怡安集團 (AON) 2015 Q2 法說會逐字稿

Welcome to Aon PLC's second-quarter 2015 earnings conference call.

(Operator Instructions)

I would also like to remind all parties that this call is being recorded and that it is important to note that some of the comments in today's call may be constituted of certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated.

Information concerning risk factors that could cause such differences are described in the press release covering our second quarter 2000 press release, as well as having been posted on our website. Now it is my pleasure to turn the call over to Greg Case, President and CEO of Aon PLC.

Thanks very much. Good morning, everyone. Welcome to our second-quarter 2015 conference call. Joining me today is our CFO, Christa Davies. I would note that there are slides available on our website for you to follow along with our commentary today. Consistent with previous quarters, I would like to cover two areas before turning the call over to Christa for further financial review.

First is, our performance against key metrics we communicate to shareholders. Second is, overall organic growth performance including continued areas of strategic investment across Aon. On the first topic, our performance versus key metrics. Each quarter, we measure our performance against the key 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 second quarter, organic revenue growth was 2% overall with growth across both segments, highlighted by 4% growth in the Americas retail brokerage business. Operating margin increased 80 basis points reflecting strong operating performance and Risk Solutions. EPS increased 5% to $1.31 including an $0.08 unfavorable impact from foreign currency translation reflecting growth, operating improvement and effective capital management. Finally, free cash flow increased 2% to $223 million year to date, driven by a 10% increase in cash flow from operations partially offset by higher capital expenditures.

Turning to slide 4, on the second topic of growth and investment. I want to spend the next few minutes discussing the quarter for both of our segments. In Risk Solutions, organic revenue growth was 2% overall compared to 1% in the prior-year quarter, reflecting solid growth across retail brokerage partially offset by a modest decline in reinsurance.

As we've discussed previously, we're driving a set of initiatives and making strategic investments that are strengthening underlying performance and position our Risk Solutions segment for long-term growth and improved operating leverage, with management of our renewal book through Aon client promise and retention rates of more than 90% on average across retail brokerage. New business generation of more than $260 million across our retail business. 17 consecutive quarters of net new business trends in core treaty reinsurance.

An increased operating leverage from our investments in innovative technology and data and analytics including the global risk insight platform which now captures over 2.8 million trades and $135 billion of bound premium, with more than 40 carriers utilizing the platform today. Review, our reinsurer dashboard combined with strategic consulting to help reinsurers be more effective markets for receiving company clients. Our Aon brokerage initiative to better match client need with insurer appetite for risk and to identify structured portfolio solutions.

Finally, we're expanding our content and global footprint through tuck-in acquisitions that increase scale in emerging markets or expand capability. Reflecting on the individual businesses within Risk Solutions. In the Americas, organic revenue growth was 4% compared to 2% in the prior-year quarter. Exposures continue to be positive across the region while the impacts of pricing was modestly negative, resulting in continued stable market impact. We saw a strong growth across Latin America, reflecting both double-digit new business generation and strong management of the renewal book portfolio.

We also generated strong growth across to our Affinity business. In US retail, we saw solid new business generation with record retention of greater than 93% for the second consecutive quarter. In international, organic revenue growth was 2%. Exposures continued to be stable and the impact from pricing was modestly negative on average, driven by fragile market conditions in many countries across Europe and pressure in the Pacific region.

We saw strong growth across Asia, with double-digit growth in many countries including Hong Kong, China, Japan and Singapore. Results also reflect solid growth in New Zealand, driven by both new business generation and strong management of the renewal book portfolio. In Continental Europe, new business generation continued to be positive. With strong leadership across the region, we're well-positioned to benefit from potential improvements in the macroeconomic environment.

In reinsurance, organic revenue declined 1% compared to a decline of 4% in the prior-year quarter. Results reflect a significant unfavorable market impact in the quarter as excess capital in the space continues to pressure global treaty pricing. We saw a continued new business generation in treaty placements as clients take advantage of lower pricing by purchasing more coverage and strong growth in facultative placements partially offset by a decline in capital markets transactions. While the rate of price decline is decelerated compared to the previous year, a record amount of capital continues to place pressure on the market.

Finally, new opportunities for growth combined with industry leading data and analytics is positioning the business for a return to growth over the next 12 months. Overall, across Risk Solutions, we are on track for low to mid single-digit organic growth for the full year 2015 as we continue to drive new business generation, strong retention and take a unified approach to serving clients across the portfolio with industry leading data and analytics.

Turning to HR Solutions. Organic revenue growth was 2% similar to the prior-year quarter, with growth across both major businesses and in high-demand areas where we have invested in innovative solutions and client serving capability. These investments reflect Aon Hewitt's client leadership and in depth understanding and influence of market trends, including continued investment to strengthen our comprehensive portfolio of health solutions, covering the full spectrum of benefit strategies and funding choices from self-insured to fully insured. This includes our industry leading position in healthcare exchanges for active employees and retirees.

