Aon plc
Q3 2012 Earnings Call Transcript

Published: 26 Oct 2012

[Operator:]

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

[Gregory C. Case:]

Thank you, Catherine, and good morning, everyone. Welcome to our Third Quarter Conference Call. Joining me 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 there are slides available on our website for you to follow along with our commentary today. First is our performance against key metrics we communicate to shareholders, second is overall organic growth performance and third is continued areas of strategic investment across Aon. On the first topic. Our performance versus key metrics. Each quarter, we measure our performance against the 3 metrics we focus on achieving over the course of the year

[Christa Davies:]

Thanks so much, Greg, and good morning, everyone. As Greg noted, our performance reflects solid organic revenue growth and significant steps to strengthen our global firm. From a financial perspective, our third quarter results overall exceeded our previous expectations. We continue to drive a set of initiatives to improve our operating performance, deliver savings from our formal restructuring programs and generate strong free cash flow growth. We are effectively allocating capital, as highlighted by the repurchase of 275 million of ordinary shares in the quarter. I would note, this is more share repurchase than we've done in any quarter in the past year, and is reflection, in our belief, in the strength of the firm. Now, let me turn to the financial results as highlighted on Page 6 of the presentation. Our core EPS performance, excluding certain items, increased 8% to $0.95 per share for the third quarter compared to $0.88 in the prior-year quarter. Results reflect solid organic growth, restructuring savings, a lower effective tax rate and effective capital management in the quarter. Certain items that were adjusted for in core EPS performance and highlighted in the schedules on Page 12 of the press release include noncash intangible asset amortization, restructuring charges and $4 million of re-domicile costs, primarily for legal and advisory fees with the completed re-domicile on April 2. Foreign currency translation did not have a material impact on earnings per share in the quarter. If currency would have remained stable at today's rates, we would expect a very modest unfavorable translation impact to EPS in the fourth quarter of 2012. 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 decreased 20 basis points to 20%, and operating income decreased 1% versus the prior-year quarter. Included in operating income was a $10 million impact related to both unfavorable foreign currency translation and a decline in investment income from lower short-term interest rates globally. Organic revenue growth and restructuring savings primarily absorbed the significant investments we are making in our GRIP platform and in key talent across Asia and Latin America. Let me spend a moment on the formal restructuring programs, key initiatives that have enabled concurrent funding investments and long-term structural margin expansion. With respect to the Aon Benfield program, savings in the third quarter are estimated at $36 million compared to $30 million in the prior-year quarter. The Aon Benfield program is expected to deliver cumulative expense savings of $146 million in 2012 compared to the cumulative savings of $122 million in 2011. Further, associated with the transfer of the Health and Benefits business at January 1, 2012, an estimated $46 million of restructuring savings under the Aon Hewitt program will be achieved in Risks Solutions. Approximately $33 million of the $46 million in cumulative savings have been achieved under the program, including an estimated $7 million of incremental savings in the third quarter. A breakout of restructuring charges is incurred in Risk Solutions, associated with the Aon Hewitt program, is detailed in the schedules on Page 13 of the press release. For the first 9 months of 2012, Risk Solutions margin is up 10 basis points, and Risk Solutions operating income is up 2%, absorbing significant investments in the business, lower investment income and unfavorable foreign currency translation. We continue to expect strong operating performance in the fourth quarter driven by seasonal strength, less investment spend and increased return on investments as we begin to scale long-term initiatives, resulting in margin expansion for the full year and placing up on track to deliver our long-term target of 26%. Turning to the HR Solutions segment. Organic revenue growth was 4%. Operating margin increased 150 basis points to 17.5%, and operating income increased 11% compared to the prior-year quarter. Included was a $5 million favorable impact from FX. Organic revenue growth of 4%, $20 million of incremental restructuring savings and an increase in cost that were deferred related to the timing of large client implementations, more than offset our significant investments in long-term growth initiatives and an unfavorable revenue mix shift. With respect to the Aon Hewitt restructuring program, we incurred $16 million of charges in the quarter. Cumulative savings related to the formal restructuring program in the third quarter are estimated at $64 million compared to $37 million in the prior-year quarter, of which approximately $7 million of the incremental savings were achieved in the Risk segment. At the beginning of the year, we provided specific comments regarding the outlook for HR Solutions in 2012

[Operator:]

[Operator Instructions] Our first question is coming from Adam Klauber of William Blair.

