Aon PLC  (NYSE: AON) Q1 2020 Earnings Call Transcript

Aon PLC  (AON) Q1 2020 earnings call dated May 01, 2020

Corporate Participants:

Greg Case — Chief Executive Officer

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

Eric Andersen — President

Analysts:

Elyse Greenspan — Wells Fargo — Analyst

Meyer Shields — KBW — Analyst

Suneet Kamath — Citi — Analyst

Jimmy Bhullar — JPMorgan — Analyst

Dave Styblo — Jefferies — Analyst

Paul Newsome — Piper Sandler — Analyst

Michael Phillips — Morgan Stanley — Analyst

Phil Stefano — Deutsche Bank — Analyst

Presentation:

Operator

Good morning, and thank you for holding. Welcome to Aon Plc’s First Quarter 2020 Conference Call. [Operator Instructions]

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 first quarter 2020 results as well as having been posted on our website.

Now it is my pleasure to turn the call over to Greg Case, CEO of Aon plc.

Greg Case — Chief Executive Officer

Thanks, Elena, and good morning, everyone. Welcome to our first quarter conference call. I’m joined virtually by Christa Davies, our CFO; and Eric Andersen, our President. Like previous quarters, we posted a detailed financial presentation on our website. At this time of unprecedented humanitarian and economic challenge, I want to start by thanking our 50,000 Aon colleagues around the world with a remarkable dedication, resilience and impressive response to this crisis. It’s inspiring to see our colleagues tirelessly go into extraordinary lengths to support each other and connect the firm, embracing Aon United. Our global team is fully committed to bringing the best of our firm to clients at a time when they need our help more than ever.

As we all know, we’re experiencing a humanitarian tragedy at a scale that’s difficult to comprehend, and economic consequences are likely to play out for months or even years to come. The global economy is forecast to shrink by 3% in 2020, and unemployment is increasing around the world. Against that backdrop, I’d like to talk about how we’re responding as a firm and how we expect to emerge stronger and even more capable. Our colleagues are the firm, and we’re committed to their safety and well-being. In response to local government guidelines, we’ve canceled travel and events and now have over 98% of our colleagues working remotely. And to ensure our colleagues stay healthy, well and productive, we made available to all colleagues virtual learning tools to optimize remote work as well as multiple tools and services around telemedicine and well-being.

We’ve also increased communication and connectivity across the firm, and our leadership teams and our COVID-19 task force accelerate best practice sharing, coordinate our responses and anticipate future impacts to ensure we can continue to deliver solutions for clients. Further, our Aon Business Services operational platform ensures that we can work remotely with secure access to all applications with no loss of productivity, enabling our team full access to all resources required to meet client needs. And finally, we are committed that no colleague will lose their job as a result of COVID-19.

Turning to Q1 results. Our team delivered a strong quarter with positive performance across each of our key metrics despite some early disruption from the impacts of COVID-19 at the end of the quarter. Our results include 5% organic revenue growth with particular strength from Reinsurance Solutions and Health Solutions, substantial operating margin expansion of 200 basis points to 35.7% and 11% year-over-year earnings per growth per share growth. In the quarter, we also took substantial steps to bring the full force of our firm to help clients respond to the pandemic and resulting economic stress while also delivering on business-as-usual commitments, and we did this while managing the transition of working remotely, which gave us even more opportunity for innovation across the organization. To coordinate our pandemic response for clients, our COVID-19 task force brings together experts from across the firm to develop, deliver and share solutions from around the world all through our own firm and for clients.

In one example, as the pandemic quickly escalated in Italy, our Commercial Risk and Health Solutions colleagues partnered with carriers to address the need for COVID-19 coverage for our clients’ employees. This unique and tailor-made solution provides employees with allowances for hospitalization and recovery expenses in the event you’re diagnosed with COVID-19. In addition, the cover provides post-hospitalization assistance, including domestic assistance, child care and more. The solution is now available in Italy and Spain and we’re working to scale this further across the globe, a great example of our Aon United team innovating on behalf of clients during a very critical time.

In another instance, in New York, our human capital team developed an analytic tool to assess the pandemic risk to a community’s workforce in order to help speed recovery. The tool they built uses Department of Labor data and Aon analytics to analyze occupational risk by job and location based on work characteristics like proximity and exposure. The team took that model and layered on medical forecast from our Health Solutions team to map potential impacts by geography over time. The resulting tool helps communities plan reopening strategies while minimizing risk and prioritizing antibody test for the highest risk and most mission-critical workers. Currently, we’re using our model in partnership with community groups in New York while we anticipate rolling it out to clients communities around the world. And these are just two examples of the many ways in which we’re helping clients respond to the new demands of these challenging times.

Christa will elaborate more on our financial results and outlook. However, I would highlight that our business is globally diversified and highly resilient given it’s largely recurring and nondiscretionary business and we operate in over 120 countries in virtually every sector and business segment. It’s also important to reinforce that given our strong historic focus on cash flow, we are fortunate to have an exceptionally strong understanding of revenue, cost and cash. Within our single P&L, we have the ability to assess cash and other performance by business, by geography, by solution line and by individual offering. This capability has been in place and been further refined every year for well over a decade. With this embedded capability for our business, we can compare the current economic environment to the recession of 2008 and 2009.

We have considered a number of macroeconomic scenarios and their potential impacts to our business. At this unique point in time, no one can predict the future. However, we will continue to act from a position of strength on areas that we can control and to protect our colleagues and our clients. While we always hope for the best, we’ve taken steps to prepare for virtually any economic scenario. For Q1, we did see some early impacts of COVID-19, especially in more discretionary areas within retirement and data analytics. Overall, the impact we’ve seen on our revenue and cash flow through April is modest. Moving forward, we’re taking steps in three areas. Our top priority is to proactively support colleagues, followed by our priorities to manage expenses and conserve liquidity. First, we’re reducing non-compensation expenses through an effort which began in early March. Second, we paused share buyback and M&A, although we’re committed to maintaining our dividend.

