Aon Corp. Q2 2008 Earnings Call

Aon Corporation (AOC)

Q2 FY08 Earnings Call

August 1, 2008, 11:00 AM ET

Executives

Gregory C. Case - President and CEO

Christa Davies - EVP and CFO

Analysts

Keith Walsh - Citigroup

Brian Meredith - UBS

Dan Farrell - Fox-Pitt Kelton

Meyer Shields - Stifel Nicolaus

Jay Gelb - Lehman Brothers

William Lu - Morgan Stanley

Chuck Hamilton - FTN Midwest

Keith Alexander - JPMorgan

Dan Johnson - Citadel Investment Group

Presentation

Operator

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

It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our first-quarter results as well as having been posted on our website.

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

Gregory C. Case - President and Chief Executive Officer

Thank you. Good morning, everyone, and welcome to our second quarter 2008 conference call. Joining me today is our CFO Christa Davies.

As I'd done in the last few calls, I'd like to cover three areas before turning the call over to Christa for further financial review.

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

To begin I want to say that from our teams perspective the results posted for second quarter 2008 represent another quarter of continued progress and momentum against our operating plans to build Aon. Irrespective of market conditions, regulatory challenges or other challenges outside our control, we continue to execute on our plans to substantially strengthen our firm.

On the first topic our performance versus commitments. As we do each quarter, we measure our performance against the three performance metrics we committed to our shareholders; grow organically; expand margins; and increase earnings per share.

Our operating plans are committed to achieving all three outcomes over the course of each year, not necessarily every quarter. Further, we said we would not sacrifice one of these metrics for another.

As I have already commented our results reflect quite simply a quarter of continued progress against our goals, spike soft market conditions globally, weak economic conditions in the U.S, and very strong performance in second quarter of last year.

Organic revenue growth was 2% overall, which grows across risk and human capital. Adjusted pretax margin decreased 20 basis points. But, if we'd excluded the $20 million of legacy litigation accruals in our brokerage segment, which really represents largely a clean-up of issues that have been around Aon for over a decade. The adjusted pretax margin would have increased 90 basis points, and brokerage margin would have increased 150 basis points to 19.3%. And finally, the third metric EPS on an adjusted basis increased 25%.

When you look at our results across the organization and compared to the industry, they represent meaningful progress from Aon colleagues around the globe who are working hard to strengthen a meaning position in risk advice and human capital management, as highlighted by recent recognitions. For example, analysts pointed out by business insurance is the number one insurance broker for 2008. And euro money is the best broker in the world, voted by clients.

On the second topic, for the areas in investment. As we have discussed before our team remains very excited about our industry. We believe long term, the aggregate level of risks continues to increasing 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 on April 1, we are solely focused on two of the most critical areas facing our clients today; risk advice and human capital management. During the quarter we continue to build on industry leading global capabilities with significant investments. A few example is include in retail brokerage we had a key hires in construction, and expanded our geographic presence in emerging markets such as China, India, and the Middle East.

We introduced new products to our clients such as Smart Drive, a safety program moving to cut accident frequency in half and improve loss control. In reinsurance we are already realizing benefits form our colleagues who recently joined us in the acquisition of Gallagher Re. And in consulting we had a key leadership in benefits businesses globally and emerging markets in Asia-Pacific. These categories highlight just a few of the investments we are making to further strengthen our capabilities and better serve our clients.

One key point as investors it's important that you understand these investments are being made in the context of our overall margins benefits. As we continue to build our firm we are moving inefficiency and costs from back office functions. Finance, HR, IT, to fund investments in client facing capability and simultaneously improving margin.

We can do this in ways other firms may not be able to just given the way we came together over the last 20 years. The key takeaway here is that we continue to make meaningful investments in our firm and remain excited about how our fundamental clients moving capability continues to strengthen around the world.

Finally on the third topic, organic growth. I'll highlight organic growth by segment for the quarter. In brokerage overall organic growth for the segment was 2% despite pricing that was down on average mid to high single-digits globally with substantially softer conditions in the Americas and reinsurance. Retention rates were 90% or better on average highlighting strong client satisfaction.

We also continue to see early benefits from investments in many areas such as faculty reinsurance and environmental. Strong double-digit growth in new business, in several areas across the firm including EMEA, Affinity, China, and Latin America. These results really reflect o strong performance when you consider a very strong results in Q2 last year.

It's truly gratifying to see our team coming together around the globe with a common client settlements [ph] platform and a single selling database, now deployed in more than 80 countries and covering more than 90% of our revenue. Our business leaders are more capable of engaging the colleagues and breaking down geographic and business boundaries to serve clients better around the globe.

Turning now to the individual regions across brokerage. In the Americas, organic revenue declined 1%. We saw continued strong performance in Latin America and in Affinity, and overall retention rates were very strong at 90% or better.

Our U.S. retail business continues to work through both soft market conditions and a slowdown in commercial construction and M&A related activity, as well as difficult comparisons from last year's record new business. So as you may remember Q2, 2007 represented a single biggest new business quarter in the history of our U.S operation.

Overall we believe our results in the Americas does not fully reflect the underlying strength of improvements we are seeing in productivity and collaboration across U.S. For example the total number of opportunities in the pipeline are up 6% driven by the efforts of our colleagues and implementing our revenue engine platform, and these efforts overall then would be offset in the near term by the slowdown in construction and M&A activity, which tend to drive higher revenue per transaction.

Coming to Europe, Middle East and Africa, another strong quarter with organic growth of 7%. Retention rates above 90% on average, really driven by our number one position in most of these markets. Pricing is relatively much difficult EMEA although still a challenge.

We saw a double-digit growth in emerging markets such as Africa and the Middle East, and solid growth across most countries in continental Europe. We're getting early benefits from employment of our revenue engine effort and local marketing campaigns. And we continue to invest across the region and in emerging markets.

