Aon Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.26.13 | About: Aon Corporation (AON)

Aon (NYSE:AON)

Q1 2013 Earnings Call

April 26, 2013 8:30 am ET

Executives

Gregory C. Case - Chief Executive Officer, President, Executive Director and Member of Executive Committee

Christa Davies - Chief Financial Officer and Executive Vice President

Analysts

Adam Klauber - William Blair & Company L.L.C., Research Division

Brian Meredith - UBS Investment Bank, Research Division

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Gregory Locraft - Morgan Stanley, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Michael Zaremski - Crédit Suisse AG, Research Division

Operator

Good morning, and thank you for holding. Welcome to Aon plc's First Quarter Earnings Conference Call. [Operator Instructions] I would also like to remind all parties that this call is being recorded and that it is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995 (sic) [Private Securities Litigation 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 are described in the press release covering our first quarter results, as well as having been posted on our website.

Now it is my pleasure to turn the call over to Greg Case, President and CEO of Aon plc.

Gregory C. Case

Thank you very much, and good morning, everyone. Welcome to our first quarter 2013 conference call. Joining me here today is our CFO, Christa Davies.

Consistent with previous quarters, I'd like to cover 3 areas before turning the call over to Christa for further financial review. And we note that there are slides available on our website for you to follow along with our commentary today. First is our performance against key metrics we communicate to shareholders; second is overall organic growth performance; and third is continued areas of strategic investment across Aon.

On the first topic, our performance versus key metrics. Each quarter, we measure our performance against the 4 metrics we focus on achieving over the course of the year: grow organically, expand margins, increase earnings per share, and deliver free cash flow growth.

Turning to Slide 3. In the first quarter, organic revenue growth was 2% overall, driven by strong growth in Retail Brokerage. Operating margin was essentially flat, as a significant increase in Risk Solutions margin was offset by a decline in HR Solutions and the unallocated section. EPS increased 13% to $1.11, reflecting both solid operating performance and effective capital management. And finally, free cash flow increased $80 million in our seasonally weakest quarter, driven by strong working capital performance. Overall, a solid start to the year as we strengthen our industry-leading platform for long-term growth, strong free cash flow generation and increased financial flexibility.

Turning to Slide 4, on the second topic of growth. I want to spend the next few minutes discussing the quarter for both of our segments. In Risk Solutions, overall organic revenue growth was 3% compared to 4% in the prior year quarter, with growth across every major business. As we've discussed previously, we're driving a set of initiatives that are strengthening underlying performance and positioning our Risk Solutions segment for long-term growth and improved operating leverage with management of our renewal book through Client Promise and retention rates more than 90% on average, our record level of performance, highlighting strong client satisfaction in Retail Brokerage; new business generation of approximately $240 million across our Retail business, with double-digit new business growth in many markets globally across the Americas, Asia and Pacific regions; investments in new product and service capabilities, with the rollout of GRIP and Aon Broking globally; and in our core treaty reinsurance business, net new business trends have now been positive for 8 consecutive quarters.

Reflecting on the individual businesses within Risk Solutions. In the Americas, organic revenue growth was 6% compared to 4% in the prior year quarter. Exposures are relatively stable, and the impact from pricing was modestly positive on average, reflecting a steady pace of change over the last 12 months. We saw solid growth across all regions, including Latin America, U.S. Retail and Canada.

In U.S. Retail, we delivered solid growth, driven by double-digit new business growth, including growth in property/casualty, health and benefits, construction and Affinity, as well as strong management of the renewal book portfolio with improved retention and rollover rates.

In international, organic revenue growth increased 3% compared to 4% in the prior year quarter. Exposures are relatively stable, and the impact from pricing was flat on average, with firmer pricing in cat-exposed regions and softer pricing in most regions across Europe. We saw strong growth in emerging markets, New Zealand and many markets across Asia, including double-digit growth in areas such as Korea, Philippines and Singapore.

