Aon plc
Q4 2012 Earnings Call Transcript

Published: 1 Feb 2013

[Operator:]

Good morning, and thank you for holding. Welcome to Aon plc's Fourth 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 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 fourth quarter results, as well as having been posted on our website. Now it is my pleasure to turn the call over to Greg Case, President and CEO of Aon plc. You may begin.

[Gregory C. Case:]

Thank you, Jeff, and good morning, everyone. Welcome to our fourth quarter and full year 2012 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 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, significant investments to strengthen our platform, strong free cash flow and effective allocation of capital, as highlighted by the repurchase of $500 million of ordinary shares in the quarter. I would note, this is more share repurchase than we've done in any quarter since 2008 and is both the reflection of our belief in the underlying value of the firm and the record cash flow from operations we delivered in 2012. Now let me turn to the financial results for the quarter as highlighted on Page 6 of the presentation. Our core EPS performance, excluding certain items, increased 9% to $1.27 per share for the fourth quarter compared to $1.16 in the prior-year quarter. Results reflect improved organic growth across both segments, 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 schedules on Page 13 of the press release include noncash intangible asset amortization, restructuring charges and re-domicile costs, primarily for legal and advisory fees. Foreign currency exchange rates have no material impact on earnings per share in the quarter from a translation standpoint. If currency would have remained stable at today's rates, we would expect no material translation impact to EPS in the first quarter of 2013. 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 was flat at 23.2%, and operating income increased 2% versus the prior-year quarter. Included in operating income was an unfavorable impact from nonrecurring items and a $7 million or a 30 basis point decline in investment income from lower short-term interest rates, globally. Organic revenue growth and a modest benefit from restructuring savings in the quarter were primarily offset by these 2 items. Let me spend a moment on formal restructuring programs, key initiatives that have enabled concurrent funding investments and long-term structural margin expansion. The Aon Benfield's restructuring program is now complete. Savings in the fourth quarter are estimated at $36 million compared to $33 million in the prior-year quarter. The Aon Benfield program delivered cumulative expense savings of $146 million in 2012 compared to $122 million in 2011. Associated with the transfer of the Health and Benefits business at January 1, 2012, an estimated $52 million of restructuring savings under the Aon Hewitt program will be achieved in Risk Solutions. Approximately $40 million of the $52 million in cumulative savings have been achieved under the program, including an estimated $7 million of incremental savings in the fourth quarter. A breakout of restructuring charges incurred in Risk Solutions associated with the Aon Hewitt program is detailed in the schedules on Page 14 of the press release. In 2012, we strengthened the Risk Solutions platform with significant investments in GRIP and key talents, managed through continued economic uncertainty in Europe and absorbed an unfavorable impact from both investment income and foreign currency translation. Against these challenges, Risk Solutions margin increased 10 basis points to 21.7%, and operating income increased 2%, placing us on track for a stronger performance in 2013. Turning to the HR Solutions segment. Organic revenue growth was 6%. Operating margin increased 50 basis points to 17%, and operating income increased 11% compared to the prior-year quarter. Strong organic revenue and $17 million of incremental restructuring savings 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 $41 million of charges in the quarter. Cumulative savings related to the formal restructuring program in the fourth quarter are estimated at $67 million compared to $43 million in the prior-year quarter, of which, approximately $7 million of the incremental savings were achieved in the Risk segment. While we are always cautious not to overplay the results of 1 quarter, our results reflect a solid performance. For the full year, we are primarily on track with the plans that we laid out at the beginning of 2012, which included

[Operator:]

[Operator Instructions] The first question is from Michael Nannizzi.

[Michael Nannizzi:]

Christa, so did you say -- you said mid-single digits improvement in Consulting earnings, is that correct?

[Christa Davies:]

Yes, so HR Solutions operating income will grow mid-single digits in 2013. And we also said that we would expect margin expansion in 2013.

[Michael Nannizzi:]

Okay. So, I mean, in order to have double-digit earnings per share growth in the company, what do you need from brokerage or deployment to get there?

[Christa Davies:]

Michael, we're not giving that level of guidance. Really, we've invested significantly in 2012, and we expect that free cash flow growth is really going to be driven by improved growth and operating margin expansion, decreased uses of cash and significant improvements in cash flow from our reduced tax rate. As we think about EPS growth, it's really improvement in operating margin in both Risk and HR, it's effective deployment of capital, as you've seen during 2012 with share buyback, and continued improvements in effective tax rate.

