AON PLC EXECUTIVE SUMMARY OF THIRD 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 third quarter of 2020 financial results from continuing operations. The third 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 third quarter of 2020, revenue increased$6 million , or 0%, to$2.4 billion compared to the prior year period due primarily to a 1% favorable impact from acquisitions, net of divestitures, offset by a 1% unfavorable impact from fiduciary investment income. For the nine months endedSeptember 30, 2020 , revenue decreased$27 million , or 0%, to$8.1 billion compared to the prior year period due primarily to a 1% unfavorable impact from foreign currency translation, offset by 1% organic revenue growth. •Operating expenses for the third quarter of 2020 were$1.9 billion , a decrease of$75 million from the prior year period. The decrease was due primarily to a$63 million decrease in restructuring charges, a$54 million decrease from accelerated amortization related to certain tradenames that were fully amortized in the second quarter, and expense discipline in an effort to proactively manage liquidity due to uncertainties surrounding COVID-19 and its impact on the Company, including lower travel and entertainment expense, partially offset by$43 million of transaction costs related to the pending combination with Willis Towers Watson, a$12 million increase in expense related to acquisitions, net of divestitures, a$13 million unfavorable impact from foreign currency translation, and an increase in discretionary expenses. Operating expenses for the first nine months of 2020 were$6.0 billion , a decrease of$450 million compared to the prior year period primarily due to a$281 million decrease in restructuring charges, an$87 million decrease from accelerated amortization related to certain tradenames that were fully amortized in the second quarter, an$80 million favorable impact from foreign currency translation, and expense discipline in an effort to proactively manage liquidity due to uncertainties surrounding COVID-19 and its impact on the Company, partially offset by$79 million of transaction costs related to the pending combination with WTW, an$18 million increase in expense related to acquisitions, net of divestitures, and$15 million of costs related to the Ireland Reorganization. •Operating margin increased to 18.5% in the third quarter of 2020 from 15.1% in the prior year period. The increase was driven by a decrease in operating expenses as listed above. Operating margin for the first nine months of 2020 increased to 25.5% from 20.2% in the prior year period. The increase was driven by 1% 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$52 million , or 23%, to$281 million for the third quarter of 2020 compared to the prior year period. During the first nine months of 2020, net income from continuing operations increased$291 million , or 24%, to$1,483 million compared to the first nine months of 2019. •Diluted earnings per share from continuing operations was$1.18 per share for the third quarter of 2020 compared to$0.93 per share for the prior year period. During the first nine months of 2020, diluted earnings per share from continuing operations was$6.18 per share compared to$4.79 per share for the prior year period •Cash flows provided by operating activities was$2,023 million for the first nine months of 2020, an increase of$860 million from the prior year period, primarily due to working capital improvements, of which a portion is related to short-term actions taken to proactively manage liquidity, a$210 million decrease in restructuring cash outlays, and strong operational improvement. The prior year period included approximately$85 million of net cash payments related to legacy litigation. 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 third 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 was flat for the third quarter of 2020. Flat organic revenue reflects strength in the core portions of our business, offset by a decline in the more discretionary portions. Organic revenue growth was 1% for the first nine months of 2020, driven by strength in the core portions of our business, partially offset by a decline in the more discretionary portions. •Adjusted operating margin, a non-GAAP measure defined under the caption "Review of Consolidated Results - Adjusted Operating Margin," was 22.4% for the third quarter of 2020 compared to 22.0% in the prior year period. The increase in adjusted operating margin primarily reflects expense discipline, including lower travel and entertainment expense, partially offset by an increase in discretionary expenses, an$18 million decrease in fiduciary investment income, and an unfavorable impact from foreign currency translation of$3 million . For the first nine months of 2020, adjusted operating margin was 29.0% compared to 27.3% for the prior year period. The increase in adjusted operating margin primarily reflects expense discipline, including lower travel and entertainment expense, increased operating leverage across the portfolio, and 1% organic revenue growth, partially offset by a$35 million decrease in fiduciary investment income, and an unfavorable impact from foreign currency translation of$17 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$1.53 per share for the third quarter of 2020 and$7.19 per share in the first nine months of 2020, compared to$1.45 and$6.64 per share for the respective prior year periods. •Free cash flow, a non-GAAP measure defined under the caption "Review of Consolidated Results - Free Cash Flow," increased in the first nine months of 2020 by$908 million , or 91%, from the prior year period, to$1,904 million , reflecting an increase in cash flows from operations and a$48 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. 