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Aon (NYSE:AON)

Q2 2011 Earnings Call

July 29, 2011 8:30 am ET

Executives

Greg Case - Chief Executive Officer, President, Executive Director and Member of Executive Committee

Christa Davies - Chief Financial Officer and Executive Vice President

Analysts

Yaron Kinar - Deutsche Bank AG

Dan Farrell - Sterne Agee & Leach Inc.

Keith Walsh - Citigroup Inc

Jay Cohen - BofA Merrill Lynch

Matthew Heimermann - JP Morgan Chase & Co

Brian Meredith - UBS Investment Bank

Meyer Shields - Stifel, Nicolaus & Co., Inc.

Michael Nannizzi - Goldman Sachs Group Inc.

Adam Klauber

Operator

Good morning, and thank you for holding. Welcome to Aon Corporation's Second Quarter Earnings Conference Call. [Operator Instructions] I would also like to remind all parties 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 second quarter results, as well as having been posted on our website.

Now it's my pleasure to turn the call over to Greg Case, President and CEO of Aon Corporation. Sir, you may begin

Greg Case

Thank you, and good morning to everyone. Welcome to our second quarter conference call. Joining me here today is our CFO, Christa Davies. To begin, our second quarter results reflect continued progress with solid growth in our Retail Brokerage business, delivery of synergy savings related to Aon Hewitt and the repurchase of more than 300 million of common stock. Consistent with our messages on previous calls, irrespective of the stock market, economic conditions or other challenges outside our control, we continue to execute on our strategy to substantially strengthen and unite Aon around the globe. Also consistent with previous quarters, I'd like to cover 3 areas before turning the call over to Christa for further financial review: First is our performance against key metrics we communicate to shareholders; second is continued areas of investment across Aon; and third is overall organic growth performance.

On the first topic, our performance versus key metrics. Each quarter, we measure our performance against the 3 metrics we focus on achieving over the course of the year, grow organically, expand margins and increase earnings per share. In the second quarter, organic growth was plus 1%, highlighted by solid growth in our Retail Brokerage business, placing us firmly on track for growth in 2011. Adjusted operating margin decreased 220 basis points, driven by the inclusion of Hewitt results, including a significant increase in intangible amortization expense. EPS increased 2% to $0.83, driven by strong underlying performance and effective capital management. Overall, our team views the underlying second quarter results as a quarter of continued progress as we strengthen the firm for long-term growth and value creation.

On the second topic, further areas of investments. We believe Aon is in a unique position. Solid operating performance combined with expense discipline and strong cash flow continues to enable substantial investment in colleagues and capabilities. A few examples include, in Risk Solutions, we're invested in innovative technology, such as our Global Risk Insight Platform, which delivers unmatched data and analytics, new revenue opportunities and greater insights into our commission yields across $54 billion of premium flow globally. We're also investing in additional capability and talent, as well as strengthening our international footprint through recently completed acquisitions such as Glenrand in South Africa, which solidifies our position as the largest broker on the continent of Africa.

We're investing in client leadership to drive greater productivity and efficiency with the rollout of the revenue engine in EMEA and Asia Pacific, the rollout of Client Promise, which is driving greater retention rates and ensuring clients understand our value proposition and the rollout of our Aon Broking platform to better match client needs with insurer appetite for risk in any geography around the globe.

In HR Solutions, we continue to strengthen our industry-leading position in both public and corporate healthcare exchanges, enabling clients to prepare for ultimate changes in healthcare legislation with design, purchasing and administration capability.

We're expanding our capability in investment management consulting as highlighted by the acquisition of EnnisKnupp, complementing our incredibly strong U.K. business with over $4.3 trillion in combined assets under advisement. And we're expanding our international footprint as the workplace is increasingly becoming more global with investments in key talent and capabilities across Asia.

Finally, we're continuing to invest in expanding our core HR BPO offerings through point solution opportunity such as dependent eligibility audits and assets management.

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 long-term 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 want to spend the next few minutes discussing the quarter for both our segments. In Risk Solutions, overall organic revenue was plus 2%, a continuation of the positive trends we saw in the prior quarter despite soft pricing, excess capital and fragile economic conditions globally. Against these headwinds, which are primarily market-related, we're driving a set of initiatives that continue to strengthen our underlying performance and give us confidence that our Risk Solutions business is firmly positioned for long-term growth and leveraged to an improving economy. With management of our renewable book portfolio through Client Promise and retention rates of 90% or better on average, highlighting strong client satisfaction.

New business generation, more than $240 million across our Retail business with strong growth in many markets including China, Africa, Australia, New Zealand, Italy, Denmark and U.S. Retail just to a name a few, highlighting the strength of our global client-serving capability, and investments in new products and service capabilities with the rollout of GRIP, Client Promise and Impact on Demand and global growth in treaty reinsurance, driven primarily by net new business.

Turning to the individual businesses. In the Americas, organic revenue growth was plus 3%. Pricing continues to be soft, down low-single digits on average with relatively stable exposure units. But in spite of this headwind, we saw strong growth in both Latin America and in our Affinity products, partially offset by a modest decline in U.S. Retail and continued sector weakness in areas such as construction. However, for construction, despite continued weakness in this important sector, our team delivered a strong quarter of improved performance led by strength in the commercial surety business. We've got a great platform and a great team we plan to keep investing behind to position this business for substantial long-term growth.

On the international front, organic revenue growth is plus 3%. Pricing continues to be flat to modestly down on average with firmer pricing in cat-exposed regions. We saw strong growth in New Zealand and across Asia, including double-digit growth in areas such as Thailand, China and Japan, driven primarily by new business activity. We have modest growth in U.K. Retail and EMEA as exposures are generally stable, but economic conditions remain fragile across the region.

In Reinsurance, organic revenue declined 2%. However, in the core book of Reinsurance, global treaty revenue drove a 2% increase in total organic revenue. The first quarter of growth in treaty Reinsurance since Q2 of 2009, driven primarily by improved trends in new business and less impact on the pricing side. Capital advisory and facultative placements, which are very much more transaction-driven, drove a 4% decline in total organic revenue as the prior year quarter included significant activity related to cap on [ph] placements.

As we reflect on the merger with Benfield, the transaction continues to perform better than our original expectations as the first 2 years were not as much about growth but about strengthening an unparalleled reinsurance platform with unmatched data and analytics, while delivering on the economics of the transaction, including $122 million in synergy savings that remain well ahead of the original schedule. We remain confident and excited about our capability in Aon Benfield.

