Q4 2019 Earnings Call

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Good morning, Thank you for holding welcome to Am CLC fourth quarter and full year 2019 conference call. At this time all parties will be in listen only mode until just question and answer portion of today's call.

Well I'd also like to remind all parties that this call is being recorded if anyone has an objection you may disconnect. Your lines at this time.

It is important to note that some of the comments in today's call may constitute certain statements that are forward looking in nature as defined by the private Securities Reform Act with 90 95.

Such statements are subject to certain risks and uncertainties that could cause actual results could differ materially from historical results in dose anticipated.

Permission concerning risks factors that could cause such differences are describing to press release, covering our fourth quarter and full year 2019 resorts, that's wallets hadn't been posted on our website now.

Now, it's my pleasure to turn to hold over to Greg Keys. She elevating plc you may begin.

Good morning, everyone and welcome to our fourth quarter and full year 2019 conference call.

<unk> joined today in Chicago by our two co President, Eric Anderson, and Michael corner, and our CFO , Chris Today. These joins our discussion from London.

Like previous quarters, we posted a detailed financial presentation on our website. So that we can focus our time on these quarterly calls to Roger more insight and longer term view for the firm.

First let me start by recognizing the remarkable dedicate your my own colleagues around the world.

There were at the core, but everything we achieved and their execution. This year was impressive their collective efforts continue to strengthen the firm and create long term momentum reflected through a strong finish to the year with positive performance across each of our before key metrics in the fourth quarter, including 7% organic revenue growth and acceleration from.

Prior year on top of strong comparable highlighted by growth of 5% are greater in four of our five solution mines substantial operating margin expansion of 210 basis points.

70% EPS growth overcome and continued FX headwinds in the corner.

And a similar performance across our key metrics for the full year.

Highlighted by organic revenue growth of 6% for the overall portfolio, our strongest level of organic growth in over 15 years, reflecting continued acceleration we're historical trend.

Double digit operating income and EPS growth as well as record operating margin of 27.5%.

And 1% growth and free cash flow delivering on our double digit annual growth target.

Our progress this year continues to reflect meaningful improvement against our objectives, which is a direct result of the strategic investments in actions, we previously taken to achieve our potential.

Operating as one United Global professional services firm.

At this time last year, we looked ahead to 29 cheap and share thoughts and aspirations for our firm as we turn the page to truly enter an era they on United.

Now a year later, our track record both with clients and demonstrated by our financial performance reinforces that our and United growth strategy is not only gaining traction it's building momentum.

We then on our own United journey for over a decade and along the way you've heard US described structural changes we have made to enable firm wide decisions and to make it easier for college to work together within and across solution lines and geographies to fulfill the potential of our firm.

As we look out to 2020, we're excited to a formalized a clear roadmap highlighted on page six of the presentation. The brings renewed focus an urgency to our journey and insurance would bring the best today on to our clients we call this Yan United Blueprint.

It covers four areas.

Our deliberating on United effort.

That was announced last quarter translates the trust to condition built through our decade long change effort into a frontline plant leadership program, making it easier for college to collaborate and better articulate client benefits.

To consistently in local markets.

Our and business services organization capitalizes on the benefits of scale to drive operational and client service excellence.

Our new ventures group accelerate innovation at scale to address unmet client need and expand our addressable market.

Iran impact model defines our colleague mission and the governing behavior and shared values that shape our culture.

The full potential Darfur.

Yeah, they on United sits at the intersection of these four components.

We're committed to working differently on the N., United Blueprint lays out how we're executing on this objective.

We know that when we consistently operate as a on United and bring a full force or from the clients, we strengthened our value proposition, which translates into gross.

We're winning more clients doing more with existing clients and identifying scalable new ideas to bring declines.

You've already seen the trend of our organic revenue growth consistently improve over the last six years.

From 3% in 2014 in 2015% to 4% 2016 to 20, 75% 2018, and now reaching 6% 29.

The acceleration to date is a proof point that the end United approach, we're taking to better understand and addressed unique needs of clients is delivering differentiated insights, but all businesses make better decisions.

Which is why we will continue to double down on investments in industry to finding content and capabilities.

These investments allow us to build by and scale capabilities that expand our reach and address increasing demand, which we believe underpins our ability to sustainably delivered mid single digit or greater organic revenue growth over the long term.

Our outlook is driven by three categories of growth.

First is continued growth across our core portfolio as we improve client value creation, driven by are delivering and United program.

As a baseline and as you've heard US highlight previously Aon operates in global markets across risk retirement and health each with demand characteristics that are increasing in both magnitude and complexity.

Clients today face growing volatility and are confronting greater challenges than ever before.

Against that backdrop, the unmatched investments we've made a proprietary data and analytics gives us a competitive advantage that differentiate insights we provide to clients ultimately, allowing them to make better decisions that measurably improve their business or reduced our volatility.

When you combine the power of our analytics with our breadth of expertise and United behavior, We are deepening and further developing client relationships as we offer them more integrated solutions like many of the examples we've used as context during these quarterly discussions.

Finally put.

We win more retain more and do more with clients. A perfect example is the success that we've achieved within our enterprise playgroup.

Enterprise client group dedicates leaders to bring our and United efforts to life with our largest most complex clients by identifying and matching our best solutions to their specific business objectives.

In 2019, we drove 50% more new business generation into existing relationships with clients and this group as compared to a similar set of clients. So we don't yet served with the concentrated and United approach.

We have more than tripled the number of clients. We serve in this way from approximately 52 over 160 this year.

Second.

We continue to strengthen our business mix as we evolve our portfolio toward higher growth areas of client demand.

We are disproportionately investing organically and inorganically in priority areas that are defined by attractive growth and margin characteristics. A great example, just delegated investment management within retirement solutions, which is a 1.8 trillion dollar market expected to grow 10% over the coming years.

We have invested both organically and through our acquisition of the talented group and the combined business has grown assets under management at a 34% compound annual growth rate since launching in 2010.

Sales and it's just one of the 86 acquisitions, we made in priority areas over the last five years.

While divesting 84 noncore businesses.

