Aon plc. - Class A (AON) — Q3 2020 Earnings Call Transcript

Thanks very much and good morning everyone. Welcome to our third quarter conference call. I am joined virtually by Christa Davies, our CFO, and Eric Andersen, our President. Like in previous quarters, we posted a detailed financial presentation on our website. We'd like to begin by thanking our Aon colleagues for their extraordinary focus and dedication in supporting clients and each other. What they do every day is exceptional; whether it's building strong lasting relationships with clients as we help them navigate these complex times or the way Aon colleagues come together to collaborate and innovate in ways that are helping us build an even stronger firm; truly tremendous work by the Aon team around the world. Turning to our performance, in the third quarter we delivered strong results that once again demonstrate the resilience of our business and the strength of our analytic services platform. Organic revenue growth was flat overall reflecting strength in the core areas of our portfolio and ongoing expected pressure in the more discretionary areas. We saw continued strength in reinsurance solutions with 13% organic revenue growth driven by strong net new business generation and double-digit growth in three facultative and capital markets. Commercial risk delivered modest growth of 2% with strength in the core and continued pressure in more discretionary areas. Health solutions growth is 1%, modest growth internationally partially offset by pressure in the U.S. with respect to ongoing headwinds in the global economy and lower employment levels. Retirement Solutions and data analytic services both experienced organic revenue declines as we saw expected pressure in more discretionary businesses, like human capital, travel, and events. As we assess our revenue outlook in Q4, the primary theme is continued uncertainty in the global economy. As many governments consider new restrictions in response to increases in COVID-19 cases, while government stimulus remains uncertain and evaluating Q4 revenue expectations, two points are important. First, given the seasonality of our business, we have a larger portion of more discretionary revenue occurring in Q4. So the pressure on organic will be more significant than in prior quarters. For example, areas like construction and transaction liability recognize revenue when shovels hit the ground and deals are closed. As expected we're seeing pressure in the larger investments in the current environment. In addition, organic revenue growth in Q4 last year was exceptional at 7% overall, as we highlighted last year, which includes double digit growth in transactional liability as well as double-digit growth in voluntary health benefits. A few areas of the more discretionary portion of our business are larger in Q4. The second, and importantly, we believe these segments are temporary and reflect pressure from current economic conditions. We're confident in the strong underlying fundamentals of our business. Overall, we have a revenue basis diversified across the industry and geography and solution lines; roughly 80% is now discretionary, and another significant portion renews every year with an average retention rate of 95%. From an operating standpoint, we delivered strong results, including a 40 basis points of operating margin expansion in the quarter to 170 basis points margin expansion year-to-date. We saw 6% EPS growth in the quarter and exceptionally strong free cash flow of $1.9 billion through September, up 91% from the same period last year. These results demonstrate our continued resilience of our Aon United strategy focused on working across our solutions lines and geographies to bring the best of the firm to clients. Furthermore, this strategy continuously evolves in response to client feedback. Over and over, our best outcomes occur when we listen attentively and deeply understand client challenges. One recent example of this is the partnership with a global market leader in the Internet of Things. Using our clients’ telematics, colleagues in commercial risk, human capital, and data analytics developed a mobility as a service solution that attributes like on-demand car sharing. This forms part of a total rewards program for employees. Our client provided the technology, and we provided the insurance solutions that are digitally distributed through our total rewards platform. This enabled the company to offer simple flexible benefits to their workforce that meet their needs at the time when tracking and retaining talent in new ways is paramount for their growth. Not only have we co-created a cutting-edge solution, but we've also elevated our partnership