In Asia Pacific Organic growth was 1%, double-digit growth in emerging markets such as China and Korea, with modest growth in Australia sowing through as well. These results were offset by continued weakness in a specific part of Japan around certain regulatory changes. We said have a set of initiatives that we're driving here and hope to have these features results by year end. Overall, solid platform of leadership positions in Australia, New Zealand, China, and across the region as we continue to invest in the emerging markets.

In the UK organic revenue increased 1%. We saw solid retention rates of 90% plus modest growth in our UK retail business partially offset by weaker trends in our network business.

On the reinsurance side organic growth of 2% driven by growth in both facultative and capital market transactions that close during the quarter. And we continue to win new business for treaty placements that were offset by higher seeing retentions in soft pricing.

Our colleagues in reinsurance continued to provide our clients with a unique and integrated solution on capital management. We're number one treaty, number one in facultative, and number one broker in capital markets, which is truly a strong platform to win and so do clients.

Additionally, on reinsurance I'd like to we're very pleased we have our new colleague from Gallagher Re rejoin us during the quarter enhancing our capabilities in U.S accident, health, and life markets along with enhanced capabilities in the UK specialty, casualty and FI business.

Turing mow to consulting segment. Overall organic growth was 2%. We saw a continued growth in our core services businesses of 3%, driven by solid growth internationally, in retirement and health and benefits. This was partially offset by a slowdown on our global compensation practices group, which reports the financial services sector.

In outsourcing we saw a modest growth in our benefit outsourcing business offset by a modest decline related to previously announced termination of a significant outsourcing contract. Overall a good quarter of progress in a consulting group.

In summary, as our team reflects on the results, quite simply, it's a quarter of continued progress against our goals. Despite soft market conditions globally and weak economic trends in the US, we are in a position of strength. With the industry's broadest set of globally on resources and capabilities, our colleagues are breaking down geographic and business boundaries to serve clients better around the globe.

We are reinforcing our culture that has been held accountable for performance as we fund substantial investments to drive long-term growth, while managing the expenses to deliver margin improvements. In short we are working hard to build on our leadership position with our clients and markets, and the team feels very good about our continued progress for the second quarter, and what all this implies for our prospects going forward.

I am now very pleased to turn the call over to Christa for further financial review. Christa?

Christa Davies - Executive Vice President and Chief Financial Officer

Thanks, Greg. Good morning, everyone. As Greg noted our positive momentum continued in the second quarter with improvement across our three key financial metrics.

We continue to invest in building our global capabilities, and we also believe that we are effectively managing capital as we return more than 1 billion of capital to shareholders through our share repurchase program.

The sales of both combined and stealing [ph] was completed on April 1. After-tax proceeds related to the transaction were approximately 2.7 billion, and a pretax gain of approximately of 1.4 billion was recorded in discontinued operations during the second quarter. This transaction represented a tremendous amount of great work by our colleagues and fully focused of our assets now and to the most important issues facing our clients today; risks and human capital managements.

Turning to continuing operations, EPS was $0.55 a share for the second quarter. There are several items that we have highlighted which we think are important to understand in the second core performance. First, restructuring charges in the second quarter was $53 million or $0.13 per share. Second, we recorded a total of $11 million of $0.03 per share for the previously disclosed review and compliance activities related to the Foreign Corrupt Practices Act, FCPA. Consequently, we reviewed the core our adjusted EPS performance for our continuing operations of $0.71 a share, up 25% over the prior year quarter.

Also included in the results foreign currency translation had a favorable impact to approximately $0.06 per share as the U.S dollar declined against most major currencies. Lastly, we recorded an unfavorable impact of $20 million or $0.05 per share related to litigation accruals in our brakeage segment.

Before turning to the business segments, let me spend a moment on the 2005 and 2007 restructuring programs. Key initiatives that are enabling concurrent funding of investment, and delivering meaningful margin expansion. Related to the 2005 program, we incurred no charges in the quarter and the actions necessary to generate the savings are complete.

We achieved approximately $11 million of incremental savings in the quarter versus Q2 '07, and on schedule to realize that $270 million savings target in 2008, which would reflect incremental savings of approximately $45 million for the full year 2008 compared to 2007.

With respect to the 2007 restructuring program we incurred $53 million of charges in the second quarter primarily related to workforce reduction in EMEA and the UK in our brokerage segment.

We achieved approximately $16 million of savings in the second quarter, and are on track to achieve about $50 million to $70 million of savings target in 2008, $175 million to $200 million of savings in 2009, and $240 million of cumulative annualized savings by 210 before any potential reinvesting. Page 12 of the press release provides our usual quarterly update on this program.

Turing to the segment. Adjusted brokerage pretax income increased 10% to $295 million. And adjusted pretax margin improved 30 basis points to 18.1% including the previously mentioned $20 million litigation expense accrual. Had we not incurred this expense in the quarter pretax margin would have increased 150 basis points to 19.3%.

Expense discipline in a challenging processing market is even more critical as we continued to invest significantly in growing our capabilities. As you can see from the press release total operating expenses for brokerage increased $133 million quarter-over-quarter almost entirely accounted for by $65 million of foreign currency translations, $28 million increased in restriction costs $20 million related to the litigation accruals, and $11 million to FCTA and related compliance activities.

Excluding these items core expenses were up modestly versus the prior quarter as the inflation we're pushing our core expenses were largely offset by benefits related to restructuring programs and ongoing expense initiatives.

Turning to consulting. Adjusted pretax income decreased 2% to $47 million and the adjusted pretax margin decreased 80 basis points to 14% in the quarter. As we commented in last year's conference calls Q2 '07 included a $5 million gain recorded in revenue related to the sale of an equity investment. How [ph] we adjusted for the gain in the prior year quarter pretax margin on our underlying business would have increased 60 basis points.

As you can see from the press release total operating expenses in consulting increased $13 million quarter-over-quarter almost entirely accounted for by $11 million of unfavorable foreign currency impact. Absent the impacted FX consulting expenses were up modestly reflecting solid expense management, product gains, funding investments in colleagues and capabilities to drive future growth.

