Good morning, and thank you for holding. Welcome to Aon plc's second quarter earnings conference call. At this time, all parties will be in a listen-only mode until the question and answer portion of today's call. If anyone has any objection, you may disconnect your line at this time. I would also like to remind all parties that this call is being recorded, and that it is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature, as defined by the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our second quarter results, as well as having been posted on our website.
It is my pleasure to turn the call over to Mr. Greg Case, President and CEO of Aon plc. Thank you, sir. You may begin.
Thank you, Emily. Good morning, everyone, and welcome to our second quarter conference call. Joining me here today is our CFO, Christa Davies. Consistent with previous quarters, I'd like to cover three areas before turning the call over to Christa for further financial review. I would note that there are slides available on our website for you to follow along with our commentary today. First, our performance against key metrics we communicate to shareholders. Second, I'll cover overall organic growth performance. Third is continued areas of investment across Aon. On the first topic, our performance versus key metrics. Each quarter, we measure our performance against the three metrics we focus on achieving over the course of the year: grow organically, expand margins, and increase earnings per share.
Turning to slide three, in the second quarter, organic revenue growth was 4% overall, with solid growth across all major businesses in both risk and HR Solutions. Operating margin decreased 100 basis points, driven primarily by significant investments we are making in new growth opportunities and in key talent across our businesses. Finally, EPS was $1.02, as growth and effective capital management primarily offset incremental investment spend. Overall, our second quarter results reflect improved organic revenue growth across all of our major businesses as we make significant investments to further strengthen our client-serving capabilities. Our results were also very consistent with the plans we laid out in Q1 for the full year 2012, recognizing that Risk Solutions was a bit better than anticipated, and HR Solutions was a bit lighter than anticipated due to higher investment spend and the timing of certain deferred costs.
While Christa will provide additional financial commentary in a few minutes, we continue to anticipate improved performance in the second half of the year, are on track with our long-term targets, and have continued to take significant steps to further position the firm for long-term growth, strong free cash flow generation, and increased financial flexibility. Turning to slide four, on the second topic of growth, I want to spend the next few minutes discussing the quarter for both of our segments. In Risk Solutions, overall organic revenue growth was 4%, with growth across every major business. As market-related conditions continue to stabilize, we're driving a set of initiatives that are strengthening underlying performance and positioning our Risk Solutions segments for long-term growth and leverage to an improving economy. With management of our renewal book through Client Promise and retention rates of 90% or better on average, highlighting strong client satisfaction.
New business generation of approximately $250 million across our retail business, with strong growth across many markets, including China, New Zealand, Benelux, France, U.S. retail, Latin America, and Affinity, just to name a few, highlighting the strength of our global client-serving capability. Investments in new product and service capabilities with the rollout of GRIP and Aon Broking globally, and in our core treaty reinsurance business, net new business trends have now been positive for five consecutive quarters. Reflecting on the individual businesses. In the Americas, organic revenue growth improved to 4% compared to 2% in the prior year quarter. Exposures were relatively stable, and the impact from pricing was modestly positive, reflecting a continued modest pace of improvement from a year ago. We saw solid management of the renewal book portfolio in U.S. retail and Affinity, strengthened by the continued rollout of Client Promise.
We also saw solid new business growth in Latin America. Overall, results reflect strong performance overcoming continued market weakness in certain areas, such as the commercial construction sector. In international, organic revenue growth was 3% against pricing, which was flat on average overall, with firmer pricing in cat-exposed regions. We saw strong growth in New Zealand across many regions in Asia and the emerging markets, including double-digit growth in many areas such as China, Thailand, Hong Kong, and New Zealand. In the U.K. and continental Europe, macroeconomic conditions remain fragile across many core markets. However, with leadership positions across the U.K. and Europe, we saw strong retention rates and management of our renewal book portfolio deliver modest growth overall, a solid performance given economic headwinds.
In reinsurance, organic revenue growth improved to 7% compared to a decline of 2% in the prior year quarter, a level of organic revenue performance not achieved since Q3 2006. Results primarily reflect strong new business growth in global treaty placements, a modest portion of which is non-recurring revenue. The impact of the market from pricing was favorable in the near term, primarily due to property cat-exposed regions. The underlying strength of the book continues to improve, as net new business won was positive for the fifth consecutive quarter. This level of performance Strength in new business generation continues to reflect Aon Benfield's value proposition for clients, while strengthening their operational performance and reducing volatility through unmatched data, analytics, and advisory capability. Turning to HR Solutions, overall organic revenue growth improved to 4% compared to flat in the prior year quarter.
We saw the rate of organic growth improve across both businesses, despite weak discretionary spend globally and continued economic pressure in continental Europe. Performance also reflects growth in areas where we're making significant investments in the business, in areas such as HR BPO, investment consulting, and pension risk management consulting. These investments reflect Aon Hewitt's understanding of market trends and the long-term issues that face our clients, as healthcare reform, healthcare costs, and the associated financial risks continue to rise unchecked at a time when overall health and wellness is not improving. Multinational clients are increasingly looking for global benefit solutions that support their global organizations delivered at a local level, managing and transferring risk against pension plans that are increasingly frozen and largely underfunded.
Finally, after working through the worst economic recession in the last 70 years, clients are just beginning to renew their focus on talent, retention, development, and engagement to prepare themselves for renewed long-term growth. Turning to the individual businesses. In outsourcing, organic revenue growth improved to 6% compared to flat in the prior year quarter. We saw strong growth in HR BPO from both new client wins and in discretionary products and services such as dependent eligibility audits. Results were partially offset by a decline in benefits administration as anticipated price compression and lower project-related revenue were greater than net client wins. In consulting services, organic revenue growth was 3% compared to 1% in the prior year quarter.
