Aon Corporation Q2 2009 Earnings Call Transcript

Aon Corporation (AOC)

Q2 2009 Earnings Call Transcript

July 30, 2009 8:30 am ET

Executives

Greg Case - President and CEO

Christa Davies - EVP and CFO

Analysts

Keith Walsh - Citi

Don Johnson - Citadel

Eli Fleminger - Stifel Nicolaus

David Small - J.P. Morgan

Scott Heleniak - RBC Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Aon Corporation second quarter 2009 earnings conference call. At this time, all parties will be in a listen-only mode until the question-and-answer portion of today's call. I'd like to remind all parties that this call is being recorded. If anyone has an objection, you may disconnect your line at this time.

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. 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 second quarter results as well as having been posted on our Web site.

Now, it's my pleasure to turn the call over to Mr. Greg Case, President and CEO of Aon Corporation. Please go ahead, sir.

Greg Case

Thanks, John. Good morning, everyone, and welcome to our second quarter 2009 conference call. Joining me today is our CFO, Christa Davies.

For the past two quarters, we've indicated our belief that 2009 would be a tale of two stories, headwinds from the economy and pressure from the insurance market offset by our core business performance improvement. And that's exactly what we continue to see in Q2.

As described, the current global economic recession is providing significant headwinds for our business. We continue to operate in the soft insurance pricing market as rates continue to decline, albeit at a somewhat slower pace. And in addition to the pricing declines, we're seeing a volume impact driven by the current economic environment. The realities of the economic recession for our clients will continue to pressure volume and constrain organic growth in the industry in the near future at a rate we believe similar to what we've seen in the last two quarters.

However, irrespective of the short term marketplace or economic challenges, the core foundation of Aon continues to improve and is stronger than ever. The plans we put in place to substantially strengthen our firm are on track and showing very good progress. Given this context, we're very pleased with our performance in Q2.

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 is our performance against key commitments to shareholders. The second is continued areas of investment across Aon. And the third is our overall organic growth performance.

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

Turning to the second quarter, organic revenue growth was flat overall, a solid performance given the current environment, highlighted by strong growth in key areas such as Aon Benfield, which delivered 4% organic growth; and, Americas Brokerage, which delivered 3% organic growth.

Adjusted pretax margin increased 180 basis point overall, with significant margin improvement in all segments, highlighting strong expense discipline. And EPS on an adjusted basis increased 9%.

As a team, we believe these results reflect continued strong operational performance and are the direct result of Aon colleagues dedicated to delivering industry leading capabilities to support our clients while building our firm.

On the second topic, further areas of investment; we believe we're in a unique position in the industry, with solid operating performance, combined with expense discipline and a strong balance sheet continues to enable substantial investment in colleagues and capabilities. While we have significant opportunity remaining to deliver cost savings under our restructuring programs, we continue building on our leadership position in the industry.

A few examples in the quarter include in retail brokerage. We're spending a significant amount of time and resource toward the rollout of Client Promise and our Global Risk Insight Platform or GRIP. Client Promise outlines ten ways Aon provides value for clients, from optimization of total cost risk, to dedicated teams, to powerful benchmarking. GRIP is our internal proprietary database that captures and provides unique industry and market level insights to both clients and carriers across 60 billion of our global premium flow.

While early, we've already begun to see benefits to retention or penetration of existing clients. A quick example, we recently provided a demo to a very large retailing client. And while we already serve them on our financial services group, our industry data and insight proved very useful as we were invited back to discuss our full range of additional lines throughout our casualty business.

In reinsurance, we're fully focused on developing Aon Benfield, and building capability to better serve clients as we strengthen the franchise that is unparalleled in the industry. And I'll talk more about Aon Benfield in a bit. In consulting, we continue to invest in key leadership globally, with more than 60 senior leaders hired over the last several quarters across our business, including help and benefits, and management retirement consulting. These categories highlight just a few of the investments we're making, and we remain excited about how our fundamental client serving capability continues to strengthen around the world.

One key point we've covered on previous calls, as investors, it's important you understand these investments are being made in the context of our overall margin improvement efforts. As we continue to build our firm, we're removing inefficiency in costs from none client-facing areas to fund investment in client-facing capability while simultaneously improving margin over the course of the year.