Overall our expense initiatives continued to manage the inherent inflation we push, and the investments we're making in the business with a net effect driving margin improvement. As Greg said we're committed to margin improvement over the course of each year not necessarily each quarter. I'd note that the total pretax margin for the first half of 2008 is up 80 basis points to 15.7% compared to the prior year first half.

Finally turning to the unallocated section. Unallocated investment income for the quarter was $17 million, a decrease of $12 million from the prior year quarter. Primarily reflecting $26 million dollar decline in distributions received from our PEP securities. Partially offset by a high interest income generated from an increase in cash balances. Distribution related to PEP securities a subject to complete the transactions in the underlying portfolios. As we've said previously, these distributions are entirely uncertain in timing.

Going forward we would anticipate potential quarterly distributions of approximately $5 million as we monetized the unrealized gain overtime. We realized there are lots of moving pieces in the unallocated sections, as we manage the volatility in our PEP securities and the balance of cash against that share repurchase program.

We will continue to anticipate a loss of $50 million to $55 million per quarter, similar to the loss of $52 million in the second quarter. The effective tax rate on continuing operations was 25.7% in the quarter as compared to 34.9% in the prior year quarter. This was primarily due to the favorable resolution of prior year taxes in the UK.

For 2008, we anticipate that the effective tax rate on continuing operations will be 30%, as compared to previous expectations of 30.5%, due primarily statutory rate reductions and changes in the geographic distribution of income.

During the second quarter, we reported approximately $24.5 million shares or 1.1 billion of common stock. As of June 30, the company had approximately 1.3 billion of remaining share repurchase authorization. Shares of actual common stock outstanding at the end of the quarter decline $21 million to $278 million at June 30, compared to $299 million at March 31.

Cash and short term investments were approximately $3 billion at June 30. The U.S cash pool available for media and corporate use was approximately 1.8 billion reflecting assumptions the estimated tax expense related to the insurance underwriting transactions and cash balances that are restricted or held by international business units.

Total debt outstanding at June 30, was 2 billion and debt-to-capital was 23.9% reflecting a solid balance sheet with significant financial flexibility regarding capital allocation.

As we have discussed before, capital allocation decisions are driven by a risk adjusted return-on-capital process. For potential uses of capital that may include, share repurchase which continues to be our priority, acquisitions such as Gallagher RE, pension plan actions focus on reducing volatility, and other uses such as debt reduction and dividends.

In summary with the competed sale of our insurance underwriting business, we've positioned our portfolio to focus on through the most critical issues facing clients today, risks and human capital management. We continue to drive results against our key financial metrics in a challenging environment.

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 will turn the call back over to the operator, and we would be delighted to take your questions.

Question And Answer

Operator

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

Keith Walsh - Citigroup

Hey, good morning, every body.

Gregory C. Case - President and Chief Executive Officer

Hi, Keith.

Christa Davies - Executive Vice President and Chief Financial Officer

Good morning.

Keith Walsh - Citigroup

Just first for Greg couple of questions and then I've got one for Christa. Your competitors over Gallagher RE we're talking about how.... pricing has been a problem, but also the slowing economy could be something that they could see impacting the top line for them. May if you could comment on that, and then may be just a follow-up with the new business of wins to losses I know you talk about that in the past how was that running still?

Gregory C. Case - President and Chief Executive Officer

Sure, Keith, you reflect on kind of the overall headwinds that are being talked about by most around the industry obviously one is being discussed is around the soft market or the pricing side, and which is true and continues and then from an economic standpoint as we talked a little bit on the last call we do see the economic or economy having impact on our business overall. This is a couple of examples in the private equity side, which we were very involved in on the construction side. These areas in which we see our clients suffering frankly and that impact us, and it will continue to impact us. The good news for Aon is, we are global firm, in many respects about hedge about as well as you can possible be from an economic standpoint, but overall we have... we shared very well, and the teams been able to understand our situation very active, which I mean feel incredibly proud and this quarter highlights that. But it should be clearly understood that the economic situation, the economic pressure is real impacts our clients in many, many ways and it is impacting our business.

On you second point on the wins and losses, as we continue to put in place our revenue engine and what we are doing on our client leadership approach. This continues to survey on incredibly well, and our win, loss ratio continues to be at year-to-date 2:1. We continue to do very well against competitors and our candidly quite excited about the potential it could look like as we continue to put things in place that are focused on our clients, again this is lots of our competitors and very much about our clients.

Keith Walsh - Citigroup

Great, Greg. And if I could just follow-up with Christa, you know you kind of alluded to the return on cash in three buckets that you typically look at. Has M&A become more attractive with the New York Attorney General Amendment that allows contingent commissions for three years is that sort of change the dynamic a little bit? Thanks.

Christa Davies - Executive Vice President and Chief Financial Officer

Keith, it hasn't really changed that sort of focus at all. We really have continued to do sort of $200 million to $300 million in acquisitions a year. We expect that sort of trend to continue. Year-to-date it was on a little over $60 million acquisitions, primarily in the brokerage segment and primarily in international growth. And we sort of continue to see acquisitions falling in sort of three buckets that I have mentioned before. The first bucket is around sort of specialist acquisitions, sort of deep [ph] specialties around say construction or environmental or particular types of risk. The second is sort of geographic expansion for us, so we are sort of acquiring lot in International as I mentioned. And the third is around specific teams and Gallagher RE acquisition are great example of that.

Keith Walsh - Citigroup

Great. Thanks a lot.

Gregory C. Case - President and Chief Executive Officer

Thanks, Keith.

Operator

And next to line of Brian Meredith with UBS. Please go ahead.

Brian Meredith - UBS

Hey, good morning. One for Christa and one for Greg here. Christa first of all on the unallocated expense income area, I think last quarter you said that you expect $50 million to $55 million excluding the income coming from the combined acquisition. I'm wondering if that's what you're implying here with your guidance or have expenses actually increased in the area as your guidance actually different now?

