Aon PLC

NYSE:AON

Earnings Call Transcript 2020-Q1

[Operator]

Good morning and thank you for holding. Welcome to Aon Plc’s First Quarter 2020 Conference Call. At this time, all parties will be in a listen-only mode, until the question-and-answer portion of today's call. I would also like to remind all parties that this call is being recorded. If anyone has any 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 1995. Such statements are subject to certain risks and uncertainties, that could cause actual results to differ materially from historical results or those anticipated.

Information concerning risk factors that could cause such differences are described in the press release covering our first quarter 2020 results, as well as having been posted on our website.

Now, it is my pleasure to turn the call over to Greg Case, CEO of Aon plc.

[Greg Case, CEO]

Thanks Elena and good morning everyone. Welcome to our first quarter conference call. I am joined virtually by Christa Davies, our CFO, and Eric Andersen, our President. Like previous quarters we posted a detailed financial presentation on our website. At this time of unprecedented humanitarian and economic challenge I want to start by thanking our 50,000 Aon colleagues around the world for their remarkable dedication, resilience and impressive response to this crisis. It is inspiring to see our colleagues tirelessly going to extraordinary lengths to support each other and connect the firm embracing and united.

Our global team is fully committed to bring in the best of our firm to clients at a time when they need our help more than ever. As we all know, we're experiencing the humanitarian tragedy at a scale that's difficult to comprehend and economic consequences are likely to play out for months or even years to come. The global economy is forecast to shrink by 3% in 2020 and unemployment is increasing around the world. Against that backdrop I'd like to talk about how we're responding as a firm and how we expect to emerge stronger and even more capable.

Our colleagues are the firm and we're committed to their safety and well-being and response to local government guidelines we've canceled travel and events and now have over 98% of our colleagues working remotely. And to ensure our colleagues stay healthy, well and productive we made available to all colleagues virtual learning tools to optimize remote work as well as multiple tools and services around telemedicine and well-being.

We've also increased communication and connectivity across the firm and our leadership teams and our COVID-19 taskforce, accelerate best practice sharing, coordinate our responses and anticipate future impacts to ensure we can continue to deliver solutions for clients. Further, Aon business services operational platform ensures that we can work remotely with secure access to all applications with no loss of productivity enabling our team full access to all resources required to be client be. And finally we're committed that no colleague will lose their job as a result of COVID-19.

Turning to Q1 results. Our team delivered a strong quarter with positive performance across each of our key metrics despite some early disruptions from the impacts of COVID-19 at the end of the quarter. Our results include 5% organic revenue growth with particular strength from reinsurance solutions and health solutions.

Substantial operating margin expansion of 200 basis points to 35.7% [audio gap]

To coordinate our pandemic response for clients our COVID-19 taskforce brings together experts from across the firm to develop, deliver and share solutions from around the world both for our own firm and for clients. In one example as the pandemic quickly escalated in Italy our commercial risk and all solutions colleagues partnered with carriers to address a need for COVID-19 coverage for our clients’ employees. This unique and tailor-made solution provides employees with allowances for hospitalization and recovery expenses in the event they are diagnosed with COVID-19. In addition, the cover provides post hospitalization assistance including domestic assistance, childcare and more. The solution is now available in Italy and Spain and we're working to scale this further across the globe; a great example of our and United team innovating on behalf of clients during a very critical time.

In another instance, in New York our human capital team developed an analytic tool to assess the pandemic risk to a community's workforce in a real speed recovery. The tool they built uses Department of Labor data and Aon analytics to analyze occupational risk by job and location based on more characteristics like proximity and exposure. The team took that model and layered on medical forecasts from health solutions team to map potential impacts by geography over time.

The resulting tool helps communities plan reopening strategies while minimizing risk and prioritizing antibody tests for the highest risk and most mission-critical workers. Currently we're using our model in partnership with community groups in New York, but we anticipate rolling it out to clients communities around the world. And these are just two examples of the many ways in which we're helping clients respond in the new demands of these challenging times.

Christa will elaborate more on our financial results and outlook, however, I would highlight that our business is global diversified and highly resilient given its largely recurring and non-discretionary business and we operate in over 120 countries and virtually every sector and business segment.

It's also important to reinforce that given our strong historic focus on cash flow, we are fortunate to have an exceptionally strong understanding of revenue, cost and cash. Within our single P&L we have the ability to assess cash and other performance by business, by geography, by solution line and by individual offering. This capability has been in place and been further refined every year for well over a decade. With this embedded capability for our business we can compare the current economic environment to the recession of 2008-2009.

We have considered a number of macroeconomic scenarios and their potential impacts to our business. At this unique point in time no one can predict the future. However, we will continue to act from a position of strength on areas that we can control and to protect our colleagues and our clients. Well, we always hope for the best, we've taken steps to prepare for virtually any economic scenario. For Q1, we did see some early impacts of COVID-19 especially in more discretionary areas within retirement and data analytics. Overall, the impact we've seen on revenue and cash ledger April is modest.

Moving forward, we're taking steps in three areas; our top priority is to proactively support colleagues followed by our priorities to manage expenses and conserve liquidity. First we're reducing non-compensation expenses through an effort which began in early March. Second, we paused share buyback and M&A, although we're committed to maintaining our dividend.

And third, we have committed that no colleague will lose their job as a result of COVID-19. In order to protect all 50,000 colleagues, we're asking them to support the firm with a temporary compensation reduction and we're planning for roughly 70% of colleagues to take a reduction of up to 20% of salary which will be implemented in accordance with local practices. While the remaining roughly 30% of our firm will see no reduction. This step is intended to protect 50,000 colleagues and insurers that we are able to continue to deliver with full capability of Aon at a time when clients need us most. Taking these pre-emptive steps now from a position of strength ensures we're able to continue to invest in increasing our relevance to clients as we continue to look to address their unmet needs.