And third, we have committed that no colleague will lose their job as a result of COVID-19. In order to protect all 50,000 colleagues, we’re asking them to support the firm with a temporary compensation reduction. And we’re planning for roughly 70% of colleagues to take a reduction of up to 20% of salary, which will be implemented in accordance with local practices, while the remaining roughly 30% of our firm will see no reduction. This step is intended to protect 50,000 colleagues and ensures that we are able to continue to deliver the full capability of Aon at a time when clients need us most. Taking these preemptive steps now from a position of strength ensures we’re able to continue to invest in increasing our relevance to clients as we continue to look to address their unmet needs. One outcome of the current trauma is that we’re seeing there’s a heightened interest by clients in understanding where other areas of major potential risk might exist.

Specifically, we see concern in areas like cyber, climate change and health-wealth gap, which may create future debilitating events. Up to now, these risks have only been addressed in a very limited way. For example, for one client, COVID-19 highlighted that when catastrophes happen, whether epidemics or natural catastrophes, a very key aspect of successful recovery is access to liquidity and capital to match exposures available immediately. To create the cover and fulfill the required speed of resolution, our team designed an innovative parametric insurance solution to address earthquake exposure. The program quickly provides our client with a liquidity infusion in the event of a quake and gives them broad discretion on how to use these funds. This product covers our client and the exposure to their employees who may require financial assistance, ensuring the resilience and responsiveness in a future crisis.

Driving faster innovation for clients is a key outcome of our strategy and one that we can accelerate through our planned combination with Willis Towers Watson. As our world becomes more complex, clients need unique capabilities that this combination will create. Our two firms have been on similar paths, focused on bringing the best solutions from across their respective organizations to clients. As a combined firm, we’ll be able to accelerate progress and become even more relevant to our clients with faster innovation and better solutions.

In summary, our global team has been truly remarkable in the response to the COVID-19 crisis, supporting each other and our clients. In addition, they delivered a strong first quarter of progress even as the early effects of the crisis were being experienced. We believe our Aon United growth strategy has positioned us very well to emerge from the current crisis an even stronger firm positioned for long-term growth.

With that overview, I’d like to turn the call over to Christa for her thoughts on our financial results and outlook. Christa? Thanks so much, Greg, and good morning, everyone. As I talk about our results, I’ll also provide some thoughts on how the macroeconomic environment impacts our outlook and the steps we’re taking to proactively and conservatively manage our business and our balance sheet to ensure we retain stability and flexibility and position our firm to continue to deliver shareholder value over the long term. Our business has strong fundamentals. Our revenue base is diversified across industry, geography and solution line. Roughly 80% is nondiscretionary and has a significant portion that renews every year with 95% retention rates on average. However, given uncertainty around duration and magnitude of COVID-19 and the resulting economic downturn and its impact to our clients and our firm, for the near term, we’re withdrawing our financial guidance of mid-single-digit or greater organic revenue growth and double-digit free cash flow growth. We are also taking prudent steps to preemptively reduce expenses and discretionary uses of cash in order to maintain the strength of our balance sheet and optimize financial flexibility in the event of any future declines in revenue. We are taking these actions from a position of strength and know they will position us to continue to protect our colleagues, execute our Aon United strategy and focus on our key financial metrics in the short and long term. In Q1, we delivered strong operational and financial performance to start the year. We achieved 5% organic revenue growth that translated into solid operational improvement, overcoming an unfavorable near-term impact from foreign currency translation. As I reflect on each of our key financial metrics, first, we delivered organic revenue growth of 5% with strength in Reinsurance Solutions and Health Solutions offset by some early disruption from the impact of COVID-19 in our retirement and data and analytics businesses. I would also note that reported revenue was pressured by FX and the ongoing impact of divestitures from efforts we’ve described in prior quarters to reshape our portfolio to higher-growth and higher-margin areas. Second, we delivered solid operational improvement with operating income growth of 8%, operating margin expansion of 200 basis points and 11% earnings per share growth, driven by a strong organic revenue growth and ongoing productivity improvements and expense discipline from Aon Business Services. As we noted in our earnings material, FX was an unfavorable impact of approximately $0.03 in the quarter. At today’s rates, we would expect a $0.03 per share unfavorable impact in Q2, $0.04 per share unfavorable impact in Q3 and $0.06 per share unfavorable impact in Q4. Third, free cash flow was $279 million in the quarter, and I would note Q1 is our seasonally smallest quarter for cash flow due primarily to incentive compensation payments. The $279 million this year is an increase from last year’s $17 million, which was negatively impacted by approximately $85 million of net cash payments related to legacy litigation. The increase in free cash flow was driven by operating income growth as well as near-term actions we’ve taken to delay certain expenses. We did see an increase in receivables, primarily driven by the strong 9% organic revenue growth in Reinsurance Solutions. As I look towards the rest of the year, we have confidence in the underlying resilience of our business. And while much of our business is nondiscretionary, it is impacted by long-term macroeconomic factors like GDP growth, employment and property values, amongst other things. While we are not providing revenue guidance, I wanted to provide a bit more insight into our business that may be helpful in understanding how we may be impacted in various economic scenarios. We have a very stable revenue base with 80% of our revenues in core highly recurring businesses, with retention rates of 95% on average. In terms of our business, 80% of our business is core. Core revenues tend to be highly recurring and nondiscretionary and include things like property and casualty or directors’ and officer’s insurance placements, cyber remediation, treaty reinsurance, required actuarial work on pension programs and health and benefits brokerage. Many of these services are regulated, required or necessary cost of doing business. 20% of our business is relatively more discretionary. These more discretionary revenues include project work like risk consulting, transaction liability, human capital consulting, travel and event cover and health and benefits consulting. Much of this book also recurs and renews every year, though some of it is likely to be deferred or not renewed. In an economic downturn, we expect to see a larger and more immediate impact in the more discretionary portion of our book. We’ve already started to see some early impacts of COVID-19 in Q1, as I mentioned, and given the overall global economic environment, we expect this could be more negatively impacted going forward. Within our solution lines, commercial risk, reinsurance and health include the largest pool components while Retirement Solutions and Data & Analytics Services have the largest components that are more discretionary. More positively, as Greg mentioned, we see significant opportunities in areas of our business around innovative solutions to address the current crisis; for instance, in balance sheet and liquidity solutions for clients. Overall, we’re confident in our strong fundamental business. We did not see material impacts to revenue or collections in Q1 or in April. However, given global economic uncertainty, we’re taking steps to manage costs prudently and defer some spend and investment in order to proactively get in front of any negative impacts. Our business is highly resilient, and our historic investment in Aon Business Services gives us the ability to make quicker, smarter decisions across the firm to manage expenses. The steps we’ve taken with our Aon Business Services platform to drive operational efficiency not only help us manage costs and improve margins but also help us continue to manage cash flow and working capital, which further ensures our stability and flexibility. For instance, in Q1, 82% of our outside services spend was managed centrally, allowing us to manage purchase decisions, ensure we derive maximum supplier value and optimize working capital. This allows us to take steps now to defer preemptively and reduce costs. I would note that these expense reductions will contribute to near-term margin improvement. However, some, like travel and entertainment, do not reflect sustainable core operating margin expansion. Overall, our Aon Business Services operating platform enables us to operate effectively while we continue to run the firm on cash and prudently manage our cash and liquidity position. In the past, we have consistently focused and delivered on key financial metrics of organic revenue growth, operating margins, free cash flow and return on invested capital. In today’s economic environment, the context is different but our strategy and tactics to drive performance of our firm remain the same. Our historic focus on maximizing the translation of revenue into the highest level of free cash flow serves us well in this environment as we are focused on preserving capital to enable future growth. These steps and others we’ve taken to drive operating income growth, make progress on working capital and reduce structural uses of cash are perhaps more essential now in this economic environment than ever before. For instance, we have daily cash flow forecasting across the lines of the cash flow statement. Because we’ve run the firm based on free cash flow for well over 10 years now, this gives us the ability to compare our free cash flow to previous years and, in particular, to the financial crisis of 2008/’09. This gives us the ability to analyze and take steps to address any challenges by country, by business, by line of the cash flow statement and to look out for early markers or trends, for instance, from areas that may have been more hard hit by COVID-19. I’d also highlight that structural uses of cash on pension, restructuring and capex collectively are expected to free up approximately $300 million of cash in 2020 compared to 2019. While we are maintaining our dividend, we have paused our discretionary uses of cash for share buyback and M&A. We’re very confident in the strength of our balance sheet and how we manage liquidity. We do not take underwriting risk, and we’re committed to our investment-grade credit ratings. We manage liquidity risk through a well-laddered debt maturity profile with no more than $750 million of term debt coming due in any given year. We have $1.65 billion in committed credit from our $900 million credit facility due in 2022 and our $750 million credit facility due in 2023. We have not had a need to draw on our committed credit despite our seasonally lowest period of cash flow. We also continue to access commercial paper markets for working capital needs in the U.S. and Europe. We know this prudence makes us resilient now and prepares us to come out stronger. As Greg mentioned, we are committed and excited about our combination with Willis Towers Watson, and we expect to file our joint preliminary proxy in the coming weeks followed by a joint definitive proxy and shareholder vote, which we expect in Q3. In summary, our colleagues, business, Aon United strategy and our Aon Business Services operational platform are strong and equip us well to react to challenging times. The steps we’ve taken to drive our key financial priorities are more relevant than ever as we manage flexibility and stability in these challenging times. Our disciplined approach to free cash flow and return on invested capital provides stability and 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is coming from Elyse Greenspan from Wells Fargo. Your line is now open.