Finally, on the third topic of growth; I want to spend a few moments discussing the quarter for each of our primary segments. In brokerage, overall organic growth in the segment was essentially flat. Given industry conditions, this was a solid result, with roughly $1 million difference in organic growth between Q1 and Q2. In fact, the rate of organic growth in four of the five businesses was either flat or improved from Q1, except for EMEA where economic conditions continue to be difficult and prior years' results were particularly strong, up 7% organically in the second quarter of last year.

Our results reflect strong management of our renewal book, with retention rates of 90% or better on average, highlighting strong client satisfaction. We continue to drive new business from the investments we're making in many markets around the globe, including US retail, Latin America, China, and certain emerging markets in Europe, all of which delivered double digit growth in new business.

For the quarter, pricing for overall brokerage was flat to down low single digits, relatively similar to Q1. Retail was flat to down low single digits, on average, globally. And reinsurance was up low single digits, on average, globally.

Turning to the individual regions across retail brokerage and reinsurance; for the Americas, organic revenue increased 3%, which is exceptional performance driven by strong growth in both US retail and Latin America, really solid work here by our colleagues that were focused on closing new opportunities with clients in a difficult economic market. New business growth was up double digits in Latin America and US retail due to significant wins in our financial institutions book as well as growth in our eSolutions business, and new product introductions such as Aon Cornerstone. The results also highlight the work put in place over the last year on our revenue engine efforts to drive continued improvement in performance -- improved performance through pipeline management, productivity improvements, and client service.

In Europe, Middle East, and Africa, organic revenue declined 3% against the strong comparable of plus-7% in the prior year quarter. In EMEA, our business reflects strong retention rates, above 90% on average, driven by our number one position in those markets. However, new business growth in continental Europe, where GDP declines are most significant, was weaker as we manage against difficult economies. Risk managers are eliminating discretionary spend and essentially buying the budget or less in an uncertain economic environment.

In Asia Pacific, organic growth declined 1%. The results reflect solid growth across a number of markets such as China, Korea, Indonesia, New Zealand, and Australia. However, these results were primarily offset by two specific areas. In Thailand, where we're the dominant broker, political instability continues to delay many projects across the region where we're heavily involved. And in Japan, we've previously commented that we're running down a set of businesses that were impacted by regulatory changes in the region.

While all the necessary restructuring actions have been completed and profitability is already improved, we would expect that organic growth will continue to be impacted albeit at a lessening rate through the end of this year. Excluding the impact of winding down these businesses in Japan, organic growth in APAC would have been nearly 300 basis points higher, plus 2% versus minus 1%, as we have a solid platform of leadership positions across the region that are performing very well.

In the UK, organic growth declined 5% similar to last quarter as this geography is really bearing the brunt of the economic downturn. The UK economy is highly dependent on financial construction and energy sectors, which have been particularly hard hit by the recession. Soft pricing, compounded by exposures that were down as much as 20%, have been a meaningful headwind across the region.

In summary, as we look across retail brokerage, our second quarter results reflect strong performance against the impacts of the continued soft market and a very challenging economic market globally. Our underlying operational improvement plans are fully on track, and our fundamental client serving capability continues to strengthen around the world.

Turning to Aon Benfield in reinsurance, organic growth was 4%, a very strong result was driven by growth and both our treaty and facultative books of business. And as commented, pricing overall was up low single digits on average globally, with firmer pricing in selected areas, such as such as US property tax gross regions similar to the first quarter. Partially offsetting this price increase is some evidence of increased risk retention by clients placing downward pressure on revenue.

Overall, it's really a quarter of excellent progress and development for Aon Benfield as our plans have really developed great momentum. The work of the Aon Benfield leadership team has really been exceptional. The response from our colleagues has been tremendous. As an example, we've retained more than 95% of the top 150 leaders we identified in our original integration plan despite unsuccessful attempts by competitors to attract key talent.

The response from our clients has been equally exciting. For example, we've not lost a single account in our top 30 client list that we identified in our original integration plan. In fact, across the bases, several hundreds of treaties we've placed across the combined firm, we've seen a net gain in treaty business won.

