Aon plc (AON) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and thank you for holding. Welcome to Aon plc's Second Quarter Earnings Conference Call. [Operator Instructions] I would also like to remind all parties that this call is being recorded, and that it is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our second quarter results, as well as having been posted on our website. If anyone has any objection, you may disconnect your line at this time. Now it is my pleasure to turn your call over to Greg Case, President and CEO of Aon plc. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to our Second Quarter 2013 Conference Call. Joining me here today is our CFO, Christa Davies. Consistent with previous quarters, I'd like to cover 3 areas before turning the call over to Christa for further financial review. And we note that there are slides available on our website for you to follow along with our commentary today. First is our performance against key metrics we communicate to shareholders; second is overall organic growth performance; and third, continued areas of strategic investment across Aon. On the first topic, our performance versus key metrics. Each quarter, we measure our performance against the 4 metrics we focus on achieving over the course of the year: grow organically, expand margins, increase earnings per share and deliver free cash flow growth. Turning to Slide 3. In the second quarter, organic revenue growth was 3% overall, driven by strong growth in Consulting and Retail Brokerage. Operating margin was essentially flat, as an increase in Risk Solutions margin was offset by a decline in HR Solutions and the unallocated section. EPS increased 9% to $1.11, reflecting effective capital management. And finally, free cash flow increased 20% driven by strong working capital performance. Overall, a solid performance against our key metrics as we strengthen our industry-leading platform for long-term growth, strong free cash flow generation and increased financial flexibility. Turning to Slide 4, on the second topic of growth. I want to spend the next few minutes discussing the quarter for both of our segments. In Risk Solutions, organic revenue growth was 3%, with growth across every major business. As we've discussed previously, we're driving a set of initiatives that are strengthening underlying performance and positioning our Risk Solutions segment for long-term growth and improved operating leverage. With management of our renewal book through Client Promise, and retention rates of more than 90% on average, a record level of performance, highlighting strong client satisfaction in Retail Brokerage; new business generation of approximately $270 million across our Retail business, with double-digit new business growth in many markets globally across the Americas, Asia and Pacific regions; investments in new product and service capabilities, with the growth of GRIP and Aon Broking globally delivering increased operating leverage; and in our core treaty reinsurance business, net new business trends have now been positive for 9 consecutive quarters. Reflecting on the individual businesses within Risk Solutions. In the Americas, organic revenue growth was 5%. Exposures are relatively stable, the impact from pricing was modestly positive on average, reflecting a steady pace of increase over the last 12 months. We saw solid growth across all regions, including Latin America, U.S. Retail and Canada. In U.S. Retail, we delivered solid growth, driven by strong new business growth, including growth in property/casualty, Health and Benefits and Affinity, as well as strong management of renewal book portfolio with record levels of retention. In international, organic revenue growth was 3%. Exposures are relatively stable, and the impact from pricing was flat on average, with firmer pricing in cat-exposed regions and softer pricing in most regions across Europe. We saw strong growth in emerging markets, New Zealand and many regions across Asia, including double-digit growth in areas such as China, Philippines and Taiwan. In the U.K. and continental Europe, macroeconomic conditions remained fragile across many core markets. However, with leadership positions across this region, we saw solid new business growth, strong retention rates and management of our renewal book portfolio delivered modest growth. Overall, a solid performance against economic and market headwinds. In Reinsurance, organic revenue growth was 2%. As we've noted over the last few quarters, record capacity continues to be available to meet demand. And cedents are retaining more risk, driving unfavorable market impact in the quarter. Absent an event in the industry, macro factors will continue to be a headwind in 2013. Against those headwinds, results reflect modest growth across all businesses. In treaty, as mentioned before, net new business won was positive for the ninth consecutive quarter. And we did deliver solid growth in our industry-leading capital markets transactions and advisory business. Overall, this level of performance and strength in new business generation reflects Aon Benfield's unmatched level of investment and long-term value proposition for clients, while strengthening operational performance and reducing volatility through unmatched data, analytics and advisory capability. Turning to HR Solutions. Overall, organic revenue growth was 2%. We saw strong growth in Consulting Services despite weak discretionary spend globally and continued economic pressure in continental Europe. Underlying performance also reflects growth in areas where we're making significant investments in the business, in areas such as health care exchanges, investment consulting, pension and risk management consulting and HR BPO. These investments reflect Aon Hewitt's client leadership, understanding the market trends and the long-term issues that face our clients, as health care reform, health care costs and the associated financial risks continue to rise unchecked at a time when overall health and wellness is not improving. Multinational clients