[Gregory C. Case:]

And I'll just add, Michael, as you think about our portfolios come together, the Risk Solutions part of the business ARS first, Aon Benfield, are kind -- a little ahead of where Aon Hewitt is and HR Solutions is, which has sort of come together in terms of overall growth and development of the business, and that's what you're seeing develop here.

[Michael Nannizzi:]

Okay. And then I guess, if I remember right, in the second quarter, I thought, Christa, maybe you had said that the expectations were for margin improvement on a year-over-year basis in Risk in the fourth quarter. Is that right or did I not have my notes right?

[Christa Davies:]

We did originally anticipate that, and what we would say now is there were 2 specific items in the fourth quarter 2012 in Risk Solutions. One was a $7 million impact related to investment income, so a 30-basis-point decline related to that. We did have interest rates decline even further in Australia and Europe, which is hard to believe but true. And then we had a onetime item related to Denmark of $7 million or a 30-basis-point impact. So 60 basis points between those 2 items.

[Michael Nannizzi:]

I see. Okay. And then lastly just on the deployment. I mean, do you feel like you're going to be providing free cash flow, I guess from now it sounds like on a quarterly basis? How should we think about the fourth quarter in context? Is that -- are we assuming that, that was facilitated by some of the capital that was freed up during the repatriation? Or is there kind of an increased factor as far as the ability to deploy capital based on what you had given us in the past for expectations in 2012?

[Christa Davies:]

Yes, Michael, it is exactly cash freed up from repatriation. If you look at share repurchase during the course of 2012, we repurchased $1.1 billion. Included in that was $300 million freed up from international cash held on our balance sheet. So $800 million is the underlying amount of share repurchase. And if you think about share repurchases for 2013, we would say it will be similar to 2012. And similarly patterned, a la back-half weighted, given that's where our seasonality in our business and cash generation occurs.

[Operator:]

The next question is from Dan Farrell from Sterne Agee.

[Dan Farrell:]

Just wanted to ask a follow-up on the Brokerage business. So I know you grew margins if you adjust Denmark. And then, even if you look at the change in the fiduciary income, I think you would've expected that it would be down versus the 14 a year ago. So there is improvement, but it still feels like it didn't come through as much as you might have thought it would. And I'm wondering if there's anything else from an expense or revenue issue that we should be thinking about as we think about earnings power for next year?

[Gregory C. Case:]

Dan, we don't think there is. In fact, if you step back and think about how the margin evolved, Christa highlighted a few one-timers for Q4, which you're always going to have back and forth. As we think about margins for the year, we put it in context of we're up slightly. But what was more important for us from an operating margin leverage standpoint is the investments we were able to make in 2012 and how we were able to absorb them completely and still have positive margins for the year. When you think about our investment in GRIP, which we talked about in the first, second and third quarter, it was really at an unprecedented level as we've rolled that out, with investments in Aon Benfield analytics, Aon Broking, et cetera. So we were able to make a series of investments that we think are fundamentally strengthening the operating leverage of the company and still absorb all that in the year. So from our standpoint, as we reflect on '12, we feel very good about the prospects for '13 and '14 from a margin expansion standpoint. And in many respects, when we think about sort of how those investments have actually played out, and you couldn't have made them in a year and still recovered margin unless they were really starting to pay dividends, we feel actually quite good about progress toward the 26%, as Christa described. And then if you combine that with sort of the engine of the firm, around record or substantial growth, certainly greater than any time over the last number of years, the cash flow generation in that engine is now just kicking in, in the way Christa described, and then the re-domicile of the headquarters to the U.K, which is principally going to help the Risk Solutions business more than any other, we feel good about operating leverage through '13 and '14, in fact, probably stronger now than we did at the beginning of '12.

[Dan Farrell:]

Okay. And then one other question just on balance sheet cash. Of the $600 million roughly of unrestricted at the end of the quarter, how much of that do you feel is usable? And then also, there's the $350 million of higher invoicing that's dragging cash. If I recall at the beginning of the year, it was closer to $400 million, so you've had a little unwind. But I thought the beginning of the year felt like most of that would resolve through 2012. And it doesn't seem like that much has. So I'm just wondering on the timing of when the rest of that $350 million actually comes back into the balance sheet cash.