[Adam Klauber:]

Could you tell us how much, to date, have you invested in the health care exchanges? And how much, I guess, total do you expect invest? And could you talk about -- I realize it's a very long-term process, but what's the potential of ramp-up in clients in the different exchanges?

[Gregory C. Case:]

Well, as of -- on the health care exchange front, as we've made a number of investments that we talked about and very excited about the overall platform. To date, we targeted, as we said before, about $75 million in the investment, about $40 million, which was last year and $35 million in this year in 2012. And pleased to say, we were able to launch our first-ever, as I described before, corporate exchange, which is coming live in the fourth quarter. It's the first time this ever occurred, 100,000 lives. Very excited about that. And as you know, we've got a very, very strong retiree exchange as well and our Navigators exchange. Just for context, if you think about it, there are 48 million eligible retirees out there. And an additional context on the corporate side, 122 million active employees today. And all of those are in an environment in which sort of increasing health care costs are clearer everywhere, employers are looking for ways to actually sort through that complexity. Not only are costs going up but health is actually deteriorating. So we see a substantial amount of opportunity in this is over the long term. And that's why we made the investments and are very excited about these platforms and what they can mean for us. As we said at the first quarter, we see the real impact happening more in '14, '15, et cetera. We're going to see impact in '13, but it's really going to happen in '14 and '15, so these are investments for the long term. But I would say, much like the overall story for Aon Hewitt, we feel very good about these, these are stable on track and actually progressing just as we thought they would and are excited about the overall investment.

[Adam Klauber:]

Okay. And just one follow-up. HR margins were clearly good. Were there any sort of onetime or favorable items that helped the margins this quarter?

[Christa Davies:]

What I would say is it was a little better than our expectations. A lot of things moved in the right direction, and we do believe that we're on track with previous guidance with operating income up modestly in Q4 and continued progress in 2013.

[Operator:]

The next question is coming from Jay Cohen, Bank of America Merrill Lynch.

[Jay Adam Cohen:]

A couple of questions. I guess, sticking with HR and the margins, you did refer to some, I guess, deferred expenses, which sounded like it helped the earnings. Can you explain what that is? And if they're deferred, does that mean higher expenses in later periods?

[Christa Davies:]

Right. Great question, Jay. So the third costs are really related to the timing of large client implementations and so when clients go live, we defer those costs from the P&L on to the balance sheet. So that's essentially the way mechanics work. And it's really just related to the timing of when clients go live. And so, that was a significant impact on the quarter and continues to be a part of the way we operate the economics of the business.

[Gregory C. Case:]

But I think about, Jay, [ph] overall, about just how margin's going to progress, Jay, as we described before. We intend to make progress year to year. Third quarter is an indication that we step forward, as we reflect on 2012. When we finish Q4, we believe we'll have made a modest progress as Christa described. And we believe we're well-positioned to make modest progress in '13 and continue on the march for the 22% target.

[Christa Davies:]

Just one other note, Jay. We are deferring revenue that's matching those deferred expenses, so we're matching revenue and expense. So you're not going to get some incremental expense going forward without the incremental revenue.

[Jay Adam Cohen:]

Got it, now that make sense. And then separately, if you can give us an update on GRIP. I don't know if you can talk about how many insurance companies you've got signed up to the platform and what your goals are for that product?

