Aon plc. - Class A (AON) — Q3 2018 Earnings Call Transcript

Thanks, and good morning, everyone, and welcome to our third-quarter conference call. Joining me today is our CFO, Christa Davies. In addition, we are excited to have our Co-Presidents, Eric Andersen and Mike O'Connor, join the call today. As highlighted last quarter, we intend to use our time on the call to provide you with more insight into the longer-term view for the firm, with greater transparency into strategic initiatives. Also, like last quarter, we posted our detailed financial presentation on our website. We believe this approach provides a more thoughtful, long-term focus towards operational performance, including examples of investment in growth areas that are strengthening our capability to serve clients. Mike and Eric will be great additions to this discussion to give you another perspective on the power of leading Aon United. With that opening, we'd like to start by noting that our colleagues around the world delivered another strong result for the third quarter, with positive performance across each of our key metrics, including 6% organic revenue growth; 190 basis points of margin expansion; 18% operating income growth; and 34% growth in EPS; and a similar strong performance across our key metrics year-to-date, reinforcing our continued long-term momentum, which Christa will discuss a little bit more in a bit. This continued momentum is a direct result of the strategic actions we've progressively taken to build upon the idea of leading Aon United and the impact it's having at scale on our business. As discussed last quarter, we've been laying the foundation for Aon United for over a decade, evolving our portfolio, investing in new content and capability, and aligning client demand through programs like Aon Client Promise, all focused on increasing our relevance and strengthening our ability to deliver value for clients. More recently, over the last few quarters, we've taken steps to further reinforce and amplify this progress. In doing so, we've truly entered the era of Aon United, through structural changes that break down barriers and make it easier to deliver the best of the firm to clients: a single leadership team; a single P&L; a single brand; a single operating model. Most compelling, a united global professional services firm. Just last week, we announced another reinforcing step in this journey: the formation of our New Ventures Group, a team of leaders from across the firm who've created additional capacity to build on our already industry-leading record in innovation and further accelerate new sources of value for clients, led by Tony Goland as Chief Innovation Officer. The benefits that accrue when our global firm effectively works together are distinctive and unmatched in the industry and are unlocking significant value for our clients through greater innovation and superior, tailor-made solutions that fit their specific business objectives. Let me give you two quick examples. The first is an example of how our strategic investment in client-serving capabilities led to connections across solution lines and geographies in our core business that created unique client value. And the second is an example of how we're expanding the marketplace by attacking new business challenges on behalf of our clients. The first example. I was recently with one of our enterprise client leaders, which is a team of business advisers that coordinates Aon's value proposition for a select group of significant clients and a large private equity client. And we were discussing the needs of their portfolio companies. And in doing so, it became clearer that they wanted to put their balance sheet to work in new ways and that they aspired to create value outside of traditional PE opportunities. Our enterprise client leader connected that aspiration to our pension de-risking capabilities, and we began a conversation about the opportunity to apply their capital to help de-risk the pension obligations of their portfolio companies and potentially, beyond that, in the broader marketplace. By doing so, we expanded the conversation from risk mitigation to value creation. This is likely to be a new source of value for the client over the coming years and was made possible by the connection our enterprise client leader made between our commercial risk solutions capabilities and related offerings in Retirement Solutions. This example also demonstrates how the enterprise client group could help us create a templated approach to value creation and that we can replicate across sectors. And more broadly, how that team is helping us institutionalize our approach to Aon United growth opportunities and developing best practices designed to make it easier for all of our client-facing colleagues to bring the best of our firm to clients. This second example is all about marketplace expansion, as we continue our focus on expanding the marketplace by developing solutions to our clients' most pressing business needs. In Q3, we continued to invest behind cyber, with the launch of our silent cyber solution, driven by analytics and backed by an evolving reinsurance solution to help carriers respond to expanding cyber risk and regulations. Our actions are translating into accelerated revenue growth. Aon United equals growth, which you can see from both the quarter and the year-to-date in 2018 versus 2017. More important, it'll be a driving factor toward delivering on our goal of mid-single-digit organic revenue growth or greater over the long term as we expand the market, shift towards faster-growing areas of client demand, and continue to increase market share. With that, I'll turn the call over to Christa for our thoughts on our progress year-to-date and long-term outlook for continued shareholder value creation. Christa?

