Executives
Greg Case – President and CEO
Christa Davies – CFO
Analysts
Keith Walsh – Citi
Brian Meredith – UBS
Meyer Shields – Stifel Nicolaus
Jay Cohen – BofA Merrill Lynch
Paul Newsome – Sandler O’Neil
Jay Gelb – Barclays Capital
Matt Hammerman – JP Morgan
Dan Johnson – Citadel
Aon Corp. (AOC) Q4 2010 Earnings Call Transcript February 4, 2011 8:30 AM ET
Operator
Good morning and thank you for holding. Welcome to Aon Corporation’s 4Q 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 would like to remind all parties, that this call is being recorded, and that it is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995.
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 fourth quarter results, as well as having been posted on our website.
Now, it is my pleasure to turn the call to Greg Case, President, and CEO of Aon Corporation.
Greg Case
Thanks very much, and good morning everyone. Welcome to our Fourth Quarter and Full Year 2010 Conference Call. Joining me here today is our CFO, Christa Davies. To begin, this was a very positive quarter for our colleagues around the globe reflecting continuing momentum across both segments and a solid finish to the year.
First and foremost though, on behalf Aon colleagues around the world, I wanted to again extend a heartfelt welcome to colleagues from Hewitt and thank them and all of our joint team for the tremendous effort in bringing our two firms together, a just truly extraordinary work.
Since closing the merge on October 1st, we have fully launched with our leadership and teams in place delivering restructuring savings in working together with our clients with greater capability and content than ever before.
The outcome of this work have substantially strengthened Aon’s position as a global leader in risk and people with Aon Risk Solution and Aon Benfield in our Risk Solution segment and Aon Hewitt in HR solution segment, each a clear global leader in their own right.
Beyond this effort our team was delivering results that demonstrate continued progress and momentum irrespective of soft markets, economic additions or other challenges outside of our control or executing on our strategy to substantially strengthen and unite Aon around the globe.
Consistent with previous quarters, I’d like cover three areas before turning the call over to Christa for further financial review. First is our performance against key commitments to shareholders, second, is continued areas of investment across Aon including an update on the progress of Aon Hewitt, and third, overall organic growth performance.
On the first topic our performance versus commitments. Each quarter we measure our performance against the three metrics we committed to shareholders to achieving over the course of the year, grow organically, expand margins, and increase earnings per share.
In the fourth quarter, organic revenue was plus 2%, a continued improvement from the prior quarter as our Risk Solution segments posted highest rate of organic revenue in the past three years and our Consulting Services business posted its third straight quarter of organic revenue growth.
Adjusted operating margins decreased 290 basis points and EPS was $0.84. At a record margin in risk solutions and strong operating income growth across both segments, we are impacted by the inclusion of Hewitt with higher intangible amortization and a high reflective tax rate.
Overall, our teams use the underlying fourth quarter results is a solid quarter of continued progress, as we strengthen the firm for long-term growth and value creation.
On the second topic, preferred areas of investments, we believe Aon is in unique position, solid operating performance combined with expense disciple and strong cash flow, continues to enable substantial investment in colleagues and capabilities.
As we have significant opportunity remaining to deliver further margin expansion, we’ll continue to invest and build in our leadership position and industry leading capabilities to capture growth opportunities, we’ll receive them across our markets.
A few examples include in risk solutions, we’ve invested in innovative technologies such as our global risk insight platform and FAConnect to ensure that clients have seamless access to the best of global Aon in every region around the globe.
Highlighting the unique value of GRIP, we have now completed over 850,000 trades, captured more than $50 billion of premium and continue to expand with addressable market opportunity. We are also investing in additional capacity and talent, as well as strengthening our international footprint through acquisitions such as Rasini Viganò in Italy and Glenrand in South Africa which will enclose – will solidify our position as the largest broker on the continent of Africa.
Finally, we are investing in client leadership to drive greater productivity and efficiency with the rollout of the revenue engine in EMEA and Asia Pacific, the roll out of Client Promise which is driving greater retention rates and ensuring client’s understand our value proposition, and the roll out of our Aon working platform to better match client needs would ensure our appetite for risk where premium placement has really (inaudible) geography.
To that extent, the beginning in 2011, retail organic revenue in our Risk Solution segment will be reported as Americas and International as we group EMEA, U.K., and Asia Pacific together to better reflect our seamless network.
Turning to HR Solutions, we let off the call highlighting Aon Hewitt. We are extremely excited about this opportunity and the combination it brings to Aon. Hewitt, with strength in consulting, benefits outsourcing and HR business processing outsourcing and Aon Consulting, with strength in employee benefits, retirement, and global compensation just to name a few, form a global leader in HR solutions under the newly created brand of Aon Hewitt.
Since we spoke last quarter, we continue to make great progress. First, our leadership teams are fully in place and colleagues around the globe are working exceptionally well together to serve clients. As an example, eight new benefits administration clients went alive on January 1, with all systems go and implementation proceeding very well.
Second, the feedback and support for Aon Hewitt continues to be exceptionally strong across middle market, large corporate, and Fortune 100 clients. In fact, Aon Hewitt has already secured a number of new business wins across multiple product lines, as clients fully recognize the breadth and depths of Aon Hewitt’s products and service capabilities.
Third, integration activities are well underway with savings already being realized as we focus on delivering the $355 million of synergy savings we outlined in the original announcement and Christa will provide an update on this shortly.
In summary, across Risk Solutions and HR Solutions, our fundamental client serving capability continues to substantially strengthen around the globe. These investments fully funded in the context of continued margin improvement position Aon very well to take advantage of an improving global economy and a long-term growth opportunity we see across our markets.
Finally, on the third topic of growth, I am going to spend the next few minutes discussing the quarter for both of our segments. In Risk Solutions, overall organic revenue was plus
3%, reflecting improved performance and the highest rate of organic revenue growth in three years. In retail, organic revenue was plus 4% with solid growth across all major regions.