[Gregory C. Case:]

Well, as we've described before, and if you think about GRIP in the context of what we're trying to accomplish on the overall Risk Solutions platform, what we said before, when you think about how we grow the business, we can increase the number of clients, increase the wallet share we've got with them or increase the yield per dollar of premium placed. And that's exactly squarely where the GRIP world fits, increasing yield per dollar premium placed. And it really is -- it's -- for us, it's about how we put the platform in place and how we build it over time. And as you described, Jay, we made very good progress with it. We've got, as I described before, almost $80 billion of premium sort of in the GRIP system. We've talked before about multiple carriers who've signed on to this, substantially proven the concept, as we described before. And what we see in '12 is we're really rolling that out. And it's really having substantial impact not only with our carriers but with our clients, this having a substantial impact in helping us really match capital with client need in a very substantial way, and it's increased our level of service. So we're very positive on the GRIP platform, and it really is the reason. As we said in Q1, we've seen so much progress with it, we proved the concept and now, we're scaling up the concept as we roll out the platform.

[Jay Adam Cohen:]

But no disclosure on how many insurance companies are on the platform at this point?

[Gregory C. Case:]

Yes, it's really not about the number. It's really about what we're trying to do and how we're actually increasing the yield per dollar of premium placed. So you're going to see the impact of GRIP show up in that yield, show up in margin over time. And it's much more -- it's much deeper than just literally market by market. We're actually seeing benefits beyond just signing off insurance markets.

[Operator:]

The next question is coming from Brian Meredith of UBS.

[Brian Meredith:]

Yes. Just a couple of quick ones here. First, Christa, is it possible to give us what the capital markets benefit was for the reinsurance organic revenue growth rate this quarter?

[Christa Davies:]

Hang on. Just looking for that. I think it was like 100 basis points, roughly.

[Brian Meredith:]

Okay. Excellent. And then Christa, another quick question here. On the tax rate guidance, the 26% for the remainder of the year, is that -- when I think about your 500 basis points that you're going to get over -- or more than 500 basis points from the redomestication, is that kind of the baseline I should be thinking about?

[Christa Davies:]

So we did start -- before the transaction, our effective tax rate was 29%. And so you can see we're making progress on the benefits of the move to the U.K. already with the tax rate decline from 29% to 26% this quarter. And so, and we did say this quarter, the tax rate benefits from the transaction would be more than 500 basis points. So what I would say in regards to that is we had an overall plan in place and as we continue to execute on that plan, and we get more certainty on it, we'll continue to update you.

[Brian Meredith:]

Got you. And then -- and just lastly, I just want to follow-up on Jay's question. Is there any way that you could actually qualify where the deferral in revenues and expenses were in the quarter with respect to the HR Solutions business? Just so we can kind of look at the different ratios and how they're really kind of working?

[Christa Davies:]

Yes, we did say it was significant. We haven't revealed that number. And look, we would say it's related to the timing of large client implementations in both our BPO and benefits administration station business. And it will be lumpy by quarter as client implementations phase in.

[Operator:]

The next question is coming from Ray Iardella of Macquarie.

[Raymond Iardella:]

Just, I guess, 2 questions for me. First, maybe talk a little bit about the construction business. You mentioned some weakness there, I think, in the U.S. Just curious, one of your competitors suggested it might be getting a little bit better. Just curious what you guys are seeing?

[Gregory C. Case:]

Yes, it's -- as you know, we've got a very, very strong construction business, not only across the U.S., but really globally. The most significant in the industry. It is a sector which we like a lot for the long term. In fact, irrespective -- you kind of look at the analysis a lot of different ways, but you're in the trillions when you think about sort of the infrastructure build that's going to be required around the globe, we've estimates 10 trillion to 15 trillion over the course of the next couple of decades. So we love the sector. We love the space. And we've simply made the most significant set of investments in this space. But in that regard, this has been a headwind for us for the last number of quarters. With the headwind for us this quarter, we definitely see some potential positive signs. But for us, this is a very, very substantial bet, bigger than anyone else's. And as we start to see benefits, we think they will be substantial, but for now, we see progress, then we see good pipeline, but we haven't seen it in the quarter yet.

