Aon Corporation Q1 2009 Earnings Call Transcript

Aon Corporation (AOC)

Q1 2009 Earnings Call

May 1, 2009 8:30 am ET

Executives

Gregory C. Case - President and Chief Executive Officer

Christa Davies - Chief Financial Officer

Analysts

Keith Walsh - Citi

Dan Farrell - Fox-Pitt Kelton

Meyer Shields - Stifel Nicolaus & Co.

Jay Cohen - Bank of America

Matthew Heimermann - J.P. Morgan

Jay Gelb - Barclays Capital

Presentation

Operator

Ladies and gentleman, good morning and welcome to Aon Corporation’s first quarter 2009 earnings conference call. (Operator Instructions).

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

Now, it’s my pleasure to turn the call over to Mr. Greg Case, President and CEO of Aon Corporation.

Gregory C. Case

Good morning everyone. Welcome to our first quarter 2009 conference call. Joining me here today is our CFO, Christa Davies.

In Q4, we described that 2009 would be a tale of two stories; headwinds from the economy and market turmoil offset by our core business performance improvement, and as described, current global economic recession is providing headwinds for our business. We continue to operate in a soft insurance pricing market as P&C rates continue to decline albeit at a somewhat slower pace. In addition to pricing declines we’re seeing a volume impact driven by the current economic environment, which places pressure on our business in three primary ways. One is around declining insurable risks due to decreasing asset values including property values, shipment volume, BI values, payroll, just to name a few. The second area is around client cost-driven behavior where clients are actively looking to reduce spend to meet budget reductions and increase risk retention as a result of prioritizing their total spend. The third area is around sector-specific weakness including financial services, construction, PE, M&A, all of which have been particularly hard hit.

The realities of the economic recession for our clients will continue to pressure volume and constrain organic growth of the industry in the near future. But given this context, we are very pleased with our operational performance in Q1 despite these operational and unprecedented headwinds. Irrespective of the short-term marketplace or economic challenges the core foundation of Aon is stronger than ever, and the plans we have put in place to substantially strengthen our firm are on track and showing very good underlying progress.

Consistent with our previous quarterly updates, I’d like to cover three areas before turning the call over to Christa for further financial review. The first area is around our performance against key commitments to shareholders, the second is around continued areas of investment across Aon, and the third is around overall organic growth performance.

On the first topic, our performance versus commitments, as we do each quarter, we measure our performance against three metrics we committed to shareholders; grow organically, expand margins, and increase earnings per share; and our operating plans are not focused quarterly, but on achieving all three outcomes simultaneously over the course of each year, and we are focused on delivering against that commitment again in 2009.

Turning to the first quarter, organic revenue growth was 1% overall with growth across both our brokerage and consulting segments. Adjusted pre-tax margin decreased 30 basis points overall while unadjusted brokerage pre-tax margin increased a 100 basis points to 20.7% against significant headwinds. It also marked the first time we cracked the 20% barrier for brokerage margin in any Q1 period for many, many years. EPS on adjusted basis increased 9%.

As a team, we believe these results reflect continued operational improvement during the challenging time in the global economy. This progress is a direct result of Aon colleagues dedicated to delivering industry-leading capabilities to support our clients while building our firm. In these volatile times, our clients need risk management help more than ever. The cost of volatility is increasing dramatically. The types of risk that are keeping companies up at night are in fact growing. For example in our 2009 global risk management survey of 551 risk managers, three new risks were added this year to their top ten concerns; competition, commodity risk, and liquidity risk. It is clear that the cost of volatility is increasing.

On the second topic, further area of investment, as commented we will continue to build on our industry-leading capabilities and make significant investments to support our clients. A few examples in the quarter include; in retail brokerage, we are spending a significant amount of time and resource toward the rollout of our Global Risk Insight Platform and Client Promise. For those who were at RIMS recently in Orlando, you had an opportunity to see firsthand how we’re combining industry-leading analytics with a clearly definable approach to providing value to our clients.

In reinsurance, we are fully focused on developing the Aon Benfield partnership and building capability to better serve our clients and support colleagues, and in consulting, we continue to invest in key leadership globally across a number of our practices including health and benefits and retirement consulting.

These categories highlight just a few of the investments we are making. We remain excited about how our fundamental client serving capability continues to strengthen around the world as our firm is now fully focused on risk advice and human capital solutions.

One key point we’ve covered on previous calls, as investors it’s important that you understand these investments are being made in the context of our overall margin improvement efforts. As we continue to build our firm, we are removing inefficiency and cost from non-client facing areas to fund investment in client facing capability while simultaneously improving margin over the course of each year.

