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    aon Transcript Q4 08 aon Transcript Q4 08 Document Transcript

    • FINAL TRANSCRIPT AOC - Q4 2008 Aon Corporation Earnings Conference Call Event Date/Time: Feb. 06. 2009 / 8:30AM ET www.streetevents.com Contact Us © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call CORPORATE PARTICIPANTS Greg Case Aon Corporation - President, CEO Christa Davies Aon Corporation - EVP, CFO CONFERENCE CALL PARTICIPANTS Keith Walsh Citigroup - Analyst Dan Farrell Fox-Pitt Kelton - Analyst Brian Meredith UBS - Analyst Jay Cohen Banc of America Merrill Lynch - Analyst Meyer Shields Stifel Nicolaus - Analyst Jay Gelb Barclays Capital - Analyst David Small JPMorgan - Analyst Mark Wayne William Blair - Analyst Keith Alexander JPMorgan - Analyst Dan Johnson Citadel - Analyst Hani Sabbagh Viking - Analyst PRESENTATION Operator Good morning, ladies and gentlemen. Thank you for holding. Welcome to the Aon corporations fourth quarter and full year 2008 earnings conference call. At this time, all parties will be in listen only mode until the question and answer portion of today's call. I would also like to remind all parties that this call is being recorded. If anyone has an objection you may disconnect your line at this time. It's important to note that some of today's comments 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's my pleasure to turn the call over to Mr. Greg Case, President and Chief Executive Officer of Aon Corporation. Sir, please go ahead. www.streetevents.com Contact Us 1 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Greg Case - Aon Corporation - President, CEO Thank you, and good morning, everyone. Welcome to our fourth quarter 2008 conference call. Joining me here today is our CFO, Christa Davies. Just as we've done in previous calls I'd like to cover three areas before turning the call over to christa for further financial review. First area is our performance against key commitments to shareholders. The second is our continued areas of investment across Aon, and the third is our overall organic growth performance. Start by saying that from our team's perspective, the results of the fourth quarter represent another solid quarter of continued progress and momentum and a strong finish to the year. Irrespective of marketplace or economic conditions, we continue to execute on our plans to substantially strengthen our firm for long term growth and shareholder value creation. On the first topic, our performance versus commitments, as we do each quarter, we measure our performance against three metrics we committed to our shareholders: Growing organically, expanding margins, increasing earnings per share. Our operating plans are focused on achieving all three outcomes over the course of each year, not necessarily every quarter. Further, we said we would not sacrifice one of these metrics for another. As I've already commented, our results reflect a quarter of continued progress against our goals. Organic revenue growth was 2% overall, with growth across all brokerage businesses, and our consulting services business. Adjusted pre-tax margin increased 120 basis points and EPS on an adjusted basis increased 19%. When you look at our results across the organization, and compared to the industry, they represent meaningful progress from Aon colleagues who are dedicated to building our firm while delivering industry leading capabilities to support our clients during an unprecedented time in the global economy; however, we're not immune to the effects of the current turmoil, as we are a global firm with operations in more than 120 countries. Our team is making tough decisions on multiple fronts to insure that we drive performance and continue to deliver results for our shareholders. Christa will talk more about that in a bit but let me be clear. We're also faced with a time when our clients need our help more than ever. Events over the last quarter alone continue to reinforce our conviction that the cost of volatility is increasing and demand for the advice and service we provide is expanding. On the second topic, further areas of investment, as commented, we will continue to make significant investments to support our clients and build on our industry leading capabilities. A few examples during the quarter include: In reinsurance, we want to officially welcome Graham Chilton and all colleagues across Benfield. During the quarter we work closely together to create a reinsurance franchise of unique capability and skill that is unmatched in the industry. The reaction from clients and colleagues around the world has been exceptionally positive and our development plans are well under way. We feel very fortunate to have been able to bring together and create this level of unmatched capability at a time of arguably highest need ever for our clients. It's an exciting opportunity for all involved. In retail brokerage, we continue to invest in and expand our affinity business in Latin America while adding key talent in emerging markets such as China, India and the Middle East and areas that continue to deliver strong double digit growth. In consulting, we added key leadership in our benefits business globally. In emerging markets and Asia Pacific and in our US leadership team. These categories highlight just a few of the investments we're making to further strengthen our capabilities and better serve our clients. One key point that we covered in our last call, as investors, it's important you understand these investments are being made in the context of our overall margin improvement efforts. As we continue to build our firm, we're removing inefficiency and cost from non-client facing areas. Areas such as finance, HR, IT, to fund investment in client facing capability and simultaneously improving margin over the course of the year. We can do this in ways other firms may not be able to given how we came together over the last 20 years. Christa will talk about our efforts in this area as we increased our overall cost savings committment by $70 million in the quarter. The key take away here is that we continue to make meaningful investment in our firm and remain excited about how our fundamental client serving capability continues to strengthen around the world. www.streetevents.com Contact Us 2 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call And finally, on the third topic of growth. I will highlight organic growth for the quarter across each of our primary business segments, starting with brokerage. Overall brokerage growth for the segment was 2% with positive growth across all businesses. This marks the 13th consecutive quarter of organic growth despite weak economic conditions and a soft market globally. For the quarter, pricing was down on average low single digits globally in both retail and reinsurance, representing a modest change from the mid single digit declines on average globally in the prior quarter. These results reflect solid management of our renewal book with retention rates at 90% or better on average, highlighting strong client satisfaction. And we continue to drive new business from the investments we're making in many areas such as facultative reinsurance and our emerging markets. With strong double digit growth in several areas across the firm including Latin America, China, and the Middle East/Africa regions. Turning to the individual regions across retail brokerage and reinsurance, on retail, in the americas, organic revenue increased 3%. This was driven by management of our renewal book in the US retail segment and continued strength in Latin America. These results are especially remarkable given soft market conditions and the continued slowdown in both our construction and private equity M & a sectors. Really solid work here by our colleagues that were focused on closing opportunities with existing clients in a difficult economic market, and the results highlight the work put in place over the last year in our revenue engine effort to drive improved performance through pipeline management, productivity improvements and client service. Now turning to Europe, Middle East and Africa. Organic growth increased 1% including the impacts of adjustments that were made during the quarter to conform revenue recognition to Aon's overall accounting policies, excluding this impact, organic revenue would have increased 3%. These results reflect strong retention rates, above 90% on average driven by our number one position in most markets. Pricing was relatively flat similar to the prior quarter, and we achieved double digit growth in emerging markets such as Africa and the Middle East and we saw solid growth in continental Europe as we manage against a weakening economy. The results were driven by benefits from deployment of our revenue engine effort and local marketing campaigns and we were able to achieve these results while we continue to invest across the region and the emerging markets. Turning to Asia Pacific, organic growth was 3%, with significant growth in markets such as China, Hong kong, New Zealand, as well as positive organic growth in Australia. Results continue to be affected by weakness in a specific part of Japan around certain regulatory changes, but on this topic, we have a set of initiatives in place and closure of the issue is nearly complete. But overall, a solid platform of leadership positions across Australia, New Zealand, China and across the region as we continue to grow in this important area of the world. In the UK, organic growth was 1%. Retention rates held firm while pricing was down low single digits. The result was really driven by growth in captives and our network business partially offset by a modest decline in our UK retail business. Overall as