with this client to a more strategic level, working together to innovate for mutual growth. This example of Aon United action also highlights a larger area: clients demand continuous updates and industry innovation. It's one of the areas we described in our recent innovation white paper in conjunction with our partnership with Willis Towers Watson. Many industry sectors face highly specific challenges that lack adequate solutions. As a result, we recognize that there's a need in our industry to create more affordable scalable solutions to broaden access to a wider range of recipients. For example, we’ve been investing in digital distribution capabilities to efficiently reach areas that aren't well served today, highlighted by our capability for the small commercial space. As we've seen across the economy, COVID-19 accelerated digital adoption. Through September, premium volume flowing through the couple of platforms is up more than three times over last year, showing that this new platform is addressing previously unmet client demand for more efficient digital solutions to their risk management needs. As part of our innovation white paper, we identified and prioritized four areas we can more quickly and effectively address due to our combination with Willis Towers Watson, further proof that the combination will make us better and faster. As outlined in this piece, we think about delivering innovation on at least two levels. The first level is about how our business gets better today, as we provide more comprehensive solutions to clients. A significant part of this is reinforcing our colleagues' subject matter expertise by industry and geography, along with analytic tools that help them provide better solutions to enable clients to make better decisions. We live in that type of innovation in our core business every day and see the opportunity to do even more with the complementary capabilities of Willis Towers Watson. Building on that first level, there’s a second level in which we bring those comprehensive solutions to new addressable markets, like U.S. mortgage reinsurance, and deliver specific insight and analytic-driven solutions like Aon client treaty. These newer challenges can’t be assessed with historic insight alone. We have some of the capabilities today but will be stronger in combination with Willis Towers Watson and more capable of delivering these solutions at scale. A fantastic example of this second level is a solution we recently developed for a private agricultural technology client. Rather than issuing equity, they were able to use our intellectual property capital market solution to raise funds through non-dilutive debt. Our proprietary industry-defining method of evaluation enabled us to value their IP so it was insurable and could be used as collateral for a loan for over $100 million. This is another example of how we're driving innovation today. We observe that client need continues to outpace innovation in our industry. We believe that our combination with Willis Towers Watson will be fundamental in helping reverse this negative trend. As we've consistently emphasized, our priority is to continue listening to and understanding our clients. We take pride in the strength of our client relationships and we're listening to them more than ever before. We also want to ensure we hear from them regarding the pending combination, and we are. Clients from across industries, solution lines, and geographies have expressed tremendous support for the pending combination and especially for the opportunities it presents to drive enhanced innovation. Similarly, we're listening to our colleagues and we're hearing that they're incredibly excited about the pending combination and what it means in terms of opportunities for them both in what they can bring to their clients and their own growth and professional development. We continue to see higher colleague retention year-over-year across the term and across geographies and solution lines. In Q2 and Q3, we saw a 39% decline in voluntary turnover year-over-year. Maybe most remarkably, our latest survey of how colleagues feel about Aon and our mission yielded the strongest sentiment in over 10 years. This is a meaningful credit to our people leaders and all of our global colleagues. In summary, our focus on Aon United and on providing innovative solutions for our clients is delivering results today as we manage through challenging times. Equally important, our progress and development establishes us in a position of strength for long-term growth, which is substantially accelerated in the combination with Willis Towers Watson. With that overview, I'd like to turn to Christa for further financial review. Christa?

