Q3 2020 Aon PLC Earnings Call
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Good morning, and thank you for holding welcome to Aon plc third quarter 2020 conference call.
This time all parties will be in question in a listen only mode until the question and answer portion of today's call I.
I would also like to remind all parties that this call is being recorded if.
If anyone has an objection you may disconnect. Your line 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 of 1990 fives.
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 third quarter 2020 results as well as having been posted on our web site.
Now it is my pleasure to turn the call over to Greg case, CEO of Aon plc.
Thanks, very much and good morning, everyone welcome to our third quarter conference call I'm joined virtually by Christa Davies, our CFO and Eric Anderson, our President I.
The previous quarters, we posted a detailed financial presentation on our website.
Your next again why take care Aon colleagues for their extraordinary focus and dedication and supporting clients and each other.
What they do every day is exceptional Robert.
Whether it's building strong lasting relationships with clients as we help them navigate these complex times.
The way around politics come together to collaborate and innovate in ways that are helping us build an even stronger.
Really tremendous work by the young people around the world.
Turning to our performance in the third quarter, we delivered strong results once again demonstrate the resilience of our business and strength the ramp into services platform.
Organic revenue growth was flat overall, reflecting strength in the core areas of our portfolio and ongoing expected pressure the more discretionary areas.
We saw continued strength in reinsurance solutions with 30% organic revenue growth driven by strong new business generation double digit growth and treat facultative in capital markets.
Commercial risk delivered modest growth of 2% with strength in the core and continued pressure more discretionary areas.
Solutions growth was 1% modest.
Modest growth internationally, partially offset by pressure in the U.S., which reflects ongoing headwinds in the global economy and lower employment levels.
Retirement solutions I'd now like services, both experienced organic revenue declines as we saw expected pressure more discretionary businesses like human capital travel into that.
As we assess our revenue outlook for Q4. The primary thing is continued uncertainty in the global economy. That's many companies consider new restrictions response to increases in called the 90 day since well government stimulus remains uncertain.
And evaluating Q4 revenue expectations two points are important first.
Given the seasonality of our business, we have a larger portion of more discretionary revenue occurring in Q4. So the pressure on organic will be more significant than in prior quarters. For example areas like construction and transactional I don't even think about your risk recognize revenue when troubles hit the ground and deals are closed as expected we're seeing pressure in these larger investments in the car.
Barmy.
In addition, organic revenue growth in Q4 last year was exceptional.
<unk> percent overall, that's you highlighted last year. This includes double digit growth in transaction liability as well as double digit growth in voluntary benefits two areas. The more discretionary portion of our business there seems to be larger in Q4.
Second and importantly, we believe these headwinds are temporary and just like pressure from current economic conditions were called and the strong underlying fundamentals of our business overall revenue base is diversified across industry geography and solution lines roughly 80%, it's not discretionary and that's a significant portion there were news every year with 95% retention rates on that.
Rich.
From an operating standpoint, we delivered strong results, including 40 basis points of operating margin expansion in the quarter contributing to a 170 basis points of margin expansion year to date.
<unk> EPS growth in the quarter, an exceptionally strong free cash flow of 1.9 billion through September.
91% over the same period last year.
These results demonstrate the continued resilience over and United strategy focused on working across our service lines and geographies to bring the best of the firm to clients further.
Further the strategy computer so your balls in response to client feedback over and over our best outcomes come when we listened intently and deeply understand client challenges.
One recent example of this is a partnership the global market leader in the Internet of things using.
Using our clients telematics colleagues in commercial <unk> human capital and data analytics.
Optum mobility as a service solution.
That includes attributes like on demand car sharing that forms part of a total rewards for rapid <unk>.
Our plant provided the technology and we provided the insurance solution. That's digitally distributed through our total rewards platform. This enabled the company to offer a distinctive flexible benefit to their workforce that meets their needs at a time, when attracting and retaining talent in new and creative ways is paramount to their growth.
Not only are we co created a cutting edge solution. We've also elevated our partnership with this client to a more strategic level working together to innovate for mutual growth.
This example, and you're not even action also highlights a larger area, where client demand continues to outpace industry innovation.
It's one of the areas. We described in our recent innovation White paper written Willis towers Watson.
Many industry sectors <unk> highly specific challenges that lack adequate solutions.
As a result, we recognize that there is a need in our industry to create more affordable scalable solutions to broaden access to a wider range of recipients.
For example, we're investing in digital distribution capabilities to officially reach areas that aren't well served today.
By our club wallet capability with a small commercial space.
