Aon Plc. (NYSE:AON) Q2 2020 Results Earnings Conference Call July 31, 2020 8:30 AM ET
Greg Case – CEO
Christa Davies – CFO
Eric Andersen – President
Conference Call Participants
Suneet Kamath – Citigroup
Elyse Greenspan – Wells Fargo
Dave Styblo – Jefferies
Jimmy Bhullar – JPMorgan
Sean Reitenbach – KBW
Phil Stephano – Deutsche Bank
Good morning and thank you for holding. Welcome to Aon Plc’s Second 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 second 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.
Thanks very much and good morning everyone. Welcome to our second 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.
To begin, I want to thank our global team for their extraordinary leadership and responding to the on-going challenges presented by COVID-19. Even if the vast majority of our workforce continue to work remotely, their innovation, connectivity and engagement in support of our clients and each other is truly exceptional. And we see that engagement we call it feedback most recently in the near 90% fulberating over response to the pandemic. Consistent with our excitement calling attention is up across the organization. Further, our firms response to more recent and fundamental issues of social injustice and inclusion had been resolute and inspiring. Our global team is committed to structural change that is meaningful and lasting, change that will make us a better and more inclusive firm. We’re doing progress on this front as central to our future and are taking action for reflecting this priority.
Turning to our second quarter results, for Aon overall, organic revenue declined 1%, an outcome that demonstrates great work by our team and resilience of our business in the face of unprecedented challenges in the global economy.
In particular, I’d like to highlight 9% organic revenue growth and reinsurance solutions, driven by net new business generation and trading and double-digit growth in faculty placements. These results demonstrate the team’s seamless transition to the new working environment and their focus on meeting evolving client needs.
But in commercial risk 1% organic revenue growth is driven by strong retention across most major geographies, and particular strength in core property, casualty, partially offset by impact in more discretionary areas of the portfolio, such as transaction liability, construction and project work.
Retirement solutions declined 1% in organic revenue reflecting solid growth in investments, ability in retirement and pressure in the more discretionary aspects of our business, especially human capital.
Two areas of particular challenge for the quarter were health solutions and data analytic services. We expect the short term headwinds impacting results in both areas will reverse over time, and health solutions which declined 18% in the quarter, two issues were evident. First, pressure in both core and more discretionary areas of our business, primarily driven by a decline in employment levels related to COVID-19 and the timing of certain revenue.
And second, a one- time adjustment representing approximately 5% of the decline, which was identified with the implementation of a new system. This will not repeat in future periods. Overall, our performance in health solutions reflects the pressure of the COVID-19 challenge, but also highlights the long term importance and priority of this solution for our clients.
In data analytic services, which declined 8% results were driven primarily by an expected decline in our travel and events practice. We expect this to bounce back strongly when the economy returns to a more normal performance level.
In terms of overall organic revenue expectations for Q3 and Q4, the outlook is obviously uncertain. If macroeconomic conditions persist, we expect to see on-going firm wide revenues pressures similar to what we observed in Q2.
From an operating standpoint, we delivered strong results, including 240 basis points of operating margin expansion, 5% EPS growth, and exceptionally strong free cash flow of $1.1 billion through June, up $875 million from the first half of last year.
It’s important to highlight that while this performance reinforces confidence in our Aon United strategy in any economic environment, we do see on-going macroeconomic pressures from trends in GDP growth, asset values and employment among others. We continue to prepare for a broad range of economic scenarios, but we believe the probabilities of absolute worst case scenarios assessed in early March have diminished.
This reduced probability is what gave us the confidence to restore and repay our temporary SAR reductions for colleagues, with a bonus on withheld around. In this time of adversity on so many fronts, our colleagues are continuing to find innovative ways to bring Aon United solutions to pressing client needs.
For example, one client the facilities management and energy services company has been facing substantial challenge related to the current economic conditions. Colleagues from commercial risk, data analytics and human capital came together to collectively help this company navigate short term headwinds, while also strengthening their operational efficiency and overall resilience. One of their biggest challenges was the cost of operating and maintaining their fleet. Our team designed a new solution for risk management and talent assessment, designed to reduce fuel and insurance costs while enhancing driver safety, an outcome that’s also our clients top priorities.
The issues faced by clients today demonstrate that our economy is unprepared for complex and interconnected challenges fully demonstrated by the COVID-19 pandemic. Looking forward, there are other, long tail risks on the horizon. As climate changes, population ages, and the wealth gap continues to widen, volatility will increase.
Our global risk survey highlights one of the top 10 risks our clients face, only one is fully insured, four are partially insured and five are not insured at all. The mandate is clear. We must innovate faster to provide answers to these growing areas of client demand.
