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Edited Transcript of AON earnings conference call or presentation 25-Oct-19 12:30pm GMT

Q3 2019 Aon PLC Earnings Call

LONDON Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Aon PLC earnings conference call or presentation Friday, October 25, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christa Davies

Aon plc - Executive VP of Global Finance & CFO

* Eric Andersen

Aon plc - Co-President

* Gregory C. Case

Aon plc - CEO & Executive Director

* Michael J. O'Connor

Aon plc - Co-President

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Conference Call Participants

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* Brian Robert Meredith

UBS Investment Bank, Research Division - MD, Financials Research Sector Head & Global Insurance Strategist

* David Anthony Styblo

Jefferies LLC, Research Division - Equity Analyst

* Elyse Beth Greenspan

Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst

* John Andrew Heagerty

Atlantic Equities LLP, Research Division - Research Analyst

* Jon Paul Newsome

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior Insurance Analyst

* Joshua David Shanker

Deutsche Bank AG, Research Division - Research Analyst

* Meyer Shields

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Michael David Zaremski

Crédit Suisse AG, Research Division - Research Analyst

* Yaron Joseph Kinar

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and thank you for holding. Welcome to Aon plc's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) I would also like to remind all parties that this call is being recorded. If anyone has an objection, you may disconnect your line at this time.

It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by 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 2019 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.

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Gregory C. Case, Aon plc - CEO & Executive Director [2]

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Thanks very much, and good morning, everyone. Welcome to our third quarter 2019 conference call. Joining me today is our CFO, Christa Davies. In addition, we have our 2 co-Presidents, Eric Andersen and Mike O'Connor, joining the discussion to help lead our Q&A session with their frontline perspective of client impact that illustrates the result we're achieving with clients through our Aon United growth strategy.

Like previous quarters, we posted a detailed financial presentation on our website, so that we can focus our time on these quarterly calls to provide you more insight into the longer-term view for the firm.

First, let me start by recognizing the remarkable dedication of my Aon colleagues around the world. Their collective efforts continue to strengthen the firm and create long-term momentum reflected through strong performance in the third quarter. We delivered positive results across each of our key financial metrics, including 5% organic revenue growth. And I would highlight organic revenue growth on the year-to-date and trailing 12-month basis of 6%, reflecting continued acceleration of our historical trend, substantial operating margin expansion of 350 basis points and 11% EPS growth, overcoming FX headwinds in the quarter.

We're driving the continued progress through this year with momentum headed into the last quarter of 2019, and this is a direct reflection of the strategic investments and actions we continue to take to achieve our potential operating as one united global professional services firm.

Last quarter, we touched on valuable insights from our global risk management survey, highlighted how clients faced growing volatility and complexity in today's evolving world.

Nearly every organization, industry and economy are confronting greater challenges than ever before, and most of these risks are underserved, if addressed at all, because they're not well understood with less historical experience and use of available data to predict, measure or manage these challenges. More concerning is that these challenges are very likely to grow in intensity over the next few years as emerging risks become even more prominent, threatening the ability of our clients to continue driving growth, protecting their assets and developing talent.

Against that backdrop, we are responding with actions that bring the full force of our firm to clients by developing innovative solutions and applying data and analytics to better inform and advise them for their future. This approach is at the core of our Aon United growth strategy and establishes the commercial foundation upon which we drive innovation, deliver expanded client value and accelerate the growth of our firm.

Beginning in 2017, with the divestiture of our outsourcing business, we have taken a series of important steps designed to remix our portfolio to achieve a faster-growing, higher-margin set of offerings that better reflect the expanding needs of our clients. This approach is best evidenced by the $4.8 billion disposition of our outsourcing business and the subsequent $1.5 billion reinvestment over the last 2 years in middle market and back-office service innovation.

That reinvestment included the creation of Aon Business Services, an important step toward modernizing infrastructure and creating a common technology platform that simplifies repeatable elements of client service and allows colleagues to spend more time on the highest value aspects of their client relationships while supporting sustainable margin expansions for the firm.

In parallel, we took steps to reduce structural barriers that prevented colleagues from delivering the best of the firm to clients, which, in 2018, included the shift to a single global brand and the creation of a single global operating committee, creating a forum for Aon United decision-making that has accelerated growth in our core business.

Last year, we also created the New Ventures Group, which is driven by a team of global leaders that command a capital and supporting infrastructure necessary to function of the growth stage development platform. This group is developing a portfolio of cutting edge client solutions on topics like intellectual property and public sector partnerships, which further accelerate net new innovation on behalf of clients and expands our addressable market.

The Aon United actions we have taken at the global level have unified our firm and further strengthened our capabilities, which is proven out by our performance through 2019.

With this momentum, we announced the next phase of our Aon United growth strategy earlier this month, outlining 2 key components that translate our progress at the global level into how we go to market locally, allowing us to more effectively bring the full force of our global firm to clients. We described the first component as delivering Aon United because it includes a series of steps that will improve sales effectiveness, strengthen our segmentation strategy and further increase collaboration across solution lines, all of which means more value creation for clients and further acceleration of organic growth.

The second component is about the expansion of our industry-leading Aon Business Services platform. Aon Business Services has already proven that it helps capitalize on the benefits of our global scale to deliver world-class client service and provide colleagues additional capacity to deliver more value to clients, which is why we're expanding our Aon Business Services' footprint and establishing client service hubs, leveraging technology platforms and new capabilities to accelerate our ability to deliver the best of the firm to clients while driving further operational excellence in our back- and middle-office services, which will drive greater productivity in our operations and contribute to sustainable margin expansion.

These moves create a common baseline for Aon United and the experience of Aon United in our local geographies, including how the firm articulates our value proposition to clients, delivers repeatable elements of client service, develops our colleagues and measures return on invested capital.