As we see it across the economy overnight you accelerated digital adoption through September premium volume flowing through the couple a platform is up more than three times over last year to me that that's you platforms addressing previously on my client demand.
A more efficient did you'll find solutions to their risk management needs.
That's part of our innovation White paper, we identified and prioritize four areas, we can more quickly and effectively address because we're a combination with Willis towers Watson further proof that the combination will make us better faster.
Wind in the speech, we think about delivering innovation on at least two levels.
The first level, it's about how our business gets better today is really more comprehensive solutions to clients.
A big part of that is reinforcing our public subject matter expertise.
Like industry, and geography, well with analytic tools that help them provide better solutions that enable clients to make better decisions.
No type of innovation in our core business every day and see the opportunity to do even more with a complementary capabilities Willis towers Watson.
Building on that first level, there's a second level, which we think most comprehensive solutions to net new addressable markets like U.S. mortgage reinsurance and deliver specific insight and I really didn't solutions like Aon client treaty.
These newer challenges can be assessed what the stork inside along.
We have some of the capabilities today, but will be stronger in combination with little started Watson and more capable of delivering these solutions at scale.
He Fantastic example of this second level is the solution. We recently developed for private agricultural technology client.
Rather than issuing equity they were able to use our intellectual property capital market solution to raise funds through non dilutive debt.
Our proprietary industries are fighting nothing devaluation enable us to die either IP. So it wasn't sharable can be used as collateral for a lot of over 100 million.
Well. This is another example of how we're driving innovation today, we observed the client need continues to outpace innovation in our industry.
Believed that our combination with little starts Watson will be fundamental nothing reversed its negative trends.
As we've consistently emphasized our priority is continuing listening to an understanding our clients we take pride in the strength of our client relationships.
We're listening to them more than ever before we also want to make sure we hear from them regarding the pending combination and we are.
My answer them across industries solution lines and geographies have expressed tremendous support for the pending combination and especially the opportunities it presents to drive enhanced innovation.
Similarly, we're listening to our colleagues we're hearing that they were incredibly excited about the pending combination and what it means in terms of opportunities for them both.
Hoping that they can bring to their clients and their own growth in professional football.
We continue to see higher public retention year over year in total across the firm and across geographies and solution mines. In Q2, Q3, we saw 39% decline in voluntary turnover year over year.
Maybe most remarkable our latest survey of our colleagues are feeling about aon and our mission yield the strongest sentiment and over 10 years. This is a meaningful credit to our people leaders and all of our global colleagues.
In summary, our focus on United and on providing innovative solutions for our clients is delivering results today as we manage through challenging times.
Equally important our progress and development establish is in a position of strength for long term growth.
Which has accelerated substantially in the combination with little started Watson.
Or you would like to turn the call it because don't further financial review Christa.
Thanks, so much Greg and good morning, everyone.
As Greg mentioned, we do live in a solid operational performance in both the <unk> and <unk>.
Despite continuing macroeconomic challenges demonstrating resiliency of our business and the strength of <unk> and United strategy in any economic environments.
We remain committed to deliver shareholder value over the long time, which we believe will be acceleration by our pending combination with <unk>.
Last year my commentary today, it's more focused on the calls given differences in the external environment today, that's the beginning of <unk>.
But also note that Q3 is a seasonally smallest <unk> how.
Having said that we manage our business on a full year basis <unk> continued progress against our loans have been actually metrics out.
Third quarter results reflect continued strong performance in challenging economic conditions.
Organic revenue was flat highlighted by 13% organic revenue growth in reinsurance solution.
<unk> organic revenue growth in commercial resolution.
Describing to you one I didnt have strong fundamentals with roughly 80% being cool I'm 20, but that relatively more discretion me either.
As expected we continued to see large impact in the more discretionary portions of our business.
Human capital consulting troubling event transaction liability and project work across the portfolio, which contributed to organic revenue decline in the Thomas solution and de bundling et cetera.
I would also note the reported revenue continues to be pressured by love to do should be investment income as a result of low interest rates globally, representing a decrease of $18 million.
<unk>.
Moving to operating performance, we delivered another quarter of improvement demonstrating strong operational discipline as we returned to more normalized levels.
Compared to the second quarter.
We have strong uses they hold the fixes that operating income growth operating margin expansion of 170 basis points and EPS growth of that.
As I look towards the bulk was up there.
Its continued macro economic uncertainty and as Greg mentioned, we increased revenue pressure in the fourth quarter compared to prior quarters.
What I communicated last quarter we.