In the U.K. and continental Europe, macroeconomic conditions remained fragile across many core markets. However, with leadership positions across this region, we saw strong retention rates, and management of our renewal book portfolio delivered modest growth. Overall, a solid performance against economic and market headwinds.

In Reinsurance, organic revenue growth was 1% compared to 5% in the prior year quarter. As we noted last quarter, record capacity continues to be available to meet demand, and cedents are retaining more risk, driving an unfavorable market impact in the quarter. Results reflect growth in our capital markets advisory and transaction business, as well as facultative placements. In treaty, as mentioned before, net new business won was positive for the eighth consecutive quarter. Overall, this level of performance and strength in new business generation reflects Aon Benfield's value proposition for clients, while strengthening operational performance and reducing volatility through unmatched data, analytics and advisory capability.

Finally, we would observe that absent an event in the industry, macro factors will continue to be a headwind in 2013.

Turning to HR Solutions. Overall, organic revenue growth was 1% compared to 3% in the prior year quarter. We saw modest organic growth across both Consulting and Outsourcing despite weak discretionary spend globally and continued economic pressure in continental Europe. Underlying performance also reflects growth in areas where we're making significant investments in the business, in areas such as healthcare exchanges, investment consulting, pension and risk management consulting and HR BPO. These investments reflect Aon Hewitt's client leadership, understanding of market trends and the long-term issues that face our clients as healthcare reform, healthcare costs and the associated financial risk continue to rise unchecked at a time when overall health and wellness is not improving. Multinational clients are increasingly looking for a global benefit solution that supports their global organizations delivered at the local level, managing and transferring risk across pension schemes that are increasingly frozen and largely underfunded. And finally, after continuing to work through the worst economic recession in the last 70 years, clients are just beginning to renew their focus on talent, retention, development and engagement to prepare themselves for renewed long-term growth.

Turning to the individual businesses within HR Solutions. In Consulting Services, organic revenue growth was 1% compared to 1% in the prior year quarter. Underlying results reflect growth in communications consulting and strong demand across our retirement businesses, for investment consulting, pension administration services and talent rewards. And despite continued pressure on discretionary services and overall economic weakness in continental Europe, for the full year, we continue to expect low- to mid-single-digit organic growth across the Consulting Services business.

In Outsourcing, organic revenue growth was 1% compared to 3% in the prior year quarter. Organic growth reflects net new client wins and demand for HR BPO, healthcare exchanges and discretionary services, partially offset by a modest decline in benefits administration. As we noted last quarter, we continue to make progress in our healthcare exchanges, and the pipeline for growth during the fourth quarter of 2013 enrollment period continues to grow. If you think about the corporate exchange, the progress of the team has been a truly outstanding accomplishment, from concept in 2011 to launch last quarter of the industry's only active corporate exchange; enrollment of roughly 100,000 employees plus eligible dependents; and all participating clients are referenceable, with representation for both existing and new clients on the exchange. Great progress from the team in healthcare exchange area, reflecting the strength of our industry-leading platform across employee benefits design, brokerage and administration.

Slide 5 highlights the third topic, areas of investment. We believe Aon is in a unique position. Solid long-term operating performance, combined with expense discipline and strong free cash flow, continues to enable substantial investment in colleagues and capabilities around the globe. A few examples include, in Risk Solutions, we're investing in client leadership to drive greater productivity and efficiency, with the rollout of the Revenue Engine internationally, as well as the rollout of Client Promise, which is driving greater retention and rollover rates. We continue to invest in innovative technology such as the Global Risk Insight Platform. GRIP is the world's leading global database of risk and insurance placement information. We now have roughly 1.6 million trades, more than $83 billion of bound premium and a growing client list of insurance carriers utilizing the platform for its analytics and service capabilities. In addition, we're driving our Aon Broking initiative to better match client needs with insurer appetite for risk, as highlighted by our ability to package similar risks and place substantial programs and facilities into the market on behalf of clients. A great example of this is a sidecar facility agreement we announced with Berkshire Hathaway, providing clients efficient access to AA+-rated capacity for eligible business placed by Aon Risk Solutions. Clients are expressing considerable interest in this facility, especially in traditionally capacity-challenged sectors, as a way to augment capacity for products within those sectors.