Strong new business growth geographically, and in new products and services related to our GRIP platform was partially offset by the impact of pricing, which was down mid-single digits on average globally. In reinsurance, excess capital and limited industry loss experience continue to drive soft pricing and higher seen retentions, a trend we expect for the foreseeable future.
Against these headwinds, which are primarily market related, we’re driving initiatives that continue to strengthen our underlying performance and give us confidence that our Risk Solutions business is firmly positioned for long-term growth.
With retention rates at 90% or better on average, including U.S. retail, which posted its highest quarter ever over 93%, highlighting strong client satisfaction. Strong new business generation of more than $250 million across our retail business with double-digit new business growth across many markets, including Latin America, Germany, Italy, Asia, and Australia, just to name a few, highlighting just some of the strength of our global client-serving capability and investments in new products and services with a continued rollout of GRIP, client promise, FAConnect, and impact on demand across Risk solutions.
Turning to the individual areas across Risk Solutions, in the Americas, organic revenue growth was plus 3%. We saw a strong growth in Latin America, modest growth in U.S. retail and progress related to our GRIP platform, partially offset by a modest decline in Canada.
These trends highlight the work put in place over the last year to drive improved performance through pipeline management and productivity improvements through the revenue engine, client service, it’s client promise a more balanced from immigration which is Aon Broking.
Turning to Europe, Middle East, and Africa, organic revenue was plus 5%. We saw a solid growth across Continental Europe including Growth in Germany, Italy, and Spain driven by strong retention rates and leadership positions across these markets. We also saw a strong growth in a number of emerging markets driven by new business in areas such as Russia, Central and Eastern Europe, and Africa, continuing the highlighted strength of our global network.
In the U.K., organic revenue was plus 6%. The results reflect the positive turnaround driven by tremendous effort across both the retail and wholesale network despite a weak environment overall. And while, these results in the quarter were partially benefited from certain nonrecurring revenue, the underlying trends reflect solid growth driven by a new business in a number of areas such as aviation, energy and construction where we continue to add key talents as well as in our Infinity business, truly outstanding progress in this region.
In Asia Pacific, organic revenue growth is plus 7%. We saw strong growth across most major markets including Australia, New Zealand, and Japan as well as strong double-digit growth in a number of emerging markets. Results were partially offset by continued economic weakness and political instability in Taiwan.
Turning to reinsurance, organic revenue declined 1%, excess capital and relatively low industry loss experience continue to drive soft pricing globally and higher seen retentions in our treaty business.
If we break down the organic performance for the quarter, the negative impact to the on our treaty business was partially offset by strong growth and capital management transactions in advisory businesses, which can be upward down any given quarter given the transactional nature of the business.
While we’re seeing some stabilizing trends in our reinsurance business given continued market impact, we would expect results for the foreseeable future to be more reflective of our full year results, as market impact from soft pricing and higher seen retentions on our treaty business is partially offset by growth in (inaudible) and capital management and advisory business.
Turning to HR Solutions, organic revenue overall was flat to the prior year with plus 2% organic growth in consulting offset by a negative 2% in outsourcing. Consulting revenue growth was primarily driven by strong participation for certain global compensation surveys and growth in investment consulting in the U.S. and the U.K.
In outsourcing, the modest decline was primarily driven by lower project related revenue and price compression in or benefits administration business partially offset by growth in new clients in benefits administration and point solutions in HR BPO.
In summary of our fourth quarter and full year results, we’re delivering solid progress against our core commitment to shareholders despite continued soft market conditions and a fragile global economy.
Looking forward, we begin 2011 in a position of strength, as the leading global professional services firm focused on risk and people. The integration of Aon Hewitt is well underway and interaction with clients around the globe has been exceptional.
Operational initiatives and cost savings related to our restructuring programs are expected to drive continued margin improvement while our strong cash flow generation provides significant financial flexibility. I just like to end my comments by thanking our Aon colleagues around the world for their efforts in 2010 to work together to serve our clients and build our firm.
I’m now pleased to turn the call over to Christa, for further financial review, Christa?
Christa Davies
Thank you very much, Greg, and good morning everyone. As Greg noted, our fourth quarter results reflect continued progress to strengthen our industry leading positions and client serving capabilities across risk and people with the closed merger of Hewitt.
Total organic growth for the company increased to the highest level since 2008. Expense discipline and benefits related to restructuring programs drove solid operating income and performance in both segments and we repurchased 150 million in common stock highlighting our belief in the long-term valued firm.
Now, let me turn to results of the fourth quarter. Our core EPS performance excluding certain items with $0.84 per share for the fourth quarter, compared to $0.96 per share in the prior year quarter. Results reflect the merger with Hewitt including $37 million in intangible asset amortization and a higher effective tax rates of 32.8% the quarter.
Certain items that were adjusted for in core EPS performance and highlighted is scheduled on page 12 include $57 million of restructuring charges primarily related to the Aon Hewitt restructuring program, $21 million of Hewitt relating costs primarily integration related and $9 million of anti-bribery and compliance initiative costs. Lastly, foreign currency translation had no material impact on adjusted EPS results.
Now, let me talk about each of the segment. In our Risk Solution segment with organic revenue growth of 3%, we delivered a record margin of 21.9%, on an adjusted basis, up 70 basis points from the prior year quarter.
Our performance for the quarter continues to demonstrate strong operational discipline, and underlying structural margin improvement positioning the segment for greater operating leverage long-term as economic conditions continue to improve around the globe.
On an adjusted basis, operating income increased 7% or $26 million to $387 million, a solid performance given the strong results received in the prior year quarter as well. The year-over-year performance was primarily driven by increase in organic revenue and benefits related to restructuring programs partially offset by certain insurance recoveries that benefited the prior year quarter.
Let me spend a moment on each of the restructuring program, key initiatives that are enabling concurrent funding investments and delivering further long-term margin expansion.