Thanks so much, Greg, and welcome, everyone. As Greg described, the steps we're taking to lead Aon United drove another strong performance for the third quarter. I would note that our progress year-to-date continues to reinforce both our short- and long-term financial targets. Our performance year-to-date through the third quarter reflects organic revenue growth of 4%, an acceleration from 3% year-to-date in 2017. In addition to accelerating organic growth, M&A is continuing to contribute, both improving the mix and driving total revenue growth of 10% year-to-date. Adjusted operating margins increased 210 basis points year-to-date and acceleration from our historic average of 70 to 80 basis points a year over the last decade. Accelerating revenue, combined with significant margin expansion, is delivering strong operating income growth of 19% year-to-date, with core operating income growth reflecting 10% or more than half of the year-over-year performance. Core margin expansion year-to-date is up 50 basis points, and I would note this includes the absorption of near-term investments in client-facing capabilities to support the Aon United growth initiatives that Greg highlighted. EPS growth of 29% year-to-date, placing us firmly on track to exceed our short-term target of $7.97 in EPS in 2018. Lastly, reported free cash flow increased substantially, reminding you that the prior year included cash tax payments related to the divestiture. Strong operational performance contributed to year-over-year growth, partially offset by increased restructuring outflows reflecting this is expected to be our peak year of restructuring cash usage. Adjusting for the impacts of the divestiture, underlying free cash flow grew 5% year-over-year, including a discretionary strategic decision to pull forward $80 million of pension contributions into the third quarter. Our continued momentum and long-term outlook are amplified by the investments we're making across the portfolio to support Aon United growth objectives of mid-single-digit organic revenue growth or greater over the long term and in our Aon United operating model to drive ongoing productivity improvements. As Greg discussed, we're investing organically and inorganically, in both talent and in capabilities across the portfolio in the highest return on invested capital opportunities, which are often driven by areas of client demand, where we find new ways to add value or more effectively service clients' unique business needs. One example is the operating leverage we're creating in our Affinity business, by designing and building an application that will create a differentiated solution for small businesses who prefer digital channels to help navigate their buying process. Through the creation of our next-generation global business services model, we're creating greater scalability, productivity and operating leverage, including the continued expansion of captive and outsourced service delivery centers, which will contribute to the substantial cost reduction. This is just one example of productivity improvements from our single operating model that will continue beyond the near-term restructuring program. Ongoing productivity improvements combined with accelerating revenue growth and a portfolio mix shift to higher-margin businesses are expected to drive continued long-term core margin expansion. More importantly, an accelerating growth profile, increased operating leverage and continued progress on working capital initiatives gives us confidence in our ability to deliver on our goal of double-digit annual growth in free cash flow over the long term. As I mentioned before, 2018 is expected to be the peak year of cash usage related to the restructuring initiative. Declining uses of cash for restructuring, CapEx, and pension are expected to free up $650 million of free cash flow by the end of 2020, significantly increasing our capital flexibility to invest in value creation opportunities. With an expectation of strong free cash flow growth, combined with an opportunity for substantial additional leverage in 2019 and 2020, we're diligent about maximizing return on invested capital and making all capital allocation on this basis. This is highlighted by the $1.25 billion of share repurchase year-to-date, which remains the highest return on capital investment given our free cash flow valuation. In summary, we continue to accelerate revenue growth through significant investments in client-facing colleagues and capabilities to deliver Aon United, and we're driving substantial free cash flow generation that's expected to unlock significant shareholder value creation over the long term. With that, I'll turn the call back over to Greg.

Thanks, Christa. As mentioned earlier, we are glad to have Mike and Eric join us on the call to help provide further insight into how Aon United creates value for our clients and drives growth for the firm. Now going back to questions from our Q2 call, several questions revolved around the very topic, around creating value day-to-day. Today, we want to pick up on that line of questions from the last call and kick off today's discussion with a perspective from both Mike and Eric on this topic. However, before we turn to that question, I'm going to briefly talk about each of these leaders and their importance to our firm. Eric has spent over 20 years at Aon and in that time, he's led and contributed to virtually every part of our business; he's held regional leadership roles in our commercial risk and health businesses; he's taken on the global leadership role in Reinsurance Solutions; he's most recently added Retirement Solutions, working with our colleagues to create connections between our insurance clients and our Investment Solutions. Of course, all those solutions are incubators for some of the most innovative uses of data and analytics. He's had the opportunity to support this portfolio and understand the power of the insights we deliver to clients through data and analytics. Eric is also very well-known and trusted by our market partners. Perhaps most importantly, Eric's been in the ring as Aon has evolved over the years and has a unique appreciation for the importance and potential of our Aon United growth strategy. Mike has been with Aon for over a decade. His background in client service, coupled with excellent operational leadership, provides a unique perspective on how we develop and commercialize insight and most effectively connect it to client need. Like Eric, Mike has held a broad range of leadership roles at Aon, most recently as CEO of our Commercial Risk Solutions, Health Solutions and Affinity Businesses. In that role, Mike championed an M&A agenda that has seen us build new capabilities related to emerging risks like cyber, intellectual property, both of which are consistent with our commitment to create new sources of value for clients. It's also worth noting that Mike spent a great deal of time in London working out of our global headquarters, which provided him with a more global perspective on the firm and a nuanced understanding of the Lloyd's marketplace, which is important to our clients. Now back to the question on Aon United and its impact at the front line of our firm. Eric, can I ask you to take the first cut at addressing that, and Mike, you can follow on.