One outcome of the current trauma is that we're seeing it’s a heightened interest by clients and understanding where other areas of major potential risk might exist. Specifically we've seen concerning areas like cyber, climate change and the health wealth gap, which may create future debilitating events.

Up to now these risks have only been addressed in a very limited way, for example, for one client COVID-19 highlighted that when catastrophes happen whether epidemics or natural catastrophes a very key aspect of successful recovery is access to liquidity and capital to match exposures available immediately. To create the cover and fulfill the required speedy resolution our team designed an innovative parametric insurance solution to address earthquake exposure. The program quickly provides our client with a liquidity infusion in the event of a quake and gives them broad discretion on how to use these funds. This product covers our client and the exposure to their employees who may require financial assistance ensuring the resilience and responsiveness in a future crisis.

Driving faster innovation for clients is a key outcome of our strategy and one that we can accelerate through our plan combination with Willis Towers Watson. As our world becomes more complex clients need the unique capabilities that this combination will create. Our two firms have been on similar paths focused on bringing the best solutions from across their respective organizations to clients. As a combined firm we will be able to accelerate progress and become even more relevant to our clients with faster innovation and better solutions.

In summary, our global team has been truly remarkable in the response to the COVID-19 crisis supporting each other and our clients. In addition, they delivered a strong first quarter of progress even at the early effects of the crisis were being experienced. We believe our Aon United growth strategy is positioned us very well to emerge from the current crisis and even stronger firm position for long-term growth.

With that overview I'd like to turn the call over to Christa for her thoughts on our financial results and outlook. Christa?

[Christa Davies, CFO]

Thanks so much Greg and good morning everyone. As I talk about our results, I'll also provide some thoughts on how the macroeconomic environment impacts our outlook and the steps we're taking to proactively and conservatively manage our business and our balance sheet to ensure we retain stability and flexibility and position our firm to continue to deliver shareholder value over the long term.

Our business has strong fundamentals. Our revenue base is diversified across industry, geography and solution line. Roughly 80% is non-discretionary and has a significant portion that renews every year with 95% retention rates on average.

However, given uncertainty around duration and magnitude of COVID-19 and the resulting economic downturn and its impact to our clients and our firm, the near-term we're withdrawing our financial guidance of mid single digital aggression organic revenue growth and double-digit free cash flow growth.

We are also taking prudent steps to preemptively reduce expenses and discretionary uses of cash in order to maintain the strength of our balance sheet and optimized financial flexibility in the event of any future declines in revenue. We are taking these actions from division of strength and know they will position us to continue to protect our colleagues, execute our Aon United strategy and focus on our key financial metrics in the short and long term.

In Q1, we delivered strong operational and financial performance to start the year. We achieved 5% organic revenue growth that translated into solid operational improvement for becoming an unfavorable near-term impact from foreign currency translation.

As I reflect on each of our key financial metrics, first we delivered organic revenue growth of 5%. We strengthen reinsurance solutions and health solutions offset by some early disruption from the impacts of COVID-19 and our retirement and data analytics businesses. I would also note the reported revenue was pressured by FX and the ongoing impact of divestitures from efforts we've described in prior quarters to reshape our portfolio to high growth and higher margin areas.

Second, we delivered solid operational improvement with operating income growth of 8%, operating margin expansion of 200 basis points and 11% earnings per share growth driven by a strong organic revenue growth and ongoing productivity improvement and expense discipline from Aon Business Services.

As we noted in our earnings material FX with an unfavorable impact for approximately $0.03 in the quarter. At today's rates we would expect $0.03 per share unfavorable impact in Q2, $0.04 per share unfavorable impact in Q3 and $0.06 per share unfavorable impact in Q4.

Third, free cash flow was $279 million in the quarter and I would note Q1 is our seasonally smallest quarter for cash flow due primarily to incentive compensation payments. The $279 million this year is an increase from last year's $17 million which was negatively impacted by approximately $85 million of net cash payments related to legacy litigation. The increase in free cash flow was driven by operating income growth as well as near-term actions we've taken to delay certain expenses. We did see an increase in receivables primarily driven by the strong 9% organic revenue growth in reinsurance solutions.

As I looked towards the rest of the year, we have confidence in the underlying resilience of our business and while much of our business is non-discretionary it is impacted by long term macroeconomic factors like GDP growth, employment and property values amongst other things. While we are not providing revenue guidance I wanted to provide a bit more insight into our business that may be helpful in understanding how we may be impacted in various economic scenarios. We have a very stable revenue base with 80% of our revenues in core highly recurring businesses with retention rates of 95% on average.

In terms of our business, 80% of our business is core. Core revenues tend to be highly recurring and non-discretionary and include things like property and casualty or directors and officers’ insurance placements, driver remediation, treaty reinsurance, required actuarial work on pension programs and help a benefits brokerage. Many of these services are regulated, required or necessary cost of doing business. 20% of our business is relatively more discretionary. These more discretionary revenues include project work like risk consulting, transaction liability, human capital consulting, travel and event cover and helper benefits consulting. Much of this book also records and renews every year. So some of it is likely to be deferred or not renewed.

In an economic downturn, we expect to see a larger and more immediate impact in the more discretionary portion of our book. We've already started to see some early impacts of COVID-19 in Q1 as I mentioned and given the overall global economic environment we expect this could be more negatively impacted going forward.

Within our solution lines commercial risk, reinsurance and health include the largest core component, while retirement solutions and data analytic services have the largest components that are more discretionary. More positively as Greg mentioned we see significant opportunities in areas of our business around innovative solutions to address the current crisis, for instance in balance sheet and liquidity solutions for clients.