Overall, we feel very good about the progress of Aon Benfield. Our colleagues have built client serving capability that is simply unmatched in the industry, and the world's premiere reinsurance franchise. We're very, very appreciative of all the hard work of Aon Benfield leaders around the world to make this a reality.

Turning to our consulting segment, organic growth was a negative 1%. It was driven by continued global economic weakness that is impacting discretionary spend and placing pressure on payroll related businesses. Our core services business declined 1%, due primarily to an anticipated decline in human capital, which includes compensation consulting and talent management.

Our outsourcing business declined 4% related to the wind down of the specific outsourcing contract that will largely be completed by year-end, partially offset by growth in our benefits outsourcing business. Excluding the wind down of this particular contract, outsourcing would have grown 1% organically for the quarter; overall, solid growth performance in a very challenging economic environment.

In summary of Aon's Q2, we faced economic uncertainty and headwinds from the recession, yet delivered strong, core operational performances as highlighted by 4% organic growth in our reinsurance franchise and 3% organic growth in Americas Brokerage, total adjusted pretax margin improvement of a 180 basis points, and an adjusted EPS increase of 9%, another quarter of progress in strengthening Aon.

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

Christa Davies

Thanks, Greg. Good morning, everyone. As Greg noted, our second 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. We are demonstrating expense discipline and enabling investment in our business and concurrent margin improvements. We've realized less than 40% of the total savings opportunity we anticipate to achieve under the 2007 and Aon Benfield restructuring program. Our balance sheet and strong cash flow provides us with excellent financial flexibility to create long term value pressure holders, as highlighted by the repurchase of $125 million of common stocks during the quarter.

Turning to continuing operations, our core EPS performance is reflected in an adjusted EPS of $0.76 per share for the second quarter, up 9% over the prior year quarter. GAAP EPS for continuing operations was $0.51 per share for the second quarter. The difference is highlighted by several specific items. First, restructuring charges were $95 million or $0.24 per share. Second, we recorded a $5 million loss or $0.01 per share related to Canadian pension curtailments. Lastly, we recorded $2 million of costs related to Benfield integration and $1 million of costs for FCCA review. 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 delivered organic revenue that was flat and an adjusted pretax margin of 19.6%, an increase of a 130 basis points over the prior year quarter. To achieve 130 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, investment income, intangible amortization expense, and pension expense.

Adjusted brokerage pretax income increased 5% or $15 million to $309 million. The year-over-year margin increase was driven primarily by savings related to our restructuring programs and operational improvement, partially offset by three challenging headwinds that had a 250 basis-point unfavorable impact in the quarter.

Looking specifically investment income, investment income in brokerage declined 61% or $30 million, and had an unfavorable impact of 150 basis points, driven by a significant decline in interest rates globally. For example, three-month LIBOR rates have declined roughly 300 basis points on average since the beginning of the fourth quarter of 2008, including a 25 to 50 basis-point decline in Q2. Assuming interest rates remain at current levels throughout the year, this would imply brokerage investment income of approximately $80 million in 2009.

Let me spend a moment on each of the restructuring programs, key initiatives that are enabling concurrent funding of investments and delivering margin expansion. With respect to the 2007 restructuring program, we incurred $74 million of charges and achieved approximately $52 million of savings in the second quarter, primarily in the brokerage segment through workforce reduction.

The 2007 restructuring program is on track as we expect $550 million of total costs to achieve $370 million of annualized run rate savings in 2010. We still have substantial savings to achieve under this program, with $169 million or roughly 46% of the total annualized savings target achieved to date. We would expect Q3, Q4 savings to increase from Q2 as projects are completed in order to hit 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 $21 million of charges and achieved approximately $10 million of savings in the second quarter. We continue to expect the program to result in approximately $185 million of costs and are fully on track to deliver $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 only achieved approximately $183 million thus far, or 37% 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 two restructuring programs are just beginning to deliver benefits, and we continue to deliver progress towards our 20% plus brokerage margin target.

