What that does for a CFO is, you now actually know the amount of increase youre going to have every year. So youve literally controlled your volatility in terms of what youre doing. Thats incredibly powerful. The great thing is, when weve actually started to do this, employees are making choices that better fit with their lifestyles. This is actually a really important thing, and a lot of times younger families buy too much health care coverage, and a lot of times older families buy too little health care coverage. When you think about making that choice, if youre a younger family and youre buying the right health care coverage and youre investing the difference in your retirement, youre actually addressing two issues. That can be powerful over time.
Its not easy to talk insurance with Gregory Case. Although as CEO of London-based Aon he oversees one of the worlds largest insurance brokerages and reinsurers, the 50-year-old prefers to discuss risk and client solutions, reflecting in part the 17 years he spent as an executive at management consulting firm McKinsey & Co. in Chicago. Since joining Aon in 2005, Case has quarterbacked the transformation of the insurer into what he calls a professional services firm, selling off its underwriting businesses and making two big acquisitions, paying $1.4 billion for reinsurer Benfield Group in 2008 and $4.9 billion for human resources specialist Hewitt Associates two years later. Under Case, who has an undergraduate degree in finance from Kansas State University and an MBA from Harvard Business School, Aon has seen its earnings per share more than double, from $1.69 in 2006 to $4.21 last year. Shares of the company have nearly tripled in value during his tenure, rising from roughly $22 when he started to a recent price of $62. Institutional Investor Editor Michael Peltz met with Case at Aons New York offices in March to talk about his plans for continuing to grow his companys business in an increasingly complex and risky world, including the decision to move Aons headquarters last year from Chicago to London. Institutional Investor: What attracted you to Aon? Case: I had watched the financial services industry for quite some time from where I was at McKinsey and had watched Aon because it was a Chicago company. I really saw an opportunity that I thought was extraordinary. You had a firm with incredible global infrastructure literally a physical infrastructure in 120 countries capable of serving clients. The idea was, lets build the preeminent professional services firm in the world, focused on risk, helping clients understand risk, measure risk, mitigate risk by the way, youll notice I havent said the word insurance yet and focused on helping them with their most important people issues around pensions, retirement, health and benefits. So you set out to transform Aon into more than an insurance company? Right. We had a conversation around the idea that this has to be about continuing to evolve the firm in a way that we truly are going to do something that is unique and sustainable on these two platform areas called risk and people. At the time, a third of Aon was still an underwriting company. We took the decision to completely restructure the company. We sold off all of our underwriting companies, and we focused on risk and people. And we went from the underwriting business, which was big-balance-sheet and heavily regulated, to what are now people businesses that dont have big balance sheets. How has Aons revenue mix changed? We sold off roughly $3 billion worth of assets. Youll see from a revenue standpoint a third of our revenue was underwriting, a large chunk after that was risk, and after that was consulting, which was the people part of the business. When you look at it today, its roughly 60-40: 60 percent risk, 40 percent people. And theres no underwriting. How far along was the transformation when the financial crisis hit? We had announced at the time the largest acquisition in Aons history, which was Benfield. That was in August 2008, right before the crisis hit. But we had already sold off combined insurance, and wed sold off warranties. Wed actually done some of the selling off to create the restructuring, and then we brought in Benfield right before the crisis. So we had to go through the crisis with everybody else, integrate and bring Benfield into the family and bolster what was our reinsurance platform. How important is reinsurance to Aon? Its very important. The risk solutions segment is about 60 percent of our business. If you think about what we do in the risk business, we work with commercial companies large, middle-size and small. We take all comers. And the beauty of it is that the companies are in 120 countries and come in every form and flavor. So its truly a global focus. And that group of companies oftentimes requires insurance solutions, and we help coordinate those. Thats what our retail group does. Its called Aon Risk Solutions. And then we also work with the insurers on how they think about their risk mitigation, and thats what Aon Benfield does. Thats the reinsurance business. Its the largest reinsurance risk adviser in the world, and its probably 50 percent bigger than its next biggest competitor. Its been a true tour de force in investment for us around content and analytics. Can you tell us about the analytics? We are on an absolute mission to give people data, content and analytics