For Aon, our path forward to increase innovation and support clients is clear. Our Aon United book plan provides a proven roadmap and the combination with Willis Towers Watson will substantially accelerate progress. Together we’ll be better for our clients on day one, driven by the complementary nature of our core businesses across solution lines and geographies, and will be better in the future driven by a shared commitment to analytics and increased ability to unlock new sources of value for our clients.
We’ve been saying for some time that the world is becoming more volatile, economically, demographically, geopolitically. And the events of the last hundred days only underscore that reality. They also raised the stakes for Aon United admission and the goal of bringing the best of our firm to clients.
At a time when our clients need us most, the combination with Willis Towers Watson further strengthens our client serving capability and puts us in a position to best address their unmet needs. Those that they turn to us for today, and the emerging needs that’s met by the next generation professional services firm that we’re bringing together.
In summary, we delivered strong operational results in the quarter and remain well positioned to manage through and accelerate out of these challenging times. Despite the pandemic, we’re becoming a more capable organization, and one that will be further advanced in combination with Willis Towers Watson.
With that, I’ll turn the call over to Christa for further Financial Review, Christa?
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 significant macroeconomic challenges, demonstrating the resiliency of our business and the strength of our Aon United strategy in any economic environment.
The steps we’ve taken to proactively and conservatively manage discretionary expenses and liquidity have enabled us to maintain financial stability and flexibility. This conservatism makes us resilient through these challenging times and positions us to come up stronger. We remain committed to deliver significant shareholder value over the long term, which we believe will be accelerated by our combination with Willis Towers Watson.
As I discuss our results today, I would note that while we manage our business on a full year basis, and typically focus on year-to-date numbers, my commentary today is somewhat more focused on the quarter, especially given differences in the external environment in Q1 and Q2, and how that impacted our decisions, results and outlook.
Our second quarter results reflect the strong performance in challenging economic conditions. Organic revenue declined by 1% with 9% organic revenue growth and reinsurance and 1% organic revenue growth in commercial real solutions.
As I described last quarter, our business has strong fundamentals, with roughly 80% in core and 20% relatively more discretionary. As expected, we did see larger and more immediate impact in the more discretionary portions of our business, which contributed to organic revenue declines in retirement solutions, Health Solutions and data analytic services.
I would also note that reported revenue was pressured by FX as well as lower fiduciary investment income as a result of lower interest rates globally. As I look towards the rest of the year, as Greg mentioned, we remain confident in the Underlying resilience of our business. However, given continued macroeconomic uncertainty, we are not providing specific financial guidance that is planned.
In terms of organic revenue expectations for Q3 and Q4, the outlook is obviously uncertain. If current macroeconomic conditions persist, we would expect the on-going firm wide revenue pressures, similar to what we observed in Q2.
Moving to operational performance; for the first half of 2020, we delivered solid operating improvements with 7% ROI gross operating margin expansion of 230 basis points and EPS growth of 9%. I would note that while operational improvement in the first quarter includes strong organic revenue growth, improvement in the second quarter includes the temporary reduction of discretionary expenses, including reduced travel and events, which does not reflect sustainable core operating margin expansion.
As Greg mentioned, we’re still preparing for a broad range of outcomes. However, we do see a decreased likelihood of worst case scenarios. While operating margins have improved 230 basis points to the first half of the year, due in part to pre-emptive and temporary expense actions we took to decrease underlying expenses as compared to the prior year, we expect operating expenses to the second half of 2020 to be more consistent with underlying expenses in the second half of 2019, excluding restructuring charges.
This represents a difference in Q2 as we return to more normalized levels of spend in the face of reduced likelihood of worst case macroeconomic scenarios. We expect that the second half of the year will include very targeted investment in priority areas, while maintaining strong operational discipline.
Finally, as noted in our earnings material, FX was an unfavorable impact of approximately $0.01 in the second quarter and $0.05 year-to-date. At today’s rates we would expect a $0.02 per share unfavorable impacts in each of Q3 and Q4.
Overall, we’re confident the investments we’ve made in our Aon Business Services operating platform enable us to continue to manage costs in the near term, and to unlock significant operational leverage over the long term.
Aon Business Services enabled our ability to distribute content and capabilities across the firm to drive long term growth and free cash flow.
Turning to cash and capital allocation, free cash flow increased $875 million to $1.1 billion, driven by strong operational improvements, the impact of temporary salary reduction, near term actions we’ve taken to improve working capital and a decrease in restructuring cash outlays.
I would note that the impact of temporary salary reductions were reflected in the income statement in Q2, but the withheld amount will be paid and impact cash flow in Q3. As the world moves to working remotely, our ability to centrally manage invoicing, cash collections and vendor payments has been essential. And this environment has served to accelerate the transition to digital, which then helps ensure we’re able to focus on driving free cash flow growth.