Finally on the third topic of growth, I want to spend a few minutes discussing the quarter for each of our primary segments. As I mentioned in my opening comments, the global recession has had significant impact in reducing exposure base and client budgets for premiums. We think this impact was material and substantially reduced organic growth for the quarter. In brokerage however organic growth in the segment was 1%. This marks the 14th consecutive quarter of organic growth despite very challenging economic conditions and a continued soft market.

For the quarter, pricing was flat to down, low single-digits overall; retail was flat to down, low single digits on average globally; and reinsurance was really flat to up, low single digits on average globally; and as described at the opening, pricing movement has been more than offset by buying behavior of our clients. Our results reflect strong management of our renewal book portfolio with retention rates 90% or better on average highlighting strong client satisfaction, and we continue to drive new business from the investments we are making in many areas that are delivering strong, double-digit growth, including Latin America, China, and the Middle East, Africa regions, all of which constituted 15% growth.

Turning to the individual regions across retail brokerage and reinsurance; the Americas organic revenue increased 2% driven by continued strength in Latin America and growth in Canada as well as strong management of our renewal book portfolio in the US. These results are especially remarkable given the soft market conditions and a significant slowdown in both our construction and private equity M&A markets. For example, excluding construction our growth in the Americas was 4%; really solid work here by our colleagues that we’re focused on closing opportunities with existing clients in a difficult economic market. The results also highlight work put in place over the last year in our revenue engine effort to drive improved performance through pipeline management, productively improvements, and client service.

In Europe, Middle East, and Africa; organic revenue was flat. These results reflect retention rates above 90% on average driven by our number one position in most markets. Pricing was relatively flat similar to the prior quarter and we achieved strong double digit growth in the merging markets such as Africa and the Middle East where we continue to invest. However new business growth in continental Europe was weak as we managed against deteriorating economies where risk managers are essentially buying to budget or less in an uncertain economic environment.

In Asia Pacific, organic growth declined 2%. The results reflect significant growth in a number of markets such as China and New Zealand; however, these solid results were more than offset by two specific areas. In Japan where we’re winding down a business that was impacted by regulatory changes in the region and while profitability has already improved substantially, we would expect that organic growth will continue to have a modest impact for the next several quarters; and the second area is in Thailand where we are the leading broker, and political instability continues to delay many projects across the region where we are very heavily involved. Excluding these two countries organic growth in APAC would have been nearly 500 basis points higher, positive 3% versus a minus 2% as we have a solid platform of leadership positions across the region that are performing well.

In the UK, organic growth declined 5% as this geography is really bearing the brunt of the economic turndown. The UK economy is heavily dependent on the financial, construction, and energy sectors in which we’ve been particularly hard hit by the recession. Soft pricing compounded by exposures that are down as much as 20% have been a meaningful headwind across the region. The good news is that the underlying business trends for us are very strong as we continue to win clients.

In summary, as we look across each of our brokerage, our first quarter results reflect the impact of a continued soft market and a very challenging economic environment globally; however, we believe our underlying operational performance is fully on track and our fundamental client serving capability continues to strengthen around the world.

Turning to reinsurance; for our reinsurance colleagues Q1 has really been a quarter of excellent progress and development for Aon Benfield as our plans for the combined firm continued to gain momentum. Just as an example, on Wednesday of this week I was with our US P&C treaty team, roughly 300 colleagues, and it was thrilling for me to look across this room and see the unmatched capability and expertise together, all focused on our client development and client leadership agenda.

For the group, organic growth was 1% for the quarter driven primarily by growth in our treaty book of business, and as commented, pricing overall was flat to low single digits on average globally with much firmer pricing in selected areas such as US property CAT-exposed regions.

We’ve also seen some evidence of increased risk retention by clients facing downward pressure on revenue, but Aon Benfield is well underway and on track as our management team is in place and our innovation plan is just beginning to deliver the client impact and savings expected as part of the merger. Client feedback continues to be positive and overwhelming and clients are excited about our existing capability and the potential of Aon Benfield, and our colleagues are working hard together to build our firm. Overall, just tremendous impact here as our Aon Benfield colleagues provide clients with a unique and integrated solution around capital management; the number one treaty, the number one faculty, the number one broker in the world on capital markets.

Turning to our consulting segment; overall organic growth was 2%. Our core services business also delivered growth around 2% driven by solid results in our health and benefits business globally, partially offset by a significant and anticipated decline in human capital which included compensation consulting, talent management, and discretionary spend. In outsourcing, we saw a modest growth in our benefits outsourcing business which continues to win new clients offset by a decline related to the wind-down of a specific outsourcing contract that will be largely completed by year-end. Overall, a solid quarter of core growth performance in a very challenging economic environment.