you take a step back and look across retail brokerage, we feel very good about our progress. I'd like to remind our investors that this call really marks the one year anniversary of the formation of ARS, our global operating committee under the leadership of Steve McGill and Ted Devine that coordinates our entire global retail business, over $60 billion in premium flow and this 25 person operating team has performed extremely well, as we're beginning to capture the full benefits of being a global firm for our clients and our shareholders. For me, it's been very exciting to watch our colleagues' progress. Not just what was accomplished in 2008 but for what we set the stage to accomplish in 2009 and the coming years. Now turning to reinsurance. Organic growth was 2% for the quarter, driven by growth in facultative placements and new wins in treaty. To date, much of that progress has been offset by higher retentions and soft pricing but overall continued solid results that lead the industry. Our Aon Benfield colleagues provide our clients with a unique and integrated solution around capital management, number one in treaty, number one in facultative, and the number one broker in capital markets. We stand in a privileged position with more capability to help our clients at a time of highest client need. Now turning to our consulting segment. Overall organic growth was 3%. Our team delivered 4% growth in our core services business despite weak economic trends. And this growth was driven by solid results across most practices including retirement, health and benefits and human capital, and it really highlights the strength and diversity of our portfolio both from a product and geographic standpoint. in outsourcing, we saw modest growth in our benefits outsourcing business, offset by a decline www.streetevents.com Contact Us 3 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call related to previously announced termination of a significant outsourcing contract, but overall, another solid quarter of leadership in progress in the consulting group. In summary, our team feels very good about the results for the fourth quarter and the progress we made as a team against our key commitments in 2008. For the year, 2008, organic growth was 2% in a very challenging market environment where pricing was down 5 to 15% on average. Pre-tax margin for 2008 on adjusted basis increased 100 basis points to 15.9% with margin improvement in each segment, and EPS for the year on an adjusted basis increased 24% to $2.90. As we look now forward to 2009, we think about two distinct parts. One is the core business performance, and the second is the external market headwinds that we're facing. In terms of the core business, we feel good about our industry leading position and are focused on delivering on each of our key commitments to shareholders, while supporting our clients at a time when both their risk and cost of volatility are increasing; however, as a global firm, operating over 120 countries, we're not immune to the external market challenges that not only impact the global economy such as declines in GDP and unemployment but also in three specific areas. The first is around pension expense, given the changes in asset values and discount rates. The second is around investment income, given the decline in interest rates, and the third is around foreign currency translation. I'm now pleased to turn the call over to Christa who will discuss these specific impacts in greater detail as well as provide further financial review. Christa? Christa Davies - Aon Corporation - EVP, CFO Thanks, Greg. Good morning, everyone. As Greg noted, our fourth quarter results reflect a strong finish to the year and continued progress against our initiatives. We delivered meaningful improvement across our three key financial metrics and took further steps to streamline our product portfolio around our core businesses, while reducing capital requirements and improving the financial flexibility of our balance sheet. Our results this quarter are complicated by the merger of Benfield, the divestitures of the U.S. efforts of Cananwill, the remaining property casualty run-off operations as well as the sale of the automobile insurance specialist that was completed subsequent to the fourth quarter. During the fourth quarter we completed the merger of Benfield for total consideration of $1.43 billion, a reduction of $320 million before transaction costs of $46 million. As Greg discussed, the merger of Benfield creates an industry leading reinsurance franchise with unparalleled resources and capabilities. The Management team in reinsurance is fully in place and our restructuring program is well under way. I'll discuss more about the program shortly. Additionally, during the fourth quarter we entered an agreement to sell the US assets of our Cananwill premium financing business and close that transaction earlier this week. This agreement does not include the international assets of Cananwill; however, we will continue to evaluate strategic alternatives through the remaining portion of this business. Further, we entered an agreement to dispose of the remaining property casualty run-off insurance operations. Lastly, and subsequent to the close of the quarter, we completed the sale of Automobile Insurance Specialists, receiving $120 million in cash at closing and an additional potential consideration of $34.7 million over the next two years. These actions represent the final significant steps in transitioning from an insurance company to a professional services firm, fully focused on risk advice and human capital solutions. It has also built a balance sheet that requires less capital committment and greater financial flexibility to drive long term shareholder value. Turning now to continuing operations. EPS was $0.43 a share for the fourth quarter, down 26% from the prior year quarter. There were several items that we have highlighted which we think are important to understand in assessing core performance. First, restructuring charges in the fourth quarter were $87 million or $0.22 per share. Second, we incurred $46 million or $0.11 per share of hedging and transactional cost related to the merger of Benfield. Third, we recorded $11 million or $0.03 per share for the previously disclosed review and compliance activities related to the foreign corrupt practice act. Lastly, we incurred $8 million or $0.02 per share of curtailment costs related to freezing the US non-qualified pension plan. Consequently, we would view the core EPS performance of our continuing operations of $0.81 per share, up 19% over the prior year quarter. www.streetevents.com Contact Us 4 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Also included in the results, foreign currency translation had an unfavorable impact of approximately $0.01 per share due to fluctuations in the U.S. dollar against most major currencies. Before turning to the business segment, let me spend a moment on each of the restructuring programs, key initiatives that were enabling concurrent funding of investments and delivering meaningful margin expansions. The 2005 program is now complete and we believe that we've achieved our target of $270 million in cumulative annual savings in 2008. Going forward. we will only highlight the 2007 and Aon Benfield restructuring program. With respect to the 2007 restructuring program, we incurred $86 million of charges and achieved approximately $32 million of savings in the fourth quarter. As we manage against challenges in the broader global economy we are making tough decisions around expenses that will further streamline our cost structure globally. As a result of these actions, we expect to incur an additional hundred million of costs to achieve an additional $70 million of annualized savings. The majority will be achieved in the brokerage segment through workforce reductions. In total, the 2007 restructuring program is now anticipated to incur approximately $550 million of total costs to achieve $370 million of annualized savings in 2010. We have only just began to realize the benefits of this program with $78 million or roughly 21% of the total annualized savings target achieved under this program to date. Regarding the Aon Benfield restructuring program, there were no restructuring charges or savings associated with the program that we announced during the quarter; however, our integration plans are in place and we are now beginning to implement projects related to the program. We expect the program to result in approximately $185 million of costs, of which a portion of these will be allocated to purchase accounting, while delivering $122 million of cumulative annual savings in 2011. Now let me talk about each of the segments. In our brokerage segment, adjusted brokerage pre-tax income increased 5% or $14 million to $314 million and adjusted pre-tax margin increased 150 basis points to 19.9%. The benefits of the 2007 restructuring program continue to offset the inflationary portion expenses in our business, investments we're making additional talent and capabilities and a $7 million or 14% decline in investment income. The operating results of Benfield for the month of December were included in our fourth quarter results. Results included $38 million of revenue and a $2 million pre-tax loss which had an unfavorable impact of 60 basis points of pre-tax margin and a $0.01 unfavorable impact on EPS. Although the month of December is a seasonally weak period for Benfield, we believe the business is fairly similar to Aon's reinsurance seasonality when factoring in our revenue recognition pattern. We realize there are a lot of moving parts here for you to understand. Overall, we remain pleased with our core operational