Aon Corp. Q1 2008 Earnings Call Transcript

Aon Corporation (AOC)

Q1 FY08 Earnings Call

May 2, 2008, 11:00 AM ET

Executives

Gregory C. Case - President and CEO

Christa Davies - EVP and CFO

Scott Malchow - VP, IR

Analysts

Keith Walsh - Citigroup

Jay Gelb - Lehman Brothers

Brian Meredith - UBS

Chuck Hamilton - FTN Midwest

Chris Neczypor - Goldman Sachs

Josh Smith - TIAA-CREF

Meyer Shields - Stifel Nicolaus

Matthew Heimermann - JP Morgan

Dan Johnson - Citadel

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for holding. Welcome to Aon Corporation's First Quarter 2008 Earnings Conference Call. At this time, all parties will be in a listen-only mode until the question-and-answer portion of today's call. I'd like to remind all parties that this call is being recorded, and if anyone has an objection, you may disconnect your line at this time.

It's 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 first quarter results, as well as having them posted on our website.

Now it's my pleasure to turn the conference over to Mr. Greg Case, President and CEO of Aon Corporation. Sir, please go ahead.

Gregory C. Case - President and Chief Executive Officer

Thank you. Good morning to everyone. Welcome to our first quarter 2008 conference call. Joining me here today, in our first conference call as CFO of Aon is Christa Davies.

On the call today, I'd like to cover three areas; our performance against key commitments to shareholders, continued areas in investment across Aon, and overall organic growth performance for the quarter. I'll then turn the call over to Christa for further financial review.

On the first topic, performance against key financial commitments to shareholders; as we commented in yesterday's press release, our first quarter results reflect progress and momentum in each of our key operating metrics. Our team feels good about our results in the start of the year, especially given the market conditions we are experiencing around the globe. As we do each quarter, we'll report on three metrics, we committed to our shareholders: grow organically, expand margins, and increase earnings per share. Our plans are committed to achieving all three over the course of each year not necessarily every quarter. Further, we said we would not sacrifice one of these metrics for the other.

We were very pleased that our first quarter reflects continued improvement across all three metrics. Organic growth increased 2% in brokerage and 4% in consulting services. Pre-tax margin on an adjusted basis increased to 180 basis points. An EPS on an adjusted basis increased 25%. As we said before we are not going to use soft pricing conditions, our economic concerns as an excuse not to deliver on our commitments. When we look at our results across the organization, they represent meaningful progress from Aon colleagues around the globe for working hard to strengthen our position as the industry leading risk advice and human capital solutions provider.

Topic 2, on areas and investments across Aon; as we've discussed before on these calls our team is excited about the industry. We believe the aggregate level of risks continues to increase in complexity and size around the globe. And as a result, the needs of our clients are increasing. With the completed sales of our remaining insurance underwriting businesses, we're solely focused on the two of the most critical issues facing our clients today, risk advice and human capital management. And Aon is exceptionally well positioned to help clients understand and capitalize on both this challenge and long-term opportunity.

During the quarter, we continued to build on our industry-leading capabilities with significant investments around the globe, in our construction, environmental and energy practice groups and emerging markets in the Middle East, China, India, Eastern Europe, where we already have industry-leading positions and sales leadership in the UK, key leadership in our consulting business and colleagues from our acquisition of Gallagher Re. These categories highlight a few of our investment areas. But, we think it's a critical point for you to understand, and it's exactly in line with what we've talked about in building our firm. Removing inefficiency and costs from back office functions and processes primarily through our expense initiatives, enabling long-term investments and client-facing capability while simultaneously improving margins.

As we invest in capabilities and add leadership across the organizations, we're very careful to do this in a way that is coordinated and leverages our global network. This ensures real economic return on our investments and is the primary reason behind the Aon Risk Services organization, which consolidates all of our retail brokerage assets into a globally coordinated group with 26,000 colleagues and more than $5 billion in revenue. The formation of Aon Risk Services brings together a single global view of our retail brokerage assets and follows on our success with the globalization of both our consulting and reinsurance groups. This improves our ability to drive products and services to clients anywhere around the globe and we are already beginning to see early benefits.

As an example, Unilever, a global leader with 179,000 staff and presence in 100 countries. Unilever recently appointed Aon as sole and exclusive broker and consultant across all lines of business worldwide, including loss [ph] pool insurance programs and employed benefits together with core global programs. This is a great example of the opportunity and reasons to bring in together the significant debt resources across our risks and consulting organizations to deliver a complete solution as a global provider.

Another example in the EMEA region, during the quarter we utilized local market share planning to create more than 50 marketing campaigns that strategically identified potential clients toward benefit from our capabilities and product areas, such as environmental or analytics such as benchmarking. This quarter, organic growth in EMEA was 5% with new business growth of 28%, and our initiatives in this area are clearly played a big role in that success. Both of these examples highlight meaningful progress; capitalizing on the global capability, and coordination across Aon, but we still have much left work to do to achieve our goals.

The third topic organic growth performance; in brokerage, overall organic growth was 2%. Retention rates were 90% or better on average, highlighting very strong client satisfaction. We've strong double-digit growth in new business in several areas across the firm, and we continue to see early benefits from investments in many areas, such as environmental and faculty reinsurance among many others. This really reflected solid results overall, despite soft market conditions, our pricing was down on average mid-to-single high digits globally with substantially softer conditions in the Americas.

On the Americas specifically, organic growth was 1% despite the challenging market conditions I just described. We had strong performance in our Latin American region and our Affinity business. And our U.S retail business continues to win RFPs at a two to one rate versus competitors for revenue retract that moves on or off our income statement during the period. But, it also faced headwinds compared to prior year and area such as private equity transactions and commercial construction were overall activity decline. Overall from our view, our current positive growth in the Americans still doesn't fully reflect the underlying strength of our improvements we are seen in productivity and collaboration across the group.

