aon Transcrip tQ2 08

F I N A L T R A N S C R I P T

AOC - Q2 2008 Aon Corporation Earnings Conference Call

Event Date/Time: Aug. 01. 2008 / 11:00AM ET

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C O R P O R A T E P A R T I C I P A N T S

Greg CaseAon Corporation - President, CEO

Christa DaviesAon Corporation - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Keith WalshCitigroup - Analyst

Brian MeredithUBS - Analyst

Dan FarrellFox-Pitt Kelton Cochran Caronia Waller - Analyst

Meyer ShieldsStifel Nicolaus - Analyst

Jay GelbLehman Brothers - Analyst

Bill WiltMorgan Stanley - Analyst

Chuck HamiltonFTN Midwest Research - Analyst

Keith AlexanderJPMorgan Chase & Co. - Analyst

Al CopersinoBernard L. Madoff Investment Securities LLC - Analyst

Dan JohnsonCitadel Investment Group - Analyst

P R E S E N T A T I O N

Operator

Good morning ladies and gentlemen and thank you for holding. Welcome to Aon Corporation's second-quarter 2008 earningsconference call. At this time all parties will be in a listen-only mode until the question-and-answer portion of today's call. I wouldlike to remind all parties that this call is being recorded. If anyone has an objection, you may disconnect your line at this time.

It's important to note that some of the comments in today's call may constitute certain statements that are forward-looking innature as defined by the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks anduncertainties 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 oursecond-quarter results as well as having been posted on our website. Now, it's my pleasure to turn the call over to Mr. GregCase, President and CEO of Aon Corporation. Sir, please go ahead.

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Aug. 01. 2008 / 11:00AM, AOC - Q2 2008 Aon Corporation Earnings Conference Call



Greg Case - Aon Corporation - President, CEO

Thank you. Good morning everyone and welcome to our second-quarter 2008 conference call. Joining me here today is ourCFO, Christa Davies. As I have done in the last few calls, I would like to cover three areas before turning the call over to Christafor further financial review.

First area is around our performance against key commitments to shareholders. The second is around our continued areas ofinvestment across Aon and the third is around our overall organic growth performance.

To begin, I want to say that from our team's perspective, the results posted for second-quarter 2008 represent another quarterof continued progress and momentum against our operating plans to (inaudible) Aon. Irrespective of market conditions,regulatory challenges or other challenges outside our control, we continued to execute on our plans to substantially strengthenour firm.

On the first topic, our performance versus commitments, as we do each quarter, we measure our performance against the threeperformance metrics we committed to our shareholders -- grow organically, expand margins and increase earnings per share.Our operating plans are committed to achieving all three outcomes over the course of each year not necessarily every quarter.

Further we said we would not sacrifice one of these metrics for another. As I've already commented, our results reflect quitesimply a quarter of continued progress against our goals despite soft market conditions globally, weak economic conditionsin the US and a very strong performance in second quarter of last year.

Organic revenue growth was 2% overall with growth across risk and human capital. Adjusted pretax margin decreased 20 basispoints but if we had excluded the $20 million of legacy litigation accruals in our brokerage segment which really representslargely a cleanup of issues that have been around Aon for over a decade, the adjusted pretax margin would have increased 90basis points and brokerage margin would have increased 150 basis points to 19.3%.

Finally, the third metrics, EPS, on an adjusted basis increased 25%. When you look at our results across the organization andcompared to the industry, they represent meaningful progress from Aon colleagues around the globe who are working hardto strengthen our leading position in risk advice and human capital management as highlighted by recent recognitions.

For example, Aon was pointed out by business insurance as the number one broker for 2008 and Euromoney is the best brokerin the world voted by clients. On the second topic, further areas in investment; as we've discussed before, our team remainsvery excited about our industry.

We believe long-term, the aggregate level of risk continues to increase in complexity and size around the globe. As a result, theneeds of our clients are increasing. With the completed sales of our remaining insurance underwriting businesses on April 1,we're solely focused on two of the most critical areas facing our clients today -- risk advice and human capital management

During the quarter, we continued to build on industry-leading global capabilities with significant investments. A few examplesinclude in retail brokerage, we added key hires in construction and expanded our geographic presence in emerging marketssuch as China, India in the Middle East.

We introduced new products to our clients such a SMARTDrive, (inaudible) safety program proven to cut accident frequencyin half and improve loss control. In reinsurance, we are already realizing benefits from our colleagues who recently joined us inthe acquisition of Gallagher Re. And in consulting we added key leadership and benefits businesses globally in emerging marketsin Asia-Pacific.







These categories highlight just a few of the investments we are making further strengthen our capabilities and better serve ourclients. One key point -- as investors, it's important that you understand these investments are being made in the context ofour overall margin improvement efforts.

As we continue to build our firm, we're removing inefficiency and cost from back office functions -- finance, HR, IT -- to fundinvestments in clients-facing capability and simultaneously improving margin. We can do this in ways other firms may not beable to just given the way we came together over the last 20 years. The key takeaway here is that we continued to makemeaningful investment in our firm and remain excited about how our fundamental client-serving capability continues tostrengthen around the world.

Finally on they topic of growth, I'll highlight our organic growth by segment for the quarter. In brokerage, overall organic growthfor the segment was 2%. Despite pricing that was down on average mid to high single digits globally with substantially softerconditions in the Americas in reinsurance, retention rates were 90% or better on average, highlighting strong client satisfaction.

We also continued to see early benefits from investments in many areas such as (inaudible) reinsurance and environmental,strong double-digit growth in [new] business in several areas across the firm including EMEA, (inaudible), China and LatinAmerica. These results really reflect a strong performance when you consider our very strong results in Q2 last year.

It's truly gratifying to see our team coming together around the globe. With a common client platform and a single sellingdatabase now deployed in more than 80 countries and covering more than 90% of our revenue, our business leaders are morecapable of engaging with colleagues and breaking down geographic and business boundaries to serve clients better aroundthe globe.