Results reflect increased demand for surveys and services in our compensation consulting group, strong growth across our business in Asia, primarily for talent rewards, and strong demand for delegated pension risk management and investment consulting services. Results were partially offset by a decline in discretionary demand for actuarial services in core retirement consulting in Europe. Overall, in HR Solutions, we delivered solid organic revenue performance in the second quarter and are fully on track with previous expectations of delivering improved growth in both businesses in 2012. Our priorities for 2012 remain focused on driving growth, delivering improved profitability from our strategic investments, and improving the growth profile in our core benefits administration and retirement consulting businesses. Slide five highlights the third topic, further areas of investment. We believe Aon is in a unique position.
Solid long-term operating performance, combined with expense discipline and strong free cash flow, continues to enable substantial investment in colleagues and capabilities around the globe. A few examples include, in Risk Solutions, we're investing in client leadership to drive greater productivity and efficiency with the rollout of the Revenue Engine internationally, as well as the rollout of Client Promise, which is driving greater client retention and rollover rates across our client base. We continue to invest in innovative technology such as GRIP, which is the world's leading global repository of risk and insurance placement information. We now have 1.5 million trades, more than $76 billion of bound premium, and a growing client list of 25 insurance carriers utilizing the platform's analytics and service capabilities. We're driving our Aon Broking initiative to better match client needs with insurer appetite for risk.
That's highlighted by our ability to package similar risks and place substantial programs and facilities into the market on behalf of clients. Effective January 1, we aligned our global health and benefits platform to better capitalize on our global distribution channel and deep brokerage capabilities. Finally, we're expanding our footprint through tuck-in acquisitions that either increase scale in emerging markets or expand capability to better serve clients, as well as adding key talent across Asia, in specialty sectors, and in our GRIP services business. In summary, as we've previously noted, we have proved the concept of these major investments in 2011. As we move across 2012 and 2013, we're fully on track to drive greater scale and increase operating leverage. In HR Solutions, we're making significant investments to strengthen our industry-leading position in healthcare exchanges.
Healthcare exchanges enable clients to begin the shift of their participants to a market-based defined contribution model for healthcare while addressing unsustainable healthcare cost increases and decreasing population health. As early as the fourth quarter, we plan to launch our first multi-carrier health exchange for active employees. We're expanding our outsourcing offerings in high-growth areas such as dependent eligibility audits. We continue to expand our industry-leading benefits administration solutions and technology from large market to middle market. We're developing new delegated solutions in investment consulting and pension risk management that leverage our total capabilities across advisory and delivery services. Finally, we're strengthening our international footprint to support a more global workforce with investments in key talent and capabilities across Asia and emerging markets.
In summary, we delivered improved organic revenue growth across all of our major businesses in both risk and HR Solutions, made significant strategic investments that will drive greater long-term growth, and took important steps to strengthen our global firm. With that context, I'm now pleased to turn the call over to Christa for further financial review.
Thanks so much, Greg, and good morning, everyone. As Greg noted, our second quarter results reflect solid organic revenue growth and significant steps to strengthen our global firm. Our results overall are also in line with previous expectations provided in the first quarter. As our progress is measured over the course of the year, we continue to drive a set of initiatives to improve operating performance, deliver savings from our formal restructuring programs, generate strong free cash flow, and effectively allocate capital, as highlighted by the repurchase of 250 million of ordinary shares in the second quarter. Now let me turn to the financial results, as highlighted on page six of the presentation. Our core EPS performance, excluding certain items, was $1.02 per share for the second quarter, compared to $1.03 in the prior year quarter.
Solid organic growth and effective capital management in the quarter was offset primarily by strategic investments to deliver increased long-term growth. Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on page 12 of the press release include non-cash intangible asset amortization, restructuring charges, and $14 million of re-domicile costs, primarily for legal and advisory fees with the completed re-domicile on April 2. In addition, foreign currency translation had an unfavorable impact of $0.03 per share. If currency were to remain stable at today's rates, we would expect a modest unfavorable translation impact to EPS in both the third and fourth quarter of 2012. Let me talk about each of the segments on the next slide.
In our Aon Risk Solutions segment, organic revenue growth was 4%, operating margin increased 80 basis points to 21.9%, and operating income increased 3% versus the prior year quarter. Included in operating income was a $17 million impact related to both unfavorable foreign currency translation and a decline in investment income from lower short-term interest rates globally. Solid organic revenue growth, restructuring savings, and lower lease termination costs contributed to operating margin and operating income growth in the quarter, absorbing the significant investments we're making in our GRIP platform and in key talent across Asia and Latin America. Let me spend a moment on the formal restructuring programs, key initiatives that have enabled concurrent funding investments and long-term structural margin expansion. With respect to the Aon Benfield program, savings in the second quarter are estimated at $36 million, compared to $30 million in the prior year quarter.
The Aon Benfield program is expected to deliver cumulative expense savings of $146 million in 2012, compared to cumulative savings of $122 million in 2011. Further, associated with the transfer of the health and benefits business at January 1, an estimated $46 million of restructuring savings under the Aon Hewitt program will be achieved in Aon Risk Solutions. Approximately $26 million of the $46 million in cumulative savings have been achieved under the program, including an estimated $8 million of incremental savings in the second quarter. A breakout of restructuring charges incurred in Aon Risk Solutions associated with the Aon Hewitt program is detailed in the schedules of page 13 of the press release. For the first half of 2012, operating margin is up 30 basis points and operating income is up 2%.