Thanks so much, Greg, and good morning everyone. As Greg mentioned, we delivered a solid operational performance in both the quarter and year-to-date despite continuing macroeconomic challenges, demonstrating the resiliency of our business and the strength of our Aon United strategy in any economic environment. We remain committed to delivering shareholder value over the long term, which we believe will be accelerated by our pending combination with Willis Towers Watson. Similar to last year, my commentary today is more focused on the quarter given differences in the external environment today versus the beginning of the year. I would also note that Q3 is our seasonally smallest quarter. Having said that, we manage our business on a full-year basis and target continued progress against our long-term financial metrics. Our third-quarter results reflect continued strong performance in challenging economic conditions. Organic revenue was flat, highlighted by 13% organic revenue growth in reinsurance solutions and 2% organic revenue growth in commercial solutions. As I described in Q1, our business has strong fundamentals with roughly 80% being core and 20% relatively more discretionary. As expected, we continue to see larger impacts in the more discretionary portions of our business, such as human capital consulting, travel and events, transaction liability, and project work across the portfolio which contributed to organic revenue declines in retirement solutions and data analytics services. I would also note the reported revenue continues to be pressured by lower fiduciary investment income as a result of lower interest rates globally, representing a decrease of $18 million in the third quarter. Moving to operating performance, we delivered another quarter of improvement demonstrating strong operational discipline as we return to more normalized levels of expense compared to the second quarter. We had strong year-to-date performance and 6% operating income growth, operating margin expansion of 170 basis points, and EPS growth at 8%. As I look towards the fourth quarter, there's continued macroeconomic uncertainty and as Greg mentioned, we see increased revenue pressure in the fourth quarter compared to prior quarters. As I communicated last quarter, we expect expenses for the remainder of 2020 to be more consistent with underlying expenses in 2019 excluding adjusted items. This is due in part to an increase in certain discretionary expenses as well as continued target investments in priority areas for long-term growth while maintaining strong operational discipline. While certain areas such as reduced travel and entertainment expenses continue to be modest tailwinds, we're investing in priority areas such as intellectual properties and cybersecurity and making necessary operational investments. For instance, we're investing in tools for colleagues and strong cybersecurity as we continue working remotely. Finally, as noted in the earnings materials, FX had an unfavorable impact of approximately $0.01 in the third quarter and $0.06 year-to-date. At today's rates, we would expect a $0.02 per share unfavorable impact in Q4. Turning to cash and capital allocation, free cash flow increased $908 million or 91% to $1.9 billion driven by working capital improvements, of which a portion is related to short-term action taken proactively managing liquidity, a decrease in restructuring cash outlays, and strong operational improvements. Much of the strength we see in free cash flow comes from our Aon services platform. I would also note that we’re seeing ways in which services allow us to better support colleagues today and make us more resilient in the future. For instance, over time we've increased the amount of standardization across geographies and solution lines in sharing best practices and driving efficiencies. This has enabled us to better manage employee well-being, as colleagues can more easily cover for one another, allowing our colleagues greater flexibility to take time off to care for their family. We remain very confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile. We ended Q3 with approximately $300 million lower total debt compared to the end of Q2, due in part to paying down a substantial amount of commercial paper in the third quarter. Historically, we’ve looked to increase debt at EBITDA growth while maintaining leverage ratios. However, due to the uncertain microeconomic conditions, we expect to continue to manage our leverage ratios conservatively in the near future. We are diligent about maximizing return on invested capital and making capital allocation decisions through this framework. Share repurchase remains the highest return on capital investment today, given our free cash flow valuation and outlook highlighted by the $500 million of share repurchase in the quarter and nearly $1 billion year-to-date. We will continue to repurchase shares while maintaining higher than normal levels of cash for the near future given macroeconomic uncertainties. Stepping back, I want to take a moment to reflect on our pending combination with Willis Towers Watson and reiterate how excited we are about the significant shareholder value creation potential. First, as Greg described, we see ongoing opportunities for revenue growth as we bring together these highly complementary businesses. Historically, Aon has driven growth in three key areas: driving continued improvement in our core business, portfolio mix shift for high growth areas, and unlocking net new opportunities that expand our total addressable market. As Greg mentioned, COVID-19 has highlighted the reality that our clients have growing and unmet needs across risk retirement and health. The combination with Willis Towers Watson positions us to address these needs well. As we've said, we remain committed to $800 million of expected cost synergies. I would note that we expect these synergies on top of core module expansions for both firms and while we see a significant nature in macroeconomic uncertainty, we're very confident in our long-term strategy to drive margin expansion. We've said before that our margin expansion is driven by accelerating revenue growth, portfolio mix shift for high growth high margin businesses, and leveraging Aon business services operational platform. In particular, we're confident that the investments we've made in our Aon business service platform will enable us to capture our expected synergies and continue to drive long-term operating margin expansion for the combined firm. I've noted that over the last decade we have driven 70 to 80 basis points of margin expansion on average each year, sometimes higher and sometimes lower. So we run the firm on a cash basis. We've demonstrated a strong track record of driving efficiencies and growth in areas such as working capital and CapEx. We're confident the investments we've made in Aon business services will create even more opportunities to grow free cash flow as we look forward to the pending combination with Willis Towers Watson. Looking back to our deal announcement on March 9, we couldn't be more excited about the accretive nature of Aon's EPS and free cash flow in year two and significantly accretive to free cash flow in year three. Given macroeconomic uncertainty due to COVID-19, we've since withdrawn our financial guidance of mid-single digit organic revenue growth and double-digit free cash flow growth, which were key assumptions of the projections upon which we calculated accretion. We are not reissuing financial projections at this time due to the ongoing macroeconomic uncertainty. However, the primary drivers of the accretion that we provided were the $800 million of synergies and our capital allocation strategy. We remain committed to the $800 million of synergies, and while we took action to proactively manage liquidity earlier this year, we resumed share repurchase in the third quarter and continue to buy back shares. I would note that mathematically, the same amount of synergies on a smaller baseline of EPS would be more accretive. We are confident that the $800 million of synergies, our focus on driving free cash flow, and our disciplined capital allocation strategy will lead to meaningful shareholder value creation. Finally, as we continue to make progress against our key milestones, receiving shareholder approval from both sets of shareholders on August 26 with 99% approval from Aon shareholders and 96% from Willis Towers Watson shareholders, we remain on track to close the deal in the first half of 2021. In summary, our business has shown resiliency despite continued macroeconomic challenges. Our Aon United Strategy, underpinned by our Aon business services operational platform has enabled expense discipline and strong free cash flow growth while positioning us for long-term growth. Our disciplined approach to return on invested capital provides financial flexibility to unlock significant shareholder value creation over the long term. We're incredibly excited about the pending combination with Willis Towers Watson. With that, I'll turn the call back over to the operator and we'd be delighted to take your questions.