Turning now to the individual regions across brokerage. In the Americas, organic revenue declined 1%. We saw continuedstrong performance in Latin America and Affinity and overall retention rates were very strong at 90% or better.

Our US retail business continues to work through both soft market conditions and a slowdown in commercial construction andM&A related activity as well as difficult comparisons from last year's record new business. As you may remember, Q2 2007represented the single biggest new business quarter in the history of our US operation.

Overall, we believe our results in the Americas do not fully reflect the underlying strength of improvements we're seeing inproductivity and collaboration across (technical difficulty). For example, the total number of opportunities in the pipeline areup 6% driven by the efforts of our colleagues and implementing our revenue engine platform and these efforts overall thenwould be offset in the near-term by the slowdown in construction and M&A activity which tend to drive higher revenue pertransaction.

Turning to Europe, Middle East and Africa; another strong quarter with organic growth of 7%; retention rates above 90% onaverage really driven by our number one position in most of these markets. Pricing is relatively less difficult in EMEA althoughstill a challenge.

We saw double-digit growth in emerging markets such as Africa and the Middle East and solid growth across most comecountries in continental Europe. We're getting early benefits from the deployment of our revenue engine effort and localmarketing campaigns and we continue to invest across the region and in emerging markets.

In Asia-Pacific, organic growth was 1%, double-digit growth in emerging markets such as China and Korea with modest growthin Australia showing through as well. These results were offset by continued weakness in a specific part of Japan around certainregulatory changes.

We have a set of initiatives that we're driving here and hope to have these issues resolved by year-end. Overall, solid platformof leadership positions in Australia, New Zealand, China and across the region as we continue to invest in the emerging markets.







In the UK, organic revenue increased 1%. We saw solid retention rates of 90% plus, modest growth in our UK retail businesspartially offset by weaker trends in our network business. On the reinsurance side, organic growth of 2% driven by growth inboth facultative and capital market transactions that closed during the quarter. And we continued to win new business fortreaty placements that were offset by higher (inaudible) retentions and soft pricing.

Our colleagues in reinsurance continue to provide our clients with a unique and integrated solution around capital management.We're number one in treaty, number one in facultative and the number one broker in capital markets which is truly a strongplatform to win and serve clients.

Additionally on reinsurance, I would like to say we're very pleased to have our new colleagues from Gallagher Re join us duringthe quarter, enhancing our capabilities in US accident, health and life markets along with enhanced capabilities in the UKspecialty, casualty and FI business. Turning now to the consulting segment, overall organic growth was 2%.

We saw continued growth in our core services business of 3% [drew] by solid growth internationally in retirement and healthand benefits. This was partially offset by a slowdown in our global competition practices group which supports the financialservices sector.

In outsourcing we saw modest growth in our benefits outsourcing business offset by a modest decline related to previouslyannounced termination of a significant outsourcing contract. Overall, a good quarter of progress in the consulting group.

In summary, as our team reflects on the results, quite simply it is a quarter of continued progress against our goals. Despite softmarket conditions globally and weak economic trends in the US, we are in a position of strength.

With the industry's broadest set of globally owned resources and capabilities, our colleagues are breaking down geographicand business boundaries to serve clients better around the globe. We're reinforcing a culture that is being held accountablefor performance as we fund substantial investment to drive long-term growth while managing expenses to deliver marginimprovement.

In short, we're working hard to build on our leadership position with our clients and markets and the team feels very goodabout our continued progress for the second quarter and what all this implies for our prospects going forward. I am now verypleased to turn the call over to Christa for a further financial review. Christa?

Christa Davies - Aon Corporation - CFO

Thanks Greg. Good morning everyone. As Greg noted our positive momentum continued in the second quarter with improvementacross our three key financial metrics. We continued to invest in building our global capabilities and we also believe that weare effectively managing capital as we return more than $1 billion of capital to shareholders through our share repurchaseprogram.

The sales of both Combined and Sterling were completed on April 1. After-tax proceeds related to the transaction wereapproximately $2.7 billion and a pre-tax gain of approximately $1.4 billion was recorded in discontinued operations during thesecond order. This transaction represented a tremendous amount of great work by our colleagues and fully focuses our assetsnow on two of the most important issues facing our clients today -- risk and human capital management.

Turning to continuing operations, EPS was $0.55 per share for the second quarter. There are several items we've highlightedwhich we think are important to understand in assessing core performance.







First, restructuring charges in the second quarter were $53 million or $0.13 per share. Second, we recorded a total of $11 millionor $0.03 per share for the previously disclosed review and compliance activities related to the foreign corrupt practices act,FCPA.

Consequently [would view] the core or adjusted EPS performance of our continuing operations of $0.71 per share up 25% overthe prior year quarter. Also included in the results, foreign currency translation had a favorable impact of approximately $0.06per share as the US dollar declined against most major currencies.

Lastly, we recorded an unfavorable impact of $20 million or $0.05 per share related to the litigation accruals in our brokeragesegment. Before turning to the business segments, let me spend a moment on the 2005 and 2007 restructuring program, keyinitiatives that are enabling concurrent funding of investments and delivering meaningful margin expansion.

Related to the 2005 program, we incurred no charges in the quarter and the actions necessary to generate the savings arecomplete. We achieved approximately $11 million of incremental savings in the quarter versus Q2 '07 and are on schedule torealize our $270 million savings target in 2008 which would reflect incremental savings of approximately $45 million for thefull-year 2008 compared to 2007.

With respect to the 2007 restructuring program, we incurred $53 million of charges in the second quarter primarily related toworkforce reduction in EMEA and the UK in our brokerage segment. We achieved approximately $16 million of savings in thesecond quarter and are on track to achieve our 50 to $70 million of savings target in 2008, 175 to $200 million of savings in2009, and $240 million of cumulative annual savings by 2010 before any potential reinvestment. Page 12 of the press releaseprovides our usual quarterly update on this program.