Thanks, Greg. It's a privilege to be here with you and Christa, and thank you for the great question. Before I begin, I just want to echo Greg's comments on Mike and tell you how excited we are to be working together. As Greg referenced, we've known each other and worked together closely for over a decade, and that collaboration has been a great foundation and is really the spirit of Aon United. So on the Aon United question, where to begin? This has become so fundamental to the success of our firm. When I talk about the unique benefits of Aon United with our clients, I always start with our colleagues because that's really where the value originates. Our colleagues are incredibly engaged by the potential of Aon United. They have seen us systematically bring down the structural barriers over the last few years, and they have leapt at the opportunity to work closely together for clients. They were always inclined to work together, but sometimes we made it more difficult than it needed to be. By making it easier for them to bring the best of the firm to our clients, we have helped them create deeper, more meaningful relationships. That's a good thing because ultimately, we're getting paid for value. Aon United makes it easier to deliver more value for clients. In return, that strengthens our financial performance, with greater retention in our core business and increased relevance with clients through advice and solutions. Let me give you an example. If you look at our Reinsurance Solutions business, you'll find that we serve many of the largest insurers in the world. Historically, that was more of a transactional relationship. We were there to support their book of business. Over the last decade, you've seen us become more advice-driven, using data and analytics to better understand our underwriting appetites and more efficiently transfer the risks they were assuming to the secondary market. That success builds loyalty and intimacy. Those CEOs know that we understand their business better than any other type of partner they have. As we built our investment consulting business, we've earned the right to introduce that new capability to an installed base of clients that already trust us and are conditioned to accept new insights. With one client in particular, we had a great relationship in the traditional reinsurance area supporting their book of business. With our investment consulting capability, we were able to help them on the asset side of their balance sheet. By partnering with this client across their business, we were able to take our relationship to a new level of interaction where we improved operating performance and strengthened their balance sheet. That's just one example of the depth of our expertise in one solution line and our colleagues' understanding and belief in Aon United that translated into an opportunity to introduce a new capability to our clients in a manner that created unique value for them and drove growth for our firm. Mike, I know you see Aon United in action every day and have a few additional examples.

Thanks, Eric. Listening to your description, I completely agree that Aon United excites our colleagues, and we see that ultimately leading to greater client loyalty and growth. Let me take a moment and describe another example connected to the transportation sector that really reinforces this benefit. Across many geographies today, there's enormous growth around small trucks and fleets being put to work to complete the last mile of delivery. We see demand from both large clients and middle-market clients. However, the growth of these transportation businesses is challenged as there is a need for more efficient and effective insurance solutions, both vehicle insurance and health and benefits solutions for their workforce. This client need has spurred within our team a truly Aon United response. Our team stepped back and brought together an array of capabilities: industry expertise from our transportation logistics practice; operational and platform capabilities from our Affinity business that serves small businesses and consumers; reinsurance expertise to access and support capital providers; and our captive team can assist clients that desire self-insured solutions. We brought data and analytics expertise from our global risk consulting team for the vehicle solutions and our talent practice that can help assess driver performance. Finally, health and voluntary benefit solutions for this gig economy workforce from our health practice. The integration of talent and capabilities from across the firm, which does not come together without an Aon United approach, allows us to deliver a customized solution to clients that enables them to operate and grow their business. This delivers an obvious benefit to a client, but these types of opportunities also excite our colleagues. They are incredibly engaged and motivated when working across solution lines and geographies to join forces to deliver unique value to clients. That's been a big part of our journey towards becoming a professional services firm. Eric and I are seeing more and more Aon United efforts across the firm, similar to the transportation example I just shared, where colleagues are working together to create custom solutions, underpinned by insights from data and analytics that increase our relevance with clients and earn the right to provide advice and solution to our clients that help them grow, improve profitability, and reduce risk.

Thanks, Mike and Eric. I appreciate those examples of how Aon United has generated impact with both clients and colleagues. Really helpful insight as we work to make it easier for our colleagues to bring the best of Aon to clients and help us deliver on the growth potential of our firm. Obviously, we can go on with a lot more examples, but let's see what's on the minds of everyone else. Operator, please open up the lines for our next question.

I wanted to maybe continue the conversation with Mike and Eric. Aon is obviously in a very good position financially; the cash flow is strong and going to get better. You've laid out $650 million of incremental savings that you'll get over the next couple of years. You've got more restructuring savings that will be coming through. I guess, as business leaders, how do you, Mike and Eric, see that flexibility being able to benefit the business in terms of investments that you'd make? What are things that you'd like to do that would either enable you to improve retention, improve organic growth, or improve margins through your lenses?

So Dave, it's Greg. I'll start and then we'll alternate as we continue our discussion. First, I really appreciate the question. You're highlighting one of the firm's strengths, which is not just our financial flexibility and capability, but also our ability to respond to the evolving needs of our clients. We've made strategic investments on the acquisition front, such as Stroz in cybersecurity, Townsend, and other notable initiatives. We've also acquired Admix in health and data analytics and ACT in mortgage, among others. We have a wide range of options available to enhance performance through both acquisitions and organic growth. Eric and Mike have been leading this effort, and we're beginning to see positive outcomes for the overall business. Eric, can you share where you are observing these results on a daily basis? I think it's also crucial to note Mike's point about our team members responding to these changes, not just our clients.

Thanks, Greg. I think it really comes down to a couple of big areas. Certainly, we're continuing to invest in our teams. The capability and the development that they have to be able to provide the right insight I think is critical. Certainly, data and analytics are something that we talked about consistently, trying to drive content-driven insight and creating new areas of demand and, essentially, growing the pie in the business is also a major focus, and then obviously, having the right tools to be able to execute for clients. We see investment opportunities and growth areas across all five solution lines.