and help them make better decisions. Aon Benfield has about 3,000 employees; 500 of those are kind of Ph.D. statisticians who essentially model global risk on behalf of insurers. As one of my colleagues, [Aon Benfield co-CEO] Mike Bungert, would say, if the earth moves or the wind blows on a global basis, we can tell you the impact by company at a zip code level. So if Hurricane Sandy is coming to hit the coast of New York, our guys are modeling, literally block by block, what the impacts going to be and talking to our clients about it and talking to the insurers about it. Whats your take on global warming, and how has Sandy and the other unusual weather activity of the past few years impacted your business? I cant speak to global warming, but what I can tell you is that the magnitude, complexity and scrutiny of risk are going up. In our view theres more risk out there facing clients than ever before. Just think about the impact of urbanization around the globe. In 20 years two thirds of the planet is going to be urbanized. Urbanization is going to have a tremendously powerful influence on the classic risks: property coverage, casualty all the different things. But beyond the basic risks, theres also global warming sustainability, to your point the impact of cyberrisk, pandemic, identity theft; literally the level of risk in the world is going up dramatically. And if that isnt enough, its also becoming more intertwined. Take Thailand. The Thai floods [in 2011] were a tragic event. But they were also a global supply-chain event. Because so much was being manufactured there, the floods were impacting our client P&Ls all around the world. Now everybody cares about this stuff. CEOs, boards of directors, CFOs all care about this. If we can help a client strengthen its operating performance, improve its balance sheet or reduce volatility through taking actions around risk, risk assessment, risk understanding, thats powerful. Again, I havent said the word insurance yet. Where does insurance fit into this? Insurance is one solution. So what that means literally is, if you think about helping a client understand, measure and mitigate risk, there are specific periods of time in fact, a lot of what we do is, we say to a client, Listen, we can actually use somebody elses balance sheet to help you take the volatility away from your earnings, and thats called insurance. And were very fortunate; we place more premium than anyone in the world. On the retail side its about $80 billion; its about $25 billion or $30 billion on the reinsurance side. We place over $100 billion of premium per year, and were about 23 percent of all of Lloyds of London. Were the largest provider into Lloyds. Was that part of the reason you moved Aons headquarters to London? As we thought about leading a global firm and where we wanted to do it and the places we wanted to look at, London was a very logical place. It does create more connectivity to our global opportunities around the world, in Asia and Europe, in some respects even in Latin America. Lloyds is obviously a very big part of the London marketplace, and as I said before, we are the single largest provider into Lloyds. For us the opportunity to be in London sent a message of being more global and was powerful from a strategic standpoint. The other aspect is capital management. Operating as a London PLC gives us the ability to manage our capital in a much more fluid way around the world. How so? Just by having one global pool of capital. You can actually move it between countries and you dont have penalties or taxes and things like that. So, ironically, we can invest more back into the U.S. and have invested more back into the U.S. since our move to London. Lets discuss the people side of the business. At the time we bought Benfield, we had a consulting business that was successful, but it wasnt as strong as it could be. We took the decision that we really wanted to have a global platform that was compelling and we could truly do things on behalf of clients both from an advice standpoint and an execution standpoint. Hewitt was the perfect fit for that. In 2010 we made the same kind of investment in Aon Hewitt that we had made with the risk part of the business. Are there similarities between the two businesses? I often get asked, How do risk and people fit together? I would ask you, just pick a major company in the U.S. that has a huge underfunded pension. Is that a people issue, or is that a risk issue? And the answer is, yes, its an HR problem, and its a CFO problem. The second major area is health care. If you think about the one area on a clients P&L in the U.S. that went up 10 to 15 percent every year during the recession, its that little line item called health and benefits. This is an area of the P&L thats going to continue to get worse, in fact. And if there are ways we can actually help flatten the curve of increase, it would be hugely powerful. How are you trying to do that? One is something we call health care exchanges. We launched the first corporate health care exchange last year. What youre really doing is giving your employees a fixed amount and saying to them, Weve created a platform for you to secure your health care coverage with a lot of structure, by the way. Its a lot of information, a lot of comparative approaches, so they literally can go on the exchange and buy their health care coverage. What are the benefits?