Aon PLC

NYSE:AON

Earnings Call Transcript 2020-Q3

[Operator]

Good morning and thank you for holding. Welcome to Aon Plc’s Third 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 third 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 very much and good morning everyone. Welcome to our third quarter conference call. I am joined virtually by Christa Davies, our CFO, and Eric Andersen, our President. Like in previous quarters we posted a detailed financial presentation on our website.

We'd like to begin by thanking our Aon colleagues for their extraordinary focus and dedication in supporting clients and each other. What they do every day is exceptional; whether it's building strong lasting relationships with clients as we help them navigate these complex times by the way Aon colleagues come together to collaborate and innovate in ways that are helping us build an even stronger firm; really tremendous work by the Aon team around the world.

Turning to our performance. In the third quarter we delivered strong results that once again demonstrate the resilience of our business and strength of our analytic services platform. Organic revenue growth was flat overall reflecting strength in the core areas of our portfolio and ongoing to expected pressure in the more discretionary areas. We saw continued strength in reinsurance solutions with 13% organic revenue growth driven by strong net new business generation and double-digit growth in three facultative and capital markets.

Commercial risk delivered modest growth of 2% with strength in the core and continued pressure in more discretionary areas. Health solutions growth is 1%, modest growth internationally partially offset by pressure in the U.S. with respect to ongoing headwinds in the global economy and lower employment levels. Retirement Solutions and data analytic services both experienced organic revenue declines as we saw expecting pressure and more discretionary businesses, like human capital travel and events.

As we assess our revenue outlook in Q4, the primary theme is continued uncertainty in the global economy. As many governments consider new restriction the response to increases in COVID-19 cases, while government stimulus remains uncertain and evaluating Q4 revenue expectations two points are important. First, given the seasonality of our business we have a larger portion of more discretionary revenue occurring in Q4. So the pressure on organic will be more significance than in prior quarters. For example, areas of construction and transaction liability with incremental risk recognize revenue when shovels hit the ground and deals are closed. As expected we're seeing pressure in the larger investments in the current environment.

In addition, organic revenue growth in Q4 last year was exceptional at 7% overall as we highlighted last year this includes double digit growth in transactional liability as well double digit growth in voluntary health benefits. Few areas of the more discretionary portion of our business that are seeking larger in Q4.

The second, and importantly we believe these segments are temporary and reflect pressure from current economic conditions. We're confident in the strong underlying fundamentals of our business. Overall revenue basis diversified across the industry and geography and solution lines roughly 80% is now discretionary and other significant portion that renews every year with 95% retention rates on average.

From operating standpoint we delivered strong results, including 40 basis points of operating margin expansion in the quarter to 170 basis points margin expansion year-to-date. 6% EPS growth in the quarter and exceptionally strong free cash flow of $1.9 billion through September up 91% from the same period last year. These results demonstrate to continue resilience of our Aon United strategy focused on working across our solution lines and geographies to bring the best of the firm to clients.

Further this strategy continuously evolve in response the client feedback. Over and over our best outcomes come when we listen attentively and deeply understand client challenges. One recent example of this is the partnership with the global market leader and Internet of Thing. Using our clients’ telematics colleagues and commercial risk, human capital and data analytics developed mobility as a service solution that attributes like on-demand car sharing. The forms part of a total rewards program for employees. Our client provided the technology and we provided the insurance solutions that's digitally distributed through our total rewards platform. This enabled the company to offer simple flexible benefits of their workforce that meets their need at the time on tracking and retaining talent in new ways is paramount for their growth.

Not only have we co-created a cutting-edge solution, we've also elevated our partnership with this client to a more strategic level working together to innovate for mutual growth. This example of Aon United action also highlights a larger area, clients demand continues to update industry innovation. It's one of the areas we described in our recent innovation white paper [indiscernible] with Willis Towers Watson. Many industry sector face highly specific challenges that lack adequate solutions. As a result we recognized that there's a need in our industry to create more affordable scalable solutions to broaden access to a wider range of recipients. For example, for investing in digital distribution capabilities to efficiently reach areas that aren't well served today highlighted by our capability for the small commercial space.

As we've seen across the economy, COVID-19 accelerated digital adoption. Through September premium volume flowing through the couple of platform is up more than three times over last year showing that this new platform is addressing previously on that client demand for more efficient digital client solutions to their risk management needs. As part of our innovation white paper, we identified and prioritized four areas we can more quickly and effectively address because we're combination with Willis Towers Watson further proof that the combination will make us better faster.