We remain very confident in the strength of our balance sheet and manage liquidity risk through a well added debt maturity profile. We further improved liquidity in the second quarter, issuing a $1 billion of debt, of which $600 million was used to pay down term debt coming due in September 2020. We ended Q2 with $100 million lower total debt compared to the end of Q1.
Historically, we’ve looked to increase debt as EBITDA grows while maintaining leverage ratios. However, due to current macroeconomic conditions, we expect to continue to manage our leverage ratios conservatively in the near future. We are diligent about maximizing return on invested capital and make capital allocation decisions through this framework.
While we pulled certain discretionary uses of cash in the first quarter, We are considering resuming limited share buybacks in the second half of the year, subject to macroeconomic conditions, business performance and the timing restrictions related to our combination with Willis Towers Watson. We are likely to maintain higher than normal levels of cash for the near future, given macroeconomic uncertainty.
As we’ve said before, we are committed to maintaining our investment grade credit rating, following the combination with Willis Towers Watson, and continue to make progress against our key milestones.
We filed our joint definitive proxy earlier this month, and look forward to the vote for both company shareholders on August 26. We expect the deal to close in the first half of 2021 as we’ve previously communicated.
In summary, our business is stable, and resilient in the face of macroeconomic challenges. The historic steps we’ve to drive our Aon United strategy and especially our Aon Business Services operational platform are more important now than ever. Our disciplined approach return on invested capital provides financial flexibility to unlock significant shareholder value creation over the long term.
With that, I’ll turn the call back over to the operator and we’d be delighted to take your questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Suneet Kamath of Citigroup. Your line is now open.
Thanks. Good morning. I wanted to start with the merger. In the past you guys were confident that you wouldn’t need to divest any businesses. I just want to first confirm is that still your view?
Yes, it is.
Okay, great. And then relate…Go ahead, Christa. Sorry.
Sorry. So yes, that’s exactly our view. We remain exactly on track with the overall merger. We’re very excited about it and frankly, more excited today than when we announced it on March 9. And we expect to close in 2021 with no divestitures.
And so relatedly, I just, I’m trying to reconcile your confidence with some industry commentary we’re getting and some investor concerns, particularly on the reinsurance business. So if you could provide just some color on why you’re so confident with respect to that business in particular.
Sure. So we have had excellent antitrust capital, globally for quite some period of time, as you can see from the proxy detail about the background to the merger. And therefore, we feel very confident about our antitrust approval. In reinsurance in particular, though [Ph] this is a highly complementary. If I took the U.S. as an example, we’re very strong on property. Willis Towers works in a very strong in other areas, for example, in our, — in we’re very strong in large market. We’re very strong and middle market. So it’s actually a highly complementary business and so we feel really good about our ability to close the transaction with no divestitures including reinsurance.
Christa, maybe if I get could, maybe if I could just add a couple of comments as well about the reinsurance market and the way clients access capital. Brokers are only one way with which they do it. There’s a very large direct market, whether especially in Europe, as well as in the U.S., where the insurers actually go to many reinsurers directly. They also raise money through sidecars. So their access to capital is actually largely done outside the brokerage business, as opposed to within the brokerage business. So when you actually look at the entire marketplace, it’s actually the way people tend to look at it within the industry. I think really is not the correct way to do it.
Got it. And then just my last related question is just what kind of feedback have you gotten from your customers? Since the merger announcement obviously, it’s been several months now, particularly on the on the brokerage side, but also on the reinsurance side?
Lovely question, Suneet. Listen, we would suggest by the way, any discussion on the combination with Wills Towers Watson got to begin and end with the only topic that really matters and that’s the one year raising, which is clients. It’s really all about value for clients. I will tell you from the orientation from the start, John Haley, and I talk all the time about a guiding aspiration that is very clear and straightforward. We’ve used this combination as a once in a generation opportunity to change the innovation trajectory for clients and it’s really Suneet set a new standard for client leadership and impact, and that’s really our focus. How do we get better faster? How do we address unmet client needs?
And I’ll tell you since the announcement in March, I have talked to literally hundreds of clients about their needs and how they’ve evolved, and how they’re shifting over time. And I’ll tell you, I’ve heard for many of them fundamentally reordered client priorities, in a way never really seen in history. They realize they need to solve not only for both what’s going on today, the operator challenges the day, but also the long tail challenges that could shut, shut them down to the future tomorrow. And they’re literally, turning to us and asking the question, how do we partner with them prepare for the next pandemic?
How do we best protect and value is 80 plus percent of their value, and we really haven’t addressed as an industry over time. How do we mitigate this, systemic impact on climate change? Model the impact of widespread cyber outages or address things like the health wealth gap?
