Good morning, and thank you for holding. Welcome to Aon Corporation'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 objections, you may disconnect your line at this time. I would also like to remind all parties 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 Greg Case, President and Chief Executive Officer of Aon Corporation. Sir, you may begin.
Thank you, good morning, everyone. Welcome to our second quarter conference call. Joining me here today is our Chief Financial Officer, Christa Davies. To begin, our second quarter results reflect continued progress with solid growth in our retail brokerage business, delivery of synergy savings related to Aon Hewitt, and the repurchase of more than $300 million of common stock. Consistent with our messages on previous calls, irrespective of the soft market, economic conditions, or other challenges outside our control, we continue to execute on our strategy to substantially strengthen and unite Aon around the globe. Consistent with previous quarters, I'd like to cover three areas before turning the call over to Christa for further financial review. First is our performance against key metrics we communicate to shareholders. Second is continued areas of investment across Aon. Third is overall organic growth performance.
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. In the second quarter, organic growth was +1%, highlighted by solid growth in our retail brokerage business, placing us firmly on track for growth in 2011. Adjusted operating margin decreased 220 basis points driven by the inclusion of Hewitt results, including a significant increase in intangible amortization expense. EPS increased +2% to $0.83, driven by strong underlying performance and effective capital management. Overall, our team views the underlying second quarter results as a quarter of continued progress as we strengthen the firm for long-term growth and value creation. On the second topic, further areas of investment. We believe Aon is in a unique position.
Solid operating performance combined with expense discipline and strong cash flow continues to enable substantial investment in colleagues and capabilities. A few examples include in Risk Solutions, we're invested in innovative technology such as our Global Risk Insight Platform, which delivers unmatched data and analytics, new revenue opportunities, and greater insights into our commission yields across $54 billion of premium flow globally. We're also investing in additional capability and talent as well as strengthening our international footprint through recently completed acquisitions such as Glenrand in South Africa, which solidifies our position as the largest broker on the continent of Africa.
We're investing in client leadership to drive greater productivity and efficiency with the rollout of the revenue engine in EMEA and Asia Pacific, the rollout of Client Promise, which is driving greater retention rates and ensuring clients understand our value proposition, and the rollout of our Aon Broking platform to better match client needs with insurer appetite for risk in any geography around the globe. In HR Solutions, we continue to strengthen our industry-leading position in both public and corporate healthcare exchanges, enabling clients to prepare for ultimate changes in healthcare legislation with design, purchasing, and administration capability. We're expanding our capability in investment management consulting, as highlighted by the acquisition of Ennis Knupp, complementing our incredibly strong U.K. business with over $4.3 trillion in combined assets under advisement.
We're expanding our international footprint as the workplace is increasingly becoming more global with investments in key talent and capabilities across Asia. Finally, we're continuing to invest in expanding our core HR BPO offerings through point solution opportunities such as dependent eligibility audits and absence management. In summary, across Risk Solutions and HR Solutions, our fundamental client-serving capability continues to substantially strengthen around the globe. These investments, fully funded in the context of long-term margin improvement, position Aon very well to take advantage of an improving global economy and the long-term growth opportunity we see across our markets. Finally, on the third topic of growth, I want to spend the next few minutes discussing the quarter for both our segments.
In Risk Solutions, overall organic revenue was +2%, a continuation of the positive trends we saw in the prior quarter, despite soft pricing, excess capital, and fragile economic conditions globally. Against these headwinds, which are primarily market related, we're driving a set of initiatives that continue to strengthen our underlying performance and give us confidence that our Risk Solutions business is firmly positioned for long-term growth and leverage to an improving economy. With management of our renewal book portfolio through Client Promise and retention rates of 90% or better on average, highlighting strong client satisfaction. New business generation, more than $240 million across our retail business, with strong growth in many markets including China, Africa, Australia, New Zealand, Italy, Denmark, and U.S. retail, just to name a few, highlighting the strength of our global client-serving capability.
An investment to new product and service capabilities with the rollout of GRIP, Client Promise, and Impact on Demand, and global growth in treaty reinsurance, driven primarily by net new business. Turning to the individual businesses. In the Americas, organic revenue growth was +3%. Pricing continues to be soft, down low single digits on average, with relatively stable exposure units. In spite of this headwind, we saw strong growth in both Latin America and in our affinity products. Partially offset by a modest decline in U.S. retail and continued sector weakness in areas such as construction. For construction, despite continued weakness in this important sector, our team delivered a strong quarter of improved performance led by strength in the commercial surety business. We've got a great platform and a great team we plan to keep investing behind to position this business for substantial long-term growth.
On the international front, organic revenue growth is +3%. Pricing continues to be flat to modestly down on average with firmer pricing in cat-exposed regions. We saw strong growth in New Zealand and across Asia, including double-digit growth in areas such as Thailand, China, and Japan, driven primarily by new business activity. We have modest growth in U.K. retail and EMEA, as exposures are generally stable, but economic conditions remain fragile across the region. In reinsurance, organic revenue declined 2%. In the core book of reinsurance, global treaty revenue drove a 2% increase in total organic revenue. The first quarter of growth in treaty reinsurance since Q2 of 2009, driven primarily by improved trends in new business, and less impact on the pricing side.
Capital advisory and facultative placements, which are very much more transaction-driven, drove a 4% decline in total organic revenue as the prior year quarter included significant activity related to cat bond placements. We reflect on the merger with Benfield, the transaction continues to perform better than our original expectations as the first two years were not as much about growth, but about strengthening an unparalleled reinsurance platform with unmatched data and analytics while delivering on the economics of the transaction, including $122 million in synergy savings that remain well ahead of the original schedule. We remain confident and excited about our capability in Aon Benfield. A pricing perspective, despite significant industry loss experience in the first half, we believe excess capacity globally will continue to drive soft pricing, albeit at a moderately lesser rate of decline, with firmer pricing in certain cat-exposed regions.
