Aon Corporation Q3 2009 Earnings Call Transcript

Oct.30.09 | About: Aon Corp. (AOC)

Aon Corporation (AOC) Q3 2009 Earnings Call October 30, 2009 8:30 AM ET

Executives

Greg Case – President and CEO

Christa Davies – EVP and CFO

Analysts

Keith Walsh – Citi

Jay Cohen – Bank of America Merrill Lynch

Meyer Shields – Stifel Nicolaus & Company

Brian Meredith – UBS

Jay Gelb – Barclays Capital

[Shawn Orajema – Lord Abbett]

David Small – JP Morgan

Dan Farrell – Fox-Pitt Kelton

Operator

Welcome to the Aon Corporation Third Quarter 2009 Earnings conference call. (Operator Instructions) 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 third 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.

Greg Case

Joining me today is our CFO, Christa Davies. Overall our teams view the quarter very similarly to the last two quarters strong and continued to underline improvement in the core basics of our business demonstrated by improvement in brokerage margin, high client retention, and continued investment in capability offset by strong economic headwinds.

For us the headwinds are even more pronounced this quarter as organic growth was negative. In many respects, our ability to improve core brokerage margin and invest in the business in the face of the economic headwinds is a testament to the strength of our underlying operation plans. Rest assured, we're focused fully on growing our business and are not satisfied with our growth results, but we're confident that the work done today will drive and accelerate growth as the economy continues to recover.

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 third is 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 over the course of each year, grow organically, expand margins, and increase earnings per share.

In the third quarter, organic revenue declined 3% as the current global economic recession continued to provide significant headwinds for operating segments. Adjusted pre-tax margin was the same as the prior year of 15.4%. This is a very strong result as it overcomes the 300 basis point headwind related to lower investment income.

And EPS on an adjusted basis decreased 6% but given the impact of the economy and investment income on our business as well as last year's EPS included $0.07 per share for our PEP securities. We believe this is a solid operating performance.

On the second topic, further areas of investment, we believe we're in a very unique position in the industry. 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 we're spending a significant amount of time and resource toward the rollout of Client Promise and our Global Risk Insight Platform. As well as during the quarter, we announced the launch of Endpoint, our insurance carrier consulting business. In reinsurance, we're fully focused on developing Aon Benfield and building capability to better serve clients as we strengthen franchise that is unparalleled in the industry. And I'll talk more about progress at 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 in areas including retirement, heath and benefits, and management 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. These investments, fully funded in the context of our margin improvement program, position Aon very well to take advantage of improvements in the global economy.

Finally on the third topic of growth, I'm going to spend a few minutes discussing the quarter for each of our primary segments. In brokerage, overall economic growth of the segment declined 3% primarily driven by impacts of both the weak economy and a soft market. In retail, we continue to be pressured by lower exposures, reduced discretionary spend, and the impact of pricing, which was flat to down low single digits on average globally. In reinsurance, rates are flat to up low single digits but more than offset by higher Cendant retentions.

Against these market headwinds though, we're driving a set of initiatives that we believe continue to strengthen our underlying fundamental performance and position our brokerage business for long-term growth with retention rates at 90% or better on average highlighting strong client satisfaction, new business growth during the quarter from diversified markets around the global including Korea, New Zealand, Africa, Singapore highlighting the strength of our global client serving capability.

Investment in new capabilities with the rollout of GRIP and Endpoint, reinsurance investments in analytical such as impact on demand, an innovative platform combining Aon and Benfield cap management tools that literally allow clients to visualize, quantify, and optimize their exposures to cap risks, and win rates in the U.S. for example versus competitors that remain at 2 to 1 as strong as time in the last three years.

Turning to the individual regions across our retail brokerage platform, in the Americas organic revenue decreased 1%. Pricing was down low single digits and we saw strong organic growth in Latin America primarily offset by modest declines in the remainder of the book. In U.S. retail, there is less activity in economically sensitive areas such as construction which is down 20%, private equity M&A down 30%. These are partially offset by increased retention rates, enumeration per client. In Infinity, organic revenue declined driven by lower travel volumes in our travel insurance business.

Overall, the results continue to highlight the work put in place over the last year in our revenue engine effort to drive continued improved performance through pipeline management, productivity improvement, and client service.

Turning to Europe, the Middle East and Africa, organic revenue declined 5% against a strong comparable of plus 5% in the prior year quarter. Overall, pricing was down low single digits. In Continental Europe where GDP declines are most significant, we're feeling the impact of lower exposures. For example, export countries, such as Germany and the Netherlands, continue to feel the impact of lower insured values on declining ship lists.

Additionally, risk managers are essentially buying the budget or less in an uncertain economic environment. This is highlighted by two major banks which simply eliminated their blanket bond cover programs. Despite the impact of the economy on our clients, we continue to strengthen our leadership position in the market as our business reflects strong retention rates positioning us for growth as GDP rates begin to improve across the region.

In Asia Pacific, organic growth declined 1%. Results reflect growth across a number of markets, such as New Zealand, Korea, and Singapore. However, these results were primarily offset by two specific areas. In Thailand where we're a large 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 winding down a set of businesses that were impacted by regulatory changes in the region.

While all the necessary restructuring actions have been completed and the profitability continues to improved, we'd 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 specific businesses in Japan, organic growth in APAC would have been 200 basis points higher, 1% versus a negative 1%, as we have a solid platform of leadership positions in the region.

In the U.K., organic growth declined 4%, a modest improvement to last quarter as this geography continues to bear the brunt of the economic downturn. The U.K. economy is highly dependent on financial construction and energy sectors, which have been particularly hard hit in 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 the retail brokerage book it's a very challenging economic environment globally and is driving lower exposures and reducing discretionary spend. However, against these impacts our underlying operational improvement plans are fully on track, and our fundamental client serving capability continues to strengthen around the world positioning us for longer term growth.