From a pricing perspective, despite significant industry loss experience in the first half, we believe excess capacity globally will continue to drive soft pricing, albeit at a moderately lesser rate of decline with firmer pricing in certain cat-exposed regions.

Given these industry conditions for treaty business and the transactional orientation nature of the capital advisory and facultative placements, we would expect the trends in Reinsurance in the second half to modestly improve from the results in the second quarter.

Turning to HR Solutions. Overall organic revenue was flat, a modest improvement from the prior quarter as fragile economic conditions placed pressure on corporate discretionary budgets and global unemployment trends. Against these headwinds, which are primarily market-related, we are, again, driving a set of initiatives that continue to strengthen our underlying performance and give us confidence that our HR Solutions business is firmly positioned for long-term growth and leverage through an improving economy, with a high degree of recurring revenue across HR Solutions with strong renewal rates, highlighting strong client satisfaction; solid new business generation with over 150 wins, including more than 20 new mid-market benefits administration wins and a very significant recent win in a leading large financial institution in HR BPO; and continued investments in international and emerging markets and in products and services, such as investment management consulting and healthcare exchanges.

Turning to the individual businesses. In Consulting Services, organic revenue was flat, and the results reflect the modest decline from the prior quarter as fragile economic trends globally placed pressure on unemployment and discretionary spend. Solid growth in global compensation and investment management consulting was offset by impact of weak economic conditions in U.S. retirement and health and benefits consulting. And we'd expect modest organic growth in the second half similar to the first half.

In Outsourcing, organic revenue was flat and results reflect the modest improvement from the prior quarter. We saw a growth from new client wins in both Benefits Administration and HR BPO, as well as growth from point solutions in areas such as dependent eligibility verification. And we would expect flat to modest organic growth in the second half, a continued improvement from the first half.

In summary of our second quarter results, we're delivering solid underlying progress against the key metrics we communicate to shareholders. Events occurring in Japan, Australia, New Zealand; our pending Health Care Reform in the U.S., just to name a few major developments, only reinforce the needs of our clients and the significant long-term growth opportunities for Aon as the industry leader in both Risk and HR Solutions.

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

Christa Davies

Thanks very much, Greg. Good morning, everyone. As Greg noted, our second quarter results reflect continued progress to strengthen our industry-leading position and client-serving capabilities across risk and people. We are firmly on track for growth in 2011. Against that, we're managing expenses, delivering savings from our restructuring program and effectively allocating capital as highlighted by the repurchase of $303 million in common stock in the quarter. Now let me turn to the results from the second quarter.

Our core EPS performance, excluding certain items, was $0.83 per share for the second quarter, up 2% compared to $0.81 per share in the prior year quarter, as the inclusion of Hewitt results, combined with strong underlying performance and effective capital management more than offset a $62 million increase in intangible amortization expense and shares issued in the prior year for the Hewitt acquisition.

Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on Page 12 include: a noncash charge of $19 million, resulting from the accelerated amortization of deferred financing costs associated with the repaid term credit agreement, $14 million of restructuring charges and $5 million of transaction-related Hewitt costs.

Lastly, there were 2 items not adjusted for that are helpful in understanding the core results. First, a $16 million of other expense or $0.04 for reoccupying vacated leasehold properties in the U.K. and remaining lease termination costs for facility exits in France. And second, foreign currency translation had a favorable impact of $0.03. If currency were to remain stable at todays rates, we would expect a modest favorable impact to EPS in the second half.

Now let me talk about each of the segments. In our Risk Solutions segment, organic revenue growth was 2%, and we've delivered an operating margin of 19.6% on an adjusted basis, down 140 basis points from the prior year quarter. Our operating performance for the quarter was primarily impacted by 3 items. First, as noted above, we incurred $16 million of lease-related costs or a 90-basis point impact that we do not expect to recur going forward. Second, low investment income impacted margin by 30 basis points. And lastly, foreign currency translation unfavorably impacted margin by 20 basis points, primarily resulting from a weaker U.S. dollar versus the pound. These 3 items, largely nonrecurring or macro-related, unfavorably impacted margins by 140 basis points in the second quarter.

Excluding these items, our underlying performance for the quarter continues to demonstrate strong operational discipline and underlying structural margin improvement in a modest organic growth environment, positioning the segment for greater operating leverage long term as economic conditions continue to improve around the globe.

Let me spend a moment on each of our restructuring programs, key initiatives that are enabling concurrent funding and investments, and delivering long-term structural margin expansion. With respect to the 2007 restructuring program, we have incurred 100% of the charges necessary to deliver the remaining savings. Restructuring savings in the second quarter are estimated $134 million compared to $113 million in the prior year quarter. Approximately $113 million of the savings were related to the Risk Solutions segment, primarily for workforce reduction.

With respect to the Aon Benfield restructuring program, we have incurred 95% of the charges necessary to deliver the remaining savings. Restructuring savings in the second quarter are estimated at $30 million compared to $24 million in the prior year quarter. I would note in the second quarter the reversal of $22 million of restructuring costs accrued in the prior period under the Aon Benfield and 2007 restructuring programs as a result of the company reoccupying vacated leasehold properties.

Overall, we're ahead of the original schedule on our 2007 and Aon Benfield restructuring program. We have completed nearly 100% of the charges as of the end of the second quarter with approximately $24 million of incremental Risk Solutions savings still to achieve in the second half of 2011. The following 3 margin opportunities are within our control and continue to put us on track in delivering our long-term target of 25% in Risk Solutions. The first, operational efficiency and the remaining restructuring savings; the second, continued rollout of the revenue engine globally; the third, Aon Broking and GRIP-related initiatives.

In addition, there are 2 additional macro drivers that provide significant operating leverage based on improvements in the external marketplace. The fourth, is an improving global economy in areas such as employment levels, asset values and corporate revenues, which will drive leverage through exposure growth along with every 100-basis point rise in short-term interest rates delivers roughly $35 million to $40 million to the bottom line; and fifth, improvements in insurance pricing.

Turning to the HR Solutions segment. Organic revenue was flat, and we delivered an adjusted operating margin of 13.9% as a result to reflect the merger with Hewitt, including a $59 million increase in intangible asset amortization. To further assess the underlying performance of operating income and margin in the segment, we believe it's useful to add together results for both Aon Consulting and Hewitt in the prior year quarter to form your starting point of analysis.