At the end of the day, all of these steps come back to how we can most effectively bring the best of our firm to clients, so that we can help them improve their operational performance, reduce volatility or strengthen their capital position. Which is why we will continue to take steps to connect our firm, leverage our global scale and strategically invest in industry-defining content to amplify the value we can provide on their behalf and increase our relevance in today's evolving landscape.

For your reference, I'd like to highlight one example of how our colleagues came together with a real business partner approach to address a client's unique need to give you an idea of how our Aon United efforts translate into value at the frontline.

A global agricultural firm was facing operational losses due to cash flow volatility throughout the year based on seasonal crop yield that could be impacted at any given time by weather-related events or other variables outside their control. We believed we could help this client with insight gained through data and analytics that would guide a strategic choice.

Our team brought together commercial risk, reinsurance and data analytics capabilities. Then we analyzed satellite-gathered weather data, applied our proprietary catastrophic impact forecasting model and overlaid trends with the client's revenue. Our team was able to correlate patterns that enable the design of a parametric trigger solution unique to this client's operational risk.

The result was an innovative, tailor-made crop risk management program that pays off automatically once a predetermined trigger is reached. This is a more efficient and timely approach, supporting our client's competitive advantage in maintaining their crisis regardless of harvest quality. They also benefit from cash flow reliability, operational and capital stability and improved long-term business planning.

And that's just one recent success story of how we are responding to unique client demand with action, truly made possible by greater colleague collaboration and through commercializing our proprietary content and data into an opportunity to deliver client value. But the application is happening across the portfolio as we scale our Aon United efforts, translating into improved growth profile for the firm as we drive new business generation and create greater retention and share of existing clients.

Our trend of organic growth has already improved from 3% in 2014 and 2015 to 4% in 2016 and 2017 to 5% in 2018. And now in 2019, we've delivered 6% year-to-date.

Further, we expect strong performance in the fourth quarter, resulting in continued progress for the full year against our goal of mid-single-digit organic revenue growth or greater over the long term.

In summary, our clients are demanding that they be better informed and better advised to navigate and address the complex and evolving challenges they face. We continue to build momentum as we strengthen our ability to create value on behalf of clients through investments in industry-defining content and capability, combined with greater alignment across our firm while also achieving strong financial results and increased value to our shareholders.

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

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [3]

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Thanks so much, Greg, and good morning, everyone.

As Greg highlighted, we continue to take steps to deliver Aon United, which is amplifying our ability to serve clients distinctively and deliver improved financial performance. We delivered positive performance across each of our key metrics, both the quarter and year-to-date. Through the first 9 months of the year, strong organic revenue growth and increased operating leverage have contributed to substantial operational improvement, which is translating into double-digit free cash flow growth. We are delivering on restructuring initiatives and funding significant investments across the firm that will deliver improved financial performance long term.

As I further reflect on our performance year-to-date, first, the growth profile of our firm is improving with 6% organic revenue growth year-to-date and for the trailing 12 months. I would highlight year-to-date organic revenue growth accelerated 200 basis points from 4% in 2018 to 6% in 2019, as we deliver on our goal of mid-single-digit or greater organic growth over the long term.

Reported revenue has been pressured throughout 2019 by an unfavorable impact from changes in FX. Our disciplined focus on maximizing return on invested capital continues to help shape the portfolio towards our highest growth and return opportunities, as highlighted by the divestiture of certain businesses and Retirement Solutions at the end of the second quarter.

Second, we continued another quarter of substantial operational improvement, which has contributed to strong year-to-date performance of 12% operating income growth and operating margin expansion of 250 basis points. Both operating income growth and operating margin expansion have improved on a 9-month basis compared to results of 6 months while the impact from restructuring savings has remained similar, reflecting increased operating leverage across our portfolio.

We are translating strong operational performance into double-digit EPS growth of 10% year-to-date, overcoming continued headwinds from FX translation. FX rates continued to have an unfavorable impact from results in the third quarter, due primarily to a stronger U.S. dollar, resulting in a significant net unfavorable impact of approximately $0.20 year-to-date or a $58 million impact on operating income. If currency were to remain stable at today's rates, we anticipate an unfavorable impact of $0.04 or approximately $12 million reduction of operating income in the fourth quarter.

We continue to successfully execute against our restructuring initiatives with $32 million incremental savings in the third quarter. Our ongoing restructuring initiatives are driving expense savings near term, but, more importantly, they're enabling growth of the firm as we unlock additional operating leverage through our Aon Business Services operating model.

Aon Business Services is helping us modernize our infrastructure and create a common technology platform. When we simplify and standardize repeatable elements of back- and middle-office processes, we're finding that our colleagues have more time to spend with clients, strengthening our relationships and identifying expanded opportunities for our firm.

Looking beyond near-term restructuring savings, we expect to drive sustainable operating performance and long-term core margin expansion annually similar to the 70 to 80 basis points of operating margin improvement achieved annually over the last decade, net of continued reinvestment and growth opportunities. This is driven by organic growth, portfolio mix shift and ongoing productivity improvements.

Lastly, free cash flow increased by $200 million or 25% to $996 million. The substantial growth through the first 9 months primarily reflects strong operational performance. I would note both the prior and current periods include impacts that largely offset each other in total for a neutral impact to year-over-year growth.

As we think about cash flow generation going forward, we're focused on maximizing the translation of accelerating revenue growth into the highest level of free cash flow in 3 ways: operating income growth, continued progress on working capital initiatives and structural use of the cash winding down.

2018 was the peak year for cash usage, as shown in our presentation on Slide 26. Declining uses of cash restructuring, CapEx and pension continue -- are expected to free up over $585 million of free cash flow by the end of 2020.

We continue to have significant upside to a base of more than $1.45 billion of free cash flow in 2018 priced with any operating income growth or working capital improvements. Together, these inputs give us confidence in our ability to deliver on our goal of double digit growth in free cash flow over the long term.