For the second half of the year, operating income and margin are expected to be up. This is driven by operating income and margin down for the third quarter, driven by lower investment income, continued investment spend, and normal seasonal weakness. While the fourth quarter is expected to be up significantly, driven by less investment spend and normal seasonal strength. Therefore, Aon Risk Solutions operating income and margin will be up for the first half, up for the second half and up for the full year, as we discussed in the first quarter. Turning to the HR Solutions segment, organic revenue growth was 4%. Operating margin decreased 440 basis points to 15.4%, and operating income decreased 20% compared to the prior year quarter. Included was a $2 million or 20 basis point unfavorable impact from FX.
Organic revenue growth of 4% and $15 million of incremental restructuring savings were more than offset by a $23 million or -250 basis point impact from significant investments in long-term growth initiatives, an unfavorable revenue mix as benefits administration and retirement consulting declined modestly, and a $9 million impact from deferred costs and outsourcing related to timing of large client implementations. With respect to the Aon Hewitt restructuring program, we incurred $11 million of charges in the quarter. Cumulative savings related to the formal restructuring program in the second quarter are estimated at $57 million, compared to $34 million in the prior year quarter, of which approximately $8 million of the incremental savings were achieved in the Risk segment. As we discussed in the first quarter, we provided specific comments regarding the outlook for HR Solutions in 2012. Number one, we expect improved organic growth in both businesses for 2012.
Number two, we would invest approximately $35 million in new growth opportunities, primarily in our healthcare exchanges, HR BPO, investment consulting, and pension risk management. Number three, approximately 75% of the restructuring savings would be realized in adjusted operating income. Number four, expected performance would improve in the second half of the year as investment spend decreases in the second half from the first half. As we think about operating margin and income for the second half of the year, we now expect the third quarter to be relatively flat year-over-year compared to our previous expectation of down, and we expect the fourth quarter to be modestly up year-over-year compared to the previous expectations of flat in the fourth quarter.
Our improved outlook for the second half reflects continued growth, lower investment spend, less deferred project costs, and additional synergy savings as we strengthen our industry-leading HR Solutions business for long-term operational excellence in 2013 and beyond. Turning to the next slide on our long-term operating margin targets. We continue to drive a set of initiatives to improve operating performance on an annual basis. While we've improved operating margins 500 basis points over the last six years, our long-term operating margin target of 26% for Risk Solutions reflects significant opportunity for further margin improvement in the following five ways. Number one, deliver $33 million of remaining restructuring savings and other operational improvements. Number two, continued rollout of the Revenue Engine internationally. Number three, Aon Broking and group-related initiatives. These three are fully within our control.
In addition, there are two additional macro drivers that provide significant operating leverage based on improvements in the external market. Number four, increases in short-term interest rates. Number five, industry improvements driving higher insured values or insurance pricing. Similarly for HR Solutions, while we've improved operating margins nearly 1,200 basis points over the last six years, our long-term operating margin target of 22% reflects significant opportunity for further margin improvement in the following three ways. Number one, deliver $76 million of remaining restructuring savings after the transfer of savings for health and benefits. Number two, growth in the core business and return on incremental investments. Number three, improvements in the HR BPO business. Now let me discuss a few of the line items outside of the operating segments on the next slide. Unallocated expenses increased $1 million to $34 million, excluding redomicile costs.
Interest income decreased $2 million due to lower average interest rates and lower average cash balances. Interest expense decreased $6 million due primarily to a decline in the average rate on total debt outstanding. Other income of $12 million included a gain due to the favorable impact of exchange rates on remeasurement of assets and liabilities in non-functional currencies, partially offset by losses on certain company-owned life insurance plans and long-term investments. Going forward, we expect a run rate of approximately $1 million-$3 million per quarter of interest income, $35 million of unallocated expense, and $60 million of interest expense per quarter. Turning to taxes, the effective tax rate on net income from continuing operations increased to 27.5% in the second quarter, compared to 24.7% in the prior year quarter.
The effective tax rate in the second quarter of 2011 was favorably impacted by the resolution of an income tax audit and certain deferred tax adjustments. The company continued to anticipate an effective tax rate on net income from continuing operations of approximately 28% in 2012. Lastly, average diluted shares outstanding decreased to 335.6 million in the second quarter compared to 342.7 million in the prior year quarter, due primarily to the company's share repurchase program. The company repurchased 5.3 million ordinary shares for approximately $250 million in the second quarter. Actual shares outstanding on June 30th were 322.4 million, and there are approximately 11 million dilutive equivalents. As part of the change in corporate domicile, Aon plc's board of directors authorized a $5 billion share repurchase program on April 19, 2012 that replaced the previously authorized share repurchase program by Aon Corporation's board of directors in January 2010.
The company has approximately $4.75 billion of remaining authorization. Now let me turn to the next slide to highlight our strong balance sheet and cash flow. At June 30, cash and short-term investments were $802 million, and total debt outstanding was $4.5 billion. Overall debt to capital was 35.5% at June 30, compared to 35.7% at December 31. Cash flow from operations increased 8% to $284 million, compared to $264 million in the prior year quarter. Despite a higher organic growth rate, lower working capital requirements more than offset an increase in cash taxes and cash contributions to the major pension plans in the quarter. Furthermore, we continue to operate with elevated levels of invoicing and cash collections, approximately $375 million, related to a temporary delay in invoicing at Aon Hewitt, which began the second half of 2011 with the conversion of certain order to cash systems.
We continue to make progress and expect this temporary increase to return to normalized levels by the end of 2012. Free cash flow, as defined by cash flow from operations, less CapEx, increased 2% to $226 million, compared to $221 million in the prior year quarter. The increase in free cash flow reflects an 8% increase in cash flow from operations, partially offset by a $15 million increase in CapEx. Turning to the next slide to discuss our long-term financial flexibility. Regarding our underfunded pension plans, we've taken significant steps to reduce volatility and liability as we've closed plans to new entrants, frozen plans from accruing additional benefits, and continue to de-risk certain plan assets. In 2011, we contributed approximately $477 million to our plans and would expect to contribute approximately $541 million in 2012 before any discretionary contributions. Higher contributions primarily reflect a decline in discount rates.