We expect expense the remainder of 2020 to be more consistent with underlying expenses and 2019, excluding adjusted <unk>.
It's due in part to an increase in certain discretionary expenses as well as continued targeted investments in priority areas for long term growth, while maintaining strong operational discipline.
Well put in areas such as reduced travel and entertainment expenses continued to be a modest tailwind we're investing in priority areas such as <unk>.
Property I'm called the wallet.
Maybe necessary operational investments instead investing in tools with colleagues and strong cyber security as we continue working remotely.
Finally, I've thought about I think material FX had an unfavorable impact of approximately one cents in the third quarter and six that you have today.
At today's rates, we would expect a two cents per share unfavorable impact in people.
I think the Pos and capital allocation free.
Free cash flow increased 908 million or 91% to 1.9 billion driven by working capital improvements all of which a portion is related to short term actions taken proactively to manage liquidity.
Decrease in restructuring cash outlays and strong operational improvement.
Much of the strength, we see in free cash flow comes from my end business platform. I would also note we're seeing ways in which <unk> allows us to better <unk> colleagues today and make more resilience in the future for.
For instance over time, we've increased the amount of standardization across geographies I'm solution lines, and sharing best practices and driving efficiencies. This.
This has enabled us to better manage employee wellbeing I'd call. It more easily comparable wondering about allowing our colleagues greater flexibility to take time off okay.
We remain very confident in the strength of our balance sheet and manage liquidity risk through a well laddered debt maturity profile. We ended Q3 with approximately 300 million lower total debt compared to the end of Q2 due in part to paying down substantial amounts of commercial paper in that that was.
Historically, we've looked to increase debt EBITDA grows while maintaining leverage ratios. However, due to the uncertain macroeconomic conditions, we expect to continue to manage our leverage ratios conservatively in the near future.
We are diligent about maximizing return on invested capital and make capital allocation decisions through this framework.
Share repurchase remains the highest return on capital investment today, given our free cash flow valuation and outlook highlighted by the 500 million of share repurchase in the quarter and nearly a billion dollars yesterdays.
We will continue to repurchase shares while maintaining higher than normal levels of cash for the near future given macroeconomic uncertainty.
Stepping back I wanted to take a moment to reflect on our pending combination with Willis towers Watson.
Right. How excited we are about the significant shareholder value creation potential.
But as Greg described we see ongoing opportunity for revenue growth as we bring together be highly complementary businesses.
Historically aeolus driven growth in three key areas.
Driving continued improvement and alcohol business those <unk>.
<unk> volume mix shifts the high growth areas and unlocking net new opportunities that expand our total addressable market.
As Greg much in private 19 as highlighted the reality that our clients have growing an unmet need across risk retirement and health was with the combination with Willis towers Watson positions us to address well.
As we've said we remain committed to the 800 million of expected cost synergies I would note that we expect these synergies on top of coal margin expansion for both.
And while we've made significant near term macroeconomic uncertainty web very confident in our long term strategy to drive margin expansion.
We've said before that our margin expansion is driven by accelerating revenue growth portfolio mix shift to high growth high margin businesses and leverage from <unk> and business services operational platform.
In particular, we're confident the investments we've made in <unk> platform will enable us to capture our expected synergies I continue to drive long term operating margin expansion for the combined but.
I'd note that over the last decade, we've driven 70 to 80 basis points of margin expansion on average each yeah. There was some years higher some lower.
But we want to put them on a cost basis, we've demonstrated a strong track record of driving efficiencies and growth in areas such as working capital on top of it.
Confident the investments we've made in <unk> that will create even more opportunities to grow free cash flow as we look forward to the pending combination with Willis towers Watson.
Looking back to about deal announcement amotz not we couldn't deal will be accretive to LTPS IMMU, one breakeven free cash flow needs are significantly accretive to free cash flow and you're right.
Given macroeconomic uncertainty Judah COVID-19, we've since withdrawn our financial guidance of mid single digital Grace the organic revenue growth and double digit free cash flow growth, which were key assumptions the projections upon which we can calculate it accretion we.
We're not really doing financial projections at this time, given the ongoing macroeconomic uncertainty.
However, the primary drivers of the accretion that we provided with the 800 million in synergies and our capital allocation strategy.
We remain committed to the 800 million of synergy.
And while these actions are proactively manage liquidity earlier this year, we resumed share repurchases in the third quarter and continue to buy back shares.
I wouldn't know that mathematically the same amount of synergies on the more basic ought to be yes would be more accretive.