Further, we have the opportunity for incremental debt while maintaining current investment-grade ratings, as EBITDA growth, restructuring costs wind down and pension liability improves, providing significant financial flexibility over the next few years to further invest in value creation or return of capital to shareholders.

We're diligent about maximizing return on capital and make capital allocation decisions through this discipline. Share repurchase remains the highest return on capital investment today, given our free cash flow valuation and outlook, highlighted by the $1.5 billion of share repurchase year-to-date.

In summary, strong top and bottom line performance for both the quarter and year-to-date continue to reinforce our Aon United initiatives of strategic decisions, building momentum as we enter the last quarter of the year, but, more importantly, strengthen the long-term growth profile for our firm.

In addition, our disciplined approach to return on capital, combined with our expected significant free cash flow growth and increased debt opportunity over the next few years, provides the natural flexibility to unlock significant shareholder value creation over the long term.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have 9 questions in queue on -- of our Q&A. Our first question comes from David Styblo from Jefferies. That is Mike Zaremski, Crédit Suisse.

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Michael David Zaremski, Crédit Suisse AG, Research Division - Research Analyst [2]

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First question's on the commercial insurance pricing environment. A number of large corporations have been talking about fairly significant increases in pricing and/or changes in capacities kind of starting in April, May and persisting into 4Q. Maybe you can comment on what you guys are seeing and if it's helping drive revenues and margins for Aon.

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Gregory C. Case, Aon plc - CEO & Executive Director [3]

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Yes. Mike, from our standpoint, we've talked about this on the call frequently, so I really appreciate the question. Again, for us, remember, pricing really translates into market impacts, so that's encompassing both rate and insured values. And as we've highlighted, market impact for us, let's say it had a modestly positive impact to our results.

Just maybe 3 observations. When you think about Aon overall, something around half of our world is -- operates completely independent of any insurance pricing cycle. And even within our risk business, 1/3 of it is fee-based. And when you think about our overall approach in what we do, our world is really centered around using data and analytics capability to really help clients at an individual level focus on their circumstances and to get the best results. So you will see us modify programs, individual covers based on market conditions. They will fundamentally -- we will help them change behavior based on market reaction or market position. So for us, overall, modestly positive impact results, and our view is the highly client-centric approach is one of the reasons we've got new business generation and retention levels that are at an all-time high.

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Michael David Zaremski, Crédit Suisse AG, Research Division - Research Analyst [4]

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And a follow-up to that is just the -- for the 1/3 that's fee-based, historically has that grown at a low single digit pace? Or how should investors think about how the fee-based business or revenue's sensitivity?

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Gregory C. Case, Aon plc - CEO & Executive Director [5]

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Yes. So Mike, we don't break out literally sort of growth at that level. Our view, as we come back, there's really not a difference. This is how about we add value to clients and consistent -- as we described what we mean by Aon United behavior, this is how we bring global capability to our clients in our backyard and when we do it, how we describe the value. So literally, the work we're doing includes how we describe the value to clients. If we create value, we should get paid for the value. And if we don't, we should highlight that as well. So we're incredibly transparent. And our view is we are increasing our capability to both deliver value, articulate value and get paid for value.

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Michael David Zaremski, Crédit Suisse AG, Research Division - Research Analyst [6]

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Okay, great. And lastly probably for Christa. Interest rates have declined fairly measurably year-to-date, and stock market in the U.S. has done well. Any early views on if things don't change much from here? Will any -- the pension expenses or free cash flows be materially impacted for next year?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [7]

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Yes. I mean, it's a great question, Mike. What I would say is as we think about our pension on fund liabilities, we do an annual measurement at 12/31 each year. The balance sheet, in terms of our fund pension liability, Q3 doesn't reflect changes in interest rates or asset valuations. And we've certainly done a lot of work on our pensions over the last 10 years to freeze the plans and close them and derisk them to massively reduce volatility. So our results in pension cash contributions in 2020, you can see it shown in the chart on Page 26, it shows it's decreasing substantially, and we feel really good about that outlook. In terms of other impacts from interest rates, our debt is fixed. And so we don't see material impacts from interest rates.

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Operator [8]

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Our next question comes from David Styblo from Jefferies.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [9]

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Can you guys hear me this time?

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Gregory C. Case, Aon plc - CEO & Executive Director [10]

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We can.

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [11]

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We can, Dave.

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Gregory C. Case, Aon plc - CEO & Executive Director [12]

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David, welcome back. What's on your mind?

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [13]

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Good, okay. I'll give -- maybe I'll give Mike and Eric a chance to chime in on this, but I'm curious as you guys are going to market with your clients, and it sounds like you're increasingly doing more customized solutions to help them with their specific set of risks, I'd imagine that probably takes more effort, human capital, resources and so forth. I'm wondering, to what extent or how do you get compensated for that? Does that wind up being a higher-margin sell for you guys ultimately because you are providing a customized solution set for that client that they could maybe not otherwise find in the market? Maybe just what does that look like going through the sales cycle?

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Gregory C. Case, Aon plc - CEO & Executive Director [14]

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Yes. When you step back, David, and you think about sort of what really happens when we bring the best of our firm, in essence, we got -- the beauty of this is we have the capability. We have the capacity. Our colleagues have the expertise, and our clients have increasing need. The question is, how do you connect the dots and actually make that happen? And so we have more and more found situations where we're spending time with a client, understanding broad-based needs. Our colleagues have greater awareness of Aon in what they're trying to get accomplished and what we're trying to get accomplished. And so they actually then bring these other colleagues in. They address these issues in ways we haven't addressed before. And the beauty of this is it not only creates net new areas, but it also very much sort of addresses retention on existing business in what we're doing from an existing client standpoint. So the approach we're taking very much sort of leverages assets and capabilities that we've got, and clients respond very, very positively to it.