We're also investing in continued alignment of our global Health and Benefits platform to better capitalize on our global distribution channel and deep brokerage capabilities. And we continue substantial investment in further development of data and analytics capabilities at Aon Benfield to strengthen already industry-leading client servicing capability.

And finally, we're expanding our footprint through tuck-in acquisitions that either increase scale in emerging markets or expand capacity to better serve clients, as well as adding key talent across Asia in specialty sectors and in our GRIP solutions business.

In HR Solutions, we're making significant investments to strengthen our industry-leading position in healthcare exchanges, both in retiree and active markets. Healthcare exchanges enable clients to begin the shift of their participants to a market-based, defined contribution model for healthcare while addressing unsustainable healthcare cost increases and decreasing population health. While already a growing leader in the retiree market, we launched the industry's first and only fully insured, multi-carrier corporate exchange in Q4 and will be focused on driving greater scale in 2013 and improved returns in 2014. We're also expanding in high-growth areas for both current clients and new markets. Innovative solutions to de-risk pension plans are in high demand with our existing retirement client base. And our delegated pension solutions are opening relationships in new markets. We continue to expand our industry-leading benefits administration solutions and technology platforms, including extensive mobile solutions. And finally, we're strengthening our international footprint to support a global workforce with investments in key talent capabilities across Asia and emerging markets.

Overall, we've proved the concept for these major investments in 2012, and we're on plan to drive greater scale and increased operating leverage in 2013. In summary, we delivered organic revenue growth across both Risk and HR Solutions, continued to ramp up significant strategic investments that will drive greater long-term growth and operating leverage, delivered double-digit earnings and strong free cash flow growth.

With that said, I'm now pleased to turn the call over to Christa for further financial review. Christa?

Christa Davies

Thanks so much, Greg, and good morning, everyone. As Greg noted, our performance reflects a solid start to the year with double-digit earnings growth. We continue to position Aon for long-term growth, strong free cash flow generation and increased financial flexibility, as highlighted by the repurchase of $300 million of ordinary shares in the quarter.

Now let me turn to the financial results for the quarter, as highlighted on Page 6 of the presentation. Our core EPS performance, excluding certain items, increased 13% to $1.11 per share for the first quarter compared to $0.98 in the prior year quarter. Results reflect the strong performance in our Risk Solutions segment, a lower effective tax rate and effective capital management in the quarter. Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on Page 13 of the press release include noncash intangible asset amortization, restructuring charges and redomicile costs primarily for legal and advisory fees to complete the transaction.

Foreign currency translation had a $0.02 favorable impact on EPS in the quarter. If currency were to remain stable at today's rates, we would expect no material translation impact to EPS in the second quarter of 2013.

Now let me talk about each of the segments on the next slide. In our Risk Solutions segment, organic growth was 3%. Operating margin increased 110 basis points to 22.5%, and operating income increased 9% versus the prior year quarter. Organic growth, restructuring savings and a 40-basis-point favorable impact from foreign currency translation more than offset a minus 20-basis-point unfavorable impact from a significant decline in investment income due to lower short-term interest rates globally.

Let me spend a moment on the formal restructuring programs' key initiatives that have enabled concurrent funding of investments and long-term structural margin expansion. Associated with the transfer of the Health and Benefits business at Jan 1, 2012, an estimated $52 million of restructuring savings under the Aon Hewitt program will be achieved in Risk Solutions. Approximately $45 million of the $52 million in cumulative savings have been achieved under the program, including an estimated $5 million of incremental savings in the first quarter. A breakout of restructuring charges incurred in Risk Solutions associated with the Aon Hewitt program is detailed in the schedules on Page 14 of the press release.

In the first quarter, we delivered strong operating performance in Risk Solutions despite continued economic uncertainty in Europe and an unfavorable impact from decline in investment income, placing us firmly on track for margin improvement for the full year and continued progress towards our long-term target of 26%.

