q3 2011 aon corp earnings conference call on oct. 28. 2011 /...

F I N A L T R A N S C R I P T

AON - Q3 2011 Aon Corp Earnings Conference Call

Event Date/Time: Oct. 28. 2011 / 12:30PM GMT

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C O R P O R A T E P A R T I C I P A N T S

Greg CaseAon Corporation - President and CEO

Christa DaviesAon Corporation - EVP and CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Keith WalshCitigroup - Analyst

Adam KlauberWilliam Blair & Company - Analyst

Yaron KinarDeutsche Bank - Analyst

Brian MeredithUBS - Analyst

Jay CohenBofA Merrill Lynch - Analyst

Mike NannizziGoldman Sachs - Analyst

Meyer ShieldsStifel Nicolaus - Analyst

Matthew HeimermannJPMorgan Chase & Co. - Analyst

P R E S E N T A T I O N

Operator

Good morning, and thank you for holding. Welcome to Aon Corporation's third quarter earnings conference call. At this time,all participants will be in a listen-only mode, until the question and answer portion of today's call. If anyone has any objection,you may disconnect your lines at this time. I would also like to remind all parties that this call is being recorded. And that it isimportant to note that some of the comments in today's call may constitute certain statements that are forward-looking innature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties,uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerningrisk factors that could cause such differences are described in the press release covering our third quarter results, as well ashaving been posted on our website. Now it is my pleasure your to turn the call over to, Greg Case, President and Chief ExecutiveOfficer of Aon Corporation.You may begin.

Greg Case - Aon Corporation - President and CEO

Thanks very much, and good morning, everyone, and welcome to our third quarter conference call. Joining me here today, isour CFO Christa Davies. To begin, our underlying results reflect strong performance in our risk segment, delivery of synergysavings related Aon Hewitt, and repurchase of $175 million of common stock. And while not satisfied with our organic revenueperformance in HR solutions, and I'll discuss more of that in detail, we continue to execute against our long-term strategy tosubstantially strengthen the Firm for long-term growth and value creation.

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Oct. 28. 2011 / 12:30PM, AON - Q3 2011 Aon Corp Earnings Conference Call



Consistent with previous quarters, I'd like to cover 3 areas before turning the call over to Christa for further financial review.First, is our performance against key metrics we communicate to shareholders. Second, is continued areas of investment acrossAon, and third is overall organic growth performance. On the first topic, our performance versus key metrics. Each quarter wemeasure our performance against the 3 metrics we focus on achieving over the course of year, grow organically, expand marginsand increase earnings per share. In the third quarter, organic revenue was 1% overall, highlighted by strong growth of 4% inour retail brokerage business. Adjusted operating margin decreased 180 basis points, driven by the inclusion of Hewitt results,including a significant increase in intangible amortization expense which had a 220 basis point negative impact. EPS increased13%, driven by strong underlying performance and effective capital management. Overall, a quarter of continued progressagainst our key metrics, as we remain focused on our long-term strategy.

On the second topic, further areas of investment.We believe Aon is in a unique position. Solid long-term operating performancecombined with expense discipline and strong cash flow continues to enable substantial investment in colleagues and capabilities.Just a few examples. In risk solutions, we continue to invest in innovative technology, such as our Global Risk Insight platform,which is the world's leading global repository of risk and insurance placement information. We now have 1.2 million trades,more than $59 billion of bound premium, and a growing client list of more than 20 insurance carriers utilizing the platformanalytics and services capabilities.

Also, we're driving our Aon Broking initiative to better match client needs with insured appetite for risk, resulting in bettereconomics for all participants, as highlighted by a significant D&O program of more than $175 million in premium we're placingin the market on behalf of clients. We're also investing in additional capability and talent. We recently completed acquisitionssuch as Aon Grieg in Norway and Glenrand in South Africa, significantly strengthening our international footprint.

A final example is investment in client leadership to drive greater productivity and efficiency, with the rollout of the revenueengine of EMEA in Asia Pacific, as well as the rollout of Client Promise, which is driving greater retention and rollover rates, asclients gain better understanding of our value proposition. As we discussed previously, we are proving the concept of theseinvestments in 2011, and as we move into 2012, and 2013, we're going to continue to drive greater scale, and increase operatingleverage as a result of these investments in our risk business.

In HR Solutions, we continue to strengthen our industry leading position in both public and corporate healthcare exchanges.With the significant investment we're making in our Aon Hewitt Navigator's business, enabling clients to prepare for ultimatechanges in healthcare legislation with design, purchasing and administration capability. We're also expanding our capabilityin compensation consulting, with the recent acquisition of Ward Financial Group, a leading provider of benchmarking forinsurance carriers in North America.We're also expanding our international footprint, as the workforce is increasingly becomingmore global, with investments in key talent and capabilities across Asia. And finally, we're continue to invest in expanding ourcore HR BPO offerings through Point Solutions opportunities such as dependent eligibility audits, and absence managementdiagnostics. In summary, as we focus on the long, long-term across risk and HR Solutions, our fundamental client-servingcapability continues to substantially strengthen around the globe.

Finally, on the third topic of growth. I want to spend the next few minutes discussing the quarter for both our segments. In risksolutions, overall organic revenue growth was 3%, with improved rates of organic revenue in each business, despite soft pricing,excess capital and fragile economic conditions globally. Against these headwinds, which are primarily market-related, we'redriving a set of initiatives that continue to strengthen our performance, and give us confidence that our risk solutions businessis firmly positioned for long-term growth. And leveraged through an improving economy, with the management of our renewalbook portfolio through Client Promise, and retention rates of 90% or better on average. Highlighting strong client satisfaction,new business generation of more $250 million across our retail business. With solid growth across many markets includingChina, Latin America, Africa, New Zealand, Middle East, Ireland, Italy and US retail just to name is few. Highlighting the strengthof our global client serving capability. Investments in new products and service capabilities with the rollout of GRIP, Aon Brokingand Client Promise. And improved win/loss trends in our core treaty reinsurance book of business that have now been positivefor the last 2 quarters.