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Michael J. O'Connor, Aon plc - Co-President [15]

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David, it's Mike. Maybe I'd give you an example of how we helped decrease the perception of volatility from climate change. It was impacting a client's real estate portfolio. So really, really I find a very interesting example of how we're growing and expanding relationships with clients. But in this situation, we had a large real estate client, who is an investor, and the team is doing a terrific job around commercial risk. But the team in this case just stepped back and said, "What is the real issue challenging this client's business?" And one of the issues they were facing was an overhang of how climate change and other catastrophic risk over the long term would impact the real estate portfolio. And our team wouldn't done this in the past. They brought together colleagues from around the world. They brought together colleagues from commercial risk, reinsurance, our data and analytics team and said, "Could we actually come together with the experiences, the capabilities we have, the data and analytics? And could we actually put together a risk portfolio diagnostic to basically identify and quantify the impact that climate change and other risks would have on this portfolio of real estate over the long term?" We were able to share that insight with the client. They were able to take it back to their investors and actually show facts and scenarios and thereby reduce the perception of risk. And for us, this was a whole new relationship with the client. It grew our relationship with them and also solidified us as a real partner to help their business for the long term. That's just an example for us that we get really excited about in terms of what we can do for clients.

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Eric Andersen, Aon plc - Co-President [16]

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And Mike, maybe -- Dave, it's Eric. Maybe I'd just pick up on another one because you asked about how we bring the teams together. There's -- and we use an integrated client planning process, but maybe I'll just use another example to run through. We had a financial institution client that had been a long-term client, but during that process, uncovered that they were dissatisfied with the product that they were selling through their own distribution agents and were looking to find ways to either revamp either the pricing, the underwriting, the distribution, the claims process, the whole sort of process of offering the product. And they asked us for our thoughts and we were able to bring our insurance consulting capability, our data and analytics as well as our experience and knowledge of the marketplace. They had also asked some advisory firms for their opinion, but our ability to tie all of it together sort of enabled us to proceed with the client. And ultimately, for the client, the outcome is pretty straightforward, right? They end up with a revamped process that drives more revenue for them, reduces the volatility of the product itself. But for us, it actually gives us a much deeper insight into the client. It was already a great client. So really, it was bringing a new capability into an existing market as opposed to going out to cyber or government derisking or others areas that we've talked about. This is about expanding capabilities within an existing relationship using that integrated client planning process that I referred to earlier.

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Gregory C. Case, Aon plc - CEO & Executive Director [17]

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And David, one real important point here, too. This is -- your point -- your question about the sales cycle. This doesn't elongate the sales cycle at all. In fact, it's very different than that. We're bringing an existing capability and matching it to client need. We're -- in fact, we're creating new sales cycles. So it's the same sales cycle under traditional products, our traditional areas and then new sales cycles that we serve on other clients, but not that client. So the example Eric described sort of was literally an expansion. So the sales cycle and what we expanded into was no longer than ever before, and it just creates, frankly, tremendous effort. Even if a client says, in the end, "I don't really think we need you on it," we've engaged in a conversation which changes their perception of who we are and how we think about them. That actually impacts retention in our core -- in what we're currently doing with them, in addition to sort of opening up new business and new opportunity.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [18]

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Got it. Two quick questions for Christa. I heard your FX comments about the fourth quarter. I'm wondering, can you provide us some perspective to help out with modeling for how the FX looks to impact the P&L in 2020? And then free cash flow obviously rebounded really nicely, up 25% year-to-date. Was there anything unusual in the third quarter that helps provide maybe a one-time benefit or pull forward and, then looking to the fourth quarter, you expect free cash flow to be up year-over-year? Are there any other factors there, timing or whatnot, that might cause it to decline?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [19]

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Great, okay. So on FX. I guess what I would say is we did give guidance for Q4 that it's minus $0.04. It's really due to a stronger U.S. dollar. In general, we prefer a weaker U.S. dollar across our global portfolio because we're translating local revenue and local expenses into U.S. dollars. And so if the stronger U.S. dollar continues, we would expect some FX headwind in 2020, but we haven't given data.

Oh, and then on your FX -- on your free cash flow question, sorry. So free cash flow is very strong year-to-date, 25% up year-to-date over last year. We have given guidance on free cash flow, so we expect double digits for the foreseeable future. And so we would expect very strong free cash flow growth for the full year 2019. There were some restructuring cash charges that timed out of Q3 into Q4. If you think about the whole program, we'll finish restructuring in 2019 and so you'll see those cash charges come through in the fourth quarter. But we're really excited about free cash flow for the full year 2019 and most excited about free cash flow to 2020 in terms of double-digit free cash flow growth, plus the declining use of cash. So I hope that answers the question.

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Operator [20]

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And our next question comes from Elyse Greenspan, Wells Fargo.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [21]

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My first question, earlier this week, you guys announced a regional insurer group initiative. Just trying to get a little bit of additional color there just in terms of how you would kind of size your business in that regional kind of space today and kind of long-term growth aspirations there, and if that is expanding on that type of regional size account offering, dependent upon any M&A activity within the U.S.

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Gregory C. Case, Aon plc - CEO & Executive Director [22]

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Elyse, it's just another example as we look across sort of the global portfolio and it's back to kind of as we connect the dots on opportunities. We saw this as a great opportunity to help a sector that we know very, very well. And it really isn't about the size. It's really what we can bring to the table. So if you think about walking into this client and helping them with their -- a lot of the things on protecting their balance sheet, which we know very, very well, think about how we can help them on retirement, on health, on the broader base set of things to, candidly, help them improve their operating performance, strengthen their balance sheet, reduce volatility, and we bring all Aon to bear on that mission.