Turning to the segments, adjusted brokerage pre-tax income increased 10% to $295 million and adjusted pre-tax marginimproved 30 basis points to 18.1% including the previously mentioned $20 million litigation expense accrual. Had we notincurred this expense in the quarter, pre-tax margin would have increased 150 basis points to 19.3%.

Expense discipline in a challenging pricing market is even more critical as we continue to invest significantly in growing ourcapabilities. As you can see from the press release, total operating expenses for brokerage increased $133 million quarter overquarter almost entirely accounted for by $65 million of foreign currency translation, $28 million increase in restructuring costs,$20 million related to the litigation accruals and $11 million to FCPA and related compliance activities. Excluding these items,core expenses were up modestly versus the prior year quarter as the inflation reported in our core expenses were largely offsetby benefits related to restructuring programs and ongoing expense initiatives.

Turning to consulting, adjusted pre-tax income decreased 2% to $47 million and the adjusted pre-tax margin decreased 80basis points to 14% in the quarter. As we commented in last year's conference call, Q2 '07 included a $5 million gain recordedin revenue related to the sale of an equity investment. Had we adjusted for the gain in the prior year quarter, pre-tax marginon our underlying business would've increased 60 basis points.

As you can see from the press release, total operating expenses in consulting increased $13 million quarter over quarter almostentirely accountable accounted for by $11 million of unfavorable foreign currency impact. Absent the impact of FX, consultingexpenses were up modestly reflecting solid expense management while again funding investments in colleagues and capabilitiesto drive future growth.

Overall our expense initiatives continue to manage the inherent inflationary push and the investments we're making in thebusiness with the net effect driving margin improvement. As Greg said, we're committed to margin improvement over thecourse of each year, not necessarily each quarter.

I would note that the total pre-tax margin for the first half of 2008 is up 80 basis points to 15.7% compared to the prior year firsthalf. Finally, turning to the unallocated section. Unallocated investment income for the quarter was $17 million, a decrease of







$12 million from the prior year quarter primarily reflecting a $26 million decline in distributions received from our [pep] securitiespartially offset by higher interest income generated from an increase in cash balances.

Distributions related to the [pep] securities are subject to completed transactions in the underlying portfolios. As we've saidpreviously, these distributions are inherently uncertain in timing. Going forward, we would anticipate potential quarterlydistributions of approximately $5 million as we monetize the unrealized gain over time.

We realized there are a lot of moving pieces in the unallocated section as we manage the volatility in our [pep] securities andthe balance of cash against our share repurchase programs. We will continue to anticipate a loss of 50 to $55 million per quartersimilar to the loss of $52 million in the second quarter.

The effective tax rate on continuing operations was 25.7% in the quarter as compared to 34.9% in the prior year quarter. Thiswas primarily due to the favorable resolution of prior year taxes in the UK. For 2008, we anticipate that the effective tax rate oncontinuing operations will be 30% as compared to previous expectations of 30.5% due primarily to statutory rate reductionsand changes in the geographic distribution of income.

During the second quarter, we repurchased approximately 24.5 million shares or $1.1 billion of common stock. As of June 30the Company had approximately $1.3 billion of remaining share repurchase authorization. Shares of actual common stockoutstanding at the end of the quarter declined $21 million to $278 million at June 30 compared to $299 million at March 31.

Cash and short-term investments were approximately $3 billion at June 30. The US cash pool available for immediate corporateuse was approximately $1.8 billion reflecting assumptions for estimated tax expense related to the insurance underwritingtransactions and cash balances that are restricted or held by international business units.

Total debt outstanding at June 30 was $2 billion and debt to capital was 23.9% reflecting a solid balance sheet with significantfinancial flexibility regarding capital allocation. As we've discussed before, capital allocations decisions are driven by a risk-adjustedreturn on capital process for potential uses of capital that may include share repurchase which continues to be our priority,acquisitions such as Gallagher Re, pension plan actions focused on reducing volatility and other uses such as debt reductionand dividends.

In summary, with the completed sale of our insurance underwriting businesses, we've positioned our portfolio to focus on twoof the most critical issues facing clients today -- risk and human capital management. We continue to drive results against ourkey financial metrics in a challenging environment.

Our balance sheet is strong and our liquidity is excellent As we continue to drive value creation through improved businessresults and effective capital management. With that, I will turn the call back over to the operator and we would be delightedto take your questions.

Q U E S T I O N S A N D A N S W E R S

Operator

(OPERATOR INSTRUCTIONS) Keith Walsh, Citi.

Keith Walsh - Citigroup - Analyst

Just first for Greg, a couple of questions and then I've got one for Christa. Your competitors over at Gallagher were talking abouthow pricing has been a problem but also the slowing economy could be something that they could see impacting the topline







for them. Maybe if you could comment on that? And then maybe just a follow-up, with the new business wins to losses -- I knowyou've talked about that in the past. How is that running still?


Keith, as you reflect on kind of the overall headlines that are being talked about by most around the industry, obviously onebeing discussed is around the soft market or the pricing side which is true and continues. And then from an economic standpointas we talked about a little on the last call, we do see the economy having impact on our business overall. This is a couple ofexamples.

In the private equity side which we're very involved in on the construction side, these are areas in which we see our clientssuffering frankly and that impacts us and will continue to impact us. The good news for Aon is we are a global firm and in manyrespects hedged about as well as you can possibly be from an economic standpoint. But overall we have -- we've fared verywell and the team has been able to understand our situation and react to it which I am incredibly proud. And this quarterhighlights that.

But it should be clearly understood that the economic situation, the economic pressure is real, impacts our clients in many manyways and is impacting of our business. On your second point on the wins and losses, as we continue to put in place our revenueengine and what we're doing around our client leadership approach, this continues to serve Aon incredibly well.