32 -------------------------------------------------------------------------------- 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 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. OnAugust 26, 2020 , the respective shareholders of Aon and WTW approved the Combination. The shareholder approval satisfies a closing condition 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 to address the COVID-19 pandemic, as well as related re-openings, 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 continue 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 remaining 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. We also temporarily suspended our share buyback program and temporarily reduced employee salaries during the second quarter, as a precautionary measure. After carefully monitoring the situation, we determined it was appropriate, based on macroeconomic conditions and business performance, to resume share buyback during the third quarter. In addition, temporarily reduced salaries for non-executives were restored at the end of the second quarter and withheld salaries, plus 5% of the withheld salary amounts, were repaid in the third quarter. OnOctober 27, 2020 , we determined to end the previously announced temporary salary reductions for named executive officers and cash compensation reductions for non-executive directors, effective forNovember 1, 2020 . Withheld amounts will be repaid in full. For further information, see Part II, Item 5 of this report. 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 policies and actions that may impact our business or operations. Our revenues 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 third quarter of 2020 our core revenues did not experience a significant decrease due to the impacts of 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 third quarter of 2020 we saw an impact from decreases in revenue due to the impacts of COVID-19. The impacts of the pandemic on our business operations and results of operations for the third quarter of 2020 are further described in the section entitled "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): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue Total revenue$ 2,385 $ 2,379 $ 8,101 $ 8,128 Expenses Compensation and benefits 1,387 1,368 4,270 4,453 Information technology 107 120 325 363 Premises 70 76 217 248 Depreciation of fixed assets 42 44 124 124 Amortization of intangible assets 50 101 205 295 Other general expense 288 310 892 1,000 Total operating expenses 1,944 2,019 6,033 6,483 Operating income 441 360 2,068 1,645 Interest income 3 1 5 4 Interest expense (80) (78) (252) (227) Other income (expense) (1) 2 18 8 Income from continuing operations before income taxes 363 285 1,839 1,430 Income tax expense 82 56 356 238 Net income from continuing operations 281 229 1,483 1,192 Net income (loss) from discontinued operations 1 (1) 1 (1) Net income 282 228 1,484 1,191 Less: Net income attributable to noncontrolling interests 7 6 39 33 Net income attributable to Aon shareholders$ 275 $ 222 $ 1,445 $ 1,158 Diluted net income per share attributable to Aon shareholders Continuing operations$ 1.18 $ 0.93 $ 6.18 $ 4.79 Discontinued operations - - - - Net income$ 1.18 $ 0.93 $ 6.18 $ 4.79 Weighted average ordinary shares outstanding - diluted 233.5 239.1 233.9 241.9 Revenue Total revenue increased$6 million in the third quarter of 2020 compared to the third quarter of 2019. This increase reflects a 1% favorable impact from acquisitions, net of divestitures, offset by a 1% unfavorable impact from fiduciary investment income. For the first nine months endedSeptember 30, 2020 , revenue decreased$27 million compared to the prior year period due primarily to a 1% unfavorable impact from foreign currency translation, offset by 1% organic revenue growth.Commercial Risk Solutions revenue decreased$15 million , or 1%, to$1,042 million in the third quarter of 2020, compared to$1,057 million in the third quarter of 2019. Organic revenue growth was 2% in the third quarter of 2020, driven by growth across all major geographies, with particular strength inAsia , driven by strong retention and management of the renewal book portfolio. Results also reflect strong growth in core P&C in theU.S. , and a decline in the more discretionary portions of our book globally, including transaction liability and construction. On average globally, exposures and pricing were both modestly positive, resulting in a modestly positive market impact overall. For the first nine months of 2020, revenue decreased$28 million , or 1%, to$3,314 million , compared to$3,342 million in the first nine months of 2019. Organic revenue growth was 2% in the first nine 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, 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. 