AON
#<UNK>, I would characterize really ---+ and <UNK> started on this path, if you really look at for the first nine months of the year, first nine months of the year is stronger now than it was against 2014.
So the short answer is no, in fact, look at it over the course of the year.
Nothing has changed.
We would characterize the quarter as a quarter of continued progress against the long-term objectives, and look at risk.
Organic revenue for the nine months was 2%, operating income increased 4%, margin up 50 basis points.
That's roughly where it was last year.
We are now going into strongest quarter.
We believe the reinsurance business is improving, Continental Europe looks a bit more positive, or at least stable.
A lot of the investments we've made are very good.
So from our standpoint, we feel like this quarter in risk ---+ and by the way, in HR as well is just another good quarter of continued progress.
<UNK>, we are exactly on track with the goals we outlined for HR solutions for the full year.
We are going to grow organically, we're going to expand margins and we're going to grow operating income in 2015.
We have said, <UNK>, that we are going to be modestly profitable in healthcare exchanges for the full year 2015.
We would, Paul, not observe that trend.
In fact, if you think back and just reflect on Aon over the last 10 years, we've done roughly $8 billion in acquisitions over that period of time.
And we've said before, we are probably on track for $200 million to $500 million a year really adding content capability that we can expand across our portfolio.
And we're looking to do that all the time.
To the extent that we divest, it really is around a disciplined amount of return of invested capital.
We are deploying capital around the world, whether it's acquisitions or buyback or whatever.
Organic investment around the discipline that <UNK> set up, and really gauging each investment around improving return on invested capital.
So to the extent we end up divesting something, it's because we've made a determination that it's better off in somebody else's hands on behalf of our clients.
And we'll do that from time to time.
But if you just think about just even in 2014, we did $500 million in acquisitions, and in the flood business, which we really love across the US or the benefits business in the UK.
So we are excited about adding capability when it makes sense to add capability.
I would say generally, if you look over the last 10 years, absolutely.
It will be a positive number, again, it will be lumpy depending on what happens from quarter to quarter, but overall, absolutely positive.
Again, we would start, Paul, with we love the health business.
We love the opportunity to serve clients who face increasing pressures that are very real for them on promises they made to employees about trying to help them serve their families health needs and the increasing costs of that.
Against that backdrop, we provided an absolute large range of solutions.
So remember, we actually do benefits for greater health benefits are than $10 million in the US alone, so we actually do more of this than anybody else and love that set of solutions.
Exchanges end up being a set of solutions for a subset of that group, we like that as well.
And we've got exchanges large, medium, small.
We've got exchanges that are fully insured and self insured.
So we actually go through a range of different options depending on the client's situation.
But in the end, we are addressing the health needs of clients, which we believe we're going to continue to increase over time.
And again, just love the platform.
And have been very successful in growing pieces called the exchanges, but also in developing other areas as well.
Not really, <UNK>.
I think in the end, it was a great question, but really our clients are really looking at the pressure around costs overall.
That could be an accelerant, but frankly, they're feeling the pinch anyway.
They are also feeling the pinch around volatility.
So it really is, how do you help your employees meet their demands and what they need for the family, and do it in a way that is reasonably cost-effective, more pressure there.
And do it in a way that it's not super volatile quarter to quarter for the company is very difficult.
And if we'd actually lower the cost curve over time, which we have been able to do in the exchange examples, that is hugely positive.
150, 200 basis points a year, that's hugely positive.
So it really is that's the dialogue, the Cadillac tax ends up being out there, but it really hasn't been a driver.
I would say either way it is going to evolve, because the answer is a good one and it adds value and clients see that.
Anything, by the way, that increases costs, the Cadillac tax or anything else, actually is a catalyst for change.
So to the extent that's out there and it happens, it's a catalyst for change.
To the extent it doesn't, I wouldn't over play it either.
As clients see opportunities to reduce costs, flatten the curve and reduce volatility, they're going to embrace it.
I would say clients that really innovate on the health side to drive it, it's---+ to give you an example.
We are working with a well-known new car company who is as excited about innovation and health for their employees as they are about frankly changing the way the world buys cars.
