怡安集團 (AON) 2013 Q4 法說會逐字稿

Good morning and thank you for holding. Welcome to Aon PLCs fourth-quarter earnings conference call. At this time, all parties will be in a listen-only mode until the question and answer portion of today's call.

(Operator Instructions)

I would also like to remind all parties that this call is being recorded and that it's 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 and those anticipated.

Information concerning risk factors that could cause such differences are described in the press release covering our fourth-quarter results, as well as have been posted to our website.

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

Thanks very much and good morning everyone. Welcome to our fourth-quarter and full-year 2013 conference call. Joining me here today is our CFO, Christa Davies.

Consistent with previous quarters, I'd like to cover three areas before turning the call over to Christa for further financial review. I would note that there are slides available on our website to follow along with our commentary today.

First is our performance against key metrics we communicate to shareholders. Second is overall organic growth performance. And third is continued areas of strategic investment throughout Aon.

On the first topic, our performance versus key metrics. Each quarter we measure our performance against the four metrics we focus on achieving over the course of the year. Grow organically, expand margins, increase earnings per share, and deliver free cash flow growth.

Turning to slide 3, in the fourth quarter organic revenue growth was 4% overall, highlighted by strong growth in our HR outsourcing and Americas retail Brokerage businesses. Operating margin increased 160 basis points, primarily reflecting significant margin improvement in our HR Solutions segment. EPS increased 21% to $1.54, reflecting strong operating performance, a lower effective tax rate, and effective capital management. Finally, free cash flow increased 23%, driven by strong working capital performance and a decline in CapEx spend.

If we turn to the full-year, organic revenue growth was 3% overall, reflecting solid growth across both segments, despite pricing pressure in our reinsurance business and overall economic uncertainty in Europe. Operating margin increased 40 basis points, reflecting strong margin improvement in Risk. EPS increased 16% to $4.89. Finally, free cash flow increased 22% to $1.4 billion, driven by a record $1.6 billion cash flow from operations, a truly incredible effort from the team, as we are well on track to double annual free cash flow in the next three to five years.

Overall, our results reflect a strong finish to a solid year with improvement across each key metric for both the fourth quarter and full year. Having made significant investments across the firm in both risk analytics and the most robust set of solutions for health care exchanges, we continue to strengthen our platform for long-term growth, strong free cash flow generation, and significantly increased financial strength in 2014.

Turning to slide 4, on the second topic of growth. I want to spend the next few minutes discussing the quarter for both of our segments. In Risk Solutions, organic revenue growth was 3%. As we discussed previously, we are driving the set of initiatives that are strengthening underlying performance, and positioning our Risk Solutions segment for long-term growth and improved operating leverage, with management of our renewal book through client promise and retention rates of more than 90% on average, highlighting strong client satisfaction in retail Brokerage.

Double-digit growth in new business generation, reflecting more than $335 million across our retail business, with strong growth across the Americas, EMEA, and Asia-Pacific regions. Investments in new products and service capabilities, with the growth of Risk and Aon Broking delivering increased operating leverage.

And in our core treaty reinsurance business, net new business trends have now been positive for 11 consecutive quarters. Reflecting on the individual businesses within Risk Solutions, in the Americas, organic revenue growth was 4%, exposures are relatively stable, and the impact from pricing was modestly positive on average, reflecting a steady pace of market impact.

We saw strong growth in Latin America and solid growth in US retail, including growth across all businesses, property casualty, health and benefits, and affinity. In US retail we delivered a record level of new business, with solid management of renewal book portfolio, including record levels of retention.

In international, organic revenue growth was 2%. Exposures continue to be stable, and the impact from pricing was flat, on average. We saw growth in multiple markets in New Zealand, Italy, Spain, and Portugal, to name a few with double-digit growth across Asia.

In the UK and Continental Europe, macroeconomic conditions still remain relatively fragile across many core markets. However, with leadership positions across this region, we continue to deliver modest growth against the same economic and market headwinds.

In reinsurance, as we noted previously, our third quarter was favorably impacted by the timing of revenue pulled forward from the current quarter. We expected a modest decline in organic revenue. Overall, organic revenue growth was flat for the quarter. Results reflect growth in our capital market transactions and advisory business, as well as net new business growth in treaty placements, offset by the anticipated unfavorable impact of timing in the quarter.

As we've noted over the past year, record capacity continues to be available to meet demand and cedents are retaining more risk, driving expected negative market impact most notably in the US. Absent an event in the industry, macro factors will continue to be a headwind in 2014.

Against those headwinds, we expect results to continue to reflect flat to modest growth, highlighted by net new business won, which was positive for the 11th consecutive quarter, growth from investments internationally and capital markets and advisory transactions business. Overall, this level of performance and strength in new business generation reflects Aon Benfield's unmatched level of investment and long-term value proposition for clients, while strengthening operational performance and reducing volatility through unmatched data, analytics, and advisory capability.