Hi, good morning. Each of the questions and the color about 4Q, I will just start with that one and get a better sense of what are the areas that have the most exposure to the economic weakness right now and is there any way that you can provide some general bookends around how much organic pressure there will be in the fourth quarter? Are we thinking something like mid-single digits would be appropriate or there or is there just that much more discretionary spend that happened there where the pressure could be more than that?

Dave, what I tried to highlight at the start of the call is that, overall when we think about revenue going forward, nothing has really changed except for this unusual year. This unusual year is all about uncertainty. As you think about Q4, there’s just a lot of uncertainty. There is uncertainty regarding how COVID will evolve, the reaction of government, and the reaction of clients. Colleagues across Aon have done a remarkable job, an incredible job through the first nine months, and we are supporting each other and clients. But when you think about Q4 for us, the pressure we described, and the pressure is real, is really because of the disproportionate amount of what we do in the discretionary part, which overall happens to be in Q4. We do see Q4 last year was exceptionally strong. We are excited about that, but it was exceptionally strong double-digit in a number of these discretionary areas, which is where we are. Then there are aspects of our core business, such as travel and events, that are still under pressure, and they're going to come back stronger than ever. We are very confident of it, but it is a lot of uncertainty as we move into the year. We do want to highlight though that as you think about the overall profile that Christa described—growth, profitability, EPS, free cash flow—that profile hasn't changed at all as we think about Q4. Christa, is there anything you would add to that?

Greg, I might just finish with this: as we think about our business, we really manage it over the course, Dave, of a full year, and we certainly expect to grow margins over the course of 2020. We expect to grow EPS, and we have an extremely strong free cash flow outlook. While there's pressure for sure in Q4 on revenue and therefore on margins, we expect to continue to grow in 2021 and continue to manage all four of those metrics; revenue, margins, EPS, and free cash flow over the course of the year.

Helpful, thanks. And then I'm sure it's tough to opine on next year, but assuming we get back a little bit more of a normalized environment, organic growth still might be soft. Is there some sort of threshold where it gets hard to expand margins? Obviously, you could tell the curtail those back at expenses perhaps longer-term revenue growth, but how do you think about that balance for next year if growth is sort of both below the 3% to 5% range that many insurance brokers are at?