We just love that approach in that sector. And frankly, we've seen it happen around the world. This is another example of we've seen the movie before. How do we translate what we've seen sort of in the client impact in an effective way? And this is just another example of that. We're very excited about it. Our leaders are rallied around the world to do it. And it really is a set of leaders across solution lines, who are going to go sort of bring the full force of Aon to this sector, and we're really excited about it.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [23]

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Okay. And then my second question. Just in terms of margin, so 350 basis points this quarter, you still get around 210 or so if we assume -- kind of adjust for the savings in the quarter. I guess what I'm trying to get a sense of is, what's kind of the sustainable level of margin improvement here? And I know you guys kind of continuously pointed at 70 to 80 that you've historically seen, but it seems that what you're doing with Aon Business Services should lead to greater operating leverage. So should we think about the third quarter level being more sustainable relative to the margin improvement you've seen in the past?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [24]

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It's a great question, Elyse. And what we would say is year-to-date margin expansion is 250 basis points, of which 110 basis points is core margin expansion if you take out the restructuring savings. You're absolutely right that Aon Business Services is providing us with incremental operating leverage. It's driving sustained productivity improvements well beyond the restructuring savings into 2020 and beyond. And one simple example of that is the fact that we've actually automated over 500,000 hours this year through automation, which drives ongoing productivity. So you can kind of see the improved operating leverage before we reinvest in additional growth opportunities. We do think that the right guidance going forward in terms of margin expansion is the 70 to 80 basis points. That is in line with our 10-year historical average, so we feel really good about that.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [25]

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Okay. And then my last question. In terms of Reinsurance, growth's still pretty good, but we did see a little bit of a slowdown sequentially. Was there anything in terms of maybe that -- did new business slow? I guess did you see any kind of change in trends within your Reinsurance book from the second to the third quarter in either new business or retention that might've impacted the sequential slowdown in organic?

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Eric Andersen, Aon plc - Co-President [26]

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Elyse, it's Eric. Maybe I'll take a stab at it. The reality is, no, we have not seen a slowdown on it. The composition of the book is different in the second half of the year. The first half is pretty heavily loaded towards the treaty business. The second half is much more facultative in capital markets. Yes, that business is a little bit of -- a little lumpy based on how and when the clients need to cover. And so I would say we are continuing to be pretty strong in that space. It's a double-digit growth business for us, especially the pack business, and we continue to see that going forward.

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Gregory C. Case, Aon plc - CEO & Executive Director [27]

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And like everything, Elyse, we look at these things year-over-year. When you think about year-to-date progress against year-to-date last year, continued momentum and build in the business, absolutely fantastic, 9% year-to-date. So continued progress and momentum.

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Operator [28]

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Our next question comes from Paul Newsome of Sandler O'Neill.

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Jon Paul Newsome, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior Insurance Analyst [29]

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The only thing I had was, I was wondering about the divestitures that you've been doing and how we should think about the impact on revenue and margins perspectively in the fourth quarter and maybe 2020 from the divestiture piece that you're doing.

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [30]

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Yes, it's a great question, Paul. And what I would say is as we think about managing the portfolio, we're doing it on a return-on-capital basis and maximizing our investment in high-revenue growth, high-margin businesses and then obviously divesting lower-revenue growth, lower-margin businesses. As we think about modeling going forward, you should see a similar impact in retirement due to the divestiture of that business in Q2 for the next 3 quarters. So that will sort of flow through over the course of the year similar to what you saw in retirement this quarter.

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Operator [31]

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Our next question comes from John Heagerty of Atlantic Equities.

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John Andrew Heagerty, Atlantic Equities LLP, Research Division - Research Analyst [32]

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A couple of questions, if I could. Firstly, on the data and analytics division, it looks a little bit like the revenue -- the organic revenue growth is decelerating over the past 4 quarters. So I was wondering if we should read it like that or whether it's just that it has much more of a skew towards Q4 and that's likely to come through again this year?

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Gregory C. Case, Aon plc - CEO & Executive Director [33]

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Yes. I'd step back, John. As you think about sort of growth overall, I just -- it lessens for all the solution lines really. It really isn't about any single quarter even in solution line. We really look at growth across the board. So we're really looking at sort of Aon results overall and respective of how that progresses year-to-year. So lots of things happen within individual solutions lines. And if you sort of look at that perspective, that bucket together, you see really tremendous progress, 5% in '18, 6% year-to-date in 2019. By the way, that's versus 4% year-to-date in 2018, so up 200 basis points. And really, across the portfolio, all solution lines, including data and analytics, are sort of up year-to-date, including data and analytics, I may say, when you think about year-to-date. So for us, we wouldn't focus on any one particular quarter or the other. It really is about year-to-date progress or year-over-year progress, and we feel very good about where we are against that.

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John Andrew Heagerty, Atlantic Equities LLP, Research Division - Research Analyst [34]

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Okay. And then just on the divested revenues, following up on Paul's question, just it looks like the amount in terms of revenue divested so far this year is just under $100 million. In terms of cash flow generated from the divestments, it looks like it's only about $43 million. So what are we -- can you give a little bit more detail on what those businesses were and what sort of margin they're generating?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [35]

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Yes. I mean, what we can say, John, is that they're lower-revenue growth, lower-margin businesses, so it fits with our focus on improving growth and improving margins and focus on return on capital. We haven't given specifics on the amount of cash we receive. We feel really good about the overall management of the portfolio, including those divestments.

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Gregory C. Case, Aon plc - CEO & Executive Director [36]

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But just bear in mind, as you think about sort of where we are, this is probably one that's not even year-over-year. Really it's over multiple years as you think about where we are and think about our acquisition and divestiture strategy over the last number of years. We are absolutely maniacally focused on improving return on invested capital. So it's not surprising the cash flow characteristics of the business we divest aren't nearly as good as ones we have nor the ones we buy. And so we're going to be lumpy year-over-year as we think about the right acquisitions. We're going to bring in content and capability we can scale. And that will drive top line growth over time, but it really, in this case, is even more over a period of years that will drive top line growth, as you've seen over the last decade. So hopefully that's helpful. We'll continue to think about the divestitures when they're helpful to the ROIC in the overall portfolio, and we'll continue to make acquisitions with great capacity to do so when they make sense as well.