And our win loss ratio continues to be year-to-date two to one. We continue to do very well against competitors and are candidlyquite excited about what the potential could look like as we continue to put things in place that are focused on our clients.Again this is less about competitors and very much about our clients.

Keith Walsh - Citigroup - Analyst

Great, and if I could just follow-up with Christa. You kind of alluded to the return on cash, the three buckets that you typicallylook at. Has M&A become more attractive with the New York Attorney General amendment that allows contingent commissionsfor three years? Has that sort of changed the dynamic a little bit? Thanks.


It hasn't really changed our focus at all. We really have continued to do sort of 200 to $300 million in acquisitions a year. Weexpect that sort of trend to continue. Year-to-date we have done a little over $60 million in acquisitions primarily in the brokeragesegment and primarily international growth. And we sort of continue to see our acquisitions falling into three buckets that I'vementioned before.

The first bucket is around sort of specialist acquisitions, sort of deep specialties around, say, construction or environment; soparticular types of risks. The second is sort of geographic expansion for us. So we are sort of acquiring a lot in international as Imentioned. And the third is around specific (inaudible). The Gallagher acquisition is a great example of that.

Operator

Brian Meredith, UBS.







Brian Meredith - UBS - Analyst

One for Christa and one for Greg here. Christa, first of all on the unallocated expense income area, I think last quarter you saidthat expect 50 to $55 million excluding the income coming from the Combined acquisition. I'm wondering if that is what youare implying here with your guidance or have expenses actually increased in the area and is your guidance actually differentnow?


Yes, so our guidance in last quarter as you mentioned was 50 to $55 million and we continue to expect that guidance for thissector. Really the impact this quarter has been around PEPS which I mentioned was $26 million in income in Q2 '07 and 0 inthis quarter. And that is an extremely sort of volatile area in terms of timing, not in terms of the absolute value of the portfoliobut just in terms of the timing of distribution.

In terms of unallocated expenses, if I just went with through the three main buckets in unallocated, we expect unallocatedrevenue to be around $15 million a quarter, unallocated expenses to be around 33 to $35 million a quarter and interest expenseto be around $33 million a quarter -- those three things adding to 50 to $55 million a quarter.


Okay so it has changed though from last quarter where you were basically deducting the Combined insurance investmentincome from that that $50 million to $55 million and now you are not?


Yes, that $12 million of income from the combined transaction is not included here.


Not included. Okay, so I got -- so going forward it actually for the next couple of quarters should be less than the $50 million to$55 million because you will have income coming from Combined?


No, so we do expect this particular sector to be 50 to $55 million going forward.


Okay, all right. We can talk about that offline. Next question, Greg can you talk about what's going on with fees and commissionrates? you talked about how your clients are having a tough time. Is it tough to get fee increases and commission rate increasesgiven that environment?


Listen, Brian, it is -- take a step back and think about the overall conversation around commission lift, compensation which isreally what I think you're asking about.








Yes.


You know from our standpoint -- look, we view this within the context of our overall strategy around how we think aboutcompensation. And it all comes back to frankly a philosophy around client leadership, what we do.

And our strategy as we talked before and will continue to emphasize is an objective around delivering the highest value. Andthat's a conversation we're having with our clients -- by the way that doesn't change no matter what the current pricingenvironment is. And it really is around delivering highest value to price in any one in our area period.

So if you think about sort of what we're able to deliver, what we're able to bring the table, it just should be, can be and will bedifferent than what others are going to be able to do. And our view on compensation starts with making sure our clientsunderstand that, appreciate that and then we have the dialog around how we get fairly compensated for this.

Candidly, the opportunity here for us is multifaceted. First, I get asked a lot about commission lifts. The first opportunity for usis really just getting paid for what has been agreed to. One of the great things about bringing together the ARS organizationunder the leadership of Steve McGill and Ted Devine -- it's going incredibly well.

We used to have multiple negotiations with markets around what we should get paid; maybe 80, 90, 100 around the globe andnow we're having two or three. It's a very different approach to how you think about actually just getting paid for what hasalready been committed against an existing grid. There is a tremendous amount of opportunity here which is literally justexecuting on what has been agreed to.

And then where appropriate we're also making sure that we are increasing compensation and having a conversation aroundhow we secure increases where it makes sense. If you just apply kind of the clinical fact-based analysis here, you look atcontingents which is obviously a he subject for heated debate now as we think about what's gone on over the last month,(inaudible) in our industry have gone up over $1 billion post [Spitzer] which is stunning when you think about the overall contextof the environment.

And in that regard, as we sit down and talk to carriers and we talk to clients, it's actually a very straightforward conversation totalk about what we're providing, what's happening in the market and what's fair for us. That actually is working very well. We'restill early days in it and the impact in the quarter is meaningful but it will be much more meaningful in 2000 and 2010.

And then finally we're talking to both carriers and clients about getting reimbursed and paid for services we provide to them.And we provide significant service to the clients and to carriers around delivering (inaudible), auto IDs, billing to collections,policy issuance, et cetera. We've got a model for getting paid for this in the UK and we're talking to carriers about it outside theUK and actually have met with some very good success.

For us it continues to be early days as we have this conversation. But it's not about a one-off, give us a commission lift. It's verymuch around a philosophy on how we think about our strategy of pricing our services so that our clients walk away and saywow -- we actually got the highest value for price from our risk adviser in any way around the world.

Operator

Dan Farrell, Fox-Pitt Kelton.







Dan Farrell - Fox-Pitt Kelton Cochran Caronia Waller - Analyst

Can you talk a little bit about your investment in the brokerage business? You alluded to it somewhat. But you know you haveachieved 150 basis point margin improvement while it seems at the same time you're investing heavily in the business.