These industry conditions for treaty business and the transactional orientation nature of the capital advisory and facultative placements, we would expect the trends in reinsurance in the second half to modestly improve from the results in the second quarter. HR Solutions. Overall organic revenue was flat, a modest improvement from the prior quarter, as fragile economic conditions placed pressure on corporate discretionary budgets and global unemployment trends.
Against these headwinds, which are primarily market-related, we are again driving a set of initiatives that continue to strengthen our underlying performance and give us confidence that our HR Solutions business is firmly positioned for long-term growth and leverage to an improving economy with a high degree of recurring revenue across solutions with strong renewal rates, highlighting strong client satisfaction, solid new business generation with over 150 wins, including more than 20 new mid-market benefits administration wins, and a very significant recent win in a leading large financial institution in HR BPO, and continued investments in international and emerging markets and in products and services such as Investment Management Consulting and healthcare exchanges. Turning to the individual businesses. In consulting services, organic revenue was flat, and the results reflect a modest decline from the prior quarter as fragile economic trends globally place pressure on unemployment and discretionary spend.
Solid growth in global compensation and Investment Management Consulting was offset by the impact of weak economic conditions in U.S. retirement and health and benefits consulting. We'd expect modest organic growth in the second half, similar to the first half. In outsourcing, organic revenue was flat and results reflect a modest improvement from the prior quarter. We saw growth from new client wins in both benefits administration and HR BPO, as well as growth from point solutions in areas such as dependent eligibility verification. We would expect flat to modest organic growth in the second half, a continued improvement from the first half. In summary of our second quarter results, we're delivering solid underlying progress against the key metrics we communicate to shareholders.
Events occurring in Japan, Australia, New Zealand are pending healthcare reform in the U.S., just to name a few major developments, only reinforce the needs of our clients and the significant long-term growth opportunity for Aon as the industry leader in both risk and HR solutions. I'm now pleased to turn the call over to Christa for further financial review.
Thanks so much, Greg. Good morning, everyone. As Greg noted, our second quarter results reflect continued progress to strengthen our industry-leading position and client-serving capabilities across risk and people. We are firmly on track for growth in 2011. Against that, we're managing expenses, delivering savings from our restructuring programs, and effectively allocating capital, as highlighted by the repurchase of $303 million in common stock in the quarter. Now let me turn to the results of the second quarter. Our core EPS performance, excluding certain items, was $0.83 per share for the second quarter, up 2% compared to $0.81 per share in the prior year quarter. As the inclusion of Hewitt results, combined with strong underlying performance and effective capital management more than offset a $62 million increase in intangible amortization expense and shares issued in the prior year for the Hewitt acquisition.
Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on page 12 include a non-cash charge of $19 million resulting from the accelerated amortization of deferred financing costs associated with the repaid term credit agreement, $14 million of restructuring charges, and $5 million of transaction-related Hewitt costs. Lastly, there were two items not adjusted for that are helpful in understanding the core results. First, a $16 million of other expense or $0.04 for reoccupying vacated leasehold properties in the U.K. and remaining lease termination costs for facility exits in France. Second, foreign currency translation had a favorable impact of $0.03. If currency were to remain stable at today's rates, we would expect a modest favorable impact to EPS in the second half. Let me talk about each of the segments.
In our Risk Solutions segment, organic revenue growth was 2%, and we delivered an operating margin of 19.6% on an adjusted basis, down 140 basis points from the prior year quarter. Our operating performance for the quarter was primarily impacted by three items. First, as noted above, we incurred $16 million of lease-related costs or a 90 basis point impact that we do not expect to recur going forward. Second, lower investment income impacted margin by 30 basis points. Lastly, foreign currency translation unfavorably impacted margin by 20 basis points, primarily resulting from a weaker U.S. dollar versus the pound. These three items, largely non-recurring or macro related, unfavorably impacted margins by 140 basis points in the second quarter.
Excluding these items, our underlying performance for the quarter continues to demonstrate strong operational discipline and underlying structural margin improvement in a modest organic growth environment, positioning the segment for greater operating leverage long term as economic conditions continue to improve around the globe. Let me spend a moment on each of our restructuring programs, key initiatives that are enabling concurrent funding and investments and delivering long-term structural margin expansion. With respect to the 2007 restructuring program, we have incurred 100% of the charges necessary to deliver the remaining savings. Restructuring savings in the second quarter are estimated at $134 million, compared to $113 million in the prior year quarter. Approximately $113 million of the savings were related to the Risk Solutions segment, primarily for workforce reduction. With respect to the Aon Benfield restructuring program, we have incurred 95% of the charges necessary to deliver the remaining savings.
Restructuring savings in the second quarter are estimated at $30 million, compared to $24 million in the prior year quarter. I would note in the second quarter the reversal of $22 million of restructuring costs accrued in prior periods under the Aon Benfield and 2007 restructuring programs as a result of the company reoccupying vacated leasehold properties. Overall, we're ahead of the original schedule on our 2007 and Aon Benfield restructuring programs. We have completed nearly 100% of the charges as of the end of the second quarter, with approximately $24 million of incremental Risk Solutions savings still to achieve in the second half of 2011. The following three margin opportunities are within our control and continue to put us on track in delivering our long-term target of 25% in Risk Solutions. The first, operational efficiency and the remaining restructuring savings. The second, continued rollout of the revenue engine globally.
The third, Aon Broking and group related initiatives. In addition, there are two additional macro drivers that provide significant operating leverage based on improvements in the external marketplace. The fourth is an improving global economy in areas such as employment levels, asset values, and corporate revenues, which will drive leverage to exposure growth, along with every 100 basis point rise in short-term interest rates delivers roughly $35 million-$40 million to the bottom line. Fifth, improvements in insurance pricing. Turning to the HR Solutions segment. Organic revenue is flat, and we delivered an adjusted operating margin of 13.9% as results reflect the merger with Hewitt, including a $59 million increase in intangible asset amortization.