Elyse Greenspan — Wells Fargo — Analyst

Hi Good morning. My first question, I recognize like, and I think we all do, the fluidity of the situation and the impact of COVID-19 and, obviously, you guys wanting to remove your organic guidance for the time being. But is there any way that you can give us a sense, to the best of your abilities right now, what the organic view is for the balance of the year? Maybe some kind of wide range from one extreme to the other just so we have a sense of how is it still going to be slightly positive, flat, slightly negative? Kind of maybe some kind of range of how range of outcomes of how COVID might impact the business.

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

Yes. So Elyse, we’re not giving guidance on revenue or margins, as you described, because of the uncertainty of the macroeconomic environment. But we are managing them very closely over the course of the year, and we would expect that if there are any reductions in revenue, that we would reduce expenses proportionately to match. And very much focused on managing free cash flow for the firm to preserve flexibility and stability over the long term. I would note, if you think about the macro environment, Elyse, in 2008/’09 when GDP was essentially flat, our worst year of organic revenue growth was minus 1%. So we do have a very stable business in global economic recessions.

Greg Case — Chief Executive Officer

And Elyse, I might add, if you think about so to just put it into perspective. It’s a very important question. Christa has referenced this. The history and the facts are very helpful to set the baseline, so 2008/2009 just as Christa described. What’s different from 2008/2009 and today? We’d say two things are different. One, obviously, Aon is much stronger. Aon United strategy is 10 years more mature. The Aon United blueprint and the plan we have and how we deliver the global firm to our clients is in place. Aon Business Services is a real game changer for us we didn’t have in 2008/2009, driving business improvement, executing at scale. So all these things are in place.

We’ve also had a very substantial spend on data, as you’re well aware, since then, $400 million a year, so call it $3.5 billion to $4 billion. And we’re seeing opportunities around net new and new business generation and retention at all-time high. So that’s different. We’re a stronger firm. What’s also different though, objectively, comparing to then, the current economic trauma is likely much worse. But we don’t know, right? No one knows. Q2 is obviously a problem. Greater in the U.S., greater than 30% reduction in GDP, 26 million unemployment claims in the last five months. That suggests unemployment is greater than 20%. EMEA has obviously got a tremendous amount, 50 million employees plus potentially affected. Asia, at the same place.

And so the duration is not known. In normal course really, it’s sort of how fast is the recovery going to happen and by geography, how is it going to play out. And what Christa described in our script in particular is we want to be in a position to perform in every scenario, and that’s what we believe we’re set up to do.

