Aon PLC

NYSE:AON

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, and thank you for holding. Welcome to Aon plc's Third Quarter 2018 Earnings Conference Call. (Operator Instructions) I would also like to remind all parties that this call is being recorded, and that it is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities 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 third quarter 2018 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. Please go ahead, Greg

[Gregory Case, CEO & Executive]

Thanks, and good morning, everyone, and welcome to our third quarter conference call. Joining me today is our CFO, Christa Davies. In addition, we are excited to have our Co-Presidents, Eric Andersen and Mike O'Connor, join the call today. As highlighted last quarter, we intend to use our time on the call to provide you with more insight into the longer term view for the firm, with greater transparency into strategic initiatives. Also, like last quarter, we posted our detailed financial presentation on our website. We believe this approach provides a more thoughtful, long-term focus towards operational performance, including examples of investment in growth areas that are strengthening our capability to serve clients. Mike and Eric will be great additions to this discussion to give you another perspective on the power of leading Aon United.

With that opening, we'd like to start by noting that our colleagues around the world delivered another strong result for the third quarter, with positive performance across each of our key metrics, including: 6% organic revenue growth; 190 basis points of margin expansion; 18% operating income growth; and 34% growth in EPS; and a similar strong performance across our key metrics year-to-date, reinforcing our continued long-term momentum, which Christa will discuss a little bit more in a bit.

This continued momentum is a direct result of the strategic actions we've progressively taken to build upon the idea of leading Aon United and the impact it's having at scale on our business.

As discussed last quarter, we've been laying the foundation for Aon United for over a decade, evolving our portfolio, investing in new content and capability and aligning client demand through programs like Aon Client Promise, all focused on increasing our relevance and strengthening our ability to deliver value for clients.

More recently, over the last few quarters, we've taken steps to further reinforce and amplify this progress. In doing so, we've truly entered the era of Aon United, through structural changes that break down barriers and make it easier to deliver the best of the firm to clients: a single leadership team; a single P&L; a single brand; a single operating model. Most compelling, a united global professional services firm.

Just last week, we announced another reinforcing step in this journey: The formation of our New Ventures Group, a team of leaders from across the firm who've created additional capacity to build on our already industry-leading record in innovation and further accelerate new sources of value for clients, led by Tony Goland as Chief Innovation Officer. The benefits that accrue when our global firm effectively works together are distinctive and unmatched in the industry and are unlocking significant value for our clients through greater innovation and superior, tailor-made solutions that fit their specific business objectives. Let me give you 2 quick examples. The first is an example of how our strategic investment in client-serving capabilities led to connections across solution lines and geographies in our core business that created unique client value. And the second is an example of how we're expanding the marketplace by attacking new business challenges on behalf of our clients.

The first example. I was recently with one of our enterprise client leaders, which is a team of business advisers that coordinates Aon's value proposition for a select group of significant clients and a large private equity client. And we were discussing the needs of their portfolio companies. And in doing so, it became clearer that they wanted to put their balance sheet to work in new ways and that they aspired to create value outside of traditional PE opportunities. Our enterprise client leader connected that aspiration to our pension de-risking capabilities, and we began a conversation about the opportunity to apply their capital to help de-risk the pension obligations of their portfolio companies and potentially, beyond that, in the broader marketplace. By doing so, we expanded the conversation from risk mitigation to value creation. This is likely to be a new source of value for the client over the coming years and was made possible by the connection our enterprise client leader made between our commercial risk solutions capabilities and related offerings in Retirement Solutions. This example also demonstrates how the enterprise client group could help us create a templated approach to value creation and that we can replicate across sectors. And more broadly, how that, that team is helping us institutionalize our approach to Aon United growth opportunities and developing best practices designed to make it easier for all of our client-facing colleagues to bring the best of our firm to clients.

This second example is all about marketplace expansion, as we continue our focus on expanding the marketplace by developing solutions to our clients' most pressing business needs. In Q3, we continued to invest behind cyber, with the launch of our silent cyber solution, driven by analytics and backed by an evolving reinsurance solution to help carriers respond to expanding cyber risk and regulations.

Our actions are translating into accelerated revenue growth. Aon United equals growth, which you can see from both the quarter and the year-to-date in 2018 versus 2017. More important, it'll be driving -- a driving factor toward delivering on our goal of mid-single-digit organic revenue growth or greater over the long term as we expand the market, shift towards faster-growing areas of client demand and continue to increase market share.

With that, I'll turn the call over to Christa for our thoughts on our progress year-to-date and long-term outlook for continued shareholder value creation. Christa?

[Christa Davies, Executive VP & CFO]

Thanks so much, Greg, and welcome, everyone. As Greg described, the steps we're taking to lead Aon United drove another strong performance for the third quarter. I would note that our progress year-to-date continues to reinforce both our short- and long-term financial targets. Our performance year-to-date through the third quarter reflects: organic revenue growth of 4%; an acceleration from 3% year-to-date in 2017.

In addition to accelerating organic growth, M&A is continuing to contribute, both improving the mix and driving total revenue growth of 10% year-to-date. Adjusted operating margins increased 210 basis points year-to-date and acceleration from our historic average of 70 to 80 basis points a year over the last decade. Accelerating revenue, combined with significant margin expansion, is delivering strong operating income growth of 19% year-to-date, with core operating income growth reflecting 10% or more than half of the year-over-year performance.

Core margin expansion year-to-date is up 50 basis points, and I would note this includes the absorption of near-term investments in client-facing capabilities to support the Aon United growth initiatives that Greg highlighted.

EPS growth of 29% year-to-date, placing us firmly on track to exceed our short-term target of $7.97 in EPS in 2018.

And lastly, reported free cash flow increased substantially, reminding you that the prior year included cash tax payments related to the divestiture. Strong operational performance contributed to year-over-year growth, partially offset by increased restructuring outflows reflecting this is expected to be our peak year of restructuring cash usage.

Adjusting for the impacts of the divestiture, underlying free cash flow grew 5% year-over-year, including a discretionary strategic decision to pull forward $80 million of pension contributions into the third quarter.