To further assess the underlying performance of operating income and margin in the segment, we believe it's useful to add together results for both Aon Consulting and Hewitt in the prior year quarter to form your starting point of analysis. For example, if we take Hewitt's adjusted operating income of $105 million plus $47 million for Aon Consulting, your combined total of $152 million of operating income as reported for the prior year quarter. If we subtract intangible amortization expense of $59 million, this leaves an underlying $93 million of operating income. Comparing $93 million to the $151 million we reported in the second quarter, the increase in operating income reflects savings related to the restructuring program, additional synergy savings, and operational improvements. Essentially, we believe that strong operating income growth on flat organic revenue implies solid operating margin expansion in the HR Solutions segment.
Lastly, for the HR Solutions segment, I wanted to comment briefly on the Aon Hewitt restructuring program. With respect to the Aon Hewitt restructuring program, we incurred $31 million of charges in the quarter, primarily related to lease consolidation and workforce reduction. The Aon Hewitt restructuring plan is expected to result in cumulative costs of $325 million through the end of the plan, primarily encompassing $180 million in workforce reductions and $145 million in real estate rationalization costs. Cash costs are expected to be approximately $275 million. Savings related to the restructuring program in the second quarter are estimated at $34 million, with additional synergy savings achieved outside of the formal restructuring program. We expect to deliver total annual savings of $355 million in 2013, including approximately $280 million of annual savings related to the restructuring plan and additional savings in areas such as IT, procurement, and public company costs.
We are on track to deliver approximately $242 million of annual savings in 2011. These savings are the first of three key drivers for delivering our long-term operating margin target of 20% in HR Solutions. The other two key drivers are growth in the core business, including HR BPO improvements, and declining intangible asset amortization expense beginning in 2013. Let me discuss certain line items outside of the operating segments. Interest expense increased $30 million due to an increase in the average amount of debt outstanding following the merger with Hewitt. Other expense was $23 million in the second quarter, primarily due to a non-cash charge of $19 million, resulting from the accelerated amortization of deferred financing costs associated with the repaid term credit agreement.
The second quarter also included a $13 million loss related to the company's ownership in certain insurance investment funds, partially offset by $9 million of distributions from certain private equity securities. Going forward for these items, we would expect a run rate of approximately $5 million per quarter of interest income, $35 million of unallocated expense, and $60 million-$65 million of interest expense per quarter. Due to better performance from our joint ventures, we expect minority interest to be in the $9 million-$10 million per quarter going forward. Turning to taxes, the effective tax rate on net income from continuing operations was 24.7% in the second 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 anticipates an effective tax rate on net income from continuing operations of 29% for 2011. Turning to shares, average diluted shares outstanding increased to 342.7 million in the second quarter, compared to 282.6 million in the prior year quarter, due primarily to the issuance of 61 million shares of common stock related to the merger with Hewitt, partially offset by the company's share repurchase program. Actual shares outstanding on June 30 were 326.7 million, compared to 330.5 million at March 31. There are approximately 13 million diluted stock equivalents. The company has approximately $1.4 billion remaining under the share repurchase program previously authorized in 2010. Now, as we think about buyback for the remainder of 2011, we believe it's incredibly important and expect it to be in the Q4 2010 levels. Now, let me turn to the balance sheet.
At June 30, cash and short-term investments were $815 million, and total debt outstanding was $4.5 billion. During the quarter, we placed $500 million of five-year notes, of which the proceeds were used to refinance part of the original billion-dollar term loan, essentially lengthening the maturity and locking in a fixed rate. On June 15, we refinanced the remaining outstanding portion of our term loan of $450 million, essentially reducing the variable rate to LIBOR plus 137.5 basis points versus the historical rate of LIBOR plus 250 basis points. Overall debt to capital was 35% at June 30, compared to 35.3% at March 31. In summary, we delivered 1% organic revenues, placing us firmly on track for growth in 2011, despite fragile economic conditions and a continued soft market. We're managing expenses, driving operational initiatives across both segments, and fully on track to achieve our long-term operating margin targets.
We have significant leverage to an improving global economy. Our balance sheet and strong cash flow continue to provide significant financial flexibility as we repurchased $303 million of common stock in the quarter, highlighting our belief in the underlying strength of the firm. With that, I'll turn the call back over to the operator, and we'd be delighted to take your questions.
All right. Thank you. At this time for questions, press star one. Please record your name. Again, press star one for questions. Thank you. Stand by for the first question. Thank you. Our first question comes from Keith Walsh, Citi. Your line is open.
Hey, good morning, everybody. I guess I'll just come right out and ask. I'm surprised there was little negative operating leverage at brokerage. We want to adjust for the adjustments. Just thinking about it out loud, the pricing and the economy, not good, but certainly better than they were a year ago, and you still have cost saves flowing in. I think this is probably a key area here where the misses versus my numbers. If you could address that. Thanks.
Happy to do that, Keith. I'll start with a little bit of context around the quarter, then Christa Davies, maybe you can just drive in, give the specifics. First of all, overall, as we said, Keith, we're driving toward a commitment around a 25% margin with a detailed game plan in place to do that. That's fully on track. Everything is moving as expected. Q2, from our view, actually did nothing to change the view on that. I can see where you're coming from as you look at the results. As we look at behind the results and the overall game plan, as Christa Davies described, five very specific elements that are going to drive progress there and get us to that 25% margin. Three in our control around restructuring Revenue Engine, Aon Broking. Those are progressing very well. We saw great progress in the quarter.
Two outside of our control in interest rates and pricing and GDP growth. We've said all along, by the way, in addition to getting the 25% margin, we are going to simultaneously invest heavily in the business, which we continue to do in multiple places. That means we're going to have, really from our standpoint, look at this year-to-year, not quarter-to-quarter. If you look at it year-to-year, as you know well, our record reflects reasonable progress. When you think about 2005 to 2010, we've increased margin 530 basis points, give or take. That's roughly a little over 100 basis points a year from 15.1 to 20.4, while simultaneously making all the investments that we've described before back into the business. Fighting the headwinds on pricing and rates and the economy, et cetera.