[Christa Davies:]

Right. So we do -- we have made progress during this quarter, approximately $25 million. So at the end of Q3, it was $375 million, at the end of Q4, it was $350 million. We do expect the remaining $350 million to reverse itself during 2013, so that will be a sort of improvement in working capital during the course of 2013.

[Operator:]

The next question is from Adam Klauber from William Blair.

[Adam Klauber:]

How much did -- what was the investment level in health -- HR Solutions in 2012? And would you expect that investment level to be around the same in 2013, higher or lower?

[Christa Davies:]

Yes. So we originally said, Adam, that would spend $35 million in 2011, an additional $40 million in '12 and that, that would decline in '13, with getting a return on that investment in sort of '14 onwards. We expect that still to be the case. We still will be in investment mode in '13, but we will absorb that investment to generate, as I said, mid-single digit operating income growth for the year. And the way that investment will pattern itself is it will be investing through the first 3 quarters of 2013 and revenue is recognized in Q4. And that's really why, as I described, operating income growth of mid-single digits for the year will be down modestly in the first half and up in the second half.

[Adam Klauber:]

Okay, that's helpful. And then as far as the health care exchanges, how big is the retiree exchange, number one? And number two, maybe if you could give some color on the implementation of the active exchanges? From what I've heard, it was a little bumpy on the retiree side, originally. Could you contrast how the implementation has been on the active compared to the retiree, would be helpful?

[Gregory C. Case:]

Well, start overall, I remember describing sort of the opportunities we see as substantial on both the retiree side and on the active side. We watched this market, the potential for this market evolve over the last few years, and we're probably as positive on it as we've ever been, with 48 million eligible retirees out there and 122 million active employees with employer-sponsored plans, there's just tremendous opportunity here. The retiree exchange Navigators, who has about 100,000 retirees on it, it's the leading platform in the industry, it's done very, very well. As we started up last year, we progressed through the normal set of beginnings that one would expect, but have really come through this cycle exceptionally well. Our team couldn't be more pleased with where we stand right now on that platform on our retiree side. And we're investing, as Christa described before, to even strengthen that platform. So we fully believe we've got an industry -- the industry-leading platform on the retiree side with Navigators and going exceptionally well with very, very high interest. And then we're also quite excited about the corporate exchange. There's been a lot of talk out there around exchanges. And we were the first to actually launch it, we made it real. And we brought 3 companies in. We now have over 100,000 enrolled employees, plus dependents. And it's just went exceptionally well, the employee response has been very good, the company response has been very good. And what we're most excited about is the pipeline for 2013. Because as companies have come online and actually seen the concept proven, they're quite excited about the potential to think through how they can both begin to get a bit of a handle on health care cost but do it in a way that really works for their employees, which is very, very important in the process. So we're positive about these investments, feel very, very good about it. The team has done a great job. I've put them in context, this is part of a $3.9 billion, $4 billion HR Solutions business with lots of other things going on, on the retiree side and elsewhere, just exceptional platforms there. But on this specific piece around health care exchanges, feel very good about both the retiree and the corporate exchanges.

[Operator:]

The next question is from Brian Meredith from UBS.

[Brian Meredith:]

A couple of questions here. First, Greg, I wonder if you could talk a little bit about Europe and what's going on in Europe with respect to your business kind of exposures, any headwinds that you foresee from economic activity?

[Gregory C. Case:]

Yes, I would -- Brian, as you know, we've got very, very strong businesses across Europe and really exceptional platforms. And while it's been variable in different countries, Europe has long been, I think, a fiction of the U.S.'s imagination. This is a whole series of individual countries driving a set of agendas and focus. And we react locally to each one of those situations, and the team has done a very good job, which is why we've been able to grow in Europe in spite of the headwinds. But we're seeing, if you think about characterizing the world, probably a bit more instability and volatility in Europe than maybe anyplace in the world right now. I'd remind you by the way, this has been the -- this would have been the conversation we've been having about the U.S. a few years ago, and we managed through that. We'll do the same on the European front. Does that answer your question?