We would expect contributions to decline annually beginning in 2013, despite a decline in discount rates year to date, resulting in fully funded plans on a GAAP basis in 2016. Regarding our restructuring plans, cash payments were $178 million in 2011. As our restructuring plans continue to wind down, we would expect cash payments to decline $32 million to approximately $146 million in 2012, before declining further in 2013. As we continue to grow, improve operating performance, and our required uses of cash decline over the next several years, we expect our strong free cash flow to be a significant source of value creation for shareholders. As an important step in unlocking that value for shareholders, on April 2, the company completed its change in jurisdiction of incorporation from Delaware to the U.K.
We believe the transaction will help drive shareholder value through, number one, providing greater global access to expected increases in future free cash flow. Number two, enable us to access roughly $300 million of excess capital held internationally on our balance sheet. Number three, increase future cash flows through a significant reduction in our global tax rate over the long term, similar to what we've done over the last five years, which was approximately 500 basis points. In summary, we are positioned for stronger growth in 2012, and we have significant leverage to an improving global economy. While we're investing to further strengthen our industry-leading portfolio, we are focused on three primary areas that will each contribute to substantially stronger free cash flow over the next several years. First is continuing growth and operating margin improvement towards our long-term targets. Second, declining uses of cash for pensions and restructuring.
Third, greater capital flexibility and increased cash flow from a lower effective tax rate resulting from our redomicile to the U.K. Combined with a strong balance sheet and greater financial flexibility, we have positioned the firm to effectively manage capital through the announced $5 billion share repurchase program and the recent increase in our annual dividend, highlighting our firm belief in the underlying value of Aon. With that, I'd like to hand the call back to the operator for questions.
Thank you. At this time, anyone wishing to ask a question or make a comment, please press *1 on your touch-tone phone. Please be sure your telephone is unmuted, and clearly record your name at the prompt so your question may be introduced. Our first question comes from Dan Farrell from Sterne Agee.
Hi, good morning. Thanks. Just on the guidance on the consulting margin, you've laid out the case for how it improves through this year and next, but the guidance on the margin is clearly better than it was previously. Can you give a little more detail on what change in the outlook, if it's revenue driven or if there's less investment than you previously thought you had and maybe put more in this quarter? I just have a follow-up.
That's absolutely right, Dan. The guidance for HR Solutions margin in the second half of 2012 is improved from our previous guidance. Previously, we said we were down in Q3, and now we think we'll be flat year-over-year in Q3. Previously said we'd be flat in Q4, and now we think we'll be up modestly in Q4. There are three things really driving that difference. One is less investment spend, two is less deferred costs, and three is improved restructuring savings. They're sort of the three things that are just leading to that improvement from previous guidance.
Can you talk a little bit more about the level of ramp in revenue that we can see from these investments? Because obviously that's a key driver to getting these businesses ultimately to a normalized margin. Can you talk a little bit about how long you think it takes to get to that level where these are operating at a normal margin?
Yeah. One of the things we would point out is that as you look at organic revenue growth in the HR Solutions segment in the first half of the year, it's the highest it's been in several years. We are starting to see growth from these investments already. What I would observe as you look at the margin impact is as these investments sort of ramp, you're getting revenue growth, which is slightly lower margin until the investments truly scale. As the revenue growth continues to come through and the investments scale, you'll see that become higher margin revenue growth, if that makes sense.
I would just say, to add to that, the one investment we have called out over the last couple of quarters is on the healthcare exchanges, which we're very positive about. Feel like we've made great progress in the context of that. As that comes online, it's going to take the next 2 to 3 years before you really start to see the full impact of what that can bring to us, both on the retirement side and on the employee side. We're hopeful, by the way, in the fourth quarter, we're going to be able to launch the first employee exchange to go with what we do on the retirement side. It's going to take 2 to 3 years to really get those fully ramped up.
In this quarter, how much of the $23 million is the healthcare exchanges? Correct me if I'm wrong, there's 0 revenue right now on those investments, correct?
It's limited. The majority of the investment is healthcare exchanges.
Okay.
We are generating revenue on the retirement exchange. It's modest, but we do have clients. It's up and running. It's working very well and progressing just as we had hoped it would.
Okay, great. Thank you very much.
Sure.
Thanks, Dan.
Thank you. Our next question comes from Keith Walsh from Citi.
Hey, good morning, everybody. First question, just on the brokerage margins. If we adjust for the lease termination costs in 2Q 2011, it seems margins were flattish, yet we had 4% revenue growth. Can you just talk to, is there an implied 4% expense run rate in the business going forward? I've got a couple follow-ups. Thanks.
Yeah. Keith, I think one of the things we really highlighted on Aon Risk Solutions margin for the first half of the year, and we expect that sort of to continue slightly into Q3, is we really are investing significantly in the GRIP platform and in talent in Latin America and Asia. What we're really seeing is that organic revenue growth is offsetting substantial investment spend. What we did say in Aon Risk Solutions is that margin is going to be up significantly in Q4 and therefore up for the full year. We're going to see a return on that significant investment in that GRIP platform and that talent within the year.
We talked about this quite substantially in the last call, Keith, from the standpoint of the investment, particularly on the GRIP rollout, is significant, but it's also an investment unlike investment in classic investments in talent, which take a year or two to really come online. We see how the GRIP investment's going to actually pay back, that's why we talked about improved margin in the year, even with the investment we're making.