Turning to reinsurance, organic growth was negative 4% for Q3. From our standpoint, it's important to put this quarter in context with the progress of Aon Benfield for the first nine months of 2009. Overall, our team feels very good about our progress, both from a client and integration standpoint, which Christa will highlight, is well ahead of schedule. We're simply thrilled with the partnership of Aon Benfield and really beginning to see the true power of this combination through the eyes of our clients.

We continue to evaluate the integration based on three factors, clients, people, and synergies. For clients, we've retained more than 95% of the combined global client base and have not lost a single account in our top 30 client list, as we have identified in our original integration plan. In fact, across the base of several hundreds of treaties we place across the combined firm, we've seen a net gain in the treaty business won.

For people, 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. On synergies, we're well ahead of schedule in achieving our stated synergy goal of $122 million in 2011. The year-to-date numbers for our financial performance show organic growth of 1% in treaty and overall we've held up very well. Bottom line economic performance, it's well ahead of our estimates and we've even increase investment in content capability of the business that I highlighted earlier.

For Q3 specifically, while we're not happy with the printed result, there are three areas that describe our performance. Net new business wins had a positive impact of 2% on organic growth in the quarter. We're simply winning more business than we're losing as our net treaty count is up, but this is offset by market impact that was a bigger headwind, particularly with higher Cendant retentions which had a negative impact of 4% on organic growth.

And the remaining 2% negative impact in Q3 was due to a degree of timing in revenue patterns as we aligned Benfield's historically reported six month results into our quarterly number. Again, overall, our Aon Benfield team is doing an excellent job building a one-of-a-kind franchise in reinsurance.

Turning to our consulting segment, organic growth was negative 5%. This compared to a very strong comparable of plus 6% in the prior year. Global economic weakness especially in EMEA is impacting discretionary spend in payroll related lines. Our core services business declined 5% against a strong comparable of plus 8% in the prior year due primarily to a decline in human capital, which includes our global compensation and talent management businesses.

Our outsourcing business declined 5% related to the wind down of a 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 been flat for the quarter, an improvement of 500 basis points.

Overall, a very challenging and economic environment that we think will continue at a similar pace for the next several quarters. However, we're seeing some signs of life in the pipeline in the areas such as talent and investment consulting and emerging markets such as Asia Pacific where we continue to invest.

In summary of Aon's Q3, we faced economic uncertainty and headwinds from the recession. But against these headwinds we continue to drive a set of initiatives that are delivering strong core operational improvement, and positioning the firm for long-term growth supported by a strong balance sheet with significant financial flexibility.

I'm now pleased to turn the call over to Christa for further financial review.

Christa Davies

As Greg noted, our third quarter results reflect continued progress to strengthen our industry leading position as we manage against a continued soft market and a very challenging economic environment. We have demonstrated expense discipline enabling investment in our business and concurrent margin improvement. We've achieved less than 40% of the savings opportunity we anticipate to deliver under the 2007 Aon Benfield restructuring program.

Our balance sheet and strong cash flow provide us with excellent financial flexibility to create long-term value for our shareholders, as highlighted by the repurchase of 125 million of common stock during the quarter.

GAAP EPS for continuing operations was $0.40 per quarter for the third quarter. The difference is highlighted primarily by $99 million or $0.25 per share of restructuring charges. Turning to continuing operations, our core EPS performance is reflected in an adjusted EPS of $0.65 per share for the third quarter down 6% compared to $0.69 in the prior year quarter.

I would note that the prior year quarter included a favorable benefit of approximately $0.07 per share of distributions from our PEP securities. Also included in the results, foreign currency translation had an unfavorable impact of approximately $0.01 per share in adjusted EPS results.

Now, let me talk about each of the segments. In our brokerage segment against negative organic revenue of 3%, we delivered an adjusted pre-tax margin of 18.4%, an increase of 140 basis points over the prior year quarter. To achieve 140 basis points of margin improvement is particularly impressive given the economy and its impact on top line growth, not to mention the three headwinds we discussed last quarter, investment income, intangible amortization expense and pension expense.

Adjusted brokerage pre-tax income increased 9% or $23 million to $274 million. The year-over-year margin increase was driven primarily by savings related to our restructuring programs, operational improvement and lower discretionary incentive compensation partially offset by the three challenging headwinds that had a 300 basis point unfavorable impact in the quarter.

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 $84 million of charges and achieved approximately $68 million in savings in the third quarter, primarily in the brokerage segment through workforce reduction.

Our restructuring efforts have been focused on pursuing opportunities to streamline support functions throughout our global operations. This process has been embraced throughout our organization and our efforts have been far more successful than we originally anticipated.

In fact, we now expect the 2007 restructuring program to achieve nearly $100 million in addition run rate savings for a total of $467 million annual run rate savings by the end of 2010. We now expect to incur $700 million of total costs and that all remaining charges will be incurred by the end of the first half of 2010.

As you can see, we still have substantial savings yet to achieve under this program with $193 million or roughly 41% of the total annualized savings target achieved to date. We would expect the run rate of incremental savings to increase from Q3 as projects are completed in order to hit our run rate expectations by the end of 2010.

Regarding the Aon Benfield restructuring program, our integration plan is ahead of schedule and during the third quarter we accelerated our estimated cost savings we expect to achieve in 2009 and 2010, while reducing the costs necessary to deliver these saving.

During the quarter, we incurred $15 million of charges and achieved approximately $14 million of savings. We now expect the program to result in approximately $155 million of cost, a reduction of approximately $30 million, while ahead of our original schedule to deliver on $122 million of cumulative annual run rate savings in 2011.

As you can see, we still have a lot of opportunity to deliver additional cost savings from these restructuring programs as we've achieved less than 40% of the $589 million of cumulative cost savings we expect to deliver in 2011.