Overall, we're confident in our strong fundamental business. We did not see material impacts to revenue or collections in Q1 or in April. However, given global economic uncertainty, we're taking steps to manage costs prudently and defer some spend investment in order to proactively get in front of any negative impacts.

Our business is highly resilient and a historic investment in Aon Business Services gives us the ability to make quicker, smarter decisions across the firm to manage expenses. The steps we've taken with our Aon Business Services platform to drive operational efficiency not only help us manage costs and improve margins but also help us continue to manage cash flow and working capital which further ensures our stability and flexibility.

For instance, in Q1 82% of our outside services spend was managed centrally allowing us to manage purchase decisions, ensure we derived maximum supplier value and optimize working capital. This allows us to take steps now to defer preemptively and reduce costs.

I would note that these expense reductions will contribute to near-term margin improvement, however, some like travel and entertainment do not reflect sustainable core operating margin expansion.

Overall, our Aon Business Services operating platform enables us to operate effectively while we continue to run the firm on cash and prudently manage our cash and liquidity positions. In the past [indiscernible] focused and delivered on key financial metrics of organic revenue growth, operating margins, free cash flow and return on invested capital.

In today's economic environment, the context is different but our strategy and tactic to drive performance of our firm remain the same. Our historic focus on maximizing the translation of revenue into the highest level of free cash flow serves us well in this environment as we focus on conserving capital to enable future growth.

These steps and others we've taken to drive operating income growth make progress on working capital and reduce structural uses of cash are perhaps more essential now in this economic environment than ever before.

For instance, we have daily cash flow forecasting across the lines of the cash flow statement. Because we've run the firm based on free cash flows for well over 10 years now this gives us the ability to compare our free cash flow to previous years and in particular to the financial crisis of 2008-2009. This gives us the ability to analyze and take steps to address any challenges by country, by business, by line of the cash flow statement and to look out for early markers or trends for instance from areas that may have been more hard-hit by COVID-19.

I'd also highlight that structural uses of cash in pension, restructuring and CapEx collectively are expected to free up approximately $300 million of cash in 2020 compared to 2019. While we are maintaining our dividend, we have paused our discretionary use of cash, the share buyback and M&A.

We're very confident in the strength of our balance sheet and how we manage liquidity. We do not take on the riding risk and we're committed to our investment grade credit ratings. We manage liquidity risks through a well lettered debt maturity profile with no more than $750 million of term debt coming due in any given year. We have $1.65 billion in committed credit from our $900 million credit facility due in 2022 and a $750 million credit facility due in 2023. We have not had a need to draw on our committed credit despite our seasonally lowest period of cash flow. We also continue to access commercial paper markets from working capital needs in the U.S. and Europe.

We know this prudence makes us resilient now and prepares us to come out stronger. As Greg mentioned, we are committed and excited about our combination with Willis Todd Watson and we expect to file a joint preliminary proxy in the coming weeks followed by a joint definitive proxy and shell of vote which we expect in Q3.

In summary, our colleagues, business and United strategy and our Aon Business Services operational platform are strong and equip us well to react challenging time. The steps we've taken to drive our key financial priorities are more relevant than ever as we manage flexibility and stability in these challenging times. Our disciplined approach to free cash flow and return on invested capital provides stability and flexibility to unlock significant shareholder value creation over the long term.

With that I'll turn the call back over to the operator and we'd be delighted to take your questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is coming from Elyse Greenspan from Wells Fargo. Your line is now open.

[Elyse Greenspan, Wells Fargo]

Hi, thanks. Good morning. My first question, I recognized like and I think we all do the fluidity of the situation and the impact of COVID-19 and obviously you guys wanting to remove your organic guidance for the time being but is there any way that you can give us a sense on – to the best of your abilities right now what the organic view is for the balance of the year? Maybe some kind of wide range from one extent to the other, just so we have a sense of -- is it's still going to be slightly positive flat, slightly negative kind of maybe some kind of range of health, range of outcomes of how COVID might impact the business?

[Christa Davies, CFO]

Yes. So Elyse, we're not giving guidance on revenue and margins as you described because of the uncertainty of the macroeconomic environment but we are managing them very closely over the course of the year and we would expect that if there are any reductions in revenue that we would reduce expenses proportionally to match and very much focused on managing free cash flow to the firm to preserve flexibility and stability over the long term. I would note if you think about the macro-environment Elyse in 2008/2009 when GDP was essentially flat our worst year of organic revenue growth was minus 1%. So we do have a very stable business in global economic recession.

[Greg Case, CEO]

And Elyse I might add. If you think about sort of just put in the perspective it's very important question. It’s to the Christa's reference -- the history and the facts are very helpful to set the baseline. So 2008-2009 just discussed to describe what's different from 2008-2009 and today but we'd say two things are different. One, obviously Aon is much stronger and United strategies 10 years more mature and United blueprint, the plan we have and how we deliver the global firms for clients in place and business services is a real game-changer for us. We didn't have in 2008-2009, driving business improvement, executing at scales.

So all these things are in place. We've also had a very substantial spend on data as you're well aware since then $400 million a year so call it $3.5 billion to $4 billion and we're seeing opportunities around that new and new business generation and retention at all-time highs. So that's different. We're stronger firm.

What's also different though objectively comparing it to then the current economic trauma is likely much worse but we don't know, right now no one knows. Q2 is obviously a problem. In the U.S. greater than 30% reduction in GDP. $26 million unemployment claims for last five months, that suggest unemployment's greater than 20%, EMEA has obviously got a tremendous amount 50 million employees worst potentially affected Asia same place.

Until the duration it is not known. In normal course really is a sort of how fast the recovery going to happen and by geography also going to play out and as Christa described in her script in particular as we want to be in a position to perform in every scenario and that’s what we believe we're set up to do.