I would highlight that adjusted pretax brokerage margins for the first half of 2009 is up 110 basis points to 20.1%.

Turning to the consulting segment, organic revenue declined 1% with an adjusted pretax margin of 15%, a 100 basis point increase over the prior year quarter. Adjusted consulting pretax income decreased 4% or $2 million to $45 million. The year-over-year margin increase was driven primarily by benefits from the 2007 restructuring program and solid expenses from across our business.

Overall, we are very pleased with this significant progress we've made here as we managed expenses in a difficult environment and invest in future growth. While we continue to demonstrate industry leading margins, we would anticipate a margin for 2009 that is down modestly from 2008. Additional savings we expect to achieve from the 2007 restructuring program will be offset by the impact from a weak global economy and investments in future growth. I would highlight that adjusted pretax consulting margins for the first half of 2009 is down 70 basis points to 15.9%, a really solid performance given the economic challenges.

Now, let me briefly discuss the unallocated section, unallocated results were pretax loss of $41 million, or $10 million better than the prior year. This is due to a $5million gain on buying back Aon Trust preferred securities, lower interest expense, and an inclusion of the results from equity ownership and certain insurance investment funds. These gains were partially offset by lower investment income due to a decline in average in straights and lower cash balances. As a result of these moving pieces, we will continue to anticipate the unallocated sections to be a loss of approximately $55 million to $65 million per quarter. This is increased by approximately $5 million per quarter due to the Euro debt issuance. The unallocated section includes approximately $ 5million to $10 million of revenue $30 million to $35 million of expense, and $30 million to $35 million of interest expense.

Turning to taxes, the effect of tax rate on continuing operations was 27.1% in the quarter, including an underlying tax rate on operations of 28%. Based on changes in the geographic distribution of income, we will anticipate a tax rate of 28% going forward.

Now, let me turn to the balance sheet and discuss of the natural flexibility. Cash and short term investments were approximately $1.1 billion at June 30, compared to $1.4 billion at March 31. Cash and short term investments decreased primarily due to pension contributions and the repurchase of $125 million of our common stocks, partially offset by cash flow from operations. We have approximately $730 million of remaining share repurchase authorizations.

Total debt outstanding at June 30 was $1.9 billion and debt to capital was 24.3%, reflecting a solid balance sheet with significant financial flexibility. This was recently strengthened with the placement of 500 million Euros offering of 6.25% notes due July 1, 2014. This debt was issued in Euros to better align our debt with our cash flow. These proceeds have been used to pay on our Euro facility, which renews in October 2010.

In summary, Q2 represented a period of tremendous economic uncertainty and GDP declines throughout the world. These economic challenges placed downward pressure on client exposures and budgets. And in addition to the continued soft market and PNC rates resulted in modestly reduced organic revenue growth for the quarter. We expect to continue to face significant headwinds from all our investment income. And if interest rates remain at current level, we expect total investment income of approximately $80 million to 2009. We anticipate high depreciation and amortization costs and continued headwinds with tension in FX rates throughout the course of the year.

Despite all these factors, we continue to demonstrate strong core operating performance, and made progress against our key commitments, growing organically, expanding free tax margins, and increasing EPS. In this recessionary environment, we are continuing efforts on cost management, executing against our restructuring plans, and strategically investing on 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’d be delighted to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) And first from the line of Keith Walsh with Citi. Please go ahead.

Keith Walsh - Citi

Hey, good morning, everybody.

Christa Davies

Good morning, Keith.

Keith Walsh - Citi

I guess, first for Christa, when just thinking about the incremental cost saves, it is obviously very strong that it will be flowing through, going forward, but what is the base case organic or revenue we need to achieve to realize those cost saves? Could revenues go negative and stay negative and still see cost savings drop to the bottom line? Ad then I got a couple of follow-ups next.

Christa Davies

Yes. So Keith, obviously, we have committed to these cost saves and have continued to deliver them throughout the 2005 restructuring program and throughout the 2007 and Aon Benfield cost restructuring program. And we’ve done that, as you’ve seen in the last 15 quarters in the environment where profit's negative and we face significant global headwinds from the economy. And so, we continue to believe that we are going to deliver on these cost saves regardless of the economic environment.