[Brian Meredith:]

Yes, that's terrific. And then I was wondering if you could talk a little more about GRIP here? Is there more investment plans here in 2013, or we're pretty much done with that? And should we start to see the benefits in '13?

[Gregory C. Case:]

Yes, was what we said back to the margin question from before, we made substantial investments in GRIP as we really watched it evolve, and at the beginning of 2012, realized the potential. And really, we're able to absorb those in year, so not only do we make the investments, we're able to absorb and increase margin in year. We'll always continue to invest to build on it. We now are going to move to Health and Benefits in GRIP as well, so there's lots of different opportunities. But I would say the return profile moving into '13 and '14 is exactly what we hoped it would be. And the proof of concept there is we were able to achieve, as we said before, positive margin in '12 even though we made a significant investment. So just start to see that dynamic shift a bit in '13 and '14, we think that bodes very well.

[Operator:]

The next question is from Meyer Shields from Stifel, Nicolaus.

[Meyer Shields:]

Christa, I just want to clarify your comments. When you talked about the low -- I'm sorry, the mid-single digit growth, was that just in the HR Solutions business or is that for Aon as a whole?

[Christa Davies:]

That was just the mid solutions -- that was just the HR Solutions business.

[Meyer Shields:]

Okay, I wrote that down wrong. When we look at the planned use of cash, the cash expenditures anticipated for restructuring in 2013 went up, and I was wondering if you could talk about that?

[Christa Davies:]

No, they went down. So if you look at the slide deck that we released, let me just get the page for you. It is -- Page 11 of the deck shows that restructuring cash in 2012 is $143 million and restructuring cash in 2013 is $94 million. Therefore, your question, CapEx?

[Meyer Shields:]

No, the question was the $94 million. I think, in the third quarter, the slide showed $77 million for 2013.

[Christa Davies:]

Yes, look the timing of these amounts will change slightly. So obviously, we're forecasting at any particular point in time. As we complete plans and implement them over time, the numbers will change slightly. But it is -- the long-term amount is declining as each year passes.

[Meyer Shields:]

Okay. Is it reasonable to expect to continue -- I know you might be describing derisking of the defined benefit plans revenues as nonrecurring. Is that something that's nonrecurring for the long term? Or even in the short term, we don't expect a lot of similar revenue?

[Gregory C. Case:]

All we're doing, Meyer, now is pointing out that we had a lot of activity in Q4. It was actually, for the team, it was extraordinary to see. We were in fact privileged to work on some of the most significant situations out there as companies with underfunded pensions are really taking steps and actions to deal with those. You can imagine in many respects, this is like our M&A advisory business or our cap on business that literally, it's going to be lumpy, it's going to be transaction-oriented. We said onetime, because you're going to do it and you're going to that advice with the company in one time, but you can imagine, there are going to be many, many companies over time actually wanting to think about doing this. So we see the potential as quite substantial, and all we were doing is just highlighting in Q4 that there was a lot of activity as really we begin the journey to really take action against this very, very important issue.

[Operator:]

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

[Jay Adam Cohen:]

Just one, I guess, clarification. Greg, in your initial responses, you talked about still seeing some macro headwinds or the reemergence of macro headwinds in 2013. Was that a European comment or was there other things involved with that?

[Gregory C. Case:]

Yes, what I was really referring to was on the Reinsurance side, just an observation. And if you think about where we are, sort of in the reinsurance world, the capacity really has emerged at an all-time high. So we're at give or take around $500 billion right now. And it references $455 billion in 2011, so there's a substantial increase, people with lots of different activity. There are new sources of capital that want to come in, so whether it's in pension funds or life insurers or high net worth individuals, and by the way, Aon Benfield is incredibly well positioned to help facilitate the entrance of that capital, and at the same time, cedents are increasing retentions. All I was just highlighting is when you think about the headwinds around market impact, you can imagine that could reemerge in '13 at some point, and it's just something we have to deal with, which we've done before.

[Jay Adam Cohen:]

Great. And one more quick question then. Some of the pension work has closed out things that you worked on. The margin associated with those types of projects tend to be higher or lower than your normal margin?