We look forward to updating you on our continued progress later this year. Solutions to de-risk pension plans and support for delegated investment solutions as clients manage risk against pension schemes that are frozen, largely under-funded and facing regulatory changes. Investment in software as a service model in our HR BPO business. Finally, we're expanding our international footprint to support a global workforce at the local level, with investments in key talent and capabilities across emerging markets.

Turning to individual businesses within HR Solutions. In consulting services, organic revenue growth was 3% compared to 1% in the prior-year quarter. We saw a continued growth in retirement consulting driven by a demand for delegated investment consulting services. Results also reflect solid growth in compensation consulting and modest growth in communications consulting.

In outsourcing, organic revenue growth was 3% similar to the prior-year quarter. We saw growth in HR BPO driven by new client wins and cloud based solutions. Results also reflect growth in benefits administration driven by demand for discretionary services. Overall, for HR Solutions, we are on track for mid single-digit organic growth for the full year 2015, driven by growth in high-demand areas where we've made investments, as well as leadership across our core businesses.

In summary, our industry leading platform of client serving capabilities across Risk and HR Solutions combined with investments in data and analytics continues to position the Firm for long-term organic growth and improved operating leverage. With that said, I'm now pleased to turn the call over to Christa for further financial review. Christa?

Thanks so much, Greg. Good morning, everyone. As Greg noted, our second-quarter results reflect double-digit adjusted EPS growth, when excluding the impact of FX. Driven by organic growth in both Risk and HR Solutions, strong operating margin improvement and effective capital management including the repurchase of approximately $300 million of ordinary shares in the quarter.

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 5% to $1.31 per share for the second quarter compared to $1.25 in the prior-year quarter. Certain items that were adjusted for in core EPS performance and highlighted in the schedules on page 12 of the press release include non-cash intangible asset amortization and legacy litigation expenses relating to events that primarily occurred 10 or more years ago.

Further, included in the results was an $0.08 per share unfavorable impact related to foreign currency translation due to the US dollar strengthening against most major currencies. Excluding the impact of foreign currency translation, our core earnings per share in the second quarter would have been $1.39, up 11% from the prior-year quarter. Going forward, if currency were to remain stable at today's rates, we would expect a similar impact in Q3 and a lesser impact in Q4 as we continue to work through unfavorable year-over-year headwinds.

Now let me talk about each of the segments on the next slide. In our Risk Solutions segment organic revenue growth was 2%. Operating margin increased 150 basis points to 24.2%. Operating income was roughly flat to the prior-year quarter. Operating income included a $26 million unfavorable impact from foreign currency translation. Excluding this impact, operating income increased 6% compared to the prior-year quarter. Strong operating margin improvement of 150 basis points reflects solid organic revenue growth, return on our investments in data and analytics across the portfolio and a 60 basis point favorable impact from foreign currency translation.

Excluding the favorable impact in foreign currency translation, underlying operating margin improved 90 basis points in the quarter. Overall in Q2, we delivered strong underlying operating performance in Risk Solutions despite continued headwinds from an unfavorable market impact in reinsurance, fragile market conditions in Europe and historically low interest rates. If interest rates were to rise, we believe we have significant leverage to improving interest rate environment, as every 100 basis point rise in global interest rates should result in approximately $45 million of investment income.

For the first six months, operating margin improved 50 basis points, with no material impact from foreign currency translation. This places us firmly on track for further margin expansion in 2015, towards our long-term target of 26%, driven by growth, return on investments and expense discipline as we optimize our global cost structure in areas such as IT, real estate and procurement.

Turning to the HR Solutions segment, organic revenue growth was 2%, operating margin was flat at 13.2% and operating income was also roughly flat to the prior-year quarter. Solid organic revenue growth, expense discipline and a 10 basis points favorable impact from foreign currency translation were offset by continued investments in support of future growth.

For the first six months, results reflect modestly better than expected performance. Combined with our outlook for seasonal strength in the second half of the year, we are well on track for improved operating income performance for the full year and further margin expansion towards our long-term target of 22%.

Now let me discuss a few the line items outside of the operating segments on slide 9. Unallocated expenses were flat at $41 million. Interest income increased $2 million to $4 million. Interest expense increased $3 million to $68 million, due to an increase in total debt outstanding. Other income of $1 million primarily includes net gains from certain long-term investments and the sale of certain businesses.

Going forward, we expect a run rate of approximately $45 million per quarter of unallocated expense, $2 million per quarter of interest income. Interest expense in the third quarter is expected to be approximately $72 million or modestly higher than our run rate due to the overlap of the $600 million of notes placed in May to replace the notes due in September. We would expect interest expense to decline to $68 million per quarter thereafter.

Turning to taxes, the adjusted effective tax rate on net income from continuing operations, excluding the applicable tax impact associate with expenses related to legacy litigation, increased to 18% compared to the prior-year quarter at 17.5%. The prior-year quarter was favorably impacted by certain discrete tax adjustments. Lastly, average diluted shares outstanding decreased to 286.7 million in the second quarter compared to 301.6 million in the prior-year quarter.

