EXECUTIVE SUMMARY OF SECOND QUARTER 2020 FINANCIAL RESULTS
Aon plc is a leading global professional services firm providing a broad range
of risk, retirement, and health solutions underpinned by proprietary data and
analytics. Management is leading a set of initiatives designed to strengthen Aon
and unite the firm with one portfolio of capability enabled by proprietary data
and analytics and one operating model to deliver additional insight,
connectivity, and efficiency.
Financial Results
The following is a summary of our second quarter of 2020 financial results from
continuing operations. The second quarter 2020 financial results are not
necessarily indicative of results that may be expected for the full year or any
future period, particularly in light of the continuing effect and uncertainty of
the COVID-19 pandemic.
•For the second quarter of 2020, revenue decreased $109 million, or 4%, to $2.5
billion compared to the prior year period due primarily to a 2% unfavorable
impact from translating prior year period results at current period foreign
exchange rates ("foreign currency translation"), 1% organic revenue decline, and
a 1% unfavorable impact from fiduciary investment income. For the six months
ended June 30, 2020, revenue decreased $33 million, or 1%, to $5.7 billion
compared to the prior year period due primarily to a 2% unfavorable impact from
foreign currency translation and a 1% unfavorable impact from divestitures, net
of acquisitions, partially offset by 2% organic revenue growth.
•Operating expenses for the second quarter of 2020 were $1.9 billion, a decrease
of $290 million from the prior year period. The decrease was due primarily to a
$127 million decrease in restructuring charges, a $53 million favorable impact
from foreign currency translation, a $35 million decrease from accelerated
amortization related to certain tradenames that were fully amortized in the
quarter, and a temporary reduction and deferral of certain discretionary
expenses in an effort to proactively manage liquidity due to uncertainties
surrounding COVID-19 and its impact on the Company, partially offset by $18
million of transaction costs related to the pending combination with WTW.
Operating expenses for the first six months of 2020 were $4.1 billion, a
decrease of $375 million compared to the prior year period primarily due to a
$218 million decrease in restructuring charges, a $93 million favorable impact
from foreign currency translation, a $33 million decrease from accelerated
amortization related to certain tradenames that were fully amortized in the
second quarter, and a temporary reduction and deferral of certain discretionary
expenses, partially offset by $36 million of transaction costs related to the
pending combination with WTW and $12 million of costs related to the Ireland
Reorganization.
•Operating margin increased to 23.8% in the second quarter of 2020 from 15.8% in
the prior year period. The increase was driven by a decrease in expenses as
listed above, partially offset by 1% organic revenue decline. Operating margin
for the first six months of 2020 increased to 28.5% from 22.4% in the prior year
period. The increase was driven by 2% organic revenue growth and a decrease in
operating expenses as listed above.
•Due to the factors set forth above, net income from continuing operations
increased $123 million, or 43%, to $410 million for the second quarter of 2020
compared to the prior year period. During the first six months of 2020, net
income from continuing operations increased $239 million, or 24.8%, to $1,202
million compared to the first six months of 2019.
•Diluted earnings per share from continuing operations was $1.70 per share for
the second quarter of 2020 compared to $1.14 per share for the prior year
period. During the first six months of 2020, diluted earnings per share from
continuing operations was $5.00 per share compared to $3.85 per share for the
prior year period
•Cash flow provided by operating activities was $1,219 million for the first six
months of 2020, an increase of $858 million from the prior year period, and
includes near-term actions taken to improve working capital in an effort to
proactively manage liquidity due to uncertainty surrounding COVID-19 and its
impact on the Company, the impact of temporary salary reductions, for which the
amounts withheld will be paid in the third quarter, a decrease in restructuring
cash outlays, and strong operational improvement.
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We focus on four key metrics not presented in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP") that we communicate to
shareholders: organic revenue growth (decline), 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 Financial Statements. The
following is our measure of performance against these four metrics from
continuing operations for the second quarter of 2020:
•Organic revenue growth (decline) is a non-GAAP measure defined under the
caption "Review of Consolidated Results - Organic Revenue Growth (Decline)."
Organic revenue decline was 1% for the second quarter of 2020. Organic revenue
decline reflects a decline in the more discretionary portions of our business,
partially offset by strength in our core business. Organic revenue growth was 2%
for the first six months of 2020, driven by strength in our core business,
partially offset by a decline in the more discretionary portions of our
business.
•Adjusted operating margin, a non-GAAP measure defined under the caption "Review
of Consolidated Results - Adjusted Operating Margin," was 26.8% for the second
quarter of 2020 compared to 24.4% in the prior year period. The increase in
adjusted operating margin primarily reflects a temporary reduction and deferral
of certain discretionary expenses and increased operating leverage across the
portfolio, partially offset by organic revenue decline of 1% and an unfavorable
impact from foreign currency translation of $4 million. For the first six months
of 2020, adjusted operating margin was 31.8% compared to 29.5% for the prior
year period. The increase in adjusted operating margin primarily reflects a
temporary reduction and deferral of certain discretionary expenses, increased
operating leverage across the portfolio, and 2% organic revenue growth,
partially offset by unfavorable impact from foreign currency translation of $14
million.
•Adjusted diluted earnings per share from continuing operations, a non-GAAP
measure defined under the caption "Review of Consolidated Results - Adjusted
Diluted Earnings per Share," was $1.96 per share for the second quarter of 2020
and $5.65 per share in the first six months of 2020, compared to $1.87 and $5.19
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 six months of
2020 by $875 million, or 343%, from the prior year period, to $1,130 million,
reflecting an increase in cash flow from operations and a $17 million decrease
in capital expenditures.
IRELAND REORGANIZATION
On April 1, 2020, a scheme of arrangement under English law was completed
pursuant to which the Class A ordinary shares of Aon plc, a public limited
company incorporated under the laws of England and Wales and the publicly traded
parent company of the Aon group ("Aon Global Limited"), were cancelled and the
holders thereof received, on a one-for-one basis, Class A ordinary shares of Aon
plc, an Irish public limited company formerly known as Aon Limited ("Aon plc") ,
as described in the proxy statement filed with the SEC on December 20, 2019. Aon
plc is a tax resident of Ireland. References in this report to "Aon," the
"Company," "we," "us," or "our" for time periods prior to April 1, 2020 refer to