From our standpoint, we actually feel very good about being on track for the 25%. Literally nothing has changed in our mind in the context of that. Maybe Christa can describe the quarter specifically, but overall, we feel very good about it. Importantly, to your question really implied was around do we have economic leverage to a changing economy? We absolutely believe we do that. Again, nothing in the quarter in our mind changed that. Christa, maybe talk specifically about the quarter.
Sure. As we think about the Aon Risk Solutions margin, Keith, 21% versus 19.6%, there are really three items we believe that sort of are either one-time or macro related that impacted margin. 90 basis points for lease termination, 30 basis points for investment income, and 20 basis points for FX. That's 140 basis points, essentially flat year-over-year, excluding one-time and macro related items. As we think about sort of operating leverage going forward, which is really at the heart of your question, I think there are sort of three things we would say that drive operating leverage going forward. One is the initiatives we have around sort of Revenue Engine and improved productivity and expense management, essentially blocking and tackling. The second is really the return of a higher margin initiatives we have around GRIP.
We've really said that they're going to flow through 2011, 2012, and 2013, and we certainly see those coming through. The last one is really sort of leverage around exposure growth and pricing. We absolutely see positive leverage as we look out.
My follow-up, just related to the first question and more specifically around Aon Benfield. Greg, I'm having a hard time understanding your comment that it's performing better than you projected when you did the deal, when we've got revenues down for nine or 10 consecutive quarters versus Guy Carpenter and Willis Re. I have to imagine your margins are being impacted by that. Maybe if you could just give me a little more color around that.
Yeah, happy to do that, Keith. As we thought about literally, again, investing in the business and building our business for the long term, we've invested in content and capability. As we've done that, we want to make absolutely certain we do it in the context of being able to drive margin improvement. We've got a pretty good record of being able to do that. All I was reflecting is Aon Benfield's done exactly that. We knew we'd have growth pressure for the first couple of years as we put the businesses together. We had some of that. As you think about the economics of what's been returned, the synergy savings, establishing the platform within the context of that has done exceptionally well. In fact, beyond what we could've even hoped as we actually began the transaction.
Now as we look at kind of where we are now, what we're essentially seeing is the treaty book grew in this quarter, plus 2%, as I described before. The win-loss ratio as we track them is improving, we feel very good about that in the context of sort of growing the business overall. From our standpoint, as we reflect on it, all the economic returns have been there exactly as we had hoped, in fact, better. The underlying growth characteristics as we reflect on this quarter and think about the second half of the year, feel very good about it. From our standpoint, that was really what I was trying to reflect in my overall statement.
We see some upside as we think about sort of what's happening in the second half of the year and as things improve on the pricing front and the overall economy. From our standpoint, we see the growth in the second half, and we know the underlying economic leverage we've got in the business.
If I could just, one more quick one on that point. Are your margins up or down at Aon Benfield since when you did the deal? I guess that's what I really want to understand. When do we normalize on the revenue? It's been 2 years now. When do we normalize, and when do you start getting more of an average growth rate for the industry?
Yeah. As we've done historically, Keith, we talk about overall brokerage margin. As you can reflect, the brokerage margins increased in the business 100 basis points a year for each of the last five years, including the last two years when we've included Aon Benfield in the context of it. Overall brokerage margin, again, back to kind of the force march that we've been on for the last five years. Irrespective of the economic external situation, internal situation, insurance pricing, our brokerage margins increased about 100 basis points a year, including Benfield, and all the characteristics and challenges you have when you bring businesses together. We feel very good about the progress on brokerage margin.
Again, what creates some lumpiness is literally we're continuing to make significant investments, and that causes kind of the quarter-to-quarter lumpiness, and that's a trade-off we're always going to make, but it should not in any way, shape, or form, take away from what we believe is happening with our underlying brokerage margin, which continues to go up. We anticipate it will do to achieve the 25% target, which again, as I said before, we're completely on track to do. We feel like we're about there from a standpoint on the normalized, as you described, standpoint from the organic growth standpoint.
Okay. You're not going to tell me about Aon Benfield's margin specifically in the context of-
We're going to keep reporting what we always report, which is overall brokerage margin, which as I said before, is up.
Okay, thanks.
Thank you. Next question, Michael Nannizzi, Goldman Sachs, your line is open.
Thanks. Just a couple quick ones here. The buyback pace, you're reverting back to the fourth quarter, kind of $150 million a quarter. What's the thought process there? It looks like cash flow generation is pretty substantial. Is there another place you plan to channel that capital or the cash flow as you're generating it? Just one follow-up question.
As we think about cash and short-term investments on the balance sheet, $815 million, you think about that splitting roughly half half between the U.S. and international. Then you think about the uses of cash we have, Michael, which are we have some substantial uses of cash this year, pension contributions, dividends. So we're reflecting those in the comments where we really said that we think buyback for the second half of the year will look more like Q4 2010 levels as we determine the location of cash and the other uses of cash.
Got you. Okay. Just on the lease term charge. When you call these one-time items, if we are trying to think about what margins look like from here, and I understand the kind of 25% goal and kind of moving in that direction, but how should we think about the back half of the year? Are you going to have another lease termination charge or any of these one-time items going to be one-time items again in the third quarter, maybe the fourth quarter? How should we think about that?
The first thing, I mean, to say on the lease termination, particularly the U.K. one this quarter, it is very positive. It is positive for cash flow. It is positive for GAAP results. It just happens to be an impact in terms of our adjusted results because of the way you reverse the restructuring charge and then flow the operating lease expense back through our adjusted results. It is absolutely the right decision to be making for shareholders. As you think about adjusted margins in the second half of the year, I did say that we would not see lease termination impact in the second half of the year. We do believe we are now at the end of this.
Got you. Okay. Just one, I guess, for Greg. You are kind of talking about being on track from where you were to where you want to go. How does the second quarter kind of margins in both segments, how do you think about that along that same path? When you back out these one-time items, it looks like we are about flat, but we are not kind of moving in a singular direction. It does not seem, at least from the numbers. Is there something underlying that maybe you can point to more specifically? Thank you.