Can you quantify what impact that reinvestment might have? Or if you can't give specific numbers, can you talk broadly aboutyour philosophy going forward? It would seem that with your expense savings coming through you have a lot of underlyingimprovement in the earnings if you choose to let it flow through the bottom line.


Great question. I am glad you raise it. It really is at the heart of what we talk about all the time in terms of how we lead ourbusiness. And it comes back to what I described and Christa described around our three core objectives -- organic growth,margin improvement and EPS growth. And we are committed to all three of those while we invest in the business.

What I have described before is just a unique franchise called Aon that actually has both incredible capability but also just givenhow we have grown up, tremendous opportunity to shift costs from colleagues who don't face clients every day and there's avery significant group -- great colleagues but they don't spend time with clients every day -- to a group of colleagues who dospend time with clients. So if you think back two or three years ago, for every dollar we spent, we spent roughly two-thirds ofthat were closed client facing and one-third was non client facing.

Three one-third of the clients who were non client facing by the way are phenomenal folks but it overall professional services,that tends to be more like 15 or 20% of that number. By the way it's just how we grew up. And by the way we could not havegrown up any other way. It just represent a big opportunity for us and what we have done is we've actually been reducing thecost in non client facing and shifting it into client facing and at the same time improving margin.

And that is actually -- that's something that's actually quite unique we believe to Aon and something that obviously requiresreal discipline and resolve in the current environment as Christa described. We're quite understanding that our investors areuncomfortable when they think about near-term real costs that have one to three-year paybacks in terms of bringing colleaguesand ramping them up.

But understand we're building our firm. And the fact that we can both invest heavily and improve margin is we believe atremendous advantage. We haven't historically quantified exactly. Maybe at some point in the future we will start to -- we canlay this out. But the investment areas have been around construction, Affinity, Middle East, China. Christaed talk about Gallagher,across the Americas around construction, aviation and Affinity. In EMEA, a number of different teams and initiatives; in Asia-Pacific,in the UK (inaudible) we've talked about (inaudible) and capital markets.

But when you think about the overall context -- I'll pick one example -- the US. Headcount in the US has gone from close to 4800colleagues in January of '07 to closer to 4100 colleagues currently. That's a decline of 14% when you think about it. And in thatcontext we still added hundreds of new colleagues in key sectors that I've just described. So it's really for us a dedication to bothimprovement in the operating performance as well as building our firm for the long-term.


Okay great, thank you. Just one additional question. Just wanted to talk a little bit more about the North American business,your negative 1% organic. In your view it looks like it was a very difficult comp in the year-ago period, number one. And it'soften difficult with some of the disclosure to get a sense of this but do you feel in your opinion that you're gaining share in yoursort of brokerage business in North America?








I think our team and our group feels very good about where we are. And as I would describe -- when you think about Q2 -- yes,by the way. We had an incredibly difficult comp but by the way we want to apologize (inaudible) great. We hope we have a lotof difficult comps going forward.

There is soft pricing but there is for everyone and that's not an excuse for us and shouldn't be as is the economy. We just haveto work through all that. That's what we're trying to do to build our firm. What I would say we were most excited about and I'lljust think about -- actually if you think about brokerage overall, it's not that we grew organically. We're never going to getexcited about low-single digit growth.

Irrespective of whether it's industry-leading or not, it doesn't matter. We are excited about is really what we're building andwhat we're starting to really get put in place. So if you think about -- just pick a couple of things on the revenue side, what wehave done with the revenue engine -- that is a client tracking tool going from 30 selling systems to one now covering 90% ofour revenue. It's got a local market analysis portion to it, pipeline analysis, new product innovation, clients feedback.

That revenue engine piece has really been a foundation point that's actually going into our firm but it's just beginning to startto take hold. It's about 75% complete in the Americas, about maybe 50% complete in EMEA, 50% in UK, maybe 25/30% inAsia-Pacific. So it's just coming into its real being in terms of really driving our performance and it's helped us a lot in the secondquarter.

You put on top of that what we had done with the global ARS structure under Steve McGill and Ted Devine's leadership whichis working very, very well. It's a very top powerful combination, that structural move plus the revenue engine puts us in a verygood place. And we look at it over time.

That combination has led to productivity increases for a colleague of 10% plus, income improvements for a colleague over 20%plus. All that is good but from our view we are just beginning to scratch the surface. If you think about how that approach hasbeen tested, the second quarter for us was a great test (inaudible) as you said it's a soft market, a tough economy and a toughcomp quarter in '07, but the team really stood that test.

If you imagine in the US that in addition to that tough comp quarter we were also -- we also saw the economy take hold aroundM&A and private equity as well as construction, it really held up very well. In the US new business production remains strong.As I said before, the deal count for us, the number of situations closed was actually up 6% over that very strong quarter in '07.The win rates against competition as I answered before are very, very strong.

Deal size is down a bit because of the -- there aren't as many big deals in private equity and construction. But the challengereally for us has been in two or three offices driven by those two sectors I talked about. So it really is something from our viewwe feel very good about, the foundation that's being built. We feel very good about what's on the horizon for us. And we wantto just keep pushing forward. By the way, if you take the platform I just described and you add on top of it the investments incolleagues that we talked about from the previous question, we kind of like that formula.


Okay great. That was very helpful. Thank you.

Operator

Meyer Shields, Stifel Nicolaus.







Meyer Shields - Stifel Nicolaus - Analyst

One of the comments made at the New York hearing was that (inaudible) full transparency between -- in terms of what brokerspull in from their clients and from contingent commissions and there's no real economic difference between the brokers thatcollect contingents and those that don't. And I think that's a very valid comment. But what I'm wondering is can you quantifyor give us any understanding about how big is the disadvantage that you face now because some of your competitors don'thave full disclosure?


I want to makes sure I understand. The first point you made I think was that in your view there is no -- can you just restate thefirst point, that there's no difference in compensation?