34 -------------------------------------------------------------------------------- Reinsurance Solutions revenue increased$30 million , or 10%, to$321 million in the third quarter of 2020, compared to$291 million in the third quarter of 2019. Organic revenue growth was 13% in the third quarter of 2020, driven by double-digit growth across treaty, facultative, and capital markets transactions, reflecting continued net new business generation. Results in the quarter also include a modest positive impact from the timing of certain revenue. For the first nine months of 2020, revenue increased$118 million , or 8%, to$1,617 million , compared to$1,499 million in the first nine months of 2019. Organic revenue growth was 10% in the first nine months of 2020, driven by double-digit growth in treaty and in facultative placements, reflecting continued net new business generation. Market impact was modestly positive on results for the three and nine months of 2020. Retirement Solutions revenue decreased$16 million , or 3%, to$468 million in the third quarter of 2020, compared to$484 million in the third quarter of 2019. Organic revenue decline was 5% in the third quarter of 2020, primarily driven by a decline in Human Capital for rewards and assessment services, primarily from clients in the financial services space. Results also include a modest decline in Retirement and Investments, primarily in the more discretionary portions of the business. For the first nine months of 2020, revenue decreased$65 million , or 5%, to$1,258 million , compared to$1,323 million in the first nine months of 2019. Organic revenue decline was 2% in the first nine months of 2020, primarily driven by a decline in Human Capital for rewards and assessment services and a modest decline in core retirement, partially offset by growth in Investments.Health Solutions revenue increased$3 million , or 1%, to$282 million in the third quarter of 2020, compared to$279 million in the third quarter of 2019. Organic revenue growth of 1%, in a seasonally smaller quarter, reflects modest growth internationally, with particular strength inAsia and the Pacific region, and well as a modest positive impact from the timing of certain revenue, partially offset by a modest decline in theU.S. as we continue to see the impact from lower employment levels. For the first nine months of 2020, revenue decreased$40 million , or 4%, to$1,042 million , compared to$1,082 million in the first nine months of 2019. Organic revenue decline of 3% in the first nine months of 2020, was driven by a 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 increased$7 million , or 3%, to$278 million in the third quarter of 2020 compared to$271 million in the third quarter of 2019. Organic revenue decline was 7% in the third quarter of 2020, primarily driven by a decrease in the travel and events practice globally, partially offset by growth in professional associations. For the first nine months of 2020, revenue decreased$10 million , or 1%, to$883 million , compared to$893 million in the first nine months of 2019. Organic revenue decline was 5% in the first nine months of 2020, driven by a decrease in the travel and events practice globally. Continued investments in our CoverWallet digital insurance platform have resulted in a three-fold increase in platform premium volume year-to-date, allowing us to meet client demand for digital services in a more efficient way. Compensation and Benefits Compensation and benefits increased$19 million , or 1%, in the third quarter of 2020 compared to the third quarter of 2019. This increase was primarily driven by an$11 million unfavorable impact from foreign currency translation and a$9 million increase in expense related to acquisitions, net of divestitures, partially offset by a$9 million decrease in restructuring charges, and an increase in discretionary expenses. For the nine months of 2020, compensation and benefits decreased$183 million , or 4%, compared to the first nine months of 2019. The decrease was primarily driven by a$111 million decrease in restructuring charges and a$53 million favorable impact from foreign currency translation. Information Technology Information technology, which represents costs associated with supporting and maintaining our infrastructure, decreased$13 million , or 11%, in the third quarter of 2020 compared to the third quarter of 2019. This decrease was primarily driven by a$14 million decrease in restructuring charges. For the first nine months of 2020, Information technology decreased$38 million , or 10%, compared to the first nine months of 2019. The decrease was primarily driven by a$29 million decrease in restructuring charges and expense discipline. Premises Premises, which represents the cost of occupying offices in various locations throughout the world, decreased$6 million , or 8%, in the third quarter of 2020 compared to the third quarter of 2019. This decrease was primarily driven by a$3 million decrease in restructuring charges and a decrease related to reduced office occupancy. For the first nine months of 2020, Premises decreased$31 million , or 13%, compared to the first nine months of 2019. The decrease was primarily driven by a$17 million decrease in restructuring charges and a decrease related to reduced office occupancy. 