Aon Global Limited. References in the Financial Statements to "Aon," the
"Company," "we," "us," or "our" for time periods on or after April 1, 2020,
refer to Aon plc.
BUSINESS COMBINATION AGREEMENT
On March 9, 2020, Aon and WTW, entered into a Business Combination Agreement
with respect to a combination of the parties (the "Combination"). At the
effective date of the Combination, WTW shareholders will be entitled to receive
1.08 newly issued Class A ordinary shares of Aon in exchange for each ordinary
share of WTW held by such holders. The Combination is expected to be completed
in the first half of 2021 and is subject to Irish Takeover Rules. The Business
Combination Agreement contains certain operating covenants relating to the
conduct of business of both parties in the interim period until the transaction
is completed. These covenants require both parties to operate their respective
businesses in all material respects in the ordinary course of business
consistent with past practice. In addition, these covenants restrict each party
from engaging in certain actions unless a party obtains the prior written
consent of the other party. These actions relate to, among other things,
authorizing or paying dividends above a specified rate; issuing or authorizing
for issuance additional securities; salary, benefits or other compensation and
employment-related matters; capital management, debt and liquidity matters;
engaging in mergers, acquisitions and dispositions; entering into or materially
modifying material agreements; entering into material litigation-related
settlements; and making other corporate, tax and accounting changes.
On July 8, 2020, Aon and WTW filed a definitive proxy statement relating to the
Combination with the SEC, which was delivered to Aon's and WTW's shareholders.
The respective shareholder meetings of Aon and WTW to approve the Combination
are expected to take place on August 26, 2020.
On July 30, 2020, Aon, and WTW received written notice from the Committee on
Foreign Investment in the United States ("CFIUS") that CFIUS had concluded its
review under Section 721 of the U.S. Defense Production Act of 1950 ("DPA") of
the
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transaction contemplated by the Business Combination Agreement and CFIUS
determined that there are no unresolved national security concerns with respect
to the transaction. CFIUS advised that action under Section 721 of the DPA has
concluded with respect to such transaction. The foregoing satisfies the closing
condition regarding CFIUS in the Business Combination Agreement.
RECENT DEVELOPMENTS
The outbreak of the coronavirus, COVID-19, was declared by the World Health
Organization to be a pandemic and has continued to spread across the globe,
impacting almost all countries, in varying degrees, creating significant public
health concerns, and significant volatility, uncertainty and economic disruption
in every region in which we operate. While countries are in various stages of
business and travel restrictions and re-openings to address the COVID-19
pandemic, these policies have impacted and will continue to impact worldwide
economic activity and may continue to adversely affect our business. We continue
to closely monitor the situation and our business, liquidity, and capital
planning initiatives. We continue to be fully operational and have begun to
reoccupy certain offices in phases, where deemed appropriate and in compliance
with governmental restrictions considering the impact on health and safety of
our colleagues, their families, and our clients. For other areas where
restrictions remain in place or where we have started to see a resurgence of
COVID-19, we are closely monitoring the situation and continuously reevaluating
our plan to return to the workplace. We continue to deploy business continuity
protocols to facilitate remote working capabilities to ensure the health and
safety of our colleagues and to comply with public health and travel guidelines
and restrictions. We will reoccupy our offices as local mandates are lifted and
once protocols are in place to ensure a safe work environment.
As the situation is rapidly evolving, and the scale and duration of disruption
cannot be predicted, it is not possible to quantify or estimate the full impact
that COVID-19 will have on our business. We are focused on navigating these
challenges and potential future impacts to our business presented by COVID-19
through preserving our liquidity and managing our cash flow by taking proactive
steps to enhance our ability to meet our short-term liquidity needs and support
a commitment to no layoffs of our colleagues due to COVID-19. Such actions
include, but are not limited to, issuing $1 billion of our new 10-year senior
unsecured notes on May 12, 2020 and using the proceeds to repay short-term debt
and for other corporate purposes, and reducing our discretionary spending,
including limiting discretionary spending on mergers and acquisitions and
suspending our share buyback program. However, we are considering resuming
limited share buyback in the second half of the year, subject to macroeconomic
conditions, business performance, and timing restrictions related to our pending
combination with WTW. We also temporarily reduced employee salaries during the
second quarter, as a precautionary measure. After carefully monitoring the
situation, we determined that salary reductions were no longer necessary, and at
the end of the second quarter, salaries have been restored and the withheld
salaries will be repaid to employees in the third quarter.
While the ultimate public health and economic impact of the COVID-19 pandemic is
highly uncertain, we expect that our business operations and results of
operations, including our net revenues, earnings, and cash flows, will be
adversely impacted, depending on the duration and severity of the downturn, as
well as governmental or other regulatory actions that may impact our business or
operations. Our revenue can be generalized into two categories: core and more
discretionary arrangements. Core revenues tend to be highly-recurring and
non-discretionary, where the services are typically regulated, required, or
necessary costs of managing the risk of doing business. As expected, in the
second quarter of 2020 our core revenues did not experience a significant
decrease due to COVID-19; however, if the economic downturn becomes more severe,
we expect that certain services within our core business may be negatively
impacted as well. More discretionary revenues tend to include project-related
services, where as expected, in the second quarter of 2020 we saw a more
immediate impact from decreases in revenue due to the impacts of COVID-19. The
impact of the pandemic on our business operations and results of operations for
the second quarter of 2020 are further described in the "Review of Consolidated
Results" and "Liquidity and Financial Condition" contained in Part I, Item 2 of
this report.
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REVIEW OF CONSOLIDATED RESULTS
Summary of Results
Our consolidated results are as follow (in millions):
                                                                                                                      Six Months Ended June
                                                               Three Months Ended June 30,                                     30,
                                                                  2020                 2019             2020                2019
Revenue
Total revenue                                               $       2,497