performance and are fully on track with our long term targets of achieving a 20%- plus margin in brokerage, despite challenges we face in the broader global economy. I would point out that adjusted margin for the full year increased 70 basis points, even as we are now just beginning to ramp up savings related to the 2007 restructuring program. Moving to the consulting segment. Adjusted pre-tax income increased 2% to $65 million, and the adjusted pre-tax margin increased 180 basis points to 19% despite timing issues related to our compensation group that we discussed in the third quarter. Overall, a solid performance as benefits related to the 2007 restructuring program offset the inflationary put on expenses and investments we're making in the business. I would point out for the year, adjusted margins in consulting increased 220 basis points to 17%. We believe these margins are industry leading, and would anticipate that margins in 2009 will be slightly lower than 2008 on an adjusted basis due to the headwinds we face with the global economy. Now let me discuss a few specific items within the unallocated section. Unallocated investment income decreased $5 million in the quarter due primarily to the timing of distributions in certain private equity holdings. Unallocated expenses increased $35 million from the prior year quarter including $44 million of hedging costs that were noted earlier as part of the Benfield merger. Interest expense declined $6 million from the prior year quarter due to fluctuations in foreign currency and the decline in average interest rates on outstanding debts. We would expect the unallocated section to be a loss of approximately $55 million per quarter, including $5 million to $10 million of revenue and $60 million to $65 million of expense, essentially in line with the fourth quarter of 2008. For Aon overall, we continue to invest in building our capabilities to drive future revenue growth while managing expenses and concurrently driving margin expansion, even as we face challenges in the broader economy. As www.streetevents.com Contact Us 5 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Greg said, we're committed to margin improvement over the course of each year and I would note the total adjusted pre-tax margin for the year is up 100 basis points. Lastly the effective tax rate on continuing operations was 28.9% in the quarter. For 2009, we anticipate that the effective tax rate of continuing operations will be 29%. Now let me turn to capital management. Cash and short-term investments were approximately $1.2 billion at December 31, compared to $2.4 billion at September 30. Cash and short-term investments declined primarily due to $1.4 billion of cash consideration paid to merge with Benfield during the quarter, partially offset by cash flow from operations. Total debt outstanding at December 31 was 2 billion and debt-to-capital was 27.1%, reflecting a solid balance sheet with significant financial flexibility. The next maturity date for outstanding debt is the Euro revolving credit facility that expires in October 2010. As we have discussed before, capital allocation decisions are driven by risk adjusted return on capital process, so potential uses of capital that may include share repurchase, which has been our primary use of capital, mergers such as Benfield, organic investments, dividends, and pension commitments. Moving to the outlook for 2009. As Greg mentioned, we look at 2009 in two distinct pieces: Core business performance and external market headwinds. We believe that the core business performance of Aon continues to improve but with respect to the external headwinds we are faced with three specific forces that will likely impact 2009. I will outline the details for the three potential headwinds that Greg outlined: Pension expense, investment income, and foreign currency translation. Starting with pensions. I wanted to provide an update as of the 12-31-2008 measurement date. Unfunded status: At the end of 2007, the unfunded status of the combined pension plans was $983 million. Weak asset performance in 2008, combined with a decline in discount rates in the U.S. and updated mortality tables have increased the overall unfunded status of the pension plan to $1.5 billion. Pension contributions: We contributed approximately $177 million in 2008 and expect this number to increase to approximately $242 million in 2009, depending on management discretion to contribute additional cash or non-cash funds to the pension plans or any other factors that could influence potential contributions. Pension expense: Pension expense for 2008 was $72 million. As a result of the performance of the pension plans in 2008, and changes in actuarial assumptions, pension expense would have increased to $230 million in 2009, an increase of $158 million in pension expense versus 2008. In line with our philosophy to move compensation from fixed cost to performance based payments, we made the decision to freeze the U.S. defined benefit plan accruals as announced earlier this week. This decision has resulted in pension expense for 2009 of $115 million, an increase of $43 million versus 2008. You should expect that we're doing everything possible to manage pension expense and the volatility overall in our pension plans. Freezing of the US plan will partially help manage future volatility as participants will no longer be accruing additional years of service as well as deviation from expected returns and assets and liabilities will now be amortized over a longer period. During the quarter, we incurred $8 million of curtailment costs associated with freezing the US non-qualified pension plan that were adjusted for the press release schedules. Turning to the second potential headwind, investment income. Investment income is interest earned primarily on fiduciary funds as well as cash and short-term investments. At 12-31-2008, we held approximately $3.2 billion of fiduciary funds and 1.2 billion of cash and short-term investments as disclosed on our balance sheet with approximately 45% held in U.S. dollars and 55% in other currencies. As a result of declines in short-term interest rates globally, we would anticipate incremental pressure on investment income in 2009. Given the uncertainty in the market, it is difficult to predict interest rates. We can explain the sensitivity as 100 basis point decrease in interest rates globally would have a $44 million negative impact on results. Similarly, a 100 basis point increase in interest rates globally would have a $44 million positive impact on results. Turning to the third potential headwind of foreign currency. We're a global Company with local revenue and local expense in most countries. Our four biggest exposures in order of sensitivity are the Euro, Pound, Australian Dollar and Canadian Dollar. As slightly more than half our revenue in PTI is non-U.S. dollar de nominated we generally prefer a weaker dollar versus the Euro, Australian Dollar and Canadian Dollar with the Euro as our largest exposure as approximately 40% of PTI. Offsetting our normal translation exposure is our transactional exposure between the U.S. dollar revenue and Sterling expense, in which case we generally prefer a stronger dollar versus the Sterling, which helps to reduce overall sensitivity to foreign currency fluctuation. We saw this relationship occur during Q4. www.streetevents.com Contact Us 6 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call We hope that this update was helpful and we want to be clear that resulting uncertainties will not deter us from reaching our 20%-plus target margin and brokerage. In summary, risk and the cost of volatility increasing globally and we continue to streamline our assets around two of the most critical issues facing clients today: risk advice and human capital management. We continue to drive solid results against our three key financial metrics in a challenging market, while accelerating the benefits of our cost saving programs. Our balance sheet is strong with excellent liquidity as we continue to drive value creation through improved business results and effective capital management. With that, I will turn the call back over to the Operator and we would be delighted to take your questions. QUESTIONS AND ANSWERS Operator (Operator Instructions). The first question is from the line of Keith Walsh with Citi. Please go ahead. Keith Walsh - Citigroup - Analyst Good morning, everybody. Christa Davies - Aon Corporation - EVP, CFO Good morning, Keith. Keith Walsh - Citigroup - Analyst First for Greg, if we just think about revenues, thinking about for /09, looking at new business here, first if you could talk about are you still a marker share taker? I know in the past you said on your income statement you're seeing business at a two-to-one rate coming on versus leaving. Secondly, thinking about the investments you guys have been making for several years now, I think we're starting to see a real divergence in your results versus some of the others. Maybe if you can quantify those investments in the people you brought to Aon, what they've done on the revenue side, and then just the bottom line for '09. In this environment assuming more deterioration in the economy, can you grow your top line and then I have a follow-up for Christa. Thanks. Greg Case - Aon Corporation - President, CEO Thanks, Keith. I appreciate it. I will try to get those. Start with your question around what's happening. I think we are really more in the share area and balance and trade, et cetera. I'll tell you what we've seen. We continue to be very fortunate and our win rate that we continue to track both in the RFP scenario as well as in situations where we initiate, and what I'm very pleased to say is as we