The result is a positive portfolio mix shift as organic growth rates across our priority areas or did the high single and double digit ranges with significant potential to scale longer term.

And the third category is unlocking net new opportunities with innovation at scale.

Hey on has a strong track record developing first to market solutions.

For instance, we have created a 24 billion dollar premium market and U.S. mortgage reinsurance since 2012.

We also have created a multibillion dollar premium market with our fully insured health care exchanges. Both examples of conducting capital to previously uninsured risks.

Our new ventures group is central to our success in this third category of long term growth potential.

The new ventures group accelerates net new innovation on behalf of clients and expands and addressable market.

The group's serves as an incubator to rapidly scale, our most significant gross states opportunities.

Let me tell you about our latest additions to the new ventures group cover wallet, the leading digital insurance platform for small and medium size businesses.

This unique platform offers customers advice.

Digital application quote comparison, a policy management, all online with advisors standing by to lend support.

We began our relationship with cover wallet through a pilot program in the U.S. in Australia.

During the pilot we directed a portion of our net new small business leads to cover wireless platform, which resulted in nearly doubling our new business growth through increased conversion cross sell and the sale of ancillary services penetration with existing clients increased by an impressive 20%.

Recognizing the success, we are thrilled to welcome to cover all achieved.

Couple of while it is a great example of investment and differentiated capability that will serve as a building block to unlock new opportunity and the fast growing commercial insurance market for smaller businesses, a 200 billion dollar global premium market with less than 5% serve digital today.

In summary.

We delivered a strong close to a year of significant improvement with momentum heading into 2020 as we continue to strategically positioned the firm during the best a global lay on the clients and execute against or and United growth strategy.

The growth profile of the from continues to improve with further upside longer term as we identify net new opportunities, but increase the firm's total addressable market.

Our team has greater conviction now than ever that the progress we have made over the last decade have made us a stronger from allowing us to operate differently and leading to better outcomes for clients colleagues communities and shareholders without overview I'd like to turn the call over the Christopher thoughts on our financial progress this year and longer term crist over.

Do you.

Thanks, So much Greg and good morning, everyone as Greg highlighted we delivered a strong performance across our key metrics in both CLSA and for the full year as we continue to commercialize out and United strategy and demonstrate the growth potential about that.

In the quarter, we delivered 7% organic revenue growth with full out of five solution lines delivering five to central Grace out.

This translated into operating income growth of 12% and operating margin expansion of 210 basis points. We also delivered an incremental 54 million of restructuring savings in the close out out of now completed 100% of the charges related to the program.

Abstral gross and operational performance have enabled us to continue to fund the significant investments that Greg described across the fun to drive improved financial performance along with that.

As I reflect on the full year results bust organic revenue growth acceleration, 6% demonstrating continued improvement against historical trend as we deliver on our goal of mid single digit all great organic revenue growth over the long term.

All five solution lines to live it's similar or approved organic growth year over year.

I wouldn't know reported revenue was pressured throughout 2019, but unfavorable impact from changes in FX. In addition to the impact of the divestitures obsession businesses, we completed within the yet most notably within our retirement solutions business as we continue to shift stopped portfolio towards our highest gross return opportunities.

Second we delivered substantial operational improvement with operating income growth of 12% and operating margin expansion of 250 basis points to a record 27.5% margin.

We delivered 169 million over 150 basis points of incremental restructuring savings the full yet.

Shifting approximately 100 basis points of coal margin improvement.

I wouldn't know this includes the absorption of significant investments to support long term growth as we continue to live a client value in the cool ship the portfolio. It's a high growth in high margin areas and innovate at scale to unlock net new markets and we expect to continue to invest heavily in 2020 in some of our most attractive opportunities.

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We translated strong operational performance into double digit EPS growth of 12%.

Becoming a headwind from FX translation, and a higher effective tax rate within the yet compared to the prior periods.

FX rates continue to have an unfavorable impact on results in the fourth quarter due primarily to the stronger U.S. dollar, which is cumulate cumulatively resulted in significant net unfavorable impact of approximately 23 cents for the full year 2019.

Or $68 million favorable impact on operating income.

It's cards sooner remained stable at today's rates would expect an unfavorable impact of approximately six cents per share for the full year 2020.

Five cents of unfavorable impact or approximately $15 million operating income expected in the first quarter of 2020 due to a stronger U.S. dollar. This is the right.

Regarding our restructuring program.

Triple that all charges when I used the program being incurred on the program is now closed we live at 529 million an annualized savings in 2019.

Now expected live a 580 million of annualized savings and 2020 .

Let's take an increase of 45 million from my last estimate of 535 million.

I wouldn't know that incremental savings expected in 2020, well be spread throughout the year and reported as part of overall operational improvement.

The total program affects a cash investment.

Wonderful eight 5 million and is expected to deliver a 10 on investment that's 39% before any reinvestments.

There are approximately 200 million of remaining cash outlays relation to the program of which 180 million are expected to being cut and 2020 before declining substantially thereafter.

Beyond the formal restructuring program will continue to identify efficiencies drive improved productivity and enable growth of the five as we unlock additional operating leverage through <unk> and business services single operating model <unk>.

Ill business services, our platform to deliver operations technology and vendor management across the fun capitalize on the benefits of scale.

<unk> operational and clot service excellence.

As an example.

Earlier this year I provided insight into what fits within our own business services to move to a single CRM platform called M connect which standardizes our client facing sales process and creates a more holistic view of how to best serve clients across alpha.

The platform also provides ALN colleagues are the more comprehensive view of each clots accounts, including information on existing relationships and insights into clot discovery process, which allows us to improve our pipeline and jeopardy processes.

As we ramped up usage of Allen connect throughout 2019 outside sales pipeline values of increase materially.

In some businesses our pipeline increased 70% year over year in Q4.

Having or a bus sales platform integrate into the businesses contributing to increased win rates and penetration across solution lines with existing clients.

In 2019 uses or the platform is directly correlated to record new business wins in the U.S.

This is an example of how business platform within Aon business services, combining technology with best practices is supporting our El United growth strategy through enabling long term growth and improved operating leverage.