Christa Davies - Executive Vice President and Chief Financial Officer

Yeah so our guidance last quarter as you mentioned was $50 million to $55 million and we continue to expect that guidance for this sector. Really the impact of this quarter it's been around 10, which I mentioned was $26 million in income in Q2 '07 and zero in this quarter, and that is an extremely sort of volatile on area of in terms of timing not in terms of the absolute value of the portfolio, but just in terms of the timing of distribution. In terms of unallocated expenses, if I just went through the three main buckets in unallocated we expect unallocated revenue to be around $50 million a quarter, unallocated expenses to be around $33 million to $35 million a quarter, and interest expenses to be around $33 million a quarter, those reapings adding to $50 million to $55 million a quarter.

Brian Meredith - UBS

Okay, so it has change though from last where you are basically deducting the combined insurance investment income from that 50 to 55, miss now you're not?

Christa Davies - Executive Vice President and Chief Financial Officer

Yeah that $12 million of income from the combined transaction is not included here.

Brian Meredith - UBS

Not included, okay, so I got. So going forward it's actually the next couple of quarter should be less than $50 million to $55 million because you have been income coming combined?

Christa Davies - Executive Vice President and Chief Financial Officer

No, so we do expect this particular sector to be $50 million to $55 million going forward.

Brian Meredith - UBS

Okay, all right we can talk about that offline. Just back to next question, Greg, can you talk about what's going on with fees and commissions rates, can you talk about how your clients were having a tough time. Is it tough to get fee increases and commission rate increases given that environment?

Gregory C. Case - President and Chief Executive Officer

Listen, Brian it is.., if you just take a step back and think about the overall conversation around commission lift, compensation which is really what I think you're asking about.

Brian Meredith - UBS

Yes.

Gregory C. Case - President and Chief Executive Officer

From our standpoint, look we view this within the context of our overall strategy around how we think about compensation and it all comes back to frankly of last year our client leadership, what we do and our strategy as we talked before and will continue to emphasize, it is objective around delivering the highest value. And that's the conversation we are having with our clients by the way, that doesn't change, no matter what the current pricing environment is and it really is around delivering the highest valued price in any one in our area period. So if you think about what we are able to deliver, we're able to bring it to the table, it's just should be, can be and will be different no matter if we're going to be able to do. And our view on compensation starts with making sure, our clients understand that, appreciate that and then we have the dialogue on how we get further compensated for those. Candidly the opportunity here for us is multi faceted, first I got after lot about commission list, the first opportunity for us is really just getting paid for what's being agreed to. One of the great things about bringing together the ARS organization under the leadership of Steve McGill and Ted Devine is going incredibly well. We used to have multiple negotiations with markets around what should we get paid, maybe 80, 90, or 100 around the globe now we are having two or three, the very different approach to how you think about actually just getting paid for what's already been committed against an existing rate. There is an tremendous amount of opportunity there which is literally just executing on what's being agreed to and then we're appropriate we're also making sure that we are increasing compensation and having the conversation on how secure increases were it makes sense and you know if you just applied the kind of the clinical fact based analysis here you look at contingence, which is obviously subject for heating debate now as we think about what's going on last month. You know, contingency in our industry have gone up over $1 billion so post, which is stunning when you think about the overall context of the environment. And in that regard as we sit down and talk to carriers and we talk to clients, it's actually a very straight forward conversation we talk about what we are providing, what's happening in the market and what's fair us. Fact [ph] it's working very well we are still early days in it and the impacts in the quarter is meaning full, but it will be much more meaning full in 9 and 10, I think finally we are talking to both carriers and clients about getting reimbursed and paid for services we provide to them and we provide significant service to clients and carriers around delivering sort of IDE's go into collections policy issuance etcetera. We've got a model for getting paid for this in the UK, and we are talking the carriers about it outside the UK and actually that was some very good success. So for us it's continues to be buy an early days as we have this conversation but it's not about a one half give us a commission list its very much around a philosophy on how we think about our strategy of pricing our services so that our clients walk away and say wow we actually got the highest value for price from our risk advisers in anyway around the world.

Brian Meredith - UBS

Great, thank you.

Operator

Our next question from Dan Farrell of Fox-Pitt Kelton. Please go ahead.

Dan Farrell - Fox-Pitt Kelton

Hi, good morning.

Gregory C. Case - President and Chief Executive Officer

Hi, Dan.

Dan Farrell - Fox-Pitt Kelton

Can you talk a little bit about your investment in the brokerage business you alluded it somewhat but, you've achieved 150 basis points margin improvement well let seem at the same time you're investing heavily in the business, can you quantify what impact that investment might have or if you can't give specific numbers, can you talk broadly about your philosophy going forward, because it was seen that with your expense savings coming through you have a lot of underlying improvement in the earnings if you choose to let it float through the bottom line?

Gregory C. Case - President and Chief Executive Officer

Dan, this is a great question, I am glad you raised it. It is really the heart of what we talk about all the time in terms of how we lead our business and it comes back to what I described and Christa described around our three core objectives: organic growth, margin improvement, and EPS growth and we're committed to all three of those while we invest in the business and what I described before is just a unique franchise called Aon that actually has incredible capability but also just given how we have grown up, tremendous opportunity to shift costs from colleagues who don't face clients everyday and if they're very significant great colleagues but they don't spend time with clients everyday to a group of colleagues who do spend time with clients. So think about two or three years ago what we dollar spend we spend roughly two-thirds of that were close clients facing and the third was non-client facing. The third is the clients who are non-client facing by the way our phenomenal folks but in overall professional services that tends to be more like, 15%, 20% of that number. By the way it is just how we grow up it just and by the way we couldn't have grow up any other way. It just represents the big opportunity for us and what we've done is we've actually been reducing the cost to non-client facing shifting it in the client facing and at the same time improving margin. And that's actually that's something that's actually quite unique we believe that Aon and some that obviously require real discipline and resolve in the current environment as Christa described. We are quite understanding that our investors, are uncomfortable when they think about near-term real costs that have one to three year pay backs in terms of bringing colleagues and then ramping them up, but understand we're really, we are building our firm and the fact that we can both invest heavily and improved margin as we believe a tremendous advantage. I mean we haven't historically quantified exactly. Maybe at some point in future we will start here we can lay this out but in the investment areas have been around construction, Affinity, Middle East, China, Christa talk about Gallagher Re of course in the America is around construction aviation Affinity in EMEA number of different teams and initiatives In APAC, in the UK, we've talked about fac in capital markets, but when you think about the overall context, I just pick one example the US, the headcount in the US has gone from close to 1,400 colleagues in January of '07 to closer to the 4,100 colleagues and you know, currently that's a decline of 14% when you think about it Dan. And in that contracts we still added hundreds of new colleagues in key sectors that I've just described. So it's really for us a dedication about improving the operating performance as well as building our firm for the long term.