Turning to HR Solutions. Overall, organic revenue growth was 8%, with growth across both major businesses, and in areas where we are making significant investments in the business, including healthcare exchanges, investment consulting, and delegating investment solutions. These investments reflect Aon Hewitt's client leadership, understanding an influence of market trends, and the long-term issues that face our clients. As healthcare reform, healthcare costs, and associated financial risk continue to rise unchecked at a time when overall health and wellness is not improving.

Multinational clients are increasingly looking for global benefit solutions to support their global organizations, delivered at the local level. Managing and transferring risk across and against pension schemes that are increasingly frozen and largely under-funded. Finally, after continuing to work through the worst economic recession in the last seven years, clients are just beginning to renew their focus on talent, retention, development, and engagement to prepare themselves for renewed long-term growth.

Turning to the individual businesses within HR Solutions. In consulting services, organic revenue growth was 1%, compared to 8% in the prior-year quarter, which benefited from certain nonrecurring pension derisking activities. Results in the quarter reflect solid growth across our competition consulting business, and in our retirement business where investment consulting and delegated pension management services, partially offset by a modest decline in demand for actuarial services and retirement consulting.

Despite weak demand for discretionary services and overall economic weakness in continental Europe, for the full year, we delivered low- to mid-single digit organic growth across the consulting services business and would anticipate similar levels of growth in 2014.

In outsourcing, organic revenue increased 11%. Organic revenue reflects substantial growth in our healthcare exchange business as we recognize revenue related to the majority of enrollments that take place during the fourth quarter in our active and retiree exchanges. Results also reflect modest growth in our HR BPO and in benefits administration for discretionary services, partially offset by unfavorable net client activity that we saw in early 2013, but became less of a headwind starting in Q4.

Slide 5 highlights the third topic, areas of investment. We believe Aon is in a unique position. Solid, long-term operating performance combined with expense discipline and strong free cash flow generation continues to enable substantial investment in colleagues and capabilities around the world.

A few examples include, in Risk Solutions, we are investing in client leadership with the international rollout of the revenue engine and client promise to drive greater productivity and efficiency. We are investing in innovative technologies such as the Global Risk Insight Platform, the world's leading global database of risk and insurance placement information, capturing roughly 1.9 million trades and $100 billion of bound premium.

We continue to have a growing client list of insurance carriers utilizing the platform for its analytics and services capabilities. In addition, we are driving our Aon Broking initiative to better match client needs with insurer appetite for risk, as highlighted by our ability to package similar risks and place substantial programs and facilities into the market on behalf of clients.

We continue to align our global health and benefits platform to better capitalize on our global distribution channel and deep brokerage capabilities. We are investing in the further development of data and analytics capability at Aon Benfield to strengthen our already industry-leading client serving asset. Finally, we are expanding our footprint through tuck-in acquisitions that will either increase scale in emerging markets or expand capability to better serve clients.

In HR Solutions, we are making significant investments to strengthen our industry-leading position and comprehensive portfolio health solutions, including healthcare exchanges. Healthcare exchanges as Aon Hewitt's unique business model reflects, enable clients to begin transitioning their participants to a sustainable, full-service solution based on expanded choice and a competitive marketplace.

Clients continue to reinforce the value of Aon's industry-leading vision for private health exchanges, as we are seeing increased interest from a broadening spectrum of industries and geographies. In Q4, we were very pleased with our enrollment results and the excellent service experience we delivered for our clients and their employees and retirees.

In the Aon active health exchange, employer participation was six times higher, and employee covered lives tripled. We delivered on our Q4 anticipated enrollment numbers of more than 600,000 lives, including eligible dependents. In the Aon retiree health exchange, we serve more than 300,000 of our clients' retirees to evaluate the best Medicare options for their needs.

Overall, we are excited about our robust pipeline of clients in the 2014 enrollment, and continue to see increased interest in the broadening spectrum of industries, and look forward to updating you on progress later this year when our primary sales cycle has ended.

Separately, across our HR Solutions portfolio, we are expanding in high-growth areas with innovative solutions to derisk pension plans, and our delegated investment solutions are opening relationships in new markets. We're also providing a broader set of advisory, [navicy] solutions to our clients' employees to enable greater choice and improve decision-making on retirement and healthcare options.

We continue to expand our industry-leading benefits administration solutions and technology platforms. And finally, we are strengthening our international footprint to support a global workforce with investments in key talent and capabilities across emerging markets.

In summary, for both the fourth quarter and full year, we delivered positive performance across each of our key financial metrics. In addition, we strengthened our industry-leading platform with strategic investments across data, analytics, and solutions that we expect will drive long-term growth and greater operating leverage in 2014.