$ 2,606 $ 5,716 $ 5,749 Expenses Compensation and benefits

                                           1,361             1,501            2,883               3,085
Information technology                                                107               126              218                 243
Premises                                                               74                85              147                 172
Depreciation of fixed assets                                           41                40               82                  80
Amortization of intangible assets                                      58                97              155                 194
Other general expense                                                 262               344              604                 690
Total operating expenses                                            1,903             2,193            4,089               4,464
Operating income                                                      594               413            1,627               1,285
Interest income                                                         -                 1                2                   3
Interest expense                                                      (89)              (77)            (172)               (149)
Other income (expense)                                                (10)                6               19                   6
Income from continuing operations before income taxes                 495               343            1,476               1,145
Income tax expense                                                     85                56              274                 182
Net income from continuing operations                                 410               287            1,202                 963
Net income from discontinued operations                                 1                 -                -                   -
Net income                                                            411               287            1,202                 963
Less: Net income attributable to noncontrolling
interests                                                              13                10               32                  27
Net income attributable to Aon shareholders                 $         398           $   277          $ 1,170          $      936
Diluted net income per share attributable to Aon
shareholders
Continuing operations                                       $        1.70           $  1.14          $  5.00          $     3.85
Discontinued operations                                                 -                 -                -                   -
Net income                                                  $        1.70           $  1.14          $  5.00          $     3.85
Weighted average ordinary shares outstanding -
diluted                                                             233.6             242.8            234.1               243.2