With respect to the 2007 restructuring program, we’ve incurred a 100% of the charges necessary to limit [ph] our remaining savings. Restructuring savings in the fourth quarter estimated a $128 million compared to $108 million in the prior year quarter, approximately $107 million of the saving were relates the Risk Solution segment primarily for workforce reduction.
With respect to the Aon Benfield restructuring program, we incurred $6 million of charges in the quarter and have now incurred 88% of a $155 million of total cost necessary to deliver the remaining saving. Restructuring savings in the fourth quarter are estimated at $27 million compared to $17 million in the prior year quarter.
Overall, we continue to be ahead of the original schedule on our 2007 Aon Benfield restructuring program. We’ve completed 97% of the charges as of the end of the fourth quarter, yet we still have approximately $83 million of incremental Risk Solutions savings, still to achieve under these two programs between now and the end of 2011.
I would point out that the 2010 against flat organic revenue Risk Solution’s operating margin has expanded 70 basis points to a record 20.4%, placing up firmly on track the continued progress towards our long-term Risk Solutions margin target of 25%.
There are five key drivers that will move us towards our long-term margin target at 25%. One, remaining restructuring savings and operational improvement initiatives, two, continued rollout of the revenue engine, three, Aon broking. All three of these are within our control.
In addition, there are two additional macro drivers that provide significant operating leverage based on improvements in the external market. Four, an improving global economy in areas such as employments levels, asset values, and corporate revenues will drive leverage to exposure growth. Along with every 100 basis point rise in short term interest rate, delivering roughly $35 million to the bottom line, and fifth, improvements in insurance pricing.
We are on track to delivering our long-term margin target of 25% for brokerage for Risk Solutions.
Turning to the HR Solution segments, organic revenue was flat and we delivered an adjusted operating margin of 13.6% as the results reflect the merger with Hewitt including a $37 million increase in intangible asset amortization. Adjusted operating income increased a 115% or $84 million to $157 million, as the inclusion of Hewitt operating results will partially offset by increase intangible asset amortization.
To further assess the underlying performance of operating income in the segment, I wanted to highlight two particular items that impacted the results. First we recorded $11 million of nonrecurring costs related to changes in certain employee benefit plan. Second, while intangible asset amortization associated with the merger was $37 million, this result was better than our previous expectation of $65 million per quarter in the first full year.
As we continue to finalize purchase accounting, we now expect total intangible assets related to deals we valued at approximately $2 billion, resulting in intangible asset amortization expense of approximately $241 million in 2011, $310 million in 2012, $288 million in 2013, and continue to decline each year from 2014 through 2023.
Lastly for the HR Solutions segment I wanted to briefly comment on the Aon Hewitt restructuring program. With respect to the Aon Hewitt restructuring program we incurred $52 million of charges in the quarter, primarily through workforce reduction. The Aon Hewitt restructuring plan in expected to result in cumulative cost of $325 million through the end of the plan, primarily encompassing a $180 million in workforce reduction and a $145 million in real estate rationalization costs.
Cash costs are expected to be approximately $275 million. Restructuring savings in the fourth quarter are estimated at $4 million. We expect to deliver total annual savings of $355 million in 2013, including approximately $280 million of annual savings related to restructuring plan.
An additional savings in areas such as information technology, procurement, and public company cost. These savings are the first of the three key drivers to delivering our long-term 20% operating margin target in the HR Solutions segment. The two other key drivers are growth in the core business including HR BPO improvements and declining intangible amortization.
Now, let me discuss certain line items within our unallocated income and expenses. Unallocated revenue declined $29 million as the prior year quarter reflected revenue related to the company’s ownership and certain insurance investment funds. Interest expense increased $30 million due to an increase in the average amount of debt outstanding following the merger with Hewitt.
Other expense in the quarter was $3 million including an $8 million loss related to the early extinguishment of debt primarily acquired in the merger with Hewitt partially offset by gains in investments. Going forward in total we would expect a run rate of approximately $5 million per quarter of interest income, $35 million of unallocated expense, and $65 million of interest expense per quarter.
Turning to taxes, the effective tax rate on continuing operations increased to 32.8% compared to 25.4% in the prior year quarter due primarily to changes in the geographic mix of income following the closed merger with Hewitt. We would anticipate an underlining tax rate on continuing operations of 30% to 2011.
Turning to shares, average diluted shares outstanding increased to $346.7 million in the fourth quarter compared with $287.8 million in the prior year quarter due primarily to issuance of 61 million shares of common stock related to the merger with Hewitt partially offset by the Company’s share repurchase program.
Actual shares outstanding on December 31st was $333.3 million with approximately 14.3 million diluted share equivalence. The company has approximately $15 million remaining under the share repurchase program which began in 2005 and $3 billion under the share repurchase program previously authorized in 2010.
Now let me turn to the balance sheet. At 12/31, cash and short-term investments were $1.1 billion and total debt outstanding increased $2.5 billion to $4.5 billion primarily reflecting transaction related debt to Hewitt. Total requirements of our outstanding $1 billion term loan we expect to pay down a $100 million of a term loan debt in 2011.
Next, let me update you on the status of our major pension plans. Our aggregate funded status increased by 3% in 2010 and then the year an estimated 77% funded which is $1.7 billion unfunded for the major plan. The primary drivers leading to the increase in funding were strongly in global equity market offset by decrease in interest rates.
In 2011, we would expect pension expense to be modestly lower and we would anticipate contributing approximately $400 million of cash to the pension plans in 2011. Contribution represent a roughly $110 million increase from the $288 million we contributed in 2010 due to increased contributions to the U.S. pension plan.
In summary, Q4 organic revenue growth for the company increased the highest levels since 2008 despite fragile economic conditions and a continued soft market. However, against these headwinds we executed I guess some restructuring programs that have substantial savings yet to deliver.
We are well underway with the integration of Hewitt and we continue to invest strategically in long-term growth opportunities. We have significant leverage to an improved global economy as underlying exposures stabilize.