No, not that there is no difference in compensation but economically if there is full disclosure then it shouldn't matter whethera broker collects contingents or not because the client understands everything.


Got you, got you. On the New York hearings, first obviously we applaud the fact that the New York State Department of Insuranceand the New York Attorney General convened hearings to talk about this important issue and how the industry frankly canserve clients better. And that really is what this all should be about is clients.

For us it is certainly we focus on clients. It's not about the brokers, it's not about the carriers, it's about clients -- period. But therereally are two very specific points, you're touching on both of them. I would -- frankly from our standpoint we want to makesure we keep them separate.

One is the client's right or benefit to understand who is working for them, what they're paying for the service they get which isthe transparency point you're making. And then the second one is around from of compensation -- a level playing field whetheryou have contingents or not and supplementals and whatever you want to say.

For us as Steve McGill I think very ably put when he testified on our behalf, the arguments for transparency are the number oneissue for us. They are clear, they're compelling, they are obvious. You're really essentially saying should a client know who theproducer is working for. Are they working for them or are they working as an agent for insurers?

By the way, both models are fine but the client should just know. Agents are great but are you an agent or are you a broker? Bythe way, we're also trying to figure out whether you need to understand what insurers did that producer approach to meettheir needs? One? Multiple?

By the way, both are fine answers but clients should have the right to know that. Third is how much the client will pay. If youthink about it, we're actually having (inaudible) reflection (inaudible) kind of is amusing we're having a conversation around isit okay for the client to know what they paid? That's interesting but for us we don't understand the other side of that argument.

Finally, how much the producer got compensated. So from our standpoint I think you hit it on the head. Transparency on theseissues means clients are going to be better served and that producers frankly that add value are going to do great and producersthat don't won't. And you can't ask for a better trade and that. That is what professional services is all about. From our standpoint,







transparency goes a long, long way toward helping clients decide how this should evolve, not regulators or not brokers or notinsurers.


That's very helpful. Do you have any sense as to the magnitude of how much you've lost out over the past couple of yearsbecause of limited transparency?


I would -- listen, what I would say is the following. Again, I think none of these arguments should come back to sort of wherewas Aon. We essentially -- by the way, my very short tenure at Aon, a little over 3.5 years, I have never known contingentcommissions. I came in after Spitzer -- so fine.

And we essentially went to work and said let's go add client value. But there should be no illusion. Post Spitzer, post 2005contingent commissions went up by $1 billion. So take that $1 billion and then you add to that whatever you think went awayfrom Aon, Marsh and Willis and the carriers basically paid something like $1 billion plus more to smaller brokers than they hadbefore.

So, I would to start with a number that starts with $1 billion as a fact base. By the way this out of AMS Best. It's not Aon analysis.It's out of AM Best in terms of sort of a very large number that sort of the carriers have increased. In terms of the impact for us,we're not going to speculate. We're just going to go forward and serve clients.


That's helpful. Just a couple of small I guess nit-picky questions. In the first quarter you disclosed how much you had repurchasedin the first month of the second quarter I guess for -- I was wondering how many shares you repurchased in July if that numberis available.


Meyer, we're not going to do that going forward. It actually to be frank caused a lot of confusion. So what we are going to dois report what we do in the quarter and that was 24.5 million shares, $1.1 billion in stock. And what we are going to do is goingforward report exactly what our share count is as at June 30 or as at the last day in the quarter so you can actually reflect thatas a starting point for your models.


Okay and looking forward is 30% a fair tax runrate for 2009 as well?


Yes it is.

Operator

Jay Gelb, Lehman Brothers.







Jay Gelb - Lehman Brothers - Analyst

Greg, at what point does Aon reach a tipping point in terms of when expensive saves fall to the bottom line to a greater extentthan being offset by new investments?


Jay, I think you are really asking a couple of questions there. Let's start with the fundamentals -- how much opportunity wecontinue to have to drive efficiency across Aon. And I would say we actually continue to have a lot of runway there. Christadescribed the second restructuring that is underway. You saw the first restructuring which was primarily focused on the UK andthe US.

The second restructuring is primarily focused on Europe, a little on the US. And there's a lot of opportunity for us to continuethe shift that I talked about before -- expense from non client facing to client facing which by the way funds substantialinvestments and as I said before allows us to improve margins.

But you also heard at the outset and by me and repeated by Christa -- we're going to grow organically. We are going to improvemargin and we're going to increase earnings per share and we're to do that every year. That is our commitment. So I can't tellyou the exactly when the tipping point occurs. A lot depends on how our investments evolve, how we do et cetera.

But we're positioning our firm we believe for tremendous potential. We're not trying to maximize any one of those in thenear-term but for tremendous potential over time 2009, 2010 and beyond. In the near-term though we are absolutely goingto achieve the three that I just described, the three metrics I described. We also -- the only other piece of insight we have givenin terms of our views is that we have obviously got to be north of 20% margin.


Jay, the other perspective I would give is with respect to the 2007 program, we have substantial runway to go in terms of savings.We are on track to generate 50 to $70 million of savings in 2008 but 175 to $200 million of savings in 2009 and $240 million ofsavings in 2010. And so we've got pretty close to $200 million of incremental savings to go in that one program itself. And thereare obviously other expense initiatives going on outside of restructuring.


Right, I understand that. I think one of the difficulties we have in modeling is how much of that is going to be reinvested versusdrop to the bottom line. And then for that 20% margin, Greg, is that just in brokerage? And when do you expect to achieve thatby?


We have talked about it being in brokerage and we have not talked about when. We just said we needed to be comfortablyabove 20%. And from a modeling standpoint, I apologize. We're not helping you with your modeling as we are trying to shapethe firm.