are increasingly looking for global benefit solutions that support their global organizations, delivered at a local level; managing and transferring risk across pension schemes that are increasingly frozen and largely underfunded. And finally, after continuing to work through the worst economic recession in the last 70 years, clients are beginning to renew their focus on talent, retention, development and engagement to prepare themselves for renewed long-term growth. Turning to the individual businesses within HR Solutions. In Consulting Services, organic revenue growth was 6% compared to 3% in the prior year quarter. Underlying results reflect solid growth across our retirement businesses, for investment consulting, and pension administrative services, as well as communications consulting. Despite weak demand for discretionary services and overall economic weakness in continental Europe, for the full year, we continue to expect low- to mid-single-digit organic growth across the Consulting Services business. In Outsourcing, organic revenue was flat. Organic growth reflects net new client wins and demand for HR BPO, health care exchanges and discretionary services, partially offset by a modest decline in benefits administration. As we noted last quarter, we continue to make great progress in our health care exchanges and interest in the Aon Hewitt corporate exchange continues to be particularly strong. In Q2, we had excellent sales, which will drive strong growth in enrollments for 2014. And the client base represents a broad range of both new logos and existing clients across a broad range of industries. If you think about the corporate exchange, the progress of the team has been truly an outstanding accomplishment. We went from concept in 2011 to active enrollment of the industry's only active multi-carrier corporate exchange for large employers. Enrollment of roughly 100,000 employees plus eligible dependents. All participating clients are referenceable, with representation from both existing clients and new logos. Great progress from the team in serving existing clients on the exchange and building the pipeline, reflecting the strength of our industry-leading platform across employee benefits design, brokerage and administration. Slide 5 highlights the third topic, areas of investment. We believe Aon is in a unique position. Solid long-term operating performance, combined with expense discipline and strong free cash flow, continues to enable substantial investment in colleagues and capabilities around the globe. A few examples include: in Risk Solutions, we're investing in client leadership to drive greater productivity and efficiency with the rollout of the Revenue Engine internationally, as well as the rollout of Client Promise, which is driving greater retention and rollover rates. We continue to invest in innovative technology such as the Global Risk Insight Platform. GRIP is the world's leading global database of risk and insurance placement information. We now have roughly 1.7 million trades, more than $88 billion of bound premium and a growing list of insurance carriers utilizing the platform for its analytics and service capabilities. In addition, we're driving our Aon Broking initiative to better match client needs with insurer appetite for risk, as highlighted by our ability to package similar risks and place substantial programs and facilities into the market on behalf of clients. A great example of this, among many, is our structured portfolio solutions effort in Health and Benefits. Another example is the continued alignment of our global Health and Benefits platform to better capitalize on our global distribution channel and deep brokerage capabilities. Further, we have substantial investment in the development of data and analytics capabilities at Aon Benfield to strengthen an already industry-leading client-serving capability. Finally, we're expanding our footprint through tuck-in acquisitions that either increase scale in emerging markets or expand capability to better serve clients, as well as adding key talent across Asia in specialty sectors and in our GRIP solutions business. In HR Solutions, we're making significant investments to strengthen our industry-leading position in health care exchanges. Health care exchanges enable clients to begin transitioning their participants to a market-based, defined contribution model for health care that gives participants more choice while addressing unsustainable health care cost increases and decreasing population health. As a growing leader in the private health care exchange market for post-65 retirees and the leader in the private exchange market for active employees, we're focused on driving greater scale in 2013 and improved returns in 2014. We're expanding in high-growth areas for our current clients and new markets. Innovative solutions to de-risk pension plans are in high demand with our existing retirement client base. Our delegated pension solutions are opening relationships in new markets. And finally, we're providing a broader set of advisory and advocacy solutions to our clients' employees to better enable greater choice and improve decision-making on their retirement and health care options. We continue to expand our industry-leading benefits administration solutions and technology platforms, including extensive mobile solutions. And finally, we're strengthening our international footprint to support a global workforce with investments in key talent and capabilities across Asia and emerging markets. Overall, we proved the concept of these major investments in 2012, and we're fully on track to deliver greater scale and increased operating leverage in 2013 and 2014. In summary, we delivered organic revenue growth across both Risk and HR Solutions, continued to ramp up significant strategic investments that will drive greater long-term growth and operating leverage, delivered solid earnings and strong double-digit free cash flow growth. With that said, I'm now pleased to turn the call over to Christa for further financial review. Christa?