[Christa Davies:]

I mean, we don't reveal specific margins in our pension business. What I would say is we have an industry-leading platform, and we are doing some of the world's most innovative work. And we're very proud of the work we've done during the course of 2012. And we believe more of that type of derisking and buyout-type activity will occur in 2013.

[Gregory C. Case:]

Jay, this is fundamentally advice on some of the most important topics that affect our clients' balance sheets and operating statements and the work reflects that.

[Jay Adam Cohen:]

Got it. And if I could squeeze in one more question. Capital usage, clearly, you've signaled and you've shown that buybacks for you is the way you're using your excess capital. Why the strong desire to buy back stock versus dividends?

[Christa Davies:]

Jay, we allocate capital, as we've described before, on a return on capital basis, cash on cash. And as we look at the discounted cash-flow view of our own business and valuation, we think we are substantially undervalued today. And on that basis, we think the return on capital share buyback is in excess of dividends. And so we're allocating capital that way. Having said that, we did increase the dividend in 2012. And over time, we'll continue to think about the dividend more.

[Operator:]

The next question is from Matthew Heimermann from JPMC.

[Matthew G. Heimermann:]

I need a little bit of help with Consulting side. And the reason is that, in 2012, in the first half, you characterized about $33 million of investments in health care exchanges as onetime. And if you simply just reverse those, you assume that doesn't recur in 2013, that would get you to the mid-single digit operating income growth, which would kind of imply that there's no growth coming from anywhere else. So I'm just -- that doesn't sound quite right to me. So I'm wondering what I'm missing in that thought process?

[Christa Davies:]

Yes, let me help clarify for you, Matthew. The health care exchanges' investment is not a onetime investment, it's in people and IT, and I would say...

[Matthew G. Heimermann:]

But Christa, in the first half, you specifically called out $33 million of investment, which you -- which were incremental to what the kind of ongoing expenses are. So I completely understand that those expenses run ahead of the revenue. But that's what I'm addressing.

[Christa Davies:]

Yes, and what we said, Matthew, for the full year, was that we would invest about $35 million in 2011, an incremental $40 million in the course of 2012. And as I said in my comments, we're investing in 2013 as well, but we're absorbing that investment to deliver mid-single digit operating income growth. And the expense, the way the expense patterns during the course of the year, because revenue is recognized in that business only in Q4, is that you get expense Q1 through Q3, then you get revenue recognized in Q4, which therefore gets sort of improved returns. And that's why you see the patterning that we saw in the first half of '12 versus the second half of '12.

[Matthew G. Heimermann:]

I think the issue then is, and maybe it was just me but I don't think I'm alone in this, is that I think most people perceive those to be incremental to the run rate or perceive them to be characterized as such. So I think when people are kind of asking the question on mid-single digit, that's where the confusion is coming from. Because mid-single digit, like-for-like, doesn't seem unreasonable, but I think most people were thinking you would -- you had some one-offs that likely weren't going to recur. And that's kind of building on kind of how things have been characterized in 4Q. But anyways just...

[Christa Davies:]

Matthew, we continue to say that we think we'll get a return on this health care exchange business in 2014 onwards. It is a long-term investment. It takes quite some time. We described the economics and why the economics take time to scale. We feel very good about the opportunity in the return, that's going to be substantially above our average margin in our HR Solutions business, and therefore help us materially contribute to hitting our 22% long-term target.

[Matthew G. Heimermann:]

I don't disagree with the outlook for exchanges, just noting that. The -- with respect to the growth in 4Q, I was wondering if you could help put that growth in annual -- kind of on an annualized context? Specifically, I mean, is that kind of -- I know disproportionally will be a 4Q revenue recognition, but if I look at kind of the delta relative to what I was looking for, it kind of implies about 100 basis-point kind of annualized benefit for this year. Is that in the ballpark of how you would characterize it?

[Gregory C. Case:]

As we think about -- and you're talking about the HR Solutions business?

[Matthew G. Heimermann:]

Yes, just the health care exchange benefit to growth, yes.