Overall, we continue to demonstrate solid expense discipline in a very challenging environment. I would highlight that the adjusted pre-tax margin in brokerage for the first nine months of 2009 is up 120 basis points to 19.6%, delivering continued progress towards our initial 20% plus pre-tax margin targets.

Turning to the consulting segment, against negative organic revenue of 5%, we delivered an adjusted pre-tax margin of 15.6%, a modest 10 basis point decrease. Adjusted consulting pre-tax income decreased 9% or $5 million to $48 million. The modest year-over-year margin decrease was driven primarily by lower revenues largely offset by benefits relating to the 2007 restructuring program and lower discretionary incentive compensation.

Overall, we are very pleased with the significant progress we have made here as we manage expenses in a difficult environment and invest in future growth. I would highlight that adjusted pre-tax consulting margin for the first nine months of 2009 is down 50 basis points to 15.8%, a really solid performance given the economic challenges this business has faced in 2009.

Now let me discuss the unallocated section. Unallocated results were a pre-tax loss of $43 million compared to a pre-tax loss of $20 million in the prior year quarter. The prior year quarter included approximately $28 million of PEP securities distributions compared to $1 million in the third quarter.

During the third quarter, the company recorded approximately $12 million of benefits related to the company's equity ownership in certain insurance investments, of which a portion of the benefits are netted out in minority interests. We would continue to anticipate the unallocated section to be a loss of approximately $55 million to $60 million per quarter. The unallocated section includes approximately $5 million 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 effective tax rate on continuing operations was 26.7% in the quarter, including an underlying tax rate on operations of 28%. Based on our geographic distribution of income, we will continue to anticipate a tax rate of 28% going forward.

Turning to average shares outstanding. As a result of accounting guidance introduced in the first quarter, share base payment awards, which received non-profitable dividends, are now included in the calculation of basic and diluted shares outstanding. This resulted in an increase in our average diluted shares outstanding of $3.4 million in the third quarter 2009 and a similar $3.6 million share increase in the third quarter 2008. This change had an unfavorable impact of approximately $0.01 per share on adjusted EPS results.

Now let me turn to the balance sheet and discuss our financial flexibility. Cash and short-term investments were approximately $1.2 billion at September 30 compared to $1.1 billion at June 30. Cash and short-term investments increased primarily due to cash load from operations, partially offset by pension contributions and the repurchase of 125 million of our common stock.

We have approximately $605 million of remaining share repurchase authorization. Total debt outstanding at September 30 was $2 billion and debt-to-capital was 25.1% reflecting a solid balance sheet with significant financial flexibility. This was recently strengthened with a placement of a 500 million euro 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 down our euro facility, which renews in October 2010.

In summary, Q3 continued to represent a period of tremendous economic uncertainty and GDP decline throughout the world. These economic challenges place downward pressure on client exposures and budgets in addition to the continued soft market for property and casualty rates resulting in negative organic revenue for the quarter.

Despite these factors and the impact of lower investment income, higher pension costs and intangible amortization, we continue to demonstrate strong core operating performance. In this recession re-environment, we are continuing our focus on cost management, executing against our restricting 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 will turn the call back over to the operator and we'd be delighted to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Keith Walsh – Citi.

Keith Walsh – Citi

Greg, just on organic revenue starting with reinsurance, how do I reconcile the reinsurance decline that you guys are looking at when your peers, more specifically Willis reporting stronger results and Guy Carpenter talking about very strong new business generation and we know pricing is better year-over-year, especially in light of your commentary last quarter and I think you might have said it today as well that reinsurance revenue attention was actually up.

Greg Case

Keith, as you think about reflecting on Benfield, particularly as we get Aon Benfield fully up and online, there are a couple of things that really impacted the quarter, which I'll go through in detail. I alluded to but to your question I'll spend a bit more time on. But for us, we're putting together two of the leading reassurance brokerage firms in the world.

We're doing the integration of that and so that's why from our standpoint, the way you've got to look at Aon Benfield certainly for 2009 has got to be in context of sort of how we've done year-to-date and looking at 2009 overall, because there's going to be some back and forth quarterly lumpiness we believe as we get this aligned.

And that's where I would come back to if you literally said take a step back, look at year-to-date in 2009 and say we are going to bring together two of the leading reinsurance brokers in the world. We are going to be able to net-net grow the business, offset inevitable leakage and everything else that you would expect as you put these two groups together. We'd be able to retain our clients.

As I said in the commentary, Keith, we haven't lost a single client in the top 30 and we had a net gain in three business won. We'd keep all of our people 95% of the top 150 and we'd exceed expectations on the time schedule and the amount of the synergies. In the end basically be fully on track to have an unparallel platform in the industry and substantially really as we think about exceed the assumptions that underpin the deal economics.

For us that's why we feel so good about where we are. And really as we think about sort of what we're seeing having gotten back from Monte Carlo and the other industry events, our clients are really truly beginning to see the power of this combination, which is why we are just so excited it. The platform is extraordinary. It's more than we could have ever asked for and the team has done just an extraordinary job. So if you take a step back and the question how are we feeling and how should you gauge as an investor or writer about it, we feel very, very good about it.

In the context of your question along Q3 and you go through literally from a win loss standpoint, as I said, we are winning more than we're losing. We're more than offsetting the leakage at this point in time. New business growth, as I said before, in treaty was up 2%. For us it was offset by pricing that was slightly positive, but more than offset for us by higher Cendant retention. That's really what drove the decline more than anything else.

And you need to understand as you think about the insurers are reinsuring less, etc., and for us, it's had an impact on our business. And then there are a couple of points also as we put together what for Benfield was a six-month reported business. So you can expect as we put together and put it into a quarterly driven business, we're going to have a little bit of lumpiness in the numbers and we actually saw about two points of that.