Our continued momentum and long-term outlook are amplified by the investments we're making across the portfolio to support Aon United growth objectives of mid-single digit organic revenue growth or greater over the long term, and in our Aon United operating model to drive ongoing productivity improvements.

As Greg discussed, we're investing organically and inorganically, in both talent and in capabilities across the portfolio in the highest return on invested capital opportunities, which are often driven by areas of client demand, where we find new ways to add value or more effectively service clients' unique business needs.

One example is the operating leverage we're creating in our Affinity business, by designing and building an application that will create a differentiated solution for small businesses who prefer digital channels to help navigate their buying process. Through the creation of our next- generation global business services model, we're creating greater scalability, productivity and operating leverage, including the continued expansion of captive and outsourced service delivery centers, which will contribute to the substantial cost reduction. This is just one example of productivity improvements from our single operating model that will continue beyond the near-term restructuring program. Ongoing productivity improvements, combined with accelerating revenue growth and a portfolio mix shift to higher-margin businesses, are expected to drive continued long-term core margin expansion.

More importantly, an accelerating growth profile, increased operating leverage and continued progress on working capital initiatives gives us confidence in our ability to deliver on our goal of double-digit annual growth in free cash flow over the long term. As I mentioned before, 2018 is expected to be the peak year of cash usage related to the restructuring initiative. Declining uses of cash for restructuring, CapEx and pension are expected to free up $650 million of free cash flow by the end of 2020, significantly increasing our capital flexibility to invest in value creation opportunities.

With an expectation of strong free cash flow growth, combined with an opportunity for substantial additional leverage in 2019 and 2020, we're diligent about maximizing return on invested capital and make all capital allocation on this basis. This is highlighted by the $1.25 billion of share repurchase year-to-date, which remains the highest return on capital investment given our free cash flow valuation.

In summary, we continue to accelerate revenue growth through significant investments in client-facing colleagues and capabilities to deliver Aon United, and we're driving substantial free cash flow generation that's expected to unlock significant shareholder value creation over the long term. With that, I'll turn the call back over to Greg.

[Gregory Case, CEO & Executive]

Thanks, Christa. As mentioned earlier, we are glad to have Mike and Eric join us on the call to help provide further insight into how Aon United creates value for our clients and drives growth for the firm. Now going back to questions from our Q2 call, several questions revolved around the very topic, around creating value day-to-day. And today, we want to pick up on that line of questions from the last call and kick off today's discussion with a perspective from both Mike and Eric on this topic.

However, before we turn to that question, I'm going briefly talk about each of these leaders and their importance to our firm. Eric has spent over 20 years at Aon and in that time, he's led and contributed to virtually every part of our business: he's held regional leadership roles in our commercial risk and health businesses; he's taken on the global leadership role in Reinsurance Solutions; he's most recently added Retirement Solutions, working with our colleagues to create connections between our insurance clients and our Investment Solutions. And of course, all those solutions are incubators for some of the most innovative uses of data and analytics. So he's had the opportunity to support this portfolio and understand the power of the insights we deliver to clients through data and analytics. Eric is also very well-known and trusted by our market partners. And perhaps most important, Eric's been in the ring as Aon has evolved over the years and has a unique appreciation for the importance and potential of our Aon United growth strategy.

Mike has been with Aon for over a decade. His background in client service, coupled with excellent operational leadership, provides unique perspective on how we develop and commercialize insight and most effectively connect it to client need. Like Eric, Mike has held a broad range of leadership roles at Aon, most recently as CEO of our Commercial Risk Solutions, Health Solutions and Affinity Businesses. In that role, Mike championed an M&A agenda that has seen us build new capabilities related to emerging risks like cyber, intellectual property, both of which are consistent with our commitment to create new sources of value for clients. It's also worth noting that Mike spent a great deal of time in London working out of our global headquarters, which provided him more global perspective on the firm and a more nuanced understanding of the Lloyd's marketplace, and that's important to our clients.

Now back to the question on Aon United and its impact at the front line of our firm. Eric, can I ask you to take the first cut at addressing that, and Mike, you can follow on.

[Eric Andersen, Co-President]

Thanks, Greg. It's a privilege to be here with you and Christa, and thank you for the great question. Before I begin, I just want to echo Greg's comments on Mike and tell you how excited we are to be working together. As Greg referenced, we've known each other and worked together closely for over a decade, and that collaboration has been a great foundation and is really the spirit of Aon United.

So on the Aon United question, where to begin? This is just something that has become so fundamental to the success of our firm. When I talk about the unique benefits of Aon United with our clients, I always start with our colleagues because that's really where the value originates. Our colleagues are incredibly engaged by the potential of Aon United. They have seen us systematically bring down the structural barriers over the last few years, and they have leapt at the opportunity to work closely together for clients. They were always inclined to work together, but sometimes we made it more difficult than it needed to be. By making it easier for them to bring the best of the firm to our clients, we have helped them create deeper, more meaningful relationships. And that's a good thing because ultimately, we're getting paid for value. And Aon United makes it easier to deliver more value for clients. In return, that strengthens our financial performance, with greater retention in our core business and increased relevance with clients through advice and solutions. Let me give you an example. If you look at our Reinsurance Solutions business, you'll find that we serve many of the largest insurers in the world. Historically, that was more of a transactional relationship. We were there to support their book of business. But over the last decade, you've seen us become more advice-driven, using data and analytics to better understand our underwriting appetites and more efficiently transfer the risks they were assuming to the secondary market. That success builds loyalty and intimacy. Those CEOs know that we understand their business better than any other type of partner they have. So as we built our investment consulting business, we've earned the right to introduce that new capability to an installed base of clients that already trust us and are conditioned to accept new insights. With 1 client in particular, we had a great relationship in the traditional reinsurance area supporting their book of business. With our investment consulting capability, we were able to help them on the asset side of their balance sheet. Being able to partner with this client across their business, we were able to take our relationship to an entirely new level of interaction where we improved operating performance and strengthened their balance sheet. That's just one example of the depth of our expertise in 1 solution line and our colleagues' understanding and belief in Aon United that translated into an opportunity to introduce a new capability to our clients in a manner that created unique value for them and drove growth for our firm.