Keith Walsh - Citi

Okay. So even if revenue goes negative, you’re still going to be able to achieve incremental EPS growth. I guess that’s what I’m asking, what is the tipping point there?

Christa Davies

Yes, we do believe that’s true, Keith.

Keith Walsh - Citi

Okay. And then for Greg, I just chose the same question ten minutes ago, Illinois attorney general contingent commissions. Are we seeing a movement, I know it’s very premature, and then, the NYG is a different regulator. But are we seeing a movement on that front where we’re going to see more of a leveling of the playing field, if you could just comment on that?

Gregory Davies

Well Keith, from our standpoint -- I think you really touched on the important -- salient point issues for us, which is, we apply the steps, the attorney general in Illinois, as they begin to what really is a trend towards leveling the playing field for competitors. And for us, the importance is not about contingent commissions. It's much more about transparency and a level playing field for all competitors. I would observe, even with these steps, there’s still a long, long way to go in the context of the overall industry.

And for us, it comes absolutely back to one central philosophy and one only. And you’ve heard this before from us, which is -- with the paramount issues of our clients, in client value, interpreting our clients in a way that we deliver highest value for price. And we’ve taken a lot of steps over the last few years in order to do that, we've made good progress. We have a long way to go in the context of doing that, but we see this is a step, a good step towards transparency and leveling the playing field, much really -- much more about those, Keith, and about contingent commissions.

Keith Walsh - Citi

And then last question, Greg, just a more big picture here on the share purchase. If you truly believe the cost saves that you guys have played out and the margin expense and EPS growth we can achieve from that, why would you not be buying back every single share of stock possible within your authorization as soon as possible?

Gregory Case

Christa, why don't you take this?

Christa Davies

Yes. So Keith, obviously you saw we repurchased the $125 million of stocks during Q2, and we have $730 million of share repurchase authorization remaining. As we've said previously, we make capital allocation decisions based on a risk adjusted return on capital model. And given the economic uncertainty we've faced in the economy, we’ve been very prudent in terms of managing our cash flow. You can expect, Keith, it will continue to look at share repurchase, and all other firms have formed their capital allocation based on that risk adjusted capital metric.

Gregory Case

But your question’s valid, we bought back in excess of $3.5 billion at a number that is greater than 40, and we feel like the performance over the last few quarters has been very good in a highly difficult environment. So in the context of that, it’s a very, very good question.

Keith Walsh - Citi

Okay. Thanks.

Operator

And next one to the line of Don Johnson with Citadel, please go ahead.

Don Johnson - Citadel

Greg, good morning. Just a question around margin improvement and look through the net investment income that gained a little more of the controllable expenses or controllable margin, up about, I think, about 290 basis points year-over-year. The one thing we can’t do with the brokerage business is look through the additional goodwill that should come in via the Benfield transactions. Can you help us with an EBITDA margin in that segment and where it would have been, say, a year ago?

Christa Davies

Yes. I think the thing to say about the goodwill amortization is we’ve indicated that goodwill is going to be in the $50 million to $55 million -- or the amortization of intangibles due to Benfield is going to increase by $50 million to $55 million a year, and that amortized equally over the quarter. So you can really sort of factor that in, Dan, in terms of headwinds in the brokerage margin segments. That's really 70 basis points of brokerage margin impact due to that sort of increased amortization and depreciation due to the acquisition of Benfield.

Don Johnson - Citadel

Got it. Okay, so add back whatever you come up with on that adjustment, adjusted margin, you could add back another 70 bits.

Christa Davies

Right.

Don Johnson - Citadel

So look at the controllable side. And then finally, I guess, Greg, the seventeenth quarter in a row sort of question in terms of the payback you’re seeing on the investments. Can you point to either something in the organic number or something in the new business win numbers, which I think you've said were up double digits, to give us some sense that folks that we've hired over the last eight quarters are delivering relative to your expectation?