Thanks so much, Greg, and good morning, everyone. As Greg noted, we continue to position Aon for long-term growth, strong free cash flow generation and increased financial flexibility. Our performance in the quarter reflects continued progress against our key financial metrics, with solid earnings and 20% free cash flow growth, highlighted by the repurchase of $225 million of ordinary shares in the quarter. Now let me turn to the financial results for the quarter, on Page 6 of the presentation. Our core EPS performance, excluding certain items, increased 9% to $1.11 per share for the second quarter compared to $1.02 in the prior year quarter. Results reflect the strong performance in our Risk Solutions segment, a lower effective tax rate and effective capital management in the quarter. Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on Page 12 of the press release include: noncash intangible asset amortization, redomicile costs primarily for legal and advisory fees to complete the transaction; and restructuring charges related to the Aon Hewitt restructuring program. We expect that all remaining charges for the formal restructuring programs will be complete and final in 2013. Foreign currency translation had a $0.02 unfavorable impact on EPS in the quarter due primarily to a stronger dollar versus the Aussie dollar and Japanese yen. If currency were to remain stable at today's rates, we would expect a similar impact in both the third and fourth quarters. Now let me talk about each of the segments on the next slide. In our Risk Solutions segment, organic revenue growth was 3%. Operating margin increased 60 basis points to 22.5%, and operating income increased 5% versus the prior year quarter. Organic growth, including benefits from our investments in GRIP and Aon Broking, as well as $6 million of estimated restructuring savings, were partially offset by a minus 20 basis-point unfavorable impact from a decline in investment income and unfavorable foreign currency translation. Let me spend a moment on the formal restructuring programs, key initiatives that have enabled concurrent funding of investments and long-term structural margin expansion. Under the Aon Hewitt program, approximately $90 million of estimated savings will be achieved in the Risk Solutions segment, primarily related to workforce and lease consolidation within the Health and Benefits business that was transferred in 2012. Approximately $51 million of the $90 million in cumulative savings have been achieved under the program, with approximately $39 million to be achieved by the end of 2014. A breakout of restructuring charges incurred in Risk Solutions, associated with the Aon Hewitt program, is detailed in the schedules on Page 13 of the press release. Overall in the second quarter, we delivered solid operating performance in Risk Solutions despite continued economic uncertainty in Europe, an unfavorable impact from foreign currency and a decline in investment income. For the first 6 months, Risk Solutions margins were up 90 basis points, placing us firmly on track for margin improvement for the full year and continued progress towards our long-term target of 26%. Turning to the HR Solutions segment. Organic revenue growth was 2%, operating margin decreased minus 50 basis points to 14.9%, and operating income was essentially flat to the prior year quarter, in line with expectations we provided at the beginning of 2013. Overall, modest growth and $15 million of incremental restructuring savings were offset by investments in long-term growth opportunities and an unfavorable revenue mix shift. With respect to the Aon Hewitt restructuring program, approximately $288 million of estimated savings will be achieved in HR Solutions, primarily relating to workforce and lease consolidations. Approximately $227 million of the $288 million in cumulative savings have been achieved under the program, with the remaining $61 million to be achieved by the end of 2014. Incremental savings opportunities were identified as we completed the final analysis of the Aon Hewitt program. These savings will: number one, overcome the onetime impacts in the first quarter; number two, optimize our significant investments in long-term growth opportunities such as health care exchanges and investment consulting; and number three, strengthen our outlook for higher operating income growth in 2014. As discussed in the previous quarter, we provided commentary regarding the outlook for the HR segment in 2013 and that outlook is unchanged as results continue to be in line with expectations. We expect to: number one, deliver continued organic growth; number two, drive greater scale and improve return from the investments; number three, deliver savings related to the restructuring program; number four, deliver performance modestly down in the first half and up in the second half of the year, resulting in mid-single-digit operating income growth and margin expansion for the year. Now let me discuss a few other line items outside of the operating segments on Slide 9. Unallocated expenses were $44 million, including certain expenses related to the company's redomicile. Interest income was similar at $2 million. Interest expense decreased $9 million due to a decline in both the average rate and the total amount of debt outstanding in the quarter. Other income of $6 million includes a net gain due to the favorable impact of exchange rates on remeasurement of assets and liabilities in non-functional currencies and net gains related to long-term investments. Going forward, we expect a run rate of approximately $1 million per quarter of interest income, $45 million per quarter of unallocated expense and $55 million per quarter of interest expense. Turning to taxes. The effective tax rate on net income from continuing operations was 26.4% in the second quarter. The company currently expects that its full year effective tax rate for 2013 will be approximately 26%. But the tax rate for 2013 may change depending on discrete tax adjustments and the geographic distribution of income. The company currently expects that over time, the reduction in its effective tax rate on net income from continuing operations will be greater than previously anticipated. The actual effective tax rate in any particular period will depend on discrete tax adjustments and changes in the geographic distribution of income. Lastly, average diluted shares outstanding decreased to 317.1 million in the second quarter compared to 335.6 million in the prior year quarter. The company repurchased 3.5 million Class A ordinary shares for approximately $225 million in the second quarter. The company has $3.5 billion of remaining authorization under its share repurchase program. Actual shares outstanding on June 30 were 307.5 million, and there are approximately 9 million additional dilutive equivalents. Estimated Q3 2013 beginning dilutive share count is approximately 316.5 million, subject to share price movements, share issuance and share repurchase. Now let me turn to the next slide to highlight our strong balance sheet and cash flow. At June 30, cash and short-term investments were $573 million, and total debt outstanding was $4.4 billion. Overall debt-to-capital was 37% at June 30 compared to 37.6% at March 31. The decrease is primarily driven by a reduction in total debt outstanding. Cash flow from operations increased 17% or $49 million to $333 million in the second quarter, due primarily to improved working capital and a $43.5 million favorable impact from the settlement of a non-recurring onetime legal matter, partially offset by a $41 million increase in cash taxes. Free cash flow, as defined by cash flow from operations less CapEx, increased 20% or $45 million to $271 million in the second quarter, driven by improved cash flow from operations. Turning to the next slide to discuss our long-term financial flexibility. We value the firm based on free cash flow and allocate capital to maximize free cash flow returns. As you can see from this chart, based on current assumptions, we expect free cash flow to increase by over $500 million over the next 6 years, based only on a reduction in cash used in pensions and restructuring. Growth in the core business, further margin expansion and a reduction in the overall effective tax rate would generate additional free cash flow growth. Regarding our underfunded pension plans. We've taken significant steps to reduce volatility and liability as we've closed plans to new entrants, frozen plans from accruing additional benefits and continued to do de-risk certain plan assets. We currently expect contributions to decline by $85 million to $463 million in 2014, and continue to decline thereafter. Regarding our restructuring plans. Cash payments are anticipated to be $158 million in 2013. As our restructuring plans continue to wind down, we expect cash payments to decline by $83 million to approximately $75 million in 2014, before declining further each year thereafter. As we continue to grow, improve operating performance and our required uses of cash decline, we expect our strong free cash flow growth to continue to be a significant source of value creation for shareholders. In summary, we delivered solid earnings and strong free cash flow growth, and are firmly on track to deliver improved performance in 2013. While we're investing to further strengthen our industry-leading portfolio, we're focused on 3 primary areas that will each contribute to substantially stronger free cash flow over the next several years: first, continued growth and operating margin improvement towards our long-term targets; second, declining uses of cash, primarily for pensions and restructuring; third, greater capital flexibility and increased cash flow from a lower effective tax rate. Combined with a strong balance sheet and increased financial flexibility, we've positioned the firm for significant shareholder value creation. With that, I'd like to turn the call back over to the operator for questions.