brought together global ARS and really thought about how we bring global capability of Aon into our clients in a very intimate local way, we are increasing our ability to get to clients, anticipate needs and address needs before their RFPs and that showed up very clearly in the fourth quarter where on the renewal side we were able to do a number of things from a renewal standpoint that were actually quite compelling and showed up in the results. I would tell you in terms offer just movement of business, it's interesting to watch the fourth quarter and 2008 versus what's happening in 2009. The fourth quarter 2008 was very much like for us the post-katrina in which you saw clients were focused not on their brokers as they should be. They are focused on their situations and their insurers so there was less movement in the fourth quarter as they focused on their insurers and now much more movement in the first quarter as they focus on solutions, and so we're seeing a bit of a flight to quality or a flight to capability if you will in terms of just clients wanting to make sure as the tough issues they face today get resolved they need the best capability in the world to do that and we've been very fortunate www.streetevents.com Contact Us 7 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call in that context. We still continue to win at a very good clip and maintain the rates we've had in previous years and so from a new business standpoint and retention standpoint we're performing very well, and colleagues have really done a tremendous job as we've rolled out the revenue engine in the US as well as rolled it out across Europe and the rest of the world, so does that answer your question on the first side in terms of balance the trade and market share? Keith Walsh - Citigroup - Analyst Yeah, it does and just like about the investments how can we tell if these investments are paying off? What's the return you're getting? Are you gaining share from these people you're bringing over and just about the top line for '09? Greg Case - Aon Corporation - President, CEO So I would take a step back and say from an investment standpoint, what we have been, and we said this before on the call. We've been incredibly fortunate in colleagues who have elected to come and be part of Aon and help us build our firm, and that's true across every aspect of our business, it's true in retail, it's true in reinsurance and certainly true in consulting and it's essentially what we're doing to build our firm. Our view is that build approach has served us extremely well and will with continue to serve us extremely well and we want to, as the economy changes over the course of the next few years emerge even stronger in terms of building the fundamental capability of Aon. What I would tell you is we have not historically broken out in detail kind of here is who we hired and here is what their impact is. What you can reflect on though Keith is really just look at our results versus peers and think about what's going on in the overall market and from a margin return standpoint what I would say is look, take a step back. Look at us from '05 to '08 from a margin standpoint on the brokerage side. From '05 to '08 our brokerage margin increased 320, 330 basis points. It's a flat increase from 15.4 to 18.6 or 18.7, something like that, and on the consulting side we've been able to increase almost 800 basis points in terms of margin from 9 to close to 17 as Christa described in her comments. So if you step back for us, the acid test is not just the incremental kind of did I get a return on somebody I brought in but are we able to translate that into fundamental improvement in the Income Statement over the course of the long term period of time and we believe we've been able to do that and demonstrate that very clearly and I'd also say as you're well aware that these investment returns in talent take years to develop. This isn't a one year cycle. It's really more like a two or three year cycle so these things are beginning to come on line for us in a very strong way and that's actually benefiting us, but from a pure investor standpoint we encourage you to look to exactly what we look to which is are we improving margin yes or no and are we able to grow top line in the context of that and we believe we've been able to do that, so that we hope is your ultimate acid test. In terms of 2009, we like everyone are facing the impact on the global economy but what I would tell you is look, what's happening in the global economy for Aon really reflects what's happening with our clients. There is just a tremendous amount of uncertainty out there. We see our clients struggling and suffering and we want to help them. That's our view is we're going to do everything we can from a client service standpoint to help our client succeed and in the context of that, Aon will do very well, and given the breadth and we're very unique position we have a very privileged franchise with incredible geographic breadth, product breadth, capability, and we're well served to help our clients in the short-term and help Aon in the short-term and long term, some of the negative impacts that we're seeing, clients are thinking about increased retentions, thinking about ways to reduce cost, they are looking, we're observing specific sectors that are facing tremendous challenges around construction, M&A, PE, et cetera, a lot of our consumer businesses are going through challenges as well and the global downturn may well drive less activity in the marketplace, and that could have an impact on our business, but on the other hand, Keith if you take a step back, what we see happening is the fundamental risk levels in the economy today are going up, and the cost of volatility is just flat outgoing up, and in the context of that, the value for great risk insight and capability is increasing tremendously, and we're being asked by clients particularly in a lot of non-clients that are under stress to help them solve problems, to help them understand and get out of difficult situations to get placements done they wouldn't have been otherwise able to do, to resolve conflicts that between insurers and them that they haven't been able to get accomplished so from our standpoint, we see lots www.streetevents.com Contact Us 8 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call of opportunity, and as we continue to come on line with the overall ARS group and the way we have and with what we've got in reinsurance and consulting, our team continues to believe that the opportunity is quite substantial for us and which is why as Christa described, our commitments to our shareholders around growing organically and improving margin and increasing EPS remain intact. Keith Walsh - Citigroup - Analyst That's great and one quick one for Christa. You're approaching for first anniversary as CFO. Maybe if you could just talk about what you've accomplished versus the initial game plan and has that opportunity expanded and how has it changed the opportunity over the last year. Thanks. Christa Davies - Aon Corporation - EVP, CFO Yeah, it's obviously been an incredible year of learning for me and the team here is just fabulous to work with, so it's been just a terrific first year. I think the things that we've really tried to sort of achieve in finance are around sort of three goals we set at the beginning of the year. The first one is really improving the control and compliance environment and we spent a lot of time over the past 12 months doing that. The second one is improving the quality and timeliness of management information and the third is really improving the efficiency of how the operation or the finance organization runs globally, and we're making good progress in all three of those and you can see obviously the efficiency stuff come out in the restructuring plan. You can see the improvement in controls come out in the compliance sort of changes we're making around EMEA and conformance with our global accounting policy and we've been doing that throughout the year actually, and the quality and timeliness of management information is really sort of helping business leaders and CEOs make better decisions faster and the last thing I'd say obviously and you've seen this in our portfolio changes throughout the year is driving through the focus in return on capital, as the method of making all decisions for the Company whether that's acquisitions or pensions or organic investment or dividends or whatever it is, and implementing that return on capital discipline through the business has been a very big sort of drive and obviously it's resulted in substantial portfolio change particularly during 2008. Where we're now in a very fortunate position where we've completely exited the insurance underwriting business and have a very clean balance sheet with enormous financial flexibility. Keith Walsh - Citigroup - Analyst That's great. Thanks a lot guys. Operator Our next question is from the line of Dan Farrell with Fox-Pitt. Please go ahead. Dan Farrell - Fox-Pitt Kelton - Analyst Good morning. Greg Case - Aon Corporation - President, CEO Hi, Dan. www.streetevents.com Contact Us 9 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Dan Farrell - Fox-Pitt Kelton - Analyst Hi. I thought your Americas growth was particularly impressive given the current environment. Could you just give a little more color on some of the drivers of the growth there, maybe talk a little bit about how large sort of Fortune 500 businesses holding up versus middle market, maybe you could give some color on line of business or also geography, Latin America versus North America and then also, could you just refresh us on how much cash will be coming in from the sales of the auto