[Elyse Greenspan, Wells Fargo]

Okay. And then on the margin side, Christa you said right -- you guys are focused on managing expenses. So it's a message that maybe there's some fluidity on what happens with organic but regardless of the range of outcomes you guys would continue to do the expense management, will continue to expect to show margin improvement?

[Christa Davies, CFO]

So Elyse we haven't given guidance on margins nor giving direct on revenue but we do manage margins over the course of the year and we would expect that we will reduce expenses proportionally with revenue impacts for the full year and I will tell you Elyse what we've done is, we've acted early from a position of strength and we are taking actions on what we can control and we're not predicting the future. We are hoping for the best but we are planning for every economic outcome and so we have taken actions as Greg and I talked about in our opening remarks to reduce expenses ahead of any economic impact we see to ensure we come out stronger and we want to make sure that we are able to deliver for clients in a time of greater need for them.

[Elyse Greenspan, Wells Fargo]

Okay. One last one. You guys announced the merger with the acquisition of Willis at the start of March kind of before the economic slowdown picked up and when you announced the deal you had put forth the target of mid-single digit or greater organic revenue growth for the combined firms and now that deal isn't closed, so first half of next year so would be long-term view of getting back to that mid-single digit or greater organic growth kind of when we come out of this slowdown, is that still the combined view going into that acquisition?

[Christa Davies, CFO]

It certainly is Elyse. We would say, we announced our acquisition, though we announced that combination with Willis Towers Watson on March 9th and we are even more excited about it today than we were then. As we continue to engage with Willis Towers Watson we find that the DNA and strategies of the firm are remarkably similar and we are incredibly excited about the opportunity for clients and the up side to meet unmet client needs and we do believe that the combination has complementary capabilities to be able to deliver to clients and so we certainly see that the upside and revenue over time is very much in line with the commitment to mid-single digit or greater over the long term.

[Greg Case, CEO]

I think Elyse as you think about the potential and John Haley I talked about that really from day one, the entire thesis behind the combination of Aon and Willies Towers Watson centers on bringing the two firms together do really set a new standard in client leadership and impact in the combination as we described is better now with complementary capability as Christa mentioned within solution lines and geographies and segments tremendous opportunity.

But not just better now we think better in the future back to your point on mid-single digit or greater, better in the future with analytics capability, better understanding of working client need, our ability to create new market solutions, etc. all these things come together and really doing something for clients which up to now, no one's been able to really do and address sort of major risk challenges like pandemic, climate change, cyber, health, wealth. Ironically this current trauma has just reinforced in so many ways, the value of the combination and I would agree we would say March 9th we had high expectations having spent more time with John Haley and the team, our high expectations are exceeded and we're really looking forward to the next steps.

[Elyse Greenspan, Wells Fargo]

Okay. Thanks for the color.

[Operator]

Thank you. Our next question is from Meyer Shields of KBW. Your line is now open.

[Meyer Shields, KBW]

Thanks. One quick question on the recurring revenue stream. I think Christa when you talked about 80% of that being recurring is that in a normal scenario? We don't have a lot of small businesses going out of business or is that sort of framing the current expectations?

[Christa Davies, CFO]

That's framing the current expectations Meyer. We would say is 80% of our business is core and core tends to be highly recurring, non-discretionary things like property and casualty, DNO, cyber treaty, actual work on pension plans, etc. but 20% of our business is more discretionary and more discretionary much of this recurs and renews each year and so we do have a very stable and resilient business. Less than 1% of our revenue comes from any single client and we operate in 100 countries, different industries, different segments of the economy. So we feel very good about the resilience of our business.

[Meyer Shields, KBW]

Okay. No, that's helpful. Greg, can you talk on a big-picture perspectives about the compensation reduction and what that could imply for employee retention?

[Greg Case, CEO]

Well, I would say Meyer from our standpoint, first take a step back that now we're really focusing on creating value for our clients and taking care of colleagues and really to emerge as a stronger firm. I will tell you, we reflect we're humbly proud of the principles based approach we've taken and the commitments we made and it really come true as we described before. A lot has happened in the world and while everyone's hoping for a bounce-back, the ultra result will be by the way the bounce back to a major recession, I guess is what everyone is anticipating but no one really knows what it's going to look like and how long it's going to look and we step back and listen we've got to be in a position in any scenario to perform on behalf of clients -- on behalf of colleagues.

And for us, first I would just ask you to consider the foundation upon which we made close and important metric for a better part of a decade. That coupled with Aon Business Services, really is a very unique perspective on where we stand at any time and this is really all aspects of performance cash all aspects and ability to execute decisions across the board.

And by all measures, I mean look at the quarter, look at the results, we currently stand in an exceptionally strong position. We know that and we know that very well. We also know what all the scenarios look like, all the economic scenarios irrespective of how remote and for us it's an absolute priority to have our entire firm in place to support clients and a potentially historic and sustained downturn and if you take this priority seriously it requires you to take difficult steps now as Christa highlighted to protect 50,000 colleagues.

And so, the alternative by the way is to hope and hope that the current downturn really comes back to 2008-2009 revisited that alternative by the way puts client leadership fully at risk at the very time clients might need it the most and there's no doubt in every respect that's the easier path to take you can sort of shade over a lot of things along the way and we have essentially said, listen we desperately hope that's the outcome but if it's not we want to be in an absolute unique and pristine place to help our client succeed and protect our colleagues. And what I would highlight is we're going to, we fully anticipate coming out a much stronger firm and this really comes back to our investment over the last decade in Aon United.

I'll tell you something for our team, we often talk about Aon United and the capability in positive times but it turns out Aon United it is equally meaningful in times of challenge and this decade of investment in Aon United means we can take a global set of actions that we know will be difficult maybe for others to do but for us a global set of actions that really puts us in a position to support clients in every scenario.