In Europe, Middle East and Africa it was another strong quarter with organic growth of 5%, double-digit growth in emerging markets such as Africa and the Middle East, solid growth on Continental Europe and retention rates well above 90%. And as I said we are getting early benefits from deployment of our revenue engine effort and applying local market planning to drive marketing campaigns as discussed, and we continued to invest significantly in the region around construction and other emerging markets.

In Asia Pacific brokerage, there is a very, very solid platform of leadership positions in Australia, New Zealand, China and across the region. Organic growth here was 3% and improvement from the previous quarter was very strong, double-digit growth across the most Asian markets, such as China and Korea, and we continued to make many investments across the region.

In the UK, organic revenue decreased 1% in the quarter, very strong retentions 90% plus, modest growth in our UK retail business as we've invested in sales leadership offset by weaker trends in our network business. And finally, on the reinsurance side, we delivered organic growth of 1% for the quarter, growth in both facultative and a number of new treaty placements despite higher cedant retentions in soft pricing. And our colleagues in reinsurance are delivered number one in treaty, number one in faculty and number one in capital markets, which really provides our clients with a unique and integrated solution around capital management. In addition, I would like to say we are excited to welcome our new colleagues from Gallagher Re during the quarter, enhancing our capabilities in U.S accidents, health and like markets along with enhanced capabilities in the UK specialty, casualty and financial institutions business.

Turning to the consulting side, overall organic growth was flat in the quarter, and as previously highlighted the segment continues to be a tale of two businesses. In the core services business, organic growth was 4%. This was driven primarily by growth in the retirement and health and benefits group. In outsourcing business, we were down 17% as a direct result of our previously announced contract that was terminated. We've largely absorbed the majority of this decline, but would anticipate a modest quarter-to-quarter impact over the remainder of the year; overall, just a very strong quarter of progress in the consulting arena.

In summary, as our team reflects on the quarter, it's really a story about continuing momentum and progress. We're in a position of strength with the industry's broadest set of globally owned resources and capability. We continue to work to change the behavior of how we evaluate and how we sell into our market segments, as well as reinforce a culture of being held accountable for performance and delivering distinctive value. We intend to do that while continuing to deliver margin improvement and internally funding very substantial investments, which are building a base for longer-term growth across Aon. We focused on core strengths as we align our global assets with the formation of Aon Risk Services, as well as the completed sales of our insurance underwriting businesses. In short, we're working hard to build on our leadership position with our clients and markets. And the team feels very good about our progress for the first quarter and our start to the year. We remain solidly on track to meet our margin, EPS and growth objectives for 2008 and 2009.

With that said, I now want to turn the call over to Christa for further financial review, as well as extend a warm welcome on behalf of our colleagues around the globe and our shareholders on the conference call today. Christa?

Christa Davies - Executive Vice President and Chief Financial Officer

Thanks, Greg. Good morning, everyone. I'm very excited to be here. We have a great platform with a lot of opportunities to growth.

As Greg noted, our positive momentum continued in the first quarter with improvements in each of our three key financial metrics. Organic revenue growth was solid in a challenging market. We delivered meaningful margin expansion as we continued to invest in building our global capabilities and earnings per share from continuing operations was up significantly.

We also believe we are effectively allocating capital, as share repurchase sets the bar for required returns among potential use of proceeds from the completed sales of our more capital intensive insurance underwriting businesses. The sales of both Combined and Sterling were completed on April 1. After-tax proceeds related to the transaction were approximately $2.7 billion and a pre-tax gain of approximately $1.3 billion is expected to be recorded in the second quarter. This transaction represented a tremendous amount of great work by our colleagues to complete them earlier than some had anticipated we could. The results of Combined and Sterling are reported in discontinued operations and the results for remaining P&C runoff books were previously moved to the unallocated section of continuing operations, effectively completing our exit in the insurance underwriting business.

Turning to continuing operations, EPS was $0.56 a share, up 10% from Q1, 2007. There are several items that we have highlighted, which we think are important to understand in assessing core performance. First, restructuring charges in the first quarter were $60 million or $0.13 per share. Second, we recorded a small time, onetime gain of $5 million or $0.01 per share related to the sale of land. Lastly, we reported a total of $14 million or $0.03 per share for the previously disclosed review and compliance activities related to the Foreign Corrupt Practices Act, FCPA, and similar laws in other countries.

Consequently, we would view the core or adjusted EPS performance of our continuing operations is $0.71 a share, up 25% since Q1, 2007. Foreign currency translation had a favorable impact of approximately $0.08 per share as the U.S. dollar declined against most major currencies and the first quarter traditionally a seasonally strong quarter for our EMEA region.

Before turning to the business segments, let me spend a moment on the 2005 and 2007 restructuring programs; important initiatives that are enabling concurrent funding and investments of the long-term growth of Aon, and meaningful margin expansions. Related to the 2005 programs, we incurred no charges in the quarter and the actions necessary to generate savings are complete. We believe that we've realized approximately $225 million of annualized savings in 2007 and are on schedule to realize our $270 million target in 2008 which will reflect incremental savings of approximately $45 million in 2008.

With respect to the 2007 programs we incurred $60 million of charges in the first quarter, primarily related to work force reduction in EMEA and the UK. We anticipate this program will results in $360 million of total charges once complete. There was no material savings related to the 2007 restructuring program in the first quarter. We are on track to retrieve our $50 million to $70 million of savings in 2008, a $175 million to $200 million of savings in 2009 and $240 million of cumulative annualized savings by 2010 before any potential reinvestments. Page 11 of the press release provides our usual quarterly update on these programs.

