Aon's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Aon (AON)

Q1 2012 Earnings Call

May 04, 2012 8:30 am ET


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

Christa Davies - Chief Financial Officer and Executive Vice President


Dan Farrell - Sterne Agee & Leach Inc., Research Division

Raymond Iardella - Macquarie Research

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

Jay A. Cohen - BofA Merrill Lynch, Research Division

Brian Meredith - UBS Investment Bank, Research Division

Catherine A. Seifert - S&P Equity Research

Yaron Kinar - Deutsche Bank AG, Research Division

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

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

Larry Greenberg - Langen McAlenney



Good morning, and thank you for holding. Welcome to Aon plc's First 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 first 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 plc. Sir, you may begin.

Gregory C. Case

Thanks very much, and good morning, everyone, and welcome to our first quarter conference call. Joining me here today is our CFO, Christa Davies. Consistent with previous quarters, I like to cover 3 areas before turning the call over to Christa for further financial review and would note that there are slides available on our website for you to follow along with our commentary today.

First is our performance against key metrics we communicate to shareholders. Second is overall organic growth performance. And third is continued areas of investment across Aon. On the first topic, our performance versus key metrics. Each quarter, we measure our performance against the 3 metrics we focus on achieving over the course of the year: grow organically, expand margins and increase earnings per share.

Turning to Slide 3, in the first quarter, organic revenue was 4% overall, reflecting the strongest rate of organic revenue growth since the second quarter of 2007 and the strength of our industry-leading platform. Operating margin decreased 80 basis points, driven primarily by significant investments we're making across our businesses to increase long-term growth. Finally, EPS was $0.98, including $0.06 of unfavorable impact from foreign currency.

Overall, our first quarter performance reflects improved organic revenue growth across our businesses as foreign currency movement and significant investments to drive greater long-term growth has an unfavorable impact on bottom line results. While we're not satisfied with margin improvement and working capital management in the near term, we fully anticipate improved performance in the second half of the year are on track with our long-term targets and have completed significant steps to position the firm for long-term growth, strong free cash flow generation and increased financial flexibility, as highlighted by the completed redomestication to London in early April.

Turning to Slide 4, on the second 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 4% with growth across every major business. As market-related conditions continue to stabilize, we're driving a set of initiatives that are strengthening underlying performance and positioning our Risk Solutions segment for long-term growth and leverage on improving economy. With management of our renewal book through Client Promise and retention rates of 90% or better on average, highlighting strong client satisfaction.

New business generation of over $220 million across our Retail Business, with strong growth across many markets including China, Latin America, Italy and New Zealand, just to name a few, highlighting the strength of our global client-serving capability. Investments in new product and service capabilities with the rollout of GRIP and Aon Broking globally and in our core treaty reinsurance business, net new business trends have not been positive for 4 consecutive quarters.

Reflecting on the individual businesses, in the Americas, organic revenue growth improved to 4% as the impact in pricing and exposures are relatively flat, reflecting the continued modest pace of improvement from a year ago. We saw strong management of the renewal book portfolio across all regions, strengthened by the continued rollout of Client Promise. We saw solid new business growth in Latin America. Results reflect strong performance, overcoming continued market weakness in the commercial construction sector.

In international, organic revenue growth improved to 4% against pricing, which was flat to modestly down on average overall, including firmer pricing in catastrophe-exposed regions. We saw strong growth in New Zealand, across many regions in Asia and in emerging markets, including double-digit growth in many areas such as China, Taiwan and Italy. In the U.K. and Continental Europe, market conditions remained soft and macroeconomic conditions remained fragile across many core markets. With leadership positions across the U.K. and Europe, we saw strong retention rates and the management of the renewal book portfolio led to modest growth across almost every region, a solid performance given industry and economic headwinds.

In reinsurance, organic revenue growth improved to 5%, a level of organic revenue performance not achieved since Q3 2006. Results primarily reflect strong new business growth in global treaty placements. The impact of the market from pricing internationally was modestly favorable, partially offset by higher cedent retentions as clients retain more risk. The underlying strength of the book continues to improve as net new business won was positive for the fourth consecutive quarter. This level of performance and the strength of new business generation continues to reflect the Aon Benfield's value proposition for clients of strengthening operational performance and reducing volatility through unmatched data, analytics and advisory capability.

Turning to HR Solutions, overall organic revenue growth improved to 3% compared to minus 1% in the prior year quarter. We saw a growth across both businesses despite weak discretionary spend globally and continued economic pressure in Continental Europe. Performance primarily reflects strong growth in areas where we're making significant investments in the business in areas such as HR BPO, investment consulting, pension and risk management consulting and health care exchanges. These investments reflect Aon Hewitt's deep understanding of market trends and the long-term issues that face our clients, such as health care costs and associated financial risk that will continue to rise unchecked at a time when overall health and wellness is not improving.

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