In summary of Aon’s Q1, we face unprecedented economic uncertainty and headwinds from the recession, yet delivered strong core underlying performance, growing organic revenue by 1%, improving brokerage margin by a 100 basis points, and growing EPS by 9%.

I’m now pleased to turn the call over to Christa who will provide further financial review.

Christa Davies

Good morning everyone. As Greg noted, our first quarter results reflect continued progress to strengthen our industry leading position as we managed against a continued soft market and a very challenging economic environment. Our business is now focused exclusively on risk advice and human and capital solutions. We are only just beginning to realize cost savings under the 2007 Aon Benfield restructuring program. Our balance sheet and strong cash flow provides us with excellent financial flexibility in this challenging environment.

Turning to continuing operations; our core EPS performance is reflected in an adjusted EPS of $0.76 per share for the first quarter, up 9% over the prior year quarter. GAAP EPS for continuing operations was $0.80 per share for the first quarter and the difference is highlighted by three key items. First, we recorded an $83 million or $0.17 per share curtailment gain related to freezing the US defined benefit pension plan; second, restructuring charges were $43 million or $0.11 per share; and third, we recorded $10 million or $0.02 per share of costs associated with the Benfield merger. Also included in the results, foreign currency translation had an unfavorable impact of approximately $0.04 per share on adjusted EPS results.

Now let me talk about each of the segments. In our brokerage segment we achieved organic revenue growth of 1% and an adjusted pre-tax margin of 20.7%, an increase of a 100 basis points over the prior year quarter. To achieve a 100 basis points of margin improvement is particularly impressive given the economy and its constraint on top line growth not to mention the three headwinds we discussed last quarter; FX, investment income, and pensions. While Q1 is a seasonally high quarter, we continue to make progress towards our goal of 20% plus brokerage margin.

Adjusted brokerage pre-tax income increased 4% or $12 million to $321 million. The year-over-year margin increase was driven largely by savings related to our restructuring programs and operational improvement partially offset by three challenging headwinds that had a 220 basis point unfavorable impact in the quarter; investment income, depreciation and amortization, and pension expense.

Looking specifically at these headwinds; first, investment income in brokerage declined 41% or $21 million and had an unfavorable impact of a 110 basis points driven by a significant decline in interest rates globally. For example, three-month LIBOR rates have declined roughly 250 basis points on average since the beginning of the fourth quarter of 2008. Assuming interest rates remain at current levels throughout the year; this would imply brokerage investment income of approximately $100 million in 2009.

Turning to our second headwind, intangible amortization expense in brokerage increased $9 million and had an unfavorable impact of 60 basis points versus the prior year as a result of an increase in non-cash intangibles that were created from the Benfield merger. We would expect to incur an increase in intangible amortization and depreciation expense of approximately $50 million to $55 million for 2009 associated with the Benfield merger.

Third, pension expense increased $7 million and had an unfavorable impact of 50 basis points versus the prior year, driven largely by the clients in equity assets and a lower US discount rate in 2008, partially offset by changes that were made to freeze our US defined benefit pension plans. For the entire company, we expect pension expense to increase by $40 million to $50 million for 2009.

Let me spend a moment on each of the restructuring programs. Key initiatives are enabling concurrent funding of investments and delivering margin expansion. With respect to the 2007 restructuring program we incurred $34 million of charges and achieved approximately $41 million of savings in the first quarter, primarily in the brokerage segment through workforce reduction. The 2007 restructuring program is on track as we expect $550 million of total cost to retrieve $370 million of annualized run rate savings in 2010. We’ve only just begun to realize the benefits of this program with $118 million or roughly 32% of total annualized savings target achieved on this program to date. We expect Q2 savings to be similar to Q1 with a significant increase in savings in the second half of 2009 as projects are completed in order to hit our target run rate expectations in 2010.

Regarding the Aon Benfield restructuring program, our integration plan is well underway, and we are beginning to implement projects as we incurred $9 million of charges and achieved approximately $4 million of savings in the first quarter. We continue to expect the program to result in approximately $185 million of costs while delivering $122 million of cumulative annual run rate savings in 2011. As you can see we still have a lot of opportunities to deliver additional cost savings from these restructuring programs as we have achieved approximately $121 million or 25% of the $492 million of cumulative cost savings we expect to achieve in 2011.

Overall, we continue to demonstrate solid expense discipline in a very challenging environment. Our restructuring programs are just beginning to deliver benefits and we continue to deliver progress towards our long-term 20% plus brokerage margin target.