So, point is our clients are asking for more choice. They don’t have a choice on these now that there is a meaningful choice for them. And this, this integrated, client driven approach that we’re describing really defines our Aon United strategy, client driven approach that we’re describing really defines our Aon United strategy and I would tell you, it reflects very similar aspirations John Haley has for the Wills Towers Watson team. It’s been remarkable to see. And our combination with Wills Towers Watson is the catalyst that advances our ability to meet client needed.
Last thing I would say on this one, Suneet, this is such an important question in the way you asked exactly right, which is client focused. I just reflected on one of the hundreds of conversations, sitting down with one client and they’ve summarized it best back for me, because we went through all the things they were facing. And they said straight up, when I look at, you know what I need. This is the client talking to me, what I need from all of you and what’s out there now and your industry, fundamentally, this combination is about more choice, more relevant and essential choice for me. I don’t have it now. And this gives me the opportunity to have that. So our response has been exceptionally positive.
Okay, thank you.
The next question is from Elyse Greenspan from Wells Fargo. Your line is now open.
Hi, thanks. Good morning. My first question, if I looked at the slides that you guys provided on the merger, you the accretion related bullets are missing from what you had last quarter. I did see that it was in the most recent proxy. So I just want to confirm that your goal — your goals related to fruition [ph] related to EPS and free cash flow that you hit out the merger still stands today.
Elyse, thanks so much for the question. So we did commit to 800 million of synergies and we still expect to deliver those synergies and the cost to achieve them. And the timing of those synergies, the accretion dilution was based on underlying EPS estimates. And since then, we have obviously withdrawn guidance given the macroeconomic environment has changed. So we withdrew our financial guidance with mid-single digit organic growth and double digit free cash flow growth.
But the recent macroeconomic events do not impact the 800 million of cost synergies, and we continue to be incredibly excited about the combinations potential for clients. As we talked about at the beginning, the strategic rationale for the deal is really around innovation and growth. And as Greg talked about earlier, meeting unmet need for clients, which we believe are substantial. But Greg, you may want to elaborate on that.
I’ll just co-relate. As we came into this in the set of perspectives in March, as Christa highlighted, you know get to talk to someone around the integration we’re working on now. Those high expectations have been exceeded. I mean the opportunities that we see for innovation on behalf of clients are greater than ever before obviously all the economic pieces Christa highlighted are still fully in place. But that opportunity is, we think very compelling for clients as they understand it. And also, very compelling for our colleagues.
And again, this is the conversation I have all the time with John Haley. This is two organizations coming together, but both on a similar journey and see the opportunity now just to accelerate that journey dramatically on behalf of clients. So that really it’s the momentum we feel as we spend time with colleagues and Wills Towers often just continues to grow.
Okay, that’s helpful. And from the regulatory side of things are you guys I’m kind of on track with where you thought you would be at this point in time. And does it feel like you might you know, in terms of field closing, tackier [ph] one is obviously you know a big timeframe. Do you have a sense of when we — when you think when you first, when you finally think you might close the deal? Sorry. Thank you.
Yes, so Elyse we are exactly on track with our original time period. We filed our joint definitive proxy on Wednesday, July 8. We are on track to hold close shareholder votes on August 26. And we’re very excited about that. And we expect to provide updates on the process when we have something to report, but we are on track, as you said, to close the deal in the first half of 2021 exactly as we communicated at the beginning. And I think really, since March 9 when we announced the deal we’ve been spending a lot of time on the Willis Towers Watson integration, and we’re even more excited about the combination and the potential to meet unmet client needs. But maybe Eric, you can talk a little bit about that?
Sure, Christa. And really excited about the early progress that we’ve had in the integration. Both Aon and Willis Towers Watson are excited about really what it means for our colleagues in particular. We’ve been focused on a colleague mission for quite some time about what each individual colleague can actually accomplish for themselves professionally, but also on behalf of the firm and their clients. And we’re really excited to see that WTW has been doing very similar mission.
My integration partner in this [Indiscernible] and I both share a really growing excitement about what the possibilities are as we serve clients better, as we actually help our colleagues see themselves in the combined company. Yeah, we’ve been working a lot on the culture part, recognizing and getting the people issues, right and, and building that vision and that opportunity for them to build their careers here. We’ll end up with a team. I think that will be the strongest in the industry and one that will draw and retain and attract talent that we need to solve the problems that Greg you were talking about before.
One last thing I’d just add on that Elyse if I could it’s just peace around we’ve asked multiple times. What about COVID-19 is that slowed you down. And I will tell you, in many respects, two things have happened on COVID-19. One with our colleagues that Eric can talk to you a little bit too and Christa, and one of our clients. And the client one, you know, our clients actually see the world changing around them. And it really does reinforce everything we’ve talked about in terms of, meeting unmet needs, not just in not just in kind of the pandemic, but what comes after the pandemic.
So, in many respects who would have known, but COVID-19 for all of its challenges is completely reinforced everything we’ve tried to do or talk about doing, and that’s really showing up in the integrated integration planning that Eric was describing.