Yes, Dave, we do expect to grow margins next year. If you looked at 2020 margins, for example, we expect to grow margins in 2020, and we're up 170 basis points year-to-date. Long term, our goal is to drive margin expansion each year as evidenced by our record 27.5% margins in 2019, up 250 basis points on top of ten years of margin expansion with 70 to 80 basis points each year net of ongoing investment in the business. We would say long-term margin expansion is driven by revenue growth, portfolio mix shift to higher margin areas, and Aon business services driving productivity. We believe we have substantial opportunity for margin expansion with the combination of Willis Towers Watson—number one, growing Aon core margin and number two growing Willis Towers Watson margins, and number three adding the $800 million of synergies, which we are very confident about delivering.

And even Dave, as you think about the overall economy and how it struggles to evolve over time, I just want to remind you that, on top of what Christa just described, we need to consider the broad-based risks that are no longer on the rise. Pandemic, climate change, intellectual property—these are things that are real. They're in front of us. They're going to create demand over time because clients need to find ways to address these issues. So on top of all that Christa described, that's what we're really excited about with the combination being able to address that.

Hi, thanks. Good morning. My first question just in terms of the merger with Willis Towers Watson. I was hoping you could provide us an update just in terms of timing; I guess first half of next year. I'm assuming obviously that still holds, but I guess more in terms of just like it's the regulatory process where we stand today in terms of kind of the timeline you guys expected when you put the deal together just given it seems like COVID in some instances has slowed things down. Just want to kind of get an update and see anything there, still on track and where we stand from a different perspective?

Terrific, thanks for the question Elyse. We do believe we're exactly on track to close in the first half of 2021. We filed our joint definitive proxy on Wednesday, July 8th and completed the share with overwhelming support on August 26 with 99% of Aon shareholders and 96% of Willis Towers Watson shareholders voting for it. We do not expect to provide an update on the regulatory process unless we have something to report. As John Haley mentioned on Willis Towers Watson's earnings call yesterday, several global antitrust filings will be required in connection with the closed transaction. The specific planning process and timing varies by jurisdiction, and we do not expect to provide updates until we have something to report. But as we've previously indicated, we are on track and expect to be able to close in the first half of 2021.

Christa, maybe a follow-on regarding how we're doing with the integration process because I think it's pretty important. We've actually done a lot of work around the cultures of the firms and understanding how each of the firms operates through the client centricity, the capabilities of each of the firms are so complementary. We've been using this period of time really to focus on getting to know each other, trying to figure out how we can work better together. As Greg mentioned on the white paper, we're finding those opportunities. So while that regulatory process is ongoing, we've been spending a lot of time setting up and doing the planning about how we're going to come together.

Great, and then in terms of organic growth, going back to the color in terms of the greater discretionary piece in the fourth quarter, you guys said you expect to slow. I am guessing to slow in the Q4; the Q3 was obviously better than the Q2. What was the point you were trying to make? Is that the fourth quarter would be like the weakest of the year or just slow down sequentially versus Q3? I wasn't sure if there was a lot of value you were also trying to make at me referencing that to the second quarter, which I guess was the lowest so far that you have seen during this slow down.

Yes. To highlight, this is really about uncertainty. We are observing the pressure that we described, which is real, is as Christa described, with 80% in core and 90% discretionary but 20% disproportionately for us shows up in Q4. That 20% are things like M&A services; we have an awesome business here with wonderful support for clients, but if shovels don't go in the ground, that doesn't happen. Eventually, it happens but it builds the business over time over the coming years. We're not talking about the core category; it's great but in Q4 it's about uncertainty where it is. The same is true in some health businesses; travel, events, etc. So we're just highlighting there is a lot of uncertainty in Q4. No one really knows—well if anybody out there knows, please call us. We'd like to know exactly what's going on! But our colleagues have just done a masterful job being ready for clients to move and modify and help them shape their strategies, but we just have a huge amount of uncertainty sort of in terms of Q4, with growth in 2021 and all the things that Christa described; nothing has changed in our overall growth profile on what we expect long-term.