Yes. I think, as Eric said, we see opportunities with new clients and existing, and maybe I'd highlight a couple of things that come to mind. First, we're using data and analytics to draw out insights to be able to serve clients more effectively, and a great example of that is Aon Client Treaty. We talked about that before. That is data-driven insight for us to be able to provide a better solution for clients all over the world. It's driven by client demand and our ability to unite capabilities within our Insurance and Reinsurance businesses to provide a distinctive solution. We see continued growth and continued benefit for clients. There are many parts of the business we are very excited about. Transaction liability, we highlighted, continues to be a real area of client need, and we continue to invest behind that to deepen our team and grow our geographic coverage, both to serve corporates and private equity and investors. So we are very excited about that space and see continued investment opportunity there.

Just a follow-up on the numbers a little bit, maybe just for Christa. The restructuring savings. If we keep that flat again in the fourth quarter from the third quarter, you guys are going to be at nearly $360 million of restructuring savings for this year versus your $300 million goal. I guess, where is the upside coming from? And is that more something that we should think about as a pull forward, realizing the savings earlier? Or are we at a point where you start to have some visibility where you think you'd have upside of the $450 million target for next year?

Yes. So Dave, thank you so much for the question. We're extremely excited about the restructuring program and its ability to invest in building the Aon United operating model that's going to deliver the $300 million of savings in 2018 to $450 million of savings in 2019, but much more importantly than that, productivity gains and operating leverage in each year after that. I would say in terms of where we're up to, we're very excited about the progress year-to-date in the program. It's really a lot of investments in real estate, in IT and in people around our operating model. We're not in the business of updating guidance. As we think about this restructuring program, it's a three-year program which will continue until the end of 2019. What I can say is that we're very excited and confident about delivering the $300 million in savings this year and $450 million in savings next year.

And then just lastly on organic growth, that was really strong across, especially the commercial book and Reinsurance and in some ways surprisingly strong against the comp, a tough comp. Are you guys seeing more of an uptick in end market demand or is some of this, do you think, some market share gains that you guys are enjoying?

It's a combination of factors across the board. We're focused on client needs and demands, and we're actively working to enhance and introduce new solutions for our clients. The new opportunities discussed, such as in cyber and transaction liability, are examples of this. We're fortunate that our market share is improving, which is a result of offering better solutions to our clients. We believe this trend will continue. Overall, we're seeing strength across various solution lines. It won't be evident in any single quarter, but throughout the year, we expect to see ongoing progress. Our aim is to achieve mid-single-digit growth or better in the coming years, and we're committed to that goal. Keep in mind that Q4 was a unique quarter last year, so we'll be comparing against that as we wrap up the year, but we anticipate continued progress, which is what our team is most excited about.

One of your competitors recently announced a large acquisition. Could you share your thoughts on how this might affect the competitive landscape and the significance of scale?

Yes. From my perspective, success in our industry fundamentally begins with a deep understanding of client needs and how those needs evolve. There is often a lot of discussion about market and intermediary views, but that becomes irrelevant when compared to the changing nature of client requirements over time. Our focus is on gaining a clear understanding of that evolution, particularly regarding risk, retirement, and health. We are specifically working on developing unique capabilities to meet these needs in both traditional and emerging risk areas. For example, our investments in Stroz address the cyber opportunity, Townsend focuses on delegation, Admix targets health, cut-e is about talent, and we are also making organic investments in data analytics, ACT, mortgages, and exchanges. We aim to be extremely focused on effectively meeting client needs. By doing so, we are generating new demand and competing strongly in the traditional market. We believe that this approach, along with our unique financial flexibility and commitment to converting revenue into free cash flow, will not only enable us to serve clients effectively but also yield positive economic results for our shareholders. While scale and size are important factors, we believe that this focus will ultimately determine our success.

Okay, great. And then on the restructuring initiative. You talked about how this should then drive improved productivity over the long term. Can you just elaborate on that? Or are you saying that there is potential for expense savings opportunities above and beyond the $450 million that you've identified? Could you just explain that a bit more?

Absolutely, Sarah. Yes is the answer to your question. We think that if you think about delivering $450 million of savings in 2019, then your run rate exiting '19 is higher than $450 million, so we'll continue to deliver more savings in 2020. More importantly than that is productivity and operating leverage built into the platform because when you aggregate your operations under one operating model, Aon United, we are able to apply automation, AI, machine learning and really continue to drive productivity savings in future years in 2020 and '21. We're very excited about that future productivity benefits. That really gives us confidence in long-term margin expansion, driven by top-line revenue growth acceleration, improvements in the business mix, and productivity.

One other piece I'd just throw in, Sarah, is Christa and the team have orchestrated this effort. What's also unique about it, it's not just the cost saves now, as you know, and the productivity improvement over time, and this is really sort of an offshoot of Aon United and the leadership approach we've taken. As we continue to connect the firm and see opportunities, this isn't just about cost. This isn't just about efficiency; it's about effectiveness. We believe what we're going to be delivering in service and approach on behalf of clients is going to improve as we get more efficient in the process. So that really is how this is very different than anything we've seen undertaken in our industry and certainly anything we've undertaken before.