Our balance sheet and strong cash flow continue to provide excellent liquidity and significant financial flexibility as we drive value creation through improved business results and effective capital management as highlighted by the repurchase of a 150 million of common stock in the quarter.
As our investment build their models and layer on Hewitt, we would note that seasonality of the combined business is fairly similar with Q4 being the strongest followed by Q1, Q2 and then Q3 as a substantially weaker quarter.
With that, I’ll turn the call back over to the operator and will be delighted to take your questions.
Question-and-Answer Session
Operator
(Operator Instructions) All right thank you, our first questions comes from Keith Walsh from Citi, your line is open.
Keith Walsh – Citi
Hey good morning everybody, how are you.
Greg Case
Good Keith, how are you?
Keith Walsh – Citi
Good, good, first question for Christa. If you could just help me understand the amortization a little bit better, not only why does the pattern change, but why is the three year amount of amortization higher than what we originally were told. Does this imply a faster realization of the benefits from the deal, maybe if you could just walk me through that a little bit?
Christa Davies
Sure, so obviously if we looked at the deal originally Keith as you recall, we evaluate the deal on a cash basis and this is a non-cash expense. So it has changed nothing about our sort of view of the incredibly attractive nature of the deal and the cash generating ability of this deal. As we looked at amortization and – we do have 12 months to do that and so as we got in close to close and looked at the details on customer relationships in particular that did change the timing of it. And so you can see the overall amortization has increased from $1.9 billion to $2 billion, so it’s fairly similar. But the timing per year is down in 2011and up slightly in 2012 and ’13 and then down from 2014 onwards.
I would note that if you think about the overall benefits of the deal, there are going to be things that sort of change substantially, one thing, amortization, but another one it’s especially cash expenses has improved from our original deal model, its interest expense. It’s substantially down from what we originally thought that’s actually a real cash benefit to the company and so we’re feeling very good about the cash benefit of the overall sort of economics of this deal.
Keith Walsh – Citi
Okay. And maybe if you could just talk about I think the GAAP EPS increasing, you originally talked about 5.4% 2012, I think that obviously gets impacted here, but maybe we should be thinking more about cash accretion and how that’s trending and versus your original expectations.
Christa Davies
I think that’s absolutely right Keith. We run the company on a DCF model, we think about the value shareholders on a sort of cash basis and the way we evaluate the transaction, the way we think about value for shareholders is cash, and this is a non-cash expense and we can see other areas of cash improving related to the deal including the expense I mentioned.
Keith Walsh – Citi
Okay, and then for Greg, if you could just update us on a couple of the initiatives, you talked about in the past related to GRIP some of them, first half, the wholesale business keeping it in house, I guess that the revenues had been forming out over the last couple of years, where we stand there, just basically placement yield that you’re able to generate off of GRIP and then consistency around pricing that you’re getting from underwriters, any benefits there?
Greg Case
Keith, I think you setback and think about sort of everything we’ve been doing over the last year few years from an investment standpoint, it’s really is a series of investments in the firm that are really helping us do three things, one is obviously improve new clients, bringing new clients in and number of new clients in the context to that.
The second is more products with the existing clients we’ve got and then finally, as you described greater yield per dollar bringing in place from the context what we’re doing from a broking standpoint.
I would say, we continue to make progress, I think this quarter indicates you another quarter (inaudible) in terms of new clients what we’re doing from a client, and the client promise that we’re rolling out has been very, very effective, very, very positive, those are the 10 point plan, it’s been developed over a number of years with clients, four clients of our clients and it’s really helped us to increase the number of clients we’ve been able to actually bring in to Aon.
If you look at the new business numbers that $250 million were literally in a place where we are – we got a new business number that it’s literally almost at the top of I think we’ve ever done. So we’re making good progress from a new business standpoint to bringing clients in, that’s really holding across the firm, places where we’ve been roll our client promise and revenue engine it’s really where we start to see real benefits in the contexts of what’s going on and if we roll that out around the world and I see lot of these continue to increase.
Then as we think about that the product fees and putting more products in the hands of our clients, we’re seeing great progress in that as well. And then finally on Aon broking as you asked, Aon broking, is it really been an effort to best match clients and ensure appetite for risk around the world, with the global risk insight platform has allowed us to do is truly to line our clients so they understand the risk in ways they can never see it before.
As I said in my summary comments, 850,000 trades which only means every time a client goes to market we’re tracking exactly what’s happening, over $50 billion in premium, this literally is the single most significant repository of insurance information at where we’re in the world today that’s really helping clients understand risk better than ever out before and it also by the way to the extent market to want to use it and utilize it. It helps them understand growth opportunities around the world.
So again, as I said better match clients and ensure appetite for risk. So I would say Keith, we got a plan in place, had it for the last 24 months from an investment standpoint and we’re just going to keep driving it and again in this quarter I think highlights continued progress with overstate or understate it’s just continued progress as we march toward building the firm, achieving the growth, positive organic growth that Christa and I’ve described in the 25% margin that Christa talked about.
Keith Walsh – Citi
Thanks a lot.
Operator
Thank you. Next question Brian Meredith, UBS. Your line is open.
Brian Meredith – UBS
Yes, good morning. Couple of questions here, first, I wonder if you could talk a little bit about what’s going on in the outsourcing business, the negative organic growth in the quarter after we had I think it’s flat last quarter, but expect that actually to improve if employment trends improve?
Greg Case
Brian, overall, when you think about some of the outsourcing side we got, two aspects on the benefit administration side and on HR BPO side and really as we think about sort of what we are going through this is exactly what we expected as we sort re-came and looked at this.
I remember these are kind of five to seven year contracts long timeframes and a little bit of what’s happening in sticking on the HR BPO side is that we had a couple of accounts that we knew are winding down and running off that was going to impact this quarter and next quarter negatively, then that’s actually going to turn square around, again we’ve got a clear, clear visibility and knew exactly what happens on a client-by-client basis, Brian we’ve modeled all those out and we’re in fact ahead of that schedule.