The Company repurchased 3 million Class A Ordinary Shares for approximately $300 million in the second quarter. The Company has $5.1 billion of remaining authorization under its share repurchase program. Actual shares outstanding on June 30 were 279.8 million. There are approximately 7 million additional dilutive equivalents. Estimated Q3 2015 beginning dilutive share count is approximately 287 million subject to share price movement, share issuance and share repurchase.

Now let me turn to the next slide to highlight our solid balance sheet and strong cash flow growth on slide 10. At June 30, 2015, cash and short-term investments were $851 million. Total debt outstanding increased to approximately $6.1 billion. Total debt to EBITDA on a GAAP basis increased to 2.5 times compared to 2.1 times at March 31, 2015.

Cash flow from operations increased 10% or $32 million to $365 million driven by a decline in pension contributions, restructuring and cash paid for taxes, partially offset by a significant increase in cash paid to settle legacy litigation. Free cash flow is defined by cash flow from operations less CapEx increased 2% or $5 million to $223 million reflecting higher cash flow from operations, partially offset by a $27 million increase in CapEx. The anticipated increase in capital expenditure is associated with investment in certain real estate projects as we continue to optimize our real estate portfolio globally.

Looking forward, we expect significant free cash flow growth in the second half of the year leading to double-digit growth in free cash flow for the full year 2015 including the legacy litigation impact. The increase in cash paid to settle legacy litigation in the quarter will provide a tailwind to free cash flow growth in 2016.

Turning to the next slide to discuss our significant financial flexibility and the opportunity to further increase cash flow generation. We value the firm based on free cash flow and allocate capital to maximize free cash flow returns. There are four primary areas that are expected to contribute to our goal of delivering $2.3 billion or more for the full year 2017.

From the graph in the presentation, based on current assumptions, we expect annual free cash flow to increase by approximately $230 million from year end 2014 to year end 2017, based only on a reduction in cash used for pensions, restructuring and capital expenditure. Combined with operating improvements in the business, lower cash tax payments and working capital improvements, we have line of sight to achieve our expectations for substantial cash flow generation.

Regarding our pension plans. We've taken significant steps to reduce volatility and liability as we've closed plans to new entrants and frozen plans from accruing additional benefits and continue to de-risk certain plan assets. We currently expect contributions to decline by roughly $96 million to $220 million in 2015 and continue to decline thereafter. These expectations assume no change in current interest rates. A rise in global interest rates could potentially decrease contributions further.

Regarding our restructuring program. Cash payments were $82 million in 2014. As all charges related to the restructuring program have now been incurred, we expect cash payments to decline by $49 million to approximately $33 million in 2015 and continue to decline each year thereafter. In summary, we delivered positive performance across each of our key metrics, overcoming a significant headwind from foreign currency translation. We delivered strong underlying earnings growth as we continue to manage expense and create greater operating leverage from our investment in data and analytics.

Combined with strong free cash flow growth in the second half and for the full year, we are firmly on track towards our goal of generating more than $2.3 billion of free cash flow for the full year 2017. With a strong balance sheet and significant financial flexibility, we've positioned the Firm for significant shareholder value creation in 2015 and beyond.

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

(Operator Instructions)

Adam Klauber, William Blair.

On HR Solutions, Christa, you mentioned that you expect solid margin expansion and growth in the income. Can we expect -- not exactly, but the range of incremental change we saw in 2014 to be roughly around the same in 2015 for both the margin and income?

We haven't given specific guidance on operating income growth for 2015. What we can say, Adam, is we believe we will deliver mid single-digit revenue growth, operating income growth and margin expansion for the full year. You've seen us do that in both 2013 and 2014 in HR Solutions. We're well on track to deliver that for 2015.

Okay. Then as far as health exchanges. The selling season isn't done yet, but can you comment on activity in selling season in 2015 versus 2014? Is activity around the same, better, or worse? Just as far as the flow of opportunities? Also how big of a deal is the Cadillac Tax in these -- in conversations this year?

Adam, start really with the overall topic here is around health solutions we think about what is out there. We continue to see strong interest across the board, whether they are exchange solutions or bundled solutions for that matter. This is really across all client segments, needs, et cetera. So from our standpoint, there's been a lot of interest; continues to be a lot of interest in the pipeline around these sets of discussions.

It really gets to your second part of your question around what is driving it. It's really demand. Overall, health continues to deteriorate a bit. The per unit cost to healthcare continues to go up. Against that, our clients are struggling to try to deliver for their employees in the best way they possibly can but also try to bend the cost curve a bit. The Cadillac Tax is out there on the horizon. One doesn't know exactly how it's going to get resolved, but it certainly represents another piece of potential risk and challenge for them.

So all these things are a bit of a catalyst to have clients really try to address these issues and try to understand how they can bring best solutions for it. From our standpoint, we administer health benefits for 10 million covered lives, 1.2 million of which are on the exchange. By the way, that is self-insured and fully insured. We see a lot of positive activity against that and expect that will continue into 2016, 2017 and 2018 as well.