So for us net-net, we look at the nine-month view and feel, frankly, over the top about it. We couldn't actually have predicted a better set of outcomes. We look at the win loss number we feel good about. We wish the retentions weren't as high [inaudible] impact. And then on the noise, kind of on the quarter-to-quarter to noise, it's just to be expected as we put the businesses together. So Keith, we feel good about it overall.

With regard to comparisons to Willis, look these aren't GAAP numbers. These aren't GAAP reported numbers. And so it's hard for us to compare directly with Willis. We know that they calculate organic growth very differently than we do, at least as we can determine from their footnotes, but you'll have to be the judge on that.

And I guess the last thing I would say too is the books are very different, right. Our international book is much more significant than others would be as well, which also impact the overall results. But net-net the strong view we believe you should have is that Aon Benfield for us is becoming every bit, in fact more of the platform we could ever hope for.

Keith Walsh – Citi

Second question for you, your 18 quarters of CEO you always talked about growing EPS margins, organic revs all at the same time in the same year. Is this basically off the table for 2009 with a minus 1 year-to-date and 2010? If you can talk specifically across your book on how you actually grow revs in this environment?

Greg Case

Great question and here's exactly where we are on this. Take a step back for a minute, and you've just highlighted a bit of it. Our team feels very good about the plans we've got in place to build our firm and to substantially improve the financial performance, both. Build the firm, which by the way is all about growth, and improve the financial performance of the firm.

And just as you described, we've got three commitments, growth, margin and EPS. And by the way as you just described, we've achieved those in what I think could be described almost as unprecedented headwinds over the last four years. We have four years of 5% real price declines and then we topped it off with the current economic recession. And against that we have basically driven all three of those.

In addition to that, as you know, we had investment income headwinds that cost hundreds of basis points in margin pension cost headwinds, as well as amortization cost headwinds.

In the context of that, just as you said Keith, we've delivered however you want to look at it 14, 15, 16 straight quarters of organic growth. The brokerage margin if you just look at year-to-year '05 to '08 increased 340 basis points from 15.4 to 18.8, consulting margin up over 800 basis points from 9 to roughly 17, and EPS grew every quarter as well. The one that it didn't was this quarter and we described the PEPS impact on that.

So in the context of that, are we happy with this quarter in terms of growth, no, not at all. But do remember we've invested probably more than the entire industry combined on the growth portions of our business. We are absolutely committed to our three objectives. We're going to push hard on them. Obviously, we're pretty well positioned as you think about two of the three for 2009.

And we're going to push very hard on the third for 2009 as well. And we're absolutely committed to those 2010. I would hope that one quarter doesn't confuse 18 quarters of performance and headwinds and we're going to push hard to drive this business.

Keith Walsh – Citi

I guess last question for Christa. When I look at the increase in the '07 expense based plan and the front loading of the Benfield cost saves, the way I am viewing that is just more of a function of 2010 looking incrementally worse. Maybe, if you could explain to me why I'm wrong saying that?

Christa Davies

Keith, as we've engaged on this 2007 to 2009 restructuring plan, which you know is really to improve the efficiency of our back and middle office functions to allow to us to invest more in sales and clients facing activities, we're really seeing more and more opportunity as we bring global functions together. So good examples of what we're doing are really sort of the globalization and having a support function, so we're moving more and more people offshore. We've got more than 2,000 people now in India we're adopting global standard IT platforms.

And we start to roll through and consolidate our broking platforms, rationalizing our apps, rolling out standard AP&T and E sort of platforms, and consolidating real estate, we just see more and more opportunities to actually save money, and so that's really what you're seeing in the increased size of the restructuring program.

The Aon Benfield acceleration of savings was really a conscience decision by the Aon Benfield management team to fast forward the savings so they could get on and invest in the business and drive investment and client facing activities to drive growth.

Operator

Your next question comes from Jay Cohen – Bank of America Merrill Lynch.

Jay Cohen – Bank of America Merrill Lynch

Greg, when you talked about U.S. retail you mentioned one of offsets to the pressure is increase remuneration and I'm wondering if you could talk more about that and maybe even quantify it? And then secondly for Christa two short questions, one is the share count. What should we think about going forward as you continue to use shares for compensation purposes? And the second question unrelated is the debt that's coming due in October 2010, what's the amount of that and what's the rate on that debt?

Greg Case

I'll start on the whole idea of really back to remuneration and how we think about it. As we've said before, we have a number of programs we've had in place and continue to drive that as we describe our approach to remuneration, which is really around value-to-price. We said we're going to be the highest value-to-price in the industry we will not be the cheapest. We might cost $1 where we turn $2. Others might cost $0.50 they'll turn you back $0.55, you get the idea. We're going to be the highest value-to-price.

In the context of that, we have essentially said we're going to look for multiple ways to both describe to our clients in a very transparent way the value we provide and then for that get fair remuneration both from clients and from markets. And we've been able to get movement and do that and in some respect as we think about overall base rate commissions, as we think about how base commissions are applied.

Again I want to remind the group that a lot of times we've actually got agreed base rate commission around the world but we don't actually get compliance to that grid. So just compliance to that grid as we actually get to know our business more and understand our global flow, which the Global Risk Insight Platform is giving us incredible abilities to do we never had before. We think it's quite unprecedented in the industry. It allows us actually to increase the yield per dollar of premium as we think about it across the insurers and across our global world.

And it really is in the context of that that we've been able to earn back and push against the higher client retentions and other things that are going on at this point and time. And really in the retail side the lower valuations that are really impacting our performance more than anything else, and so for us that really has been reasonably successful, I'd say we're partway on that journey.