We can step back and think about this as we measure it over the course of the year, an improvement year-to-year-to-year. That is why I said before, we feel very confident about the progress. The record is clear, and the progress going forward, and the underlying things we see day to day in the business is why we are confident the brokerage margin is going to continue to march forward. When you think about quarter-to-quarter, again, we would look at it as we are roughly flat for the quarter as Christa described. These are one-time charges. Again, the leasehold improvements, things like that are literally things we have done based on bringing Hewitt into the fold. They all make sense. They work from a shareholder standpoint. We are always going to do that in the context of what we are doing.
Structurally, the improvement in the margin is clear from our standpoint and is going to progress throughout the year. It'll be higher in some quarters and lower in some quarters. This is why, by the way, you guys hear us when you get really excited when margins way up in a quarter, we say, it's going to vary quarter to quarter and year to year, it's going to march forward just as it always has. For us, in Q2, roughly flat. We made some specific investments in content capability that we think will serve us very well going forward. It has completely underscored our confidence that as the economy continues to hopefully improve in the fullness of time, we get great economic leverage in the context of that.
As I said before, we feel very good about the progress on the brokerage margin side as we think about tracking for the year. First piece. On Aon Hewitt, as Christa described, what she really took you to was a very detailed breakdown of the operating performance at a $ level. You really don't have an apples-to-apples comparison on margin, which is why it really is almost irrelevant. If you go back and look at the specifics of exactly what happened on operating income in the context of Aon Hewitt, we feel quite good about the progress year to year. If you think about sort of overall, Q1's up $43 million, Q2's up $59 million from a synergy capture standpoint.
We are fully on track to do it, in fact, ahead a little, to do exactly what we wanted to do in the context of driving margin improvement on Aon Hewitt. That's why in the end, we feel very good about sort of overall progress on margin across both businesses and feel like we're very much on track irrespective of kind of the quarter-to-quarter ups and downs. Does that make sense?
Yeah, it does. One last one, if I just could. Is there anything in the quarter that you would feel like didn't hit your expectations or is there something you think from an operational perspective you would have liked to have seen better or different?
I think from our standpoint, the thing that we want to continue to push on is organic growth. While we saw 3% organic on the retail side, we're going to keep pushing for more than that. It's been a number of quarters now we're kind of in that category. Given the investments we've made, we really believe, as Christa described, into 2012, we're going to see great leverage in the context of that. Then on the Aon Benfield front, just as Keith highlighted. Listen, we want to grow that business and drive that business. Obviously, our business is much larger than some of our counterparts, which reflects sort of changes when you compare the organic growth of the two businesses. We saw positive treaty growth in this quarter, which it's the first time since back in 2009. We feel good about that.
Organic growth is something we're always going to drive and focus on. Then again, on the Aon Hewitt front, again, we're kind of flat in organic across the two. As we think about the second half for Aon Hewitt, on the consulting side, we were +4% in the first quarter, flat in the second quarter, kind of two year to date. Our expectations are we're probably about that for the second half on the consulting side and a little better on the outsourcing side. We feel confident about growing organically for 2011, which is a step. If there's one area that we really want to continue to drive forward on, it really is going to be on the growth side. Everything else is exactly on track with what we'd hope to do.
Great. Thank you.
Thank you. Next question, Dan Farrell, Sterne Agee, your line is open.
Thank you, and good morning. Could you give us a little more color on the consulting services organic growth? It seemed a little weaker than I might have thought, and maybe you're bumping up against some tougher comparisons in the investment side or the compensation side. Also just a longer-term view of where you see that going and how you see healthcare
As I said before, literally from the consulting standpoint, we deliberately say, if you look at the first 6 months, we were +4 in the first quarter, 0 in the second quarter on the consulting services side. What you really saw there, by the way, was exceptional growth on the global compensation business and on the investment consulting business. It was offset by a decline and some pressure really across the U.S. on both the retirement side and the U.S. health and benefits side. From our standpoint, if you were to ask us to think about the year, first half, first 6 months is about 2%. We think the second half is going to be roughly in the same place. We're going to keep pushing and driving towards that.
We have the strongest, we believe, an exceptionally strong platform in the context of what's going on the consulting services side. When you put in context with healthcare reform and all the other things that are out there, we believe when clients think about their issues day to day on pensions, retirement, health and benefits, talent, those needs are going to go up, not down. We've got the strongest platform in the world to serve those needs. We feel very good about how we're positioned on the healthcare front, on the consulting front, both brokerage and in admin, and then on the outsourcing side. From our standpoint, the story here is not different than it is in risk. We feel like the issues today are more significant for our clients than ever before, and we feel like we've got exceptionally strong platforms to address those issues.
Okay. Just one other thing. On the reinsurance brokerage segment, how much of a margin differential is there on the capital markets and facultative business versus the treaty business?
we really think about that business as a risk solutions business.
Yes.
Aon Benfield plus ARS combined, that's certainly the way we report it. As Greg said, you can see margin year-over-year continues to expand, we do not break those businesses apart.
Even in the context of Aon Benfield, when we think about what we do for clients, it really is about capital solutions. Whether it's treaty, facultative solutions or capital market solutions, we're really bringing to them an integrated view around how to improve their return on invested capital. That's actually served us exceptionally well. It's why the win rates are, as I described before, are improving, we expect we'll continue to do so. We really think about it in a much more integrated way, as Christa described.
Fair enough. Thank you.
Thank you. Next, Meyer Shields, Stifel Nicolaus, your line is open.
Thanks. Good morning, everyone.
Good morning.
I'm sorry. The FX hit apparently came in the HR Solutions segment. I was hoping you'd explain the mechanics of that.
Sorry, the FX hit in the HR Solutions segment?
Right. In other words, you reported $0.03 of favorable FX. I shouldn't say hit, I should say bump. Overall, FX looks like it had a negative impact on the margin on the insurance side. When we do the math on the consulting side, I'm just trying to figure out how various FX changes impact the margin in HR Solutions.
Got it. There was no FX impact on margin in the HR Solutions segment. The impact on EPS you saw, as I mentioned, was primarily the $0.03 impact for the adjusted results was primarily due to the EUR and Australian dollar. The impact on the Risk Solutions margin was really primarily due to the GBP U.S. dollar, and there is no impact to the HR Solutions margin.