[Operator Instructions] Adam Klauber of William Blair. Adam Klauber - William Blair & Company L.L.C., Research Division: It sounds like you're getting good momentum on the company, health care exchanges. I realize selling season probably isn't over yet, but could you guys, I guess, give us some idea, if you had 2 clients last year, how many clients or what the range of potential clients you could have this year? And if you had 100,000 lives -- just any ranges would be helpful.

Yes, I'm happy to do that, Adam. As you would expect, we're going to always protect our clients and this will come out over time and be clearer over time. But this has just been, for us, an extraordinary selling season. We've been very excited about it. We had 3 clients, by the way, last year, at 100,000-plus lives, recognizing one was Aon but 2 others, Sears and Darton, our public information earn-on, went exceptionally well and I feel very good about it. This year, we're going to have a significant number of new clients, very significant, multiples of new participants, new logos. You're also going to see a real mix across industries, as well, as we were going forward looking at. And also, more carriers who are now participating in the overall exchange. So for us, it's just really been a very positive enrollment cycle this time. And we have a pipeline that's actually even more substantial for the coming year. So the investment, from our standpoint, it has really picked up and we're quite excited about it. And the last thing I would just say on this, it's really the employee experience that's really driving this. As we've tracked and watched how employees have engaged in the exchange over the last cycle, it's really been a powerful tool to talk to future companies about -- thinking about this because not only are they able to actually control costs more effectively now and manage their health care cost situation more effectively, they're also able to provide an enhanced experience for their employee, which is obviously quite important as well. So you'll see this evolve over the coming months, but it's just been an exceptionally strong cycle for us and we're quite excited about this. Adam Klauber - William Blair & Company L.L.C., Research Division: Okay, great to hear. On -- with the employer mandate being pushed off, did that push off some of the decisions of potential clients?

It really hasn't had that much impact. Overall, if anything, it raises the specter and clients want more insight and advice in terms of, sort of, how to deal with the evolving health care world. As we've said before, the Affordable Care Act, fundamentally, doesn't address employee health and it doesn't address unit cost of health care. And what the exchanges do is give companies the chance to sort of, at least, get a handle on how to think about that more effectively for their company. And so for us, it hasn't had a huge impact. And as I've said before, it had just been a very robust season and we expect it to continue in the next season as well. Adam Klauber - William Blair & Company L.L.C., Research Division: Okay. And just finally on the topic, you signed a joint venture with eHealth, if I understand that correctly, to help with potentially temporary or lower paid employees and also, potentially, early retirees. Do you think that, that joint venture will have visibility at the end of this year? Or is that more of a long-term-type venture?

Yes, it's going to come in over the long term. But it's just another example of -- one of the things we want to try to do is really try to communicate the opportunities on how to think about this very important choice at the company level and at the employee level, and eHealth helps us do that. And it's a great solution for clients but also for individuals as they think about trying to evaluate a very complex space.

Our next question comes from Brian Meredith with UBS.

A couple of questions. First, a quick one here. Christa, just curious, why will interest expense go back up since you reduced your debt?

Yes, there was a onetime item in the quarter and it's also just the timing of our debt in terms of when we brought the new debt on, which happened during the quarter. And so as you sort of, when you get to run rate numbers, it will increase.

Great. And then, Greg, I wonder if you could talk about what you think the impact right now on organic revenue growth is from the weak European economy? Let's assume we can go back to some kind of a normalized 3% nominal GDP, how would that impact organic growth in the international, as well as the HR Solutions business?

Well, as you -- firstly, you saw, Brian, in the end, I want to emphasize that it is uneven, it has been a challenge. But it really is -- Europe was really -- not Europe but, say, a series of individual countries with individual situations. And we've got very positive, we've got very strong franchises in each of those. As you saw, we had 3% growth on the Retail side in Europe, outside international this quarter as well. And roughly kind of 20% of our revenues, overall, if you think about it, there's obviously upside as the economy strengthens over time. But we've been able to actually weather the storm quite well, and we anticipate, continuing to be able to do it, to the extent it exists and continues. At its core, clients need what we're providing. They need to understand how to measure and mitigate risks. They need to understand how to deal with these important issues around their people on retention -- or on retirements, pensions and health care. So all these issues remain fundamental, and for us, it's -- we believe we've got real growth opportunities that are both domestically and around the globe.