[Christa Davies:]

And I just wanted to follow-up with Brian's question earlier on reinsurance revenues. The capital markets impact in the quarter was closer to 200 basis points of organic revenue growth. And I would want to note that Q4 2011 was a significant capital markets quarter. And so, as we think about Q4 2012, that will be a difficult comparable.

[Raymond Iardella:]

And one other follow-up, if I could. In terms of M&A, just curious, I mean, do you guys kind of see going out, the pipeline still looking pretty good? And is that, I believe you talked about in the past, $200 million to $300 million of cash kind of allocated towards M&A?

[Gregory C. Case:]

That's exactly where we continue to be. For us, really, is take a step back, Ray. This is -- we like the platform and the portfolio we've put in place. It's taken us 6 to 7 years to get here. As you think about sort of the addition of Benfield, the addition of Hewitt to the mix and a number of acquisitions that have been really tucked in to build content and capability for us, for us, the M&A strategy is not about size, it's about adding true content, capability that will support our clients. And in that regard, we really continue to see the $200 million to $300 million investments in these smaller tuck-in acquisitions around the world to really being part of the formal part of the strategy.

[Operator:]

Your next question is coming from Michael Nannizzi of Goldman Sachs.

[Michael Nannizzi:]

Just quickly, Christa, on the reinsurance piece. I imagine the guidance that you've kind of put out there contemplates the reinsurance trend that you're talking about, is that right? For 4Q?

[Christa Davies:]

Yes, it does.

[Michael Nannizzi:]

Okay. And then one question was on the buybacks. How much of the buyback in the third quarter was funded from the additional funds made available via redomestication? And kind of how much is left, I guess?

[Christa Davies:]

Yes. Look, as we think about buybacks for calendar year 2012, we are on track to buy back more in 2012 than 2011. And obviously, we gave guidance at the beginning of the year, that was close to $150 million a quarter, plus use of the international cash on the balance sheet. And we just think about it as an overall pool, including the cash flow of the company and the cash that's shored up in some [ph] investments on the balance sheet.

[Michael Nannizzi:]

Got it, okay. And then can you elaborate a bit on your comments? I mean, Greg, the -- in the press release about the Europe impact on discretionary consulting? And maybe also, on a related note, the increase in discretionary demand for BPO. Just want to understand that of how that's fits with the macro in Europe.

[Gregory C. Case:]

Yes. Really, the overall macro point, which is really the key one here you're raising, Michael, is really we see certainly, pressure around the world, as you read about everyday and we see it, really, from every corner of the world. But it's different. And right now, as we look at the sort of the global landscape, there's certainly pressure in the European quadrant. It happens to be a place where we have substantial, very strong and solid basis. And it's just part of how Aon was built over time. And in that context, what we're seeing is essentially, if you're client, in that context, if you've got something you can defer, you can push back, from a discretionary standpoint, you're going to do that. So that, really, is the comment on discretionary spend and sort of the pressure we're seeing in the context of that. But having said that, the platform we've got is exceptionally strong. And this is not B2C business, this is really B2B. And at the end of the day, at the heart of it, clients have risk issues and people issues. And that's why even in the context in the sort of the -- if you think about what's happened over the last number of years, Aon has grown the business every year, I mean, except for one, and that was we were, I think, down 1%. So we've essentially been able to, in the face of very strong economic headwinds, continue to grow the business and build the business, that's really one of the hallmarks of the overall platform of Aon, and it's one of the things we build upon. So there's a lot of pressure and it's had impact on the quarter, but there's a lot number of things we can do sort of against that. And then from a BPO standpoint, this is really about the HR topic more broadly and just overall, when you think about the things we are looking and taking the clients to sort of combat this sort of issue of discretionary spend, are things that can really have impact for them in the near-term. Things like dependent eligibility audits, leave of absence reviews, things like that. Project revenues that we can really help them improve the operating performance of their business in the near term. But these are the things we're actually bringing to them now that are different. So the mix has changed a bit, the pressure is real, but Aon's got a very strong platform to deal with it.