Okay. Where in the income statement would that $0.03 be lurking?
I'm sorry?
I'm just looking through the income statement. I'm trying to see which line item, I guess, or combination of line items.
Right
reflect that $0.03.
Well, it's really going to flow through on both revenue and expense in both the Aon Risk Solutions segment is the main area it's going to flow through, Meyer. Basically, as you bring back, the impact on the Aon Risk Solutions margin is primarily due to the phenomenon of, in the U.K., we have about $400 million to $450 million of U.S.-denominated revenue on both our ARS and Aon Benfield businesses on a yearly basis. Therefore, you have U.S.-denominated revenue and pound-denominated expenses. As the pound changes, that produces a negative impact on margin for the quarter. It's really going to flow through on the revenue and expense lines, and really all expense lines, in that Aon Risk Solutions segment. Does that help?
It doesn't. I'm going to have to take it offline because I'm still a little bit lost. Greg, can I switch gears quickly and just talk, we've had a couple of, I guess, relatively high-profile departures with, I'm thinking Andrew Appel and Elliot Richardson, wondering if you could talk to whether there's anything that we should read into that.
Yeah, I would say there really isn't when you think about what we're trying to do overall with the overall business. These are very separate cases and separate situations. In the case of Andrew, he's done great contributions at our firm, a lot of great things and has decided to move on to do something different. A mutual discussion, it's gone very well, excited for Andrew in his new role and what he's trying to do, very supportive. In the case of Elliot, even on the construction side, we've made some calls to grow our business and build our business long term. As you think about what we're trying to do to unite our global firm and deliver great value to our clients in a very local way, we've got to have our colleagues around the table doing that effectively. We made some calls.
We made some very specific calls around the folks who can help us do that. To the extent people couldn't, then we made some specific calls around it was time for them to do something different. We wish them well, but not part of global Aon. The beauty of it is we're quite confident in the teams we've got. We're very excited about how they've come on board and what they're doing to build our business. These are colleagues who have been with us for a long time with a great bench. You didn't mention the construction side, but that's equally high profile. Kevin White and team there are just doing an exceptional job of building that business. We're very excited about what's going on on the construction front and continuing to make substantial investments in the context of that.
We've also on the facultative side, done exactly the same thing. We're just exceptionally excited about that. Then on the consulting side, I would say, Kristi Savacool and Baljit Dail are doing an exceptional job as we build that business and drive it forward. Really the punchline is, we're blessed with a great bench. We're also focused on a mission to build our firm going forward, and we're going to have the people around the table that can help us do that, and only those folks.
Okay. Thank you very much.
Thank you. Next, we have Brian Meredith, UBS, your line is open.
Good morning. Couple questions for you all here. The first one, I'm wondering if, Christa, you can comment on what the impact of some of the recent acquisitions may have had on margins in the Aon Risk Solutions area. Would that have pressured margins at all?
It had a minor impact on margins, not a material impact, Brian. Obviously, as we're bringing Glenrand in, it's a significant acquisition. As Greg said, it really does position us as the number one broker across the continent of Africa, one of the key areas growing in the global economy and very important for our clients.
It's another example, though, Brian, around, we do a number of things like that, particularly that, investments in the Risk Insight Platform, a few other places that we don't break out that will from quarter-to-quarter have significant impact. We'll absorb that and move forward as we build margins over the course of each year.
Great. Secondly, with respect to the Hewitt expense saves going forward, I'm wondering, are you still on track to deliver the $229-$242 that you laid out for 2011 originally?
Yes, we absolutely are. If you saw in the quarter, we believe we're 100% on track to achieve the $242 million for 2011 and the $355 million for 2013. You saw $43 million of restructuring plus other synergy and operational improvements come through in Q1. You saw that number grow to $59 million in Q2. If you add those two numbers together, you can see that we're well on track to achieve $242.
Great. The last one, Greg, I wonder if you could talk a little bit about what the competition out there right now for talent in the insurance brokerage area. We do see a lot of teams changing hands. I'm hearing in the marketplace of various firms paying up for people. What's it look like out there right now, and will that cause any kind of pressure on margins here going forward, particularly if we see some rate improvement and maybe offset some of that?
Yeah, Brian, I think from the talent standpoint, this is something we live every day. In fact, as we reflect on it's something that I think is going to become even more and more prevalent as you think about Aon. We have worked hard to try to build our capability globally, and in doing so, have worked really hard to create great opportunities for our individual practitioners, our leaders. We really want to be the place that if you want to be a practitioner in either risk or people, you come to Aon, whether Aon Risk Solutions, Aon Benfield, or Aon Hewitt. We want to keep pushing on that mission. We want to work to improve our capability here. We think we've done that. We know we've got a long way to go. We're going to keep investing in it.
It also means we're going to be an absolute target for talent around the world. We know that, which is why we've got to keep the bar high. One of the things that's remarkable about the firm is, as we bring people in, builds the talent pool, but we've got incredible capability around the firm with a very deep bench. We're quite excited about where we are right now from a talent standpoint. We believe that's going to serve us quite well as we continue to grow the business. Is the competition higher or lower? I don't know. It's always going to be out there. When people talk about what's the competition on the client side, it's always high. That's the world we live in, and we're excited to be part of it.
Great. Thank you.
Thank you. Next, Adam Klauber from William Blair, your line is open.
Thanks. Good morning. What's the pipeline on the outsource business, and when can we get better visibility on wins/losses of the combined company?
One of the great things about our outsource business with five to seven year average contract length in the BPO space and three to four year in the benefits administration space is we have a terrific view of the pipeline over the next several years. We feel very good about the trajectory, not just in terms of revenue growth long term, but in terms of win rates. Across our outsourcing business, our win rates are very high and have frankly improved substantially from 2010 to 2011. A great tribute to the amazing leadership and depth of talent in that outsourcing business. We feel very good about the trajectory, both in terms of revenue growth and margin expansion in our outsourcing business.