We are confident that the 800 million in synergies I'll focus on driving free cash flow and our disciplined capital allocation strategy will lead to meaningful shareholder value creation.
Finally, as we continue to make progress against our key milestone receiving shareholder approval from both sets of shareholders on August 26, with 99% up <unk>, a 96% from Willis towers Watson Sheldon we remain on track to close the deal in the first half of 2021.
In summary, our business is shown resiliency despite continued macroeconomic challenges.
United strategy underpinned by a M business operational platform have enabled expense discipline and strong free cash flow growth, while positioning off the long term growth.
Our disciplined approach to return on invested capital provides financial flexibility to unlock significant shareholder value creation over the long term.
Incredibly excited about the pending combination with Willis towers Watson.
With that I'll turn the call back over to the operator, we'd be delighted to take your questions.
We will now begin the question and answer session to queue up for questions.
Star followed by the number one.
Your phone and record your name and company when prompted to withdraw from the queue you May press.
Yes, the start to.
The first question is from Dave Styblo Jefferies. Your line is now open.
Hi, good morning for the question and the color.
About four key I'd like to just start with that one.
And get a better sense of what are the areas that have the most exposure to the economic weakness right now and is there any way that you can provide some general book ends around how much pressure there will be in the fourth quarter. We are we thinking something like mid single digits would be appropriate or <unk> or is there just that much more discretionary spend that happened there.
Where the pressure could be more than that.
Dave what I tried to highlight start christer reinforce we think is listen overall, when we think about revenue going forward nothing's really changed except this unusual year. This unusual year with all about uncertainty and we were trying to highlight as you think about Q4, there's just a lot of uncertainty you know there's uncertainty on sort of whats going Oh that is going to evolve the reaction of government reaction.
Clients are college cross and I've done a remarkable job just an incredible job through the first nine months of the year supporting each other and clients, but when you think about Q4 for us the pressure Weve described in the pressure is real is really you know, it's because of a disproportionate amount of what we do our discretionary part of overall book happens in Q4. So this is you know as it is.
Scott, we're like M&A services voluntary benefits things like that they just happen they happen to be in Q4, and you know that's an uncertain environments are those the actions. After happened. We're very confident are going to happen over time, whether they happened in Q or not really just a question. The exception second pieces. You saw Q4 last year was just exceptionally strong now we make no apologies for that were credibly excited.
About that but it was exceptionally strong double digit number of these discretionary or is it just where we are then there are aspects of our core business as we've said before like travel events that are still under pressure and they're going to be back and stronger than ever before were very confident of it but its you know a lot of uncertainty that sort of we move into the year. We do want to highlight though as you think about the overall profile. The Christa described.
Gross profitability.
Yes free cash flow profile that changed at all as we think about Q4, because anything else you'd add to that or Eric.
Greg I might just finished with as we think about our business. We really managed the calls Dave a full year.
We certainly expect to grow margins over the course of 2020, we expect to grow at U.S. only we have an extremely strong strong free cash flow outlook I think while there is pressure to show in Q4 on revenue and therefore margins. We expect to continue to grow in 2021 and continue to manage all four of those metrics.
Revenue margins EPS and free cash flow the cool yeah.
Helpful. Thanks, and then you know.
Sure it's tough to pine on on next year, but assuming we get back a little bit more of a normalized environment organic growth still might be soft.
Is there some sort of rough threshold, where where it gets hard to expand margins. I mean, obviously you can tell that Kirk curtail those back at the expenses.
Perhaps longer term revenue growth, but how do you think about that balance for for next year, if growth is sort of well below the 3% to 5% range that many insurer insurance brokers are out.
Yeah, I think they we do expect to grow margins next year I have you looked at 2020 margins. As an example, you know we expect to grow margins and 2020 and 170 basis points year to date longtime my goal is to drive margin expansion each year as evidenced by a record 27.5% margins and 2019 up 250 basis points on public.
10 years of margin expansion with 70 to 80 basis points each year net of ongoing investment in the business and we would say our long term margin expansion is driven by revenue growth a portfolio mix shifts to higher growth higher margin areas.
On business services driving productivity and.
We believe we've got substantial opportunity for margin expansion, but the combination of Willis towers Watson.
Number one and growing Aon pool margin number two in growing Willis towers Watson coal margins and number three adding on the 800 million of synergies, which were very confident delivering.
Even David do you think about sort of the the overall economy irrespective of sort of how it struggled and evolves overtime I. Just also want them on your on top of that I'd really emphasize on top of what Christian just described then consider the broad based risks that are no longer on the rise of their enterprise or face things like pandemic climate change intellectual property all the things we outlined in our.