[Michael Nannizzi:]

Great. And then lastly, the retail U.S. in Risk, what happened there? I mean, you mentioned a little bit about exposures and we've heard a lot about pressure on exposures in U.S. risk. Can you talk a little bit about what you're seeing there and maybe the balance of that versus the other aspects of North America?

[Gregory C. Case:]

Yes. Let's step back. As we talked about on the retail side, 2% growth sort of in the Americas in the quarter, and that really comes across all the Americas. But we would reflect overall, Michael, 3% year-to-date. So that's the number I'd sort of have you think about. That's roughly where we expect sort of the year to play out. We obviously aspire for more across-the-board, and we're making substantial investments to achieve that. And those are starting to really make a difference a la the GRIP question from before. But that's roughly how we're looking at it. Remember, we've got a few sectors on the -- and we talked about construction before and a few others that we've made particular investments in that we like a lot but have particular headwinds for us sort of in the near term, and that really is what constrains us a bit. But we feel like the growth profile that we've achieved year-to-date is meaningful, and will continue going forward.

[Operator:]

The next question is coming from Matthew Heimermann of JPMorgan Chase.

[Matthew G. Heimermann:]

A couple of questions. First, just on the BPO business, when you guys acquired Hewitt, that was a business that basically had no margin whatsoever. And I think one of the goals was to, one, reprice that business. And as you put new business on, that old business rolled off, you get margin gains. So I guess, my question is at this point in the game, have we seen any material margin contribution from that? Or is that to come when we think about some of the implementation revenues that you were talking about earlier?

[Christa Davies:]

Yes. Look, we are very pleased with the improvement in that business. It now does have positive margins, so we continue to sort of improve margins over time. We're working very hard to get them to a 15% margin by 2015, as we originally outlined as part of the transaction.

[Matthew G. Heimermann:]

Okay. So still more to go when we think 2013 versus '12, and '14 versus '13, '15 versus '14, et cetera?

[Christa Davies:]

Absolutely, yes. It's continued improvement year-over-year.

[Matthew G. Heimermann:]

Okay. And then, just with respect to the timing issue on margins, right, so there's some expenses that don't show up but there's also revenue that doesn't show up. So when we think about the margins you reported in the quarter, I mean, you implied that was a positive. If you had, had both the expenses in the revenue show up, should we have thought about margins differently than what we saw this quarter?

[Christa Davies:]

Yes. Look, I think I wouldn't over induct too much from one quarter. I'd look more at the year because things do move sort of -- and there were a few things that moves in our direction in Q3. And so, as you look at the overall year, that's a good indication. Deferred expenses and deferred revenue both happen and match, you're right. But deferred cost did have a positive impact on the quarterly results. But again, look at the overall year, and we really think that our operating income and operating margins will continue to improve in 2013.

[Matthew G. Heimermann:]

Okay. It just -- it seemed like when you first answered, I just was following-up from the standpoint that when you first answered the question, it sounded more negative, then on the follow-up, it sounded neutral, and then it sounded a little negative again. So the real takeaway is there's always noise quarter-to-quarter, and so it might've been a little bit positive-negative, but we shouldn't play that forward in any way, shape or form.

[Christa Davies:]

That's exactly right, Matthew. Yes, that's right.

[Matthew G. Heimermann:]

Okay. And then the last question just on exchanges. I mean, the right way to track your progress in this business over the next couple of years, I'm assuming is going to be more about the lives you have in the exchanges than the client wins? But obviously, they are linked. So I wanted to just, one, make sure that, that was correct. And two, when we think about the -- obviously, we need client wins to drive lives. But give us a sense of how, from the outside perspective, what some of the data points on the client side we should kind of think about over the next couple of years to kind of measure progress here?