Mike, I know you see Aon United in action every day and have a few additional examples.

[Michael O'Connor, Co-President]

Thanks, Eric. Listening to your description, well, I complete -- I agree completely that Aon United excites our colleagues, and we see that ultimately leading to greater client loyalty and growth. Let me take a moment and describe another example connected to the transportation sector that really reinforces this benefit.

Across many geographies today, there's enormous growth around small trucks and fleets being put to work to complete the last mile of delivery. We see demand both from large clients and middle-market clients. However, the growth of these transportation businesses are challenged as there is need for more efficient and effective insurance solutions, both vehicle insurance and health and benefits solutions for their workforce. This client need has spurred within our team a truly Aon United response. Our team stepped back and brought together an array of capabilities: Industry expertise from our transportation logistics practice; operational and platform capabilities from our Affinity business that serves small businesses and consumers; reinsurance expertise to access and support capital providers; our captive team can assist clients that desire self-insured solution. We brought data and analytics expertise from our global risk consulting team for the vehicle solutions and our talent practice that can help assess driver performance.

And lastly, health and voluntary benefit solutions for this gig economy workforce from our health practice. The integration of talent and capabilities from across the firm, which does not come together without an Aon United approach, allows us to deliver a customized solution to clients that enables them to operate and grow their business. This delivers an obvious benefit to a client, but these types of opportunities also is what excites our colleagues. They are incredibly engaged and motivated when working across solution lines and geographies to join forces to deliver unique value to clients. And that's been a big part of our journey towards becoming a professional services firm.

Eric and I are seeing more and more Aon United efforts across the firm, similar to the transportation example I just shared, where colleagues are working together to create custom solutions, underpinned by insights from data and analytics that increase our relevance with clients and earn the right to provide advice and solution to our clients that help them grow, improve profitability and reduce risk.

[Gregory Case, CEO & Executive]

Thanks, Mike and Eric. I appreciate those examples of Aon United has generated impact with both clients and colleagues. Really helpful insight as we work to make -- make it easier really for our colleagues to bring the best of Aon to clients and help us deliver on the growth potential of our firm. And obviously, we can go on with a lot more examples, but let's see what's on the minds of everyone else. And operator, please open up the lines for our next question.

[Operator]

[Operator Instructions] Our first question is coming from Dave Styblo [ph].

[Unidentified Analyst]

I wanted to maybe continue the conversation with Mike and Eric. And Aon is in a, obviously a very good position financially, the cash flow is strong, going to get better. You've laid out $650 million of incremental savings that you'll get over the next couple of years. You've got more restructuring savings that will be coming through. I guess, as business leaders, how do you, Mike and Eric, see that flexibility being able to benefit the business in terms of investments that you'd make? What are things that you'd like to do that would either enable you to improve retention, improve organic growth, improve margins through your lenses.

[Gregory Case, CEO & Executive]

So Dave, it's Greg. And I'll start and then sort of -- we'll flip back and forth here as sort of we interact. First, really appreciate the question. You are really underpinning one of the strengths of the firm, so not only with the financial flexibility and capability, but really have an opportunity to look at client need and the evolution of client need and how it's changing and then react to that. So you've seen us make investments sort of on the acquisition side with Stroz in cyber, across-the-board with Townsend, sort of on the delegated side in exceptional ways. You've seen us make acquisitions with Admix in health and data analytics and ACT and in mortgage and the exchanges, et cetera. So we got a whole pallet of things we could look out across the firm to improve performance, both from an acquisition standpoint and organic standpoint. And I think Eric and Mike have really been at the helm of sort of how we've directed that and how we've driven that. And you're seeing that start to really provide yield in the overall business. Maybe, Eric start with you, just in terms of just places you're seeing it show up every day and I think the point Mike made around our colleagues are reacting to that, not just clients is important, too.

[Eric Andersen, Co-President]

Thanks, Greg. And I think really comes down to a couple of big areas. Certainly, we're continuing to invest in our teams. The capability and the development that they have to be able to provide the right insight I think is critical. Certainly, data and analytics is something that we talked about consistently, trying to drive content-driven insight and creating new areas of demand and, essentially, growing the pie in the business is also a major focus. And then obviously, having the right tools to be able to execute for clients. Is -- we see investment opportunities and growth areas across all 5 solution lines.

[Gregory Case, CEO & Executive]

Terrific. Mike, thoughts?

[Michael O'Connor, Co-President]

Yes. I think, as Eric said, we see opportunities with new clients and existing, and maybe I'd highlight a couple of things that come to mind. First, we're using data and analytics to draw out insight to be able to serve clients more effectively, and a great example of that is Aon Client Treaty. We talked about that before. That is data-driven insight for us to be able to provide better solution for clients all over the world. It's driven by client demand and the ability for us to unite capabilities within our Insurance and Reinsurance businesses to provide a distinctive solution, and we see continued growth and continued benefit for clients. And then there are many parts of the business we are very excited about. Transaction liability, we highlighted, continues to be a real area of client need, and we continue to invest behind that to continue to deepen our team and grow our geographic coverage, both to serve corporates and private equity and investors. So very excited about that space and see continued investment opportunity there

[Gregory Case, CEO & Executive]

Perfect.

[Unidentified Analyst]

And then just a follow-up on the numbers a little bit, may be just for Christa. The restructuring savings. If we keep that flat again in the fourth quarter from the third quarter, you guys are going to be at nearly $360 million of restructuring savings for this year versus your $300 million goal. I guess where is the upside coming from? And is that more something that we should think about as a pull forward,, realizing the savings earlier? Or are we at a point where you start to have some visibility where you think you'd have upside of the $450 million target for next year?