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Turning to the individual businesses. In the Americas, organic revenue growth was 4%. Exposure units were relatively stable.Pricing continues to be soft, down low single digits on average, albeit at a moderating rate of decline. We also saw growthacross all regions as a result of strong management of the renewal book of business in Latin America, US retail, solid growth innew business in Canada as well. A really, really solid performance, overcoming soft market conditions and continued sectorweakness in areas such as commercial construction and financial services, where we've got leadership positions.

On the international front, organic revenue growth was also 4%. Pricing continues to be flat to modestly down on average, withfirmer pricing in cat exposed regions. We saw strong growth in New Zealand and across Asia, including double digit growth inareas such as Thailand, Taiwan and China, We saw modest growth in UK retail and EMEA, as exposure is generally stable, buteconomic conditions remain fragile across many core markets in continental Europe.

In reinsurance, organic revenue declined 1%, a modest improvement from Q2. Results reflect a 2% decline, related to facultativetransactions, partially offset by 1% growth in capital markets and advisory businesses in our international treaty placements.In our core book of treaty reinsurance which represents 85% of revenues, we saw a 2% negative impact from the market, aspricing was flat to down modestly on average, with firmer pricing in cat exposed regions, and higher cedent retention as clientsretain more risk. And while market impact remains negative, the underlying strength in treaty reinsurance continues to improve,as net new business was up 2%, reflecting continued improvement from a negative 3% in Q4, flat in Q1, and now plus 2% inQ2.

As we look ahead to the fourth quarter, we would note that the prior year quarter, was particularly strong quarter for capitalmarkets transactions.While our pipeline is encouraging, the timing of capital market transactions, as well as facultative transactionscan be lumpy quarter-to-quarter. If certain transactions are pushed out, we expect a modest declines from this quarter's results,with the reverse being true if the transactions being completed in the quarter. Overall, we continue to be encourage the byunderlying trends of core treaty book, and we expect to see modest growth overall in 2012 if trends continue.

Turning to HR Solutions. Overall organic revenue was negative 2%, a modest decline from flat in the prior quarter, and adisappointing result, compared to our previously expectations for modest improvement. Primarily due to 2 factors, lower projectrelated revenue in outsourcing, and weaker results in EMEA and consulting.

Turning to the individual businesses. In outsourcing, organic revenue was negative 2% compared to flat for the prior quarter.We saw positive growth from new client wins in both benefits and administration and HR BPO, partially offset by price compressionwithin expectations, suggesting continued strong underlying client performance. However, results were primarily impactedby a $13 million decrease in project-related revenue, as the prior year quarter reflected strong performance including supportfor multiple M&A transactions that didn't repeat at the same level this year. In addition the quarter included $4 million relatedto a one-time adjustment of business in Canada.

As we look to the fourth quarter, we'd expect less pressure from project-related revenue, resulting in modestly improved organicrevenue performance from the third quarter results.

In consulting services, organic revenue was a negative 2%, compared to flat in the prior quarter. In the US and Canada, wecontinued to see pressure in both health and benefits consulting related to unemployment levels, and communicationsconsulting from lower discretionary spend. Additionally, significant uncertainty in the third quarter surrounding economicconditions in EMEA, drove lower than anticipated results in our health and benefits consulting business. Partially offsettingthese weaker results, were solid growth in Asia-Pacific in global compensation consulting, and investment managementconsulting. All areas where we continue to invest, and see good long-term growth opportunities. As we look to the fourthquarter, we'd expect consulting to deliver modest organic improvement from the third quarter's result.

Overall, I want to emphasize, we are not satisfied with our growth performance.While we expect economic conditions to remainfragile in the short-term, against these headwinds we're driving a set of initiatives that continue to strengthen our underlying

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performance, and give us confidence that our HR Solutions business is positioned for improved long-term growth, and leveragedthrough an improving economy.

With solid new business generation, with over 160 wins, including more than 20 new large and mid market benefits andadministration wins, and a very significant recent win in a large leading financial institution in HR BPO. A high degree of recurringrevenue across HR Solutions with strong renewal rates, highlighting strong client satisfaction. And continued investments ininternational markets, we are seeing double digit growth in investment management consulting, and in new products andservices, such as our Aon Hewitt Navigator's healthcare exchange business.

In summary, our solid performance in risk, reflects the strength of our industry-leading platform, and continues progress againstour long-term strategy. And we're driving a set of initiatives that are strengthening the underlying performance, and positioningHR Solutions for improved organic growth over time. With that said, I'd like to turn the call over to Christa for further financialreview. Christa?

Christa Davies - Aon Corporation - EVP and CFO

Thanks so much, Greg, and good morning, everyone. As Greg noted, our third quarter results reflect continued progress tostrengthen our industry-leading position, and client serving capabilities across Risk and HR. While we're firmly on track forgrowth in 2011, we are not satisfied with our organic growth performance year-to-date. Against this challenge, we are managingexpenses, driving operational initiatives, delivering savings from our restructuring program, and effectively allocating capitalas highlighted by the repurchase of $175 million in common stock in the quarter.

Now, let me turn to the results for the third quarter. Our core EPS performance, excluding certain items, was $0.69 per share forthe third quarter, up 13% compared to $0.61 in the prior year quarter. The inclusion of Hewitt results, combined with strongunderlying performance and effective capital management more than offset a $61 million increase in intangible amortizationexpense, and shares issued in the prior year for Hewitt transaction. Certain items that were adjusted for the core EPS performanceand highlighted in the schedules on page 12 include $26 million of restructuring charges, and $22 million of transaction-relatedHewitt costs.

Lastly, foreign currency translation had a favorable impact of $0.03. If currency would have remained stable at today's rates, wewould expect a very modest favorable impact to EPS in the fourth quarter.

Starting in the first quarter of 2012 and going forward, the Company will begin providing adjusted results that exclude theimpact of non-cash intangible asset amortization, and continue to exclude certain one-time items such as restructuring charges.We believe the exclusion of non-cash intangible asset amortization will more closely align external audiences and the Companyaround cash flow generation, and with how we think about capital management and shareholder value creation, through cashon cash returns. As our acquired uses of cash decline over the next several year, and free cash flows improves, we expect it tobe a significant source of value creation for shareholders.