In our <unk>, our our white paper that John Healy describe so while on the call yesterday Little stars Watts and these are things that are real they are in front of us they're going to create demand overtime because clients you've got to find ways to address these levels. All at least so on top of all that Christa described that's what we're really excited about the combination being older girls.
Helpful. Thanks much.
The next question is from at least Greenspan Wells Fargo. Your line is now open.
Hi, Thanks. Good morning, My first question just.
Yes in terms of the <unk>.
Merger with Willis towers Watson I was hoping you could provide us an update.
In terms of timing I guess.
First half of next year.
Sure I'm, assuming obviously that still holds but I guess more in terms of just like the regulatory process, where we stand today in terms of kind of the timeline.
You know when you put the deal together just given it seems like cold.
[laughter] things down, but just want to kind of get an update and see if things are still on track and where we stand.
Perspective.
Terrific. Thanks for the question relates we do believe we're exactly on track to close in the both talking 2021, we filed a joint definitive proxy on Wednesday July eight and completed the child about with overwhelming support on August 26, with 99% of Am Sheldon fighting for a nice set of Willis towers Watson shell deciding pool, we do.
What I expect to provide update the regulatory process unless we have something to report as John Haley mentioned on the <unk>, earning calls yesterday, several global abstral falling to be required in connection with the proposed transaction the specific falling process and timing varies by jurisdiction and we did not expect to provide up that until we have something to report, but as we pre.
As we indicated we are on track and expect the deal to close in the first half of 2021.
Hey, Chris can maybe a maybe a follow on add around how we're doing with the integration process because I think it's pretty important we've we've actually done a lot of work around the culture of the firm's understanding how each of the firm's operates the wives centricity the capability that each of the firms have so complementary and we've been using this period of time really to focus on getting to know each other.
We're trying to figure out how do we work better together as Greg mentioned on the white paper finding those opportunities. So while that regulatory process has gone off we've been spending an awful lot of time, setting up and doing the planning well and how we're going to come together.
Right and then on in terms of organic roles, you know going back to the color in terms of the greater discretionary piece in the fourth quarter. You guys said you expect I guess things just slow in Q4 the.
Q3 was obviously better than the Q2, you know what was the point you're trying to make I guess at the fourth quarter would be like the weakest you're well just slow down sequentially versus Q3 I wasn't sure. If there was a lot of also trying to make as we.
My point is that like the second quarter, which I guess was you know the low so far that youve seen during this slowdown.
But really that was trying to highlight is this is about this is truly is uncertainty we are observing by the way the pressure that we described which is real is you know as Weve. Chris has described before 80% scored 20 percents discretionary that 20% disproportionately for us it shows up in Q4 and that 20% are things like M&A services, we have an awesome business.
Here are a wonderful support for clients, but you know its shovels don't go in the ground that doesn't happen eventually it happens, but it's you know it is built the business overtime over the over the coming years around what I'm talking about the category. It's great. But in Q4 is nervous about uncertainty where where it is saying Mr. On some of the some of the health business as we described travel intensive cetera. So were just high.
Lighting, there's a lot of uncertainty in Q4, no one really knows [laughter] Oh, if anybody out there knows please call us a we'd like to know exactly what's going on but our colleagues have just on a masterful job be ready for clients to move and modifying and and shape Oh.
Help them shoot their strategies, but we just have a huge amount of uncertainty sort of in terms of Q4 with growth in 2021, and all the things that Christa described nothing has changed in our overall growth problems Brocal on what we expect long term.
Okay, Great and then just one last one Chris I think last quarter. You had mentioned that you guys were returning a buyback I think you used the word.
Were bought it correct me if I'm wrong, and so you guys bought back $500 million of your stock in just one month in the quarter, which was a pretty healthy level.
Can you just help us think about you know buyback.
Level from here given that you know is a pretty robust return to buyback. When you guys went back into the market in the third quarter.
Thanks, I'm actually a little bit in response to the macroeconomic uncertainty we did pulls buyback in March in order to maintain liquidity stability and flexibility and then we did announce swaps whatever busy im a limited amount of buyback for the remainder of the year, we're not giving guidance about capital allocation going forward, but we'll assess it based on actual and forecasted cash flow as well as capital market condition.
And so what you did see a lease is exceptionally strong free cash flow.
In the first nine months of the 91% to 1.9 billion, but.