And against that, we've helped them create a solution that provides transparency, choice, accountability, a whole series of things for their employees And for them, it is as much about innovation and the idea of better health and better wellness as it is about costs, by the way, you can save an reduce volatility.
So that is really the dynamic that is going on.
Margins are improving, <UNK>, but what I would say is, we are still at low single-digit margins.
As you know historically, several years ago, the margins were negative.
So they have improved, but we do believe that we will move from low single-digit margins to mid teens margins over time.
We are continuing to improve margins every year, <UNK>, and clients today are an average of three to seven year contracts.
So as clients increasingly choose software as a service options, our margins improve.
Is progressing every year, <UNK>.
No, really this is ---+ again, remember we have been privileged.
We've actually brought on board on the exchange front the largest ever on the exchange.
And so almost by definition, as we continue to add clients, the average is going to go down.
By the way, the same is true on the retiree exchange, where we've added what was the largest client in history on the retiree exchange.
So I wouldn't read too much into that, as we add clients, that average is invariably going to come down.
We are not too worried about that.
We're still though, in terms of the category, serving this category we think in a very unique way with a very unique set of options.
No.
For us in the end, we've seen overall positive trajectory, as <UNK> has described before, and we see opportunities here for improvement over time.
And again, as I said, fundamentally, this is a solution which has actually proven to be quite effective for the category of clients large and medium, and small in fact.
And we are excited about adding clients as makes sense for them, and as they elect to come on board.
The other thing I would add is, the quicker we create a platform, we now are adding more and more products to be able to offer to employees.
We've now got over 11 different products, it's not just medical, it's medical, dental, vision, short-term disability, long-term disability, health, pet insurance and others.
So it becomes a platform for employees to really have a choice as to how they want to invest their dollars.
And this is consistent on the exchange, as <UNK> is describing, there with the idea of a platform to serve.
Similar to what we do across the overall health segment.
Which is really, how to we actually serve clients in an effective way across a range of needs beyond a single product, and this just happens to be the platform to do that.
Overall, if you look at year to date, give or take 2% overall, that's probably roughly in line we would say with overall premium growth globally.
What you are getting to there is a great outcome.
That it just really isn't about price, it's really about underlying demand.
Our view is underlying demand in the risk world has continued to grow, that's going to be reflected in premiums which tend to increase year to year and we're roughly in live with that.
We are also doing things to bring new categories into play.
So the work we've done, for example, in the reinsurance world, bringing reinsurance capital into the mortgage world actually creates net new markets for what we do overall.
That's true in cyber, that's true in terrorism as well.
So for us, we think this is a demand opportunity irrespective of what is happening in the macro price environment, and we're seeing it play out over time and we are benefiting from that.
I think it's a great question, Hi, because one of the things we have been investing in, investments in data analytics, particular on the risk side.
And they are enabling us to drive margin expansion at lower rates of growth.
And what you're seeing is we absolutely invested disproportionately in our data and analytics business, particularly up and until 2012.
And what you are seeing in 2013, 2014 and 2015 are the return on those investments.
And as we think about our margin growth from 22.7%, which is where we finished at year-end calendar ---+ or 22.9% year end 2014, to 26%.
There are three big drivers of that margin expansion.
The first is the return on the investments we have made in data and analytics, which are substantial.
And you're seeing that drive the majority of our expansion in 2013, 2014, and again this calendar year.
The second is the revenue engine, which is allowing us to get record levels of retention of existing clients and record levels of new business wins.
And you have seen that in our business in calendar year 2015.
And the third is the continued expense discipline across our [rid] solutions business, and we are on track for record margins in both segments in 2015.
At that would be, <UNK>, at end of the day, where we want to be clear.
<UNK> described the track for us to improve margins irrespective of the external environment.
So we didn't talk about pricing, we didn't talk about inflation, we didn't talk about interest rates.
We anticipate and expect none of those.
If any of those happen, those are substantial accelerants of our margin expansion, but we have been able to expand margin without any of that help with increased operating leverage in the business.