So our colleagues around the world have done very-very unique things and very-very strong things and we're excited right now about our ability to help clients in times of need, irrespective of what that comes out. So from our standpoint we're going to be a stronger firm coming out of it and we're taking steps, so that we can take, that we know it’s important or the right answer for us to make that happen.

[Eric Andersen, President]

Hey Greg, just to jump in a little bit on one of the examples, we talked about the COVID-19 taskforce in your early opening but I think it's important to recognize, this is the fourth time we've activated that group, going back to 2009 whether it was H1N1, SARS, Ebola. So this group is a group that consists of experts across the firm from everything from epidemiology to credit risk to capital solutions and liquidity; all different capabilities around the world and essentially what they're trying to do is innovate on behalf of clients, whether it's trying, whether they're working on, how they're dealing with their employees, how they are thinking about return to work, how they're working on capital solutions and liquidity for the firm it really is across the entire firm learning from areas of the world that were affected early being able to share best practices and so there is an advisory part of it for sure but more importantly, I think we're trying to help them think through on an innovative new way that you actually can't do until you pull all the capabilities together with one guiding principle of trying to help the clients get through this and so while the salary piece is one part there was a lot of innovation that we're pushing and working on to be able to help those clients get through the challenge.

[Meyer Shields, KBW]

Yes. Completely understood. Thank you very much.

[Operator]

Thank you. We have a question from Suneet Kamath of Citi. Your line is now open.

[Suneet Kamath, Citi]

Thanks. I just wanted to follow up on the base salary reductions. Can you just give some feedback in terms of how the employee response has been? It seems like obviously a pretty dramatic steps. So just curious what you've been hearing since Monday's announcement?

[Eric Andersen, President]

Yes. It really has been [indiscernible] for us. Again I would sort of come back incredibly strong positive reinforcement on Aon United and what we're all about. Again imagine when we essentially step back and ask our colleagues around the globe and our leadership team, how do we actually prepare on behalf of clients and we looked at all the scenarios and again as I highlighted the alternative right now for us is to hope that the current downturn ends up being a recession which by the way we hope too.

We hopefully celebrate that not that's the case but we all realized at the time, the difficult choice is how do you protect 50,000 colleagues to serve clients in the most effective way and you recognize that if you wait and the downturn becomes more acute how do you actually have them there, how do you support the colleagues to do that and we collectively made a decision that we are going to take the steps we took because we know again in addition to protecting 50,000 jobs, our ability to continue supporting clients is extraordinary and so that was the piece.

It was obviously, when we talked about it on Monday I would say since Monday what's happened around the world has really been our colleagues have embraced it and understood exactly what we're trying to do and as I said before we're coming through this a stronger firm and if we're wrong Sunnet, if we're wrong by the way, I hope we're wrong we hope it ends up being a recession in the end our colleagues know we took steps that perhaps, it would be hard for other people to take to support clients and that if we're wrong we basically remediate all the actions we take and mitigate our actions, no problem whatsoever and they've done something no one else could do.

And the fact that we could act across the firm in Aon United fashion is pretty unique and it actually has been incredibly invigorating as our colleagues have actually put this in place. Among other things as we have reduced expenses and done a number of other things Christa described that package puts our firm in a unique position to perform in ways really no one else could do under any scenario.

[Suneet Kamath, Citi]

Got it and is there any way that you can help us think through the size of the expense reductions that just may be as a percentage of total expenses just to help us frame how impactful what you guys are doing will be?

[Christa Davies, CFO]

Suneet, we haven't given guidance to the size of this. We would say that so far the expense reductions we've taken a modest and we're not giving guidance on revenue or margins but we would say that as if revenue were to come down that we would reduce expenses proportionally and we're also very focused as I mentioned earlier on cash and making sure that we maintain a very strong cash position. It's always been the way we run the firm. We have unique insight and visibility into our cash flow byline of the cash flow statement, by solution line and one of the things I would say is we've taken a number of actions on the non-salary side and we did that first. We reduced a number of expenses things like T&E, things like third party spend much earlier in Q1 and so we are taking action for a position of strength in advance of impacts we observe.

[Greg Case, CEO]

One other thing just to highlight Suneet in context of this is as we talk to client similar to the long discussion with the clients and month leading up to our decision on sort of what we've done across the board on the different aspects and when we explain the principles based approach our clients, not surprising are incredibly grateful. They understand what happened. They understand our inability to serve them if you take different courses when things get difficult and candidly some of our global clients have asked for the playbook. They don’t [indiscernible] said how do you do this around the world in different geographies and make it work and we've described to them what Aon United is all about, how it's played out over a decade, how we built out foundation over time and then seeing us come together support each other in an ability to support them in time to need whatever those times are has been also frankly inspiring for our colleagues to sort of get the reaction as clients recognize what we're doing on their behalf.

[Suneet Kamath, Citi]

Got it. Okay, thank you.

[Operator]

Thank you. Our next question is from Jimmy Bhullar of J.P. Morgan. Your line is now open.

[Jimmy Bhullar, J.P. Morgan]

Hi good morning. So I had a few questions. First just on the impact of COVID, you discussed the sensitivity or the exposure of the various businesses but on the commercial risk business, your organic growth was decent 4% but it had been like 6% to 7% in the past couple of years actually and so is the decline just tougher comps or is it more just slow down in March and is it reasonable to assume that that's a business that could potentially turn negative in the near term?

[Greg Case, CEO]

Yes. Looking to my standpoint now we feel very strong momentum in commercial risk across the board as we highlight again in the first quarter. We were touching on some of the impacts come in at the end of the quarter in terms of sort of overall where we are but net we feel tremendous momentum sort of across each of our solution lines particularly as we're connecting with clients. And there are a number of things that are happening sort of in those solution lines as they currently exist as well as our ability to candidly generate net new business I described before. Net new business for us all-time high, retention all-time high, roll over all-time high and there's just in the business it's also the net new things we're doing. Maybe Eric, can you talk a little bit about some of the bright spots that we're seeing across the playing field here as well as some of the new initiatives that we are put in place.