For example, if we take Hewitt's adjusted operating income of $105 million, plus $47 million for Aon Consulting, your combined total is $152 million of operating income as reported for the prior year quarter. If we subtract intangible amortization expense of $59 million, this leaves an underlying $93 million of operating income. Comparing $93 million with $151 million we reported in the second quarter, the increase in operating income reflects savings related to the restructuring program, additional synergy savings and operational improvement. Essentially, we believe that strong operating income growth on flat organic revenue implies solid operating margin expansion in the HR Solutions segment.

Lastly for the HR Solutions segment, I wanted to comment briefly on the Aon Hewitt restructuring program. With respect to the Aon Hewitt restructuring program, we incurred $31 million of charges in the quarter, primarily related to lease consolidation and workforce reduction. The AON Hewitt restructure plan is expected to result in cumulative costs of $325 million through the end of the plan, primarily encompassing $180 million in workforce reduction and $145 million in real estate rationalization costs. Cash costs are expected to be approximately $275 million. Savings related to the restructuring program in the second quarter are estimated at $34 million, with additional synergy savings achieved outside of the formal restructuring program. We expect to deliver total annual savings of $355 million in 2013, including approximately $280 million of annual savings related to the restructuring plan and additional savings in areas such as IT, procurement and public company costs. We are on track to deliver approximately $242 million of annual savings in 2011.

These savings are the first of 3 key drivers for delivering our long-term operating margin target of 20% in HR Solutions. The other 2 key drivers are growth in the core business, including HR BPO improvement, and declining intangible asset amortization expense beginning in 2013.

Now let me discuss certain line items outside of the operating segment. Interest expense increased $30 million due to an increase in the average amount of debt outstanding following the merger with Hewitt. Other expense was $23 million in the second quarter, primarily due to a noncash charge of $19 million resulting from the accelerated amortization of deferred financing costs associated with a repaid term credit agreement. The second quarter also included a $13 million loss related to the company's ownership in certain insurance investment funds, partially offset by $9 million of distribution from certain private equity securities.

Going forward, for these items, we would expect a run rate of approximately $5 million per quarter of interest income, $35 million of unallocated expense and $60 million to $65 million of interest expense per quarter. Due to better performance from our joint ventures, we expect minority interest to be in the $9 million to $10 million per quarter going forward.

Turning to taxes. The effective tax rate on net income from continuing operations was 24.7% in the second quarter. The effective tax rate in the second quarter of 2011 was favorably impacted by the resolution of an income tax audit and certain deferred tax adjustments. The company anticipates an effective tax rate on net income from continuing operations of 29% for 2011.

Turning to shares. Average diluted shares outstanding increased to 342.7 million in the second quarter compared to 282.6 million in the prior year quarter, due primarily to the issuance of 61 million shares of common stock related to the merger with Hewitt, partially offset by the company share repurchase program. Actual shares outstanding on June 30 were 326.7 million compared to 330.5 million at March 31. There are approximately 13 million diluted stock equivalents. The company has approximately $1.4 billion remaining under the share repurchase program previously authorized in 2010. As we think about buyback for the remainder of 2011, we believe it's incredibly important and expect it to be in the Q4 2010 levels.

Now let me turn to the balance sheet. At June 30, cash and short-term investments were $815 million and total debt outstanding was $4.5 billion. During the quarter, we placed $500 million of 5-year notes, of which the proceeds were used to refinance part of the original $1 billion term loan, essentially lengthening the maturity and locking in a fixed rate. On June 15, we refinanced the remaining outstanding portion of our term loan of $450 million, essentially reducing the variable rate to LIBOR plus 137.5 basis points both of the historical rates of LIBOR plus 250 basis points. Overall debt to capital was 35% at June 30 compared to 35.3% at March 31.

In summary, we delivered 1% organic revenue, placing us firmly on track for growth in 2011 despite fragile economic conditions and a continued soft market. We're managing expenses, driving operational initiatives across both segments and fully on track to achieve our long-term operating margin targets. We have significant leverage to an improving global economy. Our balance sheet and strong cash flow continue to provide significant financial flexibility as we repurchased 303 million of common stocks in the quarter, highlighting our belief in the underlying strength of the firm.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Keith Walsh, Citi.

Keith Walsh - Citigroup Inc

I guess I'll just come right out and ask. I'm surprised there was little negative operating leverage at Brokerage however we want to adjust for the adjustments. But just thinking about it out loud, the pricing in the economy, not good, but certainly better than they were a year ago, and you still have cost saves flowing in. So I think this is probably a key area here where the misses versus my number, so if you could address that?

Greg Case

I'm happy to do that Keith. Let me -- I'll start with a little bit of context around the quarter, then, Christa, maybe, you could just drive in, give us specifics. First of all, overall, as we said, Keith, we're driving toward a commitment around a 25% margin with a detailed game plan in place to do that. That's fully on track. Everything is moving as expected. Q2, from our view, actually did nothing to change the view on that. I can see where you're coming from, as you look at the results. But as we look at behind the results and the overall game plan, as Christa described, 5 very specific elements are going to drive progress there and get us to that 25% margin. Three are in our control around restructuring, revenue engine, Aon Broking, those are progressing very, very well. We saw great progress in the quarter. Two outside of our control in interest rates in pricing and GDP growth. And we said all along, by the way, in addition to getting the 25% margin, we are going to simultaneously invest heavily in the business, which we continue to do in multiple places. That means, we're going to have, really from our standpoint, look at this year-to-year not quarter-to-quarter. And if you look at it year-to-year, as you know well, our record reflects reasonable progress. When you think about 2005 to 2010, we've increased margin 530 basis points, give or take. That's roughly a little over 100 basis points a year from 15.1 to 20.4, while simultaneously making all the investments that we've described before back into the business, fighting the headwind on pricing and rates and the economy, et cetera. So from our standpoint, we actually feel good, very good, about being on track for the 25%. Literally, nothing has changed in our mind in the context of that. And maybe Christa could describe, kind of, the quarter specifically. But overall, we feel very good about it. And importantly, to your question, really implied what's around do we have economic leverage to a changing economy? And we absolutely believe we do that, and again, nothing in the quarter in our mind changed that. But, Christa, maybe you can talk specifically about the quarter.