So that is why we are comfortable, and this quarter has done nothing except for reinforce that comfort that we're going to improve margin in 2015, 2016, 2017 irrespective of the external environment.
We're going to continue to make progress in margin every year.
<UNK>, it's a great question, and I think it gets to the heart of free cash flow growth for Aon and how we allocate capital.
We expect double-digit free cash flow growth for the full year 2015.
We have obviously demonstrated 21% growth in free cash flow in the nine months year to date, and we are heading into our seasonally strongest cash flow growth quarter.
So we feel really good about being able to grow free cash flow double digits this calendar year.
As we think about the capacity for buyback, you are absolutely right.
It is the growth in free cash flow and it's the leverage.
And as we think about leverage, we are absolutely committed to our current investment ratings, and therefore, as we grow EBITDA and as our ---+ pension unfunded liability comes down, we absolutely have the ability to increase leverage.
So that's the way we think about it.
Then you could say, are we allocating this capital towards buyback, or are we allocating it towards M&A.
And it is really about how we think about return on capital, which is on a cash-on-cash return.
And our highest return on capital use of cash today is buyback.
Because we do believe we're substantially under valued, because many people still look at earnings growth and for us there's a very big disconnect between earnings growth and free cash flow growth.
And so you have double-digit free cash flow growth to deliver $3.3 billion in 2017.
Yes we are.
So the way that works is that legacy litigation that occurred in Q2 that had a positive benefit on the tax rate will impact the full year tax rate for 2015.
So yes, it will show up again in Q4, <UNK>, and then it will not repeat in 2016.
And as I've said, the underlying operating rate is 19%, and that is the right rate to use for 2016.
This is overall what we put on the exchange, <UNK>, and it is 1.4 million for 2015 into 2016, just as you described.
Look at that as an overall.
We haven't broken those out explicitly.
Basically, we increased the number of clients from 30 to 55 on the active exchange.
The majority are fully insured, but we also have a number on the self-insured side as well.
<UNK>, the way to think about it is the investments we've made are really operating expenses, so they are going to show up every year.
And then as we get incremental participants enrolled, then our revenue increases which is how we get the scale to be modestly profitable this year and continued improvements in profitability in each year thereafter.
So it is the revenue growth, <UNK>.
<UNK>, what we said coming into the second half of the year was that share repurchase would be stronger in the second half of the year than the first half of the year.
Because the second half of the year is our seasonally strongest cash flow half, and that is exactly what you have seen.
So we would expect ---+ Q4 is our strongest cash flow quarter.
So as you think about share repurchases going forward, we would expect to continue to allocate capital based on the highest return on capital.
I would say as you think about hitting the $3.3 billion in free cash flow in 2017, you can assume that the share count is going to continue to trend down over that time period.
So if you think about the $3.3 billion of cash divided by a share count, it is the highest return on capital opportunity we have.
It's a great question, <UNK>, because if you look at the pension restructuring and CapEx it is $230 million.
You add a reduction in cash taxes of about $100 million or about $330 million, so you have got a gap.
And the gap is really coming from operating income growth, both in revenue and margin expansion, so that will be absolutely a big driver of the free cash flow growth.
And the second is working capital improvements.
<UNK>, if you look at 2011, our accounts receivable divided by revenue, so you get days sales outstanding, it was about 103 days sales outstanding in 2011.
In 2014, that reduced to 85 days.
So you've basically got an improvement of 18 days in days sales outstanding over that four-year period, which on 2014 revenue is the equivalent of $575 million in cash from working capital.
And what I would say is, we have got substantial improvements in working capital to come over the next five plus years.
As we continue to improve the processes around Aon and improve our operating model and improve the collection of cash from customers and the payments to suppliers.
No, actually.
It's really about revenue growth and margin expansion.
It's absolutely about operating income growth, so I did start there.
So I would say there are two big drivers of cash flow growth other, there are really four big drivers of cash flow growth.
One is revenue and margin expansion driving operating income growth.
Two is working capital improvements, which we believe is sustainable over multiple years.
Three is the reduction in uses of capital on pension restructuring and CapEx, and four is reduced cash taxes.