With that said, I'm now pleased to turn the call over to Christa for further financial review. Christa?

Thank you very much Greg and good morning everyone. As Greg noted, we delivered positive performance against all four key metrics, while continuing to position Aon's industry-leading platform for long-term growth, strong free cash flow generation, and significantly increased financial strength in 2014 and beyond.

Now, let me turn to the financial results for the quarter on Page 6 of the presentation. Our core EPS performance, excluding certain items, increased 21% to $1.54 per share for the fourth quarter, compared to $1.27 per share in the prior-year quarter. Results in the quarter reflect strong operating performance in our HR and Risk Solutions segments, a lower effective tax rate as we deliver long-term benefits related to the Company's redomicile, and effective capital management reflects in the Company's share repurchase program.

Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on Page 13 of the press release include, non-cash and tangible asset amortizations and restructuring charges related to the Aon Hewitt restructuring program. All charges for the formal restructuring program have now been completed.

Lastly, foreign currency translations had a $0.03 unfavorable impact on EPS in the quarter, due primarily to a stronger dollar, US dollar versus the Australian dollar, Canadian dollar, and Brazilian real. If currency were to remain stable at today's rates we would expect no material impact in the first quarter.

Now let me talk about each of the segments on the next slide. In our Risk Solutions segment organic revenue growth was 3%, operating margin increased 40 basis points to 23.6%, and operating income increased 2% versus the prior-year quarter. Organic growth, driven by investments in GRIP and analytics as well as $9 million of restructuring savings, were partially offset by a $16 million or 40 basis [flat] point unfavorable impact from foreign-currency translation.

Let me spend a moment on the formal restructuring program, key initiatives that have enabled concurrent funding investments and long-term structural margin expansion. Under the Aon Hewitt program, approximately $99 million of estimated savings will be achieved in Risk Solutions. Approximately $69 million of the cumulative savings have been achieved under the program, with the remaining $30 million to be achieved by the end of 2014.

A breakout of restructuring charges incurred in Risk Solutions associated with the Aon Hewitt program is detailed in the schedules on Page 14 of the press release. We would note that 100% of the charges have been incurred and the Aon Hewitt restructuring program is closed.

In Q4 we delivered solid underlying operating performance in Risk Solutions, despite an unfavorable impact from foreign currency, continued economic uncertainty in Europe, and unfavorable market impact in reinsurance. For 2013, Risk Solutions operating income grew roughly 6%, and operating margins increased 80 basis points to 22.5%, closing up firmly on track for improved operating income performance in 2014, and further margin expansion toward our long-term targets of 26%.

Turning to the HR Solutions segment. Organic revenue growth was 8%, operating margin increased 440 basis points to 21.4%, and operating income increased 36% versus the prior-year quarter, in line with Management's guidance. Significant growth in our healthcare exchange business and $18 million of incremental restructuring savings were the primary drivers of our anticipated strong fourth-quarter performance.

With respect to the Aon Hewitt restructuring program, approximately $260 million of the $303 million in total cumulative savings has been achieved under the program, with the remaining $43 million to be achieved by the end of 2014.

As Greg noted, we made tremendous progress in 2013, delivering on both our operational and financial goals that were laid out at the beginning of the year. This performance is exactly in line with our long-term outlook for the HR segment and places us firmly on track for improved performance in 2014.

For HR in 2014, we expect to, number one, deliver organic growth. Number two, generate greater scale and improve return from investments. Number three, deliver remaining savings related to the restructuring program.

Number four, deliver in 2014, greater than mid-single digit operating income growth and further margin expansion toward our long-term target of 22%. The patterning will be similar to 2013, down in the first half for Q1 and Q2, up in the second half of the year, flat in Q3, and up substantially in Q4.

Now, let me discuss a few of the line items outside of the operating segments on slide 9. Unallocated expenses increased $6 million to $54 million, reflecting an increase in long-term employee incentive compensation programs. Interest income decreased $1 million to $3 million. Interest expense increased $2 million due to costs associated with certain derivative hedging programs.

Other income of $14 million primarily includes gains on sales of businesses and certain long-term investments, as we monetize our long-term investments and put the capital to better use for shareholders. Going forward, we expect a run rate of approximately $1 million per quarter of interest income, $45 million of unallocated expense, and $60 million of interest expense in the quarter.

Turning to taxes. The effective tax rate on net income from continuing operations was 24.2%, compared to 25.2% in the prior-year quarter. The effective tax rate in the fourth quarter of 2013 was favorably impacted by changes in the geographic distribution of income and certain discrete tax adjustments.

Lastly, average diluted shares outstanding decreased to 311.4 million in the fourth quarter, compared to 327.5 million in the prior-year quarter. The Company repurchased approximately 1 million Class A ordinary shares for approximately $77 million in the fourth quarter. The Company has $2.9 billion of remaining authorization under its share repurchase program.