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Operator [37]

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Our next question comes from Yaron Kinar of Goldman Sachs.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division - Research Analyst [38]

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First question is just following up on Elyse's margin question. So kind of the just over 200 basis points of core margin improvement in the quarter, 100 or so basis points of improvement year-to-date, is the above run rate improvement also a function of timing and magnitude of investments in the platform?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [39]

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It's really about the operating leverage we're getting through Aon Business Services, which is accelerating our overall margin expansion year-to-date. Because if you look at the 9-months operating margin expansion versus the 6 months we've accelerated, and the restructuring savings has remained about the same proportion of that and the core margin expansion has expanded, and so we're getting real operating leverage in the platform from growth, from -- yes, from leverage in ABS. And we expect that to continue through calendar year 2019 and into 2020. One of the other things I'd say is operating leverage is allowing us to fund greater investment in some whole new markets and capacity. Greg, you might want to talk a bit about that.

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Gregory C. Case, Aon plc - CEO & Executive Director [40]

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Well, I just around -- as Christa described very, very well, this is -- as you think about our margin, expanding margin or our capability to do so, you've seen us over our 10-year period do the 70 to 80 basis points that's been described already. You ask yourself the question, "What's the probability we can continue to do that?" We would suggest that this quarter and this year-to-date's performance says, that probability is going up, not going down. And that's because of the operational leverage Christa described.

In addition to that, it's really important for us to convey how much we are investing in future growth for our business. And this is a number of areas. You think about what we've done in intellectual property, what we've done in the entire area of kind of public partnerships, what we've done in small client, what we've done in the retirement business, in the health business, all these things are sort of net new things we've never done before. You've seen examples. We talked about the World Bank cat bond last time. There's a whole series of things we've done to create net new, truly not just expanding share in what's already out there, but net new, things that have never been looked at before. Same in cyber. So there's a level of investment that is quite high. We're very excited about it in terms of future long-term growth, but we're also very committed to making sure we can continue to improve margins year-over-year. And as Christa described, Aon Business Services is a way to do that, but it also has lots of different attributes in terms of what we're doing. The muscle is really, really powerful, and we're going to keep working on it.

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Michael J. O'Connor, Aon plc - Co-President [41]

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Greg, Maybe I'd share as Mike -- maybe I'd share an example of how Aon Business Services change in what we do. And I'd use our health care Centre of Excellence that's doing -- that's delivering better outcomes as well as getting efficiency and productivity gains. And the short description of this is we basically moved our 600 actuaries into a center of excellence model. We're leveraging best practices. We're bringing common tools to bear, and we're driving productivity gains. And we mentioned in the past, we have built an analytical suite of tools and architect, and this group of actuaries is using that as well. We've talked about how our colleagues in the field are using it, our actuaries are using it as well, where we're going from manual calculations using assumptions to AI-driven suite of tools where we can do hundreds of assumptions simultaneously and generate 0.5 million scenarios for our client, so we can actually work with a client to pick the best outcome. In addition, you bring the group together in the Centre of Excellence and we've improved peer reviews through automated workflows. So we get all the productivity gains that you'd expect in a center of excellence, but we're most excited about the impact we're having with clients.

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Gregory C. Case, Aon plc - CEO & Executive Director [42]

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I really appreciate that example, Mike. So again, one reason we sort of entered it, sort of here this is you take a step back to your question, fundamentally our ability to improve margin. The reason we're so excited about Aon Business Services is it creates operating leverage in the business that's meaningful and real. But no kidding, Mike said 600 actuaries. We had them all around the firm. We're now bringing them together. They're doing things we didn't -- hadn't done before. And instead of giving a client 3 or 4 options on the health side, we're giving them a continuum of 500 sort of iterations -- 500,000, I'm sorry, I'm being corrected by my colleagues. 500,000 iterations of what we can do, all better than 3, by the way. And it changes fundamentally our ability to serve clients. So it builds operating leverage and improves service. And that's the equation we're pulling together when we describe Aon United. That's one big aspect of it.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division - Research Analyst [43]

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That's very helpful. I appreciate that. My second question's around intellectual property. So Greg, you've talked in the past, even just mentioned it now, that there's an underserved potential for -- or underserved client needs that have -- create a significant potential for the market. Can you and the team maybe help us try and size this market opportunity in IP? And then also discuss and the specific actions, particularly year-to-date, that Aon has taken to position itself to capitalize on this opportunity?

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Gregory C. Case, Aon plc - CEO & Executive Director [44]

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When you start with literally the fundamental opportunity, the potential demand. And it's -- any way you look at it is incredibly compelling. Just step back, pick the estimate, 2018, how much of the value of the S&P 500 was attributable to intangible assets? And it's 80% to 85%. Think about what that means, $20 trillion plus. It's an amazingly huge number sort of attributable to intangible assets, that was probably in the low 20s in the 70s. It's now in the 80s, mid-80s. And so you essentially say, "If that's where the value is coming from, this is back to the idea of net new." What are we doing that makes a difference for clients net new that doesn't exist? And the protection of intellectual property is something we have never done before. And it's why, again, we've brought in a tremendous amount of capability, some with Stroz Friedberg and 601West, tremendous capability which we've added to over time. And we've got 100-plus colleagues who are focused on how you think about value in intellectual property and how you provide cover on it, how you protect clients from the liabilities that come with it or the IP theft. And so you ask yourself, "How big could that market be?" Annually this is a market that should be much bigger than cyber. This is a $100-billion-plus market over time. If we help clients understand how to address and protect intellectual property, trade secrets, all of the things that come with that, our view is this is a tremendous opportunity for the industry and, candidly, a tremendous opportunity for our clients. And the other piece -- and I'm sorry to get off on -- go off onto IP, but I can't help it. One of the things about IP that's so cool is a lot of what we do is protecting the house. And that's in cyber. If something bad happens, how do you protect? If something happens in a plant or equipment or if something happens in a portfolio on the retirement side, these are protecting downside.