Looking to 2020 and beyond ongoing productivity improvements accelerating revenue growth on a portfolio mix shift to higher margin businesses are expected to drive continued long term margin expansion.

Noshing that we've delivered 70 80 basis points of operating margin improved but on average per year over the last decades.

Lastly, free cash flow increased by 164 million or 11% to 1.61 billion, primarily respectively, reflecting strong operational performance.

We achieved out targets double digit annual growth. Despite approximately 170 million of net cash outflows related to certain litigation settlements that will create a tailwind to 2020 .

As we think about cash flow generation going forward, we're focused on maximizing the translation of accelerating revenue growth into the highest level of free cash flow in three ways.

Operating income growth.

Hey, good progress on working capital initiatives and structural uses of cash winding down significantly and 2020 2020 walk.

Declining uses of cash restructuring capex and pension collectively are expected to free up of 455 million a free cash flow by the end of 2020 walk as shown on page 24 about presentation.

Decide significant upside to our base of approximately 1.61 billion of free cash flow and 29 teen prior to any operating income growth or working capital improvements to.

Together these inputs give us confidence in our ability to deliver double digit annual growth in free cash flow over the long term.

We have the opportunity to substantial incremental debt capacity, while maintaining our <unk> leverage ratios as restructuring expenses and now complete and pension liability continues to improves.

This provides significant financial flexibility over the coming years to further invest in value creation overtime capital shareholders wed diligent about maximizing ROI seat and make all capital allocation decisions on this basis. This is highlighted by the 2 billion of share repurchase in 2019, which remains a high.

Return on capital investment given our free cash flow evaluation.

I would highlight return on invested capital continues to improve as we shape the portfolios with 190 basis point increase year over year to 23.5% driven by operating income grows at a reduction in capital I.

I would not the 23.5% ROI see is the highest the five is hot in its history.

In summary, full year results reflect strong performance on all four key metrics driven by a and United strategy. We continue to accelerate organic growth delivered record operating margin and achieved double digit EPS and free cash flow, all while making significant investments to improve the growth probably follow the five.

We're tangibly 2.4 billion shareholders through share repurchase and dividends in 2019.

This excess provides momentum as we head into 2020 on sports out expectation of continued long term shareholder value creation.

With that I'll technical loves the operator, we'd be delighted to take your questions.

Thank you will now be gains a question and answer session. If you would like to ask a question you May press star followed white and number one.

These amateur phone and record your name slowly and theater when prompted asked her name is needed to introduce your question.

To cancel your request to me press star and send it to.

Speakers. Our first question is from Dave Styblo from Jefferies. Your line is hoping.

Hi, good morning, Thanks for the questions on the update Greg I wanted to start out with a broader question on on the ABS and maybe the next set of key initiatives that you guys are working out over the next two to three years here. Obviously, one of the focal points you talked about on that as how that can be used to support your long term margin goal of 70 to 80 basis.

Thanks.

I'm curious as is how much of that can help support that that initiative as well as some of the benefits on the revenue side I know crystal start to get at that but maybe if you could shed a little more color on on how those efforts can help accelerate the revenue growth from here as well.

Nothing to do that Dave and maybe I'll talk in a sort of overall level of focus and Kristi you can embellish a little bit on sort of the direct impact on on sustainable margins as well I think Dave it's important to step back at the core of our strategy to grow a on has been just this conversation we've been in for a long time around day and United.

And as we are the external part of that which is really the the parts facing the market meeting were more consistently delivering the best over from the clients and by the way that's easy to say everyone says, it's very hard to do but its benefits clients and colleagues immensely and you're seeing that show up on the topline, but exactly to your point on a on business services equally compelling is asking the question.

I can be we'd be world class a client service.

And if you think about it most all industries have done this.

All parts of financial services manufacturing to sort of address this challenge at a company wide level, but no one in our industry has ever done this and the reason is again, because it's really hard and in essence, we undertook investment to establishing our business services.

The ticks really proven practice from sectors all around the world and then delivers it into our world and again never really been done it's a pretty bold stood up and if you think about this is really on United from the inside the firm and delivered in the United as the externalization piece, but this inside piece, you're highlighting is really important we absorbed a lot of disruption.

Centrally single operating model single Opco single brand and and then there are four things that come out of this and one is to your point better client service in a coordinated way and Christa described the example onto the client connect piece, but beyond that is greater efficiency.

For sure, but the way it and start with efficiency. We started with client service equally important is accelerated innovation, maybe think about it if we actually found day.

Hypothetically block chain solution.

And how long would it take us to implement it 10 years ago to taken as a long time multiple years now actually where they are business services, we've got a way to accelerate innovation and then directly to your point. It's about continuous improvement. This is a platform we've invested in which allows us to actually get better and better and better over time and again, we could never have done it without the incremental.

Investment and you know as Christa highlighted we got a 39% return on it but it wasn't the return it was important it was the foundation that's in place and we're very pleased about the progress more to come but we're more excited about the potential around margin expansion in 2021 and beyond and also what it can do from a client standpoint that Christa weve talked very specifically about sort of the opportunities.

There.

In essence that are lots of examples to maybe in for Chris. It will go to Eric. This is a quick examples or just how it shows up everyday great.

That's great to be your I wanted to maybe tell a quick story to bring to life for you. How this actually works in practice.

I will use our reinsurance business as a way to describe it over the last 12 months or reinsurance team has been building a center of excellence within our E. B S business to provide cat modeling and advisory services and along with low cost location and what essentially done is it's created the standard across the entire business around the world and it's pretty.

Got it professional high end analytics. It's also allowed the senior advisory team within the teams across the world to spend more time with their clients and it's provided more structuring support more advice on how actually do approach reinsurance transactions. So you get a better standard of information and then obviously free up the time of the teams were able to spend more time with client.

That's driven more retention, it's driven higher new business wins and has actually been agree value add to the Glenn if I could add are you going on this too it's not that was a reinsurance improvement, but that reinsurance improvement now gets translated into what would what it means for commercial risk or what it means return because we're actually learning best practices across affirmative ways, we can over that information good scale than the light commercial clients reinsurance.

Glenn.

Anybody that needs that type of analytics, so that's very different but christa on the margin side what are you thinking.