[Eric Andersen, President]

Sure Greg. There's a couple in particular certainly in the DNO area the work we're doing around distressed companies in particular has really created some opportunity for us and also trying to create liquidity using surety bonds, to place letters of credit in other areas along the lines I would say balance sheet protection and providing financial liquidity are just things that honestly today the clients are very interested in dealing with but also I would say just our traditional business and how we're providing advice and how helping clients do structuring and understanding the different areas where perhaps they can take more risk themselves or perhaps combined programs things along those lines. But we're pretty optimistic with the business as it came through the first quarter.

[Greg Case, CEO]

You look at the 80% that Christa described incredibly strong core, the 20% we are working through but these net new areas are very strong, very powerful in terms of how that plays out over time to build a momentum of the business.

[Jimmy Bhullar, J.P. Morgan]

But you would expect the slowdown in that business as well in the short term though, right? In commercial?

[Christa Davies, CFO]

We would expect is as I talked about the components of a business, we would expect our commercial risk, our reinsurance and our health businesses to have a much higher percentage of call than the rest of our business because the businesses are highly recurring non-discretionary and as Eric said they're regulated and required and offered a necessary cost of doing business even firms in financial distress.

[Jimmy Bhullar, J.P. Morgan]

Okay. And then just on the Willis deal, I think there was sort of -- on the part of Willis investors they were somewhat disappointed with the modest premium and obviously that you offered on the takeout and on top of that your stocks declined a lot but many Aon shareholders are also concerned about you potentially raising the offer especially given sort of the super voting requirements at Willis. Can you sort of discuss if the deal does not go through as proposed, would you be willing to walk away from it or is there a possibility you actually consider a higher bid?

[Greg Case, CEO]

And Jimmy, to be from my standpoint, listen we've been engaging with our shareholders and John Haley and team with their shoulders on the [indiscernible] what’s inside our feedback has been exceptionally positive. Again when our shareholders really started to understand and Willis starts to understand what this combination can do it's extraordinary and there is just no other way to describe it and it's extraordinary on behalf of clients. It's extraordinary in the now as I described for a bit the solution line complimentary pieces very-very positive, geographically very-very positive, in terms of what we're trying to do the segments are very positive.

Obviously the future equally strong or stronger with analytic capability that lets us do things around understanding client need and creating that new markets that are extraordinary. So I think our investors see that potential are incredibly excited about it and Willis Towers Watson see the same incredibly excited about it, obviously the structure of the deal means the share price movements down are really less relevant in terms of where we are at all and so that's opportunity is extraordinary.

Then obviously not to mention, we highlighted in 100 million in synergies and that isn't changing in any way shape or form. So from our standpoint, this is really about the upside in the revenue potential and new solutions for client and we're incredibly excited about it, continue to be and as I said before ironically if there's one thing about this current crisis, it's pandemic, it really highlights the need for higher octane, higher capability, higher insight and you want that, you go to Aon Willis Towers Watson that's really what we're talking about. So that's really been one of the observations our shareholders have made and so it's a Willis Towers Watson as we engage with them.

[Christa Davies, CFO]

And Greg, I would just add, I think as we look forward Jimmy we're very excited about the combination. You could hear the excitement in terms of even more excited today than we were we announced it on March 9th and going forward we expect sort of two big milestones; the first is we're going to follow up for preliminary proxy in the coming weeks and the second is in Q3 we will file a defender proxy and have both shareholder votes. So we're very much looking forward to those milestones and looking for the combined capabilities to be able to serve client needs better than we do today.

[Jimmy Bhullar, J.P. Morgan]

Thank you.

[Operator]

Thank you. Our next question is from Dave Styblo of Jefferies. Your line is now open.

[Dave Styblo, Jefferies]

Hi. Good morning. Thanks for the questions. Appreciate the global diversification and solutions that you guys can provide clients during this time and I said that can help insulate the business, at the same time -- at the same time everyone's trying to figure out and assess the impact of what larger companies might dial back down from the discretionary standpoint and smaller companies that may not able be able to survive.

I'd like to pick a little bit more up to 80% of the business that's non-discretionary. I'm curious just to make sure, I understood comments there is that already contemplating companies that may not be able to survive in that situation where even though it's not discretion, they're just not there anymore or if it's not, can you provide a little bit more color about the revenue breakdown by employer size, whether how much of that is from employers with a [indiscernible] thousand plus employees versus span between 100 to a 1,000 or less, 100 to give us a sense of what might be at risk in that book.

[Christa Davies, CFO]

Absolutely. So as we think about our business it is globally diversified. It's diversified across clients, across industries, across geographies. We do operate in over 100 countries and no one client actually makes up even 1% of revenues and so we're very fortunate to have a very resilient business. As we look at our business in that 80% of the core, it's highly recurring, non-discretionary activity where many of these services are regulated required on necessary cost of doing business even for clients of financial distress, even for clients who are potentially entering bankruptcy, many of these services are still required, and so we have real opportunity to actually provide liquidity and capital solutions for clients in financial distress.

And as we think about even client size, Dave we are very well diversified there too and so we feel good about the core part of our business being extraordinarily resilient. The 20% of our business is more discretionary. The discretionary revenues include things like project work, in risk consulting, transaction liability, human capital consulting, up travel and events business and so much of this actually recurs and renews each year, it just may have the opportunity to be deferred slightly which is what we did see in Q1 in our retirement and data analytics businesses.

[Dave Styblo, Jefferies]

Right. Okay.