My first question is regarding organic growth in the long term and your perspective on your market positioning, especially considering the recent consolidation initiatives among some of your peers. It appears that your guidance suggests mid-single-digit organic growth or better over the long term, indicating strong confidence in your positioning. I would like to hear more about this. Additionally, could you provide some clarity on what gives you the assurance that, over an extended period, you can achieve organic growth that surpasses the guidance of others across various companies over the years?

Yes, I'll begin, and then Mike and Eric can add their thoughts. When we consider our approach, it revolves around understanding client needs and how they evolve over time. We are addressing those needs. It's important to note that in the sectors we operate in—risk, retirement, and health—these markets are quite fragmented and underpenetrated. For instance, looking at the risk market globally, only three out of the top ten risks identified by our clients have strong insurance solutions available. As the world becomes riskier, we have an opportunity to adapt. If we simply keep pace, we will see growth. However, what if we could exceed that? What if we offered a cyber solution that provided deeper insights and helped clients manage volatility more effectively? This would allow us to safeguard our balance sheet more efficiently. We recognize an underdeveloped risk market where we can generate new demand and better serve our clients over time. Interestingly, as we enhance our offerings, we also perform better in our traditional business. Eric's example highlights this well, as we not only provided a valuable service to a reinsurance client but also strengthened our relationship with them through our retirement solutions. Furthermore, consider our approach to government de-risking through initiatives like World Bank cat bonds. This particular case involved collaborating with four countries—Colombia, Chile, Mexico, and Peru—to tackle their earthquake risk in an innovative manner. The investment was made using pension funds and orchestrated by the World Bank, with the funds reinvested back into these economies. This represents new demand. One might ask how many developing economies around the world could benefit from such coverage. We believe this opens doors to a new category. Our focus is on meeting current client needs while also capturing new opportunities, both organically and via mergers and acquisitions. This strategy is key to driving organic growth. Eric or Mike, do you have any additional thoughts on this? Eric, would you like to...?

I'd just say, Greg, because I thought the way you described it was perfect, but also just to underscore the Aon United strategy within the firm, I think is really compelling. Mike and I both shared examples, but there are dozens of those examples that exist in the firm where, for example, one of our client leaders is working with firms out West to deal with wildfires or bringing insurance-linked securities, capability to look at that risk in a new way. There's a commercial risk leader that is handling the traditional insurance business for an insurer, was able to underscore or uncover during the Client Promise discovery period a need for additional reinsurance capital in part of their business and made those connections. The ability to bring all the different solution lines to any given firm should drive us that growth that we're talking about.

Is it that the degree of underpenetration of insurance in the market has been increasing over time? Or is it your capability of addressing that underpenetrated that's been improving over time?

Go ahead, Mike.

Well, I think it's both. The reality is, we see opportunities to continue to build capabilities within our solution lines to serve clients more deeply and bring more clients into the firm, and that's underpinned by our investments in data analytics. It's also crossing capabilities across solution lines. Think about Aon Client Treaty, where that does not happen without insurance and reinsurance capabilities. You could think about some of the things we're doing with our retail clients, bringing reinsurance tools to bear like Impact Forecasting, where we're bringing real insight through data and analytics to our retail clients. I think it's both.

The other piece, Yaron, is that we have discussed this on previous calls. For us, this is not just an abstract idea; it’s a daily reality focused on the struggle for relevance, which is a significant challenge for the entire industry. The question is whether we are helping companies manage volatility more effectively. One might argue that, as an industry, we have not been successful in this area. We have not kept pace. Looking back at claims as a percentage of GDP during the '60s and '70s, it was around 1.5% to 2%. It steadily increased every year until the late '80s, reaching about 3% to 3.5%. Since then, it has systematically declined each year and is now back to the levels seen in the '60s. In contrast, as the global economy has expanded, about 75% of the market cap of the S&P 500 is now derived from intangible assets, a substantial increase from approximately 25% in 1975. As this landscape has evolved, we have not collectively adapted. We have not addressed volatility, which we see as a significant opportunity to assist clients in growing their businesses, seizing opportunities, and minimizing risks. Additionally, we have conducted analyses with major tech companies, some larger than our insurers. They do not require capital to protect their balance sheets; however, we have utilized insurance solutions to create demand for them. They introduce products to the market that consumers purchase, backed by our coverage that protects against cyber risks. These initiatives help generate new demand, presenting a genuine opportunity and enhancing relevance not just for us, but also for global insurers and the broader economy.

Got it. My second question was just around the effective tax rate. You're guiding that down for the year, to below 18%. With some guidance expected on the BEAT later this year. Any thoughts as to how the effective tax rate plays out in '19 and beyond?

Yes. Thanks for the question. We did previously give guidance of 18% for this year, and given the impacts of discretes we saw in Q3, the 2018 full-year tax rate will be below 18%. As I look back historically, Yaron, our underlying tax rate for the last three years was approximately 18%. We're not giving guidance going forward but I think that gives you some sense.

Just asking about the BEAT tax itself. Any clarifications that are expected this year?

Yes. The way we think about it is an all-in underlying rate, and what we would say is if you look at the last three years, it's been about 18%. For 2018 in particular, it will be slightly below 18%, driven by the discretes you saw in Q3.