Turning to the HR Solutions segment. Organic revenue growth was 1%, operating margin decreased 220 basis points to 14.3%, and operating income decreased 13% compared to the prior year quarter. An unfavorable impact from legacy litigation and the timing of certain expenses of $10 million or minus 100 basis points, continued investment in long-term growth opportunities and an unfavorable revenue mix shift more than offset organic revenue and incremental restructuring savings in the quarter.

With respect to the Aon Hewitt restructuring program, we incurred $26 million of charges in the quarter. Cumulative savings related to the formal restructuring program in the first quarter are estimated at $69 million compared to $48 million in the prior year quarter, of which approximately $5 million of the incremental savings were achieved in the Risk segment. Excluding the $10 million of legacy litigation and the timing of certain expenses that negatively impacted the quarter, our results are exactly in line with expectations and guidance previously provided for the HR Solutions business.

As we noted in the previous quarter, we provided commentary regarding the outlook for the HR segment in 2013, and that outlook is unchanged. We expect to, number one, deliver continued organic growth; number two, drive greater scale from the investments made in 2012; number three, deliver additional savings related to the restructuring program; number four, deliver performance down in the first half and up in the second half, resulting in mid-single-digit operating income growth and margin expansion for the year.

Now let me discuss a few of the line items outside of the operating segments on Slide 9. Unallocated expenses were $41 million, including certain expenses related to the company's redomicile to the U.K. Interest income decreased $2 million to $1 million due to lower average interest rates and lower average cash balances; interest expense decreased $7 million to $52 million due to a decline in the average rate and the total amount of debt outstanding during the quarter; other income of $9 million includes a net gain due to the favorable impact of exchange rates on remeasurement of assets and liabilities in non-functional currencies and net gains related to certain long-term investments. Going forward, we expect a run rate of approximately $1 million per quarter of interest income, $45 million of unallocated expense and $55 million of interest expense per quarter.

Turning to taxes. The effective tax rate on net income from continuing operations decreased to 26.1% in the first quarter compared to 28% in the prior year quarter, due primarily to changes in geographic distribution of income. We currently anticipate an effective tax rate of approximately 26% in 2013. Minority interest was $11 million, similar to the prior year quarter. Based on performance, we expect minority interest to be approximately $11 million per quarter going forward.

Lastly, average diluted shares outstanding decreased to $320 million -- sorry, 320 million in the first quarter compared to 336.6 million in the prior year quarter, due primarily to our share repurchase program. The company repurchased 5 million Class A ordinary shares for approximately $300 million in the first quarter and has approximately $3.7 billion of remaining authorization. Actual shares outstanding on March 31 was 309 million, and there are approximately 10 million additional dilutive equivalents. Estimated Q2 2013 beginning dilutive share count is approximately 319 million, subject to share price movement, share issuance and share repurchase.

Now let me turn to the next slide to highlight our strong balance sheet and cash flow. At March 31, cash and short-term investments was $760 million, and total debt outstanding was $4.6 billion. Overall, debt-to-capital was 37.6% at March 31 compared to 34.9% at December 31. The increase is primarily driven by the timing for certain long-term debt placements between the fourth quarter of 2012 and the first quarter of 2013. Cash flow from operations increased by $69 million to $54 million in the first quarter compared to a use of $15 million in the prior year quarter. The first quarter is historically our seasonally weakest quarter from a cash flow perspective, due primarily to incentive compensation payouts. Significantly improved working capital performance more than offset a $106 million increase in cash taxes and a 40 -- sorry, an $86 million increase in cash contributions to the major pension plans in the first quarter. Free cash flow, as defined by cash flow from operations less CapEx, increased 93% or $80 million, reflecting a significant increase in cash flow from operations and an $11 million decline in CapEx.

Turning to the next slide to discuss our long-term financial flexibility. We value the firm based on free cash flow and allocate capital to maximize free cash flow returns. As you can see from this chart, based on current assumptions, we expect free cash flow to increase by over $500 million over the next 5 years, simply due to a reduction in cash used in pensions and restructuring.