Revenue
Total revenue decreased by $109 million, or 4%, in the second quarter of 2020
compared to the second quarter of 2019. This decrease reflects a 2% unfavorable
impact from foreign currency translation, 1% organic revenue decline, and a 1%
unfavorable impact from fiduciary investment income. For the first six months of
2020, revenue decreased by $33 million, or 1% compared to the prior year period.
This decrease reflects a 2% unfavorable impact from foreign currency translation
and a 1% unfavorable impact from divestitures, net of acquisitions, partially
offset by 2% organic revenue growth.
Commercial Risk Solutions revenue decreased $41 million, or 4%, to $1,126
million in the second quarter of 2020, compared to $1,167 million in the second
quarter of 2019. Organic revenue growth was 1% in the second quarter of 2020,
driven by growth across most major geographies, including modest growth in the
U.S. and EMEA and double-digit growth in Latin America and Asia, driven by
strong retention and management of the renewal book portfolio, partially offset
by a decline in the Pacific region. Results also include a decline in the more
discretionary portions of our book as a result of COVID-19, including
transaction liability, construction, and project-related work. On average
globally, exposures and pricing were both modestly positive, resulting in a
modestly positive market impact overall. For the first six months of 2020,
revenue decreased $13 million, or 1%, to $2,272 million, compared to $2,285
million in the first six months of 2019. Organic revenue growth was 3% in the
first six months of 2020, driven by growth across most major geographies,
including modest growth in the U.S. and EMEA and double-digit growth in Latin
America, driven by strong retention and management of the renewal book
portfolio,
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partially offset by a decline in the Pacific region. On average globally,
exposures and pricing were both modestly positive, resulting in a modestly
positive market impact overall.
Reinsurance Solutions revenue increased $28 million, or 7%, to $448 million in
the second quarter of 2020, compared to $420 million in the second quarter of
2019. Organic revenue growth was 9% in the second quarter of 2020, driven by
strong net new business generation in treaty and solid growth in facultative
placements. Results in the quarter also include a modest net negative impact
from the timing of certain revenue. For the first six months of 2020, revenue
increased $88 million, or 7%, to $1,296 million, compared to $1,208 million in
the first six months of 2019. Organic revenue growth was 9% in the first six
months of 2020, driven by strong net new business generation in treaty and solid
growth in facultative placements. Market impact was modestly positive on results
for the three and six months of 2020, both in the U.S. and internationally.
Retirement Solutions revenue decreased $26 million, or 6%, to $393 million in
the second quarter of 2020, compared to $419 million in the second quarter of
2019. Organic revenue decline was 1% in the second quarter of 2020, driven by a
decline in the more discretionary portions of the business as a result of
COVID-19, primarily in Human Capital for rewards and assessment services.
Results were partially offset by solid growth in Investments, primarily in
delegated investment management. Growth in the Retirement business was flat. For
the first six months of 2020, revenue decreased $49 million, or 6%, to $790
million, compared to $839 million in the first six months of 2019. Organic
revenue decline was 1% in the first six months of 2020, driven by a modest
decline in core retirement and in Human Capital, primarily for rewards and
assessment services, partially offset by growth in Investments, including strong
growth in delegated investment management.
Health Solutions revenue decreased $59 million, or 19%, to $258 million in the
second quarter of 2020, compared to $317 million in the second quarter of 2019.
Organic revenue decline of 18% was driven by a $34 million decrease primarily
related to COVID-19, including a $19 million reduction primarily reflecting the
annualized impact of lower employment levels and lower renewals, and a $15
million decrease from the timing of certain revenue and a decline in the more
discretionary portions of the business. Results were further negatively impacted
by a one-time adjustment of $16 million related to revenue that was recorded
across multiple years and was identified in connection with the implementation
of a new system. For the first six months of 2020, revenue decreased $43
million, or 5%, to $760 million, compared to $803 million in the first six
months of 2019. Organic revenue decline of 4% in the first six months of 2020,
was driven by decrease primarily related to COVID-19, including a reduction
primarily reflecting the annualized impact of lower employment levels and lower
renewals, and a decrease from the timing of certain revenue and a decline in the
more discretionary portions of the business. Results were further negatively
impacted by a one-time adjustment of $16 million related to revenue that was
recorded across multiple years and was identified in connection with the
implementation of a new system, partially offset by solid growth
internationally.
Data & Analytic Services revenue decreased $12 million, or 4%, to $274 million
in the second quarter of 2020 compared to $286 million in the second quarter of
2019. Organic revenue decline was 8% in the second quarter of 2020. For the
first six months of 2020, revenue decreased $17 million, or 3%, to $605 million,
compared to $622 million in the first six months of 2019. Organic revenue
decline was 3% in the first six months of 2020. Results in both periods were
driven by a decrease in the travel and events practice globally.
Compensation and Benefits
Compensation and benefits decreased $140 million, or 9%, in the second quarter
of 2020 compared to the second quarter of 2019. This decrease was primarily
driven by a $78 million decrease in restructuring charges and a $38 million
favorable impact from foreign currency translation. The temporary salary
reductions had no benefit in the quarter, as the expense for salary repayments
was accrued in the second quarter. For the six months of 2020, compensation and
benefits decreased $202 million, or 7%, compared to the first six months of
2019. The decrease was primarily driven by a $102 million decrease in
restructuring charges and a $64 million favorable impact from foreign currency
translation.
Information Technology
Information technology, which represents costs associated with supporting and
maintaining our infrastructure, decreased $19 million, or 15%, in the second
quarter of 2020 compared to the second quarter of 2019. This decrease was
primarily driven by a temporary reduction and deferral of certain discretionary
expenses and a $4 million decrease in restructuring charges. For the first six
months of 2020, Information technology decreased $25 million, or 10%, compared
to the first six months of 2019. The decrease was primarily driven by a $15
million decrease in restructuring charges and a temporary reduction and deferral
of certain discretionary expenses.
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Premises