Dan Farrell - Fox-Pitt Kelton

Okay, great. Thank you. And then just one additional question just want to talk a little bit more about the North American business, your negative 1% organic, in your view it looks like it was a very difficult comp in the year ago period number one and it's often difficult with some of the disclosure to get a sense of this but do you feel in your opinion that you're gaining share in your sort of brokerage business in North America?

Gregory C. Case - President and Chief Executive Officer

Yes,I think Dan our team and our group feels very good about it where we are and that would described when you think about Q2 yes by the way we had an incredibly difficult comp, but by the way we can apologies for that, they're just great. We open up a lot of difficult comps going forward. There is soft price and there is for everyone and that's not an excuse for us and shouldn't be as the economy, we just have to work through all that, that's where we trying to build our firm. What I would say we were most excited about and I'll just think about actually beginning of brokerage overall is not that we grow organically and we're never going to get excited about low single-digit growth irrespective of whether its industry leading or not, it doesn't matter, with what we are excited about is really what we are building and what we are starting to really get put in place. So if you think about just pick a couple of things on the revenue side, what we've done with the revenue engine and that's the client tracking tool going from 30 selling systems to one now covering 90% of our revenue which got a local market analysis portion to it pipeline analysis new product innovation, client feedback, that revenue engine piece is really been a foundation points that's going into our firm it is just beginning to start to take hold it's about 75% complete in Americas, maybe 50% complete in EMEA, 50% in UK, maybe 25% or 30% in APAC so it just coming into real being in terms really driving our performance and it's helped us a lot in the second quarter. You put on of that what we've done with the global ARS structure under Steve McGill and Ted Devine leadership, which is working very, very well, it's a very powerful combination of structural move plus the revenue engine puts us in a very good place and we look at it overtime. So that combination has led to productivity increases per colleague, 10% plus income, improvements for colleague over 20% plus all that's good but form our view we are just beginning to scratch the surface. If you think about how that approach has been tested the second quarter flows was a great test once that you said in the soft market and tough economy and the tough comp quarter in '07 but the team really stood that test. And if you imagine in the U.S that in addition to that tough comp quarter we were also, we also saw he economy take hold around M&A and private equity, as well as construction really held that very well.

In the US, new business production remains strong and as I said before that deal count for us, the number of situations closed was actually up 6% over that very strong quarter in '07. The win rates against competition as I answered before had very, very strong. Deal size is down a bit because of the there are as many big deals in private equity in construction, but the challenge really for us has been in two or three offices driven by those two sectors I talked about, so it really is something from our view we feel very good about the foundation has been build. We feel very good about what's on the right in for us and we want to just keep pushing forward, by the way if you take the platform I just described and you add on top of it, the investments in colleagues that we talk about from the previous question, we kind of like that formulae.

Dan Farrell - Fox-Pitt Kelton

Okay, great that was very helpful. Thank you.

Operator

Our next question from Meyer Shields with Stifel Nicolaus. Please go ahead.

Meyer Shields - Stifel Nicolaus

Thanks. Good morning, everyone.

Gregory C. Case - President and Chief Executive Officer

Hi, Meyer

Meyer Shields - Stifel Nicolaus

One of the comments made at the New York is about this, for transparency between, in terms of what brokers pull-in from the client from contingent commission, and there is no real economic difference between the brokers that collect contingence and those are don't. And I think that's very valid comment, but what I am wondering is, can you quantify or give us any understanding about how big is this that just like you face now because some of your competitors don't have full disclosure?

Gregory C. Case - President and Chief Executive Officer

I want to make sure I understand, Meyer, the first point you made I think was that in your view there is no, could you just restate the first point that there's no difference in compensation?

Meyer Shields - Stifel Nicolaus

No, nothing, there's no difference in compensation but economically if there is full disclosure, then it shouldn't matter whether the broker collect contingents or not, client understands everything?

Gregory C. Case - President and Chief Executive Officer

Got you. So, On the New York's hearings first obviously we applied the fact that the New York State Department Of Insurance and New York Attorney General can being hearings to talk about these important issues and how the industry frankly can serve clients better and that really is what this all should be about, it's clients. For us, it's certainly, we focus on clients, it's not about the brokers, it's not about the carriers, and it's about clients period. But there really are two very specific points, you're touching on both on them. It'd, frankly from our standpoint; we want to make sure we keep them separate. One is the client's right or benefit to understand who's working for them, what they're paying and for the service they get which is transparency point you're making.

Then the second one is around former compensation, you know, a level plain field, whether you've contingents or not and supplemental and whatever you want to say. And for us as Steve McGill I think very ably put it, he testified on our behalf. The arguments were transparency are the number one issue for us. They are clear, they're compelling, they're obvious. You really essentially saying, should a client know who the producers [ph] working for? Are they working for them or are they working for, as an agent, for insurance? By the way, both models are fine but the client should just know. The agents are great. But are you and agent or are you a broker? By the way, they should also be able to try to figure out whether you understand what insurance does that producer approach to meet their needs. One, multiple, by the way both our fine answers but client should have the right to know that. Third is, how much the client will pay? If you think about it, we're actually having, in some reflection you kind of it's amusing, revenue conversation or is it okay for the client to know what they paid. That's interesting, but for us... we don't understand inside of the argument. And finally, how much the producers for compensating. So from our standpoint I think you hit it on the head, transparency on these issues means clients are going to better served and that producers, frankly to add value are going to do great and producers they don't, won't. And you can ask for a better trade in that, that's what professional services is all about. And from our standpoint, transparency goes a long-long way toward helping clients beside. How they should have all. Not regulators, or not brokers, or not insurers.