35 -------------------------------------------------------------------------------- Depreciation of Fixed Assets Depreciation of fixed assets primarily relates to software, leasehold improvements, furniture, fixtures and equipment, computer equipment, buildings, and automobiles. Depreciation of fixed assets decreased$2 million , or 5%, in the third quarter of 2020 compared to the third quarter of 2019. For the first nine months of 2020, Depreciation of fixed assets was similar compared to the first nine 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$51 million , or 50%, in the third quarter of 2020 compared to the third quarter of 2019 reflecting a$54 million decrease from accelerated amortization related to certain tradenames that were fully amortized in the second quarter. For the first nine months of 2020 Amortization and impairment of intangibles decreased$90 million , or 31%, compared to the first nine months of 2019 due primarily to a$87 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 third quarter of 2020 decreased$22 million , or 7%, compared to the third quarter of 2019 due primarily to a temporary reduction of certain expenses, primarily travel and entertainment, and a$32 million decrease in restructuring charges, partially offset by$43 million of transaction costs related to the pending combination with WTW and an increase in discretionary expenses. For the first nine months of 2020, Other general expense decreased$108 million , or 11%, compared to the prior year period. This decrease was primarily driven by an$117 million decrease in restructuring charges, a temporary reduction of certain expenses, primarily travel and entertainment, and a$16 million favorable impact from foreign currency translation, partially offset by$79 million of transaction costs related to the pending combination with WTW and$15 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 third quarter of 2020, Interest income was$3 million , an increase of$2 million compared to the prior year period. For the first nine months of 2020, Interest income was$5 million , an increase of$1 million compared to the prior year period. Interest Expense Interest expense, which represents the cost of our debt obligations, was$80 million for the third quarter of 2020, an increase of$2 million , or 3%, from the third quarter of 2019. For the first nine months of 2020, Interest expense was$252 million , an increase of$25 million , or 11%, from the prior year period. This increase in both periods was driven primarily by higher outstanding term debt. Other Income (Expense) Total other expense was$1 million for the third quarter of 2020, compared to other income of$2 million for the third quarter of 2019. Other expense for the third quarter of 2020 primarily includes$19 million of losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies, partially offset by$13 million of gains on financial instruments used to economically hedge gains and losses from changes in foreign exchange rates,$4 million of pension and other postretirement income, and$1 million of equity earnings. Other income for the third quarter of 2019 primarily includes$17 million of gains due to the favorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies,$3 million of pension and other postretirement income, a$1 million gain on the sale of certain businesses, and$1 million of equity earnings, partially offset by$20 million of losses on financial instruments used to economically hedge gains and losses from changes in foreign exchange rates. Other income for the first nine months of 2020 primarily includes a$25 million gain on the sale of certain businesses,$21 million of gains due to the favorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies,$10 million of pension and other postretirement income, and$3 million of equity earnings, partially offset by$34 million of losses on financial instruments used to economically hedge gains and losses from changes in foreign exchange rates,$7 million of expense related to the prepayment of$600 million Senior Notes dueSeptember 2020 . Other income for the first nine months of 2019 primarily includes$17 million of gains due to the favorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies,$12 million of pension and other postretirement income, an$8 million gain on the sale of certain businesses, and$3 million of equity earnings, partially offset by$32 million of losses on financial instruments used to economically hedge gains and losses from changes in foreign exchange rates. 36 -------------------------------------------------------------------------------- Income from Continuing Operations before Income Taxes Due to the factors discussed above, income from continuing operations before income taxes for the third quarter of 2020 was$363 million , a 27% increase from income from continuing operations before income taxes of$285 million in the third quarter of 2019, and income from continuing operations before income taxes was$1,839 million for the first nine months of 2020, a 29% increase from$1,430 million for the first nine months of 2019. Income Taxes from Continuing Operations The effective tax rates on net income from continuing operations were 22.6% and 19.6% for the third quarter of 2020 and 2019, respectively. The effective tax rates on net income from continuing operations were 19.4% and 16.6% for the nine months endedSeptember 30, 2020 and 2019, respectively. For the nine months endedSeptember 30, 2020 , the tax rate was primarily driven by the geographical distribution of income and certain discrete items, including the favorable impacts of share-based payments and the release of a valuation allowance offset by the tax rate increase in theUK . For