Premises, which represents the cost of occupying offices in various locations
throughout the world, decreased $11 million, or 13%, in the second quarter of
2020 compared to the second quarter of 2019. This decrease was primarily driven
by a $5 million decrease in restructuring charges and a decrease related to
reduced office occupancy. For the first six months of 2020, Premises decreased
$25 million, or 15%, compared to the first six months of 2019. The decrease was
primarily driven by a $14 million decrease in restructuring charges, a $5
million favorable impact from foreign currency translation, and a reduction of
costs as the Company continues to optimize its global real estate footprint.
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 increased $1 million, or 3%, in
the second quarter of 2020 compared to the second quarter of 2019. For the first
six months of 2020, Depreciation of fixed assets increased $2 million, or 3%,
compared to the first six months of 2019.
Amortization and Impairment of Intangibles 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 intangibles decreased $39 million, or
40%, in the second quarter of 2020 compared to the second quarter of 2019
reflecting a $35 million decrease from accelerated amortization related to
certain tradenames that were fully amortized in the quarter. For the first six
months of 2020 Amortization and impairment of intangibles decreased $39 million,
or 20%, compared to the first six months of 2019 due primarily to a $33 million
decrease from accelerated amortization related to certain tradenames that were
fully amortized in the second quarter.
Other General Expense
Other general expense in the second quarter of 2020 decreased $82 million, or
24%, compared to the second quarter of 2019 due primarily to a temporary
reduction and deferral of certain discretionary expenses, primarily travel and
entertainment, a $38 million decrease in restructuring charges, and a $7 million
favorable impact from foreign currency translation, partially offset by $18
million of transaction costs related to the pending combination with WTW and $5
million of costs related to the Ireland Reorganization. For the first six months
of 2020, Other general expense decreased $86 million, or 12%, compared to the
prior year period. This decrease was primarily driven by an $85 million decrease
in restructuring charges, a $16 million favorable impact from foreign currency
translation, and a temporary reduction and deferral of certain discretionary
expenses, primarily travel and entertainment, partially offset by $36 million of
transaction costs related to the pending combination with WTW and $12 million of
costs related to the Ireland Reorganization.
Interest Income
Interest income represents income earned on operating cash balances and other
income-producing investments. It does not include interest earned on funds held
on behalf of clients. During the second quarter of 2020, Interest income was $0
million, a decrease of $1 million compared to the prior year period. For the
first six months of 2020, Interest income was $2 million, compared to $3 million
in the prior year period.
Interest Expense
Interest expense, which represents the cost of our debt obligations, was $89
million for the second quarter of 2020, an increase of $12 million, or 16%, from
the second quarter of 2019. For the first six months of 2020, Interest expense
was $172 million, an increase of $23 million, or 15%, from the prior year
period. This increase in both periods was driven primarily by higher outstanding
term debt and an increase in commercial paper borrowings.
Other Income (Expense)
Total other expense was $10 million for the second quarter of 2020, compared to
other income of $6 million for the second quarter of 2019. Other expense for the
second quarter of 2020 primarily includes $7 million of expense related to the
prepayment of $600 million Senior Notes due September 2020 and $4 million of
losses on financial instruments used to economically hedge gains and losses from
changes in foreign exchange rates. Other income for the second quarter of 2019
primarily includes $11 million of gains due to the favorable impact of exchange
rates on the remeasurement of assets and liabilities in non-functional
currencies, $5 million of pension and other postretirement income, a $2 million
gain on the sale of certain businesses, and $1 million of equity earnings,
partially offset by $13 million of losses on financial instruments. Other income
for the first six months of 2020 primarily includes $40 million of gains due to
the favorable impact of exchange rates on the remeasurement of assets and
liabilities in non-functional currencies, a $25 million gain on the sale of
certain businesses, and $6 million of pension and other postretirement income,
partially offset by $47 million of losses on financial instruments used to
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economically hedge gains and losses from changes in foreign exchange rates and
$7 million of additional interest expense from the prepayment of debt. Other
income for the first six months of 2019 primarily includes $9 million of pension
and other postretirement income and a $7 million gain on the sale of certain
businesses, partially offset by $12 million of losses on financial instruments
used to economically hedge gains and losses from changes in foreign exchange
rates.
Income from Continuing Operations before Income Taxes
Due to the factors discussed above, income from continuing operations before
income taxes for the second quarter of 2020 was $495 million, a 44% increase
from income from continuing operations before income taxes of $343 million in
the second quarter of 2019, and income from continuing operations before income
taxes was $1,476 million for the first six months of 2020, a 29% increase from
$1,145 million for the first six months of 2019.
Income Taxes from Continuing Operations
The effective tax rates on net income from continuing operations were 17.2% and
16.3% for the second quarter of 2020 and 2019, respectively. The effective tax
rates on net income from continuing operations were 18.6% and 15.9% for the six
months ended June 30, 2020 and 2019, respectively.
For the six months ended June 30, 2020, the tax rate was primarily driven by the
geographical distribution of income and certain favorable discrete items,
including the impact of share-based payments and the release of a valuation
allowance due to a change in judgement about realizability of deferred tax
assets in the U.K.
For the six months ended June 30, 2019, the tax rate was primarily driven by the
geographical distribution of income, including restructuring charges, and
certain favorable discrete items, including the impact of share-based payments
and changes in the assertion for unremitted earnings.
Net Income from Discontinued Operations
Net income from discontinued operations was $1 million and $0 million in the
three and six months ended June 30, 2020, respectively, compared to $0 million
in the three and six months ended June 30, 2019.
Net Income Attributable to Aon Shareholders
Net income attributable to Aon shareholders for the second quarter of 2020
increased to $398 million, or $1.70 per diluted share, from $277 million, or
$1.14 per diluted share, in the prior year period. Net income attributable to
Aon shareholders for the first six months of 2020 increased to $1,170 million,
or $5.00 per diluted share, from $936 million, $3.85 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 (decline), adjusted
operating margin, adjusted diluted earnings per share, free cash flow, and the
impact of foreign exchange rate fluctuations on operating results. This non-GAAP
supplemental information should be viewed in addition to, not instead of, our
Financial Statements.
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Organic Revenue Growth (Decline)
We use supplemental information related to organic revenue growth (decline) to
help us and our investors evaluate business growth from existing
operations. Organic revenue growth (decline) is a non-GAAP measure that includes
the impact of 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
(decline) represents a measure not in accordance with U.S. GAAP and should be
viewed in addition to, not instead of, our Financial Statements. Industry peers
provide similar supplemental information about their revenue performance,
although they may not make identical adjustments. A reconciliation of this
non-GAAP measure to the reported Total revenue is as follows (in millions,
except percentages):
                                          Three Months Ended June 30,
                                                                                                                          Less: Fiduciary                                      Organic Revenue
                                                                                                   Less: Currency        Investment Income        Less: Acquisitions,              Growth
                                             2020                 2019            % Change           Impact (1)                 (2)              Divestitures & Other           (Decline) (3)
Revenue
Commercial Risk Solutions              $       1,126           $ 1,167                 (4) %                 (2) %                   (1) %                       (2) %                      1  %
Reinsurance Solutions                            448               420                  7                     -                      (1)                         (1)                        9
Retirement Solutions                             393               419                 (6)                   (2)                      -                          (3)                       (1)
Health Solutions                                 258               317                (19)                   (4)                      -                           3                       (18)
Data & Analytic Services                         274               286                 (4)                   (2)                      -                           6                        (8)
Elimination                                       (2)               (3)                  N/A                   N/A                     N/A                         N/A                       N/A
Total revenue                          $       2,497           $ 2,606                 (4) %                 (2) %                   (1) %                        -  %                     (1) %