Regarding our underfunded pension plans, we've taken significant steps to reduce volatility and liability as we've closed plans to new entrants, frozen plans from accruing additional benefits and continue to de-risk certain plan assets. We currently expect contributions to decline $90 million to $548 million in 2013 and continue to decline thereafter.

Regarding our restructuring plans, cash payments were $143 million in 2012. As our restructuring plans continue to wind down, we would expect cash payments to decline $26 million to approximately $117 million in 2013 before declining further each year thereafter. As we continue to grow, improve operating performance and our required uses of cash decline, we expect our strong free cash flow to continue to be a significant source of value creation for shareholders.

In 2012, we took significant steps to unlock that value for shareholders by increasing our strategic position and financial flexibility with the redomicile to the U.K. The company completed its change of jurisdiction of incorporation on April 2, 2012, and we believe the transaction will help drive shareholder value through, number one, greater global access to expected increases in future free cash flow; number two, an increase in future cash flows through a significant reduction in our global tax rate over the long term, more than what we've done over the last 5 years, which was approximately 500 basis points; number three, enabled us to access $300 million of excess capital held internationally on our balance sheet during 2012.

In summary, we delivered double-digit earnings and strong free cash flow growth and are firmly on track to deliver improved performance in 2013. While we're investing to further strengthen our industry-leading portfolio, we're focused on 3 primary areas that will each contribute to substantially stronger free cash flow over the next several years: first, continued growth and operating margin improvement towards our long-term targets; second, declining uses of cash, primarily for pension and restructuring; third, greater capital flexibility and increased cash flow from a lower effective tax rate resulting from our redomicile to the U.K. Combined with a strong balance sheet and increased financial flexibility, we have positioned the firm for significant shareholder value creation.

With that, I'd like to turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

Our first question comes from Adam Klauber, William Blair.

Adam Klauber - William Blair & Company L.L.C., Research Division

In the Consulting segment, it sounded like Europe was somewhat weak. What was the growth in the -- just the U.S.?

Gregory C. Case

We don't talk overall, Adam, sort of a specific region, but as we would describe is, net-net, expectations for the year continue to be exactly where they were as we left off last year, kind of low mid-single digits across the board for the year. U.S. was stronger than Europe for obvious reasons when you think about discretionary spend and how clients are reacting under the current situations they're in. But the underlying programs we've put in place to build client retention and obtain new clients, strong in the U.S., strong in Europe, and obviously, the headwinds are a bit stronger in Europe than the U.S.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay. And then as far as the healthcare exchange, you mentioned that the pipeline for new potential clients is looking good. After you signed up several large clients at the end of the year, did that really raise perception, I guess, number one? And number two, as we think about the year-end 2013 enrollment season, any -- I know you can't set a number on it, but is it possible to sign up materially more clients than you did at the end of 2012?

Gregory C. Case

Yes, if you step back and think about the exchanges overall, remember we've got a retiree exchange. Navigators has actually been in place and is working very, very well with a pipeline that's growing. You're referring to the corporate exchange, and you're exactly right. We were the first to put a multi-carrier exchange in place and actually bring it live. And we brought it live with clients in the last renewal period. And as you just described, having done that successfully, all those clients are referenceable, very positive reaction. As you might expect with a proven concept, that has tremendous benefits for companies and even for employees over time, you're getting a lot more demand in the context than we saw last year. Exactly what we expected. Let's say, from our standpoint, what we want to do is continue to grow and build out that -- the exchanges on the corporate side. The team's done a terrific job in doing that. We've got a very robust pipeline going into this renewal season, and we expect to continue to see that grow and see the return from that investment. So from our standpoint, it's going exactly as we had expected, with probably even a little more robust demand than we thought. And certainly, as you look at the competitive environment, you're seeing a lot of other folks think about this space as well.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay. And one final question on HR Solutions margin. Clearly, first quarter is a slower seasonal quarter and you had some expenses. Without putting a number on it, do you think the margin goes up from 1Q from here?