Elyse Greenspan — Wells Fargo — Analyst

Okay. And then on the margin side, Christa, you said, right, you guys are focused on managing expenses. So is the message that maybe there is some fluidity on what happens with organic, but regardless of the range of outcomes, you guys would continue due to the expense management, will continue to expect to show margin improvement?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

So Elyse, we haven’t given guidance on margins nor given guidance on revenue. But we do manage margins over the course of the year, and we would expect that we will reduce expenses proportionally with revenue impact for the full year. And I would tell you, Elyse, what we’ve done is we’ve acted early from a position of strength, and we are taking actions on what we can control.

And we’re not predicting the future. We are hoping for the best, but we are planning for every economic outcome. And so we have taken actions, as Greg and I talked about in our opening remarks, to reduce expenses ahead of any economic impact we see to ensure we come out stronger, and we want to make sure that we are able to deliver for clients in a time of greater need for them.

Elyse Greenspan — Wells Fargo — Analyst

Okay. And one last one. You guys announced the merger with the acquisition of Willis, right, at the start of March, kind of before the economic slowdown picked up. And when you announced the deal, you had put forth a target of mid-single-digit or greater organic revenue growth for the combined firms. And now that deal doesn’t close, right, until the first half of next year. So would the long-term view of getting back to that mid-single-digit or greater organic growth kind of when we come out of this slowdown, is that still the combined view going into that acquisition?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

It certainly is, Elyse. We would say we announced that acquisition no, we announced that combination with Willis Towers Watson on March 9, and we are even more excited about it today than we were then. As we continue to engage with Willis Towers Watson, we find that the DNA and strategies of the firm are remarkably similar, and we are incredibly excited about the opportunity for clients and the upside to meet unmet client needs. And we do believe that the combination has complementary capabilities to be able to deliver to clients. And so we certainly see that the upside in revenue over time is very much in line with the commitment of mid-single digit or greater over the long term.

Greg Case — Chief Executive Officer

I think,Elyse, as you think about the potential and John Haley and I talked about that really from day one. The entire thesis behind the combination of Aon and Willis Towers Watson centers on bringing the two firms together to really set a new standard in client leadership and impact. And the combination, as we described, is better now with complementary capability, as Christa mentioned, in solution lines, in geographies, in segments, tremendous opportunity, but not just better now, we think better in the future.

Back to your point on mid-single digit or greater. Better in the future with analytics capability, better understanding of emerging client need, our ability to create new market solutions, etc., all these things come together in really doing something for clients, which up to now no one’s been able to really do and address sort of major risk challenges like pandemic, climate change, cyber, health-wealth. Ironically, this current trauma has just reinforced in so many ways the value of the combination. And I don’t think we would say March 9, we had high expectations. Having spent more time with John Haley and the team, our high expectations are exceeded, and we’re really looking forward to the next steps.

Elyse Greenspan — Wells Fargo — Analyst

Okay, thanks for the color.

Operator

Thank you. Our next question is from Meyer Shields of KBW. Your line is now open.

Meyer Shields — KBW — Analyst

Thanks. One quick question on the recurring revenue stream. I think, Christa, when you talked about 80% of that being recurring, is that in a normal scenario where we don’t have a lot of small businesses going out of business? Or is that sort of framing the current expectation?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

That’s framing the current expectations, Meyer. What we would say is 80% of our business is core, and core tends to be highly recurring, nondiscretionary things like property and casualty, D&O, cyber, treaty, actuarial work on pension plans, etc. But 20% of our business is more discretionary, and more discretionary, much of this recurs and renews each year. And so we do have a very stable and resilient business. Less than 1% of our revenue comes from any single client, and we operate in 100 countries, different industries, different segments of the economy. So we feel very good about the resilience of our business.

Meyer Shields — KBW — Analyst

Okay. No, that’s helpful. Greg, can you talk on a big-picture perspective about the compensation reduction and what that could imply for employee retention?

Greg Case — Chief Executive Officer

Well, I would say, Meyer, from our standpoint, first, take a step back. Net-net, we’re really focusing on creating value for our clients and taking care of colleagues and really to emerge a stronger firm. And we I would tell you we are we reflect we’re humbly proud of the principles-based approach we’ve taken and the commitments we’ve made, and it really come through, as we described before. A lot’s happening in the world. And while everyone is hoping for a bounce back, the ultimate result will be by the way, the bounce back to a major recession, I guess, is what everyone is anticipating, but no one really knows what it’s going to look like and how long it’s going to look. And we step back and say, listen, we’ve got to be in a position in any scenario to perform on behalf of clients and on behalf of colleagues.

And for us first, I would just ask you to consider the foundation upon which we made our decisions. Christa highlighted it. We’ve been managing cash flow as an important metric for a better part of a decade. That, coupled with Aon Business Services, really is a very unique perspective on where we stand at any time. And this is really all aspects of performance, cash, all aspects, and ability to execute decisions across the board. And by all measures I mean, look at the quarter and look at the result, we currently stand in an exceptionally strong position. We know that, and we know that very well. Yet, we also know what all the scenarios look like, all the economic scenarios, irrespective of how remote.

And for us, it’s an absolute priority to have our entire firm in place to support clients in a potentially historic and sustained downturn. And if you take this priority seriously, it requires you to take difficult steps now, as Christa highlighted, to protect 50,000 colleagues. And so the alternative, by the way, is to hope and hope that the current downturn really comes back to 2008/2009 revisited, but that alternative, by the way, puts client leadership fully at risk at the very time clients might need it the most. And there’s no doubt, in every respect, that’s the easier path to take and you can sort of shave over a lot of things along the way. And we have essentially said, listen, we desperately hope that’s the outcome.

But if it’s not, we want to be in an absolutely, absolutely unique and pristine place to help our clients succeed and protect our colleagues. And what I would highlight is we’re going to we fully anticipate coming out a much stronger firm. And this really comes back to our investment over the last decade in Aon United. I’ll tell you something. For our team, we often talk about Aon United and the capability in positive times, but it turns out, Aon United is equally meaningful in times of challenge. And this decade of investment in Aon United means we can take a global set of actions that we know will be difficult for maybe for others to do, but for us, a global set of actions that really puts us in a position to support clients in every scenario.