Now let me talk about each of the segments. In our risk solutions segment, organic revenue growth was 3%, and we deliveredan operating margin of 19% on an adjusted basis, up 110 basis points from the prior year quarter. Our performance for thequarter continues to demonstrate strong operational discipline and underlying structural margin improvement, positioningthe segment for greater operating leverage, as growth and economic conditions continue to improve around the globe. On anadjusted basis, operating income increased 16%, or $42 million to $308 million. The year-over-year performance was primarilydriven by increase in organic revenue performance, and modest benefits from the restructuring program.

Let me spend a moment on each of the restructuring programs, key initiatives that have enabled concurrent funding ofinvestments, and long-term structural margin expansion.With respect to the 2007 restructuring program, we've incurred 100%of the charges necessary to deliver the remaining savings. Restructuring savings in the third quarter are estimated at $134

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million, compared $125 million in the prior year quarter. Approximately $113 million of savings were related to the risk solutionssegment, primarily through workforce reductions. With respect to the Aon Benfield restructuring program, we have incurred83% of the charges necessary to deliver the remaining savings.

Restructuring savings in the third quarter are estimated at $30 million, compared to $27 million in the prior year quarter. Overall,we are ahead of the original schedules, and have delivered structural margin improvement. We have completed nearly all ofthe programs as of the end of the third quarter, with approximately $29 million of incremental risk solutions savings still todeliver. As remaining restructuring savings continue to wind down, the following 3 areas of margin opportunity are within ourcontrol, and continue to put us on track towards delivering our long-term target of 25% in risk solutions.

Number 1, operational efficiency and remaining restructuring savings. Number 2, continued rollout of a revenue engine. Number3, higher margin GRIP-related and Aon broking initiatives. In addition, there are 2 additional macro drivers that provide significantoperating leverage based on improvement in the external market. Number 4, an improving global economy in areas ofemployment levels, asset values and corporate revenues will drive leverage to exposure growth. Along with every 100 basispoint rise in short-term interest rates, delivers a roughly $40 million to the bottom line. And 5, improvements in insurancepricing.

Turning to the HR Solutions segment. Organic revenue declined 2%, and we delivered an adjusted operating margin of 11.2%as results reflect the merger with Hewitt, including a $61 million increase in intangible asset amortization.To further assess theunderlying performance of operating income and margin in the segment, we believe it's useful to add together results of bothHewitt and Aon consulting in the prior year quarter, to form your starting point of analysis. For example, if we take Hewitt'sadjusted operating income of $110 million, plus $55 million for Aon consulting, your combined total is $165 million of operatingincome as reported for the prior year quarter.

If we subtract additional intangible amortization expense of $61 million, this leaves an underlying $104 million of operatingincome. Comparing $104 million to the $125 million we reported in the third quarter, the increase in operating income reflectsapproximately $63 million of total restructuring and synergy savings, partially offset by lower organic revenue growth, includinga $35 million decline in project revenue, $10 million of 1-time items related certain write-offs, and a significant investment inour Aon Hewitt Navigator's business.

Lastly, for the HR Solutions segment, I wanted to give an update on the Aon Hewitt restructuring plan, and brief comment onintegration. With respect to the Aon Hewitt restructuring program, we incurred $26 million of charges in the quarter, primarilyrelated to workforce reduction and lease consolidation. The Aon Hewitt restructuring plan is expected to result in cumulativecosts of $325 million through the end of the plan, primarily encompassing $180 million in workforce reduction, and $145 millionin real estate rationalization costs. Cash costs are expected to be approximately $275 million.

Savings related to the restructuring program in the third quarter are estimated at $37 million, with additional synergy savingsachieved outside of the formal restructuring program.We expect to deliver total annual savings of $355 million in 2013, includingapproximately $280 million of annual savings related to the restructuring plan. And additional savings in areas such as informationtechnology, procurement and public company costs. We are on track to deliver our 2011 target of approximately $242 millionof annual savings.These savings are the first of 3 key drivers to delivering our long-term operating margin target of 20% in HRSolutions. The other 2 key drivers are growth in the core business including HR BPO improvement, and declining intangibleamortization expense beginning in 2013.

Lastly, as we continue to make investments in our talent and capabilities, we are also making investments in certain back officesystems such as our order to cash platform. With any IT integration there can be challenges, and during the third quarter wehad some temporary delays in invoicing certain clients in North America. However, this issue had no material impact on theresults of the third quarter. And we expect it will be corrected over the next 2 quarters, resulting in a better end-to-end cashplatform across the combined businesses.

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Now let me discuss certain line items outside the operating segment. Unallocated expenses were $44 million. The prior yearquarter included $18 million of costs related to the merger with Hewitt. Excluding those costs, unallocated expenses increased$13 million due primarily to a one-time $11 million unfavorable mark-to-market on certain Company-owned life insuranceplans. Interest expense increased $10 million to $60 million, due primarily to an increase in debt outstanding following themerger with Hewitt.

Other income of $7 million in third quarter includes gains related to Company's ownership in certain insurance investmentsfunds, and other long-term investments.The prior year quarter included an $8 million loss from sale of certain businesses. Goingforward, we expect a run rate of approximately $5 million per quarter of interest income, $35 million of unallocated expense,and $60 million to $65 million of interest expense per quarter. Lastly minority interest was 9 -- was $10 million, compared to $3million in the prior year, due to stronger performance of our joint ventures and partnerships primarily in emerging markets.

Turning to taxes, the effective tax rate on net income from continuing operations declined to 28.9% in the third quarter, comparedto 29.4% in the prior year quarter, primarily due to certain deferred tax adjustments. The Company anticipates an effective taxrate on net income from continuing operations of 29% for the fourth quarter.