Intellectual property is about creating upside. You can actually help clients create net new value that they already have, but didn't really know it. When you can actually help a client value a portfolio, by the way, the valuation comes from the fact that the insurance markets actually back it. So that creates the implicit value. All of a sudden, you're creating opportunities. So we're pretty bullish on this, as you can tell. And really -- and, again, in terms of sort of -- the idea of net new high margin, high margin because it's high value to clients, we're providing this kind of value to clients. We're doing things that no one else has been able to do. And the opportunity, we think, is substantial, and you see us investing heavily behind it. Back to the question around maintaining 70 to 80 basis point improvement and investing this heavily, how do you do it? Again, the 100-plus colleagues, how do you do it? You do it with Aon Business Services and other means to sort of create operating leverage in the business. And that's the equation we've got.

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Operator [45]

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Our next question comes from Meyer Shields of Keefe, Bruyette, & Woods.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [46]

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Greg, I was hoping you can walk us through the opportunities and challenges of Lloyd's Blueprint One on, I guess, revenues and margins there?

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Gregory C. Case, Aon plc - CEO & Executive Director [47]

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Yes. Listen, we spend a lot of time with our partner who are in Lloyd's, John Neal and Bruce and team trying to offer our thoughts and views and perspectives. We are absolutely focused on and delighted to be supportive and do what we can because it's important to our clients. And our guidance has largely been around sort of the following types of things. Whatever blueprint it comes out to be, whatever incarnation it comes out to be, you ask yourself the question, has it helped our clients? Has it done things for our clients that they don't get elsewhere in the world? Is there more innovation in a way that sort of benefits our clients? So for us, it's all about that. And that's the test of relevance for all of us, and it's the test of relevance for Lloyd's as well. And so everything we've done around it is sort of how do we help them, see what has to be true from the -- add value in a distinctive way. And then we come back to, if you're adding value in a distinctive way, that has real beneficial aspects for margin. If you're adding value in a way that's much more commoditized, then it should have much less attractive margin characteristics. So for us, we don't -- this isn't about us. It's really about our clients and sort of how we can help Lloyd's understand sort of what has to be true to help our clients. And we're very hopeful. John and Bruce and team have worked very hard to sort of -- to take some steps to sort of really drive this market forward. And we're excited about the possibilities and want to support in any way we can to support our clients.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [48]

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Okay, that's very helpful. Is there any validity to the idea that this could be sort of a revenue headwind but improve the bottom line by even more?

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Gregory C. Case, Aon plc - CEO & Executive Director [49]

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No, I don't think -- really, at the end of the day, we haven't really thought about it in that way at all. Really this is -- Lloyd's is a source of capital and capability for our clients. We want to apply it any way we can. John and Bruce are very well aware. There other options as well, and we have access to all of them. So we're, in essence, essentially saying -- we still always come back, Meyer, to the question is, what's the client need? And how are we supporting and serving it? If we do that distinctively, our margins and growth take care of themselves.

And we love that knife edge, by the way. That means we have to continue to improve. And if we don't, we suffer the consequences, as does everyone else. Our view is the opportunity's great. There's lots of capital choices out there to support our clients to the extent that's helpful and necessary, and that's how we're going to pursue it. So we don't really see -- we're really not sort of seeing sort of any short-term, long-term sort of implications that would be driven by the Lloyd's blueprint.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [50]

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Okay, fantastic. And then one small question for Christa. The press release notes that geographic distribution of earnings impacted the tax rate. Does FX itself have a tax rate impact?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [51]

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No, it doesn't. No, it doesn't. No, it doesn't, Meyer.

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Operator [52]

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Our next question comes from Brian Meredith of UBS.

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Brian Robert Meredith, UBS Investment Bank, Research Division - MD, Financials Research Sector Head & Global Insurance Strategist [53]

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Most have been answered, but there's just one here. Greg, I noticed in your survey, the #1 challenge that, I think, corporations talked about is economic slowdown/slow recovery. Could you give us some insight as far as kind of what you're seeing right now? And also, is that at all a concern for you guys as far as your organic revenue growth going forward here if we do get some economic slowdown?

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Gregory C. Case, Aon plc - CEO & Executive Director [54]

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Yes. Brian, first, I would say, I appreciate you referencing the risk survey. We find a lot of insight into that as it's -- as we're asking clients around the world what's most important to you? What's on your mind? Most salient of which is when you look at sort of the top 10 risks, most of them are -- don't actually have an insurance-related answer. Actually, 5 have none, a few have partial and then a few have something. So our view is that's a massive opportunity to sort of help clients. And to the extent slowdown becomes #1, how do help clients do that? By the way, Eric and Mike both gave examples that would sort of lean into the headwinds of what would be a recession.

As it relates to Aon, listen, we -- let's say we feel fairly fortunate. If you think about sort of what's happened to us and you go back to the recession of '08 and '09 and what happened in essence, you know the story well, we were largely flat in terms of sort of where that was. What you've seen us do in the first 9 months of this year is everyone has talked about sort of issues and concerns is grow 6% year-to-date versus 4% last year. So we're up 200 basis points versus -- year-to-date versus last year incredibly positive.