the nine months endedSeptember 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 (Loss) from Discontinued Operations Net income from discontinued operations was$1 million in both the three and nine months endedSeptember 30, 2020 , compared to net loss of$1 million in both the three and nine months endedSeptember 30, 2019 . Net Income Attributable to Aon Shareholders Net income attributable to Aon shareholders for the third quarter of 2020 increased to$275 million , or$1.18 per diluted share, from$222 million , or$0.93 per diluted share, in the prior year period. Net income attributable to Aon shareholders for the first nine months of 2020 increased to$1,445 million , or$6.18 per diluted share, from$1,158 million ,$4.79 per diluted share, in the prior year period. Non-GAAP Metrics In our discussion of consolidated results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth (decline), adjusted operating margin, adjusted diluted earnings per share, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Financial Statements. 37 -------------------------------------------------------------------------------- Organic Revenue Growth (Decline) We use supplemental information related to organic revenue growth (decline) to help us and our investors evaluate business growth from existing operations. Organic revenue growth (decline) is a non-GAAP measure that includes the impact of intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. This supplemental information related to organic revenue growth (decline) represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Financial Statements. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. A reconciliation of this non-GAAP measure to the reported Total revenue is as follows (in millions, except percentages): Three Months Ended September 30, Less: Fiduciary Less: Currency Investment Income Less: Acquisitions, Organic Revenue 2020 2019 % Change Impact (1) (2) Divestitures & Other Growth (Decline) (3) Revenue Commercial Risk Solutions$ 1,042 $ 1,057 (1) % - % (1) % (2) % 2 % Reinsurance Solutions 321 291 10 - (3) - 13 Retirement Solutions 468 484 (3) 1 - 1 (5) Health Solutions 282 279 1 (2) - 2 1 Data & Analytic Services 278 271 3 1 - 9 (7) Elimination (6) (3) N/A N/A N/A N/A N/A Total revenue$ 2,385 $ 2,379 - % - % (1) % 1 % - % Nine Months Ended September 30, Less: Fiduciary Less: Currency Investment Income Less: Acquisitions, Organic Revenue 2020 2019 % Change Impact (1) (2) Divestitures & Other Growth (Decline) (3) Revenue Commercial Risk Solutions$ 3,314 $ 3,342 (1) % (1) % - % (2) % 2 % Reinsurance Solutions 1,617 1,499 8 - (1) (1) 10 Retirement Solutions 1,258 1,323 (5) - - (3) (2) Health Solutions 1,042 1,082 (4) (2) - 1 (3) Data & Analytic Services 883 893 (1) (1) - 5 (5) Elimination (13) (11) N/A N/A N/A N/A N/A Total revenue$ 8,101 $ 8,128 - % (1) % - % - % 1 % (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 endedSeptember 30, 2020 and 2019, respectively, was$3 million and$21 million . Fiduciary investment income for the nine months endedSeptember 30, 2020 and 2019, respectively, was$23 million and$58 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):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Revenue from continuing operations $ 2,385 $ 2,379 $ 8,101 $ 8,128
Operating income from continuing operations
- as reported $ 441 $ 360 $ 2,068 $ 1,645
Amortization and impairment of intangible
assets 50 101 205 295
Restructuring - 63 - 281
Transaction costs (1) 43 - 79 -
Operating income from continuing operations
- as adjusted $ 534 $ 524 $ 2,352 $ 2,221
Operating margin from continuing operations
- as reported 18.5 % 15.1 % 25.5 % 20.2 %
Operating margin from continuing operations
- as adjusted 22.4 % 22.0 % 29.0 % 27.3 %
(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
Non-GAAP
U.S. GAAP Adjustments Adjusted
Operating income from continuing operations $ 441 $ 93 $ 534
Interest income 3 - 3
Interest expense (80) - (80)
Other income (expense) (1) - (1)
Income from continuing operations before income taxes 363 93 456
Income tax expense (1) 82 10 92
Net income from continuing operations 281 83 364
Net income from discontinued operations 1 - 1
Net income 282 83 365
Less: Net income attributable to noncontrolling interests 7 - 7
Net income attributable to Aon shareholders $ 275 $ 83 $ 358
Diluted net income per share attributable to Aon shareholders
Continuing operations $ 1.18 $ 0.35 $ 1.53
Discontinued operations - - -
Net income $ 1.18 $ 0.35 $ 1.53
Weighted average ordinary shares outstanding - diluted 233.5 - 233.5
Effective tax rates (1)
Continuing operations 22.6 % 20.2 %
Discontinued operations 26.0 % 26.0 %
39--------------------------------------------------------------------------------
Three Months Ended
Non-GAAP
U.S. GAAP Adjustments Adjusted
Operating income from continuing operations $ 360 $ 164 $ 524
Interest income 1 - 1
Interest expense (78) - (78)
Other income (expense) 2 - 2
Income from continuing operations before income taxes 285 164 449
Income tax expense (1) 56 40 96
Net income from continuing operations 229 124 353
Net income from discontinued operations (1) - (1)
Net income 228 124 352
Less: Net income attributable to noncontrolling interests 6 - 6
Net income attributable to Aon shareholders $ 222 $ 124 $ 346
Diluted net income per share attributable to Aon shareholders
Continuing operations $ 0.93 $ 0.52 $ 1.45
Discontinued operations - - -