Gregory Case

Yes. I think that we've had this discussion a few times before. The first macro thing I would step back on and just ask you to observe is, we made all these investments. We’ve done as we have described in the context of our margin improvements efforts as well and observed ‘05 to ’08. We are a firm as you look at it in year increments that has increased margin and brokerage by 320 basis points. So start with that. When you look in 2009, first quarter, arguably, at least described by many as a fairly difficult economic environment, brokerage margin up a 100 basis points. In Q2, also a difficult economic environment, 2009, the brokerage margin up 130 basis points. And by the way, you just highlighted a few other adjustments that if one looked at the controllable pieces, you might imagine it was up actually quite a bit more than that, amortization, investment, income, et cetera.

So first macro point, you get around all the different details that anyone can come up with when you ask the question, “Is margin improving, yes or no?” We feel good about that trajectory, we feel good about that trend, and we believe that will continue.

Now having said that very specifically, there are a number of areas. Look at US retail, 3% organic growth -- I'm sorry, 3% in the Americas. We don't break out US retail per se, but in a number that's similar to that, very, very strong. The new business opportunities we're seeing are actually up substantially. By the way, they're up substantially in the Americas, up substantially in varying places around the world, Asia, et cetera. And so, we see lots of -- lots of payback from the standpoint of those investments.

And as you think about the primary focal point, things we put in place like the revenue engine, it literally enables us to track very, very clearly what our pipeline looks like, performance can sell pipeline, and how those colleagues that we brought in and, by the way, brought up inside of Aon as well, very, very important, have that against that. We feel very, very good about that payback, which is why we continue to invest in our future, and at the same time, improve margin. That's why, Dan, we think we're in a very unique place right now. We can both simultaneously invest as well as improve margin. And we think that puts us in a very good place as the economy continues to evolve and when it turns.

Don Johnson - Citadel

Great. And finally for Christa, again, the run rate expenses that you need to incrementally add to for the third and fourth quarter to be on track for your total 2009 saves, whether it's for the '07 plan or the Benfield plan. Can you try to get a little more granular in terms of where we are and what sort of marginal dollars of savings need to come through in 3Q and 4Q to hit that?

Christa Davies

Keith. I'm looking at the 2007 plan first, Dan. We obviously realize $52 million in savings in this quarter. And you could expect that to grow to around $80 million by Q4 this year to realize the $370 million of annual run rate savings in 2010.

And then on the Aon Benfield plan, in terms of achieving the goal of $122 million in savings by 2011, we really indicated that we intended to achieve $33 million to $41 million of savings in 2009. If you just flat lined the $10 million of savings we achieved in Q2, in Q3, and Q4, and added the $4 million of savings we achieved in Q1, then you've already hit that range of $33 million to $41 million. So it is well on track.

Don Johnson - Citadel

So we shouldn't be expecting any incremental saves in 3Q and 4Q from the Benfield plan, but we should be expecting something on the order of $25 million to $30 million from the '07 plan?

Christa Davies

Dan, obviously your statement on the 2007 plan is correct. I didn't actually indicate what we're expecting for Aon Benfield plan. But obviously, it's going to be in that range we originally indicated.

Don Johnson - Citadel

Very good. Thank you very much.

Operator

Our next question is from Eli Fleminger with Stifel Nicolaus. Please go ahead.

Eli Fleminger - Stifel Nicolaus

Hi. Good morning.

Greg Case

Hi, Eli.

Eli Fleminger - Stifel Nicolaus

Hi. You said that overall reinsurance rates are up in most single digits. We've been hearing from people that property CAT reinsurance rates are up in the low to mid teens. What are you seeing for casualty?

Greg Case

Eli, it's much flatter when you think about what's happening overall. Again, if you look at the overall rates as we've observed them across the globe, put them altogether in the basket, they're up very low single digits. Property CAT up as you described, much flatter on the casualty side.

Eli Fleminger - Stifel Nicolaus

Okay.. So it's more similar to, say, what you're seeing for primary rates?

Greg Case

It is.

Eli Fleminger - Stifel Nicolaus

Okay.. And then last question, you mentioned primary cares are purchasing less reinsurance. But will loss ratios increasing and investing incomes down, I would think that primary cares -- if you're looking to reinsurance as source capital. What do you think it's going to take for things to reduce the retention levels?