[Christa Davies, Executive VP & CFO]

Yes. So Dave, thank you so much for the question. We're extremely excited about the restructuring program and its ability to invest in building the Aon United operating model that's going to deliver the $300 million of savings in 2018 to $450 million of savings in 2019, but much more importantly than that, productivity gains and operating leverage in each year after that. And I would say in terms of where we're up to, we're very excited about the progress year-to-date, in the program. It's really a lot of investments in real estate, in IT and in people around our operating model. We're not in the business of updating guidance. As we think about this restructuring program, it's a 3-year program which will continue until the end of 2019. What I can say is that we're very excited and confident about delivering the $300 million in savings this year and $450 million in savings next year.

[Unidentified Analyst]

Okay. And then just lastly on organic growth, that was really strong across -- especially the commercial book and Reinsurance and in some ways surprisingly strong against the comp, a tough comp. Are you guys seeing more so an uptick in end market demand or is some of this, do you think, some market share gains that you guys are enjoying?

[Gregory Case, CEO & Executive]

It's really -- it's a combination, Dave, across the board. Again, as Eric and Mike both highlighted, we're look -- in essence, looking at client need, client demand and we're actually driving ways to actually improve and bringing new solutions to the -- to bear on behalf of clients. So some of the things that Eric and Mike talked about in cyber and transaction liability, et cetera, sort of our new opportunities we're bringing to the market. We've been very fortunate from a market share standpoint, that continues to improve. That's improving because, again, candidly, we're bringing better solutions to clients. So that's -- we think that will improve over time. And net-net, you're seeing strength across -- really across the solution lines. And again, look for it not in any 1 quarter in particular but over the course of the year, you're going to see us continue to progress. As we talked about, mid-single digit or greater goal over the coming years is really our focus from a growth standpoint and you're going to see us do that. Obviously, as you sort of think about the quarters, Q4 was a particularly unique quarter last year. So we're going to be pushing against that as we end the year, but look for continued progress and that's what our team's most excited about.

[Operator]

Our next question is coming from Sarah DeWitt, JPMoran.

[Sarah DeWitt, JPMoran]

As far as -- one of your competitors recently announced a large acquisition. Could you just talk about how your thoughts on how this could impact the competitive dynamics and how important is scale?

[Gregory Case, CEO & Executive]

Yes. So from my standpoint -- look, success in our world is -- fundamentally starts with understanding client need and really understanding client need and how it evolves. And we will come back to -- there's always lots written about sort of the market view or the intermediary view or what have you. But frankly, it's all irrelevant when you compare it against sort of how client need is evolving over time. And our perspective is if you get a very clear view on that, and for us, it's all things risk, all things retirement, all things health, how is that evolving over time? And then very specifically, how are we building a unique capability to address that need, both in the traditional way and the emerging risk way. So I'd come back to, if you think about sort of the investments we've made, in Stroz, that was directly against the cyber opportunity. In Townsend, against delegated. In Admix, against health. In cut-e, in talent. And then organically, the investments we've made in data analytics and ACT and in mortgage and et cetera and the exchanges. So from our standpoint, this is -- has to be absolutely maniacally focused on sort of delivering more effectively for client need. And in doing so, we're creating net new demand and competing in the traditional market we think very effectively. Our view is, that approach to the world, combined with what is unique financial flexibility and a focus on translating revenue into free cash flow, we're not only going to serve clients effectively but also create a set of economic results that we think will be very, very positive for our partner shareholders. So from our standpoint, obviously, elements of scale and size matter. You'll continue to see movements in the marketplace, but it's really that focus, we think, is going to determine victory.

[Sarah DeWitt, JPMoran]

Okay, great. And then on the restructuring initiative. You talked about how this should then drive improved productivity over the long term. Can you just elaborate on that? Or are you saying that there is potential for expense savings opportunities above and beyond the $450 million that you've identified? And could you just explain that a bit more?

[Christa Davies, Executive VP & CFO]

Absolutely, Sara. So yes it is the answer to your question. We think that if you think about delivering $450 million of savings in 2019, then your run rate exiting '19 is higher than $450 million, so we'll continue to deliver more savings in 2020. But much more importantly than that is productivity and operating leverage built into the platform because when you aggregate your operations under 1 operating model, Aon United, then we are able to apply automation, AI, machine learning and really continue to drive productivity savings in future years in 2020 and '21. And so we're very excited about that future productivity benefits. And that really gives us confidence in long-term margin expansion, driven by top line revenue growth acceleration, improvements in the business mix and productivity.

[Gregory Case, CEO & Executive]

One other piece I'd just throw in, Sarah, is Christa and the team have orchestrated this effort. What's also unique about it, it's not just the cost saves now, as you know, and the productivity improvement over time, and this is really sort of an offshoot of Aon United and the leadership approach we've taken. As we continue to connect the firm and see opportunities, this isn't just about cost. This isn't just about efficiency, it's about effectiveness. We believe what we're going to be delivering in service and approach on behalf of clients is going to improve as we get more efficient in the process. So that really is how this is very different than anything we've seen undertaken in our industry and certainly anything we've undertaken before.

[Operator]

Our next question is coming from Yaron Kinar of Goldman Sachs.

[Yaron Kinar, Goldman Sachs]

My first question is around organic growth kind of long-term and maybe some thoughts from your perspective in terms of your positioning in the market, especially given some consolidation initiatives we've seen among some of your peers as of late. It seems like your -- with your guidance of kind of mid-single digit organic growth or better over the long term, you're pretty confident in your positioning, but would like to hear more about that if we could. And also maybe a little bit of clarity on the -- kind of what gives you the confidence that over a long period of time, you can achieve organic growth that seems just above and beyond what we've seen others guide to over several years on and across different companies.