Okay, great. And then just one last question, Chris. I think last quarter you had mentioned that you guys were returning to buybacks. I think you used the word modest, correct me if I'm wrong, and so you guys bought back $500 million of your stock in just one month in the quarter, which was a pretty healthy level. Can you just help us think about buybacks like the levels from here given that it was a pretty robust return to buyback when you guys went back into the market in the third quarter?

Thanks so much, Elyse. Look, in response to macroeconomic uncertainty, we did pull buyback in March in order to maintain liquidity, stability, and flexibility. Then we announced last quarter we resumed a limited amount of buyback for the remainder of the year. We're not giving guidance about capital allocation going forward, but we'll assess it based on actual forecasted cash flow as well as capital market conditions. What you did see, Elyse, is exceptionally strong free cash flow stunning in the first nine months of the year; it's up 91% to $1.9 billion. But the macro uncertainty remains. What you'll see is we continue to allocate cash based on return on capital, cash on cash return, and buybacks remain the highest return on capital opportunity across Aon, even at Aon's peak valuation or peak stock price. At today's prices, it is a fantastic return on capital opportunity, and so we will continue to buyback, but it'll be based on the cash we generate and capital market conditions.

Hi, good morning. I had a couple of questions both on the Willis deal. First, there's a lot of skepticism out there about your comments on not really having a lot of revenue synergies as you go through the regulatory approval process and the potential for you being forced to sell parts of the Willis business or parts of the combined business. Can you discuss what gives you confidence that that won't be the case? And then related to your expense savings targets, if we look at the $800 million number, that's I think close to roughly 5% of the cost base. In past deals, you've done a lot more than even 10%, and I would have thought that, given the similarities between the two companies, you'd actually potentially be able to do more. So maybe talk about if there's any conservatism baked into your numbers or are there things that you see that are causing you to be more cautious on expense savings.

Sure, Jimmy. So I'll take the first one on antitrust. We do believe we're on track to close in the first half of 2021, as I said, with no divestitures. The reason we're so confident about that is because we have the world's leading antitrust counsel. We've had them for more than 18 months, and we've worked through this in detail. We believe we have highly complementary businesses, and even in areas like reinsurance, which I know has been speculated upon, we look at that business and think about it from a client perspective, where clients have a huge range of choices. If you think about the clients for reinsurance, it's primarily insurers, and they can place direct, which a lot of them do. They can place in the capital markets through alternative capital; they can place through mutuals and they can place through a huge range of brokers, including a number of broker start-ups given the significant movement of talent in the reinsurance industry. We look at that incredibly competitive field and we see that there is enormous competition from a client choice perspective and so again we feel really confident about where we are and exactly on track to closing the first half of 2021 with no divestitures. Then moving to your second question—sorry Greg, did you want to jump in?

No, please go ahead. I'll pick up when you are done.

Your second on cost synergies. We did announce $800 million of cost synergies, which, as you pointed out, Jimmy, is 5.5% of the combined cost base. We achieved 11% of the combined cost base in Aon Hewitt and 18% of the combined cost base in Aon. What I think that tells you, Jimmy, is we are extremely confident about achieving the $800 million. What it also tells you is that the main strategic focus of the combination with Willis Towers Watson is on revenue and delivering on these new solutions for clients to meet unmet client needs. We want to ensure that as we bring the combination together, we're really focused on clients and driving that significant upside in terms of revenue potential as opposed to getting distracted by taking costs up. But Greg, what would you say?

I think the statistics you added are pertinent, but I want to emphasize two aspects of it, Jimmy. When you think about talent—are you asking about talent in addition to just the antitrust fees? Ask yourself, as we come together our colleagues are going to be able to sit across the table from clients with more capabilities for clients, that's a wonderfully positive thing, and that's what we're focused on. Eric, in his work with his colleagues at Willis Towers Watson and others, is really working on how that value proposition comes together to make it more compelling. This is not about synergy; it's about the net new capabilities for the client. If you step back and think about a 30-year period regarding risk as a percent of GDP, it's becoming less significant. That's what the facts tell us at a time when client need is going up and has become even more pronounced during the pandemic. Again, this is what the white paper was about and as we begin to address those opportunities, that’s why this is about growth.