Yes, I am business does is absolutely enabled us to.

The strength of the platform and I and strengthen our ability to drive margin expansion long time, it's enabled us to drive productivity each year through our investments in platform centers of excellence and third party partnerships and one. Good example of that is in 2019, we eliminated 600000 hours of manual effort and automation is US you know centers of X.

Lots and through outside party partnerships and so we're continuing to make improvement in it and it makes the sustainability of I continued margin expansion even stronger.

Okay. Thanks, maybe something a little bit nearer term on on the cost saves the new $580 million target for this year implies a margin tailwind of about 40 to 50 basis points is it fair for us to think about margins this year being better than the 70 80 basis point long term goal or are you guys thinking of using a good.

Chunk of the cost savings for Reinvestments.

Yeah, that's a really good question, Dave and what we would say is where in a much stronger place in times of margin expansion as a result of the investments, we made and restructuring and ample themselves is in particular, a and so if you looked over the last 10 years you'd say that.

Our average has been 70 80 basis points, having said that our gross margin expansion for the last couple of years is being way in excess of that and we'll begin 2020 and 2021.

Having said that we will invest significantly and growth opportunities because we've got a number of very very attractive areas of investment.

So we're not giving forward margin guidance day, but what I will tell me as the gross margin expansion is significantly in excess of 70 80, and then a really getting method by investments we make in fantastic growth areas.

Okay, Thanks, and I know the asleson before a little bit, but the mechanics, so when you're exiting the fourth quarter of 19 at $162 million run rate and you annualize that you wind up with something closer to 650 million and that's well above.

The 580 targets, so what am I not understanding about the mechanics, there as to why.

The discrepancy between those two numbers.

Look it's a great question, Dave and I, certainly understand them after you're doing I'm, having a we think about it we really thinking about it in annual savings time, so a cumulative savings in 2019 to 529.

And so you've got a 50 million to like year over year benefit and obviously those restructuring savings as well as the coal margin expansion drove record margins in 2019, and 27.5% which were extremely excited about.

Okay. Thanks.

Thank you one moment please for the next question.

Thank you speakers. Our next question is from Suneet Kamath from Citi. Your line is helping.

Thanks, Good morning, I wanted to start with.

Comment about buybacks being the best ROI see opportunity is that.

A function of sort of asking prices in terms of M&A being too high or your view of the intrinsic value of your stock price just some color on that would be helpful.

A lot of to do it Tonight. So we manage the federal return on capital cash on cash Rita and as we look at the return on capital all the opportunities we have whether that's M&A investment organic investment all you know debt pay down on pension contributions return on capital of buyback at the hospital capital across the fun and it's really based on I just kind of.

Cash flow of the fun.

The sustainability of the free cash flow outlook going forward and how much we think that's going to grow.

And so look we definitely see attractive areas and emanate, we certainly see organic investment being extremely attractive on some of our highest return on capital opportunities have been organic investments we've made in the fab.

Like the health care exchanges like data analytics like delegated investment management Big three but what we would say is its really about the free cash flow growth long time on the sustainability of that and so I DCF values are substantially above where we're trading today, which is why the return on capital a buyback is still so high.

Got it and then maybe a quick follow up on that is you had mentioned.

Pass city as another lever in your tool kit.

Given the difference between your DCF value in the current stock prices the idea of using some of that capacity to accelerate share repurchases something that you would consider.

The way the way, we think about sunny is out debt to EBITDA ratio in Elkhart investment grade rating is incredibly important to us and as a as EBITDA rose and I'm fond of pension liability comes down it will add to it keeping the leverage ratio at the same and so really it's about.

Making decisions on an ROI see basis, so that could be buyback that could be organic investment it could be M&A.

But we'll continue to keep that leverage ratio the same outpacing the importance of our current investment grade rating both to our clients onto our financial flexibility.

Got it thank you.

Thank you. Our next question is from Paul Newsome Us by from Cantor. Your line is open.

Good morning, congratulations on the quarter.

Let me. Thank can you talk a little bit more about the organic growth that we saw weakness.

This quarter, which I think it has been at the most expected could you talk a little bit about what you see is.

Tailwind in pricing and maybe focus a little bit on the reinsurance sector, which obviously had a really big.

Increase there anything in there that was.

Onetime in nature, any big wins that kind of stuff.

Reinsurance across the other businesses as well.

People were talking about sort of whats driven sort of the overall growth profile and again as well, Chris and I reflected that's actually been a trend that so across the portfolio. That's been going on for a number of years of I will come back to reinsurance I would say reinsurance offices, the smallest quarter by far we have well come back to the overall piece of we'd actually reflect on the overall year and start off with the impacts.

Pricing as you highlighted.

He is evident but not material.

Again evident, but not material in our full year organic of 6%.

That's true in reinsurance industrial and commercial risk you think about a half of our revenue base is not impacted by pricing at all and certainly on the on the risk side, you know the retirement business the health data analytics business, so take half of it out against the 6% completely.

And then you sort of say the remaining piece that's left.

On the risk side, a third of that is fee based so two thirds Commission 130 days and by the way some of those commission based revenues, particularly larger clients or cap. So it's more like a feat. So in essence, you start to start with one or the impact overall is evident as I said, but not material equally important is the work. We do I mean, we are built to serve clients and changing rate environments and the work that we do.

Do really changes their behavior. So there's not a direct linear correlation at all we would say if you step back what's driving our progress.

Progress is really driven around new business more clients, new clients retention in rollover and roll over by the way might be the place where the the price might show up at it really is about new business and retention and just I picked a couple of things off quickly and then maybe for the Derek and Mike on sort of just additional thoughts here, but on the reinsurance side in particular for the year again, that's 10% for the year, we feel very good about.

But 60% of that growth.

Well it 89 90 million was a pure treaty net new a and then you've got net new on Soc and you've got net new on iOS insurance like Securities and you essentially this is really a net new opportunity.

With exceptional retention rates in the same story really across the commercial risk portfolio I'll pick one once once one frankly, one sector, we can take anywhere around the world. The newest brokerage we had retention rates at 95% and then 170 million a net new in the quarter.