So our colleagues around the world have done very, very unique things and very, very strong things, and we’re excited. We’re excited right now about our ability to help clients in times of need, irrespective of what that comes out. So from our standpoint, Meyer, we’re going to be a stronger firm coming out of it, and we’re taking steps that we can take, that we know are important or the right answer for us to make that happen.

Eric Andersen — President

Greg, maybe just to jump in a little bit on one of the examples. We talked about the COVID-19 task force on the in your early opening. But I think it’s important to recognize that this is the fourth time we’ve activated that group, going back to 2009, whether it was H1N1, SARS, Ebola. So this group is a group that consists of experts across the firm, everything from epidemiology to credit risk to capital solutions and liquidity, all different capabilities around the world. And essentially, what they’re trying to do is innovate on behalf of clients.

Whether it’s trying whether they’re working on how they’re dealing with their employees, how they’re thinking about return to work, how they’re working on capital solutions and liquidity for the firm, it really is across the entire firm, learning from areas of the world that were affected early, being able to share best practices. And so there is an advisory part of it for sure. But more importantly, I think we’re trying to help them think through on an innovative new way that you actually can’t do until you pull all the capabilities together with one guiding principle of trying to help the clients get through this. And so while the salary piece is one part, there is a lot of innovation that we’re pushing and working on to be able to help those clients get through the challenge.

Meyer Shields — KBW — Analyst

Thank you very much.

Eric Andersen — President

Thank you.

Operator

We have a question from Suneet Kamath of Citi. Your line is now open.

Suneet Kamath — Citi — Analyst

Thanks. I just wanted to follow up on the base salary reductions. Can you just give some feedback in terms of how the employee response has been? It seems like, obviously, a pretty dramatic step so just curious what you’ve been hearing since Monday’s announcement.

Greg Case — Chief Executive Officer

Yes. It really has been Suneet, for us, again, I would sort of come back to an incredibly strong positive reinforcement on Aon United and what we’re all about. Again, imagine we essentially stepped back and asked our colleagues around the globe and our leadership team how do we actually prepare on behalf of clients, and we looked at all the scenarios. And again, as I’d highlighted, the alternative right now for is to hope that the current downturn ends up being a recession, which, by the way, we hope too. We hope we celebrate that and hope that’s the case.

What we all realized at the time, the difficult choice is how do you protect 50,000 colleagues to serve clients in the most effective way. And you recognize that if you wait and the downturn becomes more acute, how do you actually have them there? How do you support our colleagues to do that? And we collectively made a decision that we are going to take the steps we took because we know, again, in addition to protecting 50,000 jobs, our ability to continue supporting clients is extraordinary. And so that was the piece.

It was obviously, when we talked about it on Monday I would say, since Monday, what’s happened around the world has really been our colleagues have embraced it and understood exactly what we’re trying to do. And as I said before, we’re coming through this a stronger firm. And if we’re wrong Suneet, if we’re wrong by the way, I hope we’re wrong. We hope it ends up being a recession. In the end, our colleagues know we took steps that perhaps would be hard for other people to take to support clients and that if we’re wrong, we basically remediate all the actions we take and mitigate our actions, no problem whatsoever and they’ve done something no one else could do.

And the fact that we could act across the firm in an Aon United fashion is pretty unique. And it actually has been incredibly invigorating as our colleagues have actually put this in place. Among other things, as we have reduced expenses and done a number of other things Christa described, that package puts our firm in a unique position to perform and what is really no one else could do under any scenario.

Suneet Kamath — Citi — Analyst

Got it. And is there any way that you can help us think through the size of the expense reductions just maybe as a percentage of total expenses to help us frame how impactful what you guys are doing will be?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

So Suneet, we haven’t given guidance on the size of this. We would say that, so far, the expense reductions we’ve taken are modest, and we’re not giving guidance on revenue or margins, but we would say that as if revenue were to come down, that we would reduce expenses proportionately.

We’re also very focused, as I mentioned earlier, on cash and making sure that we maintain a very strong cash position. It’s always been the way we ran the firm. We have unique insight and visibility into our cash flow by line on the cash flow statement, by solution line. And one of the things I would say is we’ve taken a number of actions on the non-salary side, and we did that first. We reduced a number of expenses, things like T&E, things like third-party spend, much earlier in Q1. And so we are taking action from a position of strength in advance of impacts we observed.

Greg Case — Chief Executive Officer

One other thing I just want to highlight, Suneet, in context of this is, as we talk to clients and by the way, it’s a long discussion with clients in the month leading up to our decision and what sort of what we’ve done across the board on the different aspects. And when we explain the principles-based approach to our clients, not surprising, they are incredibly grateful. They understand what happens. They understand our inability to serve them if we take different courses when things get difficult.

And candidly, some of our global clients have asked for the playbook, and they said, “How do you do this around the world in different geographies and make it work?” And we’ve described to them what Aon United is all about, how it’s played out over a decade, how we built that foundation over time. And them seeing us come together, support each other in an ability to support them in times of need, whatever those times are, has been also, frankly, inspiring for our colleagues to sort of get that reaction as clients recognize what we’re doing on their behalf.

Suneet Kamath — Citi — Analyst

Okay. Thank you.

Greg Case — Chief Executive Officer

Thank you.

Operator

Our next question is from Jimmy Bhullar of JPMorgan. Your line is now open.

Jimmy Bhullar — JPMorgan — Analyst

Hi, good morning, sir. So I had a few questions. First, just on the impact of COVID. You discussed the sensitivity or the exposure of the various businesses. But on the commercial risk business, your organic growth was decent 4%, but it had been like 6% to 7% in the past couple of years actually. And so is the decline just tougher comps? Or is it more just a slowdown in March? And is it reasonable to assume that that’s a business that could potentially turn negative in the near term?

Greg Case — Chief Executive Officer

Yes. Look, listen, from our standpoint, no, we feel very strong momentum in commercial risk across the board. As we highlight, again, in the first quarter, we were touching on some of the impacts coming at the end of the quarter in terms of sort of overall where we are. But net, we feel tremendous momentum sort of across each of our solution lines, particularly as we’re connecting with clients.