Turning to the consulting segment, we achieved 2% organic revenue growth and an adjusted pre-tax margin of 16.8%, a 240 basis point decrease over the prior year quarter, which was a record quarter with margins over 19%. We’ve consistently said we believe this will be a mid-teens margin business. Adjusted pre-tax income decreased 21% or $14 million to $52 million. As we noted last quarter, we expected margins to decline in 2009 due to headwinds we faced in the global economy. Approximately $6 million, or 160 basis points of the margin decline, was related to human capital, which includes compensation consulting, talent management, and discretionary spend, which as Greg noted, has been significantly affected by the challenging economic environment.

Overall, we continue to expect the consulting business to deliver industry-leading margins in the mid-teens range as headwinds from the global economy are partially offset by benefits achieved from the 2009 restructuring program.

Now, let me briefly discuss the unallocated section; unallocated pre-tax income was a loss of $55 million or $7 million worse than the prior year due primarily to lower investment income and higher pension costs. We continue to expect the unallocated section to be a loss of $55 million per quarter including up to $5 million of revenue and $55 million to $60 million of expense.

Turning to taxes, the effective tax rate on continuing operations was 31.5% in the quarter. This includes an underlying tax rate on operations of 29% plus the impact the US-based pension curtailment gain had on our geographic distribution of income. For 2009 we anticipate that the effective tax rate of continuing operations will continue to be 29%.

Now, let me turn to the balance sheet and discuss our financial flexibility. Cash and short-term investments were approximately $1.4 billion at March 31 compared to $1.3 billion at December 31. Cash in short-term investments increased primarily due to cash flow from operations and the sale of AIS. Total debt outstanding at March 31 was $2 billion and debt-to-capital was 25.6% reflecting a solid balance sheet with significant financial flexibility. The next maturity date for outstanding debt is the euro revolving credit facility that expires in October 2010. As we discussed before, capital allocation decisions are driven by risk-adjusted return on invested capital process. The potential uses of capital may include share repurchase, acquisitions, organic investments, dividends, and pension commitments. As we noted in our 10-K we expect to contribute approximately $400 million to the company’s defined benefit pension plan in 2009.

In summary, Q1 represented a tremendous period of economic uncertainty and the decline throughout the world as GDP was down record levels. These economic challenges place downward pressure on client exposures and budgets in addition to the continued soft rates of P&C which resulted in reduced organic revenue growth for the quarter. We expect this trend will continue throughout the year. We continue to face significant headwinds from lower investment income, and as interest rates remain at current levels, we expect total investment income of approximately $100 million for 2009. We anticipate high depreciation and amortization cost related to the Benfield acquisition of $50 million to $55 million. We expect continued headwinds with pension costs and FX rates throughout the course of the year.

Yet despite all these factors we continue to demonstrate strong core operating performance and make progress against our key commitments, growing revenue organically, improving brokerage margins, and increasing EPS. In this recessionary environment we are continuing our focus on cost management, executing against our restructuring plans, and strategically investing in long-term growth opportunities. Our balance sheet is strong with excellent liquidity as we drive value creation through improved business results and effective capital management.

With that I’ll turn the call back over to the operator and we’ll be delighted to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of Keith Walsh - Citi.

Keith Walsh - Citi

Greg, first on reinsurance, I personally was expecting higher organic revenue there with the pricing chatter that we would be hearing out there in the industry, maybe if you could just touch on, I guess, you mentioned retention in your comment, but a little more color on how retention, and if there is a fee component to your business as well as any accounting issues as far for revenue recognition that would impact the growth into the quarter, and then I’ve got a followup for Christa.

Gregory C. Case

Great question Keith, happy to go through that for you. First of all if you take a step back and think about just the general renewal season overall, we felt very good about it. As we said the pricing impact on our total business overall in the first quarter was, on the reinsurance side, relatively flat to up low single digits; if you break that down and this relates back to some of the chatter that you’ve described, the rate online pricing was obviously more aggressive on the property CAT exposed areas in the US than it was in international and the other non-property CAT exposed areas and you clearly see that, but that then gets mitigated by the client decisions around higher retentions and their decisions around purchasing limits, etc., and that behavior is fully reflected on what’s going on in the overall economy. So, you start with a kind of a rate online, you then factor it down based on client behavior.

To your question on accounting, that really cuts to the heart of it, really for us in addition. If you think about it, how does this actually get booked, and Christa can describe it in more detail, but a large portion of this is booked on an installment basis, and therefore the timing of the revenue recognition is really an important factor. As an example, roughly about a third of our UK book is often deferred installments from 2008. So it’s really going to take a year for all of this to cycle through when you think about the impact of potential one-run renewals. The last point, I would just say is; roughly half for our business acts more or like commission and roughly half acts more or like fee; so you sort of see all those behaviors and activities come through as well in the context of the overall pricing environment. So like I said, it really takes about a year for this to cycle through.