Okay. Then finally, I think you mentioned that you expect strong free cash in the back half. Is it potentially, we'll see a corresponding pickup in share repurchase in the back half also?

Yes.

Okay. Thanks a lot.

Dave Styblo, Jefferies.

I want to start out -- just again focusing a little bit more on the second half. I know we just talked about HR Solutions and organic growth, mid single-digits there that applies an acceleration. Can you just parse back some more of the drivers there? Is it from exchange related activity? Or other things that you are seeing in the pipeline?

Since the comps were pretty tough year over year on that. Then also on the other side of the business in Risk Solutions, can you maybe just give us a little bit more of a range of how you are thinking about the organic growth? Especially, how reinsurance fits into that? I think I heard you say that you expect growth to improve but I wasn't really clear if that was more imminent or something a little bit longer term.

Sure. So, Dave, I will start on HR Solutions. Our HR Solutions business, the seasonality of that business is always second half weighted and will remain that way for the foreseeable future for us in both the consulting and the outsourcing businesses. So in the consulting business, you did see a change in patterning last year particularly around compensation consulting. So you will see that happen predominately in the second half of the year. Then obviously on the outsourcing side, our healthcare exchange business is a much more Q4 weighted activity.

So the patterning you saw in 2014 and 2013 will repeat in 2015, meaning the revenue growth is much more second half weighted. That is definitely is why we feel very good about the growth in the second half of the year. We can see that in our pipeline today. On the Risk side, I would say similarly, we feel really good about the risk growth. We are on track for low to mid single-digits in Risk Solutions over all. As Greg said, risk growth in the first half of 2015 was better than risk growth in the first half of 2014. So we are well on track to deliver great growth across Risk Solutions.

I wouldn't add much to that, Dave, other than if you think about the quarter as Christa was describing, we essentially -- it's another quarter of progress. Our view is, we're going to deliver exactly -- nothing has happened in the first half of the year that changes our view for the full year, so this is the low to mid single-digit range.

I would say from an Aon Benfield's standpoint, you'll note in my comments, I said, this is a sector that obviously has been under some pressure, given our -- frankly our tremendous position in it and the price pressure that's been on it. But we've talked about this segment returning to growth in 2016. We anticipate it's going to do that.

Also see a number of the investments we have made in the business to create operating leverage, in fact doing exactly that. So, we'd point to the 4% organic in the Americas. In particular, the US number around 93% retention for the second consecutive quarter. This is actually tremendous progress. We think that is going to continue. All these things serve to just underscore and increase our confidence and our ability to deliver on the growth targets we talked about at the beginning of the year.

Excellent, that's helpful. Then maybe just piggybacking off the risk conversation there. Maybe it is attributable to the higher retention as well as some of the programs that you've been going on and investing in. But the margins were up very nicely year over year, I think 150 basis points and 90 excluding FX.

Can you spec out anything unusual, one-timers, either last year to remind us or this year beside the core improvement that you are doing? On the core side, is that more of a function of the Aon broking initiative or the revenue engine to get a higher share of wallet? Or are there other contributors that are helping just strictly on the operating expense side?

The key message I think you started with is foremost here, which is we will continue to invest in the business, improve operating leverage and increase margins as a result of that. We're able to do that at each incremental level of growth. You are seeing us actually play that out. We'd highlighted -- by the way, this is about a year for us, it is not about a single quarter.

In the single quarter, 150 basis points is correct. But by they way, we'd back out all the FX pieces against it and say it is closer to 90 basis points for the quarter, but really 50 basis points for the first half. So our view is we're making good solid progress on margin improvement. We are going to continue to do that throughout the course of 2015. What this quarter did, was didn't change our expectation, just reinforced our ability to do that on our march toward 26%.

Okay. Then lastly, just on the free cash flow. You're obviously reaffirming that for 2017. That's in light of the FX headwinds and the challenging macro backdrop when you initially set the guidance. So I'm wondering relative to your initial expectations, have you had material upside to what you were originally thinking? I'm also wondering how bad conditions might need to get for you to fall short of that free cash flow goal? In other words, maybe can you give us a little bit more color about the assumption for organic growth, FX and margin expansion within that, the 2017.

Yes, certainly. We feel really confident about our ability to deliver on the $2.3 billion plus of free cash flow in calendar year 2017. There are really four big drivers of that: continued organic growth and margin expansion in the business; decline in cash contributions to pension restructuring and tax; then improvements in working capital.

We feel really good about the improvements we're making in the first half of 2015, with 2% growth in free cash flow. We are on track to do double-digit free cash flow growth in 2015, including the litigation settlements. We will have extremely strong cash flow growth in 2016 and 2017. So we feel really good about the path there.

Then in respect, if you think about the quarter -- the new news for the quarter is this continued positive progress on the cash generating capability, as Christa is describing. So overall top line revenue exactly where we thought it would be, same with margin. But the cash flow generating engine against all the headwinds you have highlighted, candidly continues to strengthen. We see that continuing into 2015 and in 2016 and 2017.