Christa Davies

Yes, we do. What we would say is it's going to improve sequentially each quarter during the year. And as we gave guidance, we still think we're exactly on track for mid-single-digit operating improvements for 2013, down in the first half and up in the second half. And due to the seasonality you described, you're exactly right, that Q4 will be seasonally higher than it has been historically, primarily due to healthcare exchanges.

Operator

[Operator Instructions] Our next question is from Brian Meredith, UBS.

Brian Meredith - UBS Investment Bank, Research Division

A couple quick questions here for you. First, Christa, on the guidance in the HR Solutions business for income for the year, did that include the $10 million of litigation, or should we strip that out when we're thinking about growth for the year?

Christa Davies

No, it's exactly in line with what we said at the end of Q4, Brian, so we do think we're going to get the $10 million back.

Brian Meredith - UBS Investment Bank, Research Division

So you'll get the $10 million back also. Okay, great. Second question, Greg, more for you. On this Berkshire deal that you all did. I guess the question I have there is, what has the Lloyd's market kind of reaction been from your perspective? And is there any risk, kind of from a revenue perspective, perhaps Reinsurance or something, where some of the Lloyd's syndicates may not be too happy about it?

Gregory C. Case

Yes, Brian, as we've looked at this, this really is a client solution, first and foremost. It's a client solution, as we've described it, that brings AA+ rated capacity into the market in a way it's never been brought into the market before. I would also say, as I know you know, RIMS is just concluding now on the West Coast, and the client reaction from the announcement has actually been quite positive. If you think about it, if you're a client in an area of constrained capital, this is now another area of capacity that just wasn't there before. As we've described, so it's truly a focus on kind of client need and client benefit. As we've also talked with Lloyd's about is, currently is linked to Lloyd's. So it really, we think, will actually provide some positive momentum into the Lloyd's marketplace overall, and we're going to continue to discuss it with them. Lloyd's is, obviously, a very important partner, and we're going to continue to work with our partners to serve our clients. But at its coal face [ph], this is truly a client-focused effort, and it's beginning to play out exactly like that.

Operator

Next question is Meyer Shields, KBW.

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Greg, you've mentioned the client interest in the acceptance of the Berkshire deal. Is there going to be any negative impact on Reinsurance revenues from, let's say, other Lloyd's participants that feel like they're getting squeezed out?

Gregory C. Case

Well, listen, again, back to -- here, our focus really is on the client-serving capability of this. And by the way, Lloyd's is also a very client service-focused partner as well in the context of what we do. So from our standpoint, we see this as a net positive overall. We're obviously in active conversations, as we are with Lloyd's. We're roughly 22%, 23% of Lloyd's business overall, so I think probably the single largest partner with Lloyd's. So it's a very, very important partner. But in the context of that, we think this initiative is going to be very -- it has already been extremely client-friendly and beneficial. And in that context, it really reflects the strength of our data and analytics and our approach to the overall market that we can bring to bear on behalf of clients that others haven't been able to do. So that's how we've looked at it, that's how it's playing out, and we're going to keep focused on client benefit.

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, I understand. And Christa, you mentioned that unallocated expenses were high in the quarter because of the redomicile. Is that a run rate, or this just a set of expenses associated with the move that should wind down pretty quickly?

Christa Davies

No, it is going to be run rate, so we've now reforecasted the unallocated expenses to be $45 million a quarter going forward.

Operator

Next question is Jay Cohen, Bank of America Merrill Lynch.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

A couple questions. The first is, the organic growth in the HR Solutions business really fell pretty significantly from the fourth quarter, which may have been overstated. And I'm wondering if -- what the change was between the fourth quarter and the first quarter.