As outlined in this piece we think about delivering innovation on at least two levels. The first level is about how our business gets better today as we're in more comprehensive solutions to clients. A big part of this is reinforcing our colleague subject matter expertise by industry and geography. Well, with analytic tools that help them provide better solutions to enable clients to make better decisions. We live in that type of innovation in our core business every day and see the opportunity to do even more with the complementary capabilities of Willis Towers Watson.

Building on that first level there's a second level in which we bring those comprehensive solutions to net new addressable markets like U.S. mortgage reinsurance and deliver specific insight and analytic driven solutions like Aon client treaty. These newer challenges can't be assessed with historic insight alone. We have some of the capabilities today but will be stronger in combination with Willis Towers Watson and more capable of delivering these solutions at scale. A fantastic example of this second level is a solution we recently developed for a private agricultural technology client rather than issuing equity, they were able to use our intellectual property capital market solution to raise funds through non-diluted debt.

Our proprietary industry-defining method evaluation enabled us to value their IP so it was insurable and could be used as collateral for a loan for over a 100 million. While this is another example of how we're driving innovation today we observed that client need and continues to outpace innovation in our industry. We believe that our combination with Willis Towers Watson will be fundamental in helping reverse this negative trend.

As we've consistently emphasize, our priority is continue listening to and understanding our clients. We take pride in the strength of our client relationships and we're listening to them more than ever before. We also want to make sure we hear from them regarding the pending combination and we are. Clients from across industries, solution lines and geographies have expressed tremendous support for the pending combination and especially for the opportunities it presents to drive enhanced innovation.

Similarly, we're listening to our colleagues and we're hearing that they're incredibly excited about depending domination and what it means in terms of opportunities for them both in what they can bring to their clients and their own growth and professional development. And we continue to see higher colleagues retention year-over-year in total across the term and across geographies and solution lines. In Q2 and Q3 we saw a 39% decline in voluntary turnover year-over-year.

Maybe most remarkable our latest survey of how colleagues are feeling about Aon and our mission yield the strongest sentiment in over 10 years. This is a meaningful credit to our people leaders and all of our global colleagues.

In summary, our focus on Aon United and on providing innovative solutions for our clients is delivering results today as we manage through challenging times. Equally important our progress and development establishes in a position of strength for long-term growth, which is accelerated substantially in the combination with Willis Towers Watson.

With that overview I'd like to turn to Christa for further financial review. Christa?

[Christa Davies, CFO]

Thanks so much Greg and good morning everyone. As Greg mentioned, we delivered a solid operational performance in both the quarter and year-to-date despite continuing macroeconomic challenges demonstrating the resiliency of our business and the strength of our Aon United strategy in any economic environment. We remain committed to deliver shareholder value over the long term which we believe will be accelerated by our pending combination with Willis Towers Watson.

Similar to last year, my commentary today is more focused on the quarter given differences in the external environment today versus the beginning of the year. I would also note that Q3 is our seasonally smallest quarter. Having said that, we manage our business on a full year basis and target continued progress against our long-term financial metrics.

Our third quarter results reflect continued strong performance in challenging economic conditions. Organic revenue was flat highlighted by 13% organic revenue growth in reinsurance solutions and 2% organic revenue growth in commercial resolutions. As I described in Q1 our business has strong fundamentals with roughly 80% being core and 20% relatively more discretionary.

As expected, we continue to see larger impacts in the more discretionary portions of our business such as human capital consulting, travel and events, transaction liability and project work across the portfolio which contributed to organic revenue declines in retirement solutions and data analytics services. I would also note the reported revenue continues to be pressured by lower fiduciary investment income as a result of lower interest rates globally representing a decrease of $18 million in the third quarter.

Moving to operating performance. We delivered another quarter of improvement demonstrating strong operational discipline as we return to more normalized levels of expense compared to the second quarter. We had strong year-to-date performance and 6% operating income growth, operating margin expansion of 170 basis points and EPS grows at 8%.

As I look towards the fourth quarter there's continued macroeconomic uncertainty and as Greg mentioned we see increased revenue pressure in the fourth quarter compared to prior quarters. The most what I communicated last quarter, we expect expenses for the remainder of 2020 to be more consistent with underlying expenses in 2019 excluding adjusted items. It is due in part to an increase in certain discretionary expenses as well as continued target investments in priority areas for long-term growth while maintaining strong operational discipline. While certain areas such as reduced travel and entertainment expenses continue to be a modest tailwinds, we're investing in priority areas such as intellectual properties and [indiscernible] and making necessary operational investments. For instance, investing in tools for colleagues and strong cyber security as we continue working remotely.

