by Aon Business services. It makes us all really excited about the 2023 go-forward momentum and how we scale this operation to deliver innovation for our clients.

[Greg Case, Chief Executive Officer]

So David, that was way more than you asked for on the initial piece that you asked a very important specific question. What we're trying to convey is the answer to that is key but it really is fundamental to sort of how the integrated approach happens and how it drives performance. And how we're not complete with the journey. There's a lot more opportunity ahead of us. And it also connects with our colleagues because they love driving the solutions that Eric described. It creates engagement. It creates excitement around. If you can wow a client, you've done something that is truly kind of makes the week in the month. So it's a huge opportunity and we stress it here because it's so fundamental to our success with our clients and obviously, with all of our investors as partners as well. So hopefully, that's helpful.

[David Motemaden, Evercore ISI]

No, thanks so much for the thorough answer. I really appreciate it.

[Operator]

Our next question comes from the line of Michael Ward with Citi.

[Unidentified Analyst]

This is Charlie [ph] on for Mike. I guess, first, in human capital, organic growth has been really strong for many quarters now. Wondering what the pipeline looks there. Amid macro uncertainty and comps being challenging. And you mentioned tech talent in your opening remarks, is that business benefiting from some of the job market dislocation in tech?

[Eric Andersen, President]

So why don't I take the first one. Certainly, human capital has been a very robust business for us over the last 24 months. And it's still -- we still see it. The data sales, the information around comp the competitive talent engagement assessment also very critical to the agendas of our clients. So we feel really good about that business and what it's done over the last 24 months and are confident about it literally over the next 12 to 24 months as well.

[Greg Case, Chief Executive Officer]

And on the tech talent side -- go ahead, Christa. Please go ahead.

[Christa Davies]

All right. On the tech talent, we've got one of the most fabulous brands in the tech space, Radford. And that was the example I gave on the opening remarks around using AI to actually be able to match and find the optimal tech talent at the right price, anywhere around the world. And then to be able to also figure out where your tech talent is within your existing organization to be able to optimize your workforce. And so we do see that the tech dislocations being a fabulous time to utilize this AI technology to get -- to make sure that our clients get access to the best talent and optimize it in the right way.

[Unidentified Analyst]

Got it. And then you mentioned cyber pricing kind of being more an equilibrium now. Wondering how Aon's role in the marketplace has evolved over time as that market has grown a lot over the last several years?

[Eric Andersen, President]

Listen, I think the cyber market is continuing to evolve and we'll continue to do so as the threat actors change over time. I would say we're a leading provider of both risk management. When you think about data security and the strategy to prevent cyber attack, certainly with our Stroz Friedbeg client -- brand, very strong in terms of its work with clients and then obviously, the risk transfer aspect. I would say when you think about the cyber market today and where it's going, I would say the insurers have actually gone back to basics. The way the quality of the underwriting, the in-depth understanding of what the real cyber exposures are have allowed them to price it better to understand the real risk.

And frankly, it's allowed us to distinguish and differentiate our clients and the work that they're doing around cyber protection to be able to bring them to market in a way that gives them individual views but it's become quite a market in terms of size, probably approaching about $10 billion of premium and both from an insurance and a reinsurance side, I consider Aon a market leader in the space.

[Operator]

Our next question comes from the line of Derek Han with KBW.

[Derek Han, KBW]

So my first question is on buybacks. It looks like buybacks slowed a little bit in the fourth quarter. Was there anything unusual driving that? I was a little surprised just given the strong operating cash flows.

[Christa Davies]

No, we would just say that we continue to see across the firm that we deploy cash based on the highest return on capital opportunity. Buyback is top of the list even at today's prices, Derek. And so we -- that's why we bought $3.2 billion back in calendar year 2022. And we expect buyback to remain the highest return on capital opportunity going forward.

[Derek Han, KBW]

Got it. That's helpful. And then my second question is on M&A. We've heard chatter about the M&A market kind of cooling a little bit. Are you kind of seeing that in the market? And -- how does that impact your M&A appetite for this?