[Gregory C. Case:]

So, Matthew, you're exactly right. Again, what we're doing here is we've launched 2 exchanges. We have 2 businesses that one's been in place, the Navigators on the retiree side, against a pool of 48 million eligible retirees over time. That's been in place for a number of years, is tracking well, and we are adding clients to that. And then we've launched the corporate exchange. As I described before, this is different set against the set of 122 million active employees. And you're exactly right. What we want to able to do is these need to be up and running, which they are. Running well, which they are. Adding new clients, which we are. And you're tracking that over time and tracking the number of lives that we're actually able serve. We're excited about, as we said before, with 100,000 lives in the corporate exchange, we're truly proving a concept. It's something that's never been done before that gives CFOs and heads of HR and business leaders, the opportunity to really deal with the increasing health care costs, but do it in a way that they can serve their employee base as well. And we're quite excited about that. So in many respects, we've got 2 highly viable new businesses up and running that really are changing the shape and the foundation of how businesses think about health care coverage over time. And so for us, it is making sure we've solidly proven those concepts and then growing those overtime. And you're exactly right, for 2013, it's about how we add companies and clients to that list, and then how we add lives to that list. And that's exactly what we are on track to do.

[Matthew G. Heimermann:]

Okay. And then just -- yes, I'm sorry.

[Christa Davies:]

And as we think about the economic model of health care exchanges for us, we're earning a commission on the premium placed which is a very attractive economic model. And as we scale participants overtime, that becomes more economic. And that's really how the return comes in sort of 2014 onwards.

[Matthew G. Heimermann:]

Well, I'm assuming you also get some economics from the administration piece of it, correct, which was -- which is kind of an HR benefits administration-like service, correct?

[Christa Davies:]

A little bit, yes.

[Matthew G. Heimermann:]

Okay. And then I just wanted to clarify one other issue. I mean, a lot of the conversations around us now with -- who knows what's going to happen with the election, but obviously, people are talking about possibilities that they didn't -- weren't talking about maybe a month ago. But can you talk -- I mean, I think there's a perception out there that this is -- your investment is basically a binary outcome on Obamacare. Can you tell us why that's not the case? I have my own view, but I'd like to hear yours.

[Gregory C. Case:]

Well, I really appreciate you raising that because we don't see -- the election, obviously, of interest to everyone, but doesn't really have a particular impact directly on the investments we're making here. And again, if you step back, just think about the corporate exchange for a minute. 122 million active employees today, when you think about the companies, in their opinions. We've actually surveyed -- if you remember, we actually have access and connections to, literally, in top thousand companies around the world, all their heads of HR and all their CFOs. 94% have committed to health care coverage. So overwhelmingly saying, we're going to provide some way. We're going to make sure there's coverage available so no one's going to walk away here. And only 1/3 really have a strategy to do that. So there's a great opportunity for us to help them bring clarity to what that space looks like. And we actually surveyed them, and even without an exchange in place, a full 43% of them have said, they're willing to try an exchange. So just think about that in the context sort of the overall corporate environment. A tremendous opportunity of companies saying, "My gosh, we have a problem. " And remember, Obamacare, or whatever you want to describe it, health care coverage as it currently exists, doesn't fundamentally address the issue of expense here at all, nor does it address the issue of wellness. So expense is going up, and wellness is going down. That is a fundamental reality and that's where we're really helping companies think through. So it's really independent of political parties, it's independent of policy, it's a fundamental business set of reasons, which are driving our investment in health care exchanges, and that's why we're so excited about them. Fundamentally, we win when our clients win. And in this case, there is a massive, massive issue for them that they've got to address, and this is a very viable platform for them to address that issue.

[Operator:]

The next question is coming from Greg Locraft of Morgan Stanley.

[Gregory Locraft:]

All right. I wanted to just clarify 2 things. One, for Christa. You called out that the capital markets or the reinsurance comparables are a difficult one for the fourth quarter. You also quantified the impact for this quarter. Can you do the same for the fourth, just give us the exact numbers?

[Christa Davies:]

For the fourth quarter...

[Gregory Locraft:]

In terms of what it was last year so we can model accordingly.

[Christa Davies:]

Almost all of it what was capital markets in Q4 2011 is a good way to think about it. It keeps...

[Gregory Locraft:]

Almost all the growth?