So we feel very good about where we are the standpoint of exactly what’s happening in HR BPO, very, very much on track and progressing, leadership there has just done a terrific job and on the benefits admin side, we’ve got the single most significant platform in the industry.
One of the things I hear a lot about is business, you see at time and time again and we have some appreciation for it, but I got it tell you the last couple of 100 days spending time with Aon Hewitt, we’ve got a sort of referenced clients it’s truly unmatched and so you go and talk to these clients about we’ve been able to do on their behalf and you got to help to feel good about some of the prospects as how this business rolled out.
Brian Meredith – UBS
So just to clarify, so none of these going to impact in the quarter could have been a revenue leakage as you may put them together?
Christa Davies
No.
Greg Case
Not at all. In fact, Christa can talk about, let me, as we model this out, this is only contract-by-contract and we see exactly how these are going to progress and I think in anyway should perform.
Brian Meredith – UBS
Okay great. And then the second question. Can you talk about what you’re seeing with respect to exposures in the insurance brokers business?
Greg Case
Yes, I think what we’re seeing from the exposure standpoint is, best way to describe is stabilizing a bit, not better than that but stabilizing as you’d expect but that’s a bit of an improved outlook compared to what it has been over the last year and a half, two years.
But we’ll see it stabilizing and highlighted by the way in the conflicts of that rates continue to trend down. So as we think about sort of overall growth, you’ve got soft market with stabilizing exposure sort of in the context of its still headwind but not as severe as it once was.
Brian Meredith – UBS
Great, thank you.
Operator
Thank you, your next question Meyer Shields with Stifel Nicolaus. Your line is open.
Meyer Shields – Stifel Nicolaus
Great, thanks. Good morning everyone.
Greg Case
Hi, Meyer.
Christa Davies
Good morning.
Meyer Shields – Stifel Nicolaus
In the past, I guess on the insurance side you’ve talked about a three to six months lag during economic recovery and subsequent revenue growth. I’m wondering if there’s any similar guidance you can give us in terms of the economic weakness of its impact on retirement consulting?
Christa Davies
Yes. Meyer, we’ve really said that both in our Risk business and in our consulting business and it’s been a three to four quarter lag and so we expect that to continue.
Meyer Shields – Stifel Nicolaus
Okay. Can we get any sort of indication of the impact of the nonrecurring U.K. revenues on I guess rather than top to the bottom line in the quarter?
Greg Case
You say a little more about – are you referring to the comments I had – that there was a couple of things that benefited us a bit?
Meyer Shields – Stifel Nicolaus
Yes.
Greg Case
Okay. Look, you step back and think about the U.K. and the improvement over all. To the extent there might be maybe one, two, three points in the context that’s going on. The U.K. it’s, the team really, it’s really been in the story of continued progress, the plan we put in place, great leadership team on the ground, lot of support from colleagues around the world.
Obviously, we do benefit from a comparable in last year that wasn’t fantastic, so we got that out there too. And I remember this is basically part retail part wholesale story and the retail business as we described last quarter was growing and by the way has grown this quarter too and more positive on the wholesale side, and really remembered part of the wholesale store in U.K. that’s to do with the network around the world.
So if the U.K. network is lower, it doesn’t mean the business is gone and just mean it’s being placed someplace else across the region. And that’s, but that’s stabilized a bit. We think of the U.K., its game plan is around growth, we see it, we see it evolve in 2011, low-single digits and feel like that’s going to continue.
Meyer Shields – Stifel Nicolaus
Okay, that’s very helpful. One last question if I can, I guess over the course of the session we’ve seen a lot of companies and lot of industries really cut back on their expenses just to deal with the recession. Is there any sort of latent expense increases associated with just economic stabilization and therefore overdue compensation expense?
Christa Davies
Yes, so as we took out cost to the restructuring program, it really was structural improvement. I think we sort of talked about sort of the aggregation of over 400 acquisitions and bring them together in terms of global sort of particulate back office rationalization. And a lot of the things we put in place around running those back office functions like global function, we’ll continue to have lasting benefits including sort of I mean if you think about the biggest sort of cost reduction areas, real-estate rationalization and IT rationalization, they are vary structural changes.
The things I would know as you think about sort of going into, a stabilizing economic environment is, never increases, it’s a one area I’d sort of point out that has a natural inflationary impacts on our business.
Meyer Shields – Stifel Nicolaus
Okay, thank you very much.
Operator
Thank you. Our next question, Jay Cohen, BofA Merrill Lynch, your line is open.
Jay Cohen – BofA Merrill Lynch
Thank you. Couple of questions first is, can you talk about your efforts in London to raise commissions, I mean reading and some of the press that again this might just made up in the press, but there are some opposition to essentially extra commissions you are accounting to impose in London, if you could talk about that, and I’ll have another question.
Greg Case
Sure, I happen to do that Jay. Now what we’re trying to do in London really is not about raising commissions, it really is about simplification more than anything else. We have any number of different fees, services, things we do on behalf of carriers that we have charged for and we are essentially just trying to simply all those down and make it a straight forward as possible and as I said not about increasing commissions just really more about simplification.
We are having good progress, as carriers actually understand what we’re trying to do, in fact that they appreciate the opportunity to think what is a five or six or seven different types of charges and simplify it into one on Aon carrier charge that we are actually rolling out in the context of that.
Jay Cohen – BofA Merrill Lynch
Okay that’s helpful. Second question, as you think about the brokerage business, it’s an entire, it’s a bigger picture question I guess. But, I’m trying to get a sense of the leverage. If you can maybe talk about what percentage of the expenses you see as variable and what percent are fixed, obviously it’s a general question, you think it’s too specific, but that would be helpful.