Okay. On the brokerage business, I'm sure you saw the CIAB just came out and said the rates have moved pretty much flat. Number 1, is that helping the U.S. business right now? Do you think it will have a bigger impact in the second half on organic growth?
Yeah, I would say just taking a step back, Adam, as we think about growth for the second half, we think it will be marginally better than the first half overall. Obviously reflects across our book, both on the risk side and on the Aon Risk Solutions side and Aon Benfield side. That's how we see the second half of the year playing out. I would reflect back on rates, though. As we think about it, we take a pretty analytic view of this. We think literally this, what happened in the first half, it's still soft pricing globally. Globally, exposure is stabilizing a little bit. It's still down, but not as much as it was before. Maybe you call that improvement, I guess, in the context of overall rates.
If you just think about what we reflected in the Risk Insight Platform, the Global Risk Insight Platform, literally, that's what we use as to measure rates. It's not conjecture. It's the largest repository of insurance information that exists on the planet today. In Q2, they were down 2.5% across our system. Just to put it in perspective, in Q1, they were down 3.5%, and in Q4 last year, they were down 4.4%. We've gone from -4.4% to -3.5% to -2.5%, and we feel like that's a pretty precise assessment of exactly what's going on across our book. You might suggest that our book might represent a reflection of the overall insurance marketplace, given this credit business we've got on the retail side.
On the reinsurance side, we've stated we're basically at stable to down 5%, which is exactly where we came out on the June, July timeframe on the reinsurance side. Again, this represents 41 specific programs we put in place in June and July. I would suggest it's probably the broadest market view that's out there. No one else is close in terms of what happened in that time frame. That flat to down 5% was better than January, by the way. It was more stark or down more in January. From our standpoint, we think it represents, frankly, a reflection of what we've been able to accomplish on behalf of clients. I mean, the market strength we've got, combined with exceptional analytics, produce what is really great results for clients.
If you compare it to what's been published by other folks out there, if in fact that's what they achieve for their clients, we're talking about literally relative hundreds and hundreds of millions of dollars of savings for our clients in the context of what we achieved against these 41 programs. From our standpoint, rates are still down, but not as down as they were. Again, as I said before, from an organic standpoint, we see some positive trends for us in the second half. Does that give you enough background?
Yep. Thank you very much.
Thank you. Next question, Matt Heimermann, J.P. Morgan, your line is open.
Hi, good morning, everybody.
Hey, Matt.
Good morning.
Just more high level, I guess you guys are looking into rolling out a direct-to-buyer kind of SME aggregator in other parts of the world, I guess. Can you give a sense of maybe where you are in that process and potentially what timing might be if you're considering bringing that to the States?
Yeah, this is really more, Matt, about, as we've described before on the overall Aon Broking front and what we're trying to accomplish in the context of how we serve our clients and looking for ways to aggregate risk, bring things together, and really put together better and better world-class programs in the context of how we serve clients. This is just, again, back to kind of the investments we're making in the business that do impact quarter-to-quarter margin as we've talked about before, we believe actually reinforce our capability to deliver substantial growth and margin improvement for the long term. This is just one of those examples. That's in development. Again, as we've said before, on a lot of the Aon Broking initiatives, we see real impact in more 2012, 2013, we believe we've got an incredible opportunity here.
When you think about our position in middle market and small commercial, it is literally the biggest in the world today. Our affinity business is a $600 million-plus business, an incredibly strong business. We have a proven model we know works as we aggregate risk and actually pull together a package of opportunities we can deliver back to clients. We see absolutely substantial opportunity to do this across our global book, and we've really never pursued this in the way we've talked about before, nor could we have until we brought online all the things we're doing around Aon Broking. It really is just an evolution of what's happened out of GRIP, and what's happened as we think about ways to serve clients, and it's going to be 2012 and 2013.
I'm glad you raised it because we believe it's going to be a substantial step forward in the context of Aon Broking to the betterment of our clients and to the betterment of our shareholders.
That's helpful. Should we think about this as you reshaping how the business is transacted and therefore it goes more to expense efficiency than it does? I suspect there's probably a bit of both in the strategy, but can you help us put it into context how you think about it? I guess I'm thinking maybe efficiency versus just what you think it means for market share and things like that.
Yeah, I think there will definitely be both sides. This for us, though, as much as anything, Matt, is about really how we grow the business and build the business because we will in fact be generating more attractive opportunities for clients. In addition to that, literally that's the growth side of the equation. In addition to that, we're going to be generating greater yield. If you think about the things we do to grow our business, we get more clients, we do more stuff with the existing clients, and we increase yield per $ premium placed. This really is going to help us, we believe, get more clients and, we believe, increase yield per $ premium placed.
Those two things we think from the combination will have very positive implications on the growth trajectory of the firm and on the margin of the firm, both.
Okay. When you said just on the timing question with the U.S., when you say 2012, 2013, in terms of starting to see a more material contribution or starting to see this getting out of the investment phase maybe to the more operational phase, is that kind of the timing we'd expect to see it maybe permeate other geographies outside of where you're testing it now?
Exactly right. In fact, as we've described before, we've gone through a progression. First, we realized if we could capture the data and the understanding, even though it was an incredibly substantial investment to do that. Again, think about it, we really are asking our broker colleagues to enter data around the world, sort of give us the basis of GRIP, and then investing literally in Ireland, 100-plus colleagues to actually scrub the data to make sure it's absolutely pristine so we can actually use it to serve clients. You evolve that to kind of get this into 2011. We're really starting to see some benefit there. Beyond that, you have these programs on top of that, which is the next natural evolution. That will increase yield.
Again, just for reference, if you're talking about $40 billion-$50 billion of flow, 10 basis points of yield, 50 basis points of yield matters a lot in the context of being able to actually drive that. We're going to start to see that in 2012, 2013 as we continue to evolve this whole idea of Aon Broking and serving clients in the context of that. We see it meaningfully impacting in 2012, 2013. Again, I'm glad you raised it. It's another example as to why as we watch this evolve, we have basically what we would call proved the concept. We know it works. We've done it in different places. We proved it.