[Gregory Case, CEO & Executive]

Yes. I'll start with that and Mike and Eric can comment as well. Listen, as we think about this, again, we start with a formulation focused on clients, client need and client evolution in terms of how it's playing out over time. And you see us addressing that need. And what we would remind you of, in the categories we play in, risk, retirement and health, these are highly fragmented in terms of sort of who serves those markets and underpenetrated. So you think about the risk market overall and what's happening in the global economy, of top 10 risks in the world, only 3 really have -- this is, by the way, the top 10 risks based on our client input, only 3 really have great insurance solutions against them. So in essence, the world is becoming more risky, and we have an opportunity to actually keep up. And if you just keep up, we're going to grow. Now, what if we did better than that? What if we actually provided a cyber solution that really provided more insight and helped clients reduce volatility more effectively? Or opportunities to actually protect our balance sheet more effectively. So from our standpoint, we see an underpenetrated risk market in which we can create net new demand and serve clients more effectively over time. And in doing so, ironically, what happens is we do better in our traditional business. So the example Eric described was a great one because not only do we take a great reinsurance client and offer some things from our retirement solutions area, our -- and Eric just talk about this, our reinsurance relationship strengthened and as a result of that combination. So that's really the whole piece. When you think about some the things we've done in government de-risking. The World Bank cat bonds, and I know I talked about it last time, I love this example, because literally, we took 4 countries, Colombia, Chile, Mexico and Peru. We addressed their quake risk in a way that's never been done before. It was an actual investment purchased by pension money, orchestrated by the World Bank. And given back -- that money was actually given back to the economies. That is net new demand. Now I would ask you, how many economies around the world that are underdeveloped or developing, would actually benefit from a cover like that. Then you're off to the races on a brand new category. So for us, this is about addressing current client need and addressing net new, and doing so in a way in which we can both go after both -- do this through organic and in M&A and that's all going to play back to organic growth. So just -- thoughts Eric or Mike, in terms of sort of pieces? Eric, you want to...

[Eric Andersen, Co-President]

I would just say, Greg, because I thought the way you described it was perfect, but also just to underscore the Aon United strategy within the firm, I think is really compelling. Mike and I both shared examples, but there are dozens of those examples that exist in the firm where, for example, one of our client leaders working with firms out West to deal with wildfires or bringing insurance linked securities, capability to look at that risk in a new way. Or where there's a commercial risk leader that is handling the traditional insurance business for an insurer, was able to underscore or uncover during the Client Promise discovery period a need for additional reinsurance capital in part of their business and made those connections. So the ability to bring all the different solution lines to any given firm should be able to drive us that growth that we're talking about.

[Yaron Kinar, Goldman Sachs]

So is it that the degree of underpenetration of insurance in the market has been increasing over time? Or is it your capability of addressing that underpenetrated that's been improving over time?

[Gregory Case, CEO & Executive]

Go ahead, Mike.

[Michael O'Connor, Co-President]

Well, I think it's both. I mean, the reality is, we see opportunities to continue to build capabilities within our solution lines to serve clients more deeply and bring more clients into the firm, and that's underpinned by our investments in data analytics. And it's also crossing capabilities across solution lines. And I think we highlighted Aon Client Treaty where that does not happen without insurance and reinsurance capabilities. And you could think about some of the things we're doing with our retail clients, bringing reinsurance tools to bear like Impact Forecasting where we're bringing real insight through data and analytics to our retail clients. So I think it's both.

[Gregory Case, CEO & Executive]

Yes. The other piece, Yaron, just -- and we've talked about this on previous calls. This, for us, is not just conceptual. This is our life every day around the battle for relevance, and it really is a battle for relevance in entire industry. In essence, are we helping companies address volatility in a more effective way? And I think you can make an argument, the answer is the industry as a whole, us in the middle of it, has not. We have not kept up. If you look at kind of claims as a percent of GDP back in the '60s and '70s, it's kind of essentially 1.5%, 2%, give or take. It grows, by the way, virtually every year until the late '80s to about 3%, 3.5%. And then systematically it's come down every year since. So it's back to where it was in the 60s. So net-net, as the global economy has grown -- if you think about another fact, 75% of the market cap of the S&P 500 is driven off of intangible assets. That's fundamentally changed from 1975 where it was about to 25%. And so as that world has changed, we have not collectively kept up. We have not actually addressed volatility. We see that as a huge opportunity to actually help clients grow and drive opportunity for them and reduce risk. You've also seen us, by the way, done -- we've done some analysis with some very large tech companies. And by the way, some of these large tech companies are bigger than our insurers. They don't need the capital to protect their balance sheet, but we've used insurance solutions as a way to actually create demand for them. In fact, they put a demand in the marketplace, so it's way beyond insurance. They're putting a product in the marketplace and consumers are buying it because we've actually provided cover to protect them from cyber risk on their product. And so these are kinds of things we're doing to create net new demand that we think a real opportunity, and frankly drive relevance, not just for us, but for the global -- insurers in the global economy.

[Yaron Kinar, Goldman Sachs]

Got it. And my second question was just around the effective tax rate, so you're guiding that down for the year, to below 18%. With some guidance expected on the BEAT later this year. Any thoughts as to how the effective tax rate plays out in '19 and beyond?

[Christa Davies, Executive VP & CFO]

Yes. Thanks for the question. We did previously give guidance of 18% for this year, and given the impacts of discretes we saw in Q3, the 2018 full year tax rate will be below 18%. As I look back historically, Yaron, what I would say is, exclusive of the impacts of discretes, which can be positive or negative and unpredictable in any year, our historical underlying tax rate for the last 3 years was approximately 18%. And so we're not giving guidance going forward but I think that gives you some sense.

[Yaron Kinar, Goldman Sachs]

Just asking about the BEAT tax itself. Any clarifications that are expected this year?

[Christa Davies, Executive VP & CFO]

Yes. So I guess, Yaron, the way we think about it is an all-in underlying rate, and what we would say is if you look at the last 3 years, it's been about 18%. And for 2018 in particular, it will be slightly below 18% really just driven by the discretes you saw in Q3.

[Operator]

Our next question from Kai Pan.

[Unidentified Analyst]

Thank you very much for making Eric and Mike available for this discussion. I just want to follow up around the conversation to ask Eric and Mike. What has changed in terms of your day-to-day operations in the responsibility under Aon United. And you gave a lot of good example how the work could drive collaboration and drive growth. But are there any execution risks or potential pitfalls you are worried about in terms of speed of execution as well as accountability?