Actual shares outstanding on December 31 was 300.7 million, and there are approximately 9 million additional dilutive equivalents. Estimated Q1 2014 beginning diluted share count is approximately 310 million, subject to share price movements, share issuance, and share repurchase.

Now, let me turn to the next slide to highlight our significant financial flexibility and strong free cash flow on Page 10. At December 31, 2013 cash and short-term investments were $1 billion and total debt outstanding was $4.4 billion. Overall debt to capital decreased to 35% at December 31, compared to 37.7% at December 30.

Cash flow from operations increased 18% to $649 million in the fourth quarter, due primarily to growth in net income and a decrease in pension contributions. Free cash flow as defined by cash flow from operations less CapEx, increased 23% or $110 million to $594 million in the fourth quarter, driven by strong cash flow from operations and a $13 million decrease in CapEx.

For the full-year, cash flow from operations was a record $1.6 billion, up 15%, due primarily to growth in net income, strong working capital performance, and a decrease in pension contributions. Free cash flow increased 22% or $254 million to $1.4 billion, driven by a record cash flow from operations and a $40 million decrease in CapEx. A truly outstanding performance.

Turning to the next slide to discuss our significant financial flexibility. We value the firm based on free cash flow and allocate capital to maximize free cash flow returns. As you can see from this chart, based on current assumptions, we would expect free cash flow to increase by over $600 million annually over the next five years, based only on a reduction in cash use for pensions and restructuring.

Continued growth in the core business, further margin expansion, and the reduction in the overall effective tax rate would generate additional free cash flow growth that puts us well on track with our goal of doubling free cash flow to more than $2.3 billion annually within the next three to five years.

Regarding our under-funded pension plans. We've taken significant steps to reduce volatility and liability as we've closed plans for new entrants, frozen plans from incurring additional benefits, and continue to derisk certain plan assets. Our overall unfunded status improved to $1.6 billion and 91% at year end 2013, compared to $2.3 billion and 82% at year end 2012.

We currently expect contributions to decrease by roughly $138 million to $385 million in 2014, and continue to decline thereafter. Additionally, non-cash pension expense was roughly $21 million in 2013, and we would expect non-cash pension expense is zero in 2014.

Regarding our restructuring plans, cash payments were $152 million in 2013. As all charges related to restructuring programs have now been incurred, we would expect cash payments to decline by $60 million to approximately $90 million in 2014, and decline further each year thereafter.

In summary, we finished the fourth quarter and full year 2013 with solid performance across all four key financial metrics. We continue to make substantial investments for clients and drive future long-term growth in both Risk and HR Solutions.

We delivered 22% free cash flow growth and are focused on three primary areas that will each contribute substantially to a doubling of annual free cash flow, more than $2.3 billion annually over the next three to five years. Combined with a strong balance sheet and significant financial flexibility, we've positioned the firm for improved financial performance and significant shareholder value creation in 2014 and beyond.

With that, I'd like to turn the call back over to the operator for questions.

(Operator Instructions)

Adam Klauber of William Blair.

A couple questions on exchanges. Number one, has the sales cycle for benefit admin exchanges started earlier than normal, and is it active? And the second question, you've obviously put on a big jump in new clients this year on both the active and retiree.

Do you have more capacity as you go into next year to onboard even more clients than you did this year? So two different questions. Thanks.

First Adam, on your question on the sales cycle, let me say this is part of an ongoing conversation with our clients around really how they serve their employees and support them in more effective ways. So as we completed the cycle last year, it truly has been a continuous set of conversations with clients. We're obviously in the middle of the sales cycle now.

So it's really a continuous set of conversations, that I must say have been building in momentum. More clients are interested cutting across a broad set of geographies and industries and all sizes and shapes. So very, very active set of conversations.

As we said before, for us, we have plenty of capacity. This has been about building in a very thoughtful, methodical way. On the active side, initially were 3 companies, the cycle with 18 companies, the pipeline is exceptionally strong, and we have capacity and fully anticipate adding the next set of clients.

And most important, is serving them in an impeccable way, which we were very pleased to do this last cycle. The same is holding on the retiree side, too. So very, very positive set of developments and it's within the context of what we do in ben admin anyway, we serve 9 million employees in ben admin across the board now on the active and retiree side. So it's part of a natural progression and it's proceeded very, very well.

Great. Thank you.

Brian Meredith of UBS.

A couple questions, first Greg, I'm curious. Could you give us some insight into what you see happening in the emerging markets right now? Could that have any impact on your business here in 2014 and the economic slowdown there?

Brian for us, first of all, from overall context, about 50% of our global business, overall. We see continued strong growth on the emerging market side. I'm just actually back, I was in Beijing and Shanghai and Suzhou, and it was just tremendous opportunity everywhere.