[Eric Andersen, President]

So Christa, maybe just to come up on a point of that just to drive it a little bit in that like on the transaction liability it is tied to deals being closed on construction projects for bonds. It's tied to putting a shovel in the ground. So those events will eventually happen. They're just essentially been deferred until those deals come back in.

[Greg Case, CEO]

And also Dave, this is not a static position, remember as Christa and Eric just described, we keep evolving. So the new offerings Eric described before the new solutions, client need change. So we reinforce the 80 and then we actually change and build the 20. So it isn't just a zero-sum game and the work we do is in the investments we can make on behalf of clients and now we're going to be able to make in any scenario on the behalf of clients is a very unique position.

It's also why in the end you end up seeing particularly in times of stress of like the quality, where the clients just literally come to places that they know they can get great results and great service and great capability and we're very fortunate and we're seeing a lot of that too. So there are lots of things that put us in a unique position we think to actually perform exceptionally well in the current environment or frankly any other environment one can imagine.

[Dave Styblo, Jefferies]

Okay. Great.

[Eric Andersen, President]

I think we saw that a lot in reinsurance. Certainly with the pandemic models, the ability to access capital globally and so I think you saw some of that in particular in reinsurance this quarter.

[Dave Styblo, Jefferies]

Sure. Right. That's helpful. And then maybe to shift a conversation back to the margin side, I appreciate the comments there and the flexibility to manage through revenue pressure, through operating expenses. Obviously there's a wide range of outcomes but as you've modeled this and thought through the levers that you can pull on your end how much of a revenue decline and for how long can you absorb that without margins coming under pressure year-over-year?

[Christa Davies, CFO]

Look it's a great question Dave and what we would say is we're not giving guidance on revenue or margins and it's obviously very uncertain both in terms of the macro impact and the duration as you described. What we have done is we have acted on position of strength and we've taken definitive steps in Q1 to reduce non-people expenses, third-party expenses, T&E, etc. and our investment in the Aon Business Services platform really enable us to do that far more effectively and far more quickly with third-party providers and we continue to do this early and ensure that we're taking those steps proactively to ensure that we can handle whatever comes in this uncertain environment and until we come out of this stronger, delivering for clients in a time they need us most and I'd finished by saying if there are potential revenue impacts in the air we've also seen somewhat early on in Q1 in our discretionary revenue then we will reduce expenses proportionally.

[Dave Styblo, Jefferies]

Okay. Thanks Christa.

[Operator]

Thank you. Our next question is from Paul Newsome of Piper Sandler. Your line is now open.

[Paul Newsome, Piper Sandler]

Good morning. Thanks for the call. You folks have made a lot, Aon has made a lot of acquisitions and divestitures in the financial crisis. How would the 80% recurring

number look and compare and the business mix change from the financial crisis if we're trying to compare and contrast the two periods?

[Christa Davies, CFO]

Yes. Look it's a really good question Paul. And one of the things we've spent a lot of time on is, not just on the revenue on margin slide but actually on the cash side too and comparing where we are today in terms of our portfolio versus the 2008/2009 financial crisis. The thing we would say is our business is far stronger today both in terms of the overall portfolio and the recurring and non-discretionary nature of it versus the financial crisis and the Aon Business Services platform which has allowed us to reduce non-people expenses very quickly, for example 82% of our third-party spend is all managed centrally and so we were able to through our online procurement platform actually just turn off that spend and deferred payments immediately in Q1.

And so we feel very good about our overall business portfolio from a revenue and sort of margin point of view but equally from a free cash flow point of view because we've been managing the company on free cash flow for well over 10 years including through the financial crisis which allows us to compare cash flow over the last couple of years by day, by line of the cash flow statement, by business and also to see how the impacts are better or worse versus the financial crisis. So we feel very good about our insight and the strength of our business to manage through. It's extremely resilient.

[Eric Andersen, President]

And remember Paul as Christa described before on these calls, as we thought about capital allocation by the way pre-crisis, at crisis, post-crisis back in 2008-2009 it really hasn't been an allocation of capital based on return of investment capital, cash on cash return, which means the businesses we brought in since the crisis by definition if you're going to meet that our higher margin, higher growth, our higher free cash flow businesses in terms of sort of what we're up to and we've also been a fair period of time done things as we thought about return of investment of capital that really has changed our ability to kind of creating a cash margin, cash flow margin against revenue overall in terms what we're trying to do. Working capital improved overtime. So the translation of cash from a dollar of revenue has also improved. So we've changed the business mix and strengthened our ability to generate cash over that period of time. So all those things contribute to a stronger Aon now than we were in 2008/2009.

[Paul Newsome, Piper Sandler]

No question on the margins and cash flow are higher than they were back there dramatically but I guess I was looking for particular examples that they have been changed that would have been more resilient as opposed to dramatically higher margins obviously? My second question is just an accounting one. When the insurance companies allow customers to delay payment how does that run through your income statement?

[Christa Davies, CFO]

So we actually haven't seen that yet full but if they were to allow because I think what we've seen in certain areas is in the consumer lines also or things like that but we haven't seen it in our business so far.

[Paul Newsome, Piper Sandler]

Just how is the accounting do you know yet?

[Christa Davies, CFO]

So we would still recognize revenue pool because we'd be placing the business. It would then be a collection of cash issue.

[Paul Newsome, Piper Sandler]

Great. Thank you very much.

[Operator]

Thank you. Our next question is from Michael Phillips of Morgan Stanley. Your line is now open.

[Michael Phillips, Morgan Stanley]

Thank you. Good morning. Greg, a couple times in your comments you've mentioned the difficulty -- some of steps you're taken, the difficulty that others would have on a global basis and I assume you're part of that is the salary cut that you're talking about but I guess could you give some examples of other things that you refer to there that would be difficult for competitors to do?