[Gregory Case, CEO & Executive]

We think, Kai, as they respond to their day-to-day piece. I'd start with what are the changes beyond just the copresidents. Remember, we talked about a single P&L. We talked about a single opco and a single brand, all steps that, frankly driven by Eric and Mike and our broader team, sort of really were a catalyst to sort of accelerate Aon United. And has implications, of course, for their day-to-day, which they'll talk about, but it really was built on that foundation. So thoughts, gentlemen?

[Michael O'Connor, Co-President]

I can jump in, Greg. I think as Eric highlighted, Eric and I have a long history of working together. And I think it's been -- this is the culmination of that to actually bring to life Aon United. And I think our leadership team has stepped up over a number of years. We have intimacy in that group. We have great connectivity. So I think as we come together and unite the firm, run through 1 global operating committee, have great confidence that not only will we not miss a beat, I think we have expectations we can accelerate our execution capabilities. Eric?

[Eric Andersen, Co-President]

And I would just say the connectivity that we're trying to bring to the firm as a partnership, I think is really beginning to get momentum. And Mike and I have been spending a fair amount of time around the world with our colleagues and our clients, just reinforcing the fact that we have to work, work closer together and that the reality is the clients are pushing us to do it. They're looking at the degree of risk that they are facing, and they're looking at the solutions that we have across the firm. And we said earlier about bringing down structural barriers, the ability for us to bring the entire company to help solve a client's problem builds great momentum inside the firm. You asked about risks as well, and I would just say the execution risk for us is speed. The clients problems are here and they're now, and if we don't find a way to solve them and be able to bring the firm together as quickly as we need to do, then they'll be solved by someone else in some other way. So I think what drives us the most is the fact that we see the need. We know we have the tools, it's just how fast we can get it together to get it in front of the clients.

[Unidentified Analyst]

That's great. My second question and margin front. If you're looking into 2019, your cost saving $450 million versus $300 million this year would be $150 million. That equates about 130 basis points of margin expansion, if assuming half of that flows through bottom line, would be like 60 basis points. And your core margin expansion, underlying core margin expansion, you mentioned year-to-date about 50 basis points. If you can sustain that, you could add up to like, more than 100 basis points year-over-year margin expansion into 2019. Christa, I'm just wondering, is that a right way to think about your margin potential going forward?

[Christa Davies, Executive VP & CFO]

Kai, we don't obviously give margin guidance going forward. But what we can say is we're very excited about continuing to be able to expand margins through 3 key sources. One is accelerating revenue growth, which you've seen in calendar year '19. But you also saw, for the last couple of years, we've been continuing to accelerate organic revenue growth and M&A's contributing to total revenue growth of 10% year-to-date. The second is mix shift. We continue to invest in higher revenue growth, higher margin businesses, both organically and inorganically. And Greg gave some great descriptions of those businesses earlier. And the third is the restructuring savings and ongoing productivity beyond 2019. And so we feel really good about the future margin expansion potential of the firm.

[Unidentified Analyst]

Okay. Last one, if I may. It's on your cyber and also transaction liability business. You said it had been growing double digits. I just wonder how big are this business relative to your overall portfolio and specific on the silent cyber initiative you're doing, you worry about it becoming competitor of your clients, not the clients on the insurance side but also you're using reinsurance. Is there any residual balance sheet risk to Aon?

[Gregory Case, CEO & Executive]

There's -- just to start with that one, there's no residual balance sheet risk. As you know, Kai, we're not in the business of sort of taking balance sheet risk. Ours is sort of to connect capital with need, and we do that around the world with our insurers and with alternative capital and all the different pieces around that. What we would say on the cyber side, just generally, is look, this is about net opportunity and it really starts again with our recurring theme around client need. Clients, if you think about it -- we've talked about it before. And the numbers are sort of connected to cyber trauma. Incurred $450 billion of pain, of loss in 2017 and against that's -- that's against $3 billion to $4 billion in premium that was written. So we might be the largest and it might be growing double digit and we're very excited about it. And by the way, our team's done an exceptional job. When you think about $3 billion to $4 billion in the context of $450 billion, Kai, that's massive opportunity to help clients succeed. And then remember, that $450 billion as I described on previous calls is really a North American figure. The European figure is close to 0 because they didn't actually need to report cyber. It wasn't required. Until May of 2018. So just a few months ago, the European data laws sort of kicked in, and those are incredibly onerous. So the cyber connected loss, not -- connected loss is going to go to $1 trillion on the dial, and the industry has responded with $3 billion to $4 billion. So for us, we see massive opportunity, for our clients, if we get this right, when we get this right. Frankly, for the industry as well and real opportunity. And so this is back to the idea that Mike and Eric were talking about in terms of emerging real risks that we can help clients succeed. And again, as Eric described, if we don't sort it for them and solve it, they're going to find other ways to do it. We see this as a substantial opportunity.

[Unidentified Analyst]

Okay. How big are they now relative to your portfolio?

[Gregory Case, CEO & Executive]

Very small, very, very small. These are kind of new initiatives we've put in place, think good representative examples of sort of steps we've taken but they're very, very small, tiny in terms of the broader overall Aon but we think they have tremendous potential.

[Operator]

You're next question is coming from Elyse Greenspan of Wells Fargo.

[Elyse Greenspan, Wells Fargo]

My first question. Pretty strong Reinsurance growth this quarter. You guys had pretty -- a tougher comp last Q3, about 10% organic when you adjust for rev-rec, and you have a 20% comp in the fourth quarter, obviously a lot of reinstatements and cap ons after the hurricanes last year. How do you see that? Is that a headwind or is it something that you can kind of offset to a certain degree like you did this quarter? And should we think about that being -- I know you highlighted the 50 basis points of kind of core underlying margin expansion year-to-date. Is that going to be a headwind in the fourth quarter just because Reinsurance is such high margin business or does it help that I guess you have less revenue coming through in the fourth quarter?