Greg Case

Well listen, this is what's going to -- as you think about current state in the environment right now, this is why Aon Benfield is so well positioned. We've got incredible capabilities. The conversations we're having with the clients everyday are literally around your topic, which is improving capital returns and capital management, and the Aon Benfield approach around integrating capital solutions; looking at treaty, looking at facultative, looking at capital markets, all bringing together all the different ways to help carriers improve their returns. It's exactly the strategy of Aon Benfield.

And you hit it exactly right, which is there's a real pressure around the current economic environment and the operating pressure they face versus the capital needs, regulators, rating agencies, et cetera, and that really -- and that tension is going to continue to evolve throughout the year. And that's exactly what we're talking to clients about everyday.

Eli Fleminger - Stifel Nicolaus

Okay.. Thank you very much.

Operator

(Operator instructions) And we'll have David Small with J.P. Morgan. Please go ahead.

David Small - J.P. Morgan

Keith. Good morning, just a few quick questions. Before the Aon Benfield acquisition, you had said on the conference call that Q4 would -- is your seasonally strongest margin quarter. Does that still apply now that -- post Benfield acquisition?

Christa Davies

Keith. That is still true, David, although, it's not substantially greater than Q1, which will be another strong margin quarter for us.

David Small - J.P. Morgan

You should think about Q1 and Q4 as the strongest, and Q2 and Q3 is seasonally a little weaker.

Christa Davies

Absolutely.

David Small - J.P. Morgan

Okay.. And then the second question that I had with -- just on contingents, could you help us think about how much do you think you recovered of contingents in terms of front commissions and all the negotiating that you've done over the past years with carriers.

Greg Case

I would say, David, as I've talked about the -- in answering the initial question, we really don't think about it as in terms of recovery. For us, it has been a true redefinition of how we think about going to market and competing, and delivering value for clients. Philosophically, everything we do is around highest value for cost. We will not going to be the lowest price. We're going to be the highest value. If you give Aon $1, we're going to give you back $2. Other folks will charge you $0.50, will give you back $0.55. I won't say those are exactly the numbers, but literally, that's the philosophy. That philosophy drives everything that we've done.

And if you think about the actions over the last four years, post-Fitzer, post the settlement agreement, it really has been around trying to deliver on that vision and really spending a tremendous amount of time and investment with clients, helping them understand our value. That's been the driver around the rollout of Client Promise, the driver of the GRIP, the Global Risk Insight Platform, all the efforts around new product investment, et cetera. That really has been fundamental to our definition with clients on the value we provide.

And what we've also done is taken a great number of steps and a great deal of effort to try to make consistent the compensation grids we have around the world, getting really paid for what we've already been promised. Forget about contingents or anything else. I mean, in our situation, one of the reasons we -- fundamental reasons why we globalized our retail efforts around the world, our $60 billion in premium flow. And so our colleagues can sit and really operate as one Aon, a global Aon. In the context of doing that, one point in (inaudible) for us as to gets to a $40 billion, $50 billion, or $60 billion flow, are literally hundreds of millions of dollars.

So for us, this has gone so far beyond the whole topic of contingent commissions. It's really about the right and fair remuneration for the work we do on behalf of the clients. And as we said before, we're on a journey. We've made progress. And we believe we're going to continue in that progress in the context of that.

David Small - J.P. Morgan

Two other quick questions, one other one on contingents. Would the change in the rules around contingents impact your thoughts on M&A?

Greg Case

Not really, and Christa can speak to this as well, our efforts around M&A are fundamentally driven by a program she has put in place. It has really been quite effective around return on invested capital. And thinking about where and how we invest our capital and invest in proper places. And that really has driven our work. And by the way, we've made -- I think over the course of the last 18 months, 20, 25 acquisitions already in addition to, obviously, the important partnership with Aon Benfield.

David Small - J.P. Morgan

Okay.. And then just lastly, perhaps you can address -- there have been media reports consistently over the last few months about folks leaving Aon Benfield, in particular. Maybe you could -- you started to address that a little bit in your prepared remarks, but maybe if you could give us just a little more color there.