Turning to the segments, for the quarter adjusted brokerage pre-tax income increased 15% to $310 million and adjusted pre-tax margin improved a 100 basis points to 19.5%. Expense discipline has been a recurring theme of these calls. And in challenging pricing market, prudent expense management becomes even more critical as we continued to invest significantly in growing our capabilities. As you can see from the press release, total brokerage expenses in the quarter increased $137 million quarter-over-quarter. Included in the results was $68 million unfavorable impact from foreign currency translation, a $50 million increase in restructuring costs and as I noted $14 million related to the FCPA and related compliance activities.

Excluding these items expenses were up modestly versus the prior year quarter. Our expense initiatives continued to manage the inherent inflationary push and the investments we are making in our business with the net effects driving margin improvements. As Greg said, we are committed to margin improvement over the course of each year not necessarily each quarter.

Let me pause for a moment to provide a bit more detail on our internal review and compliance activity under the FCPA and similar statutes overseas. As we noted in our third quarter 10-Q we have engaged counsel to conduct a wide ranging internal review of our compliance of these laws. And these lawyers and other external advisers did a great deal of work in the first quarter. We have been working hard to put in place best-in-class compliance programs in this area. Unfortunately, as you know from the dozens of other U.S companies which reported similar internal reviews, these activities can be very complex and expensive, particularly on a company Aon operates in over a 120 countries. Therefore, while it's very difficult to predict we are hopeful this review will be largely concluded by year end.

Integrity and professionalism are at the core of running a professional services business. We view the improved compliance environment we are putting in place as leading edge in the industry.

Turning to consulting, adjusted pre-tax income increased 35% to $66 million and the adjusted pre-tax margin improved 430 basis points to 19.2% in the quarter, a record margin for any quarter, primarily driven by the realization of restructuring benefits and other operational improvement efforts. It was a really strong performance this quarter as everything seemed to move in the right direction. As you can see from the press release, expenses were relatively flat, including a $12 million unfavorable impact from foreign currency translation. Absent that, consulting expenses were down meaningfully year-over-year, reflecting solid expense management while again funding investments in people and capabilities to drive future growth. Going forward, we continue to believe that this business is a mid-teens margin business, which we believe is industry leading.

Finally, turning to unallocated items for the quarter, the property and casualty loss was similar to the prior year quarter. We would anticipate its runoff book to have a loss of approximately $13 million in 2008 consistent with the loss in 2007. Unallocated investment income for the quarter was $5 million, a decrease of $17 million from the prior year quarter, primarily reflecting an $11 million decline in distributions received from our PEP securities. We believe the value of these securities is still similar to the valuation given previously and we anticipate that we will monetize that gain overtime.

Given the current private equity environments, we would also anticipate distributions during 2008, to be lower than the previous guidance of $10 million per quarter. Unallocated expenses were $21 million, a decrease of $13 million versus Q1, 2007 due to a number of moving items in both periods, including costs in the prior year quarter related to our historical review of stock compensation practices that has been completed.

We realize there are a lot of moving pieces in the unallocated section. We continued to anticipate a loss of approximately $50 million to $55 million per quarter inline with the loss of $51 million in the first quarter. This guidance does not include the impact of interest income earned on cash balances related to sale proceeds. The effective tax rate on continuing operations was 30.1% in the quarter as compared to 31.3% in the prior year quarter. For 2008, we anticipate the effective tax rate on continuing operations will be 30.5% as compared to previous expectations of 33% due primarily to statutory rate reductions and changes in the geographic distribution of income.

During the first quarter, we repurchased approximately 8.9 million shares, or $375 million of common stock. Subsequent to the close, we have repurchased an additional 8.9 million shares of $485 million, bringing the total amount of share repurchase to 19.8 million shares or $860 million year-to-date. We have 1.9 billion of remaining share repurchase authorization. Shares of common stock outstanding were $299 million as at 331 compared to $305 million at 1,231. Cash and short-term investments were approximately $1.3 billion at 331. However, as of yesterday, the liquidity pool available for corporate use was approximately $2.5 billion reflecting after tax proceeds received post close of the quarter, less cash used for share repurchase during the second quarter and estimated tax repayments related to the transaction.

In summary, with the completed sale of our insurance underwriting businesses, we have positioned our portfolio to focus on two of the most critical issues facing clients today, risk and human capital management. We continue to drive increases in both revenue and profitability in a challenging environment while simultaneously managing expenses that fund investments in our future and delivering meaningful margin improvements. Our balance sheet is strong and our liquidity is excellent as we continue to drive value creation through improved business results and effective capital management.

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

Question And Answer

Operator

[Operator Instructions]. And first with the line Keith Walsh with Citi. Please go ahead

Keith Walsh - Citigroup

Hi. Good morning everybody.

Gregory C. Case - President and Chief Executive Officer

Hi, Keith.

Keith Walsh - Citigroup

Greg, couple of questions here, first on revenues. When I look at Aon relative to your largest competitors out there, it appears you guys are investing while they are cutting right now. Is there a soft market window we are in right here where you have an opportunity to really aggressively step up recruiting efforts and gain some revenues? And then I have a follow-up.

Gregory C. Case - President and Chief Executive Officer

Keith as we've talked on the calls previously, we have been in investment mode really and in growth mode really for the last few years and continued to ramp that up, all within the context of what Christa described as very tight expense control margin analysis to make sure we're improving both organic growth margins and increasing earnings per share. So we see a significant opportunity on the investment side when you candidly it's frankly picked up even over the last few months. But we are going to be very careful, we are going to bringing colleagues who we think can help us build the firm, and we just continue to see tremendous opportunity in that context, and by the way it's not only in the U.S., it's globally.

Keith Walsh - Citigroup

Okay. And then just on margins, you know its Greg you are adding business from global companies then it sounds good for revenues but explain to me how do you maintain margins on these types of accounts that have much larger level of resources needed to service?