Greg Case
Yes, I think as we step back and think about the leverage, first understand we have actually over the course of last few years worked hard to just try to really variabilize the expense driven off performance. So, maybe think about the leadership team at Aon a very, very large portion of what we get really for as around performance.
And (inaudible) there, everything, the staff has outperformed there that we don’t have our issues from the senior team anymore, as an example. So nothing is time vested, it’s all performance vested and so more and more around the variable side.
But if you step back and look at the company more broadly, we still have a fair, you think about the split it’s about 80% fixed, 20% variable in the context and sort of if you look at the overall cost structure. So there is clearly leverage there in the context of growth and it’s something we are going to continue to try to work on as we align what we do every day on behalf of clients, but that’s roughly what the split is.
Jay Cohen – BofA Merrill Lynch
Can you talk about the split in the brokerage business?
Greg Case
Yes, that reflects the brokerage split.
Jay Cohen – BofA Merrill Lynch
I think sort of this whole company, the brokerage split is 80% fixed.
Greg Case
Give or take?
Jay Cohen – BofA Merrill Lynch
Okay, I think I will sneak in one more quick question, I’m sorry, but 1of the adjustments you made you took out as anti-bribery and compliance expense, just like an ongoing expense. Was there something unusual about that expense in the quarter, it wasn’t big, but it’s just going to stick out.
Christa Davies
Yes, so this is the $9 million spend incurred in the quarter, it’s the same matter as before. As we’ve mentioned, we did settle with the FSA and this reflects continued conversations with the SEC and DOJ. It isn’t reflecting the ongoing cost of running compliances in the company, its specific – just our matter.
Jay Cohen – BofA Merrill Lynch
Great, that’s great. Thanks for the reminder.
Operator
Thank you, next question Paul Newsome with Sandler O’Neil, your line is open.
Paul Newsome – Sandler O’Neil
Good morning, and thanks for the call.
Greg Case
Hi Paul.
Paul Newsome – Sandler O’Neil
Is it fair to say if you previously mentioned that risk exposures were you think flat in the insurance business that the 4% market share is essentially, 4% organic growth is market share gains and is that true, could you maybe categorize where you think you’re gaining share just from a broad business perspective, large account, small account, some place in between?
Greg Case
Yes, I think, from our standpoint is, we talked to earlier is, there is a lot going on from the standpoint of how we continue to invest in our business to do three things. Again increase the number of clients we’ve got, all the work we did around the world, that reflects new business, I’ll talk about that in a minute. And to, into the context of that, serve them more effectively, more products, and then to the extent we’ve got their interest aligned with our markets, get more per dollar premium plans.
In the context of that, as I described a lot of the gains on the organic side, have truly have been new business driven. So if you think about it, our retention is all time positive level, that’s great. New business is up significantly, we are not getting a lot of help from price and we are not getting a lot of help from what’s going from a valuation standpoint, exposure standpoint, is not there. So it really is all around new business.
If you think about sort of new business standpoint, new business is up 10%, 11% across the board, that’s reflected in the number and that’s truly true across the regions. And again just reflects the investments we’re making in the business.
And where it’s coming from really is across the board, whether its large corporate, little markets, small commercial, things we are doing on Infinity, they really, the investments we are making are not designed to sort of support one segment specifically. The design that strengthened the overall firm had an effective and we believe and hope sustainable way to drive long-term organic growth.
Again we see this as a long-term march, we are marching toward building a firm with a sustainable growth platform and marching toward on the risk side with a 25% margin. And that march sort of fluctuates quarter-to-quarter, again we don’t need to get too excited, on the opportunistic side down, what we look at is the – very much the fundamentals of what’s going on in the context of our overall business and in that regard the fundamentals on, are we winning new clients, yes. Our bill loss ratio still stands at 70% plus for example in the U.S., we still track that client by client by client.
So the fundamentals for us are looking positive and we are just going to keep marching toward that. In terms of exposures around the world, the U.K. is kind of holding to U.S. roughly flat, a little ups and downs there. EMEA is struggling a bit, Asia is up a little bit. So, we are seeing mixed of bag around the world that collection sort of gets us back to kind of relatively stable.
Paul Newsome – Sandler O’Neil
Great. I didn’t quite fully get the amortization answer but I think I’m going to take that offline if you don’t mind. But just to know, I think the amortization is a little bit more complicated than maybe sometime in the future on that?
Greg Case
Not a problem, we are here for you, just give us a call, happy talk about it and to give sort of emphasize as Christa described. The fundamentals of what we’ve worked on and yield for us, we’re compelling before and they’ve become more compelling in the context of last 200 days. So, happy to have you talk to Christa or Scott or others and we’d be happy to answer any questions.
Paul Newsome – Sandler O’Neil
Thank you very much.
Operator
Thank you. Next question (inaudible) Deutsche Bank. Your line is open.
Unidentified Analyst
Good morning, thanks for taking the question. I have one question, if you can talk little bit about the large account business, I know it’s a group of accounts that you’ve targeted in the past and in the past you’d given a little bit of color, kind of about your market share there. How is progress there, how are GRIP and Aon Broking coming along with in terms of gaining share in that market?
Greg Case
We continue to make very good progress here and again no one quarter, we want to have sort of have, these are wild weather, we are just going to keep progressing. But, couple of things just to highlight. First if you just think about the win loss ratio, we look at business in multiple different ways and we look at win loss not just in aggregate by client but also by dollar amounts. We go get ourselves confused. You can win a client, but if it doesn’t have impact overall on revenue it doesn’t have impact.
So we track in every way you could imagine. On the win loss ratio if you look at the U.S. 50,000 and above the bigger accounts, our win ratio is 73% as you think about where we were for the quarter. And that really is looking to cross over 420 different situations that we actually track, measure, and feel very good about that progress. However that win rate is held kind of in that category for the last 24 months, we fell very, very good about the progress in that regard.