Yes, Greg, maybe to elaborate on it for a second because I think our Aon United Strategy, which we've been working on for several years, is about how we integrate around the client by bringing all the capabilities together. Whether it's bringing reinsurance modeling to property clients on our commercial risk side, there are hundreds of these examples that are out there. Willis Towers Watson has very similar client-focused efforts underway, and so when you bring those together, as Christa said, this is all about finding new ways to serve our existing clients and doing more for them. The excitement that's building, both from Aon and the Willis Towers Watson side, is starting to come together as people begin to see the possibilities.

Okay, and just lastly on the health business; you saw a noticeable improvement in your organic growth from 1%, but last quarter was down double digits. I think in the release there's a mention about some timing of booking revenues. Is the majority of the improvement just because of that, or I don't know how much you can quantify it or was there underlying improvement in the business as well versus Q2?

Yes. Well, as we said in our last discussion, really this is a space we absolutely love. The overall opportunity in health, we think is tremendous coming into 2020 and as you well know, Jimmy, has become even more pronounced with everything happening with the pandemic. It's now literally at every border and every company around the world, and our opportunity to support clients here is tremendous. So we love this long-term, and we love it even in the short term, and what you saw in Q3 was just continued progression. There is still a lot of uncertainty; still a lot of discretionary events happening in the fourth quarter related to health, particularly in the U.S., but we love this space long term, and the team has done a great job—we are really looking forward to seeing this business grow and progress.

Yes. Good morning. First, I want to go back to what I think you said something along the lines of spreading the risk. So my question is, were buybacks not contemplated in your original framework?

So Suneet, actually what I said was if you think about the $800 million of synergies, the accretion was really based on two things: the $800 million of synergies and capital allocation. The buybacks of $800 million in the fourth quarter will continue to buy back shares. If you think about availing accretion mathematically, if you think about the original accretion assumptions on a smaller EPS base, then it would be more accretive today.

Okay, got it. And then I guess on the deal in terms of regulatory reviews and approvals, how might a change in the presidential administration impact the timing of the close as we think about potential changes at the DOJ or elsewhere?

Suneet, we will see any impact should there be a change in administration, especially given the timeline we expect for the deal.

Okay, and then my last question is just on margin. Looking out over time, Christa, you mentioned a couple of times the 70 to 80 basis points of margin expansion annually, and you still feel pretty good about the path going forward. But as we think about margins in the future, is there any way to frame for how much longer you guys think that you can continue to improve margins—be it at that 70 to 80 basis point range or something in that neighborhood? So when does this sort of tailwind start to peak or drop off?

Suneet, thanks so much for the question because long-term our goal is to continue to drive margin expansion. This year we do not see some cap on margins. In fact, we continue to see margin expansion for the foreseeable future. It’s really driven by revenue growth, our portfolio mix shift to higher revenue growth, higher margin areas, and Aon business services continuing to drive productivity. We obviously see substantial margin expansion with the combination of Willis Towers Watson because you get Aon core margin expansion, plus Willis Towers Watson margin expansion, plus the synergies. As we look at our portfolio today, the portions that are more analytic in nature tend to be higher margin areas of the portfolio, so that gives us confidence going forward that we'll continue to have long-term margin expansion.