Turning to shares, average diluted shares outstanding increased to 336.9 million in the third quarter, compared to 282.2 millionin the prior year quarter, due primarily of the issuance of 61 million shares of common stock related to the merger with Hewitt,partially offset with the Company's share repurchase program. Actual common shares outstanding on September 30 was 323.3million, down 3.4 million, from 326.7 million at June 30. There are approximately 12 million of diluted stock equivalents. TheCompany has approximately $1.2 billion remaining under the share repurchase program previously authorized in 2010.

Now, let me turn to the balance sheet and cash flow statement to discuss financial flexibility. On September 30, cash andshort-term investments were $903 million,(Sic-see press release) and total debt outstanding was $4.6 billion. Overall debt tocapital was 35.6% at September 30, compared to 34.9% at June 30. Cash from operations, excluding change in funds held onbehalf of clients which has no impact on cash, increased $296 million to $368 million in the third quarter, compared to $72million in the prior year quarter.

Stronger cash flow was driven primarily by the inclusion of Hewitt results, along with improved operating performance andlower working capital requirements, partially offset by restructuring related cash payments and pension contributions.Year-to-date, cash payments related to restructuring were $131 million, and the Company anticipates another $80 million ofcash payments in the fourth quarter. Cash payments related to restructuring are expected to decline approximately $65 million,to a total of approximately $146 million in 2012, before declining further in 2013.

Regarding our unfunded pension plan. Year-to-date contributions have been approximately $390 million, and the Companyanticipates contributing another $90 million in the fourth quarter. Because we've closed plans new entrance, frozen plans fromaccruing additional benefits, and derisked certain pension plan assets, pension expense is much less volatile. Despite weakequity in AA corporate bond portfolio performance year-to-date, we would not expect to see any meaningful impact to pensionexpense, either up or down in 2012.

In summary, we delivered 1% organic revenue, placing us firmly on track for growth in 2011, despite fragile economic conditions,and a continued soft market. We are managing expenses, driving operational initiatives across both segments, and fully ontrack to achieve our long-term operating margin target. We have significant leverage through an improving global economy.Our balance sheet and strong cash flow continue to provide significant financial flexibility, as we repurchased $175 million ofcommon stock in the quarter, highlighting our belief in the underlying strength of the Firm.

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

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Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions)

Keith Walsh, Citi.

Keith Walsh - Citigroup - Analyst

Hi, good morning, everybody.


Hi, Keith


Good morning.


I really want to focus on consulting, as brokerage was pretty solid. So, just thinking about consulting, the minus 2 organic. Maybeyou can split out for us, how much of that is really related to the macro environment and how much related to attrition fromthe integration? And I've got a couple follow-ups.


Sure, happy to do that, Keith. Let me -- and I'll kind of give you the clinical read on this, but overall, let me start with just aperspective. We said, as we worked to build our business over the years, irrespective of economic conditions, we focus ongrowing and building our business, period. And by the way, we're making a lot of investments to do that. And those investmentsnot only impact the top line, they impact the bottom line too. And, at the end of the day, the full responsibility for growing thebusiness is on me and our team, and we just have got to do better operationally.

We're very confident in the plans, we'll take you through those in a second, but we just have got to do better operationally. Ifyou think about sort of clinically what happened, a lot of this was economic headwinds.There was a greater economic headwindsin EMEA and in the US. In EMEA, in particular, conditions got worse. Basically, a lot of uncertainty in EMEA, as you would expectright now, and that led clients to defer a lot of discretionary spend. In the US, poor conditions remained.We thought they'd geta little better, they didn't. And the resulting impact showed up, really, in 1 area, or 2 areas in particular.

One was in project related revenue, on the outsourcing side, it was down substantially. And this is the area, Keith, that really isdiscretionary spend, things like support for M&A or benefits changes, et cetera. And, in the end, that's a significant amount overtime -- $13 million, $14 million, it's a significant amount in terms of the impact. It also showed up -- the state of the economyaround health and benefits, on the consulting side, particularly around health and benefits brokerage in EMEA. And there werea couple of one-time items, that aren't going to re-occur, that also flowed through as well.

But, to your question, this is all around sort of the overall part of the business in the end. Unfortunately, it's happening at a timewhen the core business is doing quite well. And from an integration standpoint, we see consulting growth in multiple areas,Asia Pacific, Global comp, investment consulting. Outsourcing growth, has been very, very positive. On terms of new business

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wins, we actually were doing -- we've done better in this quarter than we've done, maybe in any time over the last number ofyears. And then the synergy capture, as Christa described, was very, very good -- in fact, on or ahead of track.

And so, from our standpoint, this has been a lot of the reaction to the economy in Q3. But I want to be absolutely clear, that'snot an excuse. It really is, as I said at the beginning, this is on me and our team. And we said we're going to grow our business,irrespective of economic conditions. We expect modest improvement in Q4. And we're looking to that. And we're just goingto push through, and keep driving the business. But the core, the core thesis is incredibly positive and incredibly strong.


Okay. And then for Christa, you alluded to being ahead of target on the restructuring savings. Can you actually push those costsaves forward quicker to offset some of this underlying margin deterioration you're getting out of consulting right now?


I mean, Keith, we do believe that we are on track, if slightly ahead of our original restructuring plan. So we said we would deliver$229 million to $242 million of savings in 2011. And we've delivered $42 million in Q1, $58 million in Q2, $63 million in Q3, so$163 million year-to-date. So we believe we are well on track to doing that. And we did have the $355 million of total savings,really fast forward those savings to really, sort of set the business up, and really focus on growth. So, I think we do believe thatwe will continue to improve performance, and we're very focused on it, given that disappointing result in this quarter.


Okay. And then, last question for Greg. And in, just in my words, I guess, second deal, I guess done here with probably less thanoptimal results. And it's early days, but so far -- and we seem to be tracking below the glide path implied, when this deal wasannounced. And I want to know, what specifically is the Management team doing to get us back on that glide path? And then,in conjunction with that, why don't we get the operating heads of this business on the call? I think you're the only broker outthere that doesn't do that. So, if you can address those things? Thanks.