Gregory C. Case

So Jay, as we -- if you step back and think about the year overall, don't overplay in any single quarter too much, our view is exactly as we left off in the fourth quarter of last year. And really, it's true for top line and bottom line. We think it's going to be mid-single digits for the year across -- from a growth standpoint, both in the Consulting side and in the Outsourcing side. We saw a little more pressure than expected in the first quarter. There are -- there's a couple things that were timing, a couple things that were sort of client discretionary pressure in Europe, as we described before. But the takeaway we want you to have from this call is that we really expect low-single digits for the year overall, and that's fully online. And as Christa described as well, we expect the same on the operating income growth side too, low-single digits.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Got it. And then on the timing, so when you have a timing issue, you're losing revenue either from future quarters, so it will come in future quarters, or you earned it earlier. How does the timing work here? Is this stuff that will come in later in the year that you didn't see in the first quarter?

Gregory C. Case

Yes, it's a little bit of stuff that will come in later, as we described before, but it's also a little bit more on the seasonality side as we've pushed on the healthcare exchanges, and those are going to be more of a fourth quarter event than they are a first quarter event. But net-net, as we look at the years, as I said, we expect low single-digit growth on the top line, both on the Consulting side and the Outsourcing side, and that hasn't changed at all.

Operator

Next question is Greg Locraft, Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

Just again to sit on the European slowdown and the impact in HR. If I go back to my notes in the second quarter of last year, you all mentioned that the first quarter is seasonally the most important quarter for Europe. What I'm wondering is, is was that commentary based on the overall corporation, was it an HR Solutions comment, or was it a risk management comment?

Gregory C. Case

No, the -- as you think about the patterning of revenue across Aon, this is really what you're describing is truly focused on Risk and not on HR Solutions. So if you think about our Risk business overall, the first quarter is very important from a European standpoint. The fourth quarter is very important from an Americas and a U.S. Retail standpoint. So that's how the Risk business plays out. So that commentary was directly focused on Risk and not HR Solutions.

Gregory Locraft - Morgan Stanley, Research Division

Okay. Perfect. And then, I guess, just a follow-up then. The organic and the international division of Risk, actually, was fine. I'm assuming Europe is sitting in there. And so therefore, there's no slowdown there. You sort of hit it seasonally well. I'm sort of scratching my head as to why the miss out of Europe in HR Solutions, but I'm also appreciating that maybe it wasn't a miss relative to what you guys thought you were going to do this year anyway because the guidance remains the same.

Gregory C. Case

Yes, and if -- you're exactly right. If you parse the two, stay on risk for a second, 3%, we feel good about across international, always like it to be stronger. International also includes Asia and Pacific. Those are particularly strong. I want to be clear, there is real headwind in Europe. Our colleagues are doing a great job fighting through that with very, very strong positions we have in the marketplace, managing the renewal book. So there's real pressure there. There's certainly less pricing benefit, if any, in that theater. So there's real pressure there, and our colleagues have done a good job sort of overcoming that to kind of get to the 3% outcome. And as I said before, certainly, positively impacted by Asia and Pacific. And then as we've said on HR Solutions, we are exactly as we expect to be for the year, mid-single-digit growth across the board on Consulting and Outsourcing. A little more pressure than we thought in the first quarter, but it'll play out the same over time.

Operator

Next question is Mike Nannizzi, Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Greg, could you talk a little bit more about the trends that you're seeing in the domestic risk book and, in particular, kind of on the renewals side? What do you think is contributing other than some exclusive actions you're taking? What is contributing to the fact that renewals are -- the profile of the renewal book is improving? And I have just one follow-up.

Gregory C. Case

So this really starts back to the investments we've made over a period of time, which we're rolling out globally, started in the U.S. and are now rolling out around the world. And as we have talked over the last number of quarters, we've invested heavily to put those in place. By the way, in the context of doing that, it's cost us some margin. And as those have come to fruition, we feel like we're going to get operating leverage, and that's really what you're starting to see. And that shows up in areas like Client Promise that we've rolled out, and the Revenue Engine, also areas as we've rolled out GRIP in the U.S. and now around the world. So these are fundamental investments that we believe are strengthening the business and strengthening our ability to both bring new clients in but also improve the value proposition to existing clients. And in doing so, you're going to increase retention and increase rollover. And that's really what we're seeing in the U.S. and we anticipate seeing around the world.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Can you tell me just in terms of like your relationship with clients, and we've had a couple years of rate gains here, are you able to secure better rates for your clients than the market overall? And is that a factor as people become a little bit -- maybe a little bit more bristled about further rate gains? Is that a relevant dynamic?