Meyer Shields - Stifel Nicolaus

Okay. That's very helpful. Do you have any sense as to the magnitude of how much you've lost there over that couple of years is that transparency?

Gregory C. Case - President and Chief Executive Officer

Yeah. I would listen, or I would say is the following, and again I think none of these arguments should come back to sort of where Aon. We essentially, by the way my very short 10 year at Aon a little over three and half years. I have never known contingent commission. I came here after [indiscernible] so fine. And we essentially went to work and said let's go to our client value. But there should be no allusion post picture [ph] post 2005 contingent commissions went by $1 billion, so take that billion dollars and then you add to that whatever you think went away from Aon margin will us and the carriers basically paid something like $1 billion plus more to smaller brokers than they had before. So I would just start with the number that starts with $1 billion plus as a fact based by the way this out of Aon best [ph] it's not Aon analysis it's out of Aon best in terms of sort of a very large number that sort of a carriers have increased and in terms of the impact for us we are not going to speculate we are just going to go forward and serve the clients.

Meyer Shields - Stifel Nicolaus

Okay, that's helpful. And just a couple of small I guess nip the key question in the first quarter you disclosed how much you'd repurchase in the first month of the second quarter I guess for I was wondering how much... how many shares you have been purchased in July is that number available?

Christa Davies - Executive Vice President and Chief Financial Officer

Yeah, Meyer we are not going to do that going forward. It actually to be frank cause a lot of confusion so what we are going to do is report what we do in the quarter and that was 24.5 million shares, 1.1 billion in the stock and what we are going to do is got going forward report exactly how many what our share count is as actual very or as at the last end of the quarter so you can actually reflect that as starting point of few model.

Meyer Shields - Stifel Nicolaus

Okay, and looking forward is it if 30% of fair tax run rate for 2009 as well?

Christa Davies - Executive Vice President and Chief Financial Officer

Yes it is.

Meyer Shields - Stifel Nicolaus

Okay. Thank you very much.

Operator

And next question is from Jay Gelb with Lehman Brothers. Please go ahead.

Jay Gelb - Lehman Brothers

Thank you, Greg what point do you does Aon reaching tipping point in terms of land expenses fall to the bottom line to a greater extend then being offset by new investments?

Gregory C. Case - President and Chief Executive Officer

Jay I think you are really asking a couple of questions there I'll start with the fundamentals how much opportunity we continue to have to drive efficiency across Aon and I would say we actually continue to have a lot of runway there, Christa had describe the second restructuring that is underway you saw the first restructuring which is primarily focused on the UK and the U.S. The second restructuring is primarily focused on Europe a little on the U.S, and there is a lot of opportunity for us to continue to shift that I talked about before expense from non-client facing the client facing which by the way fund substantial investments and as I said before allows us to improve margins. But you also heard at the outside and by me and repeated by Christa, we're going to grow organically, we're going to improve margin and we're increase earnings per share and I want to that every year that's our commitment. So I'm not going to... can't tell you exactly when the tipping point occurs, it all lots depend on how our investment involve, how we do etcetera, but we're positioning our firm and we believe for tremendous potential. We're not trying to maximize any one of those in the near term but for tremendous potential overtime 9, 10 and beyond. And in the near term though we're absolutely going to achieve the three that I just descried, the three metrics I described and we've also the only other piece of insight we've given in terms of our views is that we've obviously got to be north of 20% margin.

Christa Davies - Executive Vice President and Chief Financial Officer

Jay the other perspective I give is with respect to the 2007 program we have substantial run way to go in terms of saving. we're on track to generate $50 million to $70 million of savings in 2008 but a $175 million to $200 million of savings in 2009 and $240 million of savings in 2010. And so we've got pretty close to $200 million of incremental saving to Gallagher Re in that one program itself and there's obviously other expense initiatives going on outside of restructuring.

Jay Gelb - Lehman Brothers

Right, I understand that I think one of that the difficulties we have in modeling is how much of that is going to be reinvested versus drop to the bottom line. And then for that 20% margin Greg, is that just in brokerage and when do you expect to achieve that by?

Gregory C. Case - President and Chief Executive Officer

We have talked about it been Jay in brokerage and we have not talked when. We just said when it would be comfortably about 20% and from a modeling standpoint I apologize we are not helping you with your modeling as we are trying to shape the firm, but and we can, my guess is I do not know what the right benchmark is maybe there is a, there is a going to be a substantial number that drops in the bottom line obviously it has been a substantial number and when you think about overall improvement, but if you wanted to pick a number from a modeling standpoint, pick 20% from an investment standpoint.

Jay Gelb - Lehman Brothers

Of the expenses?

Gregory C. Case - President and Chief Executive Officer

Yes.

Christa Davies - Executive Vice President and Chief Financial Officer

Yes.

Jay Gelb - Lehman Brothers

All right that's helpful. Thank you.

Operator

And next from the line of Jay Cohen with Merrill Lynch. Please go ahead. Jay Cohen, your line is open, please go ahead. And we'll move onto Bill Lu with Morgan Stanley. Please go ahead.

William Lu - Morgan Stanley

Thanks for that. The economy is being touched on the, I guess in different ways during the call, but more directly what segments to the economy as you have, and I am thinking of the U.S economy for a moment, as you evaluate your business growth opportunities and exposure to the economy. What segments do you, should we focus on, do you focus on most I guess you talked about construction and financial institutions, but just holistically what segments of the economy are most clear [ph] in the radar screen?