A - Gregory Case

Well, listen, overall, again, you just got to step back and look at the trend line, sort of what our colleagues have been able to do in Reinsurance Solutions and I would just highlight, it's been exceptional. If you look at the last few years and our ability to actually win new clients and do more with clients is actually continuing to progress. And you're seeing that, Elyse, and that's played out sort of in the first 9 much of the year. Look, Q4 -- I just want to emphasize that trend line, that overall progress is exceptional, and the team's been great on the treaty side, on the fact side, the alternative side just absolutely exceptional, and I think we see that trend line. Again, we always come back to sort of those trend line on a particular quarter. As you highlight, Q4 is unique. It's unique sort of in history, it's, by the way, our smallest quarter as you've described. The comp is very unique. We know what was going on last year is going to create a sort of headwinds in the fourth quarter, no doubt, in terms of where we are. But the overall time line and the overall trend has been exceptionally positive. But Q4, the comp is -- there's no doubt, very, very difficult from that standpoint. Eric, anything you'd add to that?

A - Eric Andersen

Yes. I would just add, Greg, a couple of things, One, we continue to see good success in the build out of the core treaty business in terms of new clients and expanded business with existing clients. Our facultative business in the third quarter was exceptionally strong and we were able also to do new things with some new client groups, whether it's government entities or firms like that, that are a little broader than the normal remit. People think of reinsurance for insurance companies. I think the combination of the 3 has been positive for us all year. And so it's led to a good 9 months.

A - Gregory Case

I would say -- this goes back to, Elyse -- very specifically, trends, exceptionally positive. Q4, definitely, definitely a major hurdle as we think about sort of the comparison.

[Elyse Greenspan, Wells Fargo]

And as we think about a few months forward and as you start having conversation with clients, do you guys have kind of a high level little view on what kind of prices we could expect in the Reinsurance market January 1 renewals?

A - Gregory Case

As we talked over time, really don't spend a lot of time on the -- talking about sort of predictions on the pricing front in particular, just given sort of our analytics and what we do day-to-day with our clients. Overall, we'd say, Elyse, when you look at pricing against sort of the progress for the first 9 months of the year, it's really sort of continues to sort of being at par, if you will. There's pluses and minuses depending on sort of what you've encountered as a client and what kind of trauma you've encountered. But overall, the overall marketplace for us continues to be relatively stable.

[Elyse Greenspan, Wells Fargo]

Okay. And then one on the expense saves. I know we had a few earlier questions. So you guys are at $308 million, the end of your target for this year was $300 million. And Christa, are you implying that you guys aren't, even if you guys get well ahead of that by the end of this year, that you guys won't potentially raise the program again? Or is it just that, that's not something that you kind of looked in to date? I just kind of want to understand how we can tie that all together and our thoughts around that.

[Christa Davies, Executive VP & CFO]

Sure, Elyse. I guess the simple thing I would say is we're not in the business of updating guidance. It's a 3-year program. We've got until the end of 2019, and we're very excited about the progress we've made to date. And we're on track to deliver $300 million of savings this year and the $450 million of savings next year.

[Elyse Greenspan, Wells Fargo]

Okay, great. And then one last question. Repurchase was a little bit lighter than what we had modeled. Was there anything in the quarter that caused that to slow down a little bit? Or it's just kind of timing, when buyback kind of comes during the year, maybe your stock actually did better this quarter. Did that play into kind of thoughts around repurchasing shares?

[Christa Davies, Executive VP & CFO]

Yes. So Elyse, as you know, we allocate capital based on return on capital, cash on cash returns. Share repurchase remains the highest return on capital opportunity across Aon. What did happen in the quarter is we did accelerate $80 million of pension contributions from future years into Q3. And so that was 1 factor that impacted us. But long-term, we see a very highly valued internal valuation of Aon, which is why the return on capital opportunity is so substantial for us.

[Operator]

Our next question is coming from Meyer Shields of KBW.

[Meyer Shields, KBW]

I have two, I think, somewhat related questions. The first is based on really, everything that you talked about on this and previous calls, should we expect what you term the market impact to be less of a factor in either direction going forward?

A - Gregory Case

Again as we come back, we talk about market impact, it really is the insured value part of the world and the pricing part of the world and as we've described before, insured values, sort of if you think about those actually has a more material impact over time than the pricing piece. And all I've tried to highlight is, if you think about sort of what we said on previous calls around the influence of pricing, that hasn't changed that dramatically. But if you think about the long-term view, maybe Eric, you want to start. Mike, you want to chime in?

A - Eric Andersen

Yes. I would just say, Greg, that the overall structure of the business remains largely unchanged from the beginning of the year. Even with natural catastrophes in Japan, Florida Panhandle, some of the man-made losses like the Genoa bridge disaster. The total cap budgets are largely in line with what the reinsurers and the insurers expected. So our senses is that with the supply and demand that was there at the beginning of the year, that's relatively unchanged. I would say the interesting part though is we try and bring that capital to provide cover for new risk, I think that's where there's growth in the business.

A - Michael O'Connor

Yes. And the only thing I would add is with our investments in the Reinsurance business and insurance business and data and analytics, we think about this risk by risk. We are spending our time making sure we understand our clients intimately well and can think about the right answer for them, and we will source solutions for them anywhere in the world that makes sense.

A - Gregory Case

And the final piece, I think to throw into this, Meyer, is the following. Listen, these conversations around pricing in this marketplace are obviously important and relevant, et cetera. We try to put them in context. And again, ours is not about pricing, ours is about client value and how we deliver on that. But what I really want to come back to is, this is about Aon, right? This is about, literally, we put 6% up, sort of in, a though -- in the quarter. It's about progress, and if you think about sort of the overall portfolio of Aon, the retirement side, the investment side, the health side. What we do in data and analytics more broadly. Less and less of our business is even connected to this in any way, shape or form and even in the context of the risk business, less and less -- obviously important, but less and less relevant over time. So I just want to put in the overall context in terms of sort of how this fits into the broader Aon portfolio, single opco, single operating model, single P&L.

