怡安集團 (AON) 2015 Q4 法說會逐字稿

Good morning and thank you for holding. Welcome to the Aon plc's fourth-quarter and full-year 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 constitute certain statements that are forward looking in nature, as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our fourth-quarter and full-year 2015 results, 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.

Thank you, and good morning, everyone. Welcome to our fourth-quarter and full-year 2015 conference call. Joining me here 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. And consistent with previous quarters I'd 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 the overall organic growth performance including continued areas of the 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 fourth quarter, organic revenue growth was 5%, with solid growth across all major businesses, highlighted by 6% growth in each of our retail brokerage businesses. Operating margin increased 110 basis points reflecting strong operating performance in both segments. And EPS increased 20% to $2.27, reflecting strong operating performance and effective capital management.

If we turn to the full year, organic revenue growth was 3% overall, reflecting solid growth across both Risk and HR solutions, despite pricing pressure and overall economic uncertainty. Operating margin increased 50 basis points, reflecting strong operating performance and record margin results in both segments.

EPS increased 8% to $6.18 overcoming substantial foreign currency headwinds. And finally, free cash flow increased 10% to a record $1.7 billion.

Overall, our results reflect both the strong performance in the quarter and for the full year. In a year of substantial volatility driven by macroeconomic factors and industry headwinds, we continue to invest heavily in client-serving capabilities across our industry-leading platform. These investments, combined with the leadership of our colleagues around the globe, contributed to strong organic growth in both segments to close the year, record operating margin in both segments, record free cash flow and a return of $1.9 billion of capital to shareholders.

Turning to slide 4, on the second topic of growth and investment, I want to spend the next few minutes discussing the quarter from both of our segments. In risk solutions, organic revenue growth was 5% compared to 3% in the prior-year quarter, driven by growth across all businesses, and reflecting a level of quarterly organic growth not seen since the second quarter of 2007.

As we 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 the 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 $330 million across our retail business with record new business in US retails. And 19 consecutive quarters of positive net new business in core-Treaty reinsurance. Increased operating leverage from our investments in innovative technology and data and analytics, including the global-risk insight platform which now captures over 3 million trades and $160 billion of bound premium, with approximately 40 carriers utilizing the platform today; ReView, our reinsure dashboard, combined with strategic consulting to help reinsurers be more effective in markets for seeding Company clients. And our Aon broking initiative to better match client needs with insurer appetite for risk and to identify structured portfolio solutions.

A great example of our innovation and data analytics recently was the launch of Aon Client Treaty, the largest ever underwritten portfolio of risk in the history of Lloyd's, an undertaking of data and analytics looking at 64,000 policy transactions, 120 different classes of business, and over 157 countries and territories. We've received terrific feedback from clients, bound coverage in every major geography, and have generated incremental new business since the launch on January 1. And, 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 6% against a strong comparable in the prior-year quarter driven by a diversified portfolio, reflecting industry expertise, product and service capability. Exposures continue to be positive across the region, while the impact from pricing was modestly negative, resulting in stable market impact overall.

We saw growth across all regions, US retail, Canada and Latin America, including growth across all businesses, property casualty, health and benefits, and in Affinity, where 16 of 18 underlying product lines were delivering growth In US retail, growth was driven by solid retention rates and record new business generation in areas such as P&C, D&O and cyber, while strong management of the renewal-book portfolio drove growth in Latin America.

In international, organic revenue growth was 6% compared to flat in the prior-year quarter. Exposures continue to be stable and the impact from pricing was modestly negative on average, driven by fragile market conditions in many countries across Europe and the continued pressure in the Pacific region.

In Continental Europe we saw solid growth driven by management of the renewal-book portfolio, reflecting strong leadership across the region. This positions us well to benefit from potential improvements in the macroeconomic environment.

We saw continued strength in New Zealand while Australia showed modest growth. Results also reflect solid growth across Asia where many markets grew double digits including Taiwan, Thailand and Singapore.

In reinsurance, organic revenue growth was 2%, a strong performance against the tough comparison in the prior-year quarter. Results in the quarter primarily reflect positive growth in Treaty globally, driven by an increase in seeding demand, as well as growth in new products such as US mortgage and Review.