In terms of buyback, you guys said, limited buybacks for the second half of the year. Did you just kind of further define that? And then, what would you need to see it sounds like maybe a bounce back to free COVID economic conditions for you to more fully return to buying back your shares?
Thanks so much for the question, Elyse. As you know, we value the firm on free cash flow and allocate capital basis on return on capital, cash-on-cash return, and buyback remains the highest return on capital opportunity across sale. We don’t give specific guidance on buybacks, but as I did mention, we are considering limited share repurchases in the second half of the year subject to macroeconomic conditions, business performance, and timing restrictions related to our combination with Willis Towers Watson.
In 2020, we’ve managed the balance sheet conservatively. And we do not expect to add further debt at this time given macroeconomic conditions. We remain committed to our current investment grade ratings, including a combination with Willis Towers Watson.
We issued a billion dollars of debt. And we’ve already used 600 million of that to prepay the 600 million of term debt that came due and all that is coming due in September 2020. And so you should expect us to continue to manage our balance sheet conservative — given the outlook and uncertainty around the macroeconomic environment. So you may see more elevated levels of cash and short term investments through the end of the year.
When you think about our available cash and use the cash in 2020, we’ve spent or committed about 1.4 billion in cash on about 460 million of buyback which we completed in Q1, 400 million of M&A largely completed in Q1, 400 million of dividends and almost 500 million in restructuring pension and CapEx as we’ve shown in prior investing materials.
And we’ve also communicated 200 million of expected deal costs, 36 million of which we’ve incurred year-to-date with the majority to be incurred when we include, when we close the transaction with Wills Towers Watson. And we have 400 million term debt coming through in March next year. So we’ll likely run elevated levels of cash and short term balances in the near future given macroeconomic uncertainty. So while there’s the potential for limited share buyback through the remainder of the year, it will be dependent on macroeconomic conditions like what we see in the capital markets, business performance, including working capital and the timing restrictions around Willis Towers Watson.
Thank you. And then one last number’s question on the free cash flow. Pretty strong increase this quarter, you highlighted strong operational improvement, temporary salary reductions in actions to improve working capital and lower restructuring costs. So obviously, the temporary salary reductions come back in the third quarter. So it’s a component of the four buckets. Is there anyway you could tell us how big of a driver, and tell him that was free cash — free cash flow into Q2, as we think about it reversing into Q3?
Yes. So thanks for the question Elyse. Free cash flow for the first half of 2020 is exceptionally strong, up 875 million or 343%. Just a very impressive performance and a result of the focus of all of our leaders across Aon as we drive revenue and translate each dollar of revenue into the maximum amount of free cash flow.
I’ll say there were three big components release to the free cash flow growth the largest single component was improvements in operating income. And so, we had a substantial growth in operating income. And then the second you know, the driver was improvement to working capital, specifically, improve receivables and improve payables. There was no meaningful change in free cash flow in Q2 from not repaying the reduction in temporary salary. So it really doesn’t change the answer.
Okay, thanks for the color.
Next, we have Dave Styblo with Jefferies. Your line is now open.
Hi there. Good morning. Thanks for the questions. Just want to come back to Elyse’s question, then and ago and just clarify. I know, consensus has changed a lot for a Aon standalone that was sort of the benchmark you guys used for EPS accretion. I guess when I run the math, I realized we’re not going to probably get to that same peak in terms of an EPS dollar. But is it still fair to think that the 10% to 15% accretion by year three still holds?
So the accretion analysis was provided in connection with the combination. It was based on 800 million of expected, annual pre-tax cost synergies which we still expect to achieve. However, the macroeconomic outlook has changed. And we withdrew the financial guidance with mid-term [Indiscernible] organic revenue growth and double digit free cash flow growth. We have not reinstated any kind of guidance going forward. And so, we can’t actually, update that guidance at this point. Recent macroeconomic events do not impact the 800 million of cost synergies. It may continue to be really excited about the combinations potential for clients and revenue opportunities as well.
Yes, I guess my point is, if you were to recast it and from the outside and we you know, we’ve recast in Aon as standalone, it’s still accretive to that new face so by 10% to 15% is how I was trying to frame it if I didn’t make it clear that way.
Yes, so look, we think the opportunity economically still remains exceptionally strong. And I would note that the accretion dilution we originally provided only included the cost synergies, because that was the only thing under the — takeover code we were able to report on externally. So it doesn’t include as an example, Dave. Any kind of improvements of working capital, any kind of improvements in CapEx, any kind of improvements in any other things that actually drove free cash flow equally doesn’t include any kind of revenue upside. And so we do believe the opportunity of the combination remains exceptionally strong. And as Greg highlighted earlier on the call, we’re more excited today about the combination than we were when we announced that on March 9.