Remember, a lot of the revenue is nondiscretionary. So 85% is renewed business, and retention rate's 90% plus on average. And so it's a very unique kind of demand characteristic. By the way, that demand characteristic is true in commercial risk. It's true in Reinsurance. It's true in retirement. It's true in health. Incredibly powerful in terms of where we are. And then if you think about where we were in '08 and '09, which is basically flat to the world and improved margins at the same time during the last recession, we're a very, very different and stronger firm now than we were then.

Now you actually have all of the things that we had back then, plus all of the net new. So we didn't have IT. We didn't have cyber. We didn't have some of the health advancements that Mike's talked about, some of the things we've done on the retirement side. So it's a much stronger firm in which we're creating new addressable demand that didn't exist before and, in many respects, we hope creating markets in which Aon will benefit. And certainly others will, too, competitors, everyone will.

We opened up a $100 billion IP market that will benefit everyone. Same on cyber. We all know cyber is anemic. It's small compared to what it should be on behalf of clients, huge opportunity against that.

So for us, we're always going to be vigilant, but we feel very good about our ability to support clients. And in many respects, the demand grows in times of volatility or in times of stress for them. And to the extent we help them improve performance or strengthen their balance sheet or reduce their volatility, that in and of itself is actually going to create an interesting play. And then the final thing I would say is sort of in recession, there's a bit of a flight to quality in terms of sort of making sure you can deliver on behalf of clients. And we would -- we believe we'd benefit from that.

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Brian Robert Meredith, UBS Investment Bank, Research Division - MD, Financials Research Sector Head & Global Insurance Strategist [55]

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Great. And then one other quick one. One's been -- just looking at the survey responses. One's political risk. And I think you may have commented about this a couple of quarters ago, but just maybe remind us. If indeed we do see Medicare for All, what impact would that have on your Health Solutions business?

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Gregory C. Case, Aon plc - CEO & Executive Director [56]

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Well, as we described, by the way, this is -- and gain, you kind of come back to fundamental what we're talking about here on sort of the health world overall. This is an incredibly dysfunctional part of the global economy, as we all know. And the population around the world's becoming less healthy and accordingly the cost of health care's going up. So net-net, we think there's going to be massive demand in the context of this.

Remember, if you look at half of our health business in the U.S., half outside the U.S., and that outside the U.S. is actually more akin to the single-payer world. And we've done exceptionally well. We're growing faster, and margins are going up. There's a lot of opportunity on just beyond the core, but also on what you do from an elective standpoint on top of it. So as we look at economies around the world, we would say the demand is real. Our ability to address it is real, and we like that opportunity.

The final thing I would say is, without any political commentary on whether that's a good solution or not, let's assume you actually went to that solution, the transition to that solution would create huge turmoil with our clients. And our ability to sort of support them in the transition would also be a source of opportunity.

But net-net, long term, we love the health space. I think there's tremendous opportunity to help clients in what is a really stressful world. And one of the things you look about it, it's not just the health side, it's health and retirement. Because our clients' employees are overspending on health on average and underspending on retirement. And imagine, Brian, if we could actually help them tweak that 1% or 2% for their employees, our company's sort of done a huge service to the families of the employees who work for them. So we're pretty bullish on sort of what's out there and the stresses for our clients and our ability to address it.

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Operator [57]

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Our last question comes from Josh Shanker of Deutsche Bank.

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Joshua David Shanker, Deutsche Bank AG, Research Division - Research Analyst [58]

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Just a couple of numbers questions really. The first one, and Dave Styblo kind of asked a question about it, I'm wondering if you can talk to a little bit what the normalized free cash flow would've been in the first 9 months of 2018. Or maybe how you think about what is the normalized growth that you've enjoyed here in the first 9 months of 2019 or maybe the first year? I know you're thinking about 2020, but can we talk about where normalized free cash flow growth has gone over the past 12 months?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [59]

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So the way we think about it, Josh, is really free cash flow growth for the first 9 months of the year is 25%. We are on track for strong free cash flow growth for full year 2019. We've given long-term guidance of double-digit free cash flow growth for the foreseeable future, and we feel like we are on track for that. And we're particularly excited about 2020, where we'll have underlying free cash flow growth of double digits, plus a declining use of cash, as you see on Page 26 in the materials, through decreased cash usage on pension CapEx and restructuring.

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Joshua David Shanker, Deutsche Bank AG, Research Division - Research Analyst [60]

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But you can't say normalizing for restructuring spend and whatnot what the 2019 versus 2018 free cash flow trend has been?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [61]

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I mean, you can see the restructuring cash yourself, but we're getting double digit free cash flow growth.

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Joshua David Shanker, Deutsche Bank AG, Research Division - Research Analyst [62]

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Normalized -- do you think that's normalized?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [63]

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Dave -- Josh, I mean, what we would say is we feel like we have double digit free cash flow growth year-to-date and long term.

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Joshua David Shanker, Deutsche Bank AG, Research Division - Research Analyst [64]

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Okay, okay. And the other question, also numbers-based. In the health care solutions sector, can you talk about the dollar value of nonrecurring headwinds you had in the quarter on revenues? And how much revenue has been moved from 3Q into 4Q?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [65]

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Here's what we'd say on Health Solutions. We feel really good about where we are in terms of Health Solutions. We've delivered 5% growth year-to-date. It's accelerated from 4% growth year-to-date in 2018. And we have all lines contributing -- all solution lines contributing to mid-single-digit growth or greater for the full year 2019, and we're looking forward to a strong Q4.

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Joshua David Shanker, Deutsche Bank AG, Research Division - Research Analyst [66]

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And -- but there's no guidance around those 2 items you cited in the press release?

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Christa Davies, Aon plc - Executive VP of Global Finance & CFO [67]

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No.

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Operator [68]

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

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Gregory C. Case, Aon plc - CEO & Executive Director [69]

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I just want to say to everyone, thank you very much for joining, and we look forward to the conversation next quarter. Thanks so much.

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Operator [70]

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