Gregory C. Case - President and Chief Executive Officer

Keith, one thing that is always an undertone in the conversations that have come up on calls but also in conversations are around larger clients that must be lower margin, must be lower revenue or lower margin overall. And candidly we have not found that the case. In fact this for us is all about approaching the client and doing it in a way they understand the value that we provide and we are essentially, we are not going to be low priced. We are going to be high valued. We've had that approach and it's working exceptionally well, it rather way raises the bar on us as we talk with clients about what Aon can do for them. We have to clearly differentiate what we can do, and what we found Keith, is that clients all around the globe are facing increasing risks, increasing concerns about how they identify risks, mitigate risks etcetera., and by the way the audience who is interested in that is no longer just the risk colleagues but also CEO, CFOs, Boards etcetera., and so as the demand increases for high quality risk advice, particularly in these larger global institutions we see the opportunity for value added being quite significant. And when that's there Keith, the opportunity to get value for price our price in the context of the value is actually quite high.

Keith Walsh - Citigroup

Great, thank you very much.

Operator

Next from the line of Jay Gelb with Lehman Brothers. Please go ahead.

Jay Gelb - Lehman Brothers

Thanks. I was hoping to get a bit more detail on the Americas brokerage organic growth. I believe you mentioned in the release that the strength came from Latin America. Something you had a sense of the underlying trend within the U.S. retail?

Gregory C. Case - President and Chief Executive Officer

: I would say Jay you take a step back on the growth story overall. They said, in my comments the team goes very good about our, the underlying trends really across the board. The and really what when you think about we are trying to accomplish and put in place to drive growth, it starts with what we are doing around the revenue engine and really making sure we've got clear view on client tracking which we done the salesforce.com which covers 90% of our revenue, clear view on how the revenue engine works in terms of local market and understanding pipeline management, new products, client feedback etcetera. And as we look at that across the globe we feel very good about how the infrastructure is coming in the place the impact is having. We've got it's probably about three quarters in place in the Americas not completely and about 50% outside the Americas.

In the contact of the U.S. the underlying kind of activities that are going on we feel very good about. So as an example we look at each of our producer groups, AES for example in the pipeline which had an increase in what they closed in the first quarter of '08 versus the first quarter of '07, almost 40% actually very, very strong performance. Our win rates as I talked before about of RFP win rates in the U.S. are still 2 to 1 [ph] over the competitions and we in fact saw that actually increase we were at about 70% this quarter and about 60% same period last quarter. So, that's actually strengthened and candidly our ability to react on a dyne is actually increasing quite substantially and this is what really cuts to the U.S. If you think about the two of our most significant areas, private equity and construction those areas when you compare first quarter last year to first quarter now I have gone down quite substantially. In fact just think about the PE reduction, the actual impact to those two categories is almost three points a growth. Our colleagues anticipated that, understood it and in fact put a number of campaigns and activities in place to offset that. So, we actually offset a headwind because we understood what was going on and had the fundamentals in place to drive activities which in turn drive growth.

So, from our standpoint 1% is not what we aspire but we feel very good about what's in place and as our revenue engine efforts continued to take hold in U.S. and around the globe, we believe the upside from a growth standpoint is actually quite strong. Although you combined that with the investments we are making, and we feel very, very good about the platform and that's what led to my comments that candidly, the growth in the Americas for the first quarter the performance lag we believe was the underlying strength or health of where we are right now.

Jay Gelb - Lehman Brothers

Okay. And then, thank you for that. Next question is on consulting, I believe Christa mentioned that the long-term goal there for margins is mid-teens compared to the 19% margin that was generated in the first quarter. What was the reason for the out performance in the first quarter?

Christa Davies - Executive Vice President and Chief Financial Officer

There are number of items that went in our favor in the first quarter and whilst we couldn't pull them out as onetime activities, we don't believe that everything will continue to go that way quarter-on-quarter. And so, we do believe that mid-teens is the long-term margin expectations for that business.

Gregory C. Case - President and Chief Executive Officer

Andall I would add to that Jay is if you think about sort of how we're building the firm and how we have approached this over the last few years, we've essentially said we're kind of drive growth, drive margin, drive EPS. We're committed to doing all three. And as you think about where consulting was a few years ago, consulting has experienced almost if you just went year-to-year-to-year, '05, '06, '07 and then even look at the first quarter of '08, it's been almost 550 basis point improvement in margins and we attacked margins very hard to make sure we improved profitability, a little bit at the expense of maximum growth, which is why you saw 4%. So, you can expect our colleagues in consulting are going to continue to drive margin but also invest around growth to be industry leading in growth as well as industry leading in margin.

Jay Gelb - Lehman Brothers

That's helpful. Thank you.

Operator

And next with line of Brian Meredith with UBS. Please go head.

Brian Meredith - UBS

Yeah, good morning. Two quick numbers questions and then one larger question for Greg. The first is a numbers question. The tax-free Christa, could we expect that to continue to go out until 2009? Or is there something unusual about that '09 why its 30.5%?

Christa Davies - Executive Vice President and Chief Financial Officer

We do believe that 30.5 is our effective tax rate, will continue into the future. So, yes for 2009, as well.

Brian Meredith - UBS

Excellent. And then, if I look at your average shares outstanding for the quarter and it just may have been when you were repurchasing the stock, the drop we had in the fourth quarter was not even comparable to... what the actual share buyback was. Is that because of options issuance or was there just you are buying the stock back later in the quarter?

Christa Davies - Executive Vice President and Chief Financial Officer

Yes, it's two things. It's sort of shares we're issuing as part of our stock program and it's stock equivalents for things like debt. So, conversion of our 3.5% convertible bonds.

Brian Meredith - UBS

Okay, What was the hit from those was it 2 million shares or something like that?

Christa Davies - Executive Vice President and Chief Financial Officer

14 million shares roughly from the conversion of bonds.

Brian Meredith - UBS

Okay, Great. Last question for Greg. Historically, you've also talked about in addition to just wanting to grow margins and grow revenues, trying to grow organic revenues at 200 basis points faster than expense growth. And if I look at your fourth quarter '07 and first-quarter '08 brokerage business when you adjust for FX, it's been about 100 basis points it looks like. And I guess the question I had there is, given the current market environment, is it really realistic to expect that you can actually grow your revenues at 200 basis points faster than your expenses?