Keith Walsh - Citi

Christa, just on the pension; I know there just has been a ton of changes you guys have been doing there, and I would assume with those changes that the volatility to the income statement has come down as well. A couple of quarters ago you updated us on sensitivities on discount rate and asset level movements; if you could update us on that with these changes and how that impacts that.

Christa Davies

I’ll be delighted to do that Keith. Obviously you’ve noted that we’re making some very tough decisions to manage the volatility around our pension plans and to reduce volatility for shareholders, and in that light we froze our US defined benefit plans this quarter, and we are making moves to reduce the contributions to the UK plans over time. In terms of the sensitivities; there are three sensitivities that I spoke to last time; number one, FX; number two, assets; and number three, discount rates. A 10% change in FX would increase or decrease our pension expense by $8 million, a 10% change in assets would increase or decrease operating expense by $34 million, and a 100% basis point change in the discount rate would increase or decrease it by $37 million. You can see that really all three of those other than the FX one have come down quite significantly. I guess the other way to think about this is if you look at our balance sheet, at the end of March 31, compared to the end of the year, you can see that the pension liabilities have come down by around $200 million, almost $250 million, and that’s really driven by two things; it’s an FX change on the liabilities particularly in the UK plan and it’s really also an improvement given the contributions we’re making to the pension plans as you have noted we are making about $400 million in contributions to the pension plans this calendar year.

Keith Walsh - Citi

Just to recap the sensitivity part, I believe from your prior comments that it was roughly $55 million and $70 million; now it’s down to like $35 million, it sounds like, as far as the assets and discount re-factored.

Christa Davies

That’s exactly right. A 10% change in assets is now $34 million and it was $55 million and the 100 basis point change in discount rate is now $37 million and it was $75 million to $80 million.

Operator

Our next question is from the line of Dan Farrell - Fox-Pitt Kelton.

Dan Farrell - Fox-Pitt Kelton

I was wondering if you could just touch on your capital flexibility; you’re still sitting with some pretty high cash levels, even higher than they were in the previous quarter, and debt-to-capital and debt-to-EBITDA have continued decline. Can you touch on thoughts there?

Christa Davies

Dan, as we’ve talked about previously, we really think about capital allocation decisions being made on risk adjusted than on invested capital basis, and we continue to evaluate all forms of capital usage being share buyback, acquisitions, organic investment, dividends, and pension commitments on that basis. One of the things you may be asking about also I guess is our share buyback program. We are still committed to that share repurchase program; we’ve got 850 million of remaining share repurchase authorization, and whilst we believe in the underlying value our stock, we believe it’s prudent to manage our balance sheet in this period of extreme volatility, and therefore we are not committing to the timing of the completion of that program.

Dan Farrell - Fox-Pitt Kelton

One other question with regard to the mix of the Benfield revenue, and I’m sorry if you touched on this already, but I didn’t hear; how much of that is July, July timeframe renewals versus January?

Gregory C. Case

We really haven’t laid out exactly how it works quarter to quarter, but it really is spread out throughout the year, in the normal renewable cycles and times that you’ve just described. A larger portion does happen in the first quarter. So January 1 renewals were a very, very important time period for us in which as I said before we felt very, very good about. All of our colleagues were very much focused on clients who were struggling in the current economic environment and we had a very, very good January 1 renewal cycle.

Christa Davies

The other thing I’d reinforce is the point Greg made earlier, just about how we recognize revenue. We really recognize revenue fairly evenly over the course of the year with Q1 and Q3 being slightly larger quarters than Q2 and Q4, but it’s fairly even during the course of the year given the installment nature of the revenue.

Operator

Our next question is from the line of Meyer Shields - Stifel Nicolaus & Co.

Meyer Shields - Stifel Nicolaus & Co.

Greg, if I could continue to comment on the retention of the Aon Benfield folks; there is a lot of whispering around that and I was hoping you could clarify what the reality is?

Gregory C. Case

Happy to do that, and glad you ask about Aon Benfield. You take a step back and think about where we are today on Aon Benfield; our team, our leadership, our colleagues really are excited and I feel very good about the integration. The leadership team is fully in place, Meyer. The colleagues around Aon Benfield have really come together and focused on clients. What’s interesting about this is that, in many respects the economic trauma that Chris and I have talked about; have been so challenging for everybody across the base business, really has impacted our reinsurance clients and in many ways rallied our team around that cause. So, the best spirit of a client serving organization came together and really focused on clients and it was great and it really helped for the combination as they poured all their energy focusing on clients.