Christa Davies

Sure. First, we think about the resolution's margins, Keith, 21% versus 19.6%. There are really 3 items, we believe, that sort of either onetime or macro-related that impacted margin. 90 basis points for lease termination, 30 basis points for investment income and 20 basis points for FX. That's 140 basis points, essentially flat year-over-year, excluding onetime and macro-related items. And then if we think about sort of operating leverage going forward, which is really the heart of your question, I think there are sort of 3 things we would say that drive operating leverage going forward. One is the initiative we have around, sort of, revenue engine, improved productivity and expense management, essentially blocking and tackling. The second is really the return of the higher margin initiative we have around GRIP. And we've really said that they're going to flow through 2011, '12 and '13, and we certainly see those coming through. And the last one is really sort of leverage around exposure growth and pricing. We absolutely see positive leverage as we look out.

Keith Walsh - Citigroup Inc

And then my follow-up, just related to the first question and more specifically around Aon Benfield. Greg, I'm having a hard time understanding your comment that it's performing better than you've projected when you did the deal. When we got revenues down for 9 or 10 consecutive quarters versus Guy Carpenter and Willis Re, and I have to imagine your margins are being impacted by that, so maybe if you could just give me a little more color around that?

Greg Case

Yes, happy to do that, Keith. As we thought about literally, again, investing in the business and building our business for the long term, we've invested in content and capability. As we've done that, we want to make absolutely certain we do it in the context of being to drive margin improvement. And we've got a pretty good record of being able to do that. All I was reflecting is Aon Benfield has done exactly that. We knew we'd have growth pressure for the first couple of years. As we put the businesses together, we had some of that. But if you think about the economics of what's been returned of synergy savings, establishing the platform, within the context of that, that is done exceptionally well. In fact, beyond what we could have even hoped as we actually began the transaction. And now as we look to kind of where we are now, what we're essentially seeing is the 3 book grew in this quarter plus 2% as I described before. The win-loss ratio, as we've tracked them, is improving. We feel very, very good about that in the context of sort of growing the business overall. And so from our standpoint, as we reflect on it, all the economic returns have been there exactly as we'd hoped, in fact, better. And the underlying growth characteristic, as we reflect on this quarter and think about the second half of the year, feel very, very good about it. So from our standpoint, that was really what I was trying to reflect in my overall statement. And we see some upside as we think about sort of what's happening in the second half of the year and as things improve on the pricing front in the overall economy. So from our standpoint, we see the growth in the second half, and we know the underlying economic leverage we've got in the business.

Keith Walsh - Citigroup Inc

And maybe just one more quick one on that point. So are your margins up or down at Aon Benfield since when you did the deal? I guess that's what I really want to understand. And then how many -- when do we normalize on the revenue? It's been 2 years now, when do we normalize, and when do you start getting more of an average growth rate for the industry?

Greg Case

Yes, and as we've done historically, Keith, we talk about overall Brokerage margin. And as you can reflect, the Brokerage margin has increased in the margins 100 basis points a year for each of the last 5 years, including the last 2 years when we've included Aon Benfield in the context of it. So overall, Brokerage margin, again, back to kind of the forced march that we've been for the last 5 years irrespective of the economic external situation, internal situation, insurance pricing, our Brokerage margin has increased about 100 basis points a year including, including Benfield and all the characteristics and challenges you're having to bring businesses together. So we feel very good about the progress on our Brokerage margin. And again what creates some lumpiness is we're continuing to make significant investments, and that causes kind of the quarter-to-quarter lumpiness. And that's the trade-off we're always going to make, but it should not, in any way, shape or form, take away from what we believe is happening with our underlying Brokerage margin, which continues to go up. And we anticipate it will do to achieve the 25% target, which again, as I said before, we're completely on track to do. And we feel like we're about there from the standpoint on the normalized as you described, standpoint from the organic growth standpoint.

Keith Walsh - Citigroup Inc

So you're not going to tell me about Aon Benfield's margin specifically in the context of. . .

Greg Case

We're going to keep reporting what we always report, which is overall margin Brokerage margin, which, as I said before, is up.

Operator

Our next question, Michael Nannizzi, Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc.

Just a couple of quick ones here. The buyback page, you kind of reverted -- you're reverting back to the fourth quarter, kind of, $150 million a quarter. What about prices there? It looks like cash flow generation is pretty substantial. Is there another place you plan to channel that capital or the cash flow as you're generating it? And just one follow-up.

Christa Davies

So as we think about cash and short-term investments on the balance sheet, $815 million, you think about that splitting roughly half-half between the U.S. and international. And then you think about the uses of cash we have, Michael, which we have some substantial uses of cash this year, pension contributions, dividends. And so we're reflecting those in the comments where we really said that we think buyback for the second half of the year will look more like Q4 2010 levels as we determine the location of cash and the other uses of cash.

Michael Nannizzi - Goldman Sachs Group Inc.

Got you, okay. And then just on the lease terms, when you call these onetime items I mean if we're trying to think about what margins look like from here, and I understand the kind of 25% goal and kind of moving in that direction, but how should we think about the back half of the year? I mean, are you going to have another lease termination charge? Are any of these onetime items going to be onetime items again in the third quarter or maybe the fourth quarter? How should we think about that?

Christa Davies

The first thing, I mean, to say on the lease termination, particularly the U.K. one this quarter, it's a very positive -- it's positive for cash flow, it's positive for GAAP results. It just happens to be an impact in terms of our adjusted results because of the way you -- reverse the restructuring charge and then flow the operating lease expense back through our adjusted results. So it is absolutely the right decision to be making for shareholders. As you think about adjusted margins in the second half of the year, I did say that we would not see lease termination impact in the second of the year. We do believe we're now at the end of this.

Michael Nannizzi - Goldman Sachs Group Inc.

Got you. Okay, and then just this one, I guess, for Greg. I mean, you're kind of talking about being on track from where you were to where you want to go. How does the second quarter, kind of, margins in both segments, how do you think about that along that same path? I mean, are you -- when you back out these onetime items, it looks like we're about flat, but we're not kind of moving in a singular direction. It doesn't seem, at least from the numbers -- is there something underlying that maybe you can point to more specifically?