[Meyer Shields, KBW]

That's helpful, that's really where I was driving at. So that really clarifies things. Second question, and clearly, I understand the bottom line impact of what you're talking about. But how do you think about areas of technology actually reducing risk. And I guess, autonomous cars, if I mean we could flip a switch and have them tomorrow, would be a good example of one major current risk significantly evaporating. How big of a factor is that?

A - Gregory Case

Again, this is back to -- if you think about -- sort of -- I think I understand your question. Will technology actually reduce volatility and risk in the world over time? And we would say, listen, we would love to find areas where that's true. More and more of what our clients actually come to us with, and this is a point Eric and Mike were making, they come to us with implications on how technology changes the business model but also changes the risk profile, and in a number of respects, increases the risk profile. And at this point in time, with technology change, even if they think they have it figured it out, there's massive uncertainty. So for us, this is the perfect time to sort of be in a changing global economy in which there is so much change going on, and risk overall is going up. By the way, it's not just risk in the classic risk business. It's risk in the retirement world. It's risk in the health world. So it really is volatility in the world today that we think is greater than ever before. I described intellectual property. All these things are sort of areas that actually are changing over time, and net-net, you'd be very hard-pressed not to say that the basket of risk in the world today is not going up. And to the point we've made on the call already, ours is the question of can we maintain relevance? Can we keep up? Can we bring solutions, either capital or risk transfer solutions that matter, retirement solutions, health solutions that matter, that help our clients improve performance or reduce their volatility? So that's why in the end, this is really about how we evolve and why that evolution can't be the traditional evolution. It isn't just about getting bigger, it's really got to be getting better and bringing higher quality to clients.

[Operator]

Last question is coming from Adam Klauber [ph].

[Unidentified Analyst]

Could you flesh out the New Ventures Group? It sounds very interesting. So a couple of follow-ups. One, I think you relate that at -- it really has to do with increasing value for a client. You gave 1. Could you maybe give another example or 2 of what those activities could be? Two, could that be an area where you direct more -- do some more acquisitions? And then three, and I think you mentioned your first. Does this area involve more potential activity with private equity and venture capital?

A - Gregory Case

Yes. So Adam, just to step back. In essence, this is just another step in the journey. We think an important one, but another step in the journey. Mike and Eric both talked about innovation and what we're doing to bring new solutions to clients. New Ventures is essentially saying, listen, we've gone proven approaches. They work exceptionally well. Can we be faster? This is to Eric's point on speed matters. Can we be faster at identifying opportunities and then scaling them globally? So this is an internal effort in which we got a group of senior leaders. Again, one of the manifestations of having the single opco and single P&L and our copresidents doing what they're doing, it's allowed us to free up leadership time to focus really more strongly on this. If you think about sort of what we're doing in data and analytics and all the pieces around that and John Bruno's area. Efforts around -- really across the firm. Ours is really about how we can accelerate those. So that's fundamentally what really New Ventures is about, and you'll see us pick 2 or 3 or 4 areas and we'll have a portfolio in which we're really trying to identify where and how we can accelerate. This is not about third-party investment, private equity investment, it's not about that at all. It's really about how we take ideas and scale them more globally, more effectively. And we've got, I'm not going to go through the portfolio today. We want you to see them evolve over time. I think they're going to be pretty interesting. But -- and reasonably significant but we have to prove it out and we have to drive it. But we know without this capability, it's very hard to actually get enough energy and effort to really scale something effectively. And that's really what New Ventures is about and I think under Tony Goland's leadership, I think with our broader group across the group, it will be a very interesting set of steps that will strengthen the firm.

[Unidentified Analyst]

Great. And then on Health Solutions, a very strong quarter. New business in EMEA region. Is that more multinational clients? Or is that more European or other EMEA-based clients. And I guess is there -- is that a growing pipeline in that type of business?

A - Gregory Case

Listen, first of all, thanks for recognizing and drawing out health. Again, as you know, we love this category. We think globally it represents a monumental opportunity to assist clients and what is really a frankly, pressing and intensifying set of needs, back to the question on is demand going up or going down? We think it's going up. And what's going on in EMEA, by the way, you're seeing throughout the course of the year, across the world. It's not only serving local clients with what we think are better sense of solutions. It's also serving global clients who want more consistent health beats around the world, very, very important. And in addition, augmenting what they have, voluntary benefits and things that actually make the value proposition stronger. So you're seeing that. In EMEA, in this quarter, you've seen it across the world, and we think it's actually going to continue strongly. And it's, again, one of the reasons we like this category so much.

[Unidentified Analyst]

Okay. And you touched on it, but voluntary benefits in the U.S. Strong growth there. Is that your increasing your product set, increasing your capabilities? I guess what's driving some expansion there?

A - Gregory Case

Again, it's both. Again, back to client demand. Clients really want to see new opportunities, they want to see solutions that actually improve well-being and you go beyond a specific product area. And you've -- sort of you've seen us bring a number of new solutions to markets that have actually served, again, our clients well. And we think have great trends ahead of them.

[Unidentified Analyst]

Great. And 1 final for Christa. On the free cash, I think you mentioned in the range of $600 million plus would be freed up in the next 2 years that had been used in restructuring, if I'm correct. Is that weighted more towards '19 or '20 to the extent you could say?

A - Christa Davies

Yes. So Adam, what we would say is as you look at the slide deck, I'm just finding the slide. We've actually outlined this. So it's $650 million of cash flow reduction. So a reduction in use of cash on pension restructuring and CapEx. It's Page 23 of the slide deck posted on our website. So $650 million, it's not just from restructuring. It's a reduction in CapEx and it's reduction in pension contributions as well.

[Operator]

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

[Gregory Case, CEO & Executive]

I just want to say everybody thank you very much for joining call, really appreciate it and look forward to our discussion next quarter. Thanks very much.

[Operator]

That concludes today's conference. Thank you for your participation. You may now disconnect from the call.+s