The basics around the integration are just going exceptionally well and this will get to the people point very directly in a moment, but we are very excited about the fundamental promise which really was behind the whole merger, and then promises around just being the preeminent provider in the world as far as insurance on topics related to capital returns. Now we sit with a firm with incredible unique insight, great capability, and tremendous ability to help clients in a very tough time. Our colleagues have really rallied around that. We were expecting that from clients, but our colleagues have really started to see that. The power of this for us really shows up when the combined Aon Benfield teams are in an RFP talking to clients and the client feedback from that has just been exceptionally, exceptionally strong.

In the context very specifically, as we started to think about the plans we had going in and the number of colleagues that we would expect as part of any merger to move on to different things, we feel quite good about that. Anytime you lose colleagues, it’s difficult, but we had a restructuring program in place that we pushed very, very successfully and we’ll continue to do, and that results in obviously colleagues who exit from the firm, and as we look at our top 150, which is really the core group that’s going to help lead the firm, well in excess of 95% of that group is still firmly in place and we are quite excited about that. So, for almost every aspect of this merger, this partnership, we just feel incredibly excited about. In the top 30 accounts as an example, we’ve not lost a single account, and I have no doubt there is lot of chatter out there fueled by lots of different folks with different agendas, but for us our agenda is us and our clients, and we just feel really, really good about it.

Meyer Shields - Stifel Nicolaus & Co.

Second question if I can; with Swiss Re having some financial issues, are we seeing any interest in reinsurance buyers that have only gone direct looking at the broker model?

Gregory C. Case

Yes, we actually have seen as you think about what’s going on with the capital providers, it is less about the direct side, it really is about the greater need for advice in the context of capital sources that have had challenges. So, Swiss Re is a very important market in the world today, and we see it is a tremendous opportunity to help clients really understand how to trade off capital not only terms and conditions in price, but also for just what kinds of decisions they want to make to make the best capital choices for them, and you are certainly seeing a lot of push for diversification across panels. So in any environment where there is difficulty and challenge, those who can provide great advice do pretty well and we feel we are in a good position for that.

Meyer Shields - Stifel Nicolaus & Co.

One numbers question if I can for Christa; what was the tax rate applied to the operating profits of AIS included in discontinued?

Christa Davies

Meyer, I’ll follow up with you on that. We’re just looking that number up, so why don’t I get back to you offline on that?

Meyer Shields - Stifel Nicolaus & Co.

That’s perfect.

Operator

Our next question comes from the line of Jay Cohen - Bank of America.

Jay Cohen - Bank of America

If you could talk about the organic growth; I guess when you think about the headwind from both pricing and the economy, the fact that are you growing organically suggest market share gains. So, I’m wondering if you can dive into that a little bit. I am wondering if that’s true, and it seems we have to be on those; who are you taking share from, and then I guess related to that, was there any growth in the US; Americas, you grew, but you mentioned Latin America and Canada; what about the US, and how are you getting this share and who is it from?

Gregory C. Case

I would take a step back, Jay. We feel, as I described in the beginning and Christa reinforced, we’ve been investing in our firm quite heavily over the last number of years and it really is all around client serving capability, and that’s in large corporate, that’s in middle market, that’s in small commercial; really across the board, and across all our global geographies, and we are just beginning to see a number of those things really start to bear fruit, and in the context of that, if you assume the global economy has had impact and obviously it has, and it’s hard to quantify with that is, but might be 2% to 3% points, it’s some number; we don’t know what it is and it’s hard to really figure out what it looks like, but it’s something, and we feel very good about the underlying basics on what’s happening in our business. As an example, I would say in new business, in the US, just to pull out an example; if you take out our construction business which obviously faced real headwinds outside the control of our construction colleagues I might add, but if you took that out, new business in the US was the best it’s been in any single first quarter in probably five to six years. It’s really been quite strong and it really is, in our view, the underlying processes and mechanisms and products and capabilities we put in place really around the world. So, the revenue engine in the US which is now installed across Europe and is just beginning to take off, efforts we are doing around Client Promise, which I mentioned before and GRIP, which is our Global Risk Insight Platform; these items, we believe, are very differentiating and really put us in a very, very strong position. This is also an environment in which clients are essentially making sure they’re with the highest quality place, and there is a bit of flight to quality which benefits those in the marketplace today who truly have to throw weight to make things happen, to get claims collected, to get best terms and conditions, and that really is the true strength of Aon. So, we are going to just keep pushing very hard on our existing game plan which we feel quite good about.

Jay Cohen - Bank of America

Can you tell who you are taking shares from or is that just impossible?