Greg Case

I really appreciate your raising that. These are all interesting articles to read. And one of them -- as a good reporter, I think going back to the source would be an interesting place to start with some of those. You can speculate where some of those maybe coming from. But the facts are pretty compelling. I will tell you, as we said as a team, we reflect on Aon Benfield, so we just could not be more excited about the progress our colleagues have made.

And it really has been, as I said before, you think about it, our colleagues around the world -- and this is certainly not much in Chicago, but our colleagues around the world have just built what really is number one in treaty, number one in facultative, number one in capital markets, the strongest analytic capability in the industry. It's quite unparalled, 500-plus strong. It is literally, for us, a tour de force in the ability to serve clients. It just doesn't -- there's nothing like it in the world today. And in the context of that, when you think about that fundamental capability, you're not surprised that the colleagues have been very responsive and their reaction has been tremendous.

As I said before, the facts are, you look at the 150 top leaders that really drive this. We're talking about 95% plus, actually. They're still with us. So we're talking about a very, very small number of people who have decided to do something else. And in an overall partnership, when you think about putting the firms together, that's a shockingly low number in the context of -- we'd started with 4,000 colleagues, and we talked about an overlap, perhaps, and 15% in terms of people.

And most important has been the reaction from clients. Again, in the top 30 clients we looked at in the original integration plan, we haven't lost one. And the other piece, you could imagine we tracked it at some level of detail. We're talking hundreds and hundreds of treaties we do, in excess of 700 we tracked. And in that, we looked at the ups and downs, and we actually net the two, it's positive.

So what I would come back to is -- as we reflect on it, the fundamental reasons why we actually entered into this partnership have actually worked so unbelievably well, and a credit to all of our colleagues around the world for making this happen. We just couldn't be more delighted with where we are in the process. And not just Aon Benfield, but also the environment and the context, the timings for this not only bringing these two great firms together, was exceptional beyond just a fundamental nature and the compelling nature of this opportunity.

Christa Davies

And if you look at the returns we originally promised to shareholders and we looked at this on a return on capital basis, we think that we are going to meet and perhaps exceed those original returns because we are on track to deliver the synergies in the savings part of the equation. And we paid substantially less for the acquisition given the premium $25 million in savings, given the FX rates. And so we're very pleased with the outcome for shareholders.

David Small - J.P. Morgan

Great. Thank you.

Operator

And we have a question from Scott Heleniak with RBC Capital Markets. Please go ahead.

Scott Heleniak - RBC Capital Markets

Hi. Good morning, just a couple of quick questions. The first is the notes offering you did in the quarter, was that strictly to pay down the Euro notes, other uses for that capital? Or was that strictly pay down?

Christa Davies

Well to pay down the Euro facility, that's correct. And then obviously, we have been trying to better align our get with that cash flow, given a large chunk of our cash flow comes in Euros, and that's why we placed Euro debt.

Scott Heleniak - RBC Capital Markets

Okay.. And just two more, any change on the retention rates? I know you've kind of been at the 90% range or so? Any change versus the last couple of quarters around that 90% or so?

Greg Case

It's held very, very well. In fact, it edged up a bit. And if you think about clients in this current environment in times of very, very high need. You can imagine those with great capability, actually, to do very well. So we've actually performed very well on that front.

Scott Heleniak - RBC Capital Markets

Okay.. And lastly, you mentioned a 60 or so new hires in the consulting unit. Can you give more detail on what specifics of -- what areas of that unit and what geographies?

Greg Case

It really has been across the board when you think about our investment in consulting, much like our other businesses, both in the US and internationally. Approximately, 55% of our business overall is outside the US. So it's really been across the board. Substantial investments in the US, around human capital consulting, health and benefits, et cetera, in Asia were in fact significant investments. It really has been across the board.

Scott Heleniak - RBC Capital Markets

Okay.. That's all I have. Thanks.

Greg Case

Thank you.

Christa Davies

Thank you.

Operator

And with no further questions, I'll turn it over to you, Mr. Case, for any closing remarks.

Greg Case

John, I think we're in good shape. Thanks very much to everyone for participating today. We very much appreciate it. Thank.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may now disconnect.

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