                                           Six Months Ended June 30,
                                                                                                                         Less: Fiduciary                                      Organic Revenue
                                                                                                  Less: Currency        Investment Income        Less: Acquisitions,              Growth
                                             2020                2019            % Change           Impact (1)                 (2)              Divestitures & Other           (Decline) (3)
Revenue
Commercial Risk Solutions              $      2,272           $ 2,285                 (1) %                 (2) %                    -  %                       (2) %                      3  %
Reinsurance Solutions                         1,296             1,208                  7                     -                      (1)                         (1)                        9
Retirement Solutions                            790               839                 (6)                   (1)                      -                          (4)                       (1)
Health Solutions                                760               803                 (5)                   (3)                      -                           2                        (4)
Data & Analytic Services                        605               622                 (3)                   (2)                      -                           2                        (3)
Elimination                                      (7)               (8)                  N/A                   N/A                     N/A                         N/A                       N/A
Total revenue                          $      5,716           $ 5,749                 (1) %                 (2) %                    -  %                       (1) %                      2  %


(1)Currency impact is determined by translating prior period's revenue at the
current period's foreign exchange rates.
(2)Fiduciary investment income for the three months ended June 30, 2020 and
2019, respectively, was $5 million and $18 million. Fiduciary investment income
for the six months ended June 30, 2020 and 2019, respectively, was $20 million
and $37 million.
(3)Organic revenue growth (decline) includes the impact of intercompany activity
and excludes the impact of changes in foreign exchange rates, fiduciary
investment income, acquisitions, divestitures, transfers between revenue lines,
and gains or losses on derivatives accounted for as hedges.
Adjusted Operating Margin
We use adjusted operating margin as a non-GAAP measure of our core operating
performance. Adjusted operating margin excludes the impact of certain items, as
listed below, because management does not believe these expenses are the best
indicators of our core operating performance. This supplemental information
related to adjusted operating margin represents a measure not in accordance with
U.S. GAAP and should be viewed in addition to, not instead of, our Financial
Statements.
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A reconciliation of this non-GAAP measure to the reported operating margin is as follows (in millions, except percentages):


                                                                                                                Six Months Ended June
                                                         Three Months Ended June 30,                                     30,
                                                            2020                 2019             2020                2019
Revenue from continuing operations                    $       2,497

$ 2,606 $ 5,716 $ 5,749



Operating income from continuing operations -
as reported                                           $         594           $   413          $ 1,627          $    1,285
Amortization and impairment of intangible
assets                                                           58                97              155                 194
Restructuring                                                     -               127                -                 218

Transaction costs (1)                                            18                 -               36                   -
Operating income from continuing operations -
as adjusted                                           $         670         

$ 637 $ 1,818 $ 1,697



Operating margin from continuing operations -
as reported                                                    23.8   %          15.8  %          28.5  %             22.4     %
Operating margin from continuing operations -
as adjusted                                                    26.8   %          24.4  %          31.8  %             29.5     %