Okay. Thank you very much.

Sarah DeWitt, JPMorgan.

On the share buyback, how should we think about the pace of that for the rest of the year? Should the full year 2015 be lower than the full year 2014 given where we are running year to date?

Yes. Full year 2015 share repurchase should be lower than 2014, because as you'll recall, Sarah, there were two unusual sources of cash, which contributed to higher than normal share repurchase in 2014. The first was we had $300 million of excess cash on the balance sheet at year end 2013, which we used in share repurchase in the first quarter of 2014.

The second was, we increased leverage during the year by $1.1 billion. So share repurchase for the full year 2015 will be lower but, as I described earlier, I think our cash flow is seasonally higher in the second half of any calendar year and therefore we expect stronger share repurchases in the second half of the year.

Okay, great. Then on the private health exchanges, could you talk a little bit qualitatively how the selling season is going? It sounds like we're hearing from others that may be some large employers might be deferring? Or you might be seeing more adoption on self-insured exchanges versus fully insured? So if you could talk about any of those trends that would be helpful.

We'd say overall, Sarah, as I had mentioned before, really for us this is about a competitive set of health solutions. Those conversations, be they fully insured exchanges, self-insured exchanges, traditional self-insured bundles, the intensity of those discussions has remained very, very strong and continue into 2015 and we anticipate into 2016 and 2017. The pipeline continues to be also quite strong across the board.

But again we're building a long-term platform here. For us it is not -- it's even not as much about the selling season as it was before, because we're seeing more clients talk about off cycle adoption and the different solutions. What the clients are looking for is a way, a solution to try to manage against what is an increasing level of costs and a set of promises they've made to employees that they really want to keep. We're trying to help them do that. So, the intensity of those conversations and the opportunity candidly for us to help them solve and address those issues continues to be very strong.

Okay. Great, thank you.

Elyse Greenspan, Wells Fargo.

My first question going back to the HR Solutions segment, through the first half of the year the earnings in that segment seem to be trending better than you planned. Was there anything seasonal or one-off in the Q2? Then does that change your outlook for where you were thinking about that business at the start of the year, maybe expecting stronger growth in the second half?

Yes, great question, Elyse. I think we had originally guided to down in operating income in the first half of the year and up in the second half of the year for strong operating income growth for the full year 2015. The first half of the year was slightly better than our expectations. I think we are still on track for exactly where we guided for the full year. So I wouldn't change full-year guidance at all. I think it was just slightly better. I wouldn't point to any significant items, there was a range of small things that were slightly better than we expected.

Okay. Then on the tax rate, the adjusted rate was about 18% in the quarter. When we think -- sequentially it was down from that 19% that you guys have pointed to. In terms of modeling for the tax rate going forward, would you change from the 19%? Or are you going to lower that slightly in the quarter?

Great question, Elyse. Our ongoing operational rate remains at 19%, subject to discrete tax adjustments. We did have some positive discrete tax adjustments in Q2, which made the rate lower than that 19% guidance. But that is exactly where we remain.

Okay. Then back on Risk Solutions, in terms of you guys pointed to what seemed like a little bit of improvement in the organic revenue growth in the back half of the year. Since you did say reinsurance would most likely decline until we hit 2016, what type of improvement are you expecting on in the retail from the about 2% growth we've seen in the first half of the year?

Elyse, we're still similar -- it is similar to the HR Solutions story. We're exactly in the same place around an expectation for the year around low to mid single-digit organic growth on the risk side. Again, what we said, with this quarter it would just reinforce our confidence in the ability to achieve that. Then I pointed at the longer term trends on the reinsurance side, where we'll really see this business returning to growth in 2016. But our 2015 expectations remain exactly the same. Again, with the new news of the quarter being just a reinforcement of the cash generating engine of Aon and how it is evolving.

Okay. Then lastly on the private healthcare exchanges, we've seen an acquisition announced recently between Willis and Towers Watson. Do you expect there to be any impact on what you're doing on the private healthcare exchange fund from those two companies getting together?

I would say from our standpoint, if you think about the overall events -- recent events really across the board not just in our space but in the markets as well, Canada, we see them as reinforcing and in many respects making more relevant the strategy we put in place. We've been pursuing really for the last 10 years -- if you think about it, industry consolidation, M&A, the risk market, the health markets, consolidation or intermediaries.

As well as the challenges frankly, our clients are facing in things like cyber globalization. All these things have puts and takes, no doubt about it. But when you put them together, the overall sum in our view, they reinforce our strategy to be the preeminent Firm focused on risk and people. On the consolidated intermediaries from our standpoint, highlights and recognition by other players in our space that -- they're seeing exactly today what we saw 10-years ago.

We've been investing behind it for the last decade. We believe the trends are real. They create great opportunities for all of us. On the consolidating market side, that's out there both on the health and the risk side, we see there's great opportunities to bring better and more relevant solutions to our clients. In many respects, we see change is opportunity. We're very well-positioned to take advantage of it.