Finally, as noted in the earnings materials FX had an unfavorable impact of approximately $0.01 in the third quarter and $0.06 year-to-date. At today's rates would expect a $0.02 per share unfavorable impact in Q4.

Turning to cash and capital allocation. Free cash flow increases $908 million or 91% to $1.9 billion driven by working capital improvements of which a portion is related to short-term action taken proactively managing liquidity, a decrease in restructuring cash outlays and strong operational improvements. Much of the strength we see in free cash flow comes from our Aon services platform. I would also note that we’re seeing ways in which services allows us to better support colleagues today and make us more resilient in the future. For instance, over time we've increased the amount of standardization across geographies and solution lines in sharing best practices and driving efficiencies. This has enabled us to better manage employee well-being as colleagues can more easily cover for one another allowing our colleagues greater flexibility to take time off to care for their family.

We remain very confident in the strength of our balance sheet and manage liquidity risk through well ladders debt maturity profile. We ended Q3 with approximately $300 million lower total debt compared to the end of Q2 due in part to paying down substantial amount for commercial paper in the third quarter. Historically, we’ve looked to increase debt at EBITDA growth while maintaining leverage ratios. However, due to the uncertain microeconomic conditions we expect to continue to manage our leverage ratios conservatively in the near future.

We are diligent and that's about maximizing return on invested capital and make capital allocation decisions for this framework. Share repurchase remains the highest return on capital investment today given our free cash flow valuation and outlook highlighted by the 500 million of share repurchase in the quarter and nearly a billion dollar year-to-date. We will continue to repurchase shares while maintaining higher than normal levels with cash for the near future given macroeconomic uncertainties.

Stepping back, I want to take a moment to reflect on our pending combination with Willis Tower Watson and reiterate how excited we are about the significant shareholder value creation potential. First as Greg described, we see ongoing opportunities for revenue growth as we bring together these highly complementary businesses. Historically, Aon has driven growth in three key areas driving continued improvement in our core business, portfolio mix shift for high growth areas and unlocking net new opportunities that expand our total addressable market. As Greg mentioned, COVID-19 has highlighted the reality that our clients have growing and unmet needs across risk retirement and health with the combination with Willis Tower Watson positions us to address well.

As we've said we remain committed to be $800 million of expected cost synergies. I would note that we expect these synergies on top of core module expansions for both firms and while we see a significant nature in macroeconomic uncertainty we're very confident now long term strategy to drive margin expansion. We've said before that our margin expansion is driven by accelerating revenue growth, portfolio mix shift for high growth high margin businesses and leverage for Aon business services operational platform. In particular we're confident the investments we've made in our Aon business service platform will enable us to capture our expected synergies and continue to drive long-term operating margin expansion for the combined firm.

I've noted that over the last decade we have driven 70 to 80 basis points of margin expansion on average each year. So it's some year higher, some lower. So we run the firm on a cash basis. We've demonstrated a strong track record of driving efficiencies and growth in areas such as working capital and CapEx. We're confident the investments we've made in Aon business services will create even more opportunities to grow free cash flow as we look forward to the pending combination with Willis Tower Watson.

Looking back to our deal announcement on March 9, we couldn't build the accretive to Aon EPS [indiscernible] free cash flow in year two and significantly accretive to free cash flow in year three. Given macroeconomic uncertainty due to COVID-19, we've since withdrawn our financial guidance of mid-single digital greater organic revenue growth and double digit free cash flow growth which were key assumptions of the projections upon which we calculated accretion. We are not reissuing financial projections at this time given the ongoing macroeconomic uncertainty. However, the primary drivers of the accretion that we provided were the $800 million of synergies and our capital allocation strategy. We remain committed to the $800 million of synergies and while we took action to proactively manage liquidity earlier this year we resumed share repurchase in the third quarter and continue to buy back shares.

I would note that mathematically the same amount of synergies on a smaller baseline of EPS would be more accretive. We are confident that the $800 million of synergies, our focus on driving free cash flow and our discipline capital allocation strategy will lead to meaningful shareholder value creation. Finally, as we continue to make progress against our key milestones receiving shareholder approval from both sets of shareholders on August 26th with 99% approval from Aon shareholders and 96% from Willis Tower Watson shareholders we remain on track to close the deal in the first half of 2021.