business and the Cananwill business? Greg Case - Aon Corporation - President, CEO Sure, let me start with the first and Christa will take the second piece. We were very pleased, very gratified with the progress we continue to make across the Americas and the work done in U.S. retail has been terrific across the team as we put in the efforts around the revenue engine which I've described which are really nothing more than giving us very clear insight into exactly what's happening today in our business so that our colleagues have better ammunition, better capability to go address client needs, and it allowed us to for example, see what was happening in our construction business, which is a phenomenal business we've got but obviously under tremendous pressure within the context of what's happening in the global economy and enabled our construction business to react and do different things on behalf of clients and enable our colleagues across the Americas to understand we've got to invest and drive indifferent areas. We're able to react to the same kinds of pressures in M & A and in PE in which we face those challenges. We also have been able to react on a segment basis so as we watch the larger companies, global companies that are domiciled in the U.S. seeing some of their challenges we've been able to anticipate those, Dan, almost realtime and react with capability that has helped serve us very well. It's also allowed us to react when you think about new business versus retention, and our existing book. As I said before, a number of activities driving initiatives around how we build our new business and new capability on behalf of clients but we've also been able to as we watch the year progress as I said in the fourth quarter, clients really focused on my gosh, what's happening in the world of insurance, what's my capital, am I well positioned, and much like a large cat had happened, when Katrina happened a very large cat happened they weren't thinking about changing brokers nor should they be. They should be focused on where they are and what their situation is and as we saw that happening, it enabled us to serve those needs of our existing clients but also broaden out from a retention standpoint, so what I'm really highlighting is our ability, our teams ability to understand the situation and react to it in almost a realtime way to serve client needs and what that's done for us is it helped us tremendously in the US, it helped us tremendously in Latin America which continues to be exceptionally strong from an overall growth and profitability standpoint and we really saw progress across the Americas. That answer your question? Dan Farrell - Fox-Pitt Kelton - Analyst That's very helpful. Greg Case - Aon Corporation - President, CEO And then let's talk about the cash piece, Christa? Christa Davies - Aon Corporation - EVP, CFO Yeah, so Dan, on the automobile insurance specialist, we received $120 million in proceeds as I mentioned with potential consideration over time of $34.7 million. On the 120 million in proceeds we'll net to about an $85 million gain, so that's Automobile Insurance Specialists. On the sale of the U.S. assets of Cananwill, we did complete that transaction earlier this week. We haven't actually revealed the financial details around that transaction. What I can say is that as a result of the sale, we've reduced the capital required for this business by $62 million so we've already freed up that capital to give us greater financial flexibility which we're very pleased about. www.streetevents.com Contact Us 10 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Dan Farrell - Fox-Pitt Kelton - Analyst Great, thank you. Operator The next question is from Brian Meredith with UBS. Please go ahead. Brian Meredith - UBS - Analyst Yeah, good morning. A couple questions for you all. First one, share buyback, Christa, just trying to understand, I got your discussion on kind of where capital and cash is going but I was under the impression that you're planning on finishing the share repurchase program. Is that still the case in 2009? Christa Davies - Aon Corporation - EVP, CFO Yeah, so, we obviously have $850 million of share repurchase authorization remaining and we've got a very strong balance sheet with excellent liquidity and cash flow generation. While we believe in the underlying value of our stock and we're committed to our share repurchase program, we believe that it's prudent to manage our balance sheet appropriately in a period of extreme volatility in both the financial markets and the broader economy and there for we're not going to commit to when we actually expect to complete the share repurchase program. We will continue to update you on our progress when we report quarterly results. Brian Meredith - UBS - Analyst Okay. And then second one, Greg, there was a story out that your largest competitor got a little bit of a commission rate increase from AIG, and I'm wondering kind of what's happening with your commission rates out there. Are you having some success in getting some additional compensation for the value you're delivering or is that more of a challenge in the current environment? Greg Case - Aon Corporation - President, CEO Brian, as we have always done, we took a step back and we think about overall remuneration and our strategy around compensation really comes back to a simple philosophy and it really centers around client leadership. Our objective, our view, our approach is all around delivering highest value. We will be the highest value to price for anyone in our arena, not the cheapest but the highest value to price. You invest a dollar in Aon, you get a return to the likes of which you will not get anywhere else. That's how we're trying and working very hard to build our organization and in the context of that, we start with that view with from compensation to make sure clients first of all understand and appreciate what we do and then we get fairly compensated for it so you can imagine within the context of that there are a number of initiatives we've been working on for quite some time, one of which is getting paid what's been agreed, ironically, back to kind of the impact of the global effort that I described lead by Steve McGill and Ted Devine, whether once was a time when Aon had a discussion with different carriers in many of the 120 countries around the world. You can imagine that that may not be occurring now given we've got a 25 person committee looking at this every day, and some of the inequities that were out there in terms of getting paid a different price for the exact same product and the exact same company SIC code with the exact same limits in the same city, from the carrier might not happen anymore, so just getting paid for what was been agreed is an initiative that's actually been working very very well for us and where appropriate, securing increases in compensation and only where appropriate, but we've been working very hard to do that and we're seeing movements www.streetevents.com Contact Us 11 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call there, and we're continuing to work on it but again all in the context of the right value for price on behalf of our clients, and then also getting reimbursed for the services we provide. So Brian we have a whole range of activities that are less about gosh, can we get a higher commission, more about we are absolutely going to be the highest value to price and in the context of that, what is the right price and then how do we secure that so that's really how we thought about it. Brian Meredith - UBS - Analyst I guess just do you think getting the right price and getting some price increases could offset some of the potential hurt from an exposure standpoint this year? Greg Case - Aon Corporation - President, CEO From our standpoint we see back to the three, now shifting from sort of pure client view from a shareholder view around organic growth, margin improvement and EPS improvement, we see lots of opportunities to coordinate our global business in a way that can be more effective and more impact full for our clients and our shareholders, so we believe there are lots of ways to do that and it's one of the reasons we're optimistic about the platform for 2009. Brian Meredith - UBS - Analyst Thank you. Greg Case - Aon Corporation - President, CEO Our next question comes from Jay Cohen from Banc of America. Please go ahead. Jay Cohen - Banc of America Merrill Lynch - Analyst It's actually Banc of America/Merrill Lynch. They keep getting that wrong. Greg Case - Aon Corporation - President, CEO Jay, that's all right. Jay Cohen - Banc of America Merrill Lynch - Analyst Three questions. First SKU talk about the pricing environment? You mentioned prices weren't down as much in the fourth quarter but what are you seeing early in January and if you want to look into your crystal balls, what do you think you'll see for 2009? Second topic, the draft on transparency by the New York Commissioner, can you talk about that? And then the last question is do you see from an economic standpoint, do you see your larger clients being impacted differently than your mid market clients? Greg Case - Aon Corporation - President, CEO Okay, we'll take those in turn. Start on the pricing side, Jay. It really is two questions just as you described. One is the impact on price through Q4 and we were very clear that this is a story on Q4 for us that's still decreasing but at a lesser rate of decrease, that story holds loud and clear. You can look at the external sources. I think CIAB and Market Scout if you want to pick those www.streetevents.com Contact Us 12 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call two saw rates down in Q4, 9% from one, I think Scout was down 