Right. But you did say in your opening comments that the weaker economy is actually having an issue on organic growth?

You're absolutely right, and it is. And as you know from us before, we're not going to use that as an excuse. We're going to grow organically irrespective of that. In terms of that, to the extent they become any kind of a tailwind -- and we haven't seen it in a while, obviously, adds substantial positive economic impact on us. But in the meantime, clients have needs, we're going to address them, and we're going to grow organically irrespective of the economic situation.

Right. Just quickly, lastly, could you break out your comments or give a little more detail on the health care exchanges and kind of break it out between how the retirement exchange is going versus the corporate exchange?

Yes, both have actually progressed well. The retirement exchange navigators have been in place a little bit longer. Strong programs, series of investments there, really love the platform and really getting strong reception from companies around the world. The newer one, Brian, on the corporate exchange, the first-ever multi-carrier fully insured exchange with 3 companies last cycle. Now we have many, many this cycle, as I've said before. Both going very, very well. And again, we are -- we love the value proposition for companies and for their individual employees. We think it's going to have a lot of power going forward. And we just want to be able to build it in a very incremental, straightforward way that let's us really build a sustainable business long term. And this year has really been a great step forward in that.

Our next question comes from Meyer Shields with KBW. Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division: And this is a simplistic question. But if all of your traditional health care clients renewed on the exchanges instead of the older systems, can you talk generally about what the impact would be on revenues and margins?

They would both improve. Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then, second, this is completely unrelated, the capital expenditures that you provided seems to be increasing about 5% a year. I was just hoping you could talk us through where that number comes from?

Yes, I mean, the largest area for capital expenditures for us is IT. And if you think about our business, we're increasingly differentiating through data and analytics. Whether that's GRIP on the Retail Brokerage side, it's the incredible series of data and analytics we have in Aon Benfield, where we spend over $100 million a year or it's health care exchanges or pension de-risking or investment consulting. So there's significant investments in data and analytics across all of our businesses. And it's a little bit less than organic growth, is the way we think about CapEx growth.

Our next question comes from Jay Cohen with Bank of America Merrill Lynch.

A couple of questions. On the corporate health care exchanges, you mentioned there were some new carriers that you put on the platform. Have any of the major carriers decided to leave the platform because of their experience in 2013?

We didn't have anybody exit, and we added multiple, as I said before, Jay. No one exited.

Okay. Second question, you had mentioned the benefits administration revenues were feeling some pressure. If you could go into more detail on what's happening in that business?

Just as you think about sort of the overall business, it's a competitive business and as it continues to evolve, we've experienced some price compression historically. We continue to do that, although that's mitigated quite a bit of late. And that's been a headwind for us as we face 2013 and we think about 2014, offset by the investments we're making to grow in other areas. And that's going to mitigate that over time, but that's been a headwind.

Mostly pricing pressure, then?

Well, it's pricing, but it's also -- kind of terms conditions, things you're doing, servicing, et cetera, and sort of the common apply [ph]. But overall, it's been a headwind. It's something we're mitigating against and it's, as I said, it has decreased, but it's been a meaningful headwind, which is why I wanted to call it out.

Our next question comes from Paul Newsome with Sandler O'Neill Partners. J. Paul Newsome - Sandler O'Neill + Partners, L.P., Research Division: A couple of questions, not related, but the first one should be easy. You mentioned that you thought that the tax rate would be lower than expected. Is that purely a function of the geographic location of where you think earnings will be, and that's changed over time? Or is there something else there?

It is exactly that, Paul. It's related to improved visibility around the geographic distribution of income and discrete tax adjustments. J. Paul Newsome - Sandler O'Neill + Partners, L.P., Research Division: So simply, more earnings in lower-taxed countries?

That's right. J. Paul Newsome - Sandler O'Neill + Partners, L.P., Research Division: And then, I wanted to ask, sort of, more of a philosophical question on the property/casualty brokerage side and get your perspective on it. I'm curious about whether or not -- there's a lot of conversation here about pricing and whether or not we're seeing a deceleration in the hard market, at least, in North America. And I was wondering if you think that the traditional linkages between Reinsurance and E&S and some other lines that tend to lead the cycle, have changed if we have more of a de-linkage between those types of markets, or if we should be paying a lot of attention to what could happen to primary because of what's going on with Reinsurance?

Paul, as we said before, I alluded to it in my comments at the beginning, we look very factually on kind of what's happening on the Retail side in pricing, against what is our GRIP platform, $80 billion of premium. So we're -- this is not concept, this is literally looking exactly what Aon has done and has in place. And there hasn't been that much change since the prior quarter, up slightly but stabilizing. As you highlight on the Reinsurance side, more pressure and it's coming from clients increasing the amount of retention that they keep and also, pressure from outside sources of capital. We see that continuing and absent some significant event, will be a headwind on the Reinsurance side. And that's just how we see it, it will evolve over time. And we're obviously quite active in both marketplaces. But generally, the story on pricing hasn't changed much since the first quarter, it's really continued at the same trends into the second quarter.

Our next question comes from Mike Zaremski with Crédit Suisse. Michael Zaremski - Crédit Suisse AG, Research Division: First question, HR Solutions segments, I noticed there was some commentary in the slide deck about unfavorable revenue mix shift. Could you elaborate because I thought Consulting was the higher-margin contributor within the segment? And I guess, related as well, Consulting organic growth picked up, and I was just curious if you think Aon is taking share there or growing at the market's organic pace?