But the macro uncertainty remains and so and say well what you'll see is you know we continue to allocate cash based on return on capital cash on cash return on buyback remains the highest return on capital opportunity across Aon, even at <unk> valuation opaque stock price and so at today's prices. It is a fantastic return on.
Capital opportunity and so you know we will continue buyback, but it'll be based on the cash we generate and capital market conditions.
Okay. Thanks, I appreciate the color.
The next question is from Jimmy Bhullar JP Morgan Your line is now open.
Hi, Good morning, I had a couple of questions both on the steel first.
There's a lot of skepticism out there about your comments on not really having a lot of revenue dissynergies as you or as you go through the regulatory approval process and the potential for you being forced to sell parts of the business business. So can you <unk> or parts of the combined business can you discuss what gives you confidence that that won't be the case and.
And then related B.
On your expense savings targets, if we look at the $800 million number that's I think close to roughly 5% of the cost base and if you in the past deals you've done a lot more than even 10% and I would have thought that given the similarities between the two companies you'd actually eventually be able to do more so maybe talk.
How about if there's any conservatism baked into your numbers.
Numbers or are there things that you see that are causing you to be more cautious on expenses.
So Jimmy so I'll take the first one on anti trust. So we do believe we're on track to close in the first half of 2020 2021, as I said with my divestitures and the reason why so confident about that is because we have the world's leading I just dropped council we've had them for more than 18 months we've worked through.
This in detail and we believe we have highly complementary businesses.
And even in areas like reinsurance, which I know has been speculated upon Jimmy we look at that business and we think about it from a client perspective and clients have a huge range of choices. If you think about the clot reinsurance, it's an insurer and they can place direct which a lot of them do they can place I'm in the capital markets, a little time to pass.
All they can place Showtime Megan placed right huge range, all brokers, including a number of brokered stops given they you know significant movement of talent in the reinsurance industry and so we look at that incredibly competitive field and we do see that there is enormous competition from a client choice perspective, and so again, we feel.
Really confident about where we are and exactly on track to close and close off 2021 with no divestitures then moving to your second question sorry, Greg did you want to jump in.
He's going to go so the couple your and your second question I'm confident so we did I'm out 800 million cost synergies, which as you pointed out to me is five and a half that of the combined cost base. I mean, we did achieve 11% of the combined coal space in Aon Hewitt and 18% of the combined cost base in Aon Benfield and what I think that tells you Jimmy is we are.
Really confident about achieving the 800 million what it also tells you Jimmy is really the main strategic focus of the combination with Willis towers Watson is on revenue and on delivering on these new solutions for clients to meet unmet need.
Really we want to make sure that as we bring the combination together, we're really absolutely laser focused on clients and driving that significant upside in terms of revenue potential as opposed to completely distracted by taking costs out, but Greg what would you say I think just to add to the piece to two aspects of it in a very important question. One is just when you think about.
Talent and you know I think you're asking about talent. In addition to just stay on the trustees.
Yourself, you know as we come together our colleagues are available are going to be able to the across the table from clients with more capability to support clients, let's say wonderfully positive thing and that's what we want to try to that is we're focused on.
Eric and his work with his colleagues Willis towers Watson truly got Bauer and others are really working on sort of how that I called the value proposition comes together to make it more compelling. This is not about synergy it's about when we net new then fits on the client side and if you step back and think about you know there's been a 30 year period. When you think about risk as a percent of GDP where it's.
Unless significant we're becoming less significant as an industry. That's what the facts tell us and by the way at a time when client need is going up and then that's become even more pronounced during pandemic and so again. This is a little white paper was about and as we begin to think about addressing those opportunities. That's why this is about growth. That's why this is you know there will be synergies of course, you bring two firms together.
But this is about growth addressing some of the most significant risks in the world today that are unaddressed literally undergrounds pandemic climate intellectual property, even seibert relatively less the drops in EMEA and it's a real opportunity in terms of sort of where we are and what we're trying to do and you know there's lots of opportunities out there as you think about sort of wherever yarn spinning.
For example that are happening every day, Eric your seat needs, but again this is really about client opportunity and creating net new as part of this combination.
Yeah, Greg and everything to pick up on it.
Just to pick up on it for a second because I do think oriented I didn't strategy, which we have been working on for several years around how we integrate around the client, bringing all the capabilities, whether it's bringing reinsurance modeling to property clients on our commercial risk side. There was 100 of these examples that are out there most hours watched that has very similar client focused efforts on.
Either way and so when you bring those together as Christopher said this is all about finding new ways to serve our existing clients to do more for them.