Overall for the year, it's 10% year over year and 70% up in Q4. So this is a net new phenomenon for us and retention phenomenon for us and this is back to the idea of and United and what we're doing the strengthen our overall portfolio and you know again ask Eric I'd like to comment on it but some of these pieces are about how we expand what we do inside the solution pizza versus.

Overall, but there are caught on that's or maybe a maybe I'll start with sort of some of the market dynamics within like you can cover off some of the client pieces of I think from a market dynamics, what we're seeing as a bit of a flight to quality.

If you think about what we do on the insurance side for these clients, we help them on risk identification first and foremost. We then work with them on risk mitigation, which is how do they actually handle the risk without going into the market to treat it and we've made a lot of significant investments in the data and analytics side, there to help them understand their risk without actually ever go into the insurance market.

And then finally, if you do go to the insurance market our teams global access to capital our ability to provide insight structuring ideas benchmarking all the things that we've been talking about over the last couple of years in terms of investment into the business actually allows our teams to be able to helps them manage through what is a transitioning market I would say, maybe one last comment before.

Throw it over to Mike Greg on the fact piece is that the facultative business is tied pretty closely in certain parts of the world Certainly Latin America on how the primary market goes whether its.

The insurers themselves looking to transition some of their portfolio risk on the individual client bases for its clients themselves looking to access the global capital anywhere that were as Greg said, we're going to build for it and our teams have been working really closely over the last several years to be able to effectively get ready for this moment like maybe a couple of comments on what the clients are actually doing.

Thanks, Eric and maybe I'd share one and this in this environment that comes to mind I think is really interesting and it brings to life. So we're talking about how we bring in United and delivered to a client and this examples where we actually brought a full range of capabilities from our cyber solutions seem to hope this client.

As Greg mentioned, our enterprise client leader model that we've rolled out as a situation where enterprise client earlier was working with our cyber solutions team and really challenged the team to think about what we could use. This client. This is a pretty sophisticated global financial services clients and the team stepped back and invested the time to understand the clients posture around.

The globe their capabilities, where they were at instead, how do we augment supplement that clients doing and we came forward with a global solution around cyber risk assessment impact on application or ability to help them with security testing an incident response and that global proposition resonated with this client and less decline in a better position in terms there readiness.

So basically respond to any incident that happened and for me. That's a great example of our team, making and United come to life for client within a solution mine and bringing more advanced that clients have more in that so not examples like literally three years ago. We had a places I read policy that have been great declared victory with an awesome and now we literally out a conversation there.

Really is much broader we're serving the cline differently, we're bringing more the enterprise client leader really that's realistic piece of the good news is even if this clients as they don't really wanted to just want to cyber policy, they actually see us differently, because we're talking about their holistic business. In this case worked out much better than that but.

Paul was I give you a sense I mean literally what's driving our they action here is really net new and retention again, we want to reflect the pricing is evident, but it's not material and overall story and it's gets to the sustainability of and what you know what and United means that the client level.

Absolutely.

<unk>.

Through a related question I'm, obviously, yeah, United has pieces here of cost cutting and efficiencies, which I think are pretty easy relatively easy for us to seize outsiders, but a lot of your examples how our.

Across essentially cross selling examples.

Oh isn't as an outsider should we.

Towards measure that change.

And maybe you could talk about your internal measures as well.

In that respect.

Well listen we'd come back to.

I would encourage you again.

Page six we've got this blueprint laid out it's got some pieces to it one of the pieces is how do we deliver our from at the frontline delivering and out at the front line.

We built a tremendous amount of infrastructure to try to support behind that.

Things that help our colleagues understand the from an eye Q the client tracking piece. The Christa described all these things go into sort of how we make it easier for our colleagues to deliver the from the translation that is really simple.

Growth so you're looking to growth during the day, if we're not actually serving clients more effectively and doing more with them. What are we doing and by the way that's got to be value driven that's not a price driven effort. That's a value driven effort, how do we create more value for clients, we create more value. They understand it will get we're gonna do fine against that so in essence, you look to topline and understand what we're doing on topline and how that's it.

Holding overtime and then you basically then look at Aon business services Christa described it.

And we describe it as well that's another means for us to actually be better. The cat modeling example, that Eric gave up was really into how you sort of clients better those clients are actually getting better content than you've ever gotten before our colleagues had to be comfortable and trust that overtime and see a build and now we're actually getting better and better serve clients are seeing better content again back to growth.

And then AB and business services, obviously creates operating leverage because a great sufficiency and that means we can invest more back into the business, but the translation. When you think about the question of how we're doing it really is the simple things first it was describing organic growth. The operating leverage you have in the business, which translates into margin improvement and the you know you you follow our store.

It hasn't changed as free cash flow generation and delivering on our double digit free cash flow growth year. After year after year end as Christa highlighted.

The on United effort has substantially strengthened our ability to deliver on that promise, which is going to be great for our clients great for our colleagues and of course, we think very very good for our shareholders.

Thank you congratulations in the quarter.

Appreciate it.

Thank you. Our next question is from like CRM Ski of Credit Suisse. Your line is open.

Hey, good morning.

Chris did you talk about the the tax rate I'm thinking into 2020.

I see it was it was lower than expected.

This quarter and maybe that had to deal with the incorporation to Ireland.

So Mike.

What we would say, it's we don't give a tax guidance going forward as I look back historically exclusive of the impact of discrete items, which can be positive or negative in the quota I start underlying great, Spain, 18% to the last three years and what you saw on the quota Mike was some positive discrete.

And and and a change in the region geographic distribution of income, but really 17 of the hospice debt portfolio, which is dangerously close the teams that we seem to the previous three is the island move I will be concluded on the study first much and and it's really about preserving capital structure into that.

Realty.

Okay, and just to think about free cash flow attacks to is the cash tax rate is that should we is similar.

It should be similar yes, youre always going to have a slight difference in timing like between.

GAAP tax rate and you all our cash tax rate because all settlements with tax authorities around the world. So there'll be some disconnect in timing, but in general that aside.

Okay, Great and my last question is on.