They're the four big drivers, and all four of them will contribute.
As we've said before, as we bring this up online, it is going to be higher accretive to our margin currently, and certainly helps us and gets us on track and accretive to our 22% target.
We are investing on behalf of clients, we're absorbing it in the P&L, we're still able to improve margins.
And as we bring this on board and we continue to see adoption, it's going to reinforce our overall margin progress and margin improvements.
Again, we would step back and say, we're actually operating in the health space, which is why we love this space so much.
This is massive, and we would say largely broken.
So this is one of the most important biggest sectors of the global economy, certainly in the US economy.
And our clients are begging an option or a set of options that can flatten the cost curve a bit, reduce volatility.
And most important give employees better choice and better transparency, and hopefully a bit of accountability.
Maybe even change their behavior and improve health overall.
So against that backdrop, we've brought a range of solutions.
It is a massive vast ocean with lots of opportunities there.
And the thing we love is we start with the fact that we actually already do this for 22 million Americans across the overall benefits spectrum, 10 million in health alone.
So we have got tremendous access to the companies to have a great set of discussions.
And we would observe, by the way, when we first started talking about exchanges, most of the world said that no, they don't like them, that we should never have them.
And then eventually everybody showed up with exchanges.
And then we talked about the idea of actually maybe even putting the risk on an insurance balance sheet, let's call it, totally insured.
And everyone said, no, those are terrible too.
And then eventually, everybody's got one of those as well.
So our view is, there is going to be lots of folks coming to the floor here to try to serve this market.
It is an important market.
And at the end of the day, we love our position, we feel very privileged to be where we are.
But we also are very clear, we need to keep innovating, we need to keep improving, we need to keep investing behind and on behalf of our clients, because none of us have gotten our clients to a place where they really need to be going forward.
And that relieves the aspiration.
So really, <UNK>, the way this works is it is collecting that cash customers owe us.
And I think historically, we've had a focus on revenue growth, and then on margin expansion and then really in the last four or five years cash flow.
So I think we haven't had the discipline around the processes and the collections that we are now putting in place.
And I think it is allowing us to translate a dollar of revenue into free cash flow much more efficiently.
So I would say it is both on that side.
And then as we aggregate together our supplier spending, we are able to get better terms in terms of how we pay suppliers.
So both of those contribute to working capital.
And I would say as we continue to bring together global Aon and improve our overall efficiency, we see substantial improvements in working capital over the next five years.
And in many respects, <UNK>, philosophically to the cash piece, and it's worth spending a minute on this.
We have brought what we believe is, it is not rocket science, but in the world of brokerage it is an innovation.
No one has actually ever looked at the idea of how you translate operating income into cash.
It turns out we are not actually squeezing, we're actually just being slightly disciplined.
And slight discipline means we have got a better engine to translate operating income into cash.
And it turns out, it is massive.
And that is why we've got a set of structural changes between now and 2013, structural in pension, structural in restructuring, structural in tax, and structural in working capital.
But again, aren't rocket science, if you're outside the brokerage world.
But in our world, require a lot of energy, a lot to change, but when you do, it creates a tremendous benefit.
So for every dollar of operating profit we're generating, our translation into free cash flow is stronger and getting stronger, and that gets us to the $2.3 billion.
I would highlight as <UNK> described before, we do not need to get to a 26% margin and a 22% margin in our targets to make $2.3 billion.
In fact, if we achieve those margins, we'd be well above $2.3 billion.
So from our standpoint, we're focused on cash because it's important to our investors and important to us.
It's an important bellwether on how much we can invest back into the business, and we are taking steps to improve that profile.
And the 21% in the first nine months, it just says hey, we're on track, and we are going to continue to do that.
And I think importantly, as <UNK> described, we're going to be able to sustain that past 2017 and the $2.3 billion.
The operating rate is going to be ---+ the underlying rate is really going to be 19%.
And then I think it depends on the discrete items, and that's what you saw this quarter which made it lower.
I appreciate everybody joining the call, and look forward to our discussion next quarter.
Thanks very much.