In the global insight platform, as I mentioned during the comments it’s progressing very, very well. There are, there is a level of flow we have in the world is a true asset for Aon, a true privilege for Aon. We can capture the insight around the flow and help our clients make better decisions, we think it’s going to help us attract more clients. And to the extent we can help markets really align, we are going to place capital risk with client demand that’s going to benefit our clients tremendously too.
And we’ve made very good progress on that from the global insight platform and as I said with 850,000 trades and $50 million in premium flowing through and real time understanding of what’s happening in the world of risk, it is a very unique platform in the world today, that’s something that’s Aon’s got that we believe it’s benefitting our clients and will help our market serve our clients too.
Unidentified Analyst
Got it, I mean if I could ask one more question regarding the consulting side or HR Solutions. The 13.6% adjustment margin, that includes to be $37 million in amortization, is that correct?
Christa Davies
Absolutely correct, yes.
Unidentified Analyst
Okay. So if I have that back can I get something like 16.9%?
Christa Davies
Right.
Unidentified Analyst
Okay. Thank you very much.
Operator
Thank you, next question Jay Gelb with Barclays Capital, your line is open.
Jay Gelb – Barclays Capital
Thanks and two questions. First for the Risk Solutions, second adjusted margins increased 70 basis points for the full year 2010. I’m trying to get a sense of what kind of anticipated improvement you are looking for over the next year. Then Christa if you can, I think in the past you’ve given us a sense of what type of usage of cash you see for Aon over the course of the coming year and where should buybacks fix it into that, thanks?
Greg Case
Yes, Jay on the first one, just around sort of a continued progress on margin. I’ll just highlight and Christ will just join in here. We’re obviously not going to give guidance on margin for next year. What I would say is, we continue to invest in content capability and what we believe is really an unprecedented way and we are still able to improve margin.
So, we improved margin this year, this quarter. We are going to keep margin on that, by the way we are not going to say it’s going to be every quarter, but every year we are going to reflect and essentially say we’ve been able to march toward a stronger margin, goal getting to 25%. We have every confidence and line and site in how we are going to progress toward that.
Christa highlighted the five very specific things that are going to drive that, three in our control on restructuring revenue engine Aon Broking et cetera. And there are couple outside of our control and the rate environment and pricing and GDP et cetera. So it really is really a matter of time and the three in our control, we can get to the 25% irrespective of what happens to the other two. And that’s the march we are on. Jay and we feel very good about some of the progress in that but Christa will have comment more on that and the second question as well.
Christa Davies
So then I think Jay we are, as Greg said incredibly confident about our ability to get 25% margin, I’m delighted to take any further question you have on that. In terms of your question on cash flow, as we gave, we gave detail on EBITA of Aon plus Hewitt when we did the Hewitt announcement and the combined of both looks $2.3 billion roughly and if you add synergies it’s $242 million to 2011 you get sort of, a total of let’s call 2.4. And then if you think of sort of major use of the cash, they’re really sort of five, I think we’ve look forward – and I’m going to add one.
Restructuring is about $50 million, pension is about $300 million, because we’ve got $400 million of contribution as well as $100 million of expense roughly. Dividends $200 million, CapEx $280 million and the other one I would add is interest expense which is about $260 million. That is about $1.3 billion and obviously add up this $1.3 billion you are going to pay tax, M&A and other discretionary uses such as share buyback, that essentially give you the number that we talked about previously.
Jay Gelb – Barclays Capital
Right 30% effective tax rate on that $1.3 billion?
Christa Davies
Right.
Jay Gelb – Barclays Capital
Okay, thank you.
Operator
Thank you. Next Matt Hammerman, JP Morgan, your line is open.
Matt Hammerman – JP Morgan
Hi, good morning, everybody.
Greg Case
Hi Mel.
Matt Hammerman – JP Morgan
Hi, first question, I guess would be on, in the HR Solutions business. I’d be really curious, I mean you talked about what you’re seeing in your outsourcing business, but what you are adding with Hewitt is tenfold the size of what you’ve got now.
So could you give us a little bit insight into what’s actually happening in the outsourcing business of Hewitt and also be curious if within services, Hewitt seeing similar trends to what you are seeing in your business and then I’ve got a follow-up?
Greg Case
Well first, step back overall sort of in the pieces around risk and people. We are seeing the same trends on both fronts. So again as we described on the risk world, more risk out there than ever before, the traditional risk, the non-traditional risk (inaudible) et cetera. More complexity in risk and more scrutiny in risk.
Ironically the same exacts sort of trends that are happening on the people front. When you think about, clients around the world and what they are trying to do in managing the other most important aspect for people you are coming back to retirement, pensions or health and benefits, talent, recruiting, communication and all these, sort of if you look at basically that aggregate level of demand Matt, it is actually growing up and we see tremendous opportunity in the context of that.
Whether we attack it from the consulting side and more advisory based products and services or we are more structural in Aon Ben [ph] and HR BPO, we truly, we believe they are – it’s strong set opportunity here, which we have a privilege position in the context now. In the Aon Ben [ph] business in particular exceptionally strong platform with various (inaudible) an amazing client list, that take reference of all client list, which is a truly a unique asset. Then HR BPO just gave stronger and stronger business everyday that really over the last 24 months has demonstrated great ability, ratability to grow and build that platform.
So, from an outsourcing standpoint we see lots of things happening in the context of sort of the overall economic environment and as Christa also described in the context of the economy, think about what happens in the economy all driven by in levels of employment, on corporate revenues, et cetera and if those continue to stabilize and trend out, now that does both well for what’s happening in the outsourcing business.
By the way, we saw that sort of that trend inside of Aon, we see that sort of trends now with Aon Hewitt and what we’ve got now is a greater capability to address those demands and serve clients more effectively.
Matt Hammerman – JP Morgan
Well I guess, I was looking a little bit more specific to one on, I know the BPO side at Hewitt had been declining, some contracts hold up, so that commentary I think isn’t too dissimilar to what she talked about in your own book, but the HR Outsourcing piece of Hewitt had been growing through the course of this year. So I guess I was more curious specific to that whether or not you are continuing to see similar trends within Hewitt.