I think the excitement that's building both on the down at a Willis towers Watson side is really starting to come together as people start to see the possibilities.
And then just lastly.
The health business you saw a noticeable improvement in your organic growth, 1%, but last quarter was down double digits I think in the release there was a mention about some timing of booking revenues is the majority to improvement just because of that or I don't know to what extent.
Quantified or was there underlying businesses.
This is <unk> <unk> versus <unk>.
It's similar as we said in our last discussion really we this is a space we absolutely love the overall opportunity and health. We think is you know is is it was tremendous coming into 2020 and as you well know Jimmy it's become even more pronounced as you think about everything that's happened with the pandemic. It's not literally a you know in every board room and every company around the world and our.
30 to support clients here is tremendous so we love this long term.
And we love it even in the short term and what you saw in Q3 was just you know continued progression against that's still a lot of uncertainty so a lot of general discretionary.
That's happened in the fourth quarter as it relates to help particularly in the U.S. are.
We you know we love this space long term look you've done a great job and we're looking forward to going to see this business grow and progress.
Thanks.
The next question is from Suneet Kamath Citi. Your line is now open.
Oh. Thanks, Good morning, first I wanted to go back to something that Youd mentioned towards the end of your prepared remarks about the deal accretion and I think you said something along the lines of.
Spreading.
The earnings over a smaller share count.
So my question is were buybacks not contemplated in your original guidance that you gave when you announced the deal.
That's when they actually what I said was if you think about the 800 million of synergies. So do you think about the accretion. It was really based on two things. It was based on the $800 million synergies and it was based on our capital allocation strategy and so you know while we you know we remain committed to the 800 million and you know, while we took a pause.
Cause on buyback Elliott and see it amounted to liquidity, we resumed share a patch in the third quarter and continue to buy back shares and.
And so if you think about accretion mathematically if you think about the original accretion assumptions on a more like E Bay.
Then you know it would be more accretive today.
Okay got it and then I guess on that deal in terms of regulatory reviews and.
At approvals how might that change in the presidential administration impact the timing of the close.
As we think about.
Central changes at the gay or elsewhere.
I mean, we do not foresee any impact should that be a change administration, especially given the timeline makes that the deal.
Okay and then my last question just on margin looking out.
Overtime Christie had mentioned a couple of times that 70 to 80 basis points of margin expansion annually and you still feel pretty good about the path going forward, but as we think about.
Margins in the future is there any way to frame for how much longer you guys think that you can continue to improve margins.
At at that 70 to 80 basis point range or something in that neighborhood, you know sort of so when does this sort of a tailwind start to sort of peak or drop off thanks.
Great. Thanks, so much of the question because long time, our goal is to continue to drive margin expansion. This year, we do not see some you know I have on margins. In fact, we can continue to see margin expansion for the foreseeable future and it's really driven by revenue growth a portfolio mix shift to higher revenue growth.
High margin areas and I own businesses and continuing to drive productivity. We obviously see substantial margin expansion with a combination of Willis towers Watson because you get a on coal margin expansion plus Willis towers Watson pool margin expansion plus the synergies and if we look at our portfolio today the portions of the more.
Analytic in nature tend to be higher margin areas of the portfolio and so that gives us confidence going forward that we'll continue to have long term margin expansion.
And so on top of that seem to be thinking about so what christy to subscribe to this you just painted a picture you know over the over the coming years literally all the pieces are in place for margin expansion, we're thinking about and business services and the capabilities. The next incarnation of I'll call. It the new add on business services as we bring the firms together sort of in the new in the new World here Oh the opportune.
Over the next few years, that's in place and there is tremendous opportunity for <unk> by its own little starts walking by itself for the combination and that's why we're pretty excited about that but but beyond that if you go to the innovation White paper grew just a minute and ask the question.
There are issues that must be addressed client need is going up as we address those issues. They are going to be done with analytics and capability. So to that we're building overtime analytics gives US you know gives us a margin profile that's different than it has been before it if you look at other analytics businesses their margin profile and their growth is much more there's much more substantial.
More than ours ours. So there's the sealy you're describing it's a great question, but we don't see that at all in fact, as we have all what we do and we hope our colleagues who is it really is about our colleagues more than any time ever about our colleagues were truly supporting them with greater levels of analytics that help us address these questions. This outcome great for our clients great.
Our colleagues happens to be exceptionally good for our shareholders as well in terms of sort of where we are so that's why we're so excited about the investment the combination to address this next level of issues that are out there and no longer on the horizon, there at our doorstep or with a higher awareness than ever before to address them.