Gregory C. Case - President and Chief Executive Officer

Bill for us, again part of the beauty of the Aon is, Aon just given what we do, given the amount of risk we move over $50 billion that on the retail site, plus we do on the reinsurance side. We literally touched about sector of the global economy. We certainly touch all the geography and basically every sector so what happens is some sectors are affected more or less, we've highlighted a three areas that two I will highlighted third that really had impact on our business in this quarter, private equity we talked about M&A, construction we talked about although that's got its offset as well when you think about what's happening outside the U.S, but construction services inside the U.S and then financial institutions, we have number of businesses which touch financial institutions and our financial institution clients by and large are suffering may be it's economic but there maybe some other things as well but those three areas in particular are three that we are... we have a very good understanding what we are reacting to. And again the message I would again highlight is what we'd like about what we are doing now is with the global operating committee come into together to talk about how we operate and we prioritize around the globe. And the revenue engine that is in place it helps us understand exactly, literally exactly what's happening around the globe by sector, by product, by new, by renewal, by client it gives us a say very, very strong platform upon, which we can react. And so those are the three areas were impacting us probably the most right now, but more important than what's hitting us, more important than what that is what we can do about it and how we can actually resign the prioritize resources to actually continue to grow and build our firm and capitalize on opportunities faster than we ever have before.

William Lu - Morgan Stanley

Thanks for that, you are speaking to an understanding group on financial institutions I suspect.

Gregory C. Case - President and Chief Executive Officer

I am aware of that.

William Lu - Morgan Stanley

I guess for Christa question, I am aware we are being able to say what the specifics are or even the timing, I thought I remembered making a mental note that there were changes coming were absolutely as proposed changes in the UK pension accounting or perhaps it was a funding of the UK pensions. I don't recall the specifics. If I am right maybe you know and could whether there is anything on the near or medium term horizon that our UK pension changes are concerned?

Christa Davies - Executive Vice President and Chief Financial Officer

Yes. Look, we obviously report our pension liabilities and expenses on the U.S GAAP basis. And sort of the extent that there are changes in the way UK GAAP reflects our pension accounting that actually dormant impact the way we report out sort of pension, expenses or liabilities.

William Lu - Morgan Stanley

Great. So the changes after all, whatever those changes may be wouldn't affects funding of the economics of Europe?

Christa Davies - Executive Vice President and Chief Financial Officer

Yes. Not, necessarily.

William Lu - Morgan Stanley

Okay.

Christa Davies - Executive Vice President and Chief Financial Officer

And obviously we are monitoring all legislations in the UK and we'll continue to sort of update you as if it comes material.

William Lu - Morgan Stanley

Very good. Thank you.

Operator

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

Chuck Hamilton - FTN Midwest

Good morning. Thank you. A couple of quick questions I guess the first one where we trying to assess the cost base which increase this quarter perhaps more than we expected we are looking at the one-time expenses and particularly the legacy litigation accruals can you give us some flavor Greg or Christa in terms of whether or not we can view this as a one-time thing what is it really reflect, and is there some underlying issue that we should be building in for future expectations.

Christa Davies - Executive Vice President and Chief Financial Officer

Yes, Chuck it was, it's accruals related litigation that's almost a decade all as Greg said we don't expect this trend to continue which is why we have sort of describes the magnitude of us. We haven't adjusted for it in asset of schedule on page 11 because we are very careful about adjusting our results for really just extraordinary asset, but it's not something that I'd be particularly concerned about to follow you.

Chuck Hamilton - FTN Midwest

Right.This is reflect the cases that are currently being litigated or is currently the settlements or just communications before you even get to that point?

Christa Davies - Executive Vice President and Chief Financial Officer

Yes. It is cases that are obviously ongoing. We don't really want to sort of go into a whole lot of detail about it to be perfectly frank.

Chuck Hamilton - FTN Midwest

Okay. And I guess the second expense item calls comes to the Foreign Corrupt Practices Act, I see that we had seen $11 million in quarter, $25 million year-to-date. How long does that timeline go on, is that 2008 issue, is that going to extend to 2009? What does that cost base look like for us?

Christa Davies - Executive Vice President and Chief Financial Officer

Yes. So obviously we're incredibly committed to the firm to ensuring that our governance implies for stages for stain [ph] and we view the improved compliance environment and putting in places leading edge in the industry. In terms of the timing we're hopeful that we can conclude this the majority of this by the end of 2008. But as you know these matters are inherently uncertain. So we would sort of expect this kind of trend to continue through 2008.

Chuck Hamilton - FTN Midwest

Okay,great. Thanks for your answers.

Operator

And next in line of Matthew Heimermann with JPMorgan. Please go ahead.

Keith Alexander - JPMorgan

Hi, this is actually Keith Alexander. Good morning. I just got a couple of questions. One, I wondered if you can talk about what your reinsurance brokerage margins look like or growth look like excluding capital markets and facultative?

Gregory C. Case - President and Chief Executive Officer

Sure, we'll talk to the growth we don't talk about the margins. We talk about the overall brokerage sector, but on re, first really glad to raised re. Our colleagues have done a phenomenal job in this sector. Obviously under tremendous pressure, given the overall market pricing environment and what our clients are facing but they've just done a great job. Part of the reason around it, it's just how they approached the market and the integrated capital solutions approach is actually for us been quite powerful. a lot of folks can talk about it, but given our position is number one in treaty, number one in fac and number one in capital markets supported by really world-class and capability, it's a very unique platform and as our proposition has helped us win a lot of new business, retain a lot of business on the treaty side, as well as support the efforts of the fac side and on the capital market side, and you saw that in the quarter. We had I think a strong quarter given the headwinds and progress across the board, the fac investments we've made have been phenomenal in terms of reacting the client need as retention have gone up, the clients have really look for ways to pull out specific risks. We've got a global fac network which is one of a kind and it's actually been very, very powerful in terms of meeting client needs and very successful for us, and we actually believe that's going to continue and have tremendous opportunity to continue to built that platform. And on capital markets tremendous group of colleagues here who've done some great work both on the cash balance side, as well as on the M&A side and really classic investment banking side, and well capital markets remains very small amount of the overall picture right now we're very hopeful that's going to look like going forward.