Greg Case

Yes. We can step back and think about this as we measure it over the course of the year and improvement year-to-year-to-year. And that's what I said before, we feel very confident about the progress. The record is clear and the progress going forward and the underlying things we see day-to-day in the business is why we are confident the Brokerage margin is going to continue to march forward. When you think about quarter-to-quarter, again, we would look at it as we are roughly flat for the quarter, as Christa described. And these are onetime charges. And again the leasehold improvement, things like that are literally things we do -- have done based on bringing Hewitt into the fold. They all make sense. They work from a shareholder's standpoint. We're always going to do that in the context of what we're doing. But structurally, the improvement in the margins is clear from our standpoint and is going to progress throughout the year. Again, it'll be higher in some quarters and lower in some quarters. This is why, by the way, you guys hear us, when you get really excited, when margins went up in the quarter, we say, it's going to vary quarter-to-quarter and year-to-year. It's going to march forward just as it always had. And so for us, in Q2, roughly flat. We made some specific investments in content capability that we think will serve us very, very well going forward. You completely underscored our confidence that as the economy continues to hopefully improve in the fullness of time, we get great economic leverage in the context of that. So and as I said before, we feel very good about the progress on the Brokerage margin side as we think about tracking for the year, first piece. And on Aon Hewitt, as Christa described, what she really took you through was a very detailed breakdown of the operating performance at $1 level. You really don't have an apples-to-apples comparison on margin, which is why it really is almost irrelevant. If you go back and look at the specifics of exactly what happened on operating income in the context of Aon Hewitt, we feel quite good about the progress year-to-year. And when you think about sort of overall Q1 is up $43 million, Q2 is up $59 million from a synergy-capture standpoint, we are fully on track to do, in fact, ahead a little, to do exactly what we wanted to do in the context of driving margin improvement on Aon Hewitt. So that's why, in the end, we feel very good about sort of overall progress on margin on across both businesses and feel like we're very much on track irrespective of, kind of, the quarter-to-quarter ups and downs. Does that make sense?

Michael Nannizzi - Goldman Sachs Group Inc.

Yes, it does. I mean one last one if I just could. So is there anything in quarter that you would feel like didn't hit your expectations? Or is there something you think from an operational perspective you would've liked to have seen better or different?

Greg Case

Yes, I think from our standpoint, the thing that we want to continue to push on is organic growth. And while we saw a 3% organic on the retail side, we're going to keep pushing for more than that. It's been a number of quarters now. We're, kind of, in that category. But given the investments we really believe that, as Christa described, into 2012, we're going to see great leverage in the context of that. And then on the Benfield front, just as Keith highlighted, listen, we want to grow that business and drive that business. Obviously, our business is much larger than some of our counterparts, which reflects sort of changes when you think -- compared to the organic growth of the 2 businesses. But we saw a positive treaty growth in this quarter, which we now -- it's the first time since back in 2009, we feel good about that. But organic growth is something we're always going to drive and focus on. And then again on the Hewitt front, again, we're kind of flat in organic across the 2. As we think about the second half for Aon Hewitt, on the consulting side, we were plus 4% in the first quarter, flat in the second quarter, kind of 2% year-to-date. Our expectations are we're probably about that for the second half on the consulting side and a little better on the Outsourcing side. So we feel confident about growing organically for 2011, which is a step. But if there's one area that we really want continue to drive forward on, it really is going to be on the gross side. Everything else is exactly on track with what we'd hoped to do.

Operator

And next question, Dan Farrell, Sterne Agee.

Dan Farrell - Sterne Agee & Leach Inc.

Could you give us a little more color on the Consulting Services organic growth? And just -- it seems a little weaker then I might have thought. Maybe you're bumping up against some tougher comparisons in the investment side or the compensation side. And then also just longer-term view of what -- where you see that going and how you see healthcare legislation having a long-term impact there.

Greg Case

Yes. As I said before, literally, from a consulting standpoint, we really say, if you look at the first 6 months, we are plus 4% in the first quarter, 0 in the second quarter on the Consulting Services side. And what you really saw there, by the way, was exceptional growth on the global compensation business and on the investment consulting business, and it was offset by a decline and some pressure really across the U.S. on both the retirement side and the U.S. health and benefit side. From our standpoint, you asked us to think about the year. First half, first 6 months was about 2%. We kind of think the second half is going to be roughly in the same place. We're going to keep pushing and driving towards that. We have the strongest, we believe, an exceptionally strong platform in the context of what's going on on the Consulting Services side. And when you put in context with Health Care Reform and all the other things that are out there, we believe when clients think about their issues day-to-day on pensions, retirement, health and benefits, talent, those needs are going to go up, not down. And we've got the strongest platform in the world to serve those needs. So we feel very, very good about how we're positioned in the healthcare front, on the consulting front, both Brokerage and in admin and then on the Outsourcing side. So from our standpoint, the story here is not different than it is in risk. We feel like the issues today are more significant for our clients than before, and we feel like we've got exceptionally strong platforms to address those issues.

Dan Farrell - Sterne Agee & Leach Inc.

Okay. And just one other thing. On the reinsurance Brokerage segment, how much of a margin differential is there on the capital markets and facultative business versus the treaty business?

Christa Davies

Look, we really think about that business as a Risk Solutions business, Aon Benfield plus ARS combined, and that's certainly the way we report it. And as Greg said, you can see margin year-over-year continues to expand and we do not break those businesses apart.

Greg Case

And even in the context of Aon Benfield, when we think what we do for clients, it really is about capital solutions. So whether it's treaty, facultative solutions or capital market solutions, we're really bringing to them an integrated view around how to improve their return on invested capital. That's actually served us exceptionally well. That's why the win rates are, as I described before, are improving and we expect will continue to do so. And so we really think about it in a much more integrated way, as Christa described.

Operator

And next, Meyer Shields, Stifel, Nicolaus.

Meyer Shields - Stifel, Nicolaus & Co., Inc.

The FX hit apparently came in the HR Solutions segment, and I was hoping you could explain the mechanics of that.

Christa Davies

Sorry, the FX hit in the HR Solutions segment?

Meyer Shields - Stifel, Nicolaus & Co., Inc.

Right. In other words, you recorded $0.03 of favorable FX, I shouldn't say hit, I should say bump. Overall FX looks like it had a negative impact on the margin on the insurance side. So when we do the math on the consulting side, I'm just trying to figure out how various FX changes impact the margin in HR Solutions.

Christa Davies

Got it. There was no FX impact on margin in the HR Solutions segment. The impact on EPS you saw, as I mentioned, was primarily the $0.03 impact for the adjustment results was primarily due to the euro and Australian dollar. The impact on the Risk Solutions margin was really primarily due to the pound, U.S. dollar, and there's no impact to the HR Solutions margin.