Gregory C. Case - President and Chief Executive Officer

Hi good afternoon I would take a step back. One thing in terms of sort of the quarter-to-quarter Brian as you think about what we're trying to accomplish and the specific focus on margin for the quarter, the team feels good about where we are. They feel good about it because we are essentially tracking against the plan. We do have a very clear view on where we think the business can be and will be, and it's driven around margin EPS and growth. The 200 basis point spread is something that we continue to drive and look at. And if you again take a step back and think about this over the last few years and the trajectory we've been able to maintain, some quarters will be up, some will be down.

By the way, as Christa talked about the restructuring, it is never in total sync with exactly what's happening on the investment side, so some up, some down. But what I would ask you to reflect on is when you think about the overall objectives, I mean we've got a great base. We know we've got to improve and strengthen the base and our position. We've got to do it from the eyes of the shareholders clearly getting to a 20 plus percent margins as we talked about, clearly getting to industry leading growth, which we largely have achieved, but by the way not satisfied with the aggregate level. And clearly increasing earnings per share, and we've got a very explicit game plan in terms of we think that's going to look like and we believe we're on track to continuing to do that.

Again, from our standpoint, what the quarter did was just underscore that we're fully on track from that standpoint. And we've made the improvements that you described before really over the last three years in a market that was actually a down market. So, from our standpoint, we believe we can continue to push it and achieve what we set out and that's squarely in the minds of our operating leaders as we think about the quarters remaining in 2008.

Christa Davies - Executive Vice President and Chief Financial Officer

And Brian, I would just add, if you look at compensation expense for the brokerage segment, it was 840 in 2007. If you add FX and acquisitions, you get to a comparable expense base of 897. You add restructuring, you get to 946 which is 5 million different from our 951 reported expenses; that's less than 1%.

Brian Meredith - UBS

Okay. But, less than 1% right. But your organics only 2%.

Gregory C. Case - President and Chief Executive Officer

Right. But again if you--

Brian Meredith - UBS

Understood... I understood. You're investing in the business, makes sense.

Gregory C. Case - President and Chief Executive Officer

Right. And if we take a step back and got to look at the trend line over the last three years, it's actually a quite positive trend line. And as I described before the underlined activities that are going on we actually feel quite strongly about. I would say our team actually leaves the first quarter feeling even better about our ability to achieve our targets.

Brian Meredith - UBS

Great, thank you.

Operator

Our next question is from the line of David Small with Bear Stearns, please go ahead.

Unidentified Analyst

Hi. This is actually Salvatore on behalf of David Small. I just have quick numerous questions, looking at... in risk and insurance. If I take the $310 million of income from our continuing operations in risk insurance and adjust it to exclude the impact of FX, I get an adjust to the income of roughly $276 million which gives an adjusted margin of approximately 18.5%. Am I thinking about this the right way?

Christa Davies - Executive Vice President and Chief Financial Officer

Yes you are, if you look at the brokerage on PPI increased year-on-year it's $40 million and of that $33 million is related to FX.

Unidentified Analyst

Okay. So, if I run through the math for quarter one '07. I would get a margin about 18.8 which will suggest that excluding FX margin is down year-over-year. Is this a result of softening pricing environment or the full stretch of the restructure is still not coming through. Maybe you guys can provide some details on that.

Gregory C. Case - President and Chief Executive Officer

First of all I take a step back a little bit. So, Salvatore and think about. So you want to factor an FX to the overall margin improvement. As we looked at it and think about who we are gagging the business, FX is part of it what we do, I mean in our global business in 120 countries around the world and frankly it's just part of what we do. Its part of sometimes positive, sometimes negative and when we think about the progress I described before and we factor in the mix so, what's happening from an investment side and what's happening from a restructuring side we actually feel very good about the trajectory overall.

Unidentified Analyst

Okay. And if I could just have one more question, I just have a question that new line in the risk insurance other income can you give some color on that? If I may have missed it earlier and I'm not sure you guys have talked about it?

Christa Davies - Executive Vice President and Chief Financial Officer

It's the gain of $5 million on the sale of land.

Unidentified Analyst

Okay, thank you

Gregory C. Case - President and Chief Executive Officer

So, again it's one-off in what we try to do is understand from a margin standpoint exactly with the core engine looks like and how it's evolving and we pull out the one off situations.

Christa Davies - Executive Vice President and Chief Financial Officer

It means that organic growth is always calculated after subtracting for acquisitions to one of the disposals and FX.

Unidentified Analyst

Okay. Great, thanks..

Operator

Our next question is from the line of Chuck Hamilton with FTN Midwest. Please go ahead.

Chuck Hamilton - FTN Midwest

: Good morning and congratulations. Three quick questions, all of them centered on organic revenue growth if you take a look at APAC and if you take a look at the organic revenue growth that was identified at fourth quarter '07 I think you had indicated a negative 5% change in organic revenue growth, and this quarter we have seen a significant swing up to positive 3% yet essentially the boilerplate on the discussion is about the same can you give us a little more color to help us understand what took place in APAC this quarter compared to last?

Gregory C. Case - President and Chief Executive Officer

Happy to do that Chuck and in APAC really as we talked about before first of all it really is three different regions if you will, broad based regions. We've got Asia which is continued to perform at exceptionally well with tremendous growth very strong, strong double digits in place of like China, Korea and as I describe before. The second is in Australia New Zealand, and Australia New Zealand really is a we are by far of the dominant risk advisor in that region and that's has experience continuous to experience of very soft market environment.