I'm not going to be able to quantify it for you because we haven't been able – we can do it for ourselves but we haven't done it externally. But suffice it to say that it's actually served us quite well in the face of a difficult economic environment and we think, by the way, it's going to serve us quite well as the global economy begins to turn.

Christa Davies

Jay on your two questions, firstly on the shares. You should sort of continue to model around 10 million of shares that will distribute in terms of employee shares. They are performance driven but that's sort of roughly the right amount. I would also point out sort of that you should add into the share count sort of 3.5 million to 4 million shares per quarter due to the new sort of accounting change. And we can send you a sort of schedule on exactly what that looks like for that last two years sort of for your modeling purposes.

On the debt question, our euro facility which renews in October of 2010, is euro $650 million. Right now as we've described the euro debt that we placed in July 1 this year has replaced that euro facility in terms of usage. The existing rate for the euro facility are fairly small, it's more like 20, 30 basis points. We're very pleased with the euro debt we've placed because it's allowed us to put in place euro debt which better aligns our cash flow and our debt and put in place a long-term facility.

Jay Cohen – Bank of America Merrill Lynch

Christa on that share, you mentioned 10 million shares. Is that an annual figure?

Christa Davies

That's an annual figure.

Jay Cohen – Bank of America Merrill Lynch

How does the 10 differ from the 3.5 million to 4.5 million per quarter?

Christa Davies

The 3.5 to 4 is the change due to the new accounting role at the beginning of the year where you have to now add into diluted share count any shares you issue to employees that have non-profitable dividends.

Operator

Your next question comes from Meyer Shields – Stifel Nicolaus.

Meyer Shields – Stifel Nicolaus & Company

Christa, what was the actual share count at the end of the quarter?

Christa Davies

For the share count at the end of 09/30 was 273.9 million, actual shares outstanding.

Meyer Shields – Stifel Nicolaus & Company

Greg, again on reinsurance one of the things that I was anticipating was maybe some recovery from the fact that the capacity bond other insurance link security market has returned. Can you talk about how that sort of plays into the results that you reported?

Greg Case

You're absolutely right, Meyer. We're seeing actually a bit of resurgence in the marketplace. It had actually gone silent for quite some time and we've done very, very well in that. You're not seeing a lot of that activity reflected in this quarter much at all. In fact, I would say very little in this quarter as really as you think about when the deals are getting done, it really is more in the fourth quarter and into the first quarter of next year.

I would tell you our team there has done an exceptional job. Our fourth quarter pipeline is exceptionally strong. If you look at us in sort of a new role of lead tables as we think about it. We're moving up very, very well and it really is us and Goldman as you think about what we've done. And again, overall is roughly five, six deals year-to-date but I would say net-net not a huge reflection at this point in the quarter you expect that going forward.

Meyer Shields – Stifel Nicolaus & Company

One more insurance question, if I can. Will you tell us the difference in terms of the timing of Benfield revenues on Aon? Was that timing issue something that was reported earlier this year or is it something we should expect in the fourth quarter?

Greg Case

No, it really is second and third quarter and part of it is all we're really trying to reflect is look, we're always going to be absolutely pristine and good, bad or indifferent going to give you exactly what the reality is. And as we pull together, for Benfield it was a six-month reporting structure, it's exactly what they did and exactly appropriate. Now we're putting it all into a quarterly reporting structure.

We're going to have some lumping us back and forth which is why we believe the nine month view and then the year view is really going to be the powerful view and your ability to gauge exactly how we've done. As we said last quarter, we wouldn't get too excited about the ups and downs on a per quarter basis because it's going to be some mixed back and forth. But the overall yearly view is going to be absolutely the clearest view.

Operator

Your next question comes from Dan Farrell – Fox-Pitt Kelton.

Dan Farrell – Fox-Pitt Kelton

Can you just comment on your view for FX for the remainder of the year and into 2010?

Christa Davies

Dan, as we think about FX if it remains at current rates then it would have a slightly positive impact on Q4 really due to sort of improvement in the euro, Australian and Canadian dollar, and then similarly to Q1 because of the improvement to the euro.

Dan Farrell – Fox-Pitt Kelton

I'm not sure if you had commented of this before but just looking at the margin expansion year-over-year. Can you give us a rough sense of how much is related to just having Benfield's into the numbers this year and how much of the margin improvement is on the core business at Benfield?

Christa Davies

Yes, absolutely none of the margin improvement is due to adding Benfield. We need to get synergies out to drive margin expansion. Did that answer your question?

Dan Farrell – Fox-Pitt Kelton

Yes, that was helpful. So are you saying that reinsurance margins are running below sort of the core brokerage business?

Christa Davies

No, what I'm saying is that the margin expansion you're seeing year-over-year is due to synergies and improvement in margins. Benfield's standalone margins were slightly lower than our sort of average reinsurance margins.

Dan Farrell – Fox-Pitt Kelton Five Stars

One last thing just on the consulting business I don't think it quite gets as much attention because of it's size, but it seems like you're doing a lot there strategically. Can you comment a little bit on that some more on the hirers that you've made and just overall strategies there?

Greg Case

We are actually quite excited about what our colleagues have done in consulting. First, as you know there's been a tremendous amount of overall improvement in the business and the fundamental part and the [improvement] of the business over the last few years, which has really given us a very strong overall platform and served us quite well.

And on top of that as we've looked across the globe and thought about where the different opportunities are, we've worked very hard to both, continue to build content and capability and we've done a number of investments around a client leadership platform and a client leadership training and approach.

But we've also brought in some significant senior hires, more than 60 senior leaders hired over the last several quarters in business around health and benefits, management, retirement consulting, and we see a significant set of opportunities globally for what we believe is a very, very strong platform. And we're excited about what the team's done with it.

Operator

Your next question comes from Brian Meredith – UBS.