Meyer Shields - Stifel, Nicolaus & Co., Inc.

Okay, so where in the income statement would that $0.03 be located?

Christa Davies

I'm sorry?

Meyer Shields - Stifel, Nicolaus & Co., Inc.

I'm just looking through the income statement. I'm to see where -- which line item I guess or combination of line items produce -- reflect that $0.03?

Christa Davies

Well, it's really going to flow through in both revenue and expense in both -- really, in the Risk Solutions segment is the main area it's going to flow through, Meyer. So basically, as you bring back -- I mean the impact on the Risk Solutions margin is primarily due to the phenomenon of in the U.K. we have about $400 million to $450 million of U.S.-denominated revenue in both our ARS and Aon Benfield businesses on a yearly basis. And therefore, you have U.S.-denominated revenue and pound-denominated expenses. And as the pound changes, that reduces a negative impact on margin for the quarter. So it's really going to flow through on the revenue and expense lines, and nearly all expense lines, in that Risk Solutions segment. Does that help?

Meyer Shields - Stifel, Nicolaus & Co., Inc.

It does, but I have to take it offline because I'm still a little bit lost. Greg, can I switch gears quickly and just talk -- we had a couple of I guess relatively high-profile departures with Andrew Appel and Elliot Richardson. And I'm wondering if you could talk to whether there's anything that we should read into that?

Greg Case

Yes, I would say there really isn't when you think about sort of what we're trying to do overall with the overall business. And these are very separate cases and separate situations. In the case of Andrew, he's done great contributions at our firm, a lot of great things, and he's decided to move on to do something different. Mutual discussion and it has gone very, very well and excited for Andrew and his new role and what he's trying to do. I'm very supportive. In the case of Elliott and even on the at construction side, we've made some calls to grow our business and build our business long term. And as you think about sort of what we're trying to do to unite our global firm and deliver great value to our clients in a very local way, we've got to have our colleagues around the table doing that effectively, and we made some calls. We made some very specific calls around the folks who can help us do that. And to the extent people couldn't, then we made some specific calls around, it was time for them to do something different. We wish him well, but not part of global Aon. And beauty of it is we're quite confident in the teams we've got. We're very excited about how they've come on board and what they're doing to build our business. These are colleagues who have been with us for a long time with a great bench. And you didn't mention the construction side, but that's equally high-profile. Kevin White and team there are just doing an exceptional job of building that business. We're very excited about what's going on in the construction front and continue to make substantial in essence [ph] in the context of that. And we've also, on the facultative side, done exactly the same thing. We're just exceptionally excited about that. And then on the consulting side, I would say Kristi Savacool and Bal Dail have just -- are doing an exceptional job as we build that business and drive it forward. And really the punchline is we're blessed with a great bench. We're also focused on a mission to build our firm going forward and we're going to have the people around the table who can help us do that and only those folks.

Operator

Next we have Brian Meredith, UBS.

Brian Meredith - UBS Investment Bank

A couple of questions for you all here. The first one, I'm wondering if, Christi, you can comment on what the impact of some of the recent acquisitions may have had on margins in the Risk Solutions area? Would that pressure margins at all?

Christa Davies

It had a minor impact on margins but not a material impact, Brian. I mean, obviously as we're bringing Glenrand in it, it's significant acquisitions. As Greg said, it really does position us as the number one broker across the continent of Africa, one of the key areas sort of growing in the global economy and very, very important for our clients.

Greg Case

It's another example of, Brian, around we do a number of things like that, particularly that, investments in the Risk Insight Platform, a few other places that we don't breakout and will, from quarter-to-quarter, have significant impact. We'll absorb that and move forward as we build margins over the course of each year.

Brian Meredith - UBS Investment Bank

Great. And then secondly with respect to the Hewitt expense saves going forward, I'm wondering, are you still on track to deliver the $229 million to $242 million that you laid out for 2011 originally?

Christa Davies

Yes, we absolutely are. So if you saw in the quarter, we believe we're 100% on track to achieve the $242 million for 2011 and the $355 million for 2013. And you saw $43 million of restructuring, plus other synergy and operational improvements come through in Q1 and you saw that number grow to $59 million in Q2. So if you add those 2 numbers together, you can see that we're well on track to achieve $242 million.

Brian Meredith - UBS Investment Bank

Great. And then the last one, Greg, I wonder if you could talk a little bit about what kind of the competition out there right now for talent in the insurance brokerage area? I mean we do see a lot of teams exchanging hands, I'm hearing, in the marketplace that the various firms kind of paying up for people. What does it look like out there right now? And will that cause any kind of pressure on margins here going forward, particularly if we see some rate improvement and maybe offset some of that?

Greg Case

Yes. You know Brian, I think from a talent standpoint, this is something we live everyday. And in fact as we reflect on it, it's something that I think it's going to become even more and more prevalent as you think about Aon. We have worked hard to try to build our capability globally. And in doing so, have worked really hard to create great opportunities for our individual practitioners, our leaders. We really want to be the place that if you want to be a practitioner in either risk or people, you come to Aon, and whether Aon Risk Solutions, Aon Benfield or Aon Hewitt. And we want to keep pushing on that mission. We want to work to improve our capability here. We think we've done that. We know we've got a long way to go. We're going to keep on investing in it. It also means we're going to be an absolute target for talent around the world. We know that, which is why we've got to keep the bar high. But it's -- one of the things that's remarkable about the firm is as we bring people in, it builds the talent pool, but we've got incredible capability around the firm with a very, very deep bench. and we're quite excited about where we are right now from a talent standpoint. And we believe that's going to serve us quite well as we continue to grow the business. Is the competition higher or lower? I don't now. It's always going to be out there. It's as if when people talk about, what's the competition on the client side? It's always high. That's the world we live in, and we're excited to be part of it.

Operator

Next, Adam Klauber from William Blair.

Adam Klauber

What's the pipeline on the Outsource business? And when can we get better visibility on wins, loses of the combined company?

Christa Davies

So one of the great things about our Outsource business with 5- to 7-year average contract length in the BPO space and 3- to 4-year in the benefits administration space is we have a terrific view of the pipeline over the next several years. And we feel very good about the trajectory, not just in terms of revenue growth long term, but in terms of win rates. And across our Outsourcing business, our win rates are very high, and it frankly improved substantially from 2010 to 2011, a great tribute to the amazing leadership and depths of talent in that Outsourcing business. So we feel very good about the trajectory both in terms of revenue growth and margin expansion in our Outsourcing business.