Well, Keith, in stepping back, as we thought about, Aon Hewitt, we -- we're now a year into this. We could not be more pleasedwith the underlying basics of what we pulled together.The underlying client-serving capability is, literally, the best in the world.The client reaction has been incredibly positive. Our new client wins are doing exceptionally well, as we look at what -- thegrowth of the business over time. The integration has gone incredibly well -- and, Keith, from our standpoint, could not havegone better, not only in the synergy capture, but also how the team has come together.

So, we would say, the underlying client-serving capability is exactly what we expected. The performance on the outsourcingside and the consulting side at the core level, exactly or better than we expected. And in the end, we've got economic headwindsthat are substantial. As I said, no excuse. We've got to deliver against those headwinds, and we will do that. And we've got theinvestments in place to make that happen. And we are as confident as ever about Aon Hewitt and the prospects for this businessin the future. So, from our standpoint, we couldn't be more pleased.

There's a lot of -- a lot that happens over the period of building a business. We're in the process of doing that. And we're quiteexcited about the future, in terms of what we're trying to do. And in terms of just -- colleagues on the phone, you can imagineour colleagues have a great deal of input into this call, in terms of what we do over time. And so, in many respects, what you'rehearing through Christa and I are very much reflected in the Management team's approach in the view on the business.

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I appreciate that, but it's important to hear from the people actually on the ground running the business day-to-day. Especiallyfor a piece of the business that's become such an important part of your Company. So, just more a suggestion, but thanks foryour time.


Well, appreciate that, Keith.We'll take it into consideration, and want to make sure we answer any and all questions you've got,in terms of what we're doing day-to-day.

Operator

Adam Klauber, William Blair.

Adam Klauber - William Blair & Company - Analyst

Thanks, good morning. Also following up on Hewitt, it seemed like sequentially, the expenses in Hewitt, even excluding therestructuring, were up over 5%, 6%.What was driving that?


Yes, so I think there's a foreign currency impact there as well, Adam, which we can sort of break out. But, we don't see sort ofabnormal expense growth.What you see in this sort of -- the margin impact is a significant impact from intangibles. So, intangibleshad a 550-basis-point impact on HR solution's margin in the quarter. We do see expansion, as I said from restructuring -- therestructuring and other additional savings flowing through. And then, really, the sort of the 3 things I noted in my script thatimpact margins of about $42 million in the quarter were an organic revenue impact of about $22 million, one-time items ofabout $10 million, and the investment at Aon Hewitt Navigator of about $10 million.


Okay. Thank you. And, Greg, if you could give us sort of an outlook on the P&C rate environment going into 2012? Obviously,there's been a lot of noise about moderate bottoming, and even some improvement. How would you characterize the market?


Yes, I would say from our standpoint -- and again, we look at this very analytically, in terms of sort of what we see happeningwith the market over time -- we would go back and essentially say, it is tightening, but we certainly haven't seen the turn. Wewere down roughly -- when we looked at our GRIP platform overall, and really -- and this is literally the placements we makearound the world, we were down roughly 5% in Q4 2010, about 4% in Q1, 3% in Q2. What we saw in this quarter was aboutdown 2%. So, exactly as described. We are down, but at a lesser and lesser rate, so it's tighter than it's been in quite some time.And then, on the reinsurance side, we're seeing, essentially, getting closer to flat as well. But certainly there remains a supplyand demand imbalance on capital. And, from that standpoint, we're flat to down slightly there. So, that's how we see the rateoutlook, modifying a bit, but we would still say that it is slightly negative to flat.

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Okay.Thank you very much.


Sure.

Operator

Yaron Kinar, Deutsche Bank.

Yaron Kinar - Deutsche Bank - Analyst

Hi. Good morning everybody.


Good morning,Yaron.


I have a question. The first question would be on the risk solutions margins. On the last call, we discussed looking at them ona year-over-year basis -- or calendar year basis. Do you still feel like you'll be able to grow those margins in 2011, relative to2010?


Yes, as we look at year-to-date margins, excluding the [powers lease] and macro factors, we think we're about flat year-to-date.And we do believe that we'll grow margins in Q4.


So, in doing that calculation, really, we're excluding the one-time items of the first half.


Right.Yes.


Okay. And then, can you maybe elaborate a little bit on the life insurance plans? What they are, will they have any impact goingforward? Assuming that the market stays flat where it is today?

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I mean, they're obviously life insurance plans that the Company owns, that have a mark-to-market impact. Assuming the marketdoesn't change, then the mark-to-market would not change.


Right. But, I guess I was a little bit surprised to see that the Company owns them. As what part of the operation does it ownthem? (multiple speakers).


I mean, it was, it was 11% -- sorry, $11 million in the quarter, and it hasn't had a material impact previously, and we don't expectit will going forward.


Okay. Is it part of the investment portfolio?


Yes. I mean, it was a set of insurance policies taken out quite some time ago, almost 10 years ago, and they're flowing through.


Okay. And then, I know you spoke a little bit about the reinsurance platform and the headwinds that are still facing it. Nonetheless,we do see better growth with some of your major competitors. When do you think that the spread between you and thecompetitors will start declining?


We feel good about progress on the [uneventful] front. Again, if you step back and think about our reinsurance platform, wewouldn't trade it for any in the world. As we've brought Benfield into the fold, we -- and back to kind of the idea of the dealmodel, and sort of our original thesis behind bringing the firms together, we are absolutely on track on how we brought themtogether, and absolutely on track in building that business.

And, as we watched it evolve over the last -- think about the last four quarters, and think about net new business versus lostbusiness, essentially it's gotten better over -- each of the last 4 quarters -- negative in 2010, negative in 2011, slightly positivein the first quarter in '11, positive in the second and third quarter in '11. So, the last four quarters the trend has gotten betterand better each quarter. And it really reflects the underlying value that we bring to clients. When we line up our analytics, andwe help them understand how we can improve their return on invested capital for our insurance carriers and our clients here,we win new business.