Net income $ 0.93 $ 0.52 $ 1.45
Weighted average ordinary shares outstanding - diluted 239.1 - 239.1
Effective tax rates (1)
Continuing operations 19.6 % 21.4 %
Discontinued operations 26.0 % 26.0 %
Nine
Months Ended
Non-GAAP
U.S. GAAP Adjustments Adjusted
Operating income from continuing operations $ 2,068 $ 284 $ 2,352
Interest income 5 - 5
Interest expense (252) - (252)
Other income (expense) 18 - 18
Income from continuing operations before income taxes 1,839 284 2,123
Income tax expense (1) 356 48 404
Net income from continuing operations 1,483 236 1,719
Net income from discontinued operations 1 - 1
Net income 1,484 236 1,720
Less: Net income attributable to noncontrolling
interests 39 - 39
Net income attributable to Aon shareholders $ 1,445 Diluted net income per share attributable to Aon shareholders Continuing operations$ 6.18 $ 1.01 $ 7.19 Discontinued operations - - - Net income$ 6.18 $ 1.01 $ 7.19 Weighted average ordinary shares outstanding - diluted 233.9 - 233.9 Effective tax rates (1) Continuing operations 19.4 % 19.0 % Discontinued operations 24.1 % 24.1 % 40
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Nine Months Ended
Non-GAAP
U.S. GAAP Adjustments Adjusted
Operating income from continuing operations $ 1,645 $ 576 $ 2,221
Interest income 4 - 4
Interest expense (227) - (227)
Other income (expense) 8 - 8
Income from continuing operations before income taxes 1,430 576 2,006
Income tax expense (1) 238 127 365
Net income from continuing operations 1,192 449 1,641
Net income from discontinued operations (1) - (1)
Net income 1,191 449 1,640
Less: Net income attributable to noncontrolling
interests 33 - 33
Net income attributable to Aon shareholders $ 1,158 Diluted net income per share attributable to Aon shareholders Continuing operations$ 4.79 $ 1.85 $ 6.64 Discontinued operations - - - Net income$ 4.79 $ 1.85 $ 6.64 Weighted average ordinary shares outstanding - diluted 241.9 - 241.9 Effective tax rates (1) Continuing operations 16.6 % 18.2 % Discontinued operations 50.4 % 50.4 % (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):
Nine Months Ended
2020 2019
Cash provided by operating activities $ 2,023 $ 1,163
Capital expenditures used for operations (119) (167)
Free cash flow provided by operations $
1,904
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.
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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 $0.04 on net income per diluted share during the three and
nine months ended September 30, 2020 , respectively. Currency fluctuations had an
unfavorable impact of $0.01 and an unfavorable impact of $0.16 on net income per
diluted share during the three and nine months ended September 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 $0.06 on adjusted net income per diluted share during the
three and nine months ended September 30, 2020 , respectively. Currency
fluctuations had an unfavorable impact of $0.02 and an unfavorable impact of
$0.20 on adjusted net income per diluted share during the three and nine months
ended September 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 flows 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,
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. We also temporarily suspended our share
buyback program and temporarily reduced employee salaries during the second
quarter, as a precautionary measure to protect our liquidity. After carefully
monitoring the situation, we determined it was appropriate, based on
macroeconomic conditions and business performance, to resume share buyback
during the third quarter. In addition, temporarily reduced salaries for
non-executives were restored at the end of the second quarter and withheld
salaries, plus 5% of the withheld salary amounts, were repaid in the third
quarter. On October 27, 2020 , we determined to end the previously announced
temporary salary reductions for named executive officers and cash compensation
reductions for non-executive directors, effective for November 1, 2020 . Withheld
amounts will be repaid in full. For further information, see Part II, Item 5 of
this report.
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. 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 . Additionally, in the third quarter, Aon
Global Holdings plc established the European Commercial Paper Program for €625
million, subsequently the previous European Commercial Paper Program,
established by Aon Global Limited for €525 million, was withdrawn in the
quarter, increasing the aggregate outstanding borrowings under the European
program by €100 million.
We believe our liquidity position at September 30, 2020 remains strong as
evidenced by 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
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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$5.9 billion and$5.2 billion atSeptember 30, 2020 andDecember 31, 2019 , respectively, and fiduciary receivables of$7.7 billion and$6.7 billion atSeptember 30, 2020 andDecember 31, 2019 , 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. AtSeptember 30, 2020 , non-U.S. cash balances of one or more entities may have been negative; however, the overall balance was positive. The following table summarizes our Cash and cash equivalents, Short-term investments, and Fiduciary assets as ofSeptember 30, 2020 (in millions):
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