Okay. Very helpful. Thanks. A question on HR, a couple. Just want to clarify something on the guidance, I guess, for 2012. It seems like, has anything changed for your view of 2012? It just seems like maybe the investment's been front-loaded a little bit. Overall, do you view 2012 differently than you did what you told us last quarter?
I think that's fair, Keith. I think that's exactly right.
We're just seeing positive momentum. It continues to develop, we're just trying to reflect that.
Okay. No change there. Just if you could just talk a little bit to the unfavorable, you mentioned, Christa, in your comments, unfavorable revenue mix. Can you just help me understand that a little bit better? Is that more a seasonality issue, or is it maybe some of the more profitable businesses of Hewitt declining since the deal's been done? Can you just talk to that a little bit? Thanks.
Yeah. What we would say is there is some unfavorable revenue mix in both benefits administration and in core retirement consulting as those high-margin businesses declined slightly. It's a very minor decline in revenue, we love the business, and are continuing to invest in it long term.
We're just seeing really growth in some of the areas in HR BPO, in particular in the exchanges, which is just ramping up very well, and that really is the mix issue. We love this portfolio overall, see lots of promise in terms of sort of where it's going to go. In fact, more I would say even than when we actually brought the two firms together, Keith. That's why we made the investments, we're just seeing a greater ramp-up in some of the areas that are improving in margin a la HR BPO and the exchanges, which are driving the revenue mix issues that Christa talked about.
Okay. Thanks a lot, guys.
Thanks.
Thank you. Our next question comes from Adam Klauber from William Blair.
Thanks. Good morning.
Hey, Adam.
Good morning.
Growth in Risk Solutions Americas obviously picked up nicely. If you have to rank order between price and new business and exposure, how would you rank the drivers of that growth?
Really, I would say it's really, Adam, across the board. We actually saw movement on the pricing side. It was modest. It was not substantial. We saw new business growth that was good. I think, $250 million overall in new business, as Christa highlighted. What we really also saw is continued management on the existing book and retention increases, particularly around sort of the rollout of Client Promise. As we roll out across Europe and the rest of the world, we think we're going to see like increases when we actually get Client Promise in place. It truly drives movement and retention. We saw stability in insured value. There wasn't a significant increase there, but it wasn't a decrease or a headwind as we've seen before.
Okay. In the same topic, on Europe, it sounds like you're still holding an okay. Are you worried that that still can get worse from where it is right now?
I think our colleagues really across the world just done a terrific job sort of on the client leadership front, and certainly across Europe. Everyone is struggling. Everyone is sort of fighting a set of headwinds. I would reflect, we grew. We had positive organic growth. It was modest, but we had positive organic growth. We're continuing to put in place, as we've done in the U.S., some proven approaches that we think will really continue to help drive retention of that book. We've got some just very privileged positions and platforms across the European theater, and that's actually served us quite well. We're certainly concerned as we reflect on the impact of our clients. So far we've held our own. We just want to highlight, obviously, there's a lot of potential headwind there, and we're fighting through it.
We grew in the quarter, and we've grown in the first half, and we're going to work hard on that for the second half.
Great. One final question, also on organic. Both reinsurance and outsourcing blipped up. How much of that for this quarter is sort of more transactional in each segment? Again, is that potential, again, a little variation because of transactional business in each of those segments?
I would separate the two. They're quite different. When you think about our reinsurance business, it's 85% treaty as our overall business. That's really the fundamentally, it was really new business generation that drove the bulk of that revenue growth. 2-3 points was probably kind of one-time sorts of things, some price impact and some other things that sort of drove that. Even if you took the 2-3 points out, it's actually a very substantial increase. Really just a reflection of the great work that's being done on the reinsurance side, really reflecting tremendous progress, new business wins that have really driven that business. Just really another quarter of progression for our reinsurance colleagues.
On the outsourcing side, it really is, remember, these are long-term contracts, multi-year contracts, and it just reflects wins on those contracts as those come online in the building of that business. As Christa described before, the context of that, these are margin business. Our businesses we're building margin on over time. So that's why we had the revenue mix that Christa described, but just really, just classic wins here. There's also about 10% of that, which is project revenue which we've talked about before, we've been under pressure on and continue to face some headwinds on.
Great. Thank you very much.
Sure.
Thank you. Our next question comes from Meyer Shields. From Stifel Nicolaus. Sir, your line is open.
Thanks. I guess one big picture question and then a small one. Christa, you talked about really positioning the company to be more leveraged to an economic recovery. Would you have done anything differently over the past couple of years if you expected, let's say, two or three years of global economic weakness?
Would I expect anything different? I think the big areas of upside there are really global interest rates. A 100 basis point increase in global interest rates has a sort of $35 million-$40 million impact on top line and bottom line. I would observe on that dimension that interest rates did decline during Q2, we are seeing sort of weakness there. As we look at other areas of the global economy, as Greg said, exposures globally are roughly stable as we think about the underlying drivers of that, which are really corporate revenues, employment levels, and asset values. That is essentially stable. Look, the other key driver is inflation. We would say that if interest rates, underlying drivers of GDP or inflation were to improve, then we have a substantial leverage to all three of those.
Yeah. I think you asked, literally, would you done anything differently as well if you had anticipated it. For us, remember, we build our game plan not anticipating substantial rate movement. We have built our game plan not anticipating economic return. We have built our game plan to grow our business and to drive cash flow, which is really the engine, which really, we believe is just continuing to build and will over time. For us, that game plan has been put together not anticipating a change in some of the headwinds. In many respects, the plan we have had in place would be the game plan we are going to go forward with. If we happen to get some benefits, as Christa described, that would be fantastic, but it does not change anything structurally that we have put in place.