And that's what we've done. Some of the discrepancy is, you think about the size of our business versus some of the othercompetitors out there. As there were adjustments in the first 18 to 24 months, they made big differences for other competitors.And for us, they were just literally part of bringing the 2 firms together. But now we are on a very strong track.The treaty businessis growing, and it grew this quarter as well, and feel very good about the trajectory of Aon Benfield.

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Okay.Thank you.

Operator

Brian Meredith, UBS.

Brian Meredith - UBS - Analyst

Yes, good morning. A couple questions here for you. First, I wonder if you could elaborate a little bit on the impact of pricingat Aon Hewitt, and exactly kind of what's going on? Is that price decrease that you're taking to try to retain business? Could youtalk about that a little bit, and what the impact on margins is?


Absolutely. So first of all, in terms of Aon Hewitt, we obviously do have pricing impact in the benefits business in particular.That's been very stable, Brian, for the last full 12 months, so every quarter. And it's been exactly in line, or actually slightly betterthan what we had originally modeled in our deal model. And that's being sort of offset by better win losses. So we are winningmore than we're losing. And that win/loss ratio is improving year over year. So we feel good about the underlying health of thatbusiness.


But I just want to understand, so prices are going down, right?


And they have been for quite some time, and it's been at a very steady rate.


Okay. Great. And then, the second question, Greg, I wonder if you could talk a little bit about GRIP? Maybe take up rate we'veseen so far? Success with respect to commission leakage, and that kind of stuff?


Happy to do that, Brian. If you step back, we said GRIP is really part of our overall Aon broking strategy, and if you think aboutsort of the way that it's going to impact our business.We have -- we think about sort of winning new clients, we're doing moreof those existing clients, and increasing the yield per dollar of premium placed. GRIP is really part of the overall Aon brokingstrategy that helps us do that. We put GRIP in place almost 3 years ago now. What we were looking for is trying to reallyunderstand our insurance -- our placements better than anyone in the world could possibly do, and GRIP has allowed us to dothat.

In addition, it allows us to help our insurance carriers think about how they can improve their placement, where they -- howthey target their placement, how they accomplish that. And we've been able to did that. We've got 20-plus partner markets

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who are part of this platform, who are finding it very, very effective in helping them actually identify how they grow theirbusiness and build their business. And it's been very effective. And, as we said, it would be proven in 2011.We think we've moredone that, and really scaled up in '12 and '13, and we're fully on track for that.


Great.Thank you.

Operator

Jay Cohen, Bank of America Merrill Lynch.

Jay Cohen - BofA Merrill Lynch - Analyst

Yes. Thank you. One clarification, as far as the savings go from the Aon Hewitt restructuring, I think you said on the call it was$63 million, but in the press release I see a number $37 million, what's the difference?


Yes, so Jay, we said originally that the $355 million of savings in -- that we would achieve 2013, would be comprised of $280million in restructuring savings, and about $75 million in additional savings. And so what you see in every quarter of this yearis a restructuring savings number, of $37 million in Q3 specifically, plus additional savings of $26 million, which get you to atotal of $63 million. And that's been happening this entire year, Jay. So in Q1, our total savings number was $42 million, of which$24 million was restructuring. In Q2 our total savings number was $58 million, of which $34 million was restructuring. And sothat same pattern is flowing through.


And I guess, based on your view of the full-year savings, we should expect to see a number north of $100 million in the fourthquarter of savings?


No. We said we would be achieving total savings for calendar year 2011 in the 229 to 242 range. So you can see if we add Q1plus Q2 plus Q3, we add to 163 year-to-date.


Oh, got it. Okay.That's helpful. And then the -- it's a small number, but this, you mentioned a $10 million write-off at HR Solutions.What does that relate to?


Right. So there are 2 different -- there's 2, $10 million of one-time items. And $4 million of it, Greg mentioned in his script arounda one-time adjustment to revenue. And there's a $6 million one-time expense item, which adds a $10 million impact in one-timeitems related to PTI in the quarter.

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Okay. I guess one broader question, just quickly on HR. The HR outsourcing business, which was I guess a source of marginpressure historically for Hewitt. Can you give us a sense of what's happening there, part of the plan was to improve those marginsover time?


Yes, in the HR BPO business, we are extremely pleased with the progress of that business. We -- when Hewitt stand-alonereported, they had previously reported that business was a negative margin business, and on track to be a mid-teens marginbusiness by 2015.We believe we are well on track with that plan.


So you're making -- you have positive margin in that business now?


Yes.


Great.Thank you.

Operator

Mike Nannizzi, Goldman Sachs.

Mike Nannizzi - Goldman Sachs - Analyst

Thanks. Just one question on -- really the HR benefits. If you ex savings in amortization, what is the benefit margin in the quarter,and how should we be thinking about that?


Yes.We don't break out specific benefit margins, Michael.


Yes.


But what I can do, is say if you look at Aon consulting in Q3 2010, that number was $55 million. Then you look at Hewitt in Q32010, that number was $110 million. So you start off with a starting point for Q3 2010 of $165 million. You subtract intangible

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amortization increase of $61 million, and you get a starting point for Q3 2011 of $104 million. We, obviously, produced resultsof $125 million. And the difference between those 3 numbers is synergy savings of $63 million, which would get you -- if youadded the $63 million to the $104 million -- to $167 million. And that difference between $167 million and $125 million reportedof $42 million, is made up of 3 items.


Okay.


The impact of organic revenue of minus $22 million, the one-time items I described of minus $10 million, and the investmentof Aon Hewitt Navigators of $10 million.


Okay, because I'm just -- when I look at it, if I ex those things out, it looks like for the last few quarters it's been trending downward.So, I'm just trying to understand, I mean is the expectation, however you calculate it, is the expectation that the number -- thatmargin number for the third quarter -- that's kind of where you expect margins to be -- that's your kind of baseline, and you'rehoping to improve from there or --? I'm just trying to understand, because it just seems like it's moving, just moving one direction.


Yes, we don't think they're moving downwards. I mean the intangible margin impact in the quarter is 550 basis points


Sure.