Maybe cover wallet and small small to mid space at a higher level does just couple of all take a balance sheet risk like a carrier or said is essentially a broker and I guess strategically it sounds like and would like to you to do more of the and the small to medium space.

It was that a kind of strategic priority.

M&A wise and what do you consider kind of getting into the the more plain vanilla small med D. A U.S. brokerage space like some of your your your competitors are in.

Let's start with the balance sheet Christian Yeah, It's up Mike Let me just take the balance sheet pace, then I'll hand grants and sort of although overall growth opportunity, which we think it's fantastic <unk>, Mike as a company, we do not take balance sheet risk.

This is in the same brokerage MGH space that we play in every single day, and so our where professional services somewhere on the business all delivering great set of slots and getting rewarded through performance fees.

Through straight fees and commissions and we do not take balance sheet risk in this business or at any other part about business, but Greg over to you on the small business opportunity, which is fantastic right and that is highly consistent I could go rebound and that's what we're gonna do we love, we love, bringing content and capability. When were then essentially matching capital at risk around the world and the capital Weve.

Matches, obviously insurance capital, but all types of capital. So you think about a changing world whether it's up whether it's small businesses are to climate change to anything you want to think about essential proper wherever it is we're matching we're matching capital at risk and using content to do that's the essence of what our firm is all about and the beauty of that is those those that demand on that as getting higher and higher that brings you to.

A couple of wallet and cover all it is just a wonderful example of.

Really high high end high quality content capability that address a small and midsize businesses and again. This is scalable capability in essence. It's it's initially the application against 200 billion dollar small commercial market growing and 6% less and fiber sensor digitally and the opportunity to really grow that market overtime, well be expectations our quarter that market.

Might be digital by 2023. So this is a massive growth opportunity to serve clients in an effective way cover wallets are going to be central to that in terms of sort of were up to and what we're doing and we're looking forward to that you also asked about mid market I would say listen.

80% or what we do around the globe is mid market. So in essence, we've always been midmarket continue to drive mid market.

And certainly the SaaS applications in that in that realm as well, we're serving large companies medium size companies and smaller companies and then cover while it is really a means for us to sort of dig into that in a very.

And a very very strong way and then the digital assets that are brought to bear till we think of applications. Much broader. So this is a great example of content and capability that scalable a lot of our acquisitions.

Yes, there was describing really M&A, if we're going to be buybacks because of because of our view of relative undervalued stock.

They're going to beat that return on invested capital, it's an absolutely not getting bigger it has to be getting better and cover while it helps us get better and this is content that we can scale and that actually has a very high return on invested capital such that's the essence of it terms of where we are is the overall perspective. So it makes sense yep. Thank you.

Thank you. Our next question is from the lease Greenspan of Wells Fargo. Your line is open.

Hi, Thanks. Good morning on my first question is on free cash flow. So if my understanding I guess, you're looking for double digits and 2020 double digits called sorry is that off of if we adjust the 2019 free cash flow level for all the restructuring cash that ran through.

Just trying to get a sense of the base that we should think about using as you look to grow double digits. This year.

Yep, Great question, only so it's off the 1.61 a.

Billion dollar base for 2019, which is essentially gas right off the GAAP cash flow statement cashless from operations less capex that till starting point and so we'll grow double digits and 2020 and will grow double digits and 2020 was driven by three key things the fastest operating income growth. The second is working capital and.

The third is declining uses of cash, which you see on page 37 of the topline.

Okay, that's helpful and Thomas.

Organic growth as we think about 2020 on you guys seem I'm pretty bullish on the growth prospects.

Just trying to think is there any seasonality that we should be thinking about with any of the quarter is on that growth Todd might be skewed heavier on you know either earlier or later in the here relative to any of the four quarters.

We have we there are patterns. If we could we can highlight we've come back to lease was really it's really the overall year and the portfolio. So we start with our growth thesis its overall year and the portfolio. So in essence. This is the 3%, 3%, 4%, 4%, 5% now 6% and what we've essentially said is we want to achieve mid single digit or greater growth over the long term.

And we put in place a number of things.

To make that happen that we think we'll continue to improve and grow and strengthen our ability to do that are positioned to do that obviously some of our our solution mines have different patterns in terms of sort of where we go back and forth, which we can we can highlight for us to maybe want to highlight some of those but net net what were essentially saying is we want to grow up mid single digit or greater and we're investing to do that and you've seen that truck rack.

Good continue to play out.

And at least in times of quarterly patterning Q1 on Q4, Austin This quarters Q1, being our largest quarter of the year since our revenue recognition on Q1 is really much more reinsurance and EMEA.

On quota and Q4 is really U.S. retail at health sort of strong quarter side that the two biggest photos of the acute three is a seasonally weakest quota.

Okay. That's helpful. And then my last question following on a you know we incorporation to Ireland I think you said that's going to take place at the end of March I'm, just trying to understand would there be would there be anything preventing you guys fine issuing intercompany loans out of Ireland I'm, just wondering if there's any kind.

Anything that we need to pay attention to there.

A lease really the move to out and it's really about maintaining a stable corporate structure and financial flexibility.

Resulting any change to <unk> business operations, the moves really about remaining in the European Union single buckets, and so it won't change any of our debt structuring internally or externally or any of our operations.

Okay. Thank you for the color.

Thank you. Our next question is from true Kumar of Goldman Sachs. Your line is Hilton.

Good morning, everybody. My first question probably ties into a leases previous question on free cash flow. So how confident are you in the ability to achieve double digit annual growth and 2020, considering that projected year over year improvement in cash uses.

We declined by almost $250 million.

Relative to the initial expectation.

Yeah, you run way extremely confident about achieving double digit growth in 2020 and 2021 on beyond if you think about 2020 in particular, you have 130 million of tailwind from legacy litigation, that's flowing into 2020 front stop and then you do have declining uses of cash of pension and restructuring <unk> into <unk>.

20, as you can see on page 37 at the top line. So just those two.

Numbers alone.

Substantial that's before you get to strong operational improvement on working capital initiatives, which drove the majority of the growth in 29 tank, Okay, and we've got the litigation would that still be the same answer.