In summary, our business has shown resiliency despite continued macroeconomic challenges. Our Aon United Strategy underpinned by our Aon business services operational platform have enabled expense discipline and strong free cash flow growth while positioning us for long-term growth. Our discipline approach to return on invested capital provides financial flexibility to unlock significant shareholder value creation over the long term. We're incredibly excited about the pending combination with Willis Tower Watson.

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

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Dave Styblo, Jefferies. Your line is now open.

[Dave Styblo, Jefferies]

Hi, good morning. Each of the questions and the color about 4Q about to just start with that one and get a better sense of what are the areas that have the most exposure to the economic weakness right now and is there any way that you can provide some general book ends around how much organic pressure there will be in the fourth quarter? Are we thinking something like mid-single digits would be appropriate or there or is there just that much more discretionary spend that happened there where the pressure could be more than that?

[Greg Case, CEO]

Dave what I tried to highlight the start of [indiscernible] reinforce I think is listen overall when we think about revenue going forward nothing's really changed except this unusual year. This unusual year is all about uncertainty and we were trying to highlight as you think about Q4 there's just a lot of uncertainty. There is uncertainty on sort of what's going on, how COVID is going to evolve, the reaction of government, the reaction of clients, colleagues across Aon have done a remarkable job just an incredible job through the first nine months and we are supporting each other and clients. But when you think about Q4 for us the pressure we described and the pressure is real is really it's because of the disproportionate amount of what we do are discretionary part of overall book happened to Q4. So this is to describe before like M&A services, voluntary benefits things like that they just happen to happen to be in Q4 and it's an uncertain environment so those the actions have to happen. We're very confident they're going to happen over time whether they happen in Q4 or not really is the question.

The second piece is, you saw Q4 last year was just exceptionally strong. Now we make no apologies for that. We're incredibly excited about that but it was exceptionally strong double digit in number of these discretionary areas which is where we are. Then there are aspects of our core business as we said before like traveling events that are still under pressure and they're going to be back and stronger than ever before. We're very confident of it but it's a lot of uncertainty is sort of we move into the year. We do want to highlight though as you think about the overall profile that Christa described growth, profitability, EPS, free cash flow that profile hasn't changed at all as we think about Q4. Christa is there anything you would add to that?

[Christa Davies, CFO]

Greg, I might just finish with as we think about our business we really manage it over the course Dave of a full year and we certainly expect to grow margins over the course of 2020. We expect to grow EPS and we have an extremely strong free cash flow outlook and I think while there's pressure for sure in Q4 on revenue and therefore on margins we expect to continue to grow in 2021 and continue to manage all four of those metrics; revenue, margins, EPS and free cash flow over the course of the year.

[Dave Styblo, Jefferies]

Helpful, thanks and then I'm sure it's tough to a pine on next year, but assuming we get back a little bit more of a normalized environment organic growth still might be soft. Is there some sort of rust threshold where it gets hard to expand margins and obviously you could tell the curtail those back at the expenses perhaps longer term revenue growth but how do you think about that balance for next year if growth is sort of both below the 3% to 5% range that many insurance brokers are at?

[Christa Davies, CFO]

Yes, Dave we do expect to grow margins next year. If you looked at 2020 margins an example we expect to grow margins and 2020 and we're up 170 basis points year-to-date. Long-term our goal to drive margin expansion each year as evidenced by our record 27.5% margins in 2019 up 250 basis points on top of ten years of margin expansion with 70 to 80 basis points each year net of ongoing investment in the business and we would say a long-term margin expansion is driven by revenue growth, our portfolio mix shift hire both higher margin areas and Aon business services driving productivity. And we believe, we have got substantial opportunity for margin expansion with the combination of Willis Tower Watson number one and growing a Aon core margin number two growing Willis Tower Watson margins and number three adding on the 800 million of synergies, which we are very confident delivering.

[Greg Case, CEO]

And even Dave, you think about sort of the overall economy which seconds or how it struggles to evolve over time I just also want to remind you on top of and I really say on top of what Christa just described we can consider the broad-based risk that are no longer on the rise of in our face and like pandemic, climate change, intellectual property all the things we outlined in our white paper that John described so well on the call yesterday and Willis Tower Watson. These are things that are real. They are in front of us. They're going to create demand over time because clients got to find ways to address these _. So on top of all Christa described that's what we're really excited about the combination being able to address.