Adam Klauber

Okay. And then on the Brokerage business, I'm sure you saw the CIB just came out and said, the rates have moved. Rates have moved pretty much flat. Number one, is that helping the U.S. business right now? And do you think it will have a bigger impact in the second half on organic growth?

Greg Case

Yes, I would say just taking a step back, Adam, as we think about sort of growth for the second half, we think it will be marginally better than the first half overall. Obviously reflects across our book both on the Risk Solutions side and Aon Benfield side. And so that's how we see the second half of the year playing out. I wouldn't reflect back on rates though. As we think about it, we took a pretty analytic view of this. We think, literally, this is what happened in the first half. It's still soft pricing globally. Globally, exposure's are stabilizing a little bit. It's still down, but not as much as it was before. So maybe you call that improvement, I guess, in the context of overall rates. But if you just think about what we reflected in the Risk Insight Platform, the Global Risk Insight Platform, literally, and that's what we use as a measure rate. Is not conjecture. It's the largest repository of insurance information exists on the planet today. And in Q2, they were down 2.5% across our system. Just to put in perspective, in Q1, they were down 3.5%, in Q4 last year, they were down 4.4%. So we've gone from negative 4.4% to negative 3.5% to negative 2.5%, and we feel like that's a pretty precise assessment of exactly what's going on across our book. And you might suggest that our book might represent a reflection of the overall insurance marketplace given the spread of business we got on the retail side. And then on the reinsurance side, we've stated -- we're basically at stable to down 5%, which is exactly where we came out on the sort of the June, July time frame on the reinsurance side. And again, this represents 41 specific programs we put in place in June and July. I would suggest this is probably the broadest market view that's out there. No one else is close in terms of sort of what happened in that time frame. That flat to down 5% was better than January, by the way. It was more stark or down more in January. But from our standpoint, we think it represents, frankly, a reflection of what we've been able to accomplish on behalf of clients. I mean, the market strength we've got combined with exceptional analytics produce what is really great, great results for clients. And if you compare it to sort of what's been published by other folks out there, if, in fact, that's a big achievement for their clients, we're talking about literally a relative hundreds and hundreds of millions of dollars of savings for our clients in the context of what we achieved against these 41 programs. So from our standpoint, rates are still down, but not as down as they were. And again, as I said before, from an organic standpoint, we see some positive trends for us in the second half. Does that give you enough background?

Operator

Next question, Matt Heimermann, JPMorgan.

Matthew Heimermann - JP Morgan Chase & Co

Just a more high level. I mean, I guess you guys are looking into rolling out a direct-to-buyer or kind of SME aggregator in other parts of the world. And, I guess, can you give us a sense of maybe where you are in that process and potentially what timing might be if you're considering bringing that to the states?

Greg Case

Yes, this is really more, Matt, about, as we described before, on the overall Aon Broking front and what we're trying to accomplish in the context of sort of how we serve our clients and looking for ways to aggregate risk, bring things together and really put together a better and better world-class programs in the context of how we serve clients. And this is just, again, back to kind of the investments we're making in the business that do impact quarter-to-quarter margin as we talked about before, but we believe actually reinforce our capability to deliver substantial growth and margin improvement for the long term. This is just one of those examples. That's in development. And, again, as we said before, on a lot of the Aon brokering initiatives we see real impact in more 2012, 2013, but we believe we've got an incredible opportunity here. When you think about our position, the middle market and small commercial, it is literally the biggest in the world today. Our Affinity business is a $600 million-plus business, so incredibly strong business. We have a proven model that we know works as we aggregate risk and actually pull together a package of opportunities we can deliver back to clients. And so we see absolutely substantial opportunity to do this across our global book. And we've really never pursued this in a way we talked about before, nor could we have until we brought online all the things we're doing around Aon Broking. So it really is just an evolution of what's happened out of GRIP, and what's happened as we think about ways to serve clients. And it's going to be '12 and '13, but I'm glad you raised it because we believe it's a -- we believe this is going to be a substantial step forward in the context of Aon Broking to the betterment of our clients and to the betterment of our shareholders.

Dan Farrell - Sterne Agee & Leach Inc.

That's helpful. Should we think about this as you reshaping how the business is transacted and therefore it goes more to expense efficiency than it does -- I suspect there's probably a bit of both in the strategy, but can you help us put into context how you think about it? I guess I'm thinking maybe efficiency versus just what you think it means for market share, things like that?

Greg Case

Yes, I think there will be definitely both sides. This, for us, though, as much as anything, Matt, it's about really how we grow the business and build the business, because we're going to -- we will in fact be generating more attractive opportunities for clients. And in addition to that, so literally, that's the gross of the equation, in addition to that, we're going to be generating greater yields. So if you think about the things we do to grow our business, we get more clients, we do more stuff with the existing clients, and we increase yield per dollar of premium placed. And this really is going to help us, we believe, get more clients and, we believe, increase yield per dollar of premium placed. Those 2 things we think, from the combination, will have very positive implications on the growth structure of the firm and on the margin of the firm, both.

Dan Farrell - Sterne Agee & Leach Inc.

Okay. And then when you said just on the timing question with the U.S. when you say 2012, 2013 in terms of starting to see more material contribution or starting to see this getting out of the investment phase, maybe to the more operational phase, is that kind of the timing we'd expect to see it maybe permeate other geographies outside of where you're testing it now?

Greg Case

It's exactly right. And in fact, as we described before, we've gone through a progression. First, we realized if we capture the data and the understanding, even though it was an incredibly substantial investment to do that, again, think about it, we really are asking our broker colleagues to enter data around the world, so they'd give us the basis of GRIP, and then investing literally in -- in Ireland, 100-plus colleagues actually scrubbed the data to make sure it's absolutely pristine, so we can actually use it to serve clients. Then you -- that's got to get us into 2011. We're really starting to see some benefit there. And beyond that, you add these programs on top of that, which is the next natural evolution. That will increase yield. And again, just for reference, if you're talking about $40 billion to $50 billion of flow, 10 basis points of yield, 50 basis points of yield matters a lot in the context of being able to actually to drive that. And we're going to start to see that in 2012, 2013 as we continue to evolve this whole idea of Aon Broking and serving clients in the context of that.