Now literally it's about scaling the concept, taking that proven concept and driving it around the world, and that's really what 2012, 2013 is about, and that's why we're pretty excited about this.
Okay. Then just one on the Aon HR Solutions business. I was just curious if you could talk a little bit about project revenues. The macro commentary you give isn't exactly constructive for project revenues coming back. When you're talking about improving growth rates, I'm assuming that's without project revenue, but I'd just be curious how significant you think the project revenue side could be to organic growth, maybe looking out 12 to 24 months from now.
Right. As we think about the impact of the economy and sort of a fragile economy on the outsourcing business, project revenue is one of the big impacts in calendar year 2011, and it was in calendar year 2010. I would note that we've largely sort of lapsed the big year-over-year impact of that now in Q2. While there's minimal impact in the second half of the year, it really is much, much smaller than what we've seen in the first half of the year. As we think about project revenue, it's really related often to M&A activity, changes in benefits plans as a result of U.S. healthcare reform. You can see some real opportunities as you look out sort of 12 to 24 to 36 months for that to grow over time.
Okay. Thank you much.
Thank you. Next question, Jeroen Kienar from Deutsche Bank. Your line is open.
Thank you. Good morning. Sorry to beat on a dead horse here, if we look at your target of executing year-over-year margin expansion in the broking business regardless of economic trends, even if I look at it on a year-to-year basis, not quarter-to-quarter, it still seems like margins are slightly down on trailing 12-month basis. Am I looking at it incorrectly, or are you looking already at 2012 when you're talking about executing this year-over-year strategy? What am I missing here?
First of all, you're absolutely looking at it correctly. Year-to-date margins are down. There's no doubt about that. We think about it as a full calendar year sort of view of the world. As we look out, we feel confident that we're on track. We just don't think about any quarter-to-quarter sort of impacts because there are lots of things in our business that are lumpy. As Greg described, we are making investments in our business that are going to generate long-term returns, and we're very confident that we're on track to 25%.
Okay. Could we also talk a little bit about maybe the potential for a downgrade in the U.S. debt of one notch or two notches? What impact does that have on your business?
Yeah. The first thing I'd say is obviously there's a lot of implications potentially to the economy of that, which are very difficult to speculate upon. If I leave that aside, I think there are two potential impacts of a U.S. sort of debt situation. One is FX. Obviously if the U.S. dollar were to sort of decline in value relative to the EUR, AUD, NZD, and CAD, that is a positive impact on our business as we bring back revenue and expenses from those countries. That's the FX impact. The second one is interest rates. If interest rates were to rise, it has two positive impacts on our business.
The first one is on fiduciary funds, each 100 basis point rise in interest rates is about $35 million-$40 million straight to the top line and bottom line. The second impact on our business is unfunded pension liability. Obviously, an increase in interest rates would decrease our unfunded pension liability, which is again good for us. The last thing I would say is we are in a very strong position in terms of balance sheet and financial flexibility. There are absolutely no issues in terms of liquidity.
Just generally overall, though, as you think about some of the specifics, obviously, we, like everyone, want this to get resolved in a reasonable way for our clients because while Christa's highlighted very well, I think specifically what the micro impacts are, things that impact our clients impact us ultimately. It's obvious you want to get this resolved.
Right. Can I sneak in one more question about your recent decision to slash the U.S. wholesale panel? Just basically two. A, how do you address clients' concerns about ability to add value with only two panelists? Two, there seems to have been some talk about potential conflicts of interest there. How do you square those?
Well, first and foremost, as we think about how we compete in the marketplace and what we're trying to do, everything we sort of step back and do is really around driving value for our clients, period. As we think about approaching the market, literally it's all the investments we're making. If you think about the formidable investments we've made, it really is around driving greater value for clients. That's helping clients improve operating performance, strengthen balance sheets, reduce volatility. Nothing actually stands in the way of how Aon is maniacally focused on doing that, and we're going to continue to do that. That drives everything we do. In the context of that, the decision really was around how we can actually help clients and really make sure that their business is actually handled in a way that's consistent.
The difficulty is when you're handing off to multiple wholesalers, there's often variability in actually how that happens over time. It's variability in the context of how you think about it inside the U.S. It's variability when you think about it when you actually transfer it over to the U.K. For us, as we reflected on how to do that and we talked to clients, we want to be extremely consistent in how we actually handle that. By the way, that includes building the capability in-house, so we're actually not handing it off to a third party who then handles our client. That actually concerns us a great deal, and it's why we made the initial decision to actually reduce the panel and focus it much more on how we serve clients effectively.
I would say in terms of the overall process. This is a process that really has been handled incredibly pristinely. We handled it much like we do any major decision that affects our clients or it affects our shareholders. A completely independent process. It was very objective, specific set of criteria. In fact, probably even more so. Overdid the process. It took us six months to make the overall decision. We are confident we made a decision that we think will help our clients long-term, and the selection of going from really was down nine down to two, to serve our clients effectively. In the end, feel very, very good about the overall process and how it's been implemented so far.
Great. Thank you very much.
No problem.
Thank you. Our last question comes from Jay Cohen, Bank of America. Your line is open.
Thank you. Most of my questions have been answered. I just wanted to clarify one thing, that was the tax rate. I guess by saying that the annual tax rate would be about 29%, are we talking for the second half of the year, a tax rate closer to 30% or slightly above?
I'm talking about the underlying effective tax rate on operations. What we reported in Q2 is essentially after specific adjustments, Jay. As you think about your model, it's really the tax rate for the full year on an underlying basis for 2011 and going forward.
Just to clarify, second half of the year, you're saying should be about 29%?
On an underlying or sort of effective rate going forward, yes.
Great. Thank you.
Thanks, Jay.
Thank you. I would now like to turn the call back over to Greg Case for closing remarks.
No closing remarks, just thanks to everybody for taking part in the call today. We appreciate it, and we appreciate your interest. Thanks very much.
Thank you. That does conclude today's conference. You may disconnect at this time.