9% and CIAB was down 6% and those rates were actually less than they were throughout the year. Mid year they were down roughly 11% and early 2008 down 15, so the story that rates have decreased at a lesser rate I think is there but they are still down. And what we saw in the quarter was exactly that. We saw rates down in low single digits that was an improvement for us but the rates were still absolutely down, and by the way we track placements now in very detailed level that gives a lot more detail than you can get for any market shores and we would tell you that holds exactly. There are obviously a few notable exceptions around marine, aviation space and obviously D&O, but that clearly was the case in terms of the fourth quarter, and in terms of the crystal ball, I would still say, Jay, reflecting comments from our colleagues across the world, this is still relatively flat with my headline relatively flat with maybe limited evidence of increasing prices across the market. They just aren't there. We just haven't seen them. Again there are clear exceptions. D&O was one, Mike Rice who leads our practice there has done a tremendous job, tracks everything in the context of this and in case of D&O, we're seeing movement in price. It's positive by the way for the first time in 21 straight quarters it's positive, and there are a few others in the peak zones and reinsurance for example, but generally across-the-board there's lots of conflicting issues here. A few examples. There's tremendous pressure on supply which would imply rates might move north. Lower investment yields, higher cat losses, et cetera, but there's also a lot of pressure Jay on the other side in terms of the ultimate behavior of the insurers and what they are doing and reacting and there's pressure on the economic slowdown and finally pressure on aggregate capacity. The clients may have a need but if reinsurance capacity for example, isn't there and you can't raise it by capital markets, there's lots of pressure back and forth in terms of what's going to happen in the overall market and the overall pricing so I would say for us for 2009, we're going to fight like heck for our clients, best terms, best price, everywhere, we'll see how it plays out but it is for us, there's a lot being said that's yet to be seen. So that's where I would say to start on the overall pricing piece. That answer your question on that? Jay Cohen - Banc of America Merrill Lynch - Analyst Yeah, that's great. Greg Case - Aon Corporation - President, CEO And then on the draft comments, from Superintendent Denalo and the New York AG, I just want to say first of all we just appreciate the opportunity given to us to formally review these overall rules and look at them. As we said publicly, strongly support the Superintendent's effort to reinforce and improve transparency in the insurance sector. It's just absolutely critical from our standpoint. I would come back to what we said before, this is really, this is really about clients. It's not about brokers and carriers, should have nothing to do with us, it's about clients and really two topics for clients. One is the client/s right or benefit to understand who is working for them and what they are paying for the service and I'd kind of struggle to even say that, but it seems so obvious but my God that's exactly what this is about. Clients have a right to understand who is working for them. They have a right to understand what they are paying for the service and then what is the form of compensation across the folks who provide it in a level playing field, and what we're asking for, what we're arguing for, what we're trying to support the Superintendent on and AG on is everything around transparency. For us that's the number one issue. That's the most compelling issue, the most obvious. What producer, are they working for the client or working for the agent? What insurers is the producer approaching? How much is the client paying, how much and how are producers going to be compensated? All those things are very obvious, very straightforward. We believe prerequisites for a healthy industry, and we are just encouraged by the movement, we're very excited to try to help in any way we can and as we said, what we want is a healthy robust industry in which clients know what they are getting, they can value what they are getting and make a judgment on whether it works or not and if it doesn't they shouldn't be able to make choices around that, and so we're quite encouraged to try to do that and try to drive that. www.streetevents.com Contact Us 13 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call So that's on the second question you had and the third one literally I think you asked do large clients, are they acting differently now than middle market or smaller clients is that what you asked? Jay Cohen - Banc of America Merrill Lynch - Analyst Yeah, exactly, Greg. Greg Case - Aon Corporation - President, CEO And look, this is, we talk about this every day. This is our focus. What's happening with our clients and how we can be supportive and try to be helpful and what both Christa and I described as arguably the highest time of need ever when you think about what clients were up to and what they were struggling with and I would say there aren't really any particular patterns, Jay. We have, there are a lot of issues facing large clients facing smaller clients as well. There are a few obviously as you think about global clients that have interrelated global businesses and network businesses and so there are a lot of second order effects they have to deal with and obviously a domestic US player or domestic European player wouldn't have to deal with so in many respects those are the same. We're seeing a huge amplification of day-to-day issues. Can I get the placement, can I get the placement at the right price. I have a conflict, I need resolution, who can help me do that? I'm in trouble and I actually need help in terms of in the bankruptcy or out of bankruptcy or in stress and out of stress and so it really is a lot of the same issues Jay with just lots of amplification. Jay Cohen - Banc of America Merrill Lynch - Analyst Great, thank you. Operator Thanks, next we go to Meyer Shields with Stifel Nicolaus. Please go ahead. Meyer Shields - Stifel Nicolaus - Analyst Pardon me, thank you, good morning everybody. Christa Davies - Aon Corporation - EVP, CFO Good morning. Meyer Shields - Stifel Nicolaus - Analyst If we look at Benfield's seasonality I guess from their filings in 2007, it looks like the revenues are about 70% in the first half and 30 in the second. I was wondering if we could get a quarterly break down for modeling purposes? Christa Davies - Aon Corporation - EVP, CFO Yeah, so the revenue pattern recognition is very similar to our reinsurance business where the first and the third quarter are slightly stronger than the second and the fourth quarter. If you really model revenue being 25% across every single quarter and www.streetevents.com Contact Us 14 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call then bumped the first and the third quarter up slightly, you'd get pretty close to the way the revenue patterns given our revenue recognition policy and the move from IFRS to US GAAP. Meyer Shields - Stifel Nicolaus - Analyst Okay that's helpful, thank you. And I think there was some comments also talking about how AIG's troubles specifically and I guess in general the fact that the number of historically prominent insurers are in some trouble that insured are less comfortable having their counterparty credit risk consolidated with one carrier. I guess two part question for that. Are you seeing that trend and does that translate into higher revenues because you'd have to do more work? Greg Case - Aon Corporation - President, CEO The last part of that, can you just repeat that? Meyer Shields - Stifel Nicolaus - Analyst Sure. I'm just wondering if that trend is in fact showing up where clients want their insurance split up among multiple carriers, does that translate into higher revenues because it's presumably more effort involved. Greg Case - Aon Corporation - President, CEO Got it, sorry. Just didn't pick up the last part of the question. Yeah, look. We see lots of, both at the retail level as well as the reinsurance level, absolutely questions and comments and concerns around capital. Is it there, is it adequate, quality capital, how does it look? Again back to the issue of why we see in our view demand going up for the services we provide, the stakes are higher than ever before. As you think about the work that Aon Benfield does in the context of on the reinsurance side, there once was a time when we're helping clients fight for opportunity and now in many respects they are fighting for success, and so what we're doing is helping them think about the diversified capital of the access, how they do it, how it evolves over time and it creates lots of opportunities to add value and when we add value, as we said before, that benefits Aon but it has to benefit clients in a disproportionate way and the current environment clearly highlights that need for clients and that opportunity for Aon. Meyer Shields - Stifel Nicolaus - Analyst Okay and one last question if I can. You talked a little bit about Aon's specific pension issues. That's clearly representative of almost everyone. Is there a measurable impact on the demand within consulting for retirement that we should expect for 2009? Greg Case - Aon Corporation - President, CEO Yeah, the consulting business in terms of sort of again back to when we were asked the question before around what's happening in the global economy we feel lots of pressures in lots of different ways but in the context of our business, again