(1)Certain transaction costs associated with the Combination will be incurred
prior to the expected completion of the Combination in the first half of 2021.
These costs may include advisory, legal, accounting, valuation, and other
professional or consulting fees required to complete the Combination.
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, 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 with
U.S. GAAP and should be viewed in addition to, not instead of, our Financial
Statements.
A reconciliation of this non-GAAP measure to the reported Diluted earnings per
share attributable to Aon shareholders is as follows (in millions, except per
share data and percentages):
                                                                               Three Months Ended June 30, 2020
                                                                                                               Non-GAAP
                                                                       U.S. GAAP           Adjustments         Adjusted
Operating income from continuing operations                          $      594           $       76          $    670
Interest income                                                               -                    -                 -
Interest expense                                                            (89)                   -               (89)
Other income (expense)                                                      (10)                   -               (10)
Income from continuing operations before income taxes                       495                   76               571
Income tax expense (1)                                                       85                   15               100
Net income from continuing operations                                       410                   61               471
Net income from discontinued operations                                       1                    -                 1
Net income                                                                  411                   61               472
Less: Net income attributable to noncontrolling interests                    13                    -                13
Net income attributable to Aon shareholders                          $      398           $       61          $    459

Diluted net income per share attributable to Aon shareholders
Continuing operations                                                $     1.70           $     0.26          $   1.96
Discontinued operations                                                       -                    -                 -
Net income                                                           $     1.70           $     0.26          $   1.96

Weighted average ordinary shares outstanding - diluted                    233.6                    -             233.6
Effective tax rates (1)
Continuing operations                                                      17.2   %                               17.5  %
Discontinued operations                                                    25.9   %                               25.9  %


                                       39

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                                                                              Three Months Ended June 30, 2019
                                                                                                              Non-GAAP
                                                                      U.S. GAAP           Adjustments         Adjusted
Operating income from continuing operations                         $      413           $      224          $    637
Interest income                                                              1                    -                 1
Interest expense                                                           (77)                   -               (77)
Other income (expense)                                                       6                    -                 6
Income from continuing operations before income taxes                      343                  224               567
Income tax expense (1)                                                      56                   46               102
Net income from continuing operations                                      287                  178               465
Net income from discontinued operations                                      -                    -                 -
Net income                                                                 287                  178               465
Less: Net income attributable to noncontrolling interests                   10                    -                10
Net income attributable to Aon shareholders                         $      277           $      178          $    455

Diluted net income per share attributable to Aon shareholders
Continuing operations                                               $     1.14           $     0.73          $   1.87
Discontinued operations                                                      -                    -                 -
Net income                                                          $     1.14           $     0.73          $   1.87

Weighted average ordinary shares outstanding - diluted                   242.8                    -             242.8
Effective tax rates (1)
Continuing operations                                                     16.3   %                               18.0  %
Discontinued operations                                                   58.5   %                               58.5  %


                                                                        Six Months Ended June 30, 2020
                                                                                                        Non-GAAP
                                                                U.S. GAAP           Adjustments         Adjusted
Operating income from continuing operations                   $    1,627           $      191          $ 1,818
Interest income                                                        2                    -                2
Interest expense                                                    (172)                   -             (172)
Other income (expense)                                                19                    -               19
Income from continuing operations before income taxes              1,476                  191            1,667
Income tax expense (1)                                               274                   38              312
Net income from continuing operations                              1,202                  153            1,355
Net income from discontinued operations                                -                    -                -
Net income                                                         1,202                  153            1,355
Less: Net income attributable to noncontrolling
interests                                                             32                    -               32
Net income attributable to Aon shareholders                   $    1,170

$ 153 $ 1,323



Diluted net income per share attributable to Aon
shareholders
Continuing operations                                         $     5.00           $     0.65          $  5.65
Discontinued operations                                                -                    -                -
Net income                                                    $     5.00           $     0.65          $  5.65

Weighted average ordinary shares outstanding - diluted             234.1                    -            234.1
Effective tax rates (1)
Continuing operations                                               18.6   %                              18.7  %
Discontinued operations                                             33.5   %                              33.5  %


                                       40

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Six Months Ended June 30, 2019


                                                                                                          Non-GAAP
                                                                  U.S. GAAP           Adjustments         Adjusted
Operating income from continuing operations                     $    1,285           $      412          $ 1,697
Interest income                                                          3                    -                3
Interest expense                                                      (149)                   -             (149)
Other income (expense)                                                   6                    -                6
Income from continuing operations before income taxes                1,145                  412            1,557
Income tax expense (1)                                                 182                   87              269
Net income from continuing operations                                  963                  325            1,288
Net income from discontinued operations                                  -                    -                -
Net income                                                             963                  325            1,288
Less: Net income attributable to noncontrolling interests               27                    -               27
Net income attributable to Aon shareholders                     $      936

$ 325 $ 1,261



Diluted net income per share attributable to Aon
shareholders
Continuing operations                                           $     3.85           $     1.34          $  5.19
Discontinued operations                                                  -                    -                -
Net income                                                      $     3.85           $     1.34          $  5.19

Weighted average ordinary shares outstanding - diluted               243.2                    -            243.2
Effective tax rates (1)
Continuing operations                                                 15.9   %                              17.3  %
Discontinued operations                                               58.5   %                              58.5  %