[Dave Styblo, Jefferies]

Helpful. Thanks much.

[Operator]

The next question is from Elyse Greenspan, Wells Fargo. Your line is now open.

[Elyse Greenspan, Wells Fargo]

Hi, thanks. Good morning. My first question just in terms of the merger with Willis Tower Watson. I was hoping you could provide us an update just in terms of timing, I guess first half of next year. I'm assuming obviously that still holds but I guess more in terms of just like it's the regulatory process where we stand today in terms of kind of the timeline you guys expected when you put the deal together just given it seems like COVID in some instances just falling things down just want to kind of get an update and see anything they're still on track and where we stand over in different perspective?

[Christa Davies, CFO]

Terrific. Thanks for the question Elyse. We do believe we're exactly on track to close in the first half of 2021. We filed our joint definitive proxy on Wednesday, July 8th and completed the share with overwhelming support on August 26 with 99% of Aon share we sighted for a 96% of Willis Tower Watson share is voting for. We do not expect to provide update to the regulatory process unless we have something to report. As John Haley mentioned on the Willis Tower Watson's earning call yesterday several global antitrust filing be required in connection with the closed transaction the specific planning process and timing varies by jurisdiction, and we do not expect to provide updates until we have something to report. But as we've previously indicated we are on track and expect to be able to close in the first half of 2021.

[Eric Andersen, President]

Christa, maybe a fallow-on at around how we're doing with the integration process because I think it's pretty important. We've actually done a lot of work around the culture of the firm's understanding how each of the firm's operates through the client centricity, the capabilities of each of the terms have the so complementary and we've been using this period of time really to focus on getting to know each other trying to figure out how do we work better together as Greg mentioned on the white paper finding those opportunities. So while that regulatory process is going on we've been spending an awful lot of time setting up and doing the planning about how we're going to come together.

[Elyse Greenspan, Wells Fargo]

Great and then in terms of organic growth, going back to the color in terms of the greater discretionary piece in the fourth quarter. You guys said, you expect I am guessing to slow in the Q4, the Q3 was obviously better than the Q2 what was the point you're trying to make is that the fourth quarter would be like the weakest of the year or just slow down sequentially versus the Q3. I wasn't sure if there was a lot of value were also trying to make it at me reference that to like the second quarter which I guess was the lowest so far that you have seen during this slow down.

[Greg Case, CEO]

Yes.The highlight it. This is about this is truly uncertainty. We are observing by the way the pressure that we described which is real is as Christa described before 80% in scored 90% discretionary but 20% disproportionately for us shows up in Q4 and at 20% are things like M&A services. We have an awesome business here wonderful support for clients but if shovels don't go in the ground that doesn't happen eventually it happens but it's it builds the business over time over the coming years we're not talking about the category. It's great but in Q4 it's about uncertainty where it is same is true on some of the health businesses we described travel, events, etc. So we're just highlighting there's a lot of uncertainty in Q4.

No one really knows well if anybody out there knows please call us. We'd like to know exactly what's going on but our colleagues have just done a masterful job being ready for clients to move and modify and shape, help them shape their strategies but we just have a huge amount of uncertainty sort of in terms of Q4 with growth in 2021 and all the things that Christa described nothing has changed in our overall growth profile on what we expect long term.

[Elyse Greenspan, Wells Fargo]

Okay. Great and then just one last one Chris I think last quarter you had mentioned that you guys were returning to buybacks and I think you used the word modest correct me if I'm wrong and so you guys bought back 500 million of your stock in just one month in the quarter which was pretty healthy level. Can you just help us think about buybacks like the levels from here given that it was a pretty robust return to buyback when you guys went back into the market in the third quarter?

[Christa Davies, CFO]

Thanks so much Elyse. Look in response to macroeconomic certainty we did pull buyback March in order to maintain liquidity, stability and flexibility and then we did announce last quarter we resume a limited amount of buyback for the remainder of the year. We're not giving guidance about capital allocation going full but we'll assess it based on actual forecasted cash flow as well as capital market conditions. And so, what you did see Elyse is exceptionally strong free cash flow stunning in the first nine months of the year up 91% to $1.9 billion but the macro uncertainty remains and so what you'll see is we continue to allocate cash based on return on capital, cash on cash return and buyback remains the highest return on capital opportunity across Aon even at Aon's peak valuation or peak stock price and so at today's prices it is a fantastic return on capital opportunity and so we will continue buyback but it'll be based on the cash we generate and capital market conditions.