Okay. That is very helpful. Small question. In HR Solutions, there is a $9 million increase in deferred costs. I was hoping you could explain what that is and how that plays out over the next few quarters.
Yeah. It is related to the timing of implementations on large outsourcing contracts. It has been a headwind in Q1 and Q2. We would expect that to reverse slightly in Q3 and Q4, hence the improved guidance year-over-year in Q3 and Q4. It is literally just as we implement contracts and you have them go live, you defer less of this expense.
Okay, great. Thank you.
Thank you. Our next question comes from Michael Nannizzi from Goldman Sachs.
Hello, this is Mike. Yep.
Hi.
My question, I guess, is on Europe. What are you assuming is a baseline for Europe, in your revenue and margin guidance? In just both segments, but in particular in the HR Solutions segment. Just one follow-up. Thanks. Sorry for the delay.
Well, as a baseline, we're assuming, at this point, it's going to be flat overall in terms of what's happened in the overall economy. It's obviously struggling and fragile. We're fighting against it. We've grown the business, and we anticipate we're going to continue to do that, but it's going to be marginally positive going forward.
Okay, your baseline, kind of the revenue guidance and margin guidance in HR Solutions is that you'll continue to grow not just outside of Europe, outside of the U.S., but also in Europe as well.
Yeah. Well, that's what we've talked about, which is literally, as we've said before, we've got a set of game plans to add clients and add business to grow the business. We anticipate we're going to continue to do that. We've highlighted that it's a struggle, and it's a struggle for our clients first and foremost, and a headwind for us. We've been able to actually succeed against that, and we anticipate doing it, but it's not going to be substantial at this point until things change.
The only other point I'd make is if you look at the seasonality of our business, Q1 is our strongest European quarter. While the second half of the year is certainly important, it's really Q1 next year that we'll be sort of focused on.
Got you. Great, thanks. Just one question on kind of capital generation, capital deployment. You've deployed $250 million through the buyback this quarter. Is your expectation to deploy what you're generating after the dividend? Or should we think about deployment including more than that, given the additional cash that you have from the re-domicile? Or how should we think about where you plan to deploy from here?
Yeah. The way we think about it is really, as we generate free cash flow, we look at return on capital on a cash-on-cash basis to allocate any form of free cash flow. We've said that we had approximately $100 million in Q1, $250 million in Q2, and we had really previously given guidance of $150 million per quarter, with the potential of $300 million of additional purchase using excess capital from the balance sheet. Beyond that, it's not really in our best interest to provide specific guidance. Any uses of cash flow or excess capacity, including the $300 million of cash held internationally, will be evaluated and allocated based on the highest return on capital.
Great. Thank you.
Sure.
Thank you. Our next question comes from Gregory Locraft from Morgan Stanley.
Hi. Good morning. Just wanted to follow up on Europe. Could you just give us the % of total revs it is for each of the divisions? I guess you'd mentioned Q1 is the biggest for the HR business. Could you talk us through how big it is from a seasonality perspective? Really what I'm trying to get at, as others are as well, is sensitivity if things come in worse to the overall projections that you guys hope to achieve in the quarters and months and years ahead.
As we think about the business overall, about 15% of our overall revenue is continental Europe. Risk is a little bit more, HR is a little bit less. As you think about patterning throughout the year, Q1 is the biggest quarter. Look, we're very sensitive to Europe, too. I would note and reinforce, as Greg described, we've grown in Europe in the first half of the year. We grew in Q2. We're very conservative in our future forecasts, but it's not really the panic that everyone's currently worried about. We're certainly tracking it extremely carefully, and we're managing what we observe as a fragile economy. As Greg said, we have industry-leading positions in most large European countries, and we're very proud of the performance that we're delivering.
Remember, it's difficult to grow in these contexts, but clients need risk understanding, and they need risk leadership. That absolutely can't go away. In some respects, by the way, some of the issues in Europe actually magnify those issues, and then potentially create opportunities. On the HR Solutions side, same token, everyone's got employees, everybody's got to work and support those employees, and in times of need, sometimes those issues become even more acute. We're by no means trying to say this is a positive. This is a big headwind and a serious headwind for our clients. We've got a lot of tools and a lot of approaches that we think serve us well in this context, and we're going to keep applying those.
Okay, just one follow-up on that. If we go back to the financial crisis, the financial markets came unglued in 2008, but it wasn't really until 2009 that you felt it in your organics in the HR Solutions. How is this any different? Why is next year going to be a good year for Europe for HR Solutions, given what we know today?
Again, we're careful to say we haven't said it's going to be a good year. We've essentially said we're going to continue to improve and build on our business. I think you've highlighted something pretty profound. If you go back and look at 2008 as an example, and look at our business overall as an example, and our growth rates, even in the context of a very challenging 2008, and what's happened over time, the worst we did was negative 1% across the board, if you think about the robustness of our business in 2009. Against that backdrop, we all serve on growth. Again, our aspiration is to grow over time, and we will do that. Just for background, that was the, as you described, Greg, the worst of the worst.
From our standpoint, we think this is different in some ways, and offers some opportunities that are a bit unique. Again, don't want to overstate it. This is going to be a challenge, continues to be a challenge. As Christa described, this is something we've, again, seen before, and we're going to deal with and support our clients on, and we think Aon will benefit from that.
Excellent. Thank you very much. One last one, just M&A. I just want to take your temperature on how you're feeling on that front. You were very explicit in cash plans, I just wanted to ask what you're thinking there.