Yes. So in terms of the unfavorable revenue mix shift, it's really about getting revenue growth in areas in which we are investing. And so if you think about the areas in which we're investing, we're investing in BPO through the partnership with OmniPoint. We're investing in health care exchanges, and those are lower-margin businesses right now, which we expect to get to a much higher margin over time. But what you're seeing is substantial revenue growth in lower-margin businesses, hence, the unfavorable revenue mix shift. And then, I think Greg is going to take the second part of your question.

Yes, on the point on share, the way we think about the overall market now, we've got a set of platforms that are unique. And we're investing behind those in ways that are actually have never been done before. So we're investing more in content capability on the risk side, both Retail and in Reinsurance. And we're doing the same, obviously, on the Hewitt side in Consulting and in Outsourcing. And we think this gives us a very strong platform to develop clients. You're seeing it in new business generation in Risk, you're seeing it, as well, on the Consulting side now, as you raised. So it's, for us, it's not about just taking share, it's winning for clients everyday, it's doing a very systematic, thoughtful approach. It's creating new demand, as well, helping clients understand issues they might not have seen before and help them to address those productively. So for us, we want to just keep investing behind value propositions that are understandable and valued by clients, things that they will pay for. That will benefit our shareholders, as well as our clients. And doing it in a systematic, thoughtful way. And that's what you're seeing evolve, really, across the businesses, on the Risk side and on the Consulting side. Michael Zaremski - Crédit Suisse AG, Research Division: Okay got it. Lastly, in terms of our leverage levels, I see the debt-to-cap up a couple of points quarter-over-quarter. I was curious if you can refresh us on how Aon thinks about its leverage tolerance levels? And I believe the rating agencies might also be a factor and they make a number of adjustments when calculating their own ratings.

Yes. So debt-to-capital was actually down slightly. It's 37% at the end of Q2, whereas, it was 37.6% at the end of Q1. And that's really just because debt came down slightly during the quarter. As we think about overall leverage levels, we definitely look at the amount of our unfunded pension liability and leases, to your point on how the credit rating agencies look at this. And we're very comfortable with our leverage levels as they are today.

Our next question comes from Josh Shanker with Deutsche Bank.

I want to talk a little bit about Lloyd's. And maybe it's just coincidental this quarter, but there's some chatter out there that there's some syndicates who are your clients who were disappointed with the quarter share range with Berkshire, and might not want to use Aon Re as their broker next year. And I noticed that Reinsurance volumes, obviously, are a little bit soft than they were a year ago. I'm wondering if it's related and if you have a response to that rumor in the market?

Yes, we haven't seen that, Josh, at all. In fact, if you step back, as we said before, we've seen now 9 consecutive quarters of net new business growth on the Reinsurance side and really strong, across the board, in traditional, as well as on the cat bond side for many of these clients. So we've seen very, very positive from that standpoint. And I would just say on the transaction you're referring to, pleased with the overall progress, seen positive results for clients. They've shown interest in really 75% to 90% of the situations depending on the line of business. Interestingly enough, by the way, for the -- basically 1 of 3 orders, both existing and new clients, have increased their share in the London market or Lloyd's as a result of this overall joint venture. So it's actually been positive from that standpoint. And I would say quite the contrary to what you're, I think, it sounds like you're picking up -- Steve McGill and team have had very positive conversations with the senior leadership of Lloyd's and many of the syndicates around, frankly, how we can continue to work together to strengthen the value proposition for clients. Because in the end, that's really what this is all about, how do we help clients succeed. And in that regard, I think it will actually be a catalyst to help Lloyd's really meet their Vision 2025 mission, which is a very aspirational set of objectives for Lloyd's overall. So from our standpoint, we see good progress here.

And do you think there's a positive outcome for Reinsurance-buying clients?

Yes, absolutely. In the end -- by the way, these Reinsurance-buying clients are also the primary clients as well in terms of what we're doing. And overall, we're strengthening relationships across Lloyd's, as well as, which is really the 87 syndicates within Lloyd's.

All right. And looking at -- maybe I can get some scale here, of course, Consulting, up very strong, 6%; Outsourcing revenue is flat. And it's interesting because in the commentary, you talked about doing well on -- in discretionary services, but -- and the health care exchange, but offset by benefits. So when I think about the size of contribution from each of those areas, HR BPO and health care quite small and benefits quite large. I know we talked about the health care exchange is a large part of the story here, but it's suggested it would be a number of years before it was a meaningful contributor to results. Can you sort of parse the size of the opportunity now versus maybe 3 years from now to help us understand where it is in terms of the arsenal of what Aon has to offer in the future?

Well, basically if you think about the overall portfolio of investments that we're making, they're not only in health care exchanges, they're in some real wheelhouses in the investment side of the business and the Retirement side of the business, on investment consulting and other areas. So there's a whole range, there's a whole portfolio of areas that we've invested heavily in that are impacting performance. In 2013, the exchanges, as we said before, are going to be more like 14 and 15 from a bottom line standpoint, closer to 15 but they're certainly going to impact top line overall. And we feel very good about the progress on these investments. And net-net, I would come back to where Christa was, which is if you think about what we committed to as we can here, mid-single-digit growth. And by the way, absorbing all of the investments we described before on the health care exchanges and the investment side, we feel very good about achieving that exact commitment, mid-single-digit growth, and stronger in 2014. So that's the progress.