[Elyse Greenspan, Wells Fargo]

Okay. Thanks. I appreciate the color.

[Operator]

The next question is from Jimmy Bhullar, JPMorgan. Your line is now open.

[Jimmy Bhullar, JPMorgan]

Hi good morning. I had a couple of questions both on the Willis deal, first there's a lot of skepticism out there about your comments on not really having a lot of revenue synergies as you go through the regulatory approval process and the potential for you being forced to sell parts of the Willis business or parts of the combined business. Can you discuss what gives you confidence that that won't be the case and then related on your expense savings targets if we look at the $800 million number that's I think close to roughly 5% of the cost base and in past deals you've done a lot more than even 10% and I would have thought that given the similarities between the two companies you'd actually potentially be able to do more so maybe talk about if there's any conservatism baked into your numbers or are there things that you see that are causing you to be more cautious on expense savings.

[Christa Davies, CFO]

Sure Jimmy. So I'll take the first one on antitrust. So we do believe we're on track to close in the first half of 2021 as I said with no divestitures and the reason we're so confident about that is because we have the world's leading antitrust council. We've had them for more than 18 months. We've worked through this in detail and we believe we have highly complementary businesses and even in areas like reinsurance which I know has been speculated upon Jimmy, we look at that business and we think about it from a client perspective and clients have a huge range of choices. If you think about the client for reinsurance it's an insurer and they can place direct which a lot of them do. They can place um in the capital markets through alternative capital.

They can place during [indiscernible] and they can place through a huge range of brokers including a number of broker startups given the significant movement of talent in the reinsurance industry and so we look at that incredibly competitive field and we do see that there is enormous competition from a client choice perspective and so again we feel really confident about where we are and exactly on track to closing the first half of 2021 with no divestitures. Then moving to your second question sorry Greg did you want to jump in?

[Greg Case, CEO]

No, please go ahead. I will pick up when you are done.

[Christa Davies, CFO]

Your second on cost synergies. So we did announce 800 million of cost synergies which as you pointed out Jimmy is 5.5% of the combined cost base and we did achieve 11% of the combined cost space in Aon Hewitt and 18% of the combined cost base in Aon and what I think that tells you Jimmy is, we are extremely confident about achieving the 800 million. What it also tells you Jimmy is, really the main strategic focus of the combination with Willis Tower Watson is on revenue and on delivering on these new solutions for clients to meet unmet client needs and really we want to make sure that as we bring the combination together we're really absolutely laser focused on clients and driving that significant upside in terms of revenue potential as opposed to completely distracted by taking costs up but Greg what would you say?

[Greg Case, CEO]

I think the stat you added the piece two aspects of it Jimmy very important question. One just when you think about talent and I think you're asking about talent in addition to just the antitrust fees ask yourself as we come together our colleagues are going to able to sit across the table from clients with more capabilities for clients that's a wonderfully positive thing and that's what we want to try to do that's what we're focused on. Eric, in his work with his colleagues at Willis Tower Watson and others are really working on sort of how that calling value proposition comes together to make it more compelling. This is not about synergy. It's about literally net new and that then fits on the client side and if you step back and think about there's been a 30 year period when you think about risk as a percent of GDP where it's gotten less significant we're becoming less significant as an industry that's what the facts tell us.

And by the way at a time when client need is going up and then that's become even more pronounced during pandemic and so again this is what the white paper was about and as we begin to think about addressing those opportunities that's why this is about growth that's why this is -- there will be synergies of course you bring two firms together but this is about growth addressing some of the most significant risks in the world today that are unaddressed literally unaddressed pandemic, climate, intellectual property even cyber relatively less addressed. And in the end it's a real opportunity in terms of sort of where we are and what we're trying to do and there's lots of opportunities out there as you think about sort of where we are in specific events that are happening every day. But in the end this is really about client opportunity and creating net new as part of this combination.

[Eric Andersen, President]

Yes Greg, maybe to pick up on it just to pick up on it for a second because I do think our Aon United Strategy which we've been working on for several years around how we integrate around the client bringing all the capabilities whether it's bringing reinsurance modeling to property clients on our commercial risk side there's a hundred of these examples that are out there. Willis Tower Watson has very similar client focused and efforts underway and so when you bring those together as Christa said this is all about finding new ways to serve our existing clients to do more for them and I think the excitement that's building both from an Aon and the Willis Tower Watson inside it's really starting to come together as people start to see the possibilities.