Thank you very much for making Eric and Mike available for this discussion. I just want to follow up around the conversation to ask Eric and Mike. What has changed in terms of your day-to-day operations and the responsibility under Aon United? You gave a lot of good examples of how the work could drive collaboration and growth. But are there any execution risks or potential pitfalls you are worried about in terms of speed of execution as well as accountability?

We think, Kai, as they respond to their day-to-day piece. I'd start with what are the changes beyond just the co-presidents. Remember, we talked about a single P&L. We talked about a single opco and a single brand, all steps that, frankly driven by Eric and Mike and our broader team, were really a catalyst to sort of accelerate Aon United. It has implications, of course, for their day-to-day, which they'll talk about, but it really was built on that foundation. So thoughts, gentlemen?

I can jump in, Greg. As Eric mentioned, he and I have a long history of collaboration. This is the culmination of that effort to actually bring Aon United to life. Our leadership team has stepped up over the years, and we share a strong bond within that group. As we unite the firm under one global operating committee, I am confident that we will not only maintain our momentum but also enhance our execution capabilities. Eric?

I would just say the connectivity that we're trying to bring to the firm as a partnership is really beginning to gain momentum. Mike and I have been spending a fair amount of time around the world with our colleagues and our clients, just reinforcing the fact that we have to work closer together and that the clients are pushing us to do it. They're looking at the degree of risk that they are facing, and they're looking at the solutions that we have across the firm. We said earlier about bringing down structural barriers, the ability for us to bring the entire company to help solve a client's problem builds great momentum inside the firm. You asked about risks as well, and I would just say the execution risk for us is speed. The clients' problems are here and they're now, and if we don't find a way to solve them and be able to bring the firm together as quickly as we need to do, they will be solved by someone else in some other way. What drives us the most is that we see the need. We know we have the tools; it's just how fast we can get it together to get it in front of the clients.

That's great. My second question is margin front. If you're looking into 2019, your cost saving $450 million versus $300 million this year would be $150 million. That equates about 130 basis points of margin expansion; assuming half of that flows through the bottom line, it would be like 60 basis points. Your core margin expansion, underlying core margin expansion, you mentioned year-to-date about 50 basis points. If you can sustain that, you could add up to more than 100 basis points year-over-year margin expansion into 2019. Christa, I'm just wondering, is that a right way to think about your margin potential going forward?

Kai, we don't obviously give margin guidance going forward. What we can say is we're very excited about continuing to be able to expand margins through three key sources. One is accelerating revenue growth, which you've seen in calendar year '19. You saw, for the last couple of years, we've been continuing to accelerate organic revenue growth, and M&A is contributing to total revenue growth of 10% year-to-date. The second is mix shift. We continue to invest in higher revenue growth, higher margin businesses, both organically and inorganically. The third is the restructuring savings and ongoing productivity beyond 2019. We feel really good about the future margin expansion potential of the firm.

Okay. Last question, if I may. It's about your cyber and transaction liability business, which you mentioned has been growing in double digits. I'm curious how large these businesses are in relation to your overall portfolio, particularly regarding the silent cyber initiative. Are you concerned about it becoming a competitor to your clients, not only on the insurance side but also in terms of reinsurance? Is there any lingering balance sheet risk for Aon?

There's — just to start with that one, there's no residual balance sheet risk. As you know, Kai, we're not in the business of sort of taking balance sheet risk. Ours is to connect capital with need, and we do that around the world with our insurers and with alternative capital and all the different pieces around that. What we would say on the cyber side, just generally, is look, this is about net opportunity, and it really starts again with our recurring theme around client need. Clients, if you think about it — we've talked about it before. The numbers are sort of connected to cyber trauma. Incurred $450 billion of pain, of loss in 2017, and against that, that's $3 billion to $4 billion in premium that was written. We might be the largest and it might be growing double digits, and we're very excited about it. By the way, our team's done an exceptional job. When you think about $3 billion to $4 billion in the context of $450 billion, Kai, that's a massive opportunity to help clients succeed. Remember, that $450 billion as I described on previous calls is really a North American figure. The European figure is close to 0 because they didn't actually need to report cyber. It wasn't required until May of 2018. Just a few months ago, the European data laws sort of kicked in, and those are incredibly onerous. The cyber connected loss, not connected loss is going to go to $1 trillion on the dial, and the industry has responded with $3 billion to $4 billion. For us, we see massive opportunity for our clients if we get this right when we get this right. Frankly, for the industry as well and real opportunity. This goes back to the idea that Mike and Eric were talking about in terms of emerging real risks that we can help clients succeed. Again, as Eric described, if we don't sort it for them and solve it, they're going to find other ways to do it. We see this as a substantial opportunity.

Okay. How big are they now relative to your portfolio?

Very small, very, very small. These are kind of new initiatives we've put in place, good representative examples of sort of steps we've taken, but they're very, very small, tiny in terms of the broader overall Aon. We think they have tremendous potential.

My first question is about the strong Reinsurance growth this quarter. You faced tougher comparisons last Q3, with about 10% organic growth when adjusted for revenue recognition, and you have a 20% comparison in the fourth quarter, largely due to reinstatements and cap-ons after last year's hurricanes. How do you view this? Will it be a challenge, or can you manage it to some extent like you did this quarter? Additionally, considering you've noted a 50 basis points core underlying margin expansion year-to-date, will this be a headwind in the fourth quarter since Reinsurance is such a high-margin business, or does having less revenue in the fourth quarter mitigate that?