Keith Alexander - JPMorgan

Okay. And my next question is actually about the hearings in the New York. I just wondering what you expect in terms of the next steps and then what do you expect actually be the results of this hearing?

Gregory C. Case - President and Chief Executive Officer

The results of this hearings I must tell you Keith I can't predict exactly where the insurance commissioner and attorney general are going to go. They have committed to us they're going to take in the consideration the input from all three of the hearings and get back in terms of what this should look like, but from our standpoint we are very hopeful that the one piece that almost have to come out of this or one would expect to come out of this is the whole area around transparency I was describing before. Again clients essentially declaring the clients of right in whole what somebody is doing for them and what you are getting paid for. It seems like, a very sound expectations but beyond that I really can not speculate.

Keith Alexander - JPMorgan

Okay all right, thank you very much. One last question did you, did Aon benefited all from the distraction really for HRH [ph] in the quarter. I know they reports that we have lowered growth results and people are expecting and I just wondering if that impacted you win March ratio at all?

Gregory C. Case - President and Chief Executive Officer

I would say we are not obviously going to speculate around HRH. We wish him the best and sure will be a fine out come. Our focus will remain steadfastly on our clients and our collogues and we didn't see much impact as that began to unfold.

Keith Alexander - JPMorgan

All right. Thank you very much.

Operator

The next question is from the line of [indiscernible] Investments. Please go ahead.

Unidentified Analyst

Thanks very much, Greg if I could take a couple or lot of questions that the contingent commission hearings going on in New York, why they went on New York. On quick question do you have any guess us to when the timing might be when the decision might be announced?

Gregory C. Case - President and Chief Executive Officer

We actually don't know, it wasn't made available to us and again if you think about we've got an opportunity to spend 20 minutes in front of the group, and provided a perspective we'll obviously we stand and ready to provide any backups support that anyone would need, but at this point we actually don't know what their time table is going to be.

Unidentified Analyst

I only had a question that, if you care not to speculate I certainly understand but what would you think about the following, is there any possibility in your mind that the end result might be that, when acting as an agent that contingent commissions are involve when acting as a broker they are not, is that some that you think? Is that you can't alluded do you think or is it that something that the regulators might choose to do and if so, do you think that your IT systems can handle that, that sort of differentiations?

Gregory C. Case - President and Chief Executive Officer

Yes, I think I would.... this is really going to about our clients. And that's how Aon is going to think about it. Our IT system etcetera will be fine, but it really is about our clients. And as I said, I really can't speculate on the direction it's going to go. The overwriting macro point that we keep pushing for is just around many clients know what's happening being transparent. As you would expect in any business that you would say to the client, here is what I am doing for you, here is what I'm getting paid to do it. Here is how I am doing it. And so, that's really our hope more than anything else out of it that sort of we come out of that level. We can't really speculate this what they're going to say.

Unidentified Analyst

That's fair enough. Thank you.

Operator

And the line of Dan Johnson with Citadel Investment Group. Please go ahead.

Dan Johnson - Citadel Investment Group

Hi. Thank you and good morning.

Gregory C. Case - President and Chief Executive Officer

Hi, Dan.

Dan Johnson - Citadel Investment Group

Hello. Two questions for you please. Can you recall which quarter did we start to see the private equity/construction/FI weakness was it the first or was it even earlier back in '07.

Gregory C. Case - President and Chief Executive Officer

Back in '07 I could actually saw quite clearly that it was actually quite strong through the second quarter 2007 and then the declines happened in the third and fourth quarter.

Dan Johnson - Citadel Investment Group

Of '07.

Gregory C. Case - President and Chief Executive Officer

Right.

Dan Johnson - Citadel Investment Group

Okay. And then in second question similar maybe to once that have been asked before on this calls is around your visibility on the returns and let's start with revenue before returns from the investments you've made and people you've have hired, can you provide us an update now with what you are monitoring internally and is there anything we can see on the outside that which show progress on that front?

Gregory C. Case - President and Chief Executive Officer

And I would say as we said before Dan and you've asked before on that but the answer is there won't be to the level you won let me first say what we are looking at we know exactly to the person who we brought in to the person. We look at our counts, we know what our people counts by geographic by practice or we look at on a daily basis. So I want to emphasize how precise what we understand who we have in our firm and who we brought in. And again that's you can imagine we understand to a person and to a group how they are doing and what our expectations are against when we bought them in. So back to Christa's return on invested capital approach we have a very, very clear view on whom we brought in how they are doing and what the return profiles look like not just at a revenue level, but at a return level. So just by the way hopefully you will take some comfort in that what you won't take comfort is that we are not going to share that with you at this point in time, but I would say if you look at the macro results that we will continue to drive margin up. We will continue to grow organically, and we will continue to improve our earnings per share, and we will continue to invest in our business and that combination we believe is a pretty LIFO combination and as long as we're sustaining that maybe we won't get as fast as he would like to get it in terms of return in '08, but what it does is it establishes and unbelievably strong platform for nine, 10 and beyond.

Dan Johnson - Citadel Investment Group

Okay. Thank you very much.

Operator

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

Gregory C. Case - President and Chief Executive Officer

I do have a closing comment for the group and the closing comment you'd have seen potentially push out [ph] yesterday in the Wall Street Journal and it's a comment and set of thoughts that I would like to express on behalf of my Aon colleagues around the world and it is... it's just a note of deep and dying appreciation in gratitude to our founder, our visionary, our leader of Aon for 44 years. Today is Pat Ryan's last day as a active leader of our firm. The man who founded our firm. The man who build our firm. The man who has made this conversation possible for myself and Christa and the team. I would emphasize the last year we have active participation because Pat is going to be always be there helping us with clients and colleagues and building our firm, which we are going be internally grateful for us. But I want to just say on behalf of all of Aon to Patrick Ryan Thank you for all you have done for our firm and thank you for all you have done for our clients and for each of us. You are wonderful colleague and a wonderful friend. Thank you.

Operator

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

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