Brian Meredith – UBS

Christa, taking a look at pension expense and kind of where the equity markets are today and interest rates, can you give us a view what you think the pension expense is going to look like in 2010 assuming where we are today.

Christa Davies

Brian, the first thing I'd say is we obviously officially measure our pension liability at the end of each year so that will be December 31, 2009. So it's difficult to give an official measurement until we go through that process. What I would say is whilst we've seen an improvement in the equities market as you described, that's been more than offset by decline in corporate credit spreads, which has decreased the discount rate. So we would anticipate pension expense largely in line at this stage, but very difficult to tell until we go through that official measurement process.

Brian Meredith – UBS

On share buyback, you've got a pretty good cash position right now and fourth quarter is typically pretty strong with respect to cash flow. Should we expect that the amount that you bought back this quarter is probably kind of a minimum amount?

Christa Davies

I guess what I would is we definitely believe in the business and its long-term growth prospect, which is why we bought back $125 million in the quarter. We obviously have a very strong balance sheet with excellent liquidity and cash flow generation and $605 million of share repurchase authorization. We are going to be prudent in terms of our cash flow management given the uncertain economic environment in which we operate today.

Brian Meredith – UBS

Greg, can you give us your current thoughts on the commission situation as well as transparency and what you think about that?

Greg Case

First, as you think about relates a bit to the question on just overall remuneration. For us, remember on the contingent commission question specifically, Gallagher got the approval that everyone saw from the state of Illinois, Illinois Attorney General. And remind everybody that we actually have a set of settlement agreements that actually go well beyond Illinois to Connecticut, New York, Florida, etc., and many, many others. And we will want to understand that situation and have it evolve. But we really want to put contingent commissions in context.

For us, they are a very, very small part of what is an overall very, very important picture called how we get remunerated. And for us, Brian, it's really going to be about value for price. And that we've put in place over the last three or four years a whole range of things that we believe are going to both help us get remunerated in a fair way and that's reinforced through the work we've done with GRIP, the work we've done with the Global Risk Insight Platform, the work we've done as we've really understood the flows around our business on a global basis.

So a whole range of things we've done that we believe are actually quite compelling from the standpoint of us getting a fair remuneration. But the absolute, most important part of this whole process for us has been full transparency and making sure clients understand exactly what they get and what they're paying for it. And then they can judge, they can judge themselves, do I like that tradeoffs. And by the way, then they can compare the tradeoffs.

The concern we continue to have is we operate in a world that's not transparent. In how many situations, how many industries around the world do you have a scenario in which clients actually don't know sometimes what they actually pay for the business or for the work that's done? It really just doesn't seem fair to the industry that we're in, to our clients because by the way, this is not about Aon about us, it's about our clients.

So for us the absolutely primary, primary item we want to make sure is in place is full transparency for our clients. And against that we should all live and die, live and die with the value that we provide them in a very, very transparent way.

Brian Meredith – UBS

Greg, you talked a little bit about certain areas that you're being to see some strength in, I guess in the consulting areas. Obviously, there's a decent amount of lead time when you put together a program for companies in the insurance area. Kind of what are you seeing? What are companies saying right now about the economic outlook and the exposures and stuff going forward?

Greg Case

Well, we have seen in certain pockets, Brian, as we've said before, light at the end of the tunnel in certain places. There is slight improvement in the U.S. and we see slight improvements – actually, we're just back from Beijing, Singapore and Tokyo and some improvements across Asia and things that are going on there. Also back from Latin America and we saw in Rio strong opportunities as Brazil begins to open up.

So there are lights everywhere, but there is still a lot of overhang. Particularly in Europe, when you look at the overall economies of Europe and the pressure that they're under right now and in the U.K. So I'm really not trying to hedge. We're preparing for a tough economic environment, a tough set of headwinds in 2010 through which, by the way, we still must and have to deliver. But we're seeing some movement. I would say people are talking about positive outcomes now instead of further negative outcomes, which we think is a very good sign.

Operator

Your next question comes from Jay Gelb – Barclays Capital.

Jay Gelb – Barclays Capital

On contingent commissions, if Aon is allowed to collect them again, how much would that translate to in revenue, potentially?

Greg Case

Jay, as we talked about this really for us, is really a small part of an overall picture that is really paramount, front and center for us. And we really haven't even looked at what the comparison would be and how it would fit in, nor have we really thought about in terms of does it make sense for us to do, given all the other things we've got going on. And part of it will be dictated by our clients and how they think about it and how they help us actually think through fair remuneration and transparent remuneration.

I would remind you that as you step back and think about us post-Spitzer and post-non-contingent commissions, we even in the context of all the headwinds I mentioned on the earlier part of the call, in the context of no contingent commissions, increased quite substantially our margins. So in many respects we have found other ways to create both transparency and to create value in the eyes of our clients to the degree that they actually reimburse us for that effort. And we've earned back a lot of those, in the context of this.

Now, there is still a long way to go. Would I say, if you took contingent commissions completely off the table, would I say we're done with the journey of fair remuneration in a transparent environment, absolutely not, not even close. There are a whole series of things we're going to continue to do that we believe will increase remuneration in some respects greater than our contingents ever were. So as I said before, it really isn't about contingent commissions for us, it's about fair remuneration in the context of the current environment and transparency.

Jay Gelb – Barclays Capital

On a separate issue, the adjusted margin improvement year-to-date in brokerage I think you said was 120 basis points. How much margin improvement can we expect in 2010 if organic growth is flattish?

Greg Case

What we've said – as you know, we don't give guidance. What we've essentially said is we are going to push very hard to get above 20 on the brokerage side. Then against that context we are going squarely – and once we get past that on an annual basis and reflect our progress in 2009, once we're passed that on an annual basis, we are going to come back to you and to the group on the phone and provide a very clear view as to what our next step is going to be and our next target is going to be. So you can anticipate as soon as we get over 20, and we want to do that because that's what we've committed, you can expect our next commitment.