[Christa Davies:]

[indiscernible] smallest quarter for reinsurance.

[Gregory C. Case:]

Yes. It's both a combination, really. Q4 is the smallest quarter for us and we just had a very, very -- it was a great client-to-client example for us, but a very substantial win in Q4 last year. And that's not going to be here this year. So in that context, that's really the market comparable. And this is really just the fundamental issue around the lumpiness of our fact business and our capital markets business. Be clear, we expect to grow this business over time. We expect modes growth in this business over time. The Aon Benfield platform is just done wonderfully well. As both Christa and I described, 6 consecutive quarters of treaty net wins. By the way, we see treaty growth positive in the fourth quarter, although as Christa described, our smallest quarter, but it's just going to be offset by a substantial, substantial transaction that happened in Q4 2011.

[Gregory Locraft:]

Okay, great. And then again, another clarifying question. On Risk Solutions, Greg, you mentioned I guess macro headwinds, macro concerns. Is this -- was your commentary directed towards just be HR business? Just towards Risk Solutions, or the entire corporation? Can you just expand a little as we think about the organic going forward, especially for Risk Solutions? That's where I'm most focused.

[Gregory C. Case:]

Well, let's say on Risk solutions. I mean, there is, on Risk Solutions front, we've seen positive pricing trends for the last number of quarters as we saw -- as we described sort of from the GRIP analytics that have -- a healthy overall industry. Against that context, you have an economy that creates the headwinds that come against that around discretionary spend and then all the pieces in the context of that. We're not going to change our view. It's basically -- it remains fragile. We're going to work through it, we're going to grow organically in the context of it. But those are some the macro headwinds I was trying to describe. And then underlying that is just the capital buildup that continues to happen in the overall insurance industry, and we're always mindful of that. But as we said before, we have a name. We're going to grow organically. We're going to improve margins. We're going to increase earnings per share. And we're going to do it irrespective of the environment, and we expect to do that in Risk Solutions in 2013.

[Gregory Locraft:]

Okay, great. And then just one follow-up there, and I know you've talked about this in the past, but just can you remind us, in Risk Solutions, what's sort of your minimum organic that you need to grow the operating margins? Sounds like almost in any world, you think you can do it. But sort of how do we think about that sensitivity of whatever organic we come up with relative to your ability to drive the margins?

[Christa Davies:]

Yes. I would give you 2 ways to think about this, Greg. The first is, in the depth of the economic recession where insurance rates were 5% to 10% down real, and we had declines in insured values which were a much bigger impact on the firm, the worst we saw in 2009 was minus 1% organic revenue growth. So the investments we're making allow us to sort of outgrow that. The other way, I guess, I would say is we have a natural, if you think about sort of the margin expansion, we have a natural inflationary portion in the expense base. So let's call that sort of 2%, that we need to sort of grow over to expand margins.

[Operator:]

The next question is coming from Mike Zaremski of Credit Suisse.

[Michael Zaremski:]

Quick follow-up on the exchange. So one of your competitors recently acquired an active exchange. So if we -- will the economics of your corporate exchange be similar to that one if we study the one that one that Towers Watson owns?

[Gregory C. Case:]

Well, remember the Extend Health that, I believe you're talking about with Towers Watson, is a retiree exchange. So this is really analogous to our Aon Hewitt Navigators business. So we have had that in place for a number of years. And I said before, love the platform, love the progress that the teams made with it, and that continues to build and grow. And that would be more of a direct competitor from that standpoint. We then would separate an additional platform we have that doesn't exist anywhere else, and that's the corporate exchange. So this is 2 separate businesses, 2 separate initiatives we're taking sort of in the context of this, and building both of those businesses. And the corporate exchange, as I described before, is really the first of its kind. And it really is the first of its kind that addresses the great -- the pool I described, the 122 million-plus of active employee. So it's really 2 separate businesses.