Okay. Thank you very much.

Brian Meredith, UBS.

A couple quick questions here for you all. The first one, Christa, the cash impact of the litigation charge in the quarter, was it the same as the earnings impact?

Not exactly. There are some timing elements of that. So I think the cash impact -- I think about over the course of the full year. You've got to obviously tax effect the expenses that we've got there.

Any guidance just so I know what the impact to free cash flow was in the quarter? Just for modeling purposes.

Yes. The way I think about it is, for the full year just use the after-tax impact of the costs.

For the full year. Okay. Great. Then the second question, on the exchanges, what is the consolidation we're seeing in the healthcare insurance industry mean for your exchange? I know because a big part of it is the competition and then lowering the prices.

Brian, for our standpoint, as I said -- just alluded to, for us, the capability on the market side, the carrier side, creates greater opportunity that we can bring on behalf of our clients. I would highlight on the active side, we've got 30 national regional carriers in the mix on the exchange side. 90 plus carriers in the mix on the retiree side. So for us, it is not about that individual level of competition. We are creating that. That's going to be there.

It is really more around fundamental capability and what these institutions bring to the table. We anticipate it is going to be stronger. To the extent there are three on the health side with greater than $100 billion plus, I'm assuming all those go through in the way planned. I'm sure they're going to be competing very, very strongly with greater capability. We think that's going to bode well for our clients. Again, change and movement in the market actually benefits us tremendously if we're capable of bringing good solutions to our clients.

Okay. Then, Greg, the last question, I'm just curious, there's always obviously competition for good talent within the insurance brokerage industry. Are you seeing any pick-up of late? We've seen some fairly significant movements in the reinsurance brokerage area and some other companies talking about trying to invest in the business. Is there any pick-up right now, do you think in the competition for talent?

Brian, I really don't see it. We always want to be the best place possible where someone can come and develop as a professional, support colleagues and serve clients. We've been talking about this for a long, long time. It's been part of our strategy for the last 10 years. We've seen opportunity over that entire period of time. Sometimes it intensifies, sometimes it wanes a bit. But it has really been a constant. The M&A activity obviously creates different opportunities. But I wouldn't over play it. For us, we're going to go after the best talents in the world to support our clients. That's not going to change for Aon.

Great. Thanks for the answers.

Meyer Shields, KBW.

Greg, you talked about tuck-in acquisitions being done. Can you give us an update in terms of whether the pricing for the acquisitions that you're looking, whether that pricing is changing at all?

I would say there for us. The overall marketplace continues to be very, very competitive. There's a lot of capital out there. Looking at different opportunities for us, as Christa will describe, we remain constant here too. Our view is around return on invested capital. We're maniacally focused on bringing capability into Aon in a way that improves and then strengthens our return on invested capital. Christa talked about what we're doing with buyback. That is always a benchmark for us.

We've got to be able to beat that from a return on invested capital standpoint. That is how we think about our acquisitions. We see a very competitive market. But we also see opportunity, lots of different firms want to be part of a firm that can actually truly change the course a clients sub-performance and do this on a global basis. This is, in many respects, again back to the destination of choice for talent, is back to Brian's question a little bit. We can be a very attractive place for those types of colleagues and for those types of firms. We're seeing that as well.

Okay. Thanks. Then real quickly in the slides, the uses of cash flow, it no longer refers to 2018. I was hoping you could take us through why -- how that decision was made?

I think it's really just focused on 2017 because we've set a very specific goal of $2.3 billion of free cash flow. So I think it was just more around reinforcing that, Meyer.

Okay. So no change to the expectation beyond.

No.

Okay. Thanks.

Kai Pan, Morgan Stanley.

First question to follow-up on the mergers and acquisitions. You have been, say, five years since your large acquisition of Hewitt back in 2010. I just wonder, are you interested or open to any big or transformative transactions that could enhance your franchise?

Kai, for us, and we -- it has been the same strategy and approach, for any firm in the world focused on risk and people. We talked about the categories of that around risk, retirement, health, talent, capital, et cetera. It's been a strategy we've worked on very, very hard. We continue to add content capability around it, both in organic investment which you see us make quite substantially, exchanges, risk insight platform, review, et cetera.

Then we add content and capability in the form of M&A, when they can actually help us strengthen that platform. By the way, back to the question before around it has got to be -- it's got to meet our return on invested capital requirements. So you'll see us, kind of the $200 million to $400 million or $500 million a year bringing in capability like that around the world. But we really like the platform we have got at this point. That is what we're focused on.

That's great. Then in the past, I remember you talked about your private exchange platform that -- basically, you said multi-carrier and fully insured. But in the commentary, it looks like you also mentioned about self-insured. Are you open -- basically is there and change your platform is lastly -- is regarding either a self-insured or fully insured?

Yes. Kai, there's really no change at all here. Again step back, this has really always been about the category of health for us. In that category, we administer benefits for 10 million covered lives. So virtually more than anybody else in the world. It was within that context that we brought about a fully insured multi-carrier exchange.