So it's quite substantial.


Yes. (multiple speakers)


-- the ex intangibles, the HR Solutions margin would be 16.7%, it's a very strong margin.


Okay. And then, just one question I want to understand in -- back in the risk business. So you had a couple of relatively prominentacquisitions -- international acquisitions, but the acquisition growth was negative in the quarter, on the international side. SoI'm just trying to reconcile those 2 points.

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Yes.They're pretty small acquisitions, Michael, so I mean, they're not going to have a material impact on the quarter.Year-to-date,we've done about 5 acquisitions worth a little over $100 million.They're pretty small.


Okay. Got it.


We're going to continue to look at the tuck-in opportunities over the course of any given year, and we've continued to do that.We'll add content and capability where it makes sense for us.


Got it. And then, last one, just on the pension contribution. Any guidance on pension contribution expectation for year-end?Given rates?


Yes. So, obviously we have a year-end measurement date, so it's difficult to predict. But we would expect pension contributionsto be up modestly for 2012. And then down, every year after that to be fully funded on a GAAP basis by 2015.


Great.Thank you.

Operator

Meyer Shields, Stifel Nicolaus.

Meyer Shields - Stifel Nicolaus - Analyst

Thanks. Good morning, everyone.


Good morning.


I think we're beating this one to death. But when we look at the HR Solutions business, the combination of your increasedamortization expense, and I guess underlying cost increases -- what should we expect that to be in the fourth quarter?

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For the fourth quarter?


Yes.


As we think about margin for the fourth quarter, what we would say, is if you took that sort of $43 million, and you kind of rolledit forward for Q4, that would have less impact in terms of negative organic. But we expect that it would be sort of modestlydeclining in Q4, and that we expect our investment in Aon Hewitt Navigators to continue.


Okay. That's helpful. When we talk about the pensions being, based on what we know now, flat on a year-over-year basis, isthat dollar or percentage?


I'm sorry, Meyer, can you repeat that question?


Right. You mentioned earlier in your comments that your expectation because of the derisking you've done in the pensionplans is that it will be flat on a year-over-year basis. Is that as a percentage of revenues or dollars?


Oh, that's in terms of pension expense. That's absolutely, right, Meyer, that basically because of the derisking we've done, andthe fact that we've closed the plans to new entrants, and frozen the benefits, so we expect pension expense year over year tobe flat.


Okay. And that's in terms of absolute dollars?


Absolutely correct.

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Okay. And last question if I can, with regard to the capital markets transactions, I understand that they're lumpy. Is there anyhelp you can give us, in terms of trying to understand, let's say, the fourth quarter of 2010's divergence from a normalized runrate, in terms of margins?


Meyer, just -- we're trying -- you're not coming through very strongly. So your question is around margins around Benfield --


No.We did have a significantly higher capital markets transaction quarter in Q4 2010.


Oh got it. Sorry. So, absolutely right. And as we said before, this is just both on the fact side and on the capital market side, thesejust tend to be lumpy businesses. So, for example, our capital markets pipeline right now is exceptionally strong. We feel verygood about it, but it depends on, literally, when the deals hit. If they hit in Q4, we're going to see some positive movement. Ifthey don't hit and they defer to Q1, then, obviously, that has a -- it has a bit of variable impact. All we're really trying to do is justhighlight that for you, in the context of this -- that the capital markets business, the fact business, is different from a patterningstandpoint, than what the treaty business is.


No, I completely understand that, and I think it's great that you're calling it out. I'm trying to get a sense of what the marginswould be, if the fourth quarter of 2011 is, and I'll put this in quotes, normal, instead of above average like last year.


Our sense -- again, as we said before, is if you go back and look at the overall risk solutions margin, on how it is improving asChrista described, we see fundamental year-over-year improvement. In the context of that, by the way, this is just part of ourmarch toward 25%. We are making clear progress on that. As we said, in the last -- first and the second quarter, it's the sameprogram. It's the same program, we've had in place for the last number of years. It's exactly the same program that's literallygiven us, roughly, a 100-basis-point improvement every year, for the last 5 years. And that's the program here -- and, by theway, up or down from the standpoint of capital markets, that's not going to deter the progress on the march to 25%.


Okay.Thank you very much.


Sure.

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Operator

Matthew Heimermann, JPMorgan.

Matthew Heimermann - JPMorgan Chase & Co. - Analyst

Hi, good morning.


Good morning.


A couple questions, hopefully these are quick. But, I wanted to just follow-up on the compensation expenses in HR Solutions.I have, if I adjust out FX, about a 2% growth in the numbers. And I'm just -- and that's adjusting for restructuring as well. So I'm-- when you talk about the savings that you're seeing, being in line, that number just feels a bit higher. So I'm just wondering,the investments that you're talking about for Navigators -- as well as, you mentioned, I think, Asia in the script -- are those mostlypeople, or are those other things?


Yes. First of all, the investments we're making are mostly people, that's right. But also, your observation that base compensationexpense is growing by 2% is roughly right. We have an inflationary push on our expense base of roughly 2%. And so, as youthink about the forces acting on the HR Solutions margin, you have synergy growth, offset by intangible amortization. And for2012, those numbers roughly match each other. And, therefore, to expand margins year over year, you really need to haveorganic revenue growth sort of 2%, to equal the inflation rate expense base push.


Well, I guess I was getting 2% underlying, adjusting out restructuring, before adding in -- net of the savings, there was a 2%increase. And so that's where I'm struggling is -- I just --


Well --


-- relative to kind of the reinvestment expenses you mentioned for Navigators, it doesn't -- it feels like there's more push therethan there should be.


No, I think there may be, other one-time things going on, Matthew, because that's not how we see the numbers.

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Okay.


We do observe that there is an inflationary expense base push as I described, plus the investment in Navigators. And that isessentially the forces acting on the margin, other than the one-time item I described, or the 2 items that impact PCI this quarter.


Okay. Maybe I'll follow-up offline, just to make sure my math is right.


Sure.