And there are a number of things that are happening sort of in those solution lines as they currently exist as well as our ability to candidly generate net new business, as I described before. Net new business for us, all-time high; retention, all-time high; rollover, all-time high. And it isn’t just in the business. It’s also the net new things we’re doing.

And maybe, Eric, can you talk a little bit about some of the bright spots that we’re seeing across the playing field here as well as some of the new initiatives that we’re putting in place?

Eric Andersen — President

Sure, Greg. There’s a couple in particular. Certainly, in the D&O area, the work we’re doing around distressed companies in particular has really created some opportunity for us and also trying to create liquidity, using surety bonds to replace letters of credit and other areas along the lines. I would say balance sheet protection and providing financial liquidity are just things that, honestly, today, the clients are very interested in dealing with, but also, I would say, just our traditional business and how we’re providing advice and how helping clients do structuring and understanding the different areas where perhaps they can take more risk themselves or perhaps combined programs, things along those lines. But we’re pretty optimistic with the business as it came through the first quarter.

Greg Case — Chief Executive Officer

If you look at the 80% that Christa described, incredibly strong core. The 20%, we’re working through. But these net new areas are very strong, very powerful in terms of sort of how that plays out over time and building momentum in the business.

Jimmy Bhullar — JPMorgan — Analyst

And but you would expect a slowdown in that business as well in the short term though, right, in commercial?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

So what we would expect is as I talked about the components of the business, we would expect our commercial risk, our reinsurance and our health businesses to have a much higher percentage of core than the rest of our business because the businesses are highly recurring, nondiscretionary. And as Eric said, they’re regulated and required and often are necessary cost of doing business even to firms in financial distress.

Jimmy Bhullar — JPMorgan — Analyst

Okay. And then just on the Willis deal, I think there was sort of on the part of Willis investors, they were somewhat disappointed with the modest premium and obviously that you offered on the takeout. And on top of that, your stocks declined a lot, but many shareholders are also concerned about you potentially raising the offer, especially given sort of the super voting requirements at Willis. Can you sort of discuss, if the deal does not go through as proposed, would you be willing to walk away from it? Or is there a possibility you’ll actually consider a higher bid?

Greg Case — Chief Executive Officer

Jimmy, from our standpoint, listen, we’ve been engaging with our shareholders and John Haley and team and with their shareholders on the Willis Towers Watson side. Our feedback has been exceptionally positive. Again, when our shareholders really start to understand and Willis Towers Watson really start to understand what this combination can do, it’s extraordinary. And there’s just no other way to describe it.

And it’s extraordinary on behalf of clients. It’s extraordinary in the now, as I described for a bit. The solution line complementary piece is very, very positive. Geographically, very, very positive in terms of what we’re trying to do. The segment is very positive. Obviously, the future, equally strong or stronger with analytic capability that lets us do things around understanding client need and creating net new markets that are extraordinary.

So I think our investors see that potential and are incredibly excited about it. And Willis Towers Watson sees the same, incredibly excited about it.

Obviously, the structure of the deal means the share price movements down are really less relevant in terms of sort of where we are at all. And so that opportunity is extraordinary. And then, obviously, not to mention, we highlighted $800 million in synergies, and that isn’t changing in any way, shape or form.

So from our standpoint, this is really about the upside and the revenue potential of new solutions for clients, and we’re incredibly excited about it and continue to be. And as I said before, ironically, if there’s one thing about this current crisis, this pandemic, it really highlights the need for higher octane, higher capability, higher insight. And you want that, you go to Aon, Willis Towers Watson. That’s really what we’re talking about. So that’s really been one of the observations our shareholders have made and so has the Willis Towers Watson shareholders as we’ve engaged with them.

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

And Greg, I would just add. I think as we look forward, Jimmy, we’re very excited about the combination. You could hear the excitement in terms of even more excited today than we were when we announced it on March 9.

And going forward, we expect sort of two big milestones. The first is we’re going to file a preliminary proxy in the coming weeks. And the second is, in Q3, we will file a definitive proxy and have both shareholder votes. So we’re very much looking forward to those milestones and looking forward to the combined capabilities to be able to serve client needs better than we do today.

Jimmy Bhullar — JPMorgan — Analyst

Thank you.

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

Thank you

Operator

Our next question is from Dave Styblo of Jefferies. Your line is now open.

Dave Styblo — Jefferies — Analyst

Hi, good morning. Thanks for the questions. Appreciate the global diversification and solutions that you guys can provide clients during this time, and obviously, that can help insulate the business At the same time, everyone is trying to figure out and assess the impact of what larger companies might back down from a discretionary standpoint and then smaller companies that may not able may not be able to survive.

I’d like to pick a little bit more at the 80% of the business that’s nondiscretionary. I’m curious just to make sure I understood comments there. Is that already contemplating companies that may not be able to survive in that situation where, even though it’s not discretionary, they’re just not there anymore? Or if it’s not, can you provide a little bit more color about the revenue breakdown by employer size? Whether how much of that is from employers with 1,000-plus employees versus some span between 100 to 1,000 or less than 100 to give us a sense of what might be at risk in that book?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

Absolutely. So as we think about our business, it is globally diversified. It’s diversified across clients, across industries, across geographies. We do operate in over 100 countries, and no one client actually makes up even 1% of revenue. And so we’re very fortunate to have a very resilient business.

As we look at our business in that 80% of the core, it’s highly recurring, nondiscretionary activity where many of these services are regulated, required or necessary cost of doing business even for clients in financial distress. Even for clients who are potentially entering bankruptcy, many of these services are still required. And so we have real opportunities to actually provide liquidity and capital solutions for clients in financial distress. And as we think about even client size, Dave, we are very well diversified there, too. And so we feel good about the core part of our business being extraordinarily resilient.

The 20% of our business that is more discretionary, the discretionary revenues include things like project work, in-risk consulting, transaction liability, human capital consulting, our travel and events business. And so much of this actually recurs and renews each year. It just may have the opportunity to be deferred slightly, which is what we did see in Q1 in our retirement and data and analytics businesses.