Christa Davies

The other thing I'd say, Jay, is as I noted in my opening remarks, we are less than 40%. We've delivered less than 40% of the savings that we publicly announced about your restructuring programs yet to date, so you can see substantial margin improvement by following through on those savings.

Jay Gelb – Barclays Capital

How much of those are going to the bottom line, Christa?

Christa Davies

It's varied, Jay, to be honest depending on the economic environment in which we have been in. So in the first three quarters of this year, for example, almost all of it has gone to the bottom line as you've seen because there would've been no way we've been able to grow margins year-over-year to the degree we have without almost having all of that go to the bottom line plus additional operation improvements on top of that.

Having said that as we look forward we anticipate having about half of that fall to the bottom line because we'll continue to invest in client facing capabilities to drive growth and better services for our clients, and we'll vary that depending on the economic circumstances in which we find ourselves to ensure that we continue to meet our three commitments to shareholders.

Greg Case

Our view, Jay, we're not going to shrink to succeed, right. Our view is we're going to grow. And if you think kind of the last couple of years in our restructuring program, we've invested in an unprecedented way, which is why we feel like we are positioned well for growth as the economy turns. I mean just think through some of the things that Christa have talked about on the call today around the investment around client promise, around the Global Risk Insight Platform, we talked about EndPoint, we talked about the investments, as we brought Aon Benfield together.

We didn't just stand on the laurels of what really were the two most significant content machines in the industry. We actually put them together and then invested behind it. So we're going to continue to do that and drive that because we want to grow this franchise. But as Christa described, we have a lot of flexibility. By the way, that's hard-earned flexibility. These are not easy things to do. But we've got a lot of flexibility as we think about meeting our commitments.

Operator

Your next question comes from Keith Walsh – Citi.

Keith Walsh – Citi

Just a follow-up on a couple of comments, first on the reinvestment to Jay's question he just asked. I think in the past you guys had said sort of a 20% reinvestment rate so I'm trying to reconcile that with the 50% you just articulated and then I've got a follow-up.

Christa Davies

Keith, what I would say is it's going to vary depending on the economic environment. One of the things that we really are doing in the current economic environment is investing far less than 20% or reinvesting far less than 20%. And I think as we position ourselves to grow the firm going forward and continue to invest in client basing capabilities we think it's going to be more like 50%. But as we said, we're going to vary it depending on the economic circumstances and making sure that we deliver our three commitments.

Keith Walsh – Citi

The second thing, again, a follow-up on share repurchase. I think your stock's going to open up in ten minutes at 30, 50 let's say. I would have to imagine within your return on invested capital model if we believe the growth rates and margin expansion potential that it looks extremely attractive and I just don't understand why we're not seeing a lot more aggressive share repurchase in that type of scenario with your stock where it is right now.

Christa Davies

Keith, as we've said we really believe in the value of the firm long-term hence the $125 million we did in Q3, and we will continue to evaluate it on a return on invested capital basis, and our average purchase price during this quarter was $41. So we certainly note the point you're making, but we are going to be more conservative than normal given the current economic environment around cash management.

Greg Case

Just reflect, Keith, just as you think about the broad perspective, we did roughly $4 billion in buyback at $41 a share. And as Christa said, we believe quite strongly in our franchise. We believe quite strongly in the flexibility we have to meet our commitments and we're going to prudently act accordingly.

Operator

Your next question comes from Meyer Shields – Stifel Nicolaus.

Meyer Shields – Stifel Nicolaus & Company

I don't know if this is a fair question, but if you look at the progress on a month-by-month basis starting with the beginning of the third quarter through October, is there any leads in terms of economic pressure that we'd be able to see in that?

Greg Case

On a month-by-month basis, Meyer, it's tough to really get a good read. We look at it on a month-by-month sometimes day-by-day and there's actually a ton of variability. Month-by-month deals skew this, things that close or don't close skew this, things that get pushed off pushed forward skew this. I would go back to Brian's question on the general outlook. We see lots of positives in the core parts of our business and really for us it comes back to are we winning clients yes or no, by the way that's units and volume.

The answer, yes, and we're winning at a rate we've won at before, in fact at least as high or better in many respects. So we feel very good about that core performance we track. And again, we track literally the number of at bats we've got as we come up in the U.S. for RFPs, etc., and we feel very good as we look at that on a month-to-month basis for us. And overall, we're also seeing some positives in some of the sectors that have been very, very challenging for us.

So on the construction side where we are the most significant player in this space and we've continued to invest in the space, we believe in it strongly long-term particularly when you look at the infrastructure investments that are being made, etc., it's been very, very challenging of late. We're starting to see some pickup in the pipeline and we feel good about that, but I think month-to-month it's hard to really make a judgment. We would say long-term do we feel like we're starting to come back, yes, and we're cautiously optimistic.

Christa Davies

The other thing I would say is it's by region of the world so, as Greg described earlier, I think we'd see signs of hope in the U.S., in Latin America and Asia for example, but Continental Europe and the U.K. is still challenged.

Meyer Shields – Stifel Nicolaus & Company

If I could switch gears a little bit, can you talk a little bit about what it is that attracted you to Carpenter Moore?

Greg Case

I'm sorry I didn't quite pick it up.

Meyer Shields – Stifel Nicolaus & Company

Just wondering what specifically you liked about Carpenter Moore as an acquisition.

Greg Case

For us, it was a phenomenal set of opportunities. It is back to executive liability in our overall FSG and D&O practice, absolutely phenomenal. It is with a word class institution in NASDAQ that is absolutely phenomenal. It positioned us exceptionally well in terms of access to the market, as well as just frankly partnering with a terrific, terrific firm. So from our standpoint we feel great about it.