Gregory C. Case

We actually have a pretty good view on the day-to-day what’s happening in both RFPs and competitive situation in areas where we initiate, but we are essentially going to stay focused on just improving our position and improving share, but we do have pretty good line of sight.

Jay Cohen - Bank of America

We don’t need to know the names of the companies, but can you get a sense of a character of those companies; is it the larger ones, the smaller ones where you are able to take the share from?

Gregory C. Case

We’ve been pretty fortunate, but again our focus is not going to be on our competitors. We respect all of them, of course. Our focus is going to be on winning the clients in a way that’s distinctive and unique, and we see everybody, we cut cross every global economy in every segment; so we are seeing everybody basically everyday.

Christa Davies

I just want to follow up on Meyer’s question on the tax rate on the AIS sale; Meyer, it’s 50% and obviously that’s showing up in discount.

Operator

Our next question is from the line of Matthew Heimermann - J.P. Morgan.

Matthew Heimermann - J.P. Morgan

One followup on Jay’s question; did you mention whether the US organic growth was positive or not; I’d missed that if you did.

Gregory C. Case

We didn’t talk about the US specifically, we talked about the Americas in the context, but the US had a good quarter and the growth rate overall was roughly flat overall, but ex-construction, as I said before, was actually strong.

Matthew Heimermann - J.P. Morgan

On the reinsurance side; I had two questions, one was, you talked about some of the things that might affect the reported revenue on an accounting basis, but can you give us a sense of what kind of same-store change was; renewal over renewal?

Gregory C. Case

Again, as I said before, we feel very good about the overall; what we went to in the January 1 renewal cycle, and we feel very good from a unit standpoint and now we’re doing client by client. We haven’t disclosed to that level of detail, but feel very good about how we did in the first quarter.

Matthew Heimermann - J.P. Morgan

But based on everything you said, does that imply then that on a same-store basis, it actually is greater than what you reported?

Gregory C. Case

My only hesitation is there are like 15 moving parts here, as we were talking about in the beginning; between the rate online, client activity, what they do with their decisions on retentions, etc., it really affects in multiple different ways. So, it’s hard to measure; we’ve been doing this and looking at this in detail for a number of years; it’s hard to get an apples-to-apples same-store. When we look back and say, “I haven’t retained clients?” Yes or No? “Have we actually provided value on clients in a way that’s distinctive and helping them shaping the program?” Yes or No? And in that context we feel very good about it and then beyond that, as we said, a lot of things mitigate what the outcome is and then you’ve got the final point around how you do the accounting, which is much more on the installment basis. So it’s really hard to do the same-store piece in a way I think you’re asking the question.

Matthew Heimermann - J.P. Morgan

One moving piece of that or I guess it maybe not of the question I asked, but with respect to Benfield, when we think about Benfield year-on-year and just the capital market piece of the revenue; given what’s happened with capital market, is it fair to say that that part of the business is likely facing headwinds year-on-year?

Gregory C. Case

Overall, when you throw everything in the pot, all the different puts, takes, back, forwards, ups, and down; we’re up 1% as we described. So one of the things that we always come back to at the end of the day is all about performance, and so you got to do all your puts and takes, did you grow or not organically; yes we did. And in the context of the different aspects of it; one place that we clearly have a lot of pressure, and it’s not just Benfield, we had the most significant capital markets group in the field with Aon capital markets, now with Aon Benfield capital markets, our Aon Benfield Investment Bank, it’s a quite significant capability that was under tremendous pressure in the first quarter and the second quarter in terms of actually reported results. Ironically, there is probably as much conversation and activity as there has ever been before as clients are really struggling and thinking about their capital position and what their different options are. So, we feel very good about our position, we feel very good about the dialogues and the impact we are going to have, but from an accounting standpoint and a reported standpoint, there is a lot of pressure on capital markets in the first half of the year, but guess what; there’s lots pressure everywhere. We’ve got to step back, understand that, readjust and perform.

Matthew Heimermann - J.P. Morgan

One last question; this is just with respect to the anti-money-laundering, you had this fine, but are there any processes; I’m assuming there are some extra processes and procedures that you now have put in place; do those have any material impact with respect to efficiency or speed to market or ease of getting things done; new world versus old world?

Christa Davies

Obviously one of those things we’ve done as part of looking at anticorruption and compliance effort is put in place a compliance environment that we view as the leading edge in the industry, and we really think that that improves our ability to deliver terrific value to clients and it helps provide terrific clients service. We are obviously in a field where we are providing professional services and reputation is absolutely critical, and therefore having an improved compliance environment we think helps us. So, no I don’t think it changes our speed to market in anyway.