Yes. Okay. That’s great. And then on your comments for a second half, obviously, still an uncertain macro environment. I think you had commented that if conditions are very similar to where we’re at right now, we might expect similar organic pressure. I guess, I’m curious why that pressure might not worsen as we go forward. Some of the feedback from some other companies and channel checks just made, sometimes there’s a bit of a delay on the revenue side, especially on the broking side. So here’s just to reconcile those comments with some other things that we’ve heard in the industry in terms of why things don’t get down even further in the second half from an organic standpoint?
No, I think Dave, just overall I think you’re the macro point one to start with which is, literally in terms of overall organic revenue expectations for Q3 and Q4. You know, as you highlight obviously uncertain, as I mentioned in my comments. Look, if the current macroeconomic conditions persist, what we essentially highlighted is, we expect to see, firm wide revenue pressures similar to what we observed in Q2. Remember, things do ebb and flow, they do lag, but we’re reacting all the time.
Even Christa highlighted it before, when you think about what we have in Aon Business services and what it means, it enabled us to do to connect with clients, how we’re innovating on frankly, new client development, all these things sort of create opportunities for us that are going to also evolve as the current situation evolves.
So, our view is uncertain, but you step back and think about it, based on that uncertainty, similar to Q2 is probably a good basis to start with.
Okay, last one, real quick. I know last call you guys have talked about retirement and data analysis probably having more exposure to organic reading pressure, because higher discretionary spend in those businesses. Retirement actually held up fairly well. I’m curious to hear why that might have outperformed some of the comments relative to what we would have thought. And is there any sort of delayed impact there that that we might need to watch out for in the back half?
There really isn’t the retirement colleagues like many of our colleagues across the across the firm. Again, just want to highlight again, how much we appreciate all they do to lead on behalf of clients. It’s been extraordinary, very strong, continued performance on the investment side. The retirement piece continues, it just is an incredibly strong franchise the team has built over time. And that continues to be a foundation. Obviously some pressure on human capital side that was more than offset by the progress on the former two. So that’s really, how we held position and we expect to continue to do so. We don’t see a lag in that over time. Again, no prediction things are unclear, but that’s really what drove the performance in Q2.
Got it. Thanks so much.
Next we have Jimmy Bhullar from JPMorgan. Your line is now open.
Hi, good morning. I had a couple of questions, both related on expenses. I just wanted to clarify that you’re implying that assuming sort of a stable type environment with what you’re expecting, right now, discretionary spending will increase in the second half versus where it’s been. So that and then secondly, as you think about your expenses in the long run, is there anything that you’re doing differently now, that might have some sustainable benefits even beyond the COVID pandemic, whether it’s sort of less travel or a smaller real estate footprint or something else?
Thanks so much for the question, Jimmy. We do as you said continuously macroeconomic uncertainty for the second half of the year. However, we do see a decrease likelihood of worst case scenarios. And in the first half, we did take pre-emptive and temporary expense reductions, and the second half of 2020 we expect operating expenses to be more consistent with underlying expenses in the second half of 2019, excluding restructuring charges.
Due to spending on some very targeted investments in priority areas, due to some of the deferred expenses, things and on projects, unnecessary operations, for example IT and cyber, but maintaining strong operational expense discipline. And then, I guess in answer your question on sort of DNA, I guess what we would say is, we expect small increases in DNA in the second half. But the margin expansion we saw in the first half of 2020 includes substantial reductions to DNA that isn’t sustainable in the long term.
But maybe Eric, you’d want to talk about sort of DNA and how this actually applies to clients.
Sure. Thanks, Christa. And I think if you step back and think about the reason for DNA, right, which is really to get closer to our clients and our partners to develop that personal relationship. With the investments that we’ve been making in technology, we’re using that video capability to actually get closer to clients and get closer to market partners. You know just an example. Just try and bring it home. I participated in a pretty significant global placement for a new client literally last week and we were talking about the insurance capital available. We had people on the screen from New York, London, Singapore and Bermuda. And instead of flying everybody in for the meeting, kind of burning four days, and 10s of thousands of dollars, we were actually able to create a session for the client where they could actually see our global experts talk about our capabilities, talking about what was available. And literally other than a couple of hours sleep for our guys in Asia, who had to work through the time zone, the client will walk away actually seeing the entirety of the firm and what it could do for them on the topic. As well as see the banter, see the relationships that were there, see our ability to interact with global markets pretty much anywhere to help them.
And so while that, there will be some, interaction with clients in person, obviously, down the road. We really want to make sure that we take the best of what we’ve been learning over the last four months and embedded into the firm, because we actually think it drives a better outcome for the client, and it showcases our talent in a way that historically they would not have been in the room. So it really is. I think we’re really excited about what it can do for us when we interact with clients, especially when you need the global team together.