[Greg Case, Chief Executive Officer]

Yes. From our standpoint, we see tremendous opportunity around the marketplace overall. And as there's been some market strategy, it creates more opportunity. As Christa described, our decisions are made around literally with the cash pool. It's a return on those capital, cash-on-cash return and we see lots of opportunity out there. We also see lots of opportunity to invest organically in our business and we've been doing that with great success. And the pipeline we see is as strong as ever before as Christa described, it's got to really add value. For us, it's about content, we can scale effectively. And that really drives sort of a set of outcomes that are very powerful. And we see a lot of opportunities there.

Christa, anything else you'd add to that?

[Christa Davies]

Yes. And look, I would just add, we've found some terrific companies and invested in those this year. I mean, Tyche, fantastic capability in the capital modeling and analytics space and ERM in the modeling space in Mexico. And so we continue to invest in areas of high growth and client need which we're really excited about.

[Operator]

Our final question this morning comes from the line of Mike Zaremski with BMO Capital Markets.

[Mike Zaremski, BMO Capital Markets]

Great. Just a follow-up on the M&A landscape. Can you remind us -- we know that Aon has moved in some of M&A with cover wallet into the small commercial marketplace. Any ambitions to get into kind of the main street U.S. retail marketplace. I know you just mentioned there were some market stresses. I believe there's some market stresses for some of the private equity roll-ups there. Just curious if that's any ambitions to get into kind of Main Street retail, small mid-commercial?

[Greg Case, Chief Executive Officer]

Listen, as we step back, I want to make sure I understand the market segments that you're thinking about them. We love the segments we operate in which is really the large market, the middle sized marketplace and the small commercial market. And you're absolutely right. The bringing in cover wallet has been phenomenal. It is a capability, much like many that we can scale. Scale, not just in the small commercial market but if you think about B2B, 2C in large companies with bringing that capability in the context of that, if you think about kind of distributed businesses, franchises, things like that phenomenal kind of opportunities. So we love the space. We've got great capability in it. We were going to continue to grow it and we've seen great success with it. So that's how we think about overall small commercial. But I want to make sure does that answer your question.

[Mike Zaremski, BMO Capital Markets]

Yes. I just wanted to confirm that you -- there is no strategic initiative that kind of operates more kind of in the here I guess, for a marshaling agency or what were the sandbox that they're competing in. The smaller size businesses versus the kind of Fortune 5000, little bigger cover wallet.

[Greg Case, Chief Executive Officer]

Yes, we're absolutely active across the board. The question is how and how with content capability that lets us scale in those agreements. And we've been very successful across all of those segment pieces, not necessarily in Novo [ph] because of that size as opposed to more capability. But it really has been -- we love the segments, I see great opportunity in the segments and cover while it was a great addition to the Aon world.

Eric, anything else you'd add to that?

[Eric Andersen, President]

Yes, Greg. I would say in our Affinity businesses, we serve specialized groups of small. So we're very active in the small space but really where we can bring distinct value, whether it's in the travel space or museums, that type of thing, where we actually have a product or capability where we're able to provide distinct value to the clients. I would also say with our office -- our 500 offices around the world, we engage with clients across all segments. I mean, there are only 500 Fortune 500 clients. We do an awful lot in the middle market and the small commercial. Our strategy is to bring product solutions using the expertise that we have across all of our capabilities and package them and deliver them in a way where we're providing the real value of using Aon as your adviser, so you get that product expertise but delivered in a way where it's efficient and cost effective for them to be able to use our capabilities.

[Mike Zaremski, BMO Capital Markets]

Okay. That's interesting and helpful. And my last follow-up was on fiduciary investment income. And I know there's some nuances and that make it not -- it's tough for us to model exactly but should we be expecting a quarterly step up, a material step-up into '23 based on where the interest rates are now across the globe?

[Christa Davies]

Yes. So what I would tell you is what we saw in 2022 was that interest rate stepped up in Q3 and Q4 of 2022. And so if interest rates stay where they are today, you'll see a similar impact to Q4 in Q1 and Q2. And so we would expect that increase in interest rates stay where they are. And then for modeling going forward, every 100 basis point increase in interest rates is approximately $65 million in fiduciary investment income. And there's no delay between interest rate increases and it impacting our fiduciary investment income.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Case for any final comments.

[Greg Case, Chief Executive Officer]

I just want to say thanks, everybody, for joining us today. We appreciate it and look forward to the next call.

[Operator]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.