But -- and we can -- my guess is -- I don't know what the right benchmark is. Maybe -- there's going to be a substantial numberthat drops to the bottom line obviously and there has been a substantial number. I mean think about overall improvement. Butyou know if you wanted to pick number from a modeling standpoint, pick 20% from an investment standpoint.








Of the expense saves?


Yes.

Operator

Jay Cohen, Merrill Lynch.

Operator

Bill Wilt, Morgan Stanley.

Bill Wilt - Morgan Stanley - Analyst

Thanks for that. The economy has been touched on I guess in different ways during the call. But more directly, what segmentsof the economy -- and I'm thinking of the US economy for the moment. As you evaluate your business, growth opportunitiesand exposure to the economy, what segments should we focus on, do you focus on most? I guess you've talked about constructionand financial institutions. But just holistically what segments of the economy are most squarely on your radar screen?


For us, again part of the beauty of Aon is Aon, just given what we do, given the amount of risk we move -- over $50 billion sortof on the retail side plus what we do on the reinsurance side -- we literally touch about every sector of the global economy. Wecertainly touch every geography and basically every sector.

So what happens is some sectors are affected more or less. We've highlighted three areas that -- two and I will highlight a thirdthat really have had impact on our business in this quarter. Private equity, we have talked about M&A. Construction we havetalked about although that's got its offsets as well when you think about what's happening outside the US. But constructioncertainly inside the US.

And then financial institutions; we have a number of businesses which touch financial institutions and our financial institutionclients by and large are suffering. Maybe it's economic but there may be some other things going on as well. But those threeareas in particular are three that we are -- we have a very good understanding of one and are reacting to.

And again what the message I would again highlight is what we like about what we're doing now is with the global operatingcommittee coming together to talk about how we operate and we prioritize around the globe and the revenue engine that isin place that helps us understand exactly -- literally exactly -- what's happening around the globe by sector, by product, by new,by renewal, by client; it gives us a very, very strong platform upon which we can react.

And so those are the three areas that are impacting us probably the most right now. But more important than what is hittingus, more important than that is what we can do about it and how we can actually reassign and prioritize resources to actuallycontinue to grow and build our and capitalize on our opportunities faster than we ever have before.








Thanks for that. You're speaking to an understanding group on financial institutions, I suspect.


I am aware of that.


I guess for Christa, a question. I am aware without being able to say what the specifics are or even the timing, I thought Iremembered making a mental note there were changes coming or perhaps it was proposed changes in UK pension accountingor perhaps it was the funding of UK pensions. I don't recall the specifics. If I'm right, maybe you know and could let us knowwhether there was anything on the near or medium-term horizon where UK pension changes are concerned?


Yes, look -- we obviously report our pension liabilities and expenses on a US GAAP basis. And so to the extent that there arechanges in the way UK GAAP reflects pension accounting, they actually don't impact the way we report our sort of pensionexpenses or liabilities.


So the changes that there are -- whatever those changes may be wouldn't affect funding or the economics of Europe?


Yes, not necessarily. Obviously we're monitoring all legislation in the UK and we will continue to sort of update you as it becomesmaterial.

Operator

Chuck Hamilton, FTN Midwest.

Chuck Hamilton - FTN Midwest Research - Analyst

A couple of quick questions. I guess the first one, when we're trying to assess the cost base which increased this quarter orperhaps more than we expected, we're looking at the onetime expenses and particularly the legacy litigation accruals. Can yougive us some flavor, Greg for Christa, in terms of whether or not we can view this as a onetime thing or what does it really reflect?And is there some underlying issue that we should be building in for future expectations?


Chuck, it is accruals related to litigation that's almost a decade old as Greg said. We don't expect this trend to continue whichis why we have sort of described the magnitude of it. We haven't adjusted for it in our sort of schedule on page 11 because







we're very careful about adjusting our results for really just extraordinary items. But it's not something that I would be particularlyconcern about if I were you.


Right, now does this reflect the cases that are currently being litigated or is currently [at] settlements or just communicationsbefore you even get to that point?


It is cases that are obviously ongoing. We don't really want to sort of go into a whole lot of detail about it, to be perfectly frank.


Okay, and I guess the second expense item comes to the foreign corrupt practices act. I see that we had seen $11 million in thequarter, $25 million year-to-date. How long does that timeline go on? Is that a 2008 issue? Or is that extended to 2009? Whatdoes that cost base look like for us?


So obviously we are incredibly committed as a firm to ensuring that our governance and compliance procedures are pristineand we view the improved compliance environment we're putting in place as leading-edge in the industry. In terms of thetiming, we're hopeful that we can conclude the majority of this by the end of 2008. But as you know, these matters are inherentlyuncertain. We would sort of expect this kind of trend to continue through 2008.

Operator

Matthew Heimermann, JPMorgan.

Keith Alexander - JPMorgan Chase & Co. - Analyst

I have just got a couple questions. One, I was wondering if you could talk about what your reinsurance brokerage margins looklike or growth look like excluding capital markets and facultative?


Sure, we will talk to the growth. We don't talk about the margin. We talk about it in the overall brokerage sector. But on Re --first, I'm really glad you raised Re. Our colleagues have just done a phenomenal job in this sector obviously under tremendouspressure given the overall market pricing environment and what our clients are facing. But they've just done a great job.

Part of reason around it is just how they approach the market and the integrated capital solutions approach has actually for usbeen quite powerful. A lot of folks can talk about it but given our position as number one in treaty, number one in fac andnumber one in capital markets supported by really world-class analytic capability, it is a very unique platform.

And that value proposition has helped us win a lot of new business, retain a lot of business on the treaty side as well as supportthe efforts on the fac side and the capital market side. You saw that in the quarter. We had I think a strong quarter given theheadwinds and progress across the board.







The fac investments we have made have been phenomenal in terms of reacting to client need. As retentions have gone up,clients have really looked for ways to pull out specific risks. We've got a global fac network which is one-of-a-kind and it's actuallybeen very, very powerful in terms of meeting client needs and very successful for us. And we actually believe that's going tocontinue and have tremendous opportunity to continue to develop that platform.