Yes, absolutely, Okay, and then I guess going back to pause previous question is there anyway to quantify how much of a cross sell opportunity on a on United is driven I mean, maybe as a percentage of for the 6% organic growth for the year.

Rather good we would suggest would come back. This is less we don't think about it as cross. So we think about as client leadership and find development and again a lot of the conversations we have the aren't about sort of the next product. It's about how you understand client need more effectively address client needs. Sometimes you sell products, sometimes you have a great conversation and the clients sees you differently in retention changes.

Sometimes they see you differently, they don't by that but they buy something else or the current stuff they actually feel better about the value your brain and you actually liver greater value they understand and pay more for that so the shows up in many many different ways you get this behavior in the water and watch our our team do what they do.

And it's it's wonderful to see we know this works we know it's incredibly powerful it works on new works on retention. It works on rollover and you know.

Got it is all about how we scale it actually how we put the mechanisms in place to do it more and more across the firm and then continue to keep better and better at it and then then you're going to it shows up in topline revenue and it shows up in operating leverage because it shows up in our business services as well and you see it in topline do you see it end margin and you see it than in the translation to free cash flow. So that's that's how we've.

Like you to think about that's how we think about it obviously, we've got more detail behind that operationally, but that's fundamentally is what we're all about and what we're where we are looking to try to do and in our view in the end. This is what's driving sustainable that single digit growth over time.

Pieces around the Erika Mike in terms of out shows up in the field I think I'm a great. Tangible example of it is the enterprise client group and this is a group of client leaders within a on across the world actually invest heavy time to understand the ins and outs of each individual client and then they work within all the solution lines to either be able to craft product or services Gregory.

I mentioned or they work together to create something different and something new to add real value to the client. So again, it's hard to quantify based on each individual solution line, but that interaction with the client really could be very special and they have great value for us.

With that relationship.

Yeah, but.

Just looking at the overall organization is there anyway to think of the have the move from three to four to 5% to 6% organic growth how much of that has come through on United specifically.

Yes, we don't want to we don't want you to do that and United is what we are it's not a suffered thing it's the it's the fabric of the firm. It's the nature of the conversation. So the three to four is part new by the way CNET news record new record new record in terms of reinsurance new record in terms of commercial risk on the retirement on the health side.

And United is about a retention clients, we might have lost we're not losing now by the conversation around where the clients around if you're out RFP why are we better it's a different conversation by the way anybody can say, what we're saying, but who's done single Opco single brand.

Basically single operating system Houstonian business services. The answer is no one so as soon as value clients go Wow. This actually makes a difference. So we don't want this to be separate we want this to be in integral to what we do everyday and then if it shows up in topline and margin and it shows up in free cash flow. Our hope is you'll be very comfortable with that that overall outcome.

Greg maybe I'd add.

Example, you brought which I think really brings to life for me is think of the situation when we bring in new idea to a client.

It's a great conversation so exciting solution that can help them with the material issue, but they actually it's not the right time middle by it our team comes back and celebrate our team comes back into the clients looking at us differently or thinking about as differently and ultimately that helps us long term, that's delivering in United and for US We do that time and time again and good things are going to happen.

For the client in terms of us, helping them and helping us grow with excellent.

At the heart metrics are literally net do retention rollover and then everything sort of his derivative against that that drives overall topline and it cuts by the way across solution lines, and then within solution lines and by the way lot of the United is doing more clients in risk doing more with clients and retirement doing more with clients in health and then occasionally understanding their needs and their issue.

I didn't think it across the solution lines.

So these are the these are the types of things the team's doing to end up we're going more and more momentum around it.

Got it thank you.

Thank you. Our next question is from Brian Meredith.

Yes.

Line is open.

Yeah. Thanks, I got two questions. The first one Greg I'm just curious if we look at your solutions retirement solutions. You know is clearly the one that's been like when organic revenue growth and I understand there's some structural headwinds in certain parts that business, but I guess my question there's.

Get that business to a mid single digits, plus organic revenue growth rate can sustainably and if so what is going to take to get it there what are the things you're doing to get it there.

Listen we do all of our solutions, we believe in the end or mid single digit a greater overtime I would just start a high level and maybe because you get your your thoughts on this as well, but net net step back is about fundamental demand Brian .

Global World retirement, 20% of the world's ready for retirement, 80% not fundamentally this is a massive massive sort of pool of demand that if you can address on behalf of client you can make a huge difference and we've talked about before when you juxtapose retirement and health.

All of our clients of employees their employees almost by definition on average or overspending on health and Underspending on retirement, that's an incredibly insidious set of behaviors that over a course of a decade or two makes a difference in the life of a family. If we can actually helping with just one or two degrees hugely hugely powerful and then there are pieces inside of what were.

Doing on the retirement side like delegated et cetera that are incredibly powerful.

And actually we don't we're investing very heavily behind but Chris or thoughts on that as well.

Absolutely right, Greg, that's where I was going to explain Brian I think there's an enormous portfolio mix shift going on within retirements, what you really see as we divested a low growth talent business elsewhere on the it was a drag on organic for the first half of 2019, we've been investing heavily in high growth areas like delegated investment management, which Greg talked about which is growing.

Double digits for us and in human capital, which is again growing high single to low double digits for us and as these scale will become a bigger part of the mix in retirement overall and ran I've role and we're really confident the vertol become a mid single digit growth so great a upon about portfolio at the top.

Gotcha.

And maybe one last comment Christa because I agree the human capital business is really really performed well in the second half. There's also things that are happening legislatively like to secure act, which actually gives opportunity, especially in north America around multi employer grouping to be able to do you know more efficient more efficient pension opportunities that we.

I actually think there's our there's there's.

Great opportunity for them, especially in North America and going into 2021.

Right and then my second question, Greg you know unionized done a great job and delivering extra value or more value to customers and I guess my question is have you been able to boost yield or at least which are charging or for your services into that so it's a conversation several years ago, you're talking about trying to try to do that has that happened.

How much that contributing do you think to this organic growth and and do we think that could be a tailwind going forward.

Yeah. This is.

I really appreciate that because this is really at the heart of what we're trying to think about.