Listen, overall, again, you just got to step back and look at the trend line, sort of what our colleagues have been able to do in Reinsurance Solutions. I would just highlight, it has been exceptional. If you look at the last few years and our ability to actually win new clients and do more with clients is actually continuing to progress. You're seeing that, Elyse, and that's played out sort of in the first nine months of the year. Look, Q4 — I just want to emphasize that trend line, that overall progress is exceptional, and the team's been great on the treaty side, on the fact side, the alternative side, just absolutely exceptional, and I think we see that trend line. Again, we always come back to those trend line on a particular quarter. As you highlight, Q4 is unique; it's unique sort of in history. It's, by the way, our smallest quarter as you've described. The comp is very unique. We know what was going on last year is going to create a headwind in the fourth quarter, no doubt, in terms of where we are. But the overall timeline and overall trend have been exceptionally positive. But Q4, definitely a major hurdle as we think about sort of the comparison.

I would just add, Greg, a couple of things. One, we continue to see good success in the build-out of the core treaty business in terms of new clients and expanded business with existing clients. Our facultative business in the third quarter was exceptionally strong, and we were able also to do new things with some new client groups, whether it's government entities or firms like that that are a little broader than the normal remit. People think of reinsurance for insurance companies. I think the combination of the three has been positive for us all year.

I would say this goes back to Elyse, very specifically, trends have been exceptionally positive. Q4 is definitely a major hurdle as we consider the comparison.

And as we think about a few months forward and you start having conversations with clients, do you guys have kind of a high-level little view on what kind of prices we could expect in the Reinsurance market January 1 renewals?

As we talked over time, I really don't spend a lot of time talking about sort of predictions on the pricing front in particular, just given sort of our analytics and what we do day-to-day with our clients. Overall, we'd say, Elyse, when you look at pricing against sort of the progress for the first nine months of the year, it really continues to be at par, if you will. There are pluses and minuses depending on sort of what you've encountered as a client and what kind of trauma you've encountered. Overall, the marketplace for us continues to be relatively stable.

Okay. And then on the expense saves. I know we had a few earlier questions. You guys are at $308 million, the end of your target for this year was $300 million. Christa, are you implying that you guys aren't, even if you guys get well ahead of that by the end of this year, that you guys won't potentially raise the program again? Or is it just that, that's not something that you kind of looked into date? I just kind of want to understand how we can tie that all together and our thoughts around that.

Sure, Elyse. I guess the simple thing I would say is we're not in the business of updating guidance. It's a three-year program. We've got until the end of 2019, and we're very excited about the progress we've made to date. We're on track to deliver $300 million of savings this year and the $450 million of savings next year.

Okay, great. And then one last question. Repurchase was a little bit lighter than what we had modeled. Was there anything in the quarter that caused that to slow down a little bit? Or it's just kind of timing, when buyback kind of comes during the year, maybe your stock actually did better this quarter. Did that play into thoughts around repurchasing shares?

Yes. Elyse, as you know, we allocate capital based on return on capital, cash on cash returns. Share repurchase remains the highest return on capital opportunity across Aon. What did happen in the quarter is we did accelerate $80 million of pension contributions from future years into Q3. So that was one factor that impacted us. Long-term, we see a very highly valued internal valuation of Aon, which is why the return on capital opportunity is so substantial for us.

I have two, I think, somewhat related questions. The first is based on really everything that you talked about on this and previous calls, should we expect what you term the market impact to be less of a factor in either direction going forward?

Again as we come back, we talk about market impact, it really is the insured value part of the world and the pricing part of the world and as we've described before, insured values, sort of if you think about those actually has a more material impact over time than the pricing piece. All I've tried to highlight is, if you think about sort of what we said on previous calls around the influence of pricing, that hasn't changed that dramatically. But if you think about the long-term view, maybe Eric, you want to start. Mike, you want to chime in?

Yes. I would just say the overall structure of the business remains largely unchanged from the beginning of the year. Even with natural catastrophes in Japan, Florida Panhandle, and some of the man-made losses, like the Genoa bridge disaster, the total cap budgets are largely in line with what the reinsurers and the insurers expected. Our sense is that with the supply and demand that was there at the beginning of the year, that's relatively unchanged. The interesting part, as we try and bring that capital to provide cover for new risk, I think that's where there's growth in the business.

The only thing I would add is with our investments in the Reinsurance business and insurance business and data and analytics, we think about this risk by risk. We are spending our time making sure we understand our clients intimately well and can think about the right answer for them, and we will source solutions for them anywhere in the world that makes sense.

And the final piece I think to throw into this, Meyer, is the following. Listen, these conversations around pricing in this marketplace are obviously important and relevant, etc. We try to put them in context. Again, ours is not about pricing; it’s about client value and how we deliver on that. I really want to come back to is, this is about Aon, right? This is about, literally, we put 6% up in the quarter. It’s about progress, and if you think about sort of the overall portfolio of Aon, the retirement side, the investment side, the health side. What we do in data and analytics more broadly. Less and less of our business is even connected to this in any way, shape or form, and even in the context of the risk business, less and less obviously important, but less and less relevant over time. I just want to put in the overall context in terms of sort of how this fits into the broader Aon portfolio, single OPco, single operating model, single P&L.