In fact Australia is not only as far leading the charge down on the soft side, but positively you become to backup first. But it's really been a... it's represented grow real head wins for us. And the final pieces in a Japan where we were really there was... there's a set of investments we've described on a last couple of calls around some consortiums that we were supporting and given some law changes experienced some real headwind. And that really contributed to negative outcome in the fourth quarter of last year.

So, what we're seeing really is the putting in place of the revenue engine we described before. It is some of the fundamental blocking and tackling we're doing around revenue management. And it is the investments that are beginning but I still emphasize, beginning to take hold in the region. I would tell you we have very high aspirations what the growth rate should be in that region. And while we appreciate the recognition of the improvement quarter-to-quarter, we have very high expectations beyond where we are now.

Chuck Hamilton - FTN Midwest

Okay, great. Second question deals with reinsurance organic revenue growth. And I believe you closed the Gallagher Re transaction that was around the first of the year?

Gregory C. Case - President and Chief Executive Officer

Correct.

Chuck Hamilton - FTN Midwest

Okay. I guess I was a bit surprised to see nothing identified in terms of the adjustment for organic revenue growth in acquisitions and divestitures for the quarter. And obviously it's not going to be even over the year, but I would've expected something along 2 or 3 percentage points from acquisition for Gallagher Re this quarter.

Gregory C. Case - President and Chief Executive Officer

One of the things I would just highlight is and Christa can amplify this too. The way we calculate organic growth if you made an acquisition and it was $100 in revenue, you don't count that as organic growth. You only count the increase in the 100 first. Second, Gallagher actually closed around mid-quarter, a little bit later than that. So, in fact, it really wouldn't shown up anyway. But, I want to emphasize we are incredibly pure about and rigorous about how we think about organic growth. So, in the end, the only way it's going to impact our organic growth is incremental growth above what we brought in.

Chuck Hamilton - FTN Midwest

My point, Greg was that it didn't appear to be in the actual reported numbers. The 264 for reinsurance this quarter where it could've been backed out to get down to your organic revenue growth?

Gregory C. Case - President and Chief Executive Officer

Yes it really didn't show up because as I said before I really close to be quite precise in two parts, the close of the US piece is kind of the almost towards the end of quarter and the UK piece after that. So you are going to see the full impact of that in the second quarter.

Chuck Hamilton - FTN Midwest

All right thank you. And the third question comes down to consulting. Obviously we're strong growth in services and you got the run off of your outsourcing business. When did you lose the major client that was lost in '07 what was the quarter of that appeared in so we know when you're going to get to the run rate?

Gregory C. Case - President and Chief Executive Officer

You really started to see, it was June of '06 give or take when we got the notification. You saw tremendous run off from that but not from our outsourcing business, really just from this one specific contract. And what you are going to see for the rest of the year is a very, after the second quarter bit more now in the second quarter, but after the second quarter we think it will tail off quite substantially for the rest of the year.

Chuck Hamilton - FTN Midwest

Okay, great. Thank you very much. I appreciate it.

Operator

: And next from the line of Chris Neczypor with Goldman Sachs. Please go ahead.

Chris Neczypor - Goldman Sachs

Hi good morning.

Gregory C. Case - President and Chief Executive Officer

Hi Chris.

Chris Neczypor - Goldman Sachs

Just to follow up on the continued growth in consulting. I was wondering if you could help me understand more of the drivers there and specifically if you could put some numbers around how much of the growth is coming from employee benefits and whether not that's being offset by any weakness in which might cause more economically sensitive parts of the business? Thanks.

Gregory C. Case - President and Chief Executive Officer

Give me a little more Chris in terms of the sort of the economics... what you are trying to get at in terms of sort of the growth component. Are you looking at the... on the economy or what you are looking at the --

Chris Neczypor - Goldman Sachs

Yes exactly I am wondering how much... if you didn't have employee benefits are you seeing weakness in say compensation, management consulting, that type of business given what's going over the economy or is it really strong globally and the employee benefits really driving the numbers?

Gregory C. Case - President and Chief Executive Officer

We're actually seeing kind of mid single digits across the board showing up both frankly on the U.S. side as well as on the outside the U.S. So you are seeing in benefits, you're seeing in retirement compensation et cetera. And that would reflect on when you think about, we've obviously thought a lot about this, consulting within the context of the kind of a global economy and the impact of a recession. We feel pretty good about the status of the business in the context of the two... a context of recession. And our sense is probably about 80% of the business is tied to... sorry would be separate from the impact of a recession. So, from our standpoint, again, you never know for sure. You never know how long things are going to last. We actually feel quite good about the insulation of this business from that impact.

Chris Neczypor - Goldman Sachs

Okay. So, really it's more about the fact that you guys have your mix towards business that might not be economically impacted as opposed to that you're just not seeing any of the so called recessionary impact on some of the other business?

Gregory C. Case - President and Chief Executive Officer

Yes, I think that's about right. I think it's about right.

Chris Neczypor - Goldman Sachs

Okay. Thanks.

Gregory C. Case - President and Chief Executive Officer

Does that answer your question?

Chris Neczypor - Goldman Sachs

Yes, that's perfect. Thank you.

Operator

And next we will go to Josh Smith with TIAA-CREF. Please go ahead.

Josh Smith - TIAA-CREF

Hi, thanks for taking the call. Quick request on, can you just break out weighted average basic shares and fully diluted in the future? Can you just tell me what those numbers are? Is it just the $14 million or is there a more in diluted?

Christa Davies - Executive Vice President and Chief Financial Officer

Diluted shares at the end of Q1 2008 were 319,767.

Josh Smith - TIAA-CREF

I was talking about the weighted average. So, what was your basic average and what was your diluted average for the quarter?

Christa Davies - Executive Vice President and Chief Financial Officer

Hang on. We're just looking that up for you.

Josh Smith - TIAA-CREF

I can follow up later, this is just a request for future.