When you think about it, it's obviously tied to GDP. That might be a bit of a headwind, but when you think about the level of incidents of insurance that have coverage across per dollar or GDP, the growth opportunity in the emerging markets is just, for us, from our standpoint is substantial.

So we are seeing very strong growth across Asia, across Latin America, with particularly very high growth well into the double-digits in a number of countries. So from our standpoint, this is a very positive -- continues to be a very positive area of investment and development for us and we don't see that changing. And if it's great and it's a little less great, it's still in the great category.

Great. Christa, wondering if I could clarify your comments with respect to margin guidance in the HR Solutions business. Do you say to expect margins to be actually down again in the first half of the year in 2014, and then flat third quarter and then up in the fourth quarter? If so, why?

Yes, I was actually providing operating income guidance.

Got you.

As opposed to margin guidance. And operating income, overall, we think will be greater than mid-single digit growth in 2014. In terms of the patterning, it will be similar to 2013, down in the first half both Q1 and Q2, flat in Q3, and up substantially in Q4.

It's really reflecting the continued investment we make to support our clients in healthcare exchanges in 2014. As you know, we incur expenses in all four quarters of the year in our healthcare exchange business and recognize the revenue in Q4.

As we continue to scale more clients, really because of the success we've had in the 2013 cycle, we are continuing to invest throughout the calendar year in 2014. And that's why that patterning is continuing to occur.

Is that because there's expense on-boarding the clients in the first half of the year, is that what's happening?

Yes. That's exactly right.

If you think about it, we've invested substantially and said we would achieve mid-single digit operating income in 2013, which we did. Christa guided, said where we are going to be in 2014, which we will. Within that, we will have invested substantially in the exchange side.

But if you think about the categories of that, 2013 was about really a lot of the infrastructure and things to get it up and running and really build all the components of it. What you are seeing in the discussion of 2014 is our anticipation of where the pipeline is and indications we're getting how that's going to evolve. That really is going to be about specific client investment in addition to continued investment around the client experience.

Great. Thank you.

Jay Cohen of Bank of America Merrill Lynch.

A couple of questions. First, I may have missed this on the call. Can you give us a sense of what the tax rate will look like in 2014?

Yes. Jay, as we think about the tax rate, we've given long-term guidance on the tax rate of sort of more than 500 basis points. As we think about the tax rate in 2014, we are not giving guidance going forward. We have given long-term guidance and will report updates on progress as we report our results.

Okay. Second question. On the reinsurance broking side, I guess I was interested in your comment suggesting that you may be able to eke out flat or even up organic revenue growth in 2014, despite what appears to be some pretty stiff headwinds. I'm wondering why that is.

Part of the question is, when you think about your compensation on the reinsurance side, how much is fees versus commissions?

Jay, if you step back and think about what we've done historically, first of all, by-respect of kind of what's happening on the pricing side and the exposure side. We said we are going to grow the Risk Solutions business, that includes the reinsurance business, and that's exactly what our goal is for 2014. And we believe we are going to be on track to do that.

You're absolutely right, there is some substantial headwinds. And when you think about the capital, there is a record level of capital in the industry, now, well above $500 billion. We've had a relatively light cap year, and that's fully compounded by the continued influx of capital from nontraditional sources, which is kind of at the $45 billion, $50 billion level now. And we expect it to grow over time.

Having said that, from our standpoint, our view is that when you think about what we do on behalf of clients, we're helping them understand how to create value with their balance sheet, reduce volatility, improve operating performance. That's right exactly in the wheelhouse of what we do at Aon Benfield.

We invest in data analytics in ways no one else has really been able -- has ever done. We believe that's going to help us serve clients effectively, and that's why we believe we can continue to grow that business over time and fully anticipate being able to do that.

The fees versus the commissions? Is a decent part of this fee, does that help protect the revenue to some extent?

No. It's a mix on both sides. So fee and commission. We are about 70% commission and about 30% fee, overall. But we are doing a number of things on behalf of clients in addition to treaty placements, and some of it is related to adding advice and some of the things that come with data and analytics to help them think about their business overall, that's an increasing component.

Also, for us, when you think about our leadership position in the alternative capital area, in cap funds as an example, there is clearly an acceleration on that front, and when you think about since 2010, give or take, probably been about 90, 93, 94 deals done over that period of time. We've been involved in over half of them. There's been an acceleration of the 93; 31 were done last year. Again, we are involved in over half of them.

From our standpoint there's lots of aspects in how we help insurers improve their performance across Aon Benfield, and that is reflected in our historical performance. And I would also just say, reflect on Aon over the last five, six, seven years. In virtually any economic environment we've been able to grow the business overall.

In fact, we've grown it every year except one, in which we were just down slightly. So our view is, we've seen the movie before and fully anticipate being able to grow and help our clients succeed.

Greg, thanks for that.