But we also have a full range and complement of self-insured exchanges and a full range and complement of bundled solutions for large market, middle market and small commercial companies. So for us, it's about a range of health solutions, fully insured being one innovation in the context of that. That is really what has been the focal point from the beginning.

Great. Last question, could you talk more about your investments in the so-called cloud based solutions in outsourcing business? What is the potential growth on maturity there?

You saw that obviously, Kai -- during the quarter, we saw great growth in our cloud based solutions in HR Solutions. As you know, we invested in two of the largest workday implementation firms in the world, OmniPoint in 2012 in the US and then the largest EMEA implementation firm called Cloud in Q1 this year.

That is enabling us to foster with that growth. It's really addressing the client need around getting better data on their people and driving analytics to help them manage their -- one of their most important assets, their people much more efficiently and much more effectively. We're seeing clients increasingly choose cloud based solutions, which is driving substantial growth for us.

Are those better margin businesses than the traditional base, say, software on the premise business?

Yes. One of the efficiencies of that business model is it is much better margin for the clients. It's better margin for us too.

Okay. Thank you so much for all the answers.

Michael Nannizzi, Goldman Sachs.

Greg, just one clarification, you mentioned in reinsurance that data and analytics would help reignite growth next year. Can you just talk a little bit about what you mean underneath that? What opportunities you see for you to be able to leverage your analytics in order to reassert growth despite market conditions?

Yes. So a couple things going on, Mike, just to be aware of. Again, if you think about where we are in Aon Benfield. First, you understand the position having -- we have a very privileged position that our colleagues have built over time. Number one in treaty, substantially number one in facultative, number one in capital markets and when we do there in alternative capital. Against that, obviously, we have addressed some substantial headwinds in the treaty world, where particularly in CAT, it's under pressure. By the way, that's when the prices have been under the most pressure.

It is against that, before we get to any analytics that the team with what the capability with got, has been positive for 17 consecutive quarters on net new business. So the underlying health of this business has actually been strengthening over time. Sp start with that. As the price declines begin to decelerate, which they have, still there, still substantial, that actually bodes very well for what the underlying impact's going to be long term. Now, equally or more exciting is really what we're doing in terms of finding new markets and new ideas to deploy capital.

This is really were some of our analytics comes in. For example, we have done some very innovative work in the mortgage arena, in which we brought insurance capital -- or reinsurance capital into the mortgage world, that has never been done before. Created some price transparency and some value from that standpoint that just -- it's really a net new area in many respects, by the way. The demand growth by the way is about $6 billion in limit a year, which frankly we haven't seen anything like in the industry since the 1990s.

So for us, we're doing things that actually create net new opportunity. Then much like we did with risk insight platform in the primary space, we've done something called Review which actually helps insurers and reinsurers actually operate much better in the marketplace and understand where they can apply their capital and create better returns.

So for us, it's really threefold. One is just the basic core business and what we are doing to win new clients. Then it is creating new markets, the example I just gave you in mortgage. Then it is actually helping our clients actually perform better on the reinsurance side, using data and analytics like Review. A range of things we're doing here that we think bode well for the future.

I appreciate that. It's very helpful actually. Thank you for that. Then on the exchanges -- maybe I just don't remember, but I had thought that most of the employers that you guys have added -- the large employers you had added had been on a fully insured basis. I wasn't aware that you had begun offering a self-insured option. So I am just curious, have you been adding employers to that platform? If so, Just if we can get some idea of where you are in terms of building out the scale there? Thanks.

For us, Mike, it is always been about a range of health solutions. The confusion comes about because we believe we brought forward the first ever fully insured multi-carrier exchange for big companies. So we are the only ones adding to that because we really didn't -- no one had a solution for a period of time. In fact, many actually were pushing against the whole exchange idea. Then we started to do that, everyone loves the exchange idea. So there is a bit of semantics back and forth.

For us it has been about a range of solutions both fully insured, which we're adding clients to -- depending on funding mechanisms some like to create the choice and to create a different funding mechanism around self-insured, we're happy to do that too. Then others would say, no, let's stay with the traditional bundled solution. Then I'd remind you again, that is 10 million covered lives for us. So, the most of anybody. So that's what we've been doing forever. So for us, it's about a range of solutions. One piece of which has been an important new innovation called fully insured multi-carrier.

Got it. So, the most recent update you gave us on the 700,000 potential lives on active exchanges, So that split up between fully insured and self-insured?

No. That -- in this case, that was largely that we wanted to try to highlight the fully insured piece across the board. That was again 1.2 million lives across the exchanges. On the active side, approaching 1 million lives, 33 clients et cetera. That was really fully insured multi-carrier so we could highlight that. In the fullness of time, we're going to talk about a range of solutions beyond just fully insured. But again, that was the innovation in the marketplace that no one else had seen. Which is why we wanted to highlight it put a spotlight on it so you could see what it looked like.