And when you think about benefits administration -- I'm asking about benefits administration persisting, would that be a drag on that outlook?

No, it doesn't change the outlook at all, we're essentially absorbing the outlook. All we want to do is, as we always do, fully transparent, call out sort of the puts and takes. Ben admin has been a headwind. It's diminished, it's mitigating but it's been a headwind, offset by other areas of the business, and by the way, fully absorbing across the business all the investments we're making too. So we are absolutely where we started the year, which is a mid-single-digit growth, and that's what we're going to -- that's where we're going to end up.

Our next question comes from Greg Locraft with Morgan Stanley.

Just wanted to follow up on the HR segment. You mentioned in the last response, several times, mid-single-digit growth is where you're confident. And you did show a surge in profitability in the division last year. So there's -- what I'm wrestling with is, because of the decline in op income in the first half, it's a big bogey for the back half and yet, you're obviously very confident. Where is that confidence coming from? Is this because -- I mean, what do you see that we can't? And is it expense management, is it compensation, is it other expenses, is it accelerating organic? Because it implies a very big back half on the profitability line.

We patterned the year that way from the beginning, and the guidance we originally gave in Q4 2012 was that we were going to deliver performance modestly down in the first half and up in the second half, resulting in mid-single-digit operating income growth and a margin expansion for the year. One of the things that's driving the patterning much more towards Q4 for us is health care exchanges, where revenue recognition means that when you place the policy, which really happens all in Q4, you recognize the revenue entirely in Q4. And so we do have sort of revenue patterning and therefore, profitability patterning of that investment towards Q4. We also have savings flowing through throughout the year, and that continued to improve during the course of the year. And we have improvement in our core performance. So as Greg described, we do have some headwinds in benefits administration, which impacted more the first half than the second half. And so that's improving during the course of the year. They're really sort of the 3 big things that leads to patterning in the second half. And all of those things will also lead to improved performance in 2014.

But that line of sight that Christa just described was the exact line of sight we described Q4 last year for the year, and that's exactly what's progressed through the first half of this year.

My only -- I guess, my pushback is that the Outsourcing division, the organics coming out of the Outsourcing are just not -- I mean, you might have been sitting in the fourth quarter thinking they'd be a bit better than they are right now. So I mean, I believe you, it sounds like you guys are going to hit the guidance. It's just it seems like the revenue isn't coming in like you might've thought 6 months ago or am I wrong? Is it actually coming in exactly where you thought on the organic line when you first...

It is, actually, it's coming in exactly as we thought and I think one of the things we have with our Outsourcing business is very long contract terms. And it allows us to get very good visibility to revenue and therefore, profitability.

Okay. And then last, just on this. It looks to me like the math, unless the organic just is going to come in incredibly bigger, just raw dollars, you're going to spend less dollars year-over-year in the back half 2013 than you did in 2012. Is that correct? In this division?

It's that you get a return on the investments and in particular, the revenue shows up in the fourth quarter. And so you could describe it as less expenses, you could also describe it as the revenue or the return of that investment shows up, particularly in health care exchanges, that's really the phenomenon that's occurring. And yes, we're getting reduced expenses through savings improving, so there is some of that going on as well.

Okay. And my apologies, last on this, it sounds like then, Christa, the fourth quarter is when we're going to get the biggest bang in the margins. Third quarter should be better and then, fourth quarter is really where we're going to see, as we're modeling, is that how we should be doing it?

That's exactly right.

Our next question comes from Mike Nannizzi with Goldman Sachs.

One question, Greg, if you could, on the capital coming into the Reinsurance market, can you talk a little bit about the fees that you're generating from those types of placements? And kind of what the growth has been like from a structuring perspective as you guys engage in those activities? And then, and I'm also just curious, generally, what are the fees to you, to Aon, look like on a -- from a traditional reinsurer versus one of these structures? And then, just lastly, another carrier mentioned that they were seeing a lot of growth in the traditional market from sort of pent-up wins. And then, but the capital markets were there and opportunities were potentially coming, but that was not a big net change for them so far. I'm just curious if I could get your thoughts on those things?