Gregory Locraft of Morgan Stanley.

Again, on reinsurance brokerage. It looks like organic growth dropped in '04 and '05 mid-single digits. Pricing in that environment was actually pretty bad. Can you compare the business for reinsurance today versus the '04, '05 when the pricing declines were similar? Why is it different, why won't we be seeing negative organics in the future periods in this division?

As I just described to Jay, you can't really speak for the overall industry will able to be. I'm just going to reflect on what Aon has been able to achieve in that exact environment, in that exact environment we've been able to actually grow our position. Fundamentally, this is about obviously, exceptional treaty placement, as we've described.

But it really is more broadly about what we do on behalf of clients, insurers, to help them succeed. In our case, the investment around data and analytics is just quite substantial. We invest well over $120 million a year, real money, cash in data and developing content and capability to help our clients make better decisions.

But again, we will improve operating performance, strengthen our balance sheet, and reduce volatility. In that context, treaty placement is one aspect. It's very important. One aspect. But you are adding to now that all capital market choices they have as well as get very clear user around how analytics, data, insight can actually help them make better decisions.

That's really the broad-based value proposition which is unique about Aon Benfield. It really has been what they been able to do -- my colleagues have been able to do over many, many years. If you look at new business generation, again, it's been net positive for 11 consecutive quarters through multiple types of environments, and we fully expect it will continue to do that as we help insurers succeed at Aon Benfield.

Okay. So basically, you have a more robust product offering today than you did in the mid 2000s, is that fair?

I would say it's continued [to grow]. We have a quite more substantial product offering. Again, if you are investing $120 million-plus a year on content and capability, it's broader, it's deeper, it's more connected globally.

And equally important, we believe it's highly differentiated. There aren't many players in the industry doing what we do could invest in content and capability the way we do on behalf of clients. And haven't had the impact that it's had on behalf of clients, because in the end, that's what really is what generates client leadership.

Are you helping clients succeed? We've been able to do that. We believe that capability has strengthened substantially really every year from the period of time we described, and that's why we're at a we believe great advantaged position as we move forward.

Okay. And again on reinsurance brokerage, the reported revenues flow kind of linearly through the year while as the renewal cycle for the industry has is Jan 1, June 1. So can you kind of tie the two?

In other words, and the reason I'm asking is do you kind of have great visibility on your revenues for the reinsurance division already based on what was bound on Jan 1?

Just as you said, obviously there's a substantial number of renewals that happen on -- a percentage will happen in 1-1, and then in April and then June. So we have good visibility on the treaty front and see how that evolves. Although we would recognize revenue over the course of the year, that's why you see that flatten out.

But as I said before, there's a lot of activity to do on behalf of clients in addition to the treaty portion of the equation. All those are now part of the discussion and are active and ongoing. But you are absolutely right in terms of how the treaty evolves. We certainly have a visibility on how 1-1 is played out for sure.

Perfect. Last is just on reinsurance, again. Can you just talk about your ability to flex the margin? Let's say you get six months out and the world breaks to the negative a bit versus planned, or perhaps it breaks to the positive a bit versus planned.

How do you flex the margin in this? What's your ability to toggle the P&L?

I'll say how we think about it, and it's less about the market and it's really about the value that we provide to clients. And fundamentally, this is the absolute focus of Aon Benfield and my colleagues in this arena. When you think about, as we add value to clients, it turns out, by the way, often times the greatest value you add for them, particularly when you're adding advice, data, analytics on top of what you do in treaty, and other arenas, in times of stress, it's actually the biggest opportunity to help clients succeed.

So our ability to actually provide value, have clients recognize the value, and then get paid for value, we believe continues to increase, and that gives us the ability to actually think through some of the ability to get a return out of the business, which we've been able to do.

And just one set of facts to reinforce what Greg just said, if you look at the reinsurance revenue growth in 2012, it was 5%; in 2013 it was 2%, and despite a decline in reinsurance growth year over year, risk margins are up 80 basis points. We feel very good about our ability to grow Risk Solutions margin, despite the macroeconomic headwinds they are facing.

Okay. Great. Thanks again.

Meyer Shields of KBW.

I think maybe more directed towards Christa. If we look at the uses of cash on slide 11, it looks like the pension contribution and CapEx forecast came down pretty significantly from last update that we had. I was hoping you could explain what's going on there?

Yes. That's absolutely right, Meyer. I think pension contributions came down, commensurate with our unfunded pension liability, which declined from year end 2012 of $2.3 billion to $1.6 billion, so a $700 million decline in unfunded pension liability, which is decreasing our cash contributions.

You can see the pension contributions will continue to come down over the following years. That's really in terms of driven by improved long-term rates. And then CapEx, you can see we finished 2013 at a lower level than we expected, and we expect CapEx to grow in line with revenue going forward, albeit from a lower base.