Dave Styblo — Jefferies — Analyst

Right. Okay. And then…

Eric Andersen — President

So Christa, maybe just to come up on a point on that just to drive it a little bit in that. Like on the transaction liability, it is tied to deals being closed. On construction projects which for bonds, it’s tied to putting a shovel in the ground. So those events will eventually happen. They’re just essentially been deferred until those deals come back in.

Greg Case — Chief Executive Officer

I’d also add, Dave, this is not a static position. Remember, as Christa and Eric just described, we keep evolving, so the new offerings Eric described before, the new solutions. Client needs change. So we reinforce the 80%, and then we actually change and build the 20%. So it isn’t just a zero-sum game. And the work we do is and the investments we can make on behalf of clients and now we’re going to be able to make in any scenario on behalf of clients is a very unique position.

It’s also why, in the end, you end up seeing, particularly in times of stress, a flight to quality, where clients just really come to places that they know they can get great results and great service and great capability. And we’re very fortunate, and we’re seeing a lot of that, too. So there are lots of things that put us in a unique position, we think, to actually perform exceptionally well in the current environment, or frankly, any other environment one can imagine.

Eric Andersen — President

I think we saw that a lot in reinsurance. Certainly, with the pandemic models, the ability to access capital globally, and so I think you saw some of that in particular in reinsurance this quarter.

Dave Styblo — Jefferies — Analyst

Sure. Right. That’s helpful. And then maybe to shift the conversation back to the margin side. Appreciate the comments there and the flexibility to manage through revenue pressure through the operating expenses. Obviously, there’s a wide range of outcomes, but as you’ve modeled this and thought through the levers that you can pull on your end, how much of a revenue decline and for how long can you absorb that without margin coming under pressure year-over-year?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

Look, it’s a great question, Dave. And what we would say is we’re not giving guidance on revenue or margins. And it’s obviously very uncertain both in terms of the macro impact and the duration, as you described. What we have done is we’ve acted from the position of strength, and we’ve taken definitive steps in Q1 to reduce non-people expenses, third-party expenses, T&E, etc. And our investments in the Aon Business Services platform have really enabled us to do that far more effectively and far more quickly with third-party providers.

And we continue to do this early and ensure that we’re taking those steps proactively to ensure that we can handle whatever comes in this uncertain environment and ensure we come out of this stronger, delivering for clients in a time they need us most. And I’d finish by saying as if there are potential revenue impacts in the year, we’ve obviously seen some it early on in Q1 in our discretionary revenue, then we will reduce expenses proportionally.

Dave Styblo — Jefferies — Analyst

Okay, thanks. Christa.

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

Thank you.

Operator

Our next question is from Paul Newsome of Piper Sandler. Your line is now open.

Paul Newsome — Piper Sandler — Analyst

Good morning, thanks for the call. You folks have made a lot Aon has made a lot of acquisitions and divestitures since the financial crisis. How would the 80% recurring number look or compare in the business mix change from the financial crisis, if we’re trying to compare and contrast the two periods?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

Yes. Look, it’s a really good question, Paul. And one of the things we’ve spent a lot of time on is not just on the revenue and margin side, but actually on the cash side, too. And comparing where we are today in terms of our portfolio versus the 2008/’09 financial crisis, the thing we would say is our business is far stronger today both in terms of the overall portfolio and the recurring and nondiscretionary nature of it versus the financial crisis and the Aon Business Services platform, which has allowed us to reduce non-people expenses very quickly. For example, 82% of our third-party spend is all managed centrally. And so we were able to, through our online procurement platform, actually just turn off that spend and defer payments immediately in Q1.

And so we feel very good about our overall business portfolio from a revenue and sort of margin point of view, but equally from a free cash flow point of view because we’ve been managing the company on free cash flow for well over 10 years, including through the financial crisis, which allows us to compare cash flow over the last couple of years, by day, by line of the cash flow statement, by business and also just see how the impacts are better or worse versus the financial crisis. So we feel very good about our insight and the strength of our business to manage through it. It’s extremely resilient.

Greg Case — Chief Executive Officer

And remember, Paul, as Christa described before on these calls, as we thought about capital allocation by the way, precrisis, at crisis, post crisis, back in 2008/2009, it really has been an allocation of capital based on return on invested capital, cash-on-cash return, which means the businesses we brought in since the crisis by definition, if you’re going to meet that, are higher margin, higher growth, higher free cash flow businesses in terms of sort of what we’re up to.

And we’ve also been at that period of time, done things as we thought about return on invested capital that really has changed our ability to kind of create a cash margin cash flow margin against revenue overall in terms of what we’re trying to do. Working capital improved over time. So the translation of cash from a dollar of revenue has also improved. So we’ve changed the business mix and strengthened our ability to generate cash over that period of time. So all those things contribute to a stronger Aon now than we were in 2008/2009.

Paul Newsome — Piper Sandler — Analyst

Well, no question the margins and cash flow are higher than they were back there dramatically. But I guess I was looking for particular examples that may have been changed that would have been more resilient as opposed to dramatically higher margins obviously.

My second question is just an accounting one. When the insurance companies allow customers to delay payment, how does that run through your income statement?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

So we actually haven’t seen that yet, Paul. But if they were to allow because I think what we’ve seen in certain areas is in the consumer lines, auto or things like that, but we haven’t seen it in our business so far.

Paul Newsome — Piper Sandler — Analyst

Just how is how would the accounting work here? Do you know yet?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

So we would still recognize revenue, Paul, because we’d be placing the business. It would then be a collection of cash issue.

Paul Newsome — Piper Sandler — Analyst

Great, thank you very much.

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

Thank you.

Operator

Our next question is from Michael Phillips of Morgan Stanley. Your line is now open.

Michael Phillips — Morgan Stanley — Analyst

Thank you. Good morning, Greg, a couple of times in your comments, you’ve mentioned the difficulty on some of the steps you’re taking, the difficulty that others would have on a global basis. And I assume your part of that is the salary cuts that you’re talking about. But I guess could you give some examples of other things that you referred to there that would be difficult for competitors to do?