[Jimmy Bhullar, JPMorgan]

Okay and just lastly on the health business you saw a noticeable improvement in your organic growth on 1%, but last quarter was down double digits. I think in the release there's a mention about some timing of booking revenues. Is the majority the improvement just because of that or I don't know what extent you can quantify it or was there underlying improvement in the business as well versus 2Q?

[Greg Case, CEO]

Yes. Well similar as we said in our last discussion really this is the space we absolutely love the overall opportunity and health we think is tremendous coming into 2020 and as you well know Jimmy has become even more pronounced you think about everything that's happening with the pandemic. It's now literally in every border and every company around the world and our opportunity to support clients here is tremendous. So we love this long term and we love it even in the short term and what you saw in Q3 was just continued progression. There is still a lot of uncertainty, still a lot of discretionary uh events happen in the fourth quarter as it relates to health particularly in the U.S. but we love this space long term and the team has done a great job we are really looking forward to kind of seeing this business grow and progress.

[Jimmy Bhullar, JPMorgan]

Thanks.

[Operator]

Suneet Kamath, Citi.

[Suneet Kamath, Citi.]

Yes. Good morning. First I want to go [audio gap] and I think you said something along the lines of spreading the [audio gap] so my question is were buybacks not contemplated in your origin [audio gap].

[Christa Davies, CFO]

So Suneet actually what I said was if you think about the 800 million of synergies so if you think about the accretion it was really based on two things. It was based on the 800 million of synergies and it was based on a capital allocation. [Audio gap] 800 million and [Audio gap] quarter and continue to buy that shares and so if you think about accretion mathematically if you think about the original accretion assumptions on a smaller EPS base then it would be more accretive today.

[Suneet Kamath, Citi.]

Okay got it and then I guess on the deal in terms of regulatory reviews and approvals how might a change in the presidential administration impact the timing of the close as we think about potential changes at the DOJ or elsewhere?

[Christa Davies, CFO]

Suneet we will see any impact should there be a change in administration especially given the timeline may expect the deal.

[Suneet Kamath, Citi.]

Okay and then my last question is just on margin looking out over time Christa you mentioned a couple times the 70 to 80 basis points of margin expansion annually and you still feel pretty good about the path going forward but as we think about margins in the future is there any way to frame for how much longer you guys think that you can continue to improve margins be it at that 70 to 80 basis point range or something in that neighborhood? So when does this sort of tailwind start to peak or drop off? Thanks.

[Christa Davies, CFO]

Suneet thanks so much for the question because long term our goal is to continue to drive margin expansion this year. We do not see some cap on margins. In fact we continue to see margin expansion for the foreseeable future. And it's really driven by revenue growth, our portfolio mix shift to higher revenue growth higher margin areas and Aon business services continuing to drive productivity. We obviously see substantial margin expansion with the combination of Willis Tower Watson because you get Aon core margin expansion plus Willis Tower Watson margin expansion plus the synergies and as we look at our portfolio today the portions that are more analytic in nature tend to be higher margin areas of the portfolio and so that gives us confidence going forward that we'll continue to have long-term margin expansion.

[Greg Case, CEO]

And so on top of that Suneet, if you think you think about what Christa just described if just painted a picture over the coming years literally all the pieces are in place for margin expansion. We think about Aon business services and the capabilities the next incarnation of that called the new way Aon business services as we bring the firms together sort of in the new world here the opportunity over the next few years that's in place and there's tremendous opportunity for Aon by itself, Willis Tower Watson by itself and for the combination and that's we're pretty excited about that.

But beyond that if you go to the innovation white paper for just a minute and ask a question there are issues that must be addressed. Client need is going up. As we address those issues they're going to be done with analytics and capability so that we're building over time. That analytics gives us a margin profile that's different than it has been before. If you look at other analytics businesses their margin profile and their growth is much more substantial than ours are. So there's the ceiling you're describing it's a great question but we don't see that at all.

In fact, because we have all what we do and we help our colleagues because it really is about our colleagues more than any time ever about our colleague we're truly supporting them with greater levels of analytics that help us address these questions. This outcome great for our clients, great for our colleagues happens to be exceptionally good for our shareholders as well in terms of where we are. So that's why we're so excited about the investment and the combination to address this next level of issues that are out there and no longer on the horizon. They are at our doorstep with a higher awareness than ever before to address them.

[Suneet Kamath, Citi.]

Got it. Okay. Thanks for the answers.