Gregory C. Case

Our expectation is that a number of other firms around the industry are going to be asked to step up to the standard. One of the great outcomes was a comment by the regulators in the UK about how we reacted and what they expect the rest of the industry to do.

Operator

Our next question is from the line of Jay Gelb - Barclays Capital.

Jay Gelb - Barclays Capital

I had a question on the consulting business; I believe, Christa, you mentioned that this a mid-teens margin business over time; profit was down excess unusual items in the consulting business in the first quarter, about 20% year-over-year; is that a reasonable run rate for the full year, I just want to see if I square that up with your margin comment?

Christa Davies

One of the things we said in Q1 2008 was that there were a number of one-time items that made that margin unusually good in Q1 2008 and the margin we’re seeing in Q1 2009 is a mid-teens margin and much more consistent with what we would expect throughout the balance of the year. So, yes, I think that’s a fair statement.

Jay Gelb - Barclays Capital

Second, on Benfield; I don’t know if you can give us an indication of what the margin was for the Benfield piece in the first quarter of 2009 versus the rest of the brokerage margin?

Christa Davies

Yes, one of the things is, Jay, we really have fully integrated Benfield with Aon Reinsurance into Aon Benfield and we really don’t split it out anymore and actually it is almost impossible for us to do that, and one other thing that should give you reassurance about is really that we are actually integrating the business in a holistic way.

Jay Gelb - Barclays Capital

And then a separate issue for Greg, given the concerns about swine flu and the impact on travel and shipping trends, how much of a head win can we expect that to be in say second quarter for Aon?

Gregory C. Case

It’s really hard to tell based on what’s going on right now. Obviously, the personal tragedy we are all incredibly worried about and vigilant however we certainly are and have but for our clients. We do a lot of work helping clients understand the impact of pandemic. We’ve been talking about it for a number of years, and so, again this is back to the world we live in, a world of incredible risk, and as that goes up, pandemic being one example, it presents head wins, it presents opportunities, helping clients understand pandemic as an example. We do have a lot of clients who think they have solved pandemic, but unfortunately, they have got a supply chain that is intertwined around the world and they solved pandemic at their own local position and they don’t solve it for their supply chain and they haven’t solved pandemic. So, they will unfortunately be or fortunately lots of opportunities to help clients succeed in this difficult environment, and then there’ll be some head wins on some of their core businesses will be difficult, and this is why we have the Aon situation room while we have actually teed-up kind of a 24 x 7 access for our clients who can come in and get advised directly from Aon and from our teams on how to really come back in a very very difficult environment.

Operator

And with no further questions, I’ll turn it back to you, Mr. Case, for any final remarks.

Gregory C. Case

I’d just like to make one observation as we close the call; first is I want to thank everybody again for being part of it today, but the perspective I just offered from our team to our analysts and investors on the call, it really is just a reflection; we feel very good about the plans we got in place to build Aon, really to build a preeminent firm for our future and to continue to substantially improve financial performance for the firm. Today, these specific plans have been in place for a number of years and have really acted in the face of head wins, and when you think about it from our view, we are kind of in the third or fourth inning of the game if you think about it with clear line of sight around where we think there’s fundamental improvement potential.

As you reflect over the last few years, the team has been able to grow organically for 14 consecutive quarters, margin on the brokerage side is really increased to pretty substantially from ’05 to ’08 about 300, 320 basis points and we saw in ’09 an increase of 100 basis points and we felt very good about cracking the 20% barrier, obviously a lot more to do here, but cracking that barrier was important to us, and on the consulting margin side, significant improvement over that time period with a level now in Q1 that we believe is industry leading, and at the same time we’ve been able to invest quite substantially.

One of the things that puts us in a very good position right now is the level of investment we’ve made in our business over the last number of years while combating head wins around price declines and improving the business, and now what we see as we think about the platform today is another set of head wins around the economy, and if you think about brokerage margin and the ability to achieve 20.7% is fine in the face of the investment drag of 100, 110 basis points that Christa described, it’s even better, and for us it’s really about the fundamental engine called Aon in the preeminent firm we’re trying to build of Aon and the performance that we can provide, and as we think about it, the reason where we feel like we are kind of in the third or fourth inning of the game as we just see continued improvement opportunities as Christa described we’re really at the beginnings of the benefits from the 2007 restructuring program and at the very beginnings of the benefits from the Aon Benfield plan as well as many of the other investments we’ve got in place.

So, I just wanted to offer as we reflect on the quarter we just feel very very good about the specific plans we’ve got in place to build the preeminent risk and human capital firm in the world today as well as to continuously deliver strong returns for our shareholders; and just would end by again thanking everybody for being part of the call.

Operator

Ladies and gentlemen that does conclude your conference. Thank you for your participation.

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