Greg Case
Yes, on the HR BPO business we are incredibly pleased to look forward to that business, I think we continue to see that sort of improve over time. As Greg said the client list is unbelievably high quality and all reference class, so we are very, very pleased with sort of that business.
On the benefits administration side, we are continuing to see pricing pressure in the marketplace and some lower project revenue. But it is offset by some improvements in productivity and some growth in new business and some great retention on existing clients and incredible quality by the very high quality teams we have there.
And the thing I would say is if you think about the macro environment for outsourcing from a client perspective its far more attractive today to outsource than ever before, because the opportunity to save money to have and Hewitt deliver an exceptionally high quality experience through employees and with an increasingly complex regulatory environment, getting the compliance right is even harder than ever. And we think that trend will continue and so outsourcing becomes an even more attractive proposition than it ever was before.
Greg Case
Some of the – kind of we essentially, we expect to grow organically over the course of the year, again it’s going to be variable within quarters in the contracts that’s going on. We see that on the Risk side, we see that on the HR Solution side both on the consulting side and on the outsourcing side and believe the businesses are both well positioned to do that.
Matt Hammerman – JP Morgan
All right, that’s helpful. The other question I had was around the timing of share repurchase. Seasonally, I think between bonus payments, I’d expect restructuring costs are probably – cash restructuring costs are probably running pretty heavily right now, not sure what the timing of pension is, but as we think about flexibility of cash through the years, is it fair to say it’s tighter first half versus second half.
Christa Davies
Absolutely correct.
Matt Hammerman – JP Morgan
Got it. And just one comment if I may, I know you talked earlier in the call about potentially combining your international breakdowns into one, but from a modeling transparency and just thinking about the business standpoint, it’s very helpful to have those breakouts. I understand that there is some wholesaling noise in U.K. and the like, but I just wanted to add that.
Greg Case
We understand that and again, our goal is always to give you as much information as we bought (inaudible) context of serving you and we’re still going to give a lot of color to help you understand our business. Again, we tried over the last few years to be as clean and straightforward and make the calls positive, negative, and neutral and every way we can and we’re going to continue to do and very much appreciate the input.
Matt Hammerman – JP Morgan
All right, cheers.
Greg Case
Thanks.
Operator
Thank you, our last question comes from Dan Johnson of Citadel. Your line is open.
Dan Johnson – Citadel
Great, thank you very much. Maybe few questions if you could please. When Jay had mentioned of the 70 that increase year-to-date on margins, I was in light of an environment where interest rates still going down, so maybe I don’t know exact maybe at about – I don’t know 90 to 100 basis point improvement.
Christa or anyone else can talk about maybe the – what’s different in 2011 in terms of what’s easier and maybe in terms of or harder in terms of expenses or rate environment or any new client adds and subtracts that would make us deviate from that sort of performance again this year?
Greg Case
Dan, I don’t think – anything easier out there at least we haven’t founded yet. We’re going to keep doing what we do. As I said, it in some respect say simple equation, but not that easy to execute at least for us. We’re going to invest like the Dickens around striking in the term, new business, more products, and then better yield as we do the placements.
We don’t expect a lot from the external environment to help us, we haven’t seen it over the last few years and almost anything pricing, exposures, interest rates. So as we think about the march toward 25% margin, we’re assuming we’re not getting a lot of help from any of those categories.
What we’re going do is work is hard as we can to get yield and benefit from the investments we’ve made and we’ve seen that sort of reflected in new business, we’re going to work very hard to make sure our clients are absolutely excited about working with Aon and we expect that to show up in retention and although we’re strongly in the 90s, we have a high aspiration to continue to drive that and push that and then to the extent, we get more and more understand sort of what’s going on around global Aon and Aon Broking, we expect to be able to increase yield by the way do that in a way that benefits our clients through helping markets see what the opportunities are.
So those are the three areas that we’re really going to push hard on Dan to improve performance in 2011. They’re under our control and we are ourselves highly accountable for that and if we get some benefits from the other areas fantastic, if we don’t, we’re going to keep marching ahead.
Dan Johnson – Citadel
And what’s likely to be harder in 2011 than in 2010?
Greg Case
I think it’s going to be more the same again, we look at this quarter as a quarter of progress, not too excited, not too negative, just a quarter of progress. And so all the three are going to be same, the new business generation, what we’re doing on more products in the context of our clients and on yield we’re going to push. But Christa, any thoughts you can add?
Christa Davies
Yes, I mean one thing I think that might be more difficult from 2011 is FX. I think we’re going to have slightly sort of negative impacts on FX in Q1 from the Euro and so looking to see how that plays out.
Dan Johnson – Citadel
All right. Okay. And then the second question was just on the M&A interests on either side of the business, what you might be looking for and just sort of where that ranks in your priorities?
Greg Case
Yes, if just think about sort of the last year I think it’s a good rehearsal sort of what the coming years are like in our overall interests. I mean obviously the investment and the partnership with Hewitt is absolutely our focal point, that’s really where we’re going to focus, just as we did with the Aon Benfield truly making sure we solidify everything we can do around Aon Risk solutions, Aon Benfield, Aon Hewitt that’s our focal point, that’s where we’re going to drive.
We’re going to continue to look for opportunities probably more in the emerging markets, places where we can build content capability and expand our footprint along Glenrand South Africa, but really it’s going to be a focus on where we’re right now and the portfolio we’ve got. We feel very good about the structure right now with Aon Risk solutions, Aon Benfield and Aon Hewitt all under kind of an Aon brand and the theme around that united our firms. We’re quite positive on that Dan, feel good about that and we look for incremental places to add but it won’t be a high focus for 2011.
Dan Johnson – Citadel
Understood, thank you very much.
Greg Case
Thank you.
Operator
Thank you. That does conclude today’s conference. Have a great day, you may disconnect at this time.
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