Greg Case — Chief Executive Officer

Yes. I actually I just like start with we don’t make it a practice actually to comment on competitors or others, so we really shouldn’t comment on them in any way shape or form. What I would highlight is Aon, and that really is that is the place we know well. That’s what we focus on every day.

And we would say, if you step back and think about the steps we’ve taken to position our firm to be able to serve clients in any circumstance and protect our 50,000 colleagues, the investment in Aon United for the last decade has put us in a position where we can sit together and look across our global firm with our teams in place in every way, shape or form. They come up with a point of view. They come up with a point of view that they know is right on behalf of clients. And they know we can execute it now, not just because it’s the right thing to do because that’s just one step, but because we’ve come together, we actually are supporting each other in ways we haven’t before. And Aon Business Services allows us to execute it.

So when you think about the overall package, we stepped back, looked at the scenarios that the economy as it’s evolving and said, “Listen, under every scenario one can imagine, particularly given the uncertainty, how do we make sure we’re ready?” And ready is, by the way, the expense pieces that Christa talked about that are non-SIB related, and this is Aon Business Services at its best. I mean we’re doing things instantly that used to take us you had to build consensus over time. Our team has got an extraordinary capability there.

We obviously did things around the buyback and M&A that are much more straightforward. But what we do in Aon Business Services is very unique, and it really supports what we do on efficiency and productivity. But it really is the team and how they’ve come together in every way, shape or form in terms of sort of where we are and what we’re up to. And that’s really what’s been different, and that’s what’s unique about Aon United.

Eric Andersen — President

Greg, I think there’s also another component that’s worth mentioning in that. A lot of what we’ve done about ABS is really about leveraging our capability and getting it out globally. And so we’re able to deliver for clients today using our technology, being able to connect with markets, being able to connect with clients, actually pulling global capability to a client virtually in a way that actually allows them to move forward with their business, to understand the risk they’ve had. Certainly, the things we’ve talked about in the past, we’re continuing to work on.

Whether it’s the mortgage business, whether it’s building an intellectual property market, whether it’s working on transaction liability-type MGAs, we’re continuing to move forward in terms of product creation using the technology investments we’ve made historically, trying to get in front of what we perceive as client need that’s there today but also what we think is coming as people return to the workplace. So it is a it’s not just the expense side. It’s actually the front-end value creation that we’re leveraging using the investments that we’ve made in technology and business services.

Michael Phillips — Morgan Stanley — Analyst

Okay, great. Guys, thank you very much.

Eric Andersen — President

Thank you.

Operator

Our last question is from Phil Stefano of Deutsche Bank. Your line is now open.

Phil Stefano — Deutsche Bank — Analyst

Yeah. Thanks. I appreciate the color commentary around the discretionary versus the more discretionary breakout of the business. I guess is there any way qualitatively you can help us understand maybe a proportion of business that’s dependent upon volume or number of exposure, something along those lines?

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

I mean the place I’d start with is 80% of our business is core, and our core revenue is highly recurring and nondiscretionary. And many of these services are regulated, required or necessary cost of doing business even for businesses in financial distress or potentially going into bankruptcy. And so it is an incredibly stable and resilient business. It’s globally diversified. It’s diversified by industry, client segment, etc.

And then we’d say the 20% of our business that’s more discretionary, much of this recurs and renews every year. And so we do see that being actually quite strong too. There is some project work in there which could be deferred, as Eric described. As we think about impacts from GDP, there are obviously, as I mentioned, impacts from GDP or employment levels or asset values. And we may see exposures go down, but we do often see clients buy more in these circumstances given the increased risk that the current crisis is highlighting to them.

Phil Stefano — Deutsche Bank — Analyst

Okay. From the perspective of the comp reduction, can you just help us think about the timing of this? And are there employment regulations in certain regions that maybe complicate this versus other regions? Maybe just how do we think about how this might flow through from a timing perspective?

Greg Case — Chief Executive Officer

Phil, this is back to the prior question around sort of 10 years ago, would we be able to do this without Aon United and where we are. The answer is no. We’re executing very, very quickly on an overall game plan to support our firm in a way and our 50,000 colleagues so we can support our clients in every single scenario one can imagine.

So no, actually, what we’ve done essentially is put all these in place. And we’re seeing and as for kind of voluntary, where it needs to be voluntary, it’s been actually done exceptionally well by country around the world, with our leaders in EMEA doing amazing work, in Asia, in Latin America, amazing work coming together, in our U.S. and Canadian this is exceptional sort of, frankly, tour de force leadership around the world. And so we’ve tailored to local markets. But no, the timing is immediate or relatively immediate in terms of sort of days and weeks, not months in terms of sort of where we are, so happening very, very quickly. And it’s something we can do now that we couldn’t have done 10 years ago, impossible. And we couldn’t have executed it and actually taken some of the things Eric described and actually scale them around the globe, impossible.

Today, with Aon United, we not only can do it, we can do it actually in a way that actually strengthens the firm and builds the firm. We can do it in a way that protects our colleagues and our clients, and we can do it in a way that candidly gives us a position to actually strengthen our firm coming out of the crisis, which is why this investment in Aon United, as I said earlier, has really been wonderful in positive or in good environments. It turns out this environment is really shows us that it’s incredibly powerful in the more challenging environments as well. And it really is a credit to our colleagues around the world. They’ve just been extraordinary.

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

And look, I would say, Phil, as we think about we’re not obviously going to be giving revenue or margin guidance, but this along with other expense control measures, we will if we do see revenue declines during the year, we will decrease expenses proportional with revenue as we manage through this uncertainty. And so we’re very focused on the incredibly stable revenue base we have, as we’ve described, and the resilient business we have to navigate through this helps serve our clients and come out of this stronger.

Phil Stefano — Deutsche Bank — Analyst

Yeah. Okay. Thanks.

Christa Davies — Chief Financial Officer and Executive Vice President of Global Finance

Thank you.

Operator

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

Greg Case — Chief Executive Officer

Just wanted to say, again, we truly appreciate everybody participating on the call today. And to our Aon colleagues around the world, excited to be with you so that we push through this environment and emerge more stronger on the other side. Talk soon. Thanks very much.

Operator

[Operator Closing Remarks]