And so Jimmy, just an answer to your question. We do see opportunities, as Eric described, in potentially reimagining the way we work with our colleagues. And whether that’s on DNA or whether that’s on real estate. It’s really around the goal of actually maximizing client impact as Eric described, with a more flexible, inclusive and productive app, environment for colleagues.
And Greg, maybe you just want to talk a little bit about sort of the partnership that we’ve formed to actually reimagine the future work because it’s pretty exciting.
Yes, it really is. Terrific. Christa, I just on Eric’s speech too, remember if you think about the Aon United strategy, in order to actually operationalize that clients got to see everybody connected together. And that actually meant before more travel, because everybody had to come. Now they actually can show up. They can trump through the technology, it actually is a way to accelerate Aon United. So, anyway I think Eric’s point was really a terrific one.
With Christa highlighting is look, we step back and ask the question, how can we? How can we as Aon? But how can we help clients accelerate through and create economic recovery faster and faster, coming out of this current environment? And we asked clients, is there is there a basis, is there is there a benefit to compare notes with each other around what we’re doing.
And we raised our hand first in Chicago, and I will tell you the response was unbelievable. So we literally have — the Chicago These are companies the most significant companies in Chicago getting together, talking about work, travel, it can be. By the way, we started with back-to-work. We all realize that was a joke, everybody’s already working. So this is really not about work. By the way, it was really around how you connect with clients and do what you do. And in essence, we went from Chicago, now launched the beginning to launch in New York, London, Singapore, Real Madrid, online as well. So we have cities around the world comparing notes Jimmy on how we accelerate economic recovery. And this again, reinforces sort of what we’re all about in terms of helping clients succeed in difficult environments and leveraging Aon United capability in order to do that.
Next, we have Sean Reitenbach from KBW. Your line is now open.
Hi, I was hoping you could talk about maybe the trajectory in consultative end project related work and how that — if that started to kind of return late in 2Q into July, and do expect, like as we the economy normalizes, is it going to be a more steady return of that business? Or do you expect it to be a little lumpier?
Sean, we actually see it, it’s really varies. And in all of us, some thoughts we’ll get Eric to jump into some color commentary as well, because you go across solution lines. This is really, back to kind of we call it the discretionary parts of our business in general. And, obviously they dropped off substantially in Q2, but we see them coming back as clients have had a chance to take a breath, understand where they are begin to get some stability. They’re happy in different ways. Again, advantage for us because we can connect with them, with Aon Business services and actually offer new thoughts and views on perspectives on how to improve what they’re doing. But it really does vary.
So we’re seeing it and elements of commercial risk. The example I gave, in my opening comments really was about colleagues coming together across solution lines to create an innovative solution that didn’t exist. And in some respects, that was discretionary work for a bit, and it became a real solution, and ended up being a series of products.
So a whole series of things are happening across the firm in different ways. And I think it’s going to be in fits and starts. You’re going to see real opportunities pop up. There is no kind of steady state return. It’s going to be us doing what we do, finding opportunities and supporting clients. But you know, Eric, thoughts as you’re seeing this across solution lines?
Yes. Look, I think clients, all over the world are trying to reposition themselves into this new economic scenario. So whether it’s our retirement clients, we’re looking at the volatility in the marketplace, using our investment consulting capability. Whether it’s the risk management clients, who are trying to figure out how to navigate new risks, how to navigate the existing environment that they’re trading in. Even on the reinsurance side where the carriers are also looking at how do they reposition themselves to take advantage of growth and opportunities.
Ultimately, I think that type of work is going to continue. It is, as Greg said, coming in fits and starts as they sort of engage outside providers as they after they’ve done their internal strategy sessions. But, I think the need is certainly there, and we’ll engage the clients as they get ready.
So coming on to the coalition work. The entire effort around talent management and how that’s evolved over time and what’s different about it in the current environment, with everyone working from home, sleeping at work, as it were. All these things have been created a level of project work, it wasn’t there before. We don’t want to imply this offsets everything, but it is — it’s evolving as client data [ph] shifts and evolves.
Thank you. That’s very helpful, helpful. Obviously reinsurance solutions had a strong organic quarter and I was just hoping if we get some commentary in terms of the reinsurance markets — some, what’s going on with some supply and demand dynamics. And based on kind of what we know now coming out mid-year renewals, thoughts on persistency to those trends to carry into one one? Obviously there’s still a hurricane season to come, but based on what we know now kind of…
Yes, there is certainly hurricane season to come.
Listen, I’m really excited about the work that our reinsurance team has been doing in the first half of the year. Certainly working closely with the insurance company clients as they reposition themselves. And I was just listed [ph] in the market very similar to what you see on a commercial risk side. The insurers will pick their spots with which to trade risk as of or find other ways to deal with it either through what they underwrite on the front end or raise capital or sidecar. So there’s a multiple way with which the insurers will manage their risk. So I wouldn’t get too caught up in the pricing conversations that are happening in the marketplace, because like commercial risk clients, they will either trade or hold or mitigate as best they can.