Second question would be just, can you talk about maybe what the pipeline looks like in HR Solutions, from a revenue perspectiveversus what your book -- booking? And I'd just be curious -- obviously we had a deviation this quarter, but just wondering whatthe forward-looking is looking like relative to the reported?


Yes, we want to highlight -- as you think about the deviation this quarter -- and again, something we've got to manage irrespectiveof economic conditions -- but the deviation this quarter really was in, primarily, around areas of discretionary spend, things thatyou can actually push off, clients can actually make decisions to defer. But the core business, back to kind of what we do in thecore business around outsourcing, the core business what we do around consulting, has been very strong. So there has beenno fall off in that. On the outsourcing side, as I said before, the win rates were as strong this quarter as they've ever been, againstcompetitors. And we feel very good about the underlying intrinsics of the business and how we're progressing.

And then, this is now on top of the investments we've made. And we made a very explicit decision to invest behind Navigators,and do it in a significant way, because we think the opportunity is, really, almost unprecedented, given what's happened inhealthcare in the world today. So we see the basic platform for growth is very strong, the investments we're making on top ofit.We realize we've got margin pain, in the context of doing that. But we feel like building the business for the long term, it putsus in a -- it's just another add to an already strong platform, so feel very, very good about that. And, if you look at 2012 revenue,we see it getting back to flat, to slightly up, in terms of what we're trying to do here. But, again, feel very good about the base-- the overall base business.


So -- just more specifically, I mean, does that imply the pipeline is actually growing?


It does. And in fact --

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Okay.


-- we've got a projected trajectory on the pipeline over the last year, and we're doing very, very well on that.


Okay. And then, I guess the other question is, I mean, I actually think the Hewitt acquisition made a lot of sense, especially whenyou look at -- even though we're getting some deviations, the return on capital still looks actually quite healthy. But I guesswhat is a little bit concerning to me is the performance we're seeing is clearly a bit different than at least those of us in theoutside are seeing. And there seems to be a gap between how we're perceiving the business and how you're talking about it.And I think, I guess -- what do you think you can do to maybe bridge that gap? Because, I think, while the responses you'regiving to questions are helpful -- to Keith's point, in terms of talking to people on the ground and also just in terms of theunderlying data we have available to track your business being -- we're getting less data today than we did when Hewitt brokeout their businesses -- just what are some things you can do to maybe narrow that gap?


In terms of --


Besides the passage of time.


Well, no, I got you And part of it is, be a little patient in the passage of time, in the sense that if we come back -- we have a veryspecific set of fundamentals we look at, and have looked at from the beginning, around, literally, what is -- what's going tohappen on the revenue side, from a client development standpoint, to your point around the pipeline, and how that's evolving?And really, our fundamental client-serving capability. Can we look a client in the eye and say, we can help you in a way that noone else can? Identify that value, describe that value, and actually deliver that value. And we've seen that actually be the case.And that's why the pipeline is, in fact, growing from a client development standpoint.

And then, on the cost side, can we take out and get the cost efficiencies that we had anticipated coming in, and achieve that?And the answer on both of those fronts have been, in fact, stronger than we anticipated. Against those headwinds, arounddiscretionary spend, we saw a significant drop off, and that really is the disconnect. That's it. That is the disconnect. And by theway, the disconnect has real leverage, in the context of what we're doing. If the underlying -- if the amortization is roughly thesynergy, and we have underlying expense growth of roughly 2%, as Christa was describing, and then we need growth to getthe positive operating leverage. To the extent we don't have that -- we didn't have it this quarter -- that's the impact you'reseeing. But that, literally, is the -- that's the disconnect.

What you hear from a positive standpoint is our confidence that we will build the business and continue to drive it forward. It'snot unlike the conversations -- it's most exactly like the conversation we had about risk 4 years ago, when the question's around,what are we doing on the risk front? How are we actually building that business? And, what are we putting in place to accomplish

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that? And now, 4 years later, I think we've got a risk business that really has an incredibly strong platform with great growthprospects, in the context of what we're doing. And the investments we're making, to prove the value in 2011 -- or actually, it'sbeing proven, and now driven -- going to be driven out in 2012, 2013.

Now, in Aon Hewitt, we've got a great team in place -- great leadership team, and tremendously strong platform. And we believethe healthcare issues in the world today, and the pension issues in the world today, are going to continue to go up, and becomemore acute for our clients. So, the enthusiasm you're hearing is very much around that set of intrinsics, which we think are quitestrong. And we understand the concerns of this quarter. And we want to make sure you're clear, we're going to address thoseconcerns. But there should be no question around the underlying strength of this platform, it's just exceptionally strong.


I guess maybe I would suggest then, maybe there's some metrics, similar to when you were turning around risk, whether they'rereported in the press release or made on the call, that are somewhat consistent, maybe to help put some numbers aroundthings, to give us a better sense of how you're progressing versus the metrics. Because, I guess, maybe one of the issues we'restruggling with is -- it kind of feels like the goal posts keep moving. But part of that is, we don't really know, in an absolute sense,where the goal posts should be set.


Great input. And as we will always do, the input from all of you, take that in, and actually come back with some views andperspectives on how to make sure you know exactly how the tracking is going, as we look at it. So, appreciate the input.


Not a problem. And then, Christa, just a comment you made on the EPS change. Does that mean you're going to be providinga supplemental EPS number to what we're seeing already, or you're going to completely redefine how you are --


No, we are going to redefine adjusted EPS to exclude the intangible amortization expense.


Could I make the suggestion, I think it would be helpful if you just provided it in addition? Because I think one of the -- we're allsavvy enough financially to actually look at cash flow, and let that drive our evaluation and -- but I actually think losing, movingfurther away from GAAP, and how some of the peers report, might not be as helpful as you think it may.


Appreciate your input.Thanks very much.


All right. Cheers.

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Operator

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


I just want it say to everybody, thank you very much for joining the call today. We appreciate it, and interest in Aon, and lookforward to our next discussion.Thanks very much for joining today.

Operator

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

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q3 2011 aon corp earnings conference call on oct. 28. 2011 /...

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