the need in many respects in different areas of our business is in the demand is increasing, and so we have the number of clients that have real requests and real urgency around this topic and we continue to look at it and help them through it. Christa Davies - Aon Corporation - EVP, CFO The other thing I would say on our consulting business is we do face economic headwinds in certain areas of the consulting business which we've mentioned in previous quarters, particularly in our global compensation benchmarking business and our www.streetevents.com Contact Us 15 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call pallet consulting business, and the other thing obviously in a benefits brokerage business is if employment were to decrease, then benefits, health and benefits services would also similarly decrease, and so we have a couple of headwinds facing our consulting business that might be partially offset by the growth in certain areas of the business that you described. Greg Case - Aon Corporation - President, CEO Absolutely right. Meyer Shields - Stifel Nicolaus - Analyst That's very helpful. Thanks so much. Operator The next question is from the line of Jay Gelb with Barclays Capital. Please go ahead. Jay Gelb - Barclays Capital - Analyst Thanks and good morning. Christa Davies - Aon Corporation - EVP, CFO Hi, Jay. Jay Gelb - Barclays Capital - Analyst On the margin for 2009, Greg I think you've said every year, Aon was to expand the margin so with the headwind in consulting which you said will be lower probably in 2009 and 2008, the impact from pension, are expense saves going to more than offset that so that Aon can expand the overall margin for the Company in 2009 versus 2008? Greg Case - Aon Corporation - President, CEO Yeah. We have not as I mentioned and Christa reinforced, Jay, our objective, our committment to shareholders over the course of 2009, over the course of any year but certainly 2009 is that we are absolutely focused on improving margin, increasing earnings per share, and growing organically, and we said on the brokerage side in particular we're going to exceed 20%. That is a very clear objective for our leadership team and we're marching toward that, and listen, this is a lot about trying to understand the situation and react, and our leadership team is very respectful. The headwinds Christa is describing are real. They are substantial and our team will always look for ways to adapt to those and to react to those and I would just say to you, in particular if you look at the headwind around investment income, we run a very significant portfolio that has to be invested in a very specific way and rates have come down, so that's sort of an uncontrolled outcome that we can't really manage and we've got to work for ways to manage around that and I'd highlight for you over the course of the last few years in a pricing market we said we're not going to back away from our objectives because pricing is down and we didn't and pricing has been down 5 to 15% over the last three years and we've been able to move the performance and in the context of the current global economy as we said, there are lots of puts and takes with real headwinds in many respects and real opportunities in other respects and our team is committed to achieving the three outcomes that I described. www.streetevents.com Contact Us 16 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Jay Gelb - Barclays Capital - Analyst Fair point, thanks and then on Benfield I just want to clarify that the expenses were probably match up with the revenue seasonality, so essentially we're not going to see big shifts in seasonality of earnings in any given quarter because of the Benfield deal, is that right? Christa Davies - Aon Corporation - EVP, CFO That's a fair expectation, Jay. Jay Gelb - Barclays Capital - Analyst Okay, and then Christa, I don't know if you can comment on the amount of expense savings that drop to the bottom line from the '05 program, and also the expectations for the '07 program? Christa Davies - Aon Corporation - EVP, CFO Yeah, Jay, we've always said that with our restructuring program that we continue to invest approximately 20% of the savings back into the business and that's probably a fair number to use. Jay Gelb - Barclays Capital - Analyst Thanks. Operator Our next question is David Small with JPMorgan. David Small - JPMorgan - Analyst Yeah, hi. Two quick questions. Can you just help us understand the seasonality of margins in the business? There's just been so much restructuring going on that it's hard to see, and I'm not talking within brokerage, what the seasonality of profitability would be kind of on a normal year. Greg Case - Aon Corporation - President, CEO Well David clarify a little more, seasonality of profitability a little more on that? David Small - JPMorgan - Analyst Exactly, that would be helpful and then the second question would be shouldn't your long term margin objective be going up now that you're adding Benfield given that reinsurance is a higher margin business? www.streetevents.com Contact Us 17 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Christa Davies - Aon Corporation - EVP, CFO Okay, David, let me take the first question on brokerage margins first. We've committed to shareholders as Greg mentioned that we're going to grow PTI margin every year, during the course of any year, there are going to be puts and takes as you've described whether they are from restructuring and the impact of that or whether they are from certain headwinds we're facing around investment income or pensions or FX, and so it's very difficult to predict margins during the year and that's why we've committed to shareholders that we're growing margin on a yearly basis as opposed to any particular quarter. David Small - JPMorgan - Analyst I guess what I'm asking is without those puts and takes, if you had a normal year without so much volatility there would be some, I would imagine there would be some profitability seasonality to the business? Christa Davies - Aon Corporation - EVP, CFO Yeah, without those puts and takes you should see Q4 as being the higher margin quarter during a year and that's really kind of simple as it gets. Greg Case - Aon Corporation - President, CEO But as Christa said, David, it actually varies around the world of Aon which is the reason Christa says, this is about a portfolio for us. Q4 really represents on average overall particularly acute in the US where the U.S. is really strong in Q4. Europe is stronger in Q1, so we really have a whole portfolio effect that Christa is describing that really comes to pass which is why it gets smoothed out a bit but generally that holds and with regard to your question around the target brokerage margin what we've said is look, we are going to, we want to meet commitments, period, and we said we're going to get north of the 20% brokerage margin and we'll get comfortably North of that and we'll step back and reevaluate and right now we haven't achieved that and when we do that we'll get back to you and tell you where we're going to go but right now we're marching toward north of 20. David Small - JPMorgan - Analyst Okay, thank you. Operator Our next question is from the line of Mark Wayne with William Blair & Company. Please go ahead. Mark Wayne - William Blair - Analyst Good morning, just a quick one on investment income. You framed the sensitivity as 100 basis point movement up or down equating to $44 million. What's the starting point? What yield level are you starting from in 2008? Christa Davies - Aon Corporation - EVP, CFO Yeah, it's a great question. So obviously you can see our investment income for 2008 is around $250 million for the company, but if you focus on the brokerage number it's around $190 million for the full year 2008, so if you looked at that sort of, we're down a little more than 200 basis points in terms of year-over-year declines in interest rates and so you can sort of factor that through the numbers. www.streetevents.com Contact Us 18 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Mark Wayne - William Blair - Analyst But the 190, see the fiduciary income, you don't see the balances, right? Because there's a lot of free float I guess out there? Christa Davies - Aon Corporation - EVP, CFO So we do describe the balances on our Balance Sheet. It's $3.2 billion in fiduciary funds and then obviously we still earn interest income on the cash and short-term investments we hold which is $1.2 billion so you can see both those numbers on our balance sheet which we report every quarter. Mark Wayne - William Blair - Analyst So what average yield did you see in 2008? How do you look at that? Christa Davies - Aon Corporation - EVP, CFO Yeah, it's a bit of a complex answer, Mark, because we obviously have investments in multiple currencies around the world, and we also as we've disclosed in our 10-Q's and K's, we hedge a portion of this, and so the net impact if you were to look at a benchmark is more like three months LIBOR and obviously we're investing in more like one month LIBOR, but once you include the impact of hedging, the net results more like three-month LIBOR. Mark Wayne - William Blair - Analyst Okay, thank you. Operator We have a question from the line of Keith Alexander with JPMorgan. Please go ahead. Keith Alexander - JPMorgan - Analyst Hi, guys. Christa Davies - Aon Corporation - EVP, CFO Hi, Keith. Keith Alexander - JPMorgan - Analyst Good morning. First question and I'm just looking for a correction if I'm wrong, but I thought before there was a mention there would be a hedging gain on the Benfield transaction and if so, where was this realized on the Income Statement and how much? www.streetevents.com Contact Us 19 