EXECUTIVE SUMMARY OF SECOND QUARTER 2020FINANCIAL 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 endedJune 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 theIreland 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. 31 -------------------------------------------------------------------------------- We focus on four key metrics not presented in accordance withU.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 OnApril 1, 2020 , a scheme of arrangement under English law was completed pursuant to which the Class A ordinary shares ofAon plc , a public limited company incorporated under the laws ofEngland andWales 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 ofAon plc , an Irish public limited company formerly known asAon Limited ("Aon plc ") , as described in the proxy statement filed with theSEC onDecember 20, 2019 .Aon plc is a tax resident ofIreland . References in this report to "Aon," the "Company," "we," "us," or "our" for time periods prior toApril 1, 2020 refer toAon Global Limited . References in the Financial Statements to "Aon," the "Company," "we," "us," or "our" for time periods on or afterApril 1, 2020 , refer toAon plc . BUSINESS COMBINATION AGREEMENT OnMarch 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. OnJuly 8, 2020 , Aon and WTW filed a definitive proxy statement relating to the Combination with theSEC , 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 onAugust 26, 2020 . OnJuly 30, 2020 , Aon, and WTW received written notice from theCommittee on Foreign Investment inthe United States ("CFIUS") that CFIUS had concluded its review under Section 721 of theU.S. Defense Production Act of 1950 ("DPA") of the 32 -------------------------------------------------------------------------------- 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 theWorld 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 onMay 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. 33 -------------------------------------------------------------------------------- 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
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 theU.S. and EMEA and double-digit growth inLatin America andAsia , 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 theU.S. and EMEA and double-digit growth inLatin America , driven by strong retention and management of the renewal book portfolio, 34 -------------------------------------------------------------------------------- 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 theU.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. 35 --------------------------------------------------------------------------------
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 dueSeptember 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 36 -------------------------------------------------------------------------------- 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 endedJune 30, 2020 and 2019, respectively. For the six months endedJune 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 theU.K. For the six months endedJune 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 endedJune 30, 2020 , respectively, compared to$0 million in the three and six months endedJune 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 ,$3.85 per diluted share, in the prior year period. Non-GAAP Metrics In our discussion of consolidated results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth (decline), adjusted operating margin, adjusted diluted earnings per share, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Financial Statements. 37 -------------------------------------------------------------------------------- Organic Revenue Growth (Decline) We use supplemental information related to organic revenue growth (decline) to help us and our investors evaluate business growth from existing operations. Organic revenue growth (decline) is a non-GAAP measure that includes the impact of intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. This supplemental information related to organic revenue growth (decline) represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Financial Statements. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. A reconciliation of this non-GAAP measure to the reported Total revenue is as follows (in millions, except percentages): Three Months Ended June 30, Less: Fiduciary Organic Revenue Less: Currency Investment Income Less: Acquisitions, Growth 2020 2019 % Change Impact (1) (2) Divestitures & Other (Decline) (3) Revenue Commercial Risk Solutions$ 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 endedJune 30, 2020 and 2019, respectively, was$5 million and$18 million . Fiduciary investment income for the six months endedJune 30, 2020 and 2019, respectively, was$20 million and$37 million . (3)Organic revenue growth (decline) includes the impact of intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. Adjusted Operating Margin We use adjusted operating margin as a non-GAAP measure of our core operating performance. Adjusted operating margin excludes the impact of certain items, as listed below, because management does not believe these expenses are the best indicators of our core operating performance. This supplemental information related to adjusted operating margin represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Financial Statements. 38 --------------------------------------------------------------------------------
A reconciliation of this non-GAAP measure to the reported operating margin is as follows (in millions, except percentages):
Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 Revenue from continuing operations$ 2,497
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
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 withU.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
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
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
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 withU.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
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 -------------------------------------------------------------------------------- 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 dueMay 2030 , from which a portion of the proceeds were used to repay our$600 million 5.00% senior notes inJune 2020 , which were scheduled to mature inSeptember 2020 . We believe our liquidity position atJune 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 atJune 30, 2020 andDecember 31, 2019 , respectively, and fiduciary receivables of$8.1 billion and$6.7 billion atJune 30, 2020 andDecember 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. AtJune 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 ofJune 30, 2020 (in millions):
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