Aon (AON)

Q3 2011 Earnings Call

October 28, 2011 8:30 am ET


Christa Davies - Chief Financial Officer and Executive Vice President

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


Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Adam Klauber - William Blair & Company L.L.C., Research Division

Yaron Kinar - Deutsche Bank AG, Research Division

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

Brian Meredith - UBS Investment Bank, Research Division

Jay A. Cohen - BofA Merrill Lynch, Research Division

Keith F. Walsh - Citigroup Inc, Research Division



Good morning, and thank you for holding. Welcome to Aon Corporation's Third Quarter Earnings Conference Call. [Operator Instructions] I would also like to remind all parties that this call is being recorded, and that it's important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our third quarter results, as well as having been posted on our website.

Now it is my pleasure to turn the call over to Greg Case, President and CEO of Aon Corporation. You may begin.

Greg C. Case

Thanks very much, and good morning, everyone, and welcome to our third quarter conference call. Joining me here today is our CFO, Christa Davies. To begin, our underlying results reflect strong performance in our Risk segment, delivery of synergy savings related to Aon Hewitt, and we purchased 175 million of common stock. And while not satisfied with our organic revenue performance in HR Solutions, and I'll discuss more of that in detail, we continue to execute against our long-term strategy to substantially strengthen the firm for long-term growth and value creation.

Consistent with previous quarters, I'd like to cover 3 areas before turning the call over to Christa for further financial review. First is our performance against key metrics we communicate to shareholders; second is continued areas of investment across Aon; and third is overall organic growth performance.

On the first topic, our performance versus key metrics. Each quarter, we measure pressure performance against the 3 metrics we focused on achieving over the course of the year: grow organically, expand margins and increase earnings per share.

In the third quarter, organic revenue was 1% overall, highlighted by strong growth of 4% in our 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 increased 13%, driven by strong underlying performance and effective capital management. Overall, a quarter of continued progress against our key metrics as we remain focused on our long-term strategy.

On the second topic, further areas of investments. We believe Aon is in a unique position. Solid, long-term operating performance combined 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 risk and insurance placement information. We now have 1.2 million trades in more than 59 billion of valid [ph] premium and the growing client list of more than 20 insurance carriers utilizing the platform analytics and services capabilities. Also, we're driving our Aon Broking initiative to better match client needs with insurer appetite for risk, resulting in better economics for all participants. As highlighted by a significant D&O program of more than 175 million in premium, we're placing in the market on behalf of clients.

We're also investing in additional capability and talent through recently completed acquisitions such as Aon Grieg in Norway and Glenrand in South Africa, significantly strengthening our international footprint. A final example is our investment in client leadership to drive greater productivity and efficiency, with the rollout of the revenue engine in EMEA and Asia Pacific, as well as the rollout of Client Promise, which is driving greater retention and rollover rates as clients gain better understanding of our value proposition.

As we discussed previously, we are proving the concept of these investments in 2011, and as we move into 2012 and 2013, we're going to continue to drive greater scale and increased operating leverage 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 Navigators business, enabling clients to prepare for ultimate changes in healthcare legislation with design, purchasing and administration capability. We're also expanding our capability in compensation consulting. With the recent acquisition of Ward Financial Group, a leading provider of benchmarking for insurance carriers in North America. We're also expanding our international footprint as the workforce has increasingly becoming more global, with investments in key talent and capabilities across Asia.

And finally, we're continuing to invest in expanding our core HR BPO offerings through point solutions opportunities, such as dependent eligibility audits and absence diagnostics.

In summary, as we focus on the long term across Risk and HR Solutions, our fundamental client-serving capability 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 Risk Solutions, 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're driving a set of initiatives that continue to strengthen our performance and give us confidence that our Risk Solutions business is firmly positioned for long-term growth and leveraged to an improving economy. With the management of our renewal book portfolio through Client Promise and retention rates of 90% or better on average, highlighting strong client satisfaction.

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