[Christa Davies:]

And in terms of the economics, I would say, obviously the Extend Health is a good proxy for our retirement exchange business. As we think about our corporate exchange business, it's leveraging the platform we already have in benefits administration, and we're selling to the same client base, and so we already have a scaled platform to operate that business.

[Michael Zaremski:]

Okay. Okay, I know you guys are doing, I think, a mini-teach-in on this in a month. So I will learn more there. Okay. Next on the pension. I was just curious. So given the drop in interest rates in both the U.S. and Europe this year, could your 2013 pension contribution cash flow projections change? And related, I know there's been a couple large corporate pension plans solution transactions announced recently. I think you guys were actually involved in the one with Verizon and Prudential. Is Aon exploring a solution as well for its pension deficit?

[Christa Davies:]

So what I would say is we've taken steps already, over the last couple of years, to mitigate volatility in the size and risk of our pension plans. We've closed plans new entrants, we've frozen the benefits and we've derisked the impulsion of the plans. And I did note in my earlier comments that, on September 30, we made a move to aggregate 5 of the 7 Aon and legacy Hewitt plans into one plan in the U.K. And as a result of that, we've substantially decreased the costs of running those plans. And we made an additional contribution of $80 million that was discretionary. And so, our contributions in 2012 will be $641 million. And they will decline in 2013 despite the decline in discount rates in 2012. And the other thing I would note is that pension expense will also decline in 2013 as a result of the move we've made. Our pension plans are much less volatile, they're derisks. And if rates go lower potentially, there's also upside if they go higher.

[Michael Zaremski:]

Okay. That make sense. In regards to a solution, is that something you guys always are thinking about? Kind of a...

[Christa Davies:]

You should think we think of everything, and we look at everything.

[Operator:]

The next question is coming from Paul Newsome, Sandler O'Neill.

[Paul Newsome:]

The -- I missed what the description of the discrete benefits for the -- on the tax. Could you give us a little color on that? As well as could you talk about, prospectively, is the decline in the effective tax rate that we are looking at principally do the elimination of extraterritorial taxation or is there other stuff going on there as well?

[Christa Davies:]

So as we think about the overall sort of effective tax rate and the decline from 29% at the beginning of calendar year 2012 to the 26% we've announced to Q4 2012 and going forward, we are making progress on the benefits of the move to the U.K. with that effective tax rate decline. We have an overall plan in place, and as we continue to execute on that plan and get more certainty on it, we'll continue to update you. With respect to the quarter and the tax rate from continuing operations, it's -- it declined to 23.2%, and that was a result of certain discrete tax adjustments, principally from our tax return in 2011. As you think about your model going forward, 26% is the right go forward rate.

[Paul Newsome:]

Okay. And separately, I just -- more out of curiosity than anything, the cash restructuring payments that you talked about go out in as far as of 2015. What are the characteristics of those kind of cash restructuring charges that you'd see that far out from when you [indiscernible]

[Christa Davies:]

Yes, it's mostly lease payment. As you think about restructuring leases and closing down activities, if you refer to sort of Page 11, it gives you those restructuring cash payments out over time. And it is mainly related to leases because the people costs happen fairly quickly.

[Paul Newsome:]

And then finally, the $300 million in cash that was going to be freed up from the change in domicile, has that been moved up to the parent or we -- is that something, possibly in the future, we'll see...

[Christa Davies:]

Yes, as -- we think about, as I said earlier, as one cash pool. And we access that, and we think about returning the returns on the cash pool maximized through return on capital, measured on a cash-on-cash basis. And we are disproportionately allocating it towards share buyback given we believe we're substantially undervalued, hence the 275 million of share buyback you saw in Q3, which is the most significant we've done in the quarter over the last 12 months.

[Operator:]

No further questions at this time. I will now turn the call back to Mr. Greg Case for closing remarks.

[Gregory C. Case:]

Well, thanks, Catherine. And I just want to say to everybody, thank you very much for your interest in Aon, and we look forward to the next quarterly call. Thanks very much.

[Operator:]

This will conclude today's conference. All parties may disconnect at this time.