Got it. Makes sense. Then just last one if I could for Christa. The cash flow elements, looks like, if you guys hit your margin targets that you have outlined in the slide, it seems pretty clear that you can get to that cash flow projection that you have talked about in 2017. Is that what we should be thinking about? If not, can you give us some idea in terms of magnitude, order of magnitude, what is going to drive us getting from cash flow generation at this point to the sort of numbers, the $2.3 billion that you guys are talking about. Thank you for all the answers. I appreciate it.

Michael, I think as we think about getting to the $2.3 billion in free cash flow by 2017, we have four big drivers of getting there. The first is, the revenue growth and margin expansion. The second is, the decreased use of cash on pension and restructuring. The third is, decreased use of cash on taxes. The last is, improved working capital. I think it is -- there are four big drivers that we've outlined in the presentation that really get us to that $2.3 billion level. I guess what I would say on margins is that we're going to continue to progress in margin expansion in both segments, as you've seen historically. So we will continue to make progress.

Do you expect pensions and taxes to continue to contribute? Or should we expect that the -- it looks like a lot of that may be behind us or maybe a little bit still left? But -- so is it margin and then working capital that is going to get us from where we are to there? Or is it fair to think about it that way? Or is there another --

I would say that pension and restructuring, we still have further upside. You can see that in the slides in the presentation. It is about $230 million, I think, of cash upside between year end 2014 and year end 2017 on just pension and restructuring -- pension restructuring and CapEx actually. There's definitely upside there. I think as we finish 2015, our cash tax effective rate will have matched our effective tax rate. So you should really say that we have a level set on cash taxes at that point. So that is really where we are on cash taxes. Then from there on the primary drivers of free cash flow growth will be revenue growth and margin expansion and working capital improvements.

Okay, great. Thank you so much.

Paul Newsome, Sandler O'Neill.

I just want a follow-up question on some of the M&A take that you have. In the reinsurance market in particular, do you think that there will be a difference in demand given what is happening with the consolidation?

It will ebb and flow there, Paul. In the short-term, you can understand how people have different views on demand but those will be phased in over time. Fundamental though is asking the question, what is the return on invested capital of these institutions? Can we bring solutions to them to help improve that? For us that has always been the thesis. That is why we love this space so much. Our view is, there are many, many companies here. They have tremendous opportunity to improve return on invested capital.

Whether we're bringing them solutions that is basically treaty placements, facultative placement, alternative capital or frankly, more and more back to the question from earlier, data and analytics to help them understand their business so they can make better decisions to improve operating performance, strengthen their balance sheet or reduce their volatility. All these things for us make this highly attractive in an area of high demand. All the M&A does is create change, as we've described before, which, as I said before, puts and takes but net-net, we believe bodes very well for someone with real capability and who has made substantial investment over time try to come up with solutions, a la Aon Benfield.

Fair enough. Do you think there be any change as well in the relationship between carriers and brokers at the high end that you are it?

Say a little more about that, what are you thinking about?

Well, I am just curious, historically, the brokers have had frankly, the lion's share of the control over the negotiations between carriers and things like relationships, commissions, what not. But we are seeing some very large consolidation at the high end. I'm just curious if you see the carriers in the future trying to demand more if their peer [wrote them].

We don't see much change. Carriers, by the way, have always been demanding. We'd expect them to be and we want them to be on behalf of -- they're actually trying to protect and support their shareholders. Our mission and our maniacal focus is on our clients. So we're always looking for better solutions on behalf of our clients. That's not going to change in any way, shape or form. We're going to continue to try to strengthen our capability to deliver that.

As I've said before, we actually like the idea of some of these larger institutions with greater capability. I love the idea of sitting across the table from a Fortune 10 company and talking about bringing greater than $1 billion limits on behalf of Cyber. What a great opportunity that would be. Or greater limits than that. So for us, we see tremendous opportunity here. Think it's going to continue to evolve in this direction and consolidation will have, as I said before, some puts and takes but net net we think very positive.

Thank you. Congratulations in the quarter.

Jay Cohen, Bank of America.

Question on the international side, overall international growth was okay but not terribly good. You highlighted a couple of areas where you were growing but there must be some areas that are holding back that growth? What are those areas that are a bit more challenged now, Greg?

Jay, from our standpoint, as we've said before, really if you think about what we produced and outcomes on the Risk Solutions side overall, I have been really in the face of some headwinds as we talked about in Aon Benfield and in International. We've got some great spots. I just grabbed the four really across Asia. I highlighted them on my comments, I won't repeat them now. But really a number of different places. But if you think about Europe -- Europe really is -- you've got a lot of challenges in specific countries across Europe.

The good news is we've got incredibly strong privileged positions that go back decades, more than hundreds of years, quite literally. We believe we're very well positioned as the economics, the economy changes over time. But in the near-term, they represent some challenges. That is really been the headwinds.

Got it. Makes sense. Thanks, Greg.

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

I just want to say thanks to everyone for joining the call. I look forward to our discussion next quarter. Thanks very much.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.