Well, I'll try to answer this and we can come back if I'm missing anything. Back up Aon Benfield, roughly 85% treaty overall, 10% fac, about 5% on the investment banking or the capital market side that you were describing before. And we really -- while you can break it out in these categories, what we're really looking at is how do we help clients improve their capital efficiency? How do we actually help them think about improving return on invested capital and driving value from the standpoint of improved operating performance, a stronger balance sheet or reducing their volatility. That really is the fundamental sort of thesis behind what we do, and we actually bring a range of solutions in each of these categories to actually help clients do that. And in the context of doing that, you can imagine, if you can sit across the table from a client, look them in the eye and tell them you can increase their return on invested capital, the remuneration to Aon Benfield takes care of itself. And that's really, fundamentally, how we built the business. And it turns out, we are in the #1 position in each one of these categories: #1 in treaty, #1 in fac and #1 in capital markets. And just from the standpoint of just the, sort of, the insurance length securities piece, this is something we've been involved in for a long time. Everyone talks about kind of data and analytics and it's kind of the nouveau for most people, it's not for Aon Benfield. We've been doing this for 10 years. We invest over $120 million a year, hard dollars and content capability. And ILS is an example, it's something that's -- we focus on and we do very, very well. If you think about all the transactions since 2010, we've been involved in about almost 50% of them, 47% of them. So 29 transactions, that's 10 more transactions than #2 or #3, who happen to be investment banks. If you think about year-to-date, in 2013, I think we've done 9 deals, which probably it's half of the deals. So this is something that we're very, very involved in. It's still a modest part of overall business, but something that's very, very important in sort of what we do. And we don't think necessarily about the economics one-off. We think about it for a client, when you think about the treaty complement, the ILS complement and the fac complement, how do we improve return on invested capital for them. So for us, it really is a broad-based complement and a suite of capabilities being brought to the table with the horsepower of data and analytics that is very unique in the industry today. So I know that it didn't answer exactly what you asked, but I really want you to understand, philosophically, how we think about the business and why we see the opportunity here so positive over time.

Does a growing, sort of, alternative capital base coming in make your position -- do you think it makes your position more relevant as, kind of, a market leader in that market?

Well, again, we've got the strongest platform of anyone in the world in that category already, and philosophically, what we're essentially saying is, to our clients, "Hey, there are other sources of capital that can actually help you improve your efficiency on your balance sheet." And so we're in an excellent position -- I would argue, the best position, to sort of help clients continue to take advantage of other sources of capital to help them improve their business. So for us, this is not about a diminished opportunity or an increased opportunity, it's about a changing opportunity that we're in a very good position to take advantage of on behalf of our clients.

Great. And then, Christa, if I could really quickly -- it looked like there are some changes to the restructuring math in that last slide of the presentation before the appendix. It looks like restructuring spend, a little bit higher and then, but when I did the math on the -- increase is about 90-ish million, but the increase in total operating cash over cumulative operating cash was just about $7 million. So I was just trying to square those two?

Yes. So we have increased savings by $100 million through the end of 2014. We've increased the total cost by -- and actually, I think what you're seeing is just the timing of the actual cash payout that's changed slightly. So you've seen the cash payout increase slightly in 2013, and it's flowing through future years as well.

Because when I just -- and maybe this is wrong, I just added up all of the restructuring cash and that was about $100 million -- $90 million more through 2018. But the change in the cash -- the incoming cash, the free cash flow cumulative went from $513 million to $506 million -- I'm not exactly sure what it was but I was just trying to -- I would think that more spending would lead to the more savings down the road.

Yes. So this is just -- the cash is just a charge, and the savings are showing up in the P&L. So it's actually sort of slightly -- so you're seeing the restructuring cash is really related to the charge or the expense, and it's not netting the savings here on Page 11.

Our last question comes from Charles Sebaski with BMO.

Two questions. One, I was hoping to get a little bit more color on the organic growth in the Brokerage or the Risk services segment. How much is coming from rate versus how much is coming from new client activity?

So we've said before, overall, rates had a modestly positive impact across our overall book, very low-single digits, very low. And roughly the same story as we had in the first quarter, so it's a very modest impact. And substantial impact, as we said before, on the retention, renewal and new business. I mean, the retention rates we've been able to achieve are truly -- they've been extraordinary, record highs and the team's done an exceptionally strong job there, as well as new business generation, with $270 million in new business across the firm in this quarter. Just a very strong performance, up substantially from the same quarter last year. That's really been the driver.

I know you don't disclose specifically, but how does conceptually Aon GRIP and Broking playing into that new business? And any kind of color on how does that affect that business and just towards of opening doors or anything else?

Well, at the end of the day, what we've essentially said is, what we're trying to do with Aon Broking -- GRIP fits into that context, is essentially, it's really about yield on per dollar of premium placed across the system. So as we think about sort of the -- each dollar that we're able to place, what is our remuneration against that. And Aon Broking, in particular, helps us sort of understand the yield across the book and do things that, by the way, help strengthen the value proposition for clients. And in doing so, we get increased yield. That really is the story of GRIP as well, which is really helping carriers match capital with client need very, very effectively around world. And so in essence, that -- when you put all that together, that actually increases yield per dollar of premium placed. So that, really, is how it shows up in the P&L.

Okay. Christa, one follow-up, I think, for you on a balance sheet question. When I'm thinking about the CapEx spend, and you guys been -- you have a couple, maybe $200 million of CapEx or at least a decent portion of your CapEx going into IT spend. Where is that showing up on the balance sheet? Because if I look at intangible assets, it sort of seems that it's amortizing off and sort of the listed $99 million of intangible amortization, but I don't see -- I would expect it, I guess, to be going up as you're, in turn, reinvesting in IT.

Yes, it's showing up in the balance sheet in other assets.

Okay. So all the new investment shows up in other assets, then?

Right, pretty much.

Thank you. I would now like to turn the call back over to Greg Case for closing remarks.

I just want to say to everyone, thank you very much for participating, and we look forward to the discussion next quarter. Thanks very much.

Thank you. That concludes today's conference. Thank you for your participation. You may disconnect at this time.