And so on top of that Suneet, if you think about what Christa just described, if you paint a picture over the coming years, literally all the pieces are in place for margin expansion. We think about Aon business services and the capabilities with the next incarnation of that called the new way Aon business services as we bring the firms together in this new world; the opportunity over the next few years is in place, and there’s tremendous opportunity for Aon by itself, Willis Towers Watson by itself, and for the combination. That’s why we’re pretty excited about that. But beyond that, if you go to the innovation white paper for just a minute, there are issues that must be addressed. Client need is going up. As we address those issues, they're going to be with analytics and capabilities that we're building over time. That analytics gives us a margin profile that's different than it has been before. If you look at other analytics businesses, their margin profile and their growth are much more substantial than ours. So there's the ceiling you're describing—it's a great question—but we don't see that at all. Because we have all that we do, and we help our colleagues because it really is about our colleagues more than any time ever. We're truly supporting them with greater levels of analytics that help us address these questions, which is great for our clients, great for our colleagues, and happens to be exceptionally good for our shareholders in terms of where we are. That's why we're so excited about the investment and the combination to address the next level of issues that are out there—no longer on the horizon; they are at our doorstep with a higher awareness than ever to address them.

Got it. Okay, thanks for the answers.

Yes. Thanks and good morning. I had another question on margins, thinking more about this in the next year or two. I was hoping you could help me think about the competing forces of when we return to a normal world of growth and a normal world of expenses. Does the potential for margin expansion in one particular year have natural pressures from the return of normal expenses?

Thanks so much for the question, and what we would say is we expect to continue to drive margin expansion each year, including if you thought about returning to a normalized environment whereby you’d add expenses back as revenue came back. We’d be very disciplined about making sure that occurred. If you think about the new operating model, we're consulting with clients about, we can think about areas like lower real estate costs long-term, more service delivery centers, and ongoing Aon business services providing productivity improvements over time. There are many areas in which we think the opportunity for margin expansion continues to accelerate.

Okay. Understood. A quick numbers question—reinsurance organic growth in the year was a bit strong, and one of the things that was noted was a timing benefit. Can you just help us understand what the timing benefit was and when it was from?

So this is Eric. I would say it was pretty minor. The reinsurance business continues to do great on a full-year basis, but obviously Q3 and Q4 are the smallest quarters for us because most of the treaty business is done at that time; it's now facultative and any kind of investment banking work that gets done. I would say it’s pretty immaterial.

Okay, and then the last one just philosophically thinking about share repurchases versus the uncertainty. That's come up a lot of times on this call for the next year or two. How do you think about the uncertainty and get comfortable with the fact that at least the third quarter was a strong quarter using that level as the right action? Just given the uncertainty that you have?

Thank you so much, because we are managing cash and liquidity incredibly conservatively. You can see this as we built up cash and short-term investments on the balance sheet, decreased debt by $300 million between the end of Q2 and end of Q3. You can see it because we've got a very conservative debt ladder long-term for the firm. So we're being very conservative in response to the macroeconomic conditions. And Greg, please jump in.

Yes, and I’m just trying to put context to our overall strategy and what we're doing—like Christa is describing, literally the discipline and the approach we've taken in managing our balance sheet and driving free cash flow has been exceptional and continues to be exceptional. We have the capacity to do a lot as we invest in the business while doing share buybacks, anything that drives return on invested capital and free cash flow over time. I would highlight you're seeing the buyback. We have the capacity to do a lot, but the example I described around intellectual property is an example where we're investing in the core business and really doing things from an innovation standpoint. The loan we made for that took hundreds and hundreds of colleagues coming together to model intellectual property in ways that's never been modeled before, literally never been modeled before in a way that we could actually insure a patent portfolio and then get a loan against the patent portfolio. We're making lots of investments in the business as we build it over time. I love the example that John shared yesterday about the climate. So, we're investing in this as we see this as one of the next big horizons with how we help clients think about the transition from a challenged world, and we can help reduce volatility against that by matching capital with risk. Fundamentally, this is what we're talking about, and the beauty of it is from a cash standpoint; we have an exceptionally strong balance sheet, extraordinarily strong free cash flow, which will be reinforced as we come together in the combination. This will allow us to actually do the things that Christa described: allocate capital, improve the capital, buy back shares. It obviously makes sense for all the reasons Christa describes, but also invest in the business and bring in additional capability as needed. So we're managing cash; it is the thing we live every day.

Got it. Thank you.

I just want to say to everyone, as always, thank you so much for joining us. We appreciate it and look forward to our conversation next quarter. Thanks very much.