And it really is about a value conversation with our clients no kidding value and in essence. If you know we used. The example, if we constant dollar and we actually create value for clients. It translates into $2 a value and somebody else comes in and says I can do what you're doing for 50 cents, but you know translates into 52 cents of our client understands the value.

Really understand spot better operating performance stronger financial position less volatility whatever the source of value Bryan Lubitz quantifiable clients understand it they're thrilled to pay for it because it creates real value for them. If we don't do a great job.

And we're not adequate and describing the value shame on US right. That's the issue, but that's not that's a high bar and that's what and you know it is all about how do we get a little better every year, a describing value by the way asking ourselves are we really providing the value. If we're not investing behind it and this is we're back to kind of were invested in content intellectual capital to cover walls example, many.

The other straws towns and these are content Leighton investments that we can scale to clients to create more value, we create more value, we get better and articulate and we're going to get paid for it and clients are going to be happier in their countless examples of that Brian. We know it works question is how do we scale it and that's how I and United is different and look we're making.

The decision we're doing some things different what we're doing and delivered in United to frontline is different it requires different behavior, what we're doing on and business services is different it requires different behavior turns out that behavior has tremendous benefits for clients and great economic leverage if we can scale it and if we if we do we continue to do it will get better and better but that's.

That's how we thought about it and we've had we've had great success.

The micro level, what we want to see us more and more success over time at the macro level across the firm and that's the essence of the evolution of are they in United.

Great. Thank you.

Thank you. Our next question is from Jimmy Bhullar of JP Morgan Your line is open.

Hi, Good morning, most my questions are answered, but just to clarify you gave the rationale for.

The domiciled changed all our and then being capital then operational flexibility, but should we assume any benefit on your tax rate or does the tax it or what does not change at all.

It will not change at all.

Okay, and then on pricing you mentioned that it's been a little bit of the benefit recently, obviously a lot of your business isn't dependent on pricing, but what are you seeing out there in both the commercial than reinsurance markets.

Seems like broker brokers commentary has gotten more positive recently, but how broad based do you think the pricing improvement is by region or and or by line.

And again, we don't view it as positive or negative we viewed as sort of its the price per unit and we understand it and then we react to it and we were actually on behalf of clients. So in essence, when when price changes or per unit cost changes for unit of risk, we're helping clients understand how to change programs to line sign programs Eric mentioned.

This is exactly what were built for the data analytics, we have allow us to change programs relay or programs bring in different markets think about risk differently. So in essence.

We're constantly adapting to that on behalf of clients and that's what we've said for us.

The impact on pricing was was there was evident but it was not material.

And but what are you seeing it just doesn't observer and the market the sort of as an unbiased view or if the market. What are you seeing in terms of pricing trends overall.

And how it evolved as 2019, but as you went from 29.

Your your suit you are seeing pressure here and there were there where there have been specific accounts, where there have been specific issues overtime, but remember there's others. A you when you think about macro supply and demand of capital. There was a massive amount of capital out there that continues to be in the overall marketplace. So globally across the market lot of capital out there by the way our view is.

Ironically, there's there's a lot more risk out there thats been addressed so theres opportunities to sort of help clients and support their needs.

But there is there's there's pressure of late based on.

Some of the things are happening around the world than the accessories around the world, but net net we see an abundance of capital and an opportunity to help clients addressed or bresser risk needs.

Thank you.

Thank you. Our next question is from mayors shields of KBW.

Yes, okay.

Thanks, Good morning, I had a question about cover wallet in the context is that in the U.S.

Consumer auto insurance, if it must lower penetration than we've seen the number of other countries and I'm wondering whether that's a.

Constraint at least in the near term on capital while its growth.

Yes, my or this is broader than a direct auto. This is really sort of you think about small small company small businesses and their broad based sort of risks needs. How do you address those risks needs more holistically.

And then how do you do it with an incredibly efficient platform a underpinned by a world class data and analytics. So that really is the thesis.

And we've actually as I described before.

We spent a great deal of time will cover while in pilot mode before they actually became part of the overall a on family and we're quite optimistic about the opportunities here to help smaller companies succeed in ways. They happened before I understand our risk better mitigates the risk more effectively.

And and that really is the essence of would cover wallets about.

No I understand that and that's helpful. I'm trying to get a sense as to whether there's some sort of like cultural impediments domestically.

Two adopting direct to in this case enterprise insurance distribution.

I think it's less about it's less about cultural impediments is more around is there a compelling value proposition that that is that a small business what understand it would value and would pay for.

And if you get that combination right and they said while this is a great way for me to understand risk in my business.

Get an overall solution, that's actually very cost effective that I can understand the by the way delivers what I needed.

And I get to go back and do it I do which is run by business.

We think thats going to be really good reasonably attractive.

Okay, Let me close out thanks.

Second small question or was there any timing from maybe the first quarter 2020 kept market issues that.

You did to the reinsurance segments organic growth in Fourq you.

Got it or don't know there was not the 24 or I'm sorry, the Q4 number was really driven by.

Some cat bonds that actually were just expiry and we're renewing so it was not necessarily new issuers are new buyers, but it was just traditional expiring that had to be replaced.

But there was a significant amount of facultative business that essentially matches, the timing by which the risk its place either in the primary market.

<unk> renewal of effect placement. So there was no timing back and forth and really why are the issue on the question on reinsurance we would suggest isn't the annual question. So 2900 question, it's up to 70% in the quarter, which by the way good team did a great job on a smaller order what you think about the 10, the 10% over the course of the year and the root cause of that driven.

Bye.

So much that driven by net new as I described before treaty alone explained over 60% of the difference.

And and then let's explained a lot of the differences are described before as did fac and so it really is the 10%.

Organic for the year, which is really a powerful story.

Retail market was driving more opportunities in our reinsurance colleagues are picking those up so all these things are sort of happening but to deliver a 10% organic for the year was really remarkable effort by our reinsurance colleagues.

Understood. Thank you saw us.

Thank you I would now like to turn the call back over to crack case for closing remarks.

Just wanted to say, thank you to everyone for joining us and we look forward to the next quarter take care.

Thank you and that concludes today's conference call. Thank you all for joining you may disconnect now.