Gregory C. Case

Yes, what I would say is, so against -- we're not going to speak to specific competitors. But Aon is fundamentally built and has made what we believe to be unprecedented investment in content and capability that enable us to actually understand the market, measure risk and then bring the market to bear on behalf of our clients, respectfully, better than anyone else in the world. That's really the focus of the firm. You think about Aon Benfield. Aon Benfield spends in excess of $120 million a year on content and capability to help clients understand how to understand, measure risk, reduce risk, change volatility, reduce volatility. And in that regard, these are truly industry-leading investments. The purpose of these investments is to help drive better value for clients, and that shows up in multiple ways, terms, conditions, price, et cetera. And the same is true on the Retail side when you think about what we've done with the Global Risk Insight Platform. The Risk Insight platform, literally, is the single biggest database of risk information in the world. And as we mine that on behalf of our clients and better match carrier capital to client needs, we believe they benefit substantially. And if clients understand value, they'll pay for value. And that's what we're starting to see.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Great. And just one follow-up, if I could, for Christa. I was trying to understand just the math on HR operating income. Let me know if this is wrong, but I think with kind of low-single-digit growth on the organic side, it would seem like you would need a couple hundred basis points of improvement year-over-year in the back half of the year to hit that mid-single-digit operating income increase year-over-year. Is that right or -- and if so, is that kind of what you're expecting?

Christa Davies

Yes, we are. And what we would say is, as we think about the year, we originally gave guidance to say that we would be down in the first half and up in the second half. We still believe that's right. And in terms of operating income patterning, it's really essentially down in Q1, essentially flat in Q2 and 3 and up in Q4. And the up in Q4 is substantial, as you described, really driven by seasonality, healthcare exchanges and restructuring savings.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay. So it's further back-loaded. So it's not really not back half, it's really fourth quarter?

Christa Davies

Yes, it's mostly fourth quarter, that's right. Really primarily driven by the seasonality, because the healthcare exchange investment and the revenue from healthcare exchange is really just showing up in Q4, makes Q4 sort of much more seasonally acute than it's previously been.

Operator

Last question is Mike Zaremski, Crédit Suisse.

Michael Zaremski - Crédit Suisse AG, Research Division

Christa, could you update us on the client invoicing issue that took place last year and whether we should still expect a $350 million benefit to free cash flow this year? And I had a follow-up.

Christa Davies

Yes, we do expect to receive that benefit this year. We are continuing to make progress every quarter. And so we feel good about that progress.

Michael Zaremski - Crédit Suisse AG, Research Division

Okay. And in regards to the Aon Hewitt restructuring plan, the 2012 10-K cites expected personnel reductions of 2,000. I noticed that number was up from 1,500 to 1,800 in the prior guidance or 10-K. So should the increased reduction result in eventual -- eventually, additional cost saves?

Christa Davies

Look, as we continue to implement the plans, we continue to update the numbers. And you see the numbers move slightly, as we update the most accurate numbers in the press release, as you can see, and we'll have them in the Q this quarter. Overall, we are on track to receive the $355 million of savings. So exactly where they come from does shift slightly between workforce reduction and leases on a quarterly basis as we complete the activities.

Operator

I would now like to turn the call back over to Greg Case for closing remarks.

Gregory C. Case

Thanks. I want to thank everybody for being part of the call this morning. We appreciate your interest in Aon and look forward to the conversation next quarter. Thanks very much.

Operator

Thank you. That does conclude today's conference. You may disconnect at this time.

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Aon (AON): Q1 EPS of $1.11 beats by $0.02. Revenue of $2.9B (+3% Y/Y) beats by $0.03B. (PR)