So we see it meaningfully impacting in 2012, 2013. And again, I'm glad you raised it. It's another example as to why as we watch this evolve, we have basically, what we would call, proved the concept. We know it works. We've done it in different places. We proved it. And now, literally, it's about scaling the concept, taking that proven concept and driving it around the world. And that's really what 2012, 2013 is about. And that's why we're pretty excited about this.

Matthew Heimermann - JP Morgan Chase & Co

Okay. And then just one on the HR Solutions business. I mean I was just curious if you could talk a little bit about project revenues. The macro commentary you give isn't exactly constructive for project revenues coming back. So when you're talking about improving growth rates, I'm assuming that's without project revenue, but I'd just be curious how significant you think the project revenue side can be to organic growth and maybe looking out 12 to 24 months from now?

Christa Davies

Right. So as we think about the impact of the economy and sort of a fragile economy on the Outsourcing business, project revenues is one of the big impacts in calendar year 2011 and it was in calendar year 2010. I would note that we have largely sort of lapped the big sort of year-over-year impact of that now in Q2. And so while there's kind of minimal impact to the second half of the year, it really is much, much more than what we've seen in the first half of the year. As we think about, sort of, project revenue, it's really related often to M&A activity, changes in benefits plans as a result of U.S. Health Care Reform. So you can see some real opportunities as you look out, sort of, 12, 24 to 36 months, that to grow over time.

Operator

Next question is Yaron Kinar from Deutsche Bank.

Yaron Kinar - Deutsche Bank AG

Sorry to beat on a dead horse here, but if we look the -- at your target of executing year-over-year margin expansion in the broking business in regards to economic trends, even if I look at it on a year-to-year basis not quarter-to-quarter, it still seems like margins are slightly down on a trailing 12-month basis. So am I looking at it incorrectly or you looking already at 2012 when you're talking about executing this year-over-year strategy? What am I missing here?

Christa Davies

So first of all, you're absolutely looking at it correctly. So year-to-date, margins are down, there's no doubt that. We think about it as a full calendar year, sort of, view of the world. And as we look out, we feel confident that we're on track. And so we just don't think about any quarter-to-quarter sort of impacts because there are a lot of things in our business that are lumpy. And as Greg described, we are making investments in our business that are going to generate long-term returns. And we're very confident that we're on track to 25%.

Yaron Kinar - Deutsche Bank AG

Okay. And could we also talk a little bit about maybe the potential for a downgrade in the U.S. that -- of 1 notch or 2 notches? What impact does that have on your business?

Christa Davies

Yes. So the first thing I'd say is obviously there's a lot of implications potentially to the economy of that, which are very difficult to speculate upon. So if I leave that aside, then I think there are 2 potential impacts of a U.S., sort of, debt situation. One is FX. And obviously, if the U.S. dollar were to sort of decline in value relative to the euro, Aussie and New Zealand and Canadian dollars then that is a positive impact in our business as we bring back revenue and expenses from those countries. And then -- so that's the FX impact. And the second one is interest rates. If interest rates were to rise, then it has 2 positive impacts on our business. The first one is on fiduciary funds. And each 100-basis point rise in interest rate is about $35 million to $40 million straight to the top line and bottom line. And the second impact on our business is unfunded pension liability. Obviously, an increase in interest rates would decrease our unfunded pension liability, which is again, good for us. The last thing I would say is we are in a very strong position in terms of balance sheet and financial flexibility. And so there are absolutely no issues in terms of liquidity.

Greg Case

And just generally, overall though, if you think about sort of the specifics, obviously we, like everyone, want this to get resolved in a reasonable way for our clients because, while Christa's highlighted it very, very well, I think specifically what the macro impacts are, things that impact our clients impact us ultimately. So it's obviously we want to get this resolved.

Yaron Kinar - Deutsche Bank AG

Right. Can I sneak in one more question about your recent decision to slash the U.S. wholesale panel to basically 2? A, how do you address clients' concerns about ability to add value with only 2 panelists? And two, there seems to have been some talk about potential conflicts of interest there. How do you square those?

Greg Case

Well, first and foremost, as we think about sort of how we compete in the marketplace and what we're trying to do, everything we sort of step back and do is really around driving value for our clients, period. And as we think about approaching the market, that literally is all the investments we're making. If you think about the formidable investments we've made. It really is around driving greater value for clients. And that's something clients improve operating performance, strengthen balance, reduce volatility. Nothing actually stands in the way of how Aon is maniacally focused on doing that. And we're going to continue to do that. So that drives everything we do. In the context of that, the decision really was around how we can actually help clients and really make sure that their business is actually handled in a way that's consistent. And the difficulty as you are handing off to multiple wholesalers, there's often variability in actually how that happens over time. It's variability in the context of how you think about it inside the U.S., it's variability when you think about it when you actually transferred over to the U.K. So for us, as we reflected on how to do that and we talked to clients, we want to be extremely consistent in how we actually handle that.

By the way, that includes building the capability in-house, so we're actually not handing it off to a third party who then handles our clients. That actually concerns us a great deal, and that's why we made the initial decision to actually reduce the panel and focus it much more on how we serve clients effectively. Then I would say in terms of the overall process, this is a process that really has been handled incredibly pristinely. We handled it much like we do any major decision that affects our clients or it affects our shareholders, a completely independent process. It's very objective, specific set of criteria. In fact probably even more so, overdid the process. It took us 6 months to make the overall decision. We are confident we made a decision that we think will help our clients long term. And it's selection of going from really was down -- 9 down to 2 to serve our clients effectively, and in the end, feel very, very good about the overall process and how it's been implemented so far.

Operator

Our last question comes from Jay Cohen, Bank of America.

Jay Cohen - BofA Merrill Lynch

Most of my questions have been answered. I just wanted to clarify one thing, and that was the tax rate. I guess by saying that the annual tax rate would be about 29%, are we talking for the second half of the year a tax rate closer to 30 or slightly above?

Christa Davies

So I'm talking about the underlying effective tax rate on operations. What we reported in Q2 is essentially after specific adjustments, Jay. So as you think about your model, it's really the tax rate for the full year on an underlying basis for 2011 and going forward.

Jay Cohen - BofA Merrill Lynch

So just to clarify, so second half of the year, you're saying, should be about 29%?

Christa Davies

Yes, on an underlying or sort of effective rate going forward, yes.

Operator

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

Greg Case

No closing remarks, just thanks, everybody, for taking part in the call today. We appreciate it, and we appreciate your interest. Thanks very much.

Operator

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

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