[Gregory C. Case:]

Yes, the health care, again, put in perspective overall, we're around $3.9 billion, $4 billion top-line business. Of which -- a portion of which, about 40% or so, is on sort of in the category around health. And in that context, we're talking about a much smaller investment in the health care exchanges. It will have an impact on top line, and -- but it's going to be marginal. The engine you're seeing here on the growth side is really driven around the Consulting business, the admin business and HR BPO and the fundamental, the core businesses we've got. Health care exchanges are, again, for us, a very exciting, significant opportunity. As Christa described, we took the position we needed to make significant investments to do that and pull it off, and we did. We're gratified as to where they've come out, both on the retiree side and on the corporate side. We think we're exceptionally well positioned, but we want to be really clear that the big impacts are going to be in '14 and beyond. And we'll see some in '13, in the fourth quarter, but really, the major impacts are going to come there, which are going to be very important to the business overall, but we want to put them in context. It's -- this is an area in the context of a much bigger business.

[Matthew G. Heimermann:]

What's -- given you called it out in the press release, I guess I'm surprised to hear you characterize that as marginal for 4Q.

[Gregory C. Case:]

Well, what we wanted to highlight in the press release really more than anything else is we launched the first-ever corporate exchange. So it's never been done before. It's 100,000 lives, sort of enrollees on it, with their dependents. And literally, it's been something that's been talked about for quite some time by multiple competitors, and even by our government in the world of exchanges. And Aon Hewitt, our colleagues in Aon Hewitt, were literally, for the first time ever, were able to actually pull that off. So we actually aligned markets, which was a challenge to do. We aligned clients. We actually pulled together this exchange, multi-carrier exchange, and actually proved the concept to really the rest of corporate America that it could be done. As a result of that, by the way, you've seen many of our competitors, all jump on board, everybody talking about their own corporate exchange now, and we now have a pipeline of companies who are interested in the corporate exchange, which are very, very substantial. So that's why we called it out. We think, actually, it's a very -- it's a fundamental crossroad that we were able to get through in a various positive way, but we also don't want to overstep with the impact it's going to have in the near term. Long term, substantial. The near term, less so.

[Operator:]

The next question is from Jay Gelb from Barclays.

[Jay Gelb:]

I was just looking to follow up on Risk Solutions. If -- I'm sort of backing into this, if HR Solutions earnings growth is going to be mid-single digits in 2013, it seems to -- that for Aon to kind of hit expectations, Risk Solutions earnings growth in 2013 will need to be probably 10% or maybe even a little higher. And I mean, I know you haven't really wanted to drill into that level of detail, but it would really be helpful for us in terms of understanding expectations for the rest of the year.

[Christa Davies:]

Jay, we appreciate that it would be helpful for you. And obviously, it would be even more helpful if we gave guidance, but we really don't do that. And the reason we have given specific sort of information around HR Solutions is we have been in an investment year. We did have some unfavorable revenue mix shift during the course of '12, and therefore, we wanted to be specific both around the magnitude of that growth in '13 and the patterning of it. What I would say is if you think about 2013, we expect Risk Solutions operating margin expansion, we expect HR Solutions operating margin expansion, we expect share count to decline. And there are some other miscellaneous items, interest expense to be lower and minority interest to be lower as we've guided.

[Gregory C. Case:]

And your point is correct, though, if you think about sort of, we alluded this before, where our businesses are as they evolve. And Risk Solutions, including ARS and Aon Benfield, are at a -- are literally a few more years along than we are on Aon Hewitt, so you can certainly expect from a growth standpoint as the investments kick in, in a way we believe, and we think in '12, we've proven they will, it gives us a substantial operating leverage in '13. And that's we think you're going to see on the Risk Solutions side. And if you can imagine this conversation, we'll have exactly the same one a year from now, 1.5 years, 2 years from now on the Aon Hewitt side. But right now, Risk Solutions is a little ahead from a growth standpoint, operating income growth standpoint, than Aon Hewitt. and that's -- you're exactly right in terms of sort of how the math is going to come together.

[Jay Gelb:]

Okay. And then just a real detail question for Christa. The share dilution, should we be using 11 million going forward? Or is that sensitive to other factors, besides the share price, obviously?

[Christa Davies:]

So for Q4, obviously, we finished actual shares outstanding at 310.9 million or 11.5 million dilutive share equivalents. So that means you're dilutive share count start point for 1/1/2013 is 322.4 million. And as you think about sort of going forward 2013, we issue about 5 million to 6 million shares a year. And then obviously, you should think about what sort of share buyback you plug in, there's sort of the input variables.