(1)Adjusted items are generally taxed at the estimated annual effective tax
rate, except for the applicable tax impact associated with estimated
restructuring plan expenses, accelerated tradename amortization, impairment
charges and certain transaction costs, which are adjusted at the related
jurisdictional rate. In addition, tax expense excludes the tax impacts of
payment of certain legacy litigation and enactment date impacts of the Tax Cuts
and Jobs Act of 2017.
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
with U.S. GAAP and should be viewed in addition to, not instead of, our
Financial Statements. The use of this non-GAAP measure does not imply or
represent the residual cash flow for discretionary expenditures. A
reconciliation of this non-GAAP measure to the reported cash provided by
operating activities is as follows (in millions):
                                                     Six Months Ended June 

30,


                                                    2020                    

2019


Cash provided by operating activities         $       1,219                   $ 361
Capital expenditures used for operations                (89)                

(106)


Free cash flow provided by operations         $       1,130

$ 255




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.
                                       41
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Translating prior year quarter results at current quarter foreign exchange
rates, currency fluctuations had no impact and an unfavorable impact of $0.03 on
net income per diluted share during the three and six months ended June 30,
2020, respectively. Currency fluctuations had an unfavorable impact of $0.03 and
an unfavorable impact of $0.15 on net income per diluted share during the three
and six months ended June 30, 2019, respectively, when 2018 results were
translated at 2019 rates.
Translating prior year quarter results at current quarter foreign exchange
rates, currency fluctuations had an unfavorable impact of $0.01 and an
unfavorable impact of $0.05 on adjusted net income per diluted share during the
three and six months ended June 30, 2020, respectively. Currency fluctuations
had an unfavorable impact of $0.05 and an unfavorable impact of $0.18 on
adjusted net income per diluted share during the three and six months ended
June 30, 2019, respectively, when 2018 results were translated at 2019 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 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 are cash flows provided by
operations, available cash reserves, and debt capacity available under our
credit facilities. Our primary uses of liquidity are operating expenses,
restructuring activities, capital expenditures, acquisitions, share repurchases,
pension obligations, and shareholder dividends. We believe that cash flows from
operations, available credit facilities 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, for the foreseeable future.
As a result of the COVID-19 pandemic, we have taken various proactive steps and
continue to evaluate opportunities that will increase our liquidity and
strengthen our financial position. Such actions include, but are not limited to,
reducing our discretionary spending, including limiting mergers and acquisitions
activity and suspending our share buyback program. However, we are considering
resuming limited share buyback in the second half of the year, subject to
macroeconomic conditions, business performance, and timing restrictions related
to our pending combination with WTW. We also temporarily reduced employee
salaries during the second quarter, as a precautionary measure to protect our
liquidity. After carefully monitoring the situation, we determined that salary
reductions were no longer necessary. At the end of the second quarter, salaries
have been restored and the withheld salaries will be repaid to employees in the
third quarter.

We expect to have the ability to meet our cash needs for the foreseeable future
through the use of Cash and cash equivalents, Short-term investments, funds
available under our credit facilities and commercial paper programs, and cash
flows from operations. Short-term investments included in our liquidity
portfolio are expected to be highly liquid, giving us the ability to readily
convert them to cash, as deemed appropriate. Additionally, in the second quarter
we issued $1 billion in 2.80% Senior Notes due May 2030, from which a portion of
the proceeds were used to repay our $600 million 5.00% senior notes in June
2020, which were scheduled to mature in September 2020.

We believe our liquidity position at June 30, 2020 remains strong as evidenced
by the ability to continue to access the capital markets at attractive rates and
strong cash flows in the quarter. Given the significant uncertainties of
economic conditions due to COVID-19, we will continue to closely monitor and
actively manage our liquidity 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. In addition, some of our outsourcing agreements require us to hold
funds on behalf of clients to pay obligations on their behalf. The levels of
fiduciary assets and liabilities can fluctuate significantly, depending on when
we collect 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. Fiduciary assets, because of
their nature, are generally invested in very liquid securities with highly
rated, credit-worthy financial institutions. In our Condensed Consolidated
Statements of Financial Position, the amounts we report for Fiduciary assets and
Fiduciary liabilities are equal and offsetting. Our Fiduciary assets included
cash and short-term investments of $5.7 billion and $5.2 billion at June 30,
2020 and December 31, 2019, respectively, and fiduciary receivables of $8.1
billion and $6.7 billion at June 30, 2020 and December 31, 2019,
                                       42

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respectively. While we earn investment income on the fiduciary assets held in
cash and investments, the cash and investments cannot be used for general
corporate purposes.
We maintain multicurrency cash pools with third-party banks in which various Aon
entities participate. Individual Aon entities are permitted to overdraw on their
individual accounts provided the overall global balance does not fall below
zero. At June 30, 2020, non-U.S. cash balances of one or more entities were
negative; however, the overall balance was positive.
The following table summarizes our Cash and cash equivalents, Short-term
investments, and Fiduciary assets as of June 30, 2020 (in millions):

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