Okay. Switching gears a little bit. The share repurchase slowed in the quarter compared to what we saw in the third quarter. Is there anything underlying that? Or is that just the way things shake out?

As we think about share repurchase, we think about return on capital and cash on cash returns. And share repurchase remains our highest return investment. Hence the fact that we repurchased $1.1 billion of shares during the course of 2013, despite providing guidance of around $800 million level. If you think about it, we provided original, we did $1.1 billion in 2012 as well, but of that, $300 million came off the balance sheet.

So as they think about share repurchase, we expect share repurchase in 2014 to be similar too 2013. Obviously excess cash we'll deploy on a cash on cash return. Using return on capital is a metric we use to allocate all excess use of cash.

Okay. Thank you.

Elyse Greenspan of Wells Fargo.

I was hoping we could spend some time highlighting more of what you are seeing going on within the US economy. I know you pointed to stable exposures in your prepared remarks, and how you see the economic conditions in the US impacting what you expect to see with the organic revenue in 2014.

A couple of things. As you think about overall. First of all, just broad-based macro trends right now we described as pricing environment, which has really been stable around flat overall, with an exposure change, which has been modestly positive. For us, we have the standpoint, you can start to see aspects of the US economy strengthening, not strong, but strengthening overall. So that's sort of the macro view of where we are.

I would say though in that context, back to our ability to make investments in the business and improve margin, we continue to make investments in the business, and that really has helped us from the standpoint of -- and this is really around client promise and what we do on revenue engine and all the different pieces of it, really helped us generate a level of new business, $336 million across our retail business, really has driven across the US as well. It is a record level for us.

So we feel very good about what we have in place, the investments we've made, and the impact we are going to have over time as we grow the business organically. Really irrespective of what happens on US GDP. In the and, if you look at the components we have got a big construction book and that's obviously trending a little more positive, and [Ng' s] a little more positive, [treks] a little more positive from that standpoint.

And that puts -- and the exposures overall against those pieces are up a bit as I said before. That really is sort of how we see the US playing out with some positive overall macro implications and amplified by what we do from an investment standpoint.

Okay. Thank you. One other question on the reinsurance Broking business you pointed to your presence within the alternative capacity market. How big is that as compared to your overall book?

It's very small overall as we said before. Large piece is obviously is our treaty book. This is a smaller percentage overall, 5% to 10% we'd say, but growing. All I wanted to highlight is, if you think about alternative capital, this we believe is a reality.

It's an option for clients, it's highly viable. About $45 billion or so in the context of call it a $550 billion capital base for the insurance world; we are primary in it, but overall it turns out to be 5% to 10% of our overall book.

Okay. Thank you very much.

Michael Nannizzi of Goldman Sachs.

Christa, maybe following up on Meyer's question on the sources or the uses of cash, slide 11. So it looks like pension contributions went down on forward or are going to decline. CapEx looks like it's going to decline. But the cumulative increase to free cash flow doesn't seem to be increasing by as much as those two things are declining. If we have sources of cash, what would that look like, I guess?

Maybe the best way to start that question is, Michael, to start with free cash flow for 2012, which was $1.15 billion.

Okay.

Free cash flow number in 2012 is the number we're anchoring from to double to get to $2.3 billion over the next three to five years. And included in that free cash flow, our free cash flow definition is cash from operations straight from the cash flow statement less CapEx. Included in cash from operations is pension contributions and restructuring.

Then obviously the less CapEx means the CapEx number is also included in the free cash flow number. If you think about it, and your starting point for free cash flow now is $1.4 billion, because that's what we produced in 2013. And so if you look at this cumulative increase you can basically take the $1.15 billion, add $600 million so you get to $1.75 billion, which is just from these three line items, by themselves.

That includes no improvement in operations of our business, a la revenue growth and continued margin expansion or decline in tax rate. You can see that we are making good progress towards doubling free cash flow over the next three to five years.

Got it. Okay. I will take it off-line, I guess. If I look -- just from 2014 on, because 2013 is behind us. If I look at 2014 on, and I compare it to -- it looks like you are $200 million better on pension, maybe a little bit more, $200 million better on CapEx. But the cumulative free cash flow is up by about $20 million over that period.

So the way to think about it is, if you look at the 2014 number and say it's $333 million, as the cumulative increase, and then you look at the $602 million then from $214 million to $218 million, you've got a $300 million increase in free cash flow just from the line items above. You add that to $1.4 billion, which equals $1.7 billion.

Got it. Okay. I will take it off-line. Thank you for that. Greg I guess or maybe Christa, as well, on the Risk segment, you had margins were about 80 bps on three points of organic.

Where do you need organic to be overall, or do think about it that way in order to continue to expand margins? Or because of GRIP and Broking do you feel like you have leverage to continue to expand margins, even if organic falls below that level?