[Operator:]

The next question is from Mike Zaremski from Crédit Suisse.

[Michael Zaremski:]

I'm hoping to revisit GRIP, because frankly I feel investors have been really unable to measure the impact the initiative is having. So I guess, investment in GRIP was cited as having a negative impact in Risk Solutions within the slide deck. If there's a way to quantify that, that would be helpful. And related, I know you've talked about GRIP increasing the yield per dollar of premium placed. So how could we translate that into how it's impacted the margin, how you expect that to trend going forward?

[Gregory C. Case:]

So if you step back and think about what GRIP is about and what it enables us to do, so because we can -- we're able to now track the premium placement across our overall network with roughly $80 billion of ground [ph] premium we can look at, we're actually able to have conversations with insurance partners around how and where they want to apply capital, and in different places around our network and around the world. And that's actually quite advantageous for our clients, first and foremost, and most important, but also for the insurance carriers. And in that context, we have been literally able to offer opportunities, contracts to insurance carriers, and literally, they've come online and actually been able to improve their performance and strengthen what we actually give to clients. So fundamentally, that's one area that GRIP allows us to attack in a way that really we don't think very few, if anyone out there, can do. And in that context, that's literally what the investment in '12 was about. It was literally how we rolled that on, brought people on around that, completed the technology pieces around that, and really, really advanced and ramped up the expense. That's why it had a negative impact on margin. But if we invested all that in GRIP in '12, you have to imagine we've got some revenue, too, which is why we literally were able to invest a huge amount in '12 and keep margins flat/up a little bit for the year. So if you think about sort of how that's going to evolve in '13, that investment starts to ramp down a bit as we've got that in place, and the proven revenue against that, which we now have seen, actually comes to the fore. And that's why we believe there's real operating leverage we didn't have before in '13 and '14 that actually emerge out of these investments over the last couple of years.

[Michael Zaremski:]

And so how can we size up the rev? Does it produce $20 million, $50 million, $80 million of revenue, like any numbers behind the initiative?

[Gregory C. Case:]

So from our view, we think one of the advantages -- we know one of the advantages we have that's really unique is our ability to understand and apply data in a way that changes carrier performance and actions and benefits our clients. That is a fundamental, substantial competitive advantage. So we're not going to quantify the GRIP outcome. We're not going to quantify the investments. We think they'll both be substantial. The thing we'd ask you to look at and come back to is Brokerage margin. So flat out Risk Solutions, Brokerage margin really is the metric that we think at the end of the day is your '13 measure around, do we have the operating leverage. From our standpoint, this story around Aon has not changed over the last 5, 6 years. Exact same strategy, exact same progression. We drove a lot of coordination around expense and improved margin, as Christa described, 300, 400 basis points over the last few years, 500 basis points since '05. And by the way, we now shifted, and say, we've got to invest to literally build capability to take the next step. We've now done that over the last couple of years. We think we've proven that in '12 and for ourselves in terms of what the economic leverage is, and we think you'll see that going forward. But the play side I'd ask you to look as a proof point, the only proof point, is going to be Risk Brokerage margin, which we think is a very compelling one for you guys.

[Michael Zaremski:]

Okay. And lastly, Christa, in regards to the tax rate guidance of 26% next -- this year, I think that's flat with 2012. So why shouldn't that rate go lower given the re-domicile benefits? And I believe, for example, the U.K. corporate tax rate will continue to fall in 2013, 2014?

[Christa Davies:]

Yes. So it's not about the U.K., and what we would say is our estimate at this point in time is 26%. We have said that we would achieve benefits of approximately 500 -- or more than 500 basis points over the long term. And it's not going to be sort of neatly patterned. And as we make progress and complete activities, we will update you in future periods.

[Michael Zaremski:]

But the U.K. matters, because you do generate 15% plus of your revenues in the U.K., right?

[Christa Davies:]

It actually doesn't have an impact on our global effective tax rate.

[Operator:]

I will now turn the call back over to Greg Case.

[Gregory C. Case:]

Terrific. Just wanted to say to everybody, thank you very much for participating, we appreciate it, and look forward to the next call. Thanks very much.

[Operator:]

This concludes today's conference call. You may now disconnect.