[Operator]

Our last question is from Phil Stephano, Deutsche Bank. Your line is now open.

[Phil Stephano, Deutsche Bank]

Yes. Thanks and good morning. I had another question on margins and thinking more about this in the next year or two I was hoping you could help me think about the competing forces of when we return to a normal world of growth and a normal world of expenses does the potential for margin expansion in one particular year have natural pressures from a return of normal expenses?

[Christa Davies, CFO]

Thanks so much for the question and what we would say is we expect to continue to drive margin expansion each year including if you thought about returning to a normalized environment, you'd add expenses back as revenue came back and so we'd be very disciplined about making sure that occurred but if you think about the new better operating model where we're consulting with clients about today in terms of the work coalition you can think about sort of areas like long term, lower real estate costs, more service delivery centers and ongoing Aon business services providing productivity improvements over time. And so there are many areas in which we think the opportunity for margin expansion continues to accelerate.

[Phil Stephano, Deutsche Bank]

Okay. Understood. A quick numbers question reinsurance the organic in the year was a bit strong and one of the things that was noted was a timing benefit. Can you just help us understand what the timing benefit was and when it was from?

[Eric Andersen, President]

So this is Eric. I would say it was pretty minor. The reinsurance business continues to be great on a full year basis but we're obviously in the third and fourth quarter are the smallest quarters for us because most of the treaty business is done. It's now facultative and any kind of investment banking work that gets done. So I would say was pretty immaterial.

[Phil Stephano, Deutsche Bank]

Okay and then the last one just philosophically thinking about sharing repurchases versus the uncertainty that's come up a lot of times on this call for the next year or two how do you think about of the uncertainty and get comfortable with the fact that at least third quarter was a strong quarter with repurchases that is the right action to take just given the uncertainty that you have?

[Christa Davies, CFO]

Thank you so much because we are managing cash and liquidity incredibly conservatively. You can see that as we built up cash and short-term investments on the balance sheet you can see it because we decreased debt by 300 million between end of Q2 and end of Q3. You can see it because we've got a very conservative debt ladder long-term for the firm and so we're being very conservative in response to macroeconomic and therefore, go jump in Greg.

[Greg Case, CEO]

Go ahead Christa. No problem.

[Christa Davies, CFO]

And so, what we see is we're managing this based on our free cash flow which is exceptionally strong I mean free cash flow up 908 million years-to-date up 91% and then obviously the return on capital opportunity of share a purchase is exceptional and it was exceptional at peak stock price levels for Aon and at today's prices is just a stunning return to shareholders and so for us we'll continue to manage liquidity incredibly conservatively and then we'll continue to invest based on return on capital cash on cash returns as we think about the firm but Greg please jump in.

[Greg Case, CEO]

Yes and I'm just trying to put you if you think about this in context of our overall strategy and what we're doing like Christa describing literally the discipline and the approach we've taken in managing our balance sheet and driving free cash flow and that has been exceptional and it continues to be exceptional and we have the capacity to do a lot as we invest in the business as we do share buyback and anything that sort of drives return on invested capital and ultimately free cash flow over time but I would highlight you're seeing the buyback. Again we have capacity to do a lot but the example that I described around intellectual property isn't example we're investing in the core business and really doing things from an innovation standpoint.

The loan we made the investment to do that took hundreds and hundreds of colleagues coming together to model intellectual property in ways that's never been modeled before, literally never been modeled before in a way that we could actually insure a patent portfolio and then get a loan against the patent portfolio and so we're making lots of investment in the businesses sort of as we build it over time. I love the example that John gave yesterday John Haley on the climate so we're investing we see this as one of the next big horizon around how we help clients think about the transition from in a challenged world and we can help reduce volatility against that by matching capital with risk and fundamentally this is what we're talking about and the beauty of it is from a cash standpoint we have an exceptionally strong balance sheet, exceptionally strong free cash flow which will be reinforced as we come together in the combination that allows us to actually do the things that Christa described allocate capital to improve the capital buyback shares

Obviously, makes sense for all the reasons Christa describe but also invest in the business and bring in additional capability as needed. So we're you say cash it is the thing we live every day. We focus on in terms of what we're trying to do and we're working to strengthen to build that over time.

[Phil Stephano, Deutsche Bank]

Got it. Thank you.

[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 to everyone as always thank you so much for joining us. We appreciate it and look forward to our conversation next quarter. Thanks very much.

[Operator]

That concludes the conference. Thank you all for participating. You may now disconnect.