If you just take Christa's foundation on the cash side, I think the clearest execution plan you can imagine emanates from what Christa described. From our standpoint, we love the structure we've got. We've got the portfolio we have on HR Solutions and Risk Solutions we like a lot. We'll always add to that from the standpoint of smaller tuck-in acquisitions, and have historically spent $200 million to $300 million a year in that context on things that truly add content capability or geographic reach. That really is the extent of our M&A aspirations at this point. We love the platform we've got.
Okay, great. Thanks a lot.
Thank you. Our next question comes from Brian Meredith from UBS.
Yeah, good morning. A couple quick questions here for you. The first one, on the outsourcing business, wonder if you can talk about, is the growth you're seeing there from just underlying employee growth, or is it some of the special projects that you had stopped seeing back in 2011 that all of a sudden are starting to come through?
Really, Brian, this is really new client wins. As we bring on those new client wins, particularly around HRBPO, and on some of the comp consulting side, that's really what you're seeing a reflection of. Just fundamental strength in the core part of the business. We have not seen the discretionary spend pick up. That 10% of the project spend that's been a pressure, we've continued to see as a pressure where you're really seeing all this roll-on of new clients.
Okay, great. Next question on the health exchanges. Do you have any new clients, and how many clients have you signed on so far, and what are the enrollments looking like?
Well, again, remember there are 2 types of exchanges here. One is on the retirement side, we have an active exchange up and running, multiple clients in the context of that. Many lives in the context of what we're doing in that. We're going to go through another enrollment period coming up, that's an active exchange which we're investing behind, which we're building on. We're very hopeful to actually launch what will be the first active employee exchange, coming up in the fourth quarter of this year.
In many respects, we've got clients who are excited about that, markets who are excited about that, and look forward to doing that, which means we would have two exchanges in place, a retirement exchange, and an active employee exchange, both of which would be, as Christa described before, growth engines for us and opportunities to really build our business. We're excited about both of them.
When should we potentially see that in the revenue numbers?
Well, you'll begin to see it meaningfully in the revenue numbers, as I said before, really into 2013, but really in 2013 and 2014. You'll start to see it really in the profit numbers a bit after that. I said two to three years before.
Yeah.
That's the overall profile.
Okay. Just overall on the pricing environment for property casualty insurance, your thoughts there, and what impact is that having on your revenue growth, organic revenue growth?
Well, back overall on pricing again, on the retail side.
Yes
we draw directly and specifically from the Global Risk Insight Platform. As we said before, we've seen continued improvement just for numbers, if it's helpful. Q2, go back to last year, Q2 2011, we were -3%. Q3, we were -2%. Q4, we were roughly flat. In the first quarter, we're kind of +1%. That's roughly where we are now, give or take. On the retail side. It's positive, it's trended positive. It seems like that's beginning to flatten out a bit in terms of where we are. Really, again, I'd split that between new and renewal. We're looking at both overall here, as that's what we capture in GRIP. On the reinsurance side, we also saw marginal positive movement sort of in that, and that's reflected in the numbers. As I said before.
Yep
a couple of points as it related to our book. If you look at the global reinsurance capital, it's a story you know well, Brian. We ended 2011 with about $455 billion in capital, which was down 3% from 2010 from $470 billion. By the way, that absorbed over $100 billion worth of insured losses. If you look at the first quarter of 2012, we're back up to $470 billion. In terms of overall pressure, there's still back to almost unprecedented levels of capital in the overall business at this point in time. For us, it's been positive. It's had an impact, but when you think about where we are, you start to see that flatten out a little bit. Marginally positive but flattening out.
Thank you.
Thank you. Our next question comes from Jay Gelb from Barclays.
Thanks. Good morning. I want to touch base on a couple items. First, on the reinsurance organic revenue growth, do you expect that trend of improving organic revenue growth to continue in 3Q?
Yeah, Jay, overall, first of all, we're just pleased with the progress overall. The fundamentals of the business around new wins, net new wins, that's now been positive for five consecutive quarters, just as we expected it would be once the overall set of adjustments were made when we brought the two firms together. The 7%, I said before, kind of had 200 to 300 basis points of pricing, which is leveling out and some kind of one-time discretionary spends, which we think will probably go away. If you back that out, you're kind of still at the 4%-5% range. We see that kind of progress over the course of the year.
Okay. Christa, can you update us on the progress in improving the effective tax rate with the corporate move?
Jay, we did say that the tax rate for the full year is going to remain 28%. We did observe that the tax rate in the quarter, 27.5. We continue to see the tax rate being 28%. I would observe that's down 100 basis points from the 29% we had at the beginning of the year. As we think about the move to the U.K., we have said that we expect a substantial reduction of the global effective tax rate, approximately 500 basis points over the long term.
Right. Okay. On the Risk Solutions where you talk about the improving margins, I just wanted to confirm that that also means improving adjusted operating profit?
Yes, that's right.
Okay. I guess that would mean improving revenue year-over-year as well.
We definitely think organic revenue growth is going to be positive.
Okay. Thank you.
Thank you. Our next question comes from Matthew Heimermann from JPMorgan.
Hi. Good morning, everybody.
Good morning.
First numbers question. Just the $23 million of incremental investment spend you highlighted in the consulting segment. Can you break that up between comp and benefits and other expenses?
No, we can't. What we can say is that the majority of it is related to healthcare exchanges.
Okay. Any just qualitative comment on how to allocate it?
Yeah. As we think about what it is, it is people and it's technology. The technology spend is both an ongoing expense and it's capital expenditure. As you think about scaling up a healthcare exchange, a lot of it's about hiring people to process the placement. Some of them are very experienced people, licensed brokers, some of them are administrative people to place the business. Then there's a substantial investment in the technology platform to scale the business to the large clients that we're going to be scaling over the next couple of years.