[Greg Case, CEO]

Yes. I actually, I mean just like start with we don't make it a practice actually to comment on competitors or others. So we really shouldn't comment on them in any way shape or form. But what I would highlight is Aon and that really is that it's a place we know well, that's where we focus on every day and we would say it just step back and think about the steps we've taken to position our firm to be able to serve clients in any circumstance and protect our 50,000 colleagues, the investment in Aon United for the last decade has put us in a position where we can sit together and look across our global firm with our teams in place in every way shape or form.

They come up with a point of view that they know it's right on behalf of clients and they know we can execute it now, not just because it's the right thing to do because that's just this one step but because we've come together.

We actually are supporting each other in ways we haven't before and Aon Business Services allows us to execute it. So when you think about the overall package, we step back, looked at the scenarios that the economy as it’s evolving and said listen under every scenario one can imagine, particularly given the uncertainty how do we make sure we're ready and the ready is by the way the expense pieces that Christa talked about that are non [indiscernible] related and this is Aon Business Services at its best.

I mean we're doing things instantly that used to take us -- you had to build consensus over time. Our teams got extraordinary capability there. We obviously did things around the buyback and M&A that are much more straightforward but what we do on Aon business services is very unique and it really supports what we do on efficiency and productivity, but it really as the team, as how they come together in every way shape or form in terms of sort of where we are and what we're up to and that's really what's been different and that's what's unique about Aon United.

[Eric Andersen, President]

Hey Greg, I think there's also another component that's worth mentioning in that, a lot of what we've done about ABS is really about leveraging our capability and getting it out globally and so we're able to deliver for clients today using our technology, being able to connect with markets, being able to connect with clients actually pulling global capability to a client virtually, in a way that actually allows them to move forward with their business, to understand the risks they've had.

Certainly the things we've talked about in the past we're continuing to work on whether it's the mortgage business, whether it's building an intellectual property market, whether it's working on transaction liability type NGAs we're continuing to move forward in terms of product creation using the technology investments we've made historically trying to get in front of what we perceive as client need that's there today but also what we think is coming as people return to the workplace. So it's not just the expense side. It's actually the front end value creation that we are leveraging using the investments that we've made in technology and business services.

[Michael Phillips, Morgan Stanley]

Okay. Great guys. Thank you very much, appreciate the color.

[Operator]

Thank you. Our last question is from Phil Stefano of Deutsche Bank. Your line is now open.

[Phil Stefano, Deutsche Bank]

Yes. Thanks. I appreciate the color commentary around the discretionary versus the more discretionary breakout of the business. I guess, is there any way qualitatively you can help us understand maybe a proportion of business that's dependent upon volume or number of exposure units something along those lines?

[Christa Davies, CFO]

I mean the place I'd start with is 80% of our business is core and our core revenue is highly recurring, non-discretionary and many of your services are regulated required and necessary cost of doing business even for businesses and financial distress or potentially going into bankruptcy. And so it is an incredibly stable and resilient business. It's globally diversified. It's diversified by industry, client, segments, etc. And then we'd say for the 20% of business is more discretionary much of this recurs and renews every year and so we do see that being actually quite strong too. There is some project work in there which could be deferred as Eric described.

As we think about impacts from GDP there are obviously as I mentioned impacts from GDP or employment levels or asset values and we may see exposure to go down but we do often see clients buy more in these circumstances given the increased risk that the current crisis is highlighting to them.

[Phil Stefano, Deutsche Bank]

Okay. From the perspective of the comp reductions, can you just help us think about the timing of this? Are there employment regulations in certain regions that maybe complicated versus other regions maybe just how we think about there -- how this might flow through from a timing perspective?

[Greg Case, CEO]

No Phil, back to the prior question around sort of 10 years ago, would we be able to do this without Aon United and what we are. The answer is no we're executing very, very quickly on an overall game plan to support our firm in a way under 50,000 colleagues. So we can support our clients and every single scenario one can imagine. So no actually what we've done essentially is put all these in place and we're seeing an astray kind of voluntary where [indiscernible] volunteer it's been actually done exceptionally well by country around the world with our leaders in EMEA and doing amazing work in Asia and Latin America, amazing work coming together in our U.S. and Canadian, it's just exceptional sort of frankly towards of course on leadership around the world.

And so we've tailored to local markets but now the timing is immediate, are relatively immediate in terms of sort of days, weeks, not months in terms of sort of where we are. So happening very, very quickly and it's something we can do now that we couldn't have done 10 years ago, impossible.

And we couldn't have executed it and actually taken some of the things Eric described and actually scale them around the globe, impossible. Today with Aon United, we not only, can do, we can do it actually in a way that actually strengthens the firm and builds the firm. We can do it in a way that protects our colleagues and our clients and we can do it in a way that candidly gives us a position to actually strengthen our firm coming out of the crisis, which is why this investment in Aon United as I said earlier has really been wonderful in positive. We're in good environments turns out this environment is really shows us that it's incredibly powerful in the more challenging environments as well and it really is accredit to our colleagues around the world. They've just been extraordinary.

[Christa Davies, CFO]

And look, I would say Phil, as we think about we are obviously not going to give any revenue or margin guidance but this along with other expense control measures we will, if we do see revenue declines during the year we will decrease expenses proportional with revenue as we manage through this uncertainty and so we're very focused on the incredibly stable revenue base we have as we've described and the resilient business we have to navigate through this helped serve our clients and come out of it stronger.

[Phil Stefano, Deutsche Bank]

Good. Okay. Thanks and be well.

[Operator]

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

[Greg Case, CEO]

I just want to say again truly appreciate everybody participating on the call today and to our Aon colleagues around the world excited to be with you and so that we push through this environment and emerge much stronger on the other side. Talk to you soon. Thanks very much.

[Operator]

And that concludes today's conference. Thank you for your participation. You may now disconnect.