Gregory C. Case - President and Chief Executive Officer

It'll be quite easy, we can get Scott Malchow who can actually--

Scott Malchow - Vice President, Investor Relations

Josh, this is Scott. I'm actually in the room. One way I think to look at it here as Christa said in her script. At the end of the quarter for you to try and think about your model going forward as you think about it at 3/31, there were 299 million actual shares outstanding. At 12/31, there were 305 million shares actual shares outstanding at the end of the quarter. So you had kind of 6 million share delta from 12/31 to 3/31, it really represents the 9 million shares that we repurchased during the quarter less the 3 million shares that we issued. So you get 6 million kind of a net delta between the 305 at the end of 12/31 and 299 at the end of 3/31. So, your actual shares outstanding are 299 plus about 15.5 million or so of kind of common stock equivalents. That's how you would gauge your starting point for Q2 and then obviously share repurchase and issuance going forward from there.

Josh Smith - TIAA-CREF

Great, thanks. And then a more global question on... investor conventional wisdom is not to own the brokers in the softening market just because how can you grow when premiums are declining in price. Or I mean actually I show it to be had total premiums down for the first time in quite some time. Can you give us a sense for what your mix of businesses is, fee versus commission, and how you're insulated from that?

Gregory C. Case - President and Chief Executive Officer

Yes. First of all, again, take a step back Josh from the standpoint of how we thought about growth and I would reflect, Aon candidly is a very unique franchise with a very unique platform, very global, one of two global networks with tremendous opportunities to both reduce costs and reinvest in growth. By the way, we've done that in the last three years in a softening marketplace. We've grown organically, increased margins and increased EPS. By the way, that's a function of how strong the Aon platform was certainly when I arrived. The team now is really just capitalizing on an incredibly strong platform. And we feel very good about our ability to continue to do that. So just macro point one.

Two, we are about two-thirds commission, one-third fee. And as we continue to serve larger and larger clients, we've talked before that mix is just going to continue to strengthen on the fee side. And by the way, the conversations we're having with clients are very much around what's the value we provide, by the way value being defined as have we improved our operating performance? Yes or no. Not an unambiguous question. And/or have we strengthened your balance sheet? Yes or no. if we do that effectively and Aon has a value we are getting compensated for that in the context of what we we're doing with the clients beyond just the pure brokerage piece of the equation. So, we are candidly cautiously optimistic, in fact, very, very positive in terms of what we see the game plan evolving over the course of the next 12 to 24 months particularly when you think about we've just begun to really put in place the revenue engine that I described before and which we're understanding local markets position, we are understanding our pipeline. We are driving new products and ideas to the system as well as creating a system for client feedback, it's very much real time.

So, when you think about all those things come into play those are outside of the traditional lower... here's what happens to a broker in a soft market. Again I didn't... Aon is a place, it's not just an average brokers, it's got tremendous capability with untapped potential and really it's our obligation or the team's obligation to capture that. And we think we can do that very, very effectively in any market. By the way obviously the upside in a stronger market is particularly striking but even in the soft market it's actually quite positive.

Josh Smith - TIAA-CREF

And the two-third, one-third split, was that just for brokerage or was that for overall revenues?

Gregory C. Case - President and Chief Executive Officer

It basically... it's little bit more biased broker commission if you include everything on the consulting side but basically it's about what it is across all the brokerage.

Josh Smith - TIAA-CREF

Okay, great. And then one final follow up on the restructuring, when can you envision a period where you won't have to report adjusted margins and we'll just look at actual margins? I mean I think going through 2010 at this point with the current restructuring plans and I have to give you credit they've worked exceedingly well. But if you can't give me that, can you tell me roughly how much you are reinvesting or just give directionally how much it has to be reinvested and doesn't drop to the bottom line?

Christa Davies - Executive Vice President and Chief Financial Officer

Yes, so, Josh, our current restructuring plan for 2007 plan continuous through 2009. So, of the sort of approximately $360 million in charges that we expect throughout the program, we roughly forecast those to be $46 million in 2007, $215 million this year and $99 million next year. So that gives you a sense about how it's changed over time. And obviously that $360 million expense is expected to generate $240 million in savings on an annualized run rate basis and we do believe that we're on track to achieve those savings.

Josh Smith - TIAA-CREF

Okay. That's helpful.

Operator

Our next question from Meyer Shields with Stifel Nicolaus, please go head.

Meyer Shields - Stifel Nicolaus

Yes, thanks I have a couple of nitpicky questions and then one real one. I guess Christa, is 3 million shares per quarter the right run rate for issuance?

Christa Davies - Executive Vice President and Chief Financial Officer

It does differ depending on shares. It's around 10 million per share... 10 million per quarter on an ongoing basis... 10 million for the year sorry and. 3 million was a little higher this quarter really due to sort of incentives and things like that.

Meyer Shields - Stifel Nicolaus

And within consulting, were any of the small favorable issues that impacted the margin in the first quarter, are they going to be reversed in future quarters in 2008?

Christa Davies - Executive Vice President and Chief Financial Officer

They're not going to be reversed. It's more that there are a number of items sort of almost 10 that went in our favor in this quarter. It's not necessarily that we just don't necessary see that many things going in our favor in one quarter again.

Meyer Shields - Stifel Nicolaus

But none of them came from other quarters where we'll have low mid teens?

Christa Davies - Executive Vice President and Chief Financial Officer

No, it didn't.

Meyer Shields - Stifel Nicolaus

Okay. And then a bigger conceptual question I think for Greg. Obviously the international markets are growing faster. I guess economies are doing better and there's more insurance. Would it make sense to be making more acquisitions there to benefit from that?

Gregory C. Case - President and Chief Executive Officer

In fact, we actually are. As you think about the last 12 months or so, we have described on previous calls 20, I believe acquisitions and spent about roughly $0.25 dollars. Some of our most significant invest... or acquisitions have in fact been in Europe and across Europe. And we continue... we will make those acquisitions when they help us with our strategy. They improve our capability. They broaden our footprint and we will absolutely actively look for those and in fact that's probably been the best place. I would also say from people standpoint beyond just companies, we've also made very substantial investments across regions outside the U.S.