And on capital markets, tremendous group of colleagues here who have done some great work both on the (inaudible) side aswell as on the M&A side and the really classic investment banking side. And while capital markets remain to be a very smallamount of the overall picture right now, we are very hopeful what that's going to look like going forward.


My next question was actually about the hearings in New York. I was just wondering what you expect in terms of the next stepsand then what do you expect will actually be the result of these hearings.


The results of these hearings? I must tell you I can't predict exactly where the Insurance Commissioner and the Attorney Generalare going to go. They have committed to us they're going to take into consideration the input from all three of the hearingsand get back in terms of what this should look like. But from our standpoint we're very hopeful that the one piece that almosthas got to come out of this or one would expect would come out of this, is the whole area around transparency I was describingbefore.

Again, clients -- essentially declaring the clients have a right now what somebody is doing for them and what they're gettingpaid for seems like a very sound expectation. But beyond that I really can't speculate.


Thank you very much. One last question. Did you -- did anyone benefit at all from the distraction at Willis and HRH in the quarter?I know they reported slightly lower growth results than people were expecting. I was just wondering if that impacted your winloss ratio at all?


I would say we're not obviously going to speculate around Willis and HRH. We wish them the best and I'm sure it will be a fineoutcome. Our focus will remain steadfastly on our clients and our colleagues. And we didn't see much impact as that has begunto unfold.

Operator

Al Copersino, Bernard L. Madoff Investment Securities LLC.

Al Copersino - Bernard L. Madoff Investment Securities LLC - Analyst

Thanks very much very. Greg, if I could take a couple of other questions at the contingent commission hearings that went onin New York. One quick question, do you have any guess as to when the timing might be when the decision might be announced?








We actually don't know. It wasn't made available to us. And again if you think about we got opportunity to spend 20 minutesin front of the group and provided a perspective. We will obviously -- we stand ready to provide any backup support that anyonewould need. But at this point we actually don't know what they're timetable is going to be.

Al Copersino - Bernard L. Madoff Investment Securities LLC - Analyst

Sure, my only other question is -- if you care not to speculate, I certainly understand. But what would you think about thefollowing? Is there any possibility in your mind that the end result might be that when acting as an agent, that contingentcommissions are involved when acting as a broker they're not? Is that something that you think -- is that too convoluted doyou think? Or is that something that the regulators might choose to do? And if so, do you think that your IT systems can handlethat sort of differentiation?


I think I would -- this is really going to be about our clients and that's how Aon is going to think about it. Our IT systems et ceterawould be fine but it really is about our clients. And as I said I really can't speculate on the direction it's going to go.

The overriding macro point that we keep pushing for is just around letting clients know what's happening, being transparent.As you would expect in any business that you would say to a client here's what I'm doing for you, here is what I'm getting paidto do it, here's how I'm doing it and so that's really our hope more than anything else that we come out at that level. We can'treally speculate as to what they're going to say.

Operator

Dan Johnson, Citadel Investment Group.

Dan Johnson - Citadel Investment Group - Analyst

Two questions for you please. Can you recall which quarter did we start to see the private equity/construction/FI weakness?Was it the first or was it even earlier back in '07?


Back in '07, I can actually recall quite clearly that it was actually quite strong through the second quarter of 2007 and then thedeclines happened in the third and the fourth quarter.


Of '07.


Correct.








And then second question, similar maybe to ones that have been asked before on these calls is around your visibility on thereturns. Let's even start with revenue before returns. From the investments you have made and people you've hired, can youprovide us an update now with what you are monitoring internally? And is there anything we can see on the outside that wouldshow progress on that front?


I would say as we have said before and you have asked before, (inaudible) an answer that won't be to the level you want. Letme first say what we are looking at. We know exactly to the person who we brought in -- to the person. We look at our accounts,we know our people counts by geography, by practice are. We look at it on a daily basis. So I want to emphasize how preciselywe understand who we have in our firm and who we brought in.

And then against that you (inaudible) imagine we understand to a person and to a group how they're doing and what ourexpectations are against and when we brought them in. So back to Christa's return on invested capital approach; we have avery, very clear view on who we brought in, how they're doing and what return profiles look like; not just at a revenue level butat a return level. By the way, hopefully you'll take some comfort in that.

What you won't take comfort in is we're not going to share that with you at this point in time. What I would say is you look atthe macro results -- that we will continue to drive margin up. We will continue to grow organically and we'll continue to improveearnings per share. And we will continue to invest in our business and that combination we believe is a pretty lethal combination.And as long as we're sustaining that, maybe we don't get it as fast as you would like to get in terms of return and in '08 but whatit does is it establishes an unbelievably strong platform for '09, '10 and beyond.

Operator

And with no further questions in queue, I'll it back to you, Mr. Case, for any closing comments.


I do have a closing comment for the group. And it's a closing comment you would have seen potentially foreshadowed yesterdayin the Wall Street Journal. And it's a comment and set of thoughts that I would like to express on behalf of my Aon colleaguesaround the world.

And it is it's just a note of deep, undying appreciation and gratitude to our founder, our visionary, our leader of Aon for 44 years.Today is Pat Ryan's last day as an active leader of our firm -- the man who founded our firm, the man who built our firm, theman who has made this conversation possible for myself and Christa and the team. I would emphasize the last day of activeparticipation because Pat is going to always be there helping us with clients and colleagues and building our firm which we'regoing to be eternally grateful for.

But I wanted to just say on behalf of all of Aon to Patrick Ryan, thank you for all you've done for our firm and thank you for allyou've done for our clients and for each of us. You're a wonderful colleague and a wonderful friend. Thank you.

Operator

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation. You may now disconnect.







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Economy & Finance

aon Transcrip tQ2 08