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Christa Davies - Aon Corporation - EVP, CFO Yeah. So, Keith, actually what we've described is that we paid less for the transaction, $320 million less because a pound was worthless than the U.S. dollar so originally the transaction would cost $1.75 billion and it cost 1.43, that $320 million savings was due to the change in the depreciation of the pound versus the U.S. dollar. Offsetting that as you can see in the schedules is a $46 million hedging cost and transaction cost associated with that purchase. Keith Alexander - JPMorgan - Analyst Okay. I see. And have there been any changes to your hedging program this year or do you plan on any? Christa Davies - Aon Corporation - EVP, CFO Not materially. As we sort of said, we tend to hedge transactional, on an F X side, transactional exposures which we've talked about previously, so we have this U.S. dollar pound mismatch which we talked about several times in our UK business. We're around $350 million to $400 million of our revenue is in US dollars and we have pound expenses and we hedge that mismatch, and then we do sort of hedge foreign currency translation to minimize cash flow volatility, and the last thing we hedge which I have described briefly is interest rates because we have very long interest rates and we do go through them in quite a lot of detail and we'll update that in our filing of 10-K later this month. Keith Alexander - JPMorgan - Analyst Okay, and just another question. According to our estimates, the cost save program at Benfield should take out about a quarter of the G & A of that business. Is that right? And if so, where are these costs going to come from? Christa Davies - Aon Corporation - EVP, CFO We've said that the overall cost savings of the Aon/Benfield restructuring program will be $122 million which will be the run rate savings by 2011. That's approximately 10% of the total cost base of Aon Re plus Benfield so Aon/Benfield combined, and we've really said that those cost savings are primarily going to come from back office support and property overlap. Keith Alexander - JPMorgan - Analyst Okay. That's very helpful and one last question if I may. Can you break out the FX impact on risk insurance services between brokerage or between comp and benefits and G & A? Christa Davies - Aon Corporation - EVP, CFO We can certainly follow-up with that. Keith Alexander - JPMorgan - Analyst All right, great. Thank you. Operator Next we go to the line of Dan Johnson with Citadel. Please go ahead. www.streetevents.com Contact Us 20 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Dan Johnson - Citadel - Analyst Great. Thanks for taking the call. Just one left. Greg, on the expense front, or Christa, you've talked about the incremental savings from announced restructuring programs but if I recall in the past you've got more than a few other things going on outside of the announced programs. Can you talk a little bit about what's going on there and whether or not your outlook for savings there has changed, please? Greg Case - Aon Corporation - President, CEO Yeah, just generally our outlook has not changed. We have, as we said the restructuring programs we want to make sure we put in place. You can track down to the penny kind of investment for that and return so you can see exactly what that looks like and to the extent that involves a number of colleagues, that's something we want to make sure you have in place and you can track so we finish the 05 program, done, in place, buttoned up, clear you can go back and look at that and do the same for the other programs for the '07 and the Benfield, Aon/Benfield program, and those are proceeding very well and then the other efforts as we've described, Dan are going to continue, and have continued and make good progress on. Dan Johnson - Citadel - Analyst Very good. Thank you very much. Greg Case - Aon Corporation - President, CEO Sure. Operator And we have a question from the line of Hani Sabbah with Viking. Please go ahead. Hani Sabbagh - Viking - Analyst Yes, good morning, thanks. Most of my questions have been answered. Just one last question. Greg, maybe you could talk us through your emerging market business, obviously you've highlighted that as an area of growth for the past few quarters I guess. We've started seeing slowdown in coming out of the areas whether it be China, Asia, Middle East, can you just talk through what you're seeing in your own business and the outlook for those areas? Greg Case - Aon Corporation - President, CEO Yeah, this is great, really a great position for us. We've got a terrific brokerage business, human capital business that's really emerging very very well, and just a great part of the world for us when we think about everything around Asia Pacific. It is a tail really of multiple different regions within the region if you will, so we've got Australia where we have an incredibly strong and privileged position, New Zealand incredibly strong and privileged position, developed Markets doing extremely well on, same in Japan, and some of the results overall have been influenced from the situation in Japan we've described before that we've had to deal with based on the regulatory changes that really mask the overall growth that has happened in other areas and results in other areas continue to be very very strong in China, in other developing areas across Asia, so it's just a very very strong business for us across-the-board with tremendous opportunity. Obviously again like every place in the world today we're going to fight different challenges and headwinds as our clients encounter different challenges but those challenges again are increasing the need for risk advice, risk understanding, risk mitigation and human capital solutions. It just turns out from an www.streetevents.com Contact Us 21 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call advisory standpoint that just a different kind of activity but an increase in demand overall so we're quite excited about the platform there and what we think we can do with it. Hani Sabbagh - Viking - Analyst You've not started seeing deceleration in growth in many of these emerging markets would you say? Greg Case - Aon Corporation - President, CEO Deceleration I would say we still see strong growth. We certainly seen some decrease. The growth is still quite quite extraordinary, but certainly seeing slowdown a bit in terms of what's happening with our clients. Hani Sabbagh - Viking - Analyst Great and just finally on Japan, you said you're sort of looking at closure on that issue? Could you just talk a bit more about that? Greg Case - Aon Corporation - President, CEO Yeah, what we described before is we had a business in Japan which was really had been in place for a long period of time and a common practice in Japan around just group buying efforts so we started a business around group buying insurance, it was a business in Japan and the regulatory changes actually have basically forced us to completely change direction in that and which we've been trying to do and our sense is we've got a plan in place that will largely get the issues revolved by the first quarter, first or second quarter of this year. Christa Davies - Aon Corporation - EVP, CFO I just wanted to follow-up on Keith's question on the foreign currency translation benefit to our brokerage expense. So if you refer to page 4 of our press release you do see that we have incurred $124 million of favorable impact of foreign currency translation in the quarter. Greg Case - Aon Corporation - President, CEO We just wanted to make sure Keith got that. Christa Davies - Aon Corporation - EVP, CFO Yeah. Greg Case - Aon Corporation - President, CEO Are you good? Hani Sabbagh - Viking - Analyst Yes, I'm good, thanks. www.streetevents.com Contact Us 22 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Operator Our final question comes from the line of Meyer Shields with Stifel Nicolaus. Meyer Shields - Stifel Nicolaus - Analyst Thanks, two quick follow-ups if I can. One, the incremental savings from the 2007 restructuring, is that primarily U.S.? Christa Davies - Aon Corporation - EVP, CFO No, it isn't. The savings really split, if you did the 2007 overall charge, the $550 million, $186 million is in EMEA, $160 million is the Americas, $154 million is the UK and $50 million is APAC so you can see actually the majority is coming outside of the U.S.. Meyer Shields - Stifel Nicolaus - Analyst Okay, and are we done with the drag from CSE now? Christa Davies - Aon Corporation - EVP, CFO The consulting outsourcing contract? Meyer Shields - Stifel Nicolaus - Analyst Yes. Christa Davies - Aon Corporation - EVP, CFO We have seen the majority of that impact. It is continuing though. Meyer Shields - Stifel Nicolaus - Analyst Okay, do you know when that ends? Christa Davies - Aon Corporation - EVP, CFO In the next year or so. But it's very small. Meyer Shields - Stifel Nicolaus - Analyst Okay, thanks so much. Christa Davies - Aon Corporation - EVP, CFO Sure. www.streetevents.com Contact Us 23 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
    • FINAL TRANSCRIPT Feb. 06. 2009 / 8:30AM, AOC - Q4 2008 Aon Corporation Earnings Conference Call Operator And that concludes today's call. Mr. Case do you have any final remarks? Greg Case - Aon Corporation - President, CEO I don't. Thank you for participating today. We appreciate it. Operator Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect. DISCLAIMER Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON FINANCIAL OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. ©2009, Thomson Financial. All Rights Reserved. 2081787-2009-02-06T17:07:43.220 www.streetevents.com Contact Us 24 © 2009 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.