It's fair as we think about that ongoing administrative or people expenses aren't likely to be called out as investments. Is it fair to think about that?
That's right.
As either CapEx or any internal consultants, or what have you, on the implementation side?
That is right.
Okay.
We would say from 2013 onwards, we will absorb that in the business.
Got it. Just curious, one of the things you talked about when you originally acquired Hewitt was some of the cross-selling opportunities between Risk Solutions and HR Solutions. It feels like now that the office managers, regional managers kind of have their marching orders, and that's a priority. Any early returns on that front?
Well, let's start with one of the things that we saw enough promise, and we talked about the alignment around health and benefits. We actually moved the entire health and benefits business, so $721 million worth of revenue or thereabouts, from Aon Hewitt over to Aon Risk Solutions in the context of that, and saw very strong growth in the quarter as a result of that. If one wanted a very explicit underpinning, talk's cheap, but what action are you taking? There is a very specific action that we took based on early returns that we saw that we think are really beginning to have impact on the business, but will have much more impact over time as we take the capability we've got in the context of where we are and deliver the Hewitt capability into the risk client base and also into the middle market.
We're seeing that quite substantially, and that's one example. I would also say on the healthcare exchanges, one of the investments, if you think about it, we're involved in the design of those, but also there's a significant amount of brokerage involved in that and administration. Very directly, we're connecting in terms of overall capabilities to serve our clients. We would say, Matthew, there's a lot of connection, and it is at least or more than we anticipated coming into the overall merger. The early returns are very good in terms of what we're doing, but they're early. We've got a long way to go, and we're continuing to build, but feel good about the progress.
How, from an external perspective over the next couple of years, how should we think about where we're going to see those benefits show up? I think you highlighted the easiest ones to get your arm around in the business that was transferred in the brokerage, but how should we monitor that?
Well, I think you're going to see growth across the board. In many respects, you're going to hopefully see growth on the Aon Hewitt side, ex health and benefits. Literally what we're doing, if you just think about the capability we've got on the outsourcing side, the delivery capability we've got, if you imagine that in the middle market. Think about it. Hewitt before was much more a U.S. and U.K.-focused company, had certainly operations around the world, but Aon, exceptionally strong around the world, incredibly strong middle market, so great capability in the context of that. It also, as you move upmarket, the Hewitt capability in the large corporate arena was just extraordinary. Bringing risk capability there we think would be very positive. The exchanges we've talked about before.
From our standpoint, we actually see connectivity across the business, and we think you're going to see results in multiple places.
That's something that the mid-market, the large global, yin and yang, depending on the segment we're talking about, that's something we can expect you to call out?
Yeah, call out, I don't know if we're going to explicitly say this exactly was driven by cross-selling.
I just meant qualitatively in the-
Yeah.
-press release.
Sure.
That kind of thing. Okay. All right.
Absolutely.
Much appreciated.
You bet.
Thank you. Our last question comes from Alex Lopez from Portales Partners.
Good morning.
Hi, Alex.
Hey, Greg. I actually have a couple follow-up questions on pricing, then I have a quick question on capital management. Greg, I just want to confirm, did you mention that about two to three points of the 7% Aon Benfield organic growth does contribute to pricing? Is that right?
Yeah. When I said there were a couple of things there, one was pricing, which was marginally positive, then there were a couple of one-off additions, just really adjustments we made on behalf of clients that have impacted the quarter. I really said it was two to three points overall that included pricing as part of it.
Okay. Those one-offs, that is the non-recurring favorable pricing impact.
Correct.
Okay. Can you provide some color on the pricing environment in Aon Hewitt? We have some idea of the demand, but the pricing, I was wondering if you can talk about that.
The pricing environment, we would say, particularly on the outsourcing side, remains very competitive. It is absolutely a headwind we faced. It's negative. It has remained at a consistent negative level since we merged with Hewitt in 2010. We would say it's exactly in line with our expectations that we modeled when we acquired the company. It remains very consistent.
Great.
I think from a competitive standpoint, all of our businesses are competitive. All of them have prices as one aspect of it. We continue to compete on value, which is helping our clients understand what we can do to help improve their operating performance or reduce their volatility or strengthen their balance sheets, or really just help them improve performance. That's actually served us well on the reinsurance side, on the retail side, and in Aon Hewitt.
It's competitive in outsourcing, somewhat negative on the consulting practices within Aon Hewitt. Is that positive and competitive or?
Yes.
Okay.
Well, it's the same. I still think it's like the business has been over time. There's lots of competition, lots of competitors out there talking to clients. What we believe we've got is, Alex, a very unique way to talk about the value we can bring to the market, whether it's on the advice side, on the consulting side, or it's on the delivery side and what we do on the outsourcing side, we think we've got a very unique platform in which we can actually offer a client not only the diagnosis and help understand what to do, but also and how to do it and actually do it for them on the outsourcing side.
We think the platform called Aon Hewitt is actually quite unique in the context of the HR Solutions world, just like we believe the Risk Solutions platform we have with Aon Risk Solutions and Aon Benfield is very unique.
Okay, great. Christa, a quick question on capital management. Can you remind us how much senior debt is maturing in Q4? I think you had a little bit. Any thoughts on managing that or what we're going to do with it?
Yeah. We have in December 2012, about $225 million of debt that comes up for renewal. You should expect us to renew that as we normally do.
Okay. Great. Thank you.
Thank you. I would now like to turn the call back over to Greg Case for closing remarks.
I just wanted to say thanks to everybody for joining the call this quarter. We appreciate it and look forward to the discussion next quarter. Thanks very much.
This does conclude today's conference. Thank you for joining. You may disconnect at this time.