I would just start at the top line. Our view is, we are going to continue to expand the Risk margin overall. If you look across time, I've made investments and have been able to do that, and it largely -- multiple types of organic growth environments. That's in fact exactly what we intend to be able to do.

A lot of the investments around GRIP, what we've done in the analytics have really helped create leverage, operating leverage in the business, which is more substantial. So our ability to improve margin on lower growth rates is real, and you are starting to see that actually play out in the improvement this year. You will see that play out over time.

If we happen to get continued big pick up in the global economy, or we happen to get rate improvement, et cetera, not something our Management team has actually ever experienced, we'd love that. That would be great. But that's not what we require in order to actually improve the margins in the business, and that's really been part of the strategy of our multi-year period to invest in the business, so that we could, in fact, improve margins irrespective of the overall rate or exposure environment.

Last one just on the exchanges. How much capacity do you have on the exchange right now, without investing more in terms of the number of colored lives that you could put on the exchanges? Where do you expect to be at the end of next year, just given whatever investments you plan to make during the year? Thank you.

We have substantial capacity. Again our goal here is to serve clients in an effective way. First and foremost make it absolutely certain that the experience that our client has and their employees have is absolutely pristine. As we've said before, we've done that through the last two cycles and feel very good about that.

Now is the opportunity to continue to react and help our clients in a much broader more robust pipeline. We have the capacity to do that, and we'll update you when we get through the next sales cycle, that will be the second and third quarter. We have that behind us and we'll take you through what the overall picture looks like at that point in time, and then move forward from there. We've got a lot of capacity as we planned it out to help our clients succeed.

Thank you.

Last question comes from Mike Zaremski of Credit Suisse.

In terms of revenues in HR Solutions, consulting services slow down, outsourcing clearly picked up a lot. Should we be thinking about a shifting dynamic which is due to healthcare exchanges? Or are they independent of each other?

They are independent of each other. As we look at our consulting business, we'd say it grew 3% to the calendar year 2013 and we'd expect something similar for 2014. In terms of the Q4 numbers, we really had a very strong comparable in Q4 2012, as Greg mentioned. That really was what was happening there.

I'd add one other piece. As you think about the overall business, as I said, we feel very positive, very pleased on how our efforts on the exchange front are evolving. But within the context of broad-based Aon Hewitt and all the things we are doing there, we've made some tremendous investments on the talent solution side, and what we're doing to help clients think about really transitioning to the cloud-based approach on HR and really the idea of software-as-a-service, great for HR, tremendous investments.

On the retirement solution side, did a lot of work in the pension space, which is very interesting, very dynamic. A number of investments there really thinking about our delegated pension management services and what we can do and accomplish to help clients really think about overall, oversight management of their pension plans. And then certainly under the client contribution side, we've got a couple of efforts, something called DC Nexus and some savings you are going to hear about over time.

I want to emphasize the exchange story we believe is compelling, powerful, and emerging. It's really within the context, it's a small part of Aon Hewitt overall, in fact, we can continue to invest some in the bottom line in 2013. We hope that it will be slightly positive in 2014 from a bottom-line standpoint. But there's a lot going across Aon Hewitt we are very, very excited about, and a lot going on inside the consulting business we are very, very excited about in terms of some of the overall picture.

Okay. That's helpful. I realize it's a small piece of revenues, but operating income clearly was terrific in HR Solutions this quarter. Would you say a good portion of that was due to the healthcare exchange impact?

No, as I said before, if you think about what we said, we are going to be able to invest in the business and invest -- actually improve operating income mid-single digits, which is exactly what we did. It was actually negative from the exchange side for 2013 and we expect will be slightly positive for 2014.

The real operating leverage that comes through the exchanges shows up in 2015 and 2016, and as we continue to evaluate the pipeline and think the what really has been a tremendous set of conversation coming through there. Our view is that we will be in a very good place from an operating leverage standpoint in 2015 and 2016. I just would say again what Christa laid out for you, is that we are going to have greater than mid-single digits operating improvement growth in 2014.

Okay. Got it. Finally, for Christa, back to the tax rate. So is it long run the tax rate falls below you said 5 points? Is that below 24%, 23%? Is that how we should be thinking long-term?

No. No. No. I said when we guided 2012, we had a tax rate of 29%. We then filed a statement which basically said that our tax rate would be more than 500 basis points starting at 29%. We expect that to happen over time.

Got it. You got to 24% this quarter but we should be thinking to stay at this level will be done in the longer run? Okay. Thank you very much.

The thing I would say is quarterly tax rate numbers get impacted by certain things like discrete tax numbers, and the 25% for the full year is the rate I would look at for the full year.

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

Everyone, thanks very much for participating and look forward to our discussion next quarter. Thanks very much.

Thank you. That does conclude today's conference. You may disconnect at this time.