Got it okay. Thanks for the answers.
Our last question is from Phil Stephano Deutsche Bank. Your line is now open.
Yeah, Thanks, and good morning.
Just another question on margins and thinking more about this in the next year or two I was hoping you could help me think about the <unk> competing forces of you know when we return to a normal world of growth and the normal world of expenses.
There's the potential for margin expansion in one particular year have natural pressures from.
From a return of normal expenses.
Hi, Thanks, so much for the question on what we would say is we expect to continue to drive margin expansion each year, including you know if you thought about returning to a normalized environment Youd add expenses back as revenue came back and so we'd be very disciplined about making sure that the cod, but if you think about.
The new better operating model, where were consulted with pots about today in terms of the you know work coalition.
You can think about sort of areas like long time, lower real estate cost most of the delivery time to an ongoing aon business that was is providing productivity improvements all the time and so there are many areas in which we think the opportunity for margin expansion continues to accelerate.
Okay understood a quick numbers question reinsurance.
<unk> organic in the year was a bit strong and one of the things that was noted was a a timing benefit.
Just help us understand what what the timing benefit.
And when it was from.
Sorry. This is Eric I would say it was pretty minor the reinsurance business continues to be great on a full year basis, but we're obviously in the third and fourth quarter are the smallest quarters for us because most of the treaty business. It's done it's now facultative and any kind of investment banking work that gets done so I would say it was pretty immaterial.
And then the last one just philosophically I'm thinking about share repurchases versus the uncertainty that's come up a lot of times on this call for the next year or two.
<unk>.
How do you think about the uncertainty and get comfortable with the fact that you know at least third quarter was a strong quarter with with repurchases of <unk>.
That that is the right action to take just given the uncertainty that you have.
Hi, Thank you so much because we are managing cash and liquidity incredibly conservatively you can see that as we build top cash and short term investments on the balance sheet you can see it because we decreased debt by 300 million between into Q2 and into Q3, you can see it because we've got a very conservative debt level a long time.
The fun and so were being very conservative in response to the macroeconomic.
And I'm I'm back well you know.
I'll jump in Greg what do I guess, you can go to Michael.
I'm sorry, you know what we see is when managing this based on our free cash flow, which is exceptionally strong I mean free cash flow.
908 million year to date up 91% and then obviously you know the return on capital opportunity. If Sarah purchase is exceptional and it was exceptional at peak stock price levels. The Aon and at today's prices is just a dumbing returns to shareholders and plays well I'll, we'll continue to manage liquidity incredibly conservative late.
And then we'll continue to invest based on return on capital cash on cash returns as we think about the phone, but Greg please jump in yes.
And sort of put it if you think about this in context of our overall strategy. What we're doing with Chris has described it is literally the discipline and the approach we've taken in managing our balance sheet and driving free cash flow and that has been that has been exceptional and that continues to be exceptional and we have the capacity to do a lot as we invest in the business as we do share buyback and then anything that's sort of dry.
As return on invested capital and old and ultimately free cash flow over time, but.
But I would highlight you are seeing the the buyback we again, we have capacity to do a lot. The example that I described around intellectual property is an example, we're investing in the core business and really doing things from a you know from an innovation standpoint. The loan we made the investment to do that you know took hundreds and hundreds of colleagues.
Coming together to model intellectual property in ways never been modeled before but do they never been modeled before in a way that we could actually ensure patent portfolio and then get a loan against about portfolio and so we're making lots of investment in the business and sort of as we build it over time I I Love. The example that John gave yesterday, John Haley on the most <unk>.
Color on climate. So we're investing we see this is one of the next big horizon around how we help clients think about the transition from you know from two kind of in the new climate Challenge World.
And we can help reduce volatility against that I imagine capital at risk and fundamentally. This is what we're that's what we're talking about and the beauty of it is from a cash standpoint, we had an exceptionally strong balance sheet exceptionally strong free cash flow, which will be you know.
Reinforces would come together the combination that allows us to actually do the things that Christa described Alex.
Allocated capital to improve return on invested capital buy back shares obviously makes sense for all the reasons, Chris described but also invest in the business and bring in additional capability as needed. So you know where you say cash. It is the thing we live everyday we focus on in terms of what we're trying to do America and we're working to working to strengthen the build out over time.
Thank you.
I'd now like to turn the call back over to Greg case for closing remarks.
Just want to say to everyone as always thank you so much for joining us we appreciate it and look forward to our conversation next quarter. Thanks very much.
That concludes the conference. Thank you all for participating you may now disconnect.
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