That's helpful, that's really where I was driving at. So that clarifies things. Second question, I understand the bottom line impact of what you're talking about. But how do you think about areas of technology actually reducing risk? I guess, autonomous cars, if we could flip a switch and have them tomorrow, would be a good example of one major current risk significantly evaporating. How big of a factor is that?

I think I understand your question about whether technology will reduce volatility and risk over time. We are eager to find instances where this is the case. Our clients often approach us with insights on how technology is transforming their business models and altering their risk profiles. In many ways, this transformation tends to increase the risk profile. Currently, despite their belief that they have things figured out, there is significant uncertainty due to technological change. This is an ideal time to be involved in a rapidly changing global economy, where overall risk is rising. This increase in risk isn't limited to traditional risk areas; it extends to retirement and health sectors as well. The level of volatility today seems greater than ever. With changes in areas like intellectual property, it's evident that the overall risk basket is also increasing. As we've discussed, our primary concern is maintaining relevance and our ability to adapt. We need to provide solutions—whether financial or risk management—that genuinely help our clients enhance performance or lessen their volatility. Ultimately, our evolution must go beyond traditional growth; it must focus on improvement and delivering higher quality for our clients.

Could you provide more details about the New Ventures Group? It seems very intriguing. I have a couple of follow-up questions. First, you mentioned that it's really about increasing value for a client. You gave one example; could you share another example or two of those activities? Second, could this be a sector where you might focus on more acquisitions? Third, you mentioned your first venture; does this area suggest more potential engagement with private equity and venture capital?

Yes. So Adam, just to step back. In essence, this is just another step in the journey. We think it's an important one, but another step in the journey. Mike and Eric both talked about innovation and what we're doing to bring new solutions to clients. New Ventures is essentially saying, listen, we've gone proven approaches. They work exceptionally well. Can we be faster? This is to Eric's point on speed matters. Can we be faster at identifying opportunities and then scaling them globally? This is an internal effort in which we've got a group of senior leaders. Again, one of the manifestations of having the single operating company and the single P&L and our co-presidents doing what they're doing has allowed us to free up leadership time to focus more strongly on this. Think about what we're doing in data and analytics and all the pieces around that and John Bruno's area. Ours is really about how we can accelerate those. That’s fundamentally what really New Ventures is about, and you'll see us pick two or three or four areas, and we'll have a portfolio in which we're really trying to identify where and how we can accelerate. This is not about third-party investment, private equity investment; it's not about that at all. It's really about how we take ideas and scale them more globally, more effectively. We've got, I'm not going to go through the portfolio today. We want you to see them evolve over time. I think they're going to be pretty interesting. But — and reasonably significant but we have to prove it out and we have to drive it. We know without this capability; it's very hard to actually get enough energy and effort to really scale something effectively. That’s really what New Ventures is about, and I think under Tony Goland's leadership, with our broader group across the group, it will be a very interesting set of steps that will strengthen the firm.

Great. And then on Health Solutions, a very strong quarter. New business in the EMEA region. Is that more multinational clients or is that more European or other EMEA-based clients? I guess is there — is that a growing pipeline in that type of business?

Listen, first of all, thanks for recognizing and drawing out health. Again, as you know, we love this category. We think globally it represents a monumental opportunity to assist clients and what is really a frankly, pressing and intensifying set of needs, back to the question on is demand going up or going down? We think it's going up. What's going on in EMEA, by the way? You're seeing throughout the course of the year, across the world. It's not only serving local clients with a better sense of solutions; it's also serving global clients who want more consistent health beats around the world, very, very important. In addition, augmenting what they have, voluntary benefits and things that actually make the value proposition stronger. You're seeing that. In EMEA, in this quarter, you've seen it across the world, and we think it's actually going to continue strongly. Again, it's one of the reasons we like this category so much.

Okay. And you touched on it, but voluntary benefits in the U.S. Strong growth there. Is that your increasing your product set, increasing your capabilities? I guess what's driving some expansion there?

Again, it's both, back to client demand. Clients really want to see new opportunities, they want to see solutions that actually improve well-being, and you go beyond a specific product area. You've seen us bring a number of new solutions to markets that have actually served our clients well. We think they have great trends ahead of them.

Great. And one final for Christa. On the free cash, I think you mentioned in the range of $600 million plus would be freed up in the next two years that had been used in restructuring, if I'm correct. Is that weighted more towards '19 or '20 to the extent you could say?

Yes. So Adam, what we would say is as you look at the slide deck, I'm just finding the slide. We've outlined this. So $650 million of cash flow reduction — so a reduction in use of cash on pension restructuring and CapEx. It's Page 23 of the slide deck posted on our website. So $650 million, it's not just from restructuring. It's a reduction in CapEx and it's reduction in pension contributions as well.

I just want to say everybody thank you very much for joining the call, really appreciate it, and look forward to our discussion next quarter. Thanks very much.