So I would say that we continue to be optimistic about sort of the reinsurance business in general, the work they’re doing, most of the treaty revenue was done already, as you said, nobody really sells property catastrophe in the middle of hurricane season. So it’ll be more of a fact business and IOS business going into the second half. And it’s, 25% of the revenue left to do for the year.
So, what I would say the insurance company clients are working hard at figuring out how they want to position themselves in this new market, and we’re there to help them.
Thank you very much.
Next, we have Phil Stephano from Deutsche Bank. Your line is now open.
Yes, thanks. I wanted to ask a quick question about the $16 million adjustment income solutions. We’ve seen some peers talking about 606 revenue adjustments because of things like exposure, were down or something along those lines. In my mind, this reads like a little bit of a different story. But I guess I was just hoping you can provide some color and get to what exactly is underlying this adjustment?
Yes, and so maybe just indulge for a second. I want to give you some, some background on sort of our health results for the quarter. And Christa will talk very specifically about your question, by the way, it is apples and oranges. [Indiscernible]. But in terms of organic revenue for us in Q2, and health, it was really described as kind of a perfect storm. But the good news is result has absolutely no bearing on our long term outlook, on what we believe is an incredible immense opportunity in the solution line. The context for us just you know, for reference to is relatively small quarter for us. So changes are magnified. We obviously break out the health business, a lot of others embedded in their other solution lines we don’t. We highlight it, we completed implementation of a new system, which resulted in a onetime adjustment, was approximate five percentage decline. And the performance pressure was really around discretionary areas and core on, reduction in employment as I described.
But I will say, the work we did on for clients has been exceptional. And health solutions for us is, you know, can you just be just an exceptionally strong positive area on opportunity area. And COVID-19 ironically, again did not even underscore the long term imports to this priority area. Although you might have noticed, our last two acquisition announcement Farmington welcomed them into Aon on April 7, earlier this year, absolutely a tremendous capability that we’re going to be able to scale across our firm. And last thing I wanted to say on this is, it’s just opportunities everywhere in the world. And, while this isn’t the result we wanted, we’re disappointed in the result. I do want to call up my colleagues and healthier, they’ve done a remarkable, remarkable job supporting clients that have been under tremendous stress that’s reflected, sort of you see in the economy every day and they have just done an incredible job in that. And I think that bodes very well for our business going forward. But your specific question on Christa.
Yes, so Phil, just on the 16 million adjustments. It is identified with a new system implementation. It will not repeat in future periods. What this specifically is? We adopted and when we adopted the new revenue recognition standard on the first of January 2018, we had a temporary system in place for health. And we’ve now adopted our long term technological solution, much more granular, much more robust. It’s not uncommon to have adjustments like this when you switch systems. And as Greg outlined, we feel really good about the growth of our business long term and health, an exceptional opportunity to deliver value for clients.
No, sorry wasn’t trying to be critical anyway, just wanting to get a flavor for these oranges because it felt — it felt like it was different. Just a quick procedural question for you. To the extent that there was a change in the outlook for the merger benefits or the need to divest of something, and then happened after the shareholder vote.
What would this look like? And how would the next month or two unfold as we move towards merger completion? I understand everything is on pace. And that’s not going to be the case, but just in some crazy other scenario kind of world. What would this look like procedurally?
So from our standpoint, it’s really not something we could speculate on, because we don’t see that in any way, shape or form fill. Our view is, as Eric described, this has built momentum from the get go with our colleagues as they have come together and talked about the possibilities on integration planning, with our clients who, as I described before, see this as the potential for something new, for something they need to a lot of potential there. We talked about the shareholder vote on the 26, a lot of momentum into that. And then we’re working through all the normal antitrust processes as Christa described. We are on track to close in Q1.
So that’s kind of how we see it. That’s what’s going forward. And, again, all the original expectations sort of in — in the expense opportunities. Sure, they are absolutely there. This is never about expense, it was about growth. The combined firm and we transcribe mid-single digit or greater, that’s still in place. We pulled that for now, for all the reasons that are obvious. But as you think about long term, everything we see points to momentum. And that’s what, that’s what we’re talking about.
Great. I’m looking forward to seeing it, and best of luck.
There are no further questions on queue. I would now like to turn the call over back to Greg Case for closing remarks.
Just want to say thanks to everybody for joining the call. We appreciate it. And one last shout out to colleagues today on around the world. Thanks for all you’ve done on behalf of the firm, each other and our clients. It’s been — it’s been exceptional. Thanks and talk next quarter.
That concludes the conference. Thank you all for participating. You may now disconnect.