Christa Davies - Executive Vice President and Chief Financial Officer

The thing I would though in terms of use of capital and how we think about using shareholder funds is we do... our primary use of capital will be share buyback and that will set the bar that other uses of capital need to overcome for us to be thinking about spending on acquisitions, organic growth, or any other sort of use of capital.

Meyer Shields - Stifel Nicolaus

Okay, great. Thanks so much.

Operator

We have a question from Matthew Heimermann with JPMorgan. Please go ahead.

Matthew Heimermann - JP Morgan

Hi, good morning. I just had one left which was, can you just provide a bit more color in America's... specifically US retail about some of the products that helped offset the lack of private equity and construction this quarter? And I guess also would be curious whether or not the headwind you overcame, whether you overcame that with let's call it net new account growth or cross-selling?

Gregory C. Case - President and Chief Executive Officer

It really is back-up combination. First of all in terms of the other areas and this candidly again when I described the team's view, a positive view coming out of the quarter is really around all the things you are asking about. The underlying activities would suggest we can understand our position, take action, and change it. And so, we actually saw a significant movement in place like environmental which continues to grow very-very strongly, which is our technology platform, it continues to grow very-very positively and really in multiple places across the US. And it was really those two sectors which for obvious reasons driven by the economy went the other way. So really happened across the board.

I would also say that when you think about whether it was new business or a cross sell it was really a combination new, it was cross sell was also actions around renewal. So, one other thing that the revenue engine helps us understand very, very clearly is where we need to take initiative and actions to drive up retention and do renewal book analysis. And so it is a very, very micro view at the local market levels, almost at the colleague level if you will and it really is a combination of those things that allowed us to understand where we take action and improve it. And again that's... it's not even fully in place. But, as we put that, make that fully in place in the US and around the world, we feel quite good about what that's going to do in terms of coordinating Aon's global assets to be delivered in a very local personal way to clients.

Matthew Heimermann - JP Morgan

Okay. Thank you.

Operator

[Operator Instructions]. We'll go to Dan Johnson with Citadel.

Dan Johnson - Citadel

Thank you good morning. Let's see, on the Gallagher Re, would you mind giving us a rough thought about the size of the revenue that you acquired there?

Gregory C. Case - President and Chief Executive Officer

SureI think one of the thing Dan as you look Gallagher to it's a great example of when you - we just have so much scale analytically in this business, it just made this quite attractive for us. It was roughly $30 million to $35 million in revenue give or take. In 2008, I don't know how many folks Gallagher had in the business but they are quite substantial. We actually brought over 70 colleagues in the context of that and the what it's going to do is it's going to strengthen our presence in US accident and health and life as well as our capabilities in UK specialty and casualty. But, to us, it was a very natural kind of add-on to our re-platform.

Dan Johnson - Citadel

Great sort of. The 30 to 35 was what they had done last year or we are going to think they are going to do this year?

Gregory C. Case - President and Chief Executive Officer

It's roughly what we think we're going to be in 2008 what we think we are going to retain.

Dan Johnson - Citadel

Great and the next question would be in terms of the continued investment you make in the retail business can you talk a little about how of that the areas of interest how they have changed over the last year if at all and I mean that by geography, by skillset of people you are acquiring of industry focus, however, you want to answer that question please.

Gregory C. Case - President and Chief Executive Officer

Well it's a great question, the factors sort of where we live everyday, the profiles actually have changed and adjusted almost by quarter as you think about what we have invested. When you take a step back and look at ARS overall just to put in your context we've added lot of folks kind of in the core broking areas. We talked about environmental, we talked about technology, RiskConsole. We talked about construction it just a whole range of kind of the core brokering areas initially in the US now in the US or beyond the US we maintained a very substantial about some of our Affinity business, and our Affinity business is a $500 million had been growing very, very substantially with very significant margins that they very scale of our business.

So for as an example we've you know added 52 colleagues to be quiet specific got the roster in front of me in Latin America and across Europe in very clear places that we think we can scale the business and we that the margins that going to be its going to take about 12 months from the counter past but we feel very good about. So that... there is an example where we have changed. You saw it's a in the re insurance world really focused on a brand new area, new area we've already substantial in it in fact, but a new areas in terms of how we scaled up our capability when we invested on the fact side of re insurance and brought in while we believe to do the a fore most capability in the world on fact add to already substantial capability, so this is a little bit of rumple.

But you know we've got a very systematic way we look at it and your question is spot on. We do... this actually changes by, this actually changes by quarter as we track exactly who is coming in, the impact they are having, impact on margin, impact on revenue. And it has actually proven quite, as I said before, quite positive for us. And we feel very good about how these are going to pay off in the coming year.

Dan Johnson - Citadel

Great. Finally, for Christa, when you look at the expense saves that are projected in the 2007 program, roughly how much of that goes to brokerage? Thank you.

Christa Davies - Executive Vice President and Chief Financial Officer

: The majority of it really goes to brokerage. As you have seen from the consulting margin improvement today, they have largely completed their restructuring sort of programs. So you should see the majority of this impact in the brokerage segment.

Dan Johnson - Citadel

The majority definitely like 90 something plus?

Christa Davies - Executive Vice President and Chief Financial Officer

: Yes.

Dan Johnson - Citadel

Great. Thank you very much.

Unidentified Company Representative

Thanks, Dan.

Operator

And with no further questions in queue, I will turn it back to you, Mr. Case, for any closing remarks.

Gregory C. Case - President and Chief Executive Officer

We're in great shape. We just appreciate very much everybody being on the call. I just again wanted to offer a heartfelt welcome to Christa. Thanks for being on the call today.

Christa Davies - Executive Vice President and Chief Financial Officer

: Thanks, Greg.

Operator

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

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