Operator

Your next question comes from [Shawn Orajema – Lord Abbett].

[Shawn Orajema – Lord Abbett]

Is there anything structural in the risk management business, the brokerage risk management business that over time would prevent you from achieving the margins of your peers? So you've talked about above 20, peers are near the mid-20s. Is there anything structural that prevents you from getting there over time?

Greg Case

As we've said before, as we think about the aspirations we have for our firm we want to first of all make statements and then deliver on the statements. That's why you will see us being conservative and that's why you'll see us saying we're going to achieve a 20% margin and then we're going to give you our next view on what that's going to look like.

And I would say a couple of things, and by the way, we've been able to march forward against that progression in almost any economic environment and we intend to continue to do that. And as Christa described, we have substantial flexibility in the context of doing that. In addition, I would say we strongly believe that scale matters in this business. We strongly believe that in multiple places, and we can go though that and we observe that we're larger than many of our competitors.

So in the context of the identified cost improvement programs that we're 40% of the way through, in the context of our overall size and the scale advantages we believe we have and can achieve in the fullest of time and in the context of what we believe is a very unique global platform, we have very high expectations of where we think we progress.

Christa Davies

The other thing I'd say is, as we believe that some of the headwinds we've been facing turn around whether that's GDP, which has contributed multiple points in terms of our negative organic revenue growth, or the headwinds on investment income, amortization and pension, which has contributed over 300 basis points this quarter in terms of margin impact, or just that property and casualty rates are again down low single digits. If any of those three things turn around, then we substantial upside in our business.

[Shawn Orajema – Lord Abbett]

Lastly, I would say if someone were to have a more bullish view on the upturn in the economy, you guys seem to have been very conservative as you're laying out. But if the economy surprises to the upside in the recovery are you confident that the business has significant leverage to that, both in the normalization of short rates and in just kind of units and the ability to capture just more activity.

Greg Case

From our standpoint, again, one never knows exactly how things are going to evolve, but we actually believe if a turnaround happened it actual has multiple benefits for us, not only on the operating side, in the exposure units increase and really all the things that drive the fundamentals of our business that we believe could be quite substantial and would be quite substantial, but also in the things that are outside of the operations of our business.

So investment income is one example Christa described. If you imagine interest rates in the yield curve on a three-month LIBOR hovering above something other than zero, that's going to have tremendous impact to us in terms of impact on PTI. If you thought for whatever set of reasons God forbid inflation was going to come back and you were worried about that, we're an incredibly strong inflation hedge just given how bad impacts our business as well.

So for us we are optimistic and believe we would get tremendous leverage from any kind of turnaround, both on the operating side and on the financial side. And as we said before, however, we're prepared to act and improve the business even against those headwinds. But boy, if we saw a turnaround we think it would have tremendous leverage.

Operator

Your final question comes from David Small – JP Morgan.

David Small – JP Morgan

Could you just explain to me what you guys mean about prudent around share repurchase? I think the thing I'm confused about is you've turned out your debt. On M&A you talked about having the businesses that you like so it doesn't seem like there'd be any cash drains on the company. Aon generates a ton of free cash flow, as we've seen, so what is prudent? What are you concerned about on the cash management side that would prevent you from being more aggressive, particularly at these levels?

Greg Case

David, part of both Christa and my comment are more around literally we don't give guidance and we haven't historically, so we really can't give guidance on the topic. I would say look at two points of history and again we'll update you as the quarters pass and you'll see exactly what the pattern looks like.

But the two points of history are one, the long-term history of Aon over the last three or four years. We've bought back in addition 4 billion plus at $41 plus something like that. Scott can give you the exact numbers on what the buybacks been. So we are about as strong of believers in Aon as you can find anywhere, and nothing in this quarter and nothing in this year has done anything except underscore that in our view in terms of what the potential of business is. So I use that as one point of history.

The second is it is true we are going through a very difficult economic environment in the first and second quarter and our buyback was limited as we brought Aon Benfield together for all the obvious reasons. It was limited and we were a bit more prudent in the first quarter when everyone was worried about what the entire world was going to look like financially and we felt like we needed to be.

Why would we take an incredibly pristine balance sheet with a very cash rich position and a stock, by the way, that hadn't really declined in the context of what had gone on in the economic environment and we were going to be very careful with that. Having said all that, your points around it looks like things are stabilizing. It looks like things are turning around. It looks like the fundamentals are holding very, very well in fact improving. One would suggest we would factor all those things in as we thought about our strategy.

David Small – JP Morgan

So maybe this is another way to just clarify for everybody. How do you guys think about excess cash? Maybe you can help us quantify what do you think Aon's excess capital position is at this point at the end of the third quarter?

Christa Davies

David, I think one of the things we do on all cash investments is look at return on capital as a key metric to drive capital allocation between alternative forms of investment. And our five major uses of cash are share buyback, M&A, organic investment, pension and dividends. And as you've seen, the highest return on capital traditionally has been share buyback and continues to be. So we do look at that very favorably, as Greg mentioned.

David Small – JP Morgan

I guess I was just looking more for a number like how much extra capital, excess capital do you think you have on the balance sheet now?

Christa Davies

We haven't really given out that number. What we have said David, is the uses of cash and how much they are roughly a year. So if you said that net income is around $1 billion a year and cash flow is pretty close to that, then as we go through the uses of cash dividends are around $200 million, pension's been 400 this year, M&A traditionally is 200 to 250 a year, organic investment varies but it's been very low this year, as we've said, and then the remainder has traditionally been spent on share buybacks.

Operator

That concludes today's call. Mr. Case, do you have any final remarks?

Greg Case

Thank you again, everyone, for joining us. Have a great day.

Operator

Ladies and gentlemen, that does conclude your call. Thank you for your participation. You may now disconnect.

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