Across our portfolio, we saw a record level of new business generation in the quarter. While excess capital continues to place pressure in the market, the rate of price decline continues to moderate. Against that price measure, clients are buying more and capital is being deployed to new markets. New opportunities for growth, combined with industry leading data and analytics, has positioned our reinsurance business for a return to modest growth in 2016.

Overall, across risk solutions, we delivered our strongest quarterly rate of organic growth for the year, driven by record new business generation, strong retention rates and returns on our investments in industry-leading data and analytics. Despite fragile macroeconomic conditions and soft pricing in certain areas, we fully anticipate a continuation of low- to mid-single-digit organic growth in 2016.

Turning to HR Solutions, organic revenue growth was 4% with solid growth across both major businesses and in high demand areas where we've 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, as clients manage risk against pension schemes that are frozen, largely underfunded and facing regulatory changes, solutions to derisk pension plans and support for delegated investment solutions, a strong area of growth where assets under management have grown from $10 billion to roughly $75 billion in five years; continued investment to strengthen our industry-leading portfolio of health solutions covering the full range of benefit strategies, client size and funding choices.

Across Aon's suite of private health exchanges we enrolled roughly 1.4 million lives across 150 clients in 2015 compared to roughly 1.2 million enrolled lives across 100 clients in 2014, reflecting solid double-digit growth. Participant satisfaction was strong as 92% of individuals on the retiree exchange were satisfied with their advisor, while 88% on the active exchange liked being able to choose from multiple carriers.

Our solutions for clients continue to bend the cost curve by 150 to 200 basis points on average over a multi-year period, with more than a quarter of returning clients seeing a year-over-year decrease.

We feel good about the pipeline and our ability to drive greater scale and growth in 2016. We're also investing in software-as-a-service models in our HR BPO business, where growth in new clients and conversations with existing clients is driving strong demand, as well as the expansion of our capabilities to include financial implementations. And, finally, we're investing in our talent rewards business as we are seeing strong demand for data analytics to support increasing organizational change.

Turning to the individual businesses within HR Solutions. In consulting services organic revenue growth was 4%, overcoming a tough comparable in the prior year that included project work relating to the HAFTA bill. Results in the quarter reflect continued growth in retirement consulting, primarily driven by demand for delegating investment consulting solutions.

We also saw continued growth in compensation consulting driven by record growth in participation for survey work as companies require a benchmarking and assistance with plan designs to address retention and ways to compete more effectively with incentive strategies. In outsourcing, organic revenue growth was 4%, as well, driven by growth across all major businesses. We saw growth in benefits administration driven primarily by an increase in project-related work. Results reflect in HR BPO driven by new client wins in cloud-based solutions. And we saw solid growth in healthcare exchanges driven by an increase in the number of enrollments across the platform.

Overall, across HR Solutions, client needs are growing in both size and complexity across retirement and health. Our results reflect a solid finish to the year with growth across all major businesses, including strong growth in areas where we've been investing to continue to deliver sustainable long-term growth.

In summary, despite short-term headwinds from both a macroeconomic and industry pricing standpoint, our results for both the quarter and the year finish on a high note. We delivered solid organic growth across both segments and strengthened our operational performance, driven by our industry-leading platform of client-serving capabilities and investments in data and analytics.

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

Thanks so much, Greg. And good morning, everyone. As Greg noted, our industry-leading franchise closed the year with a strong performance despite both macroeconomic and industry specific headwinds. Our results in the quarter reflect solid organic growth and record operating margin performance in Risk and HR Solutions, record free cash flow generation and effective capital management, highlighted by the repurchase of approximately 400 million of ordinary shares in the quarter. We returned roughly $1.9 billion of capital to shareholders in 2015.

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 20% to $2.27 per share for the fourth quarter compared to $1.89 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.

Further, included in the results was a $0.10 per share unfavorable impact related to foreign currency translations due to the US dollar strengthening against most major currencies. Excluding the impact of foreign currency EPS grew 25% for the fourth quarter and 15% for the full year, in line with our compounded annual growth rate of 15% for the last 10 years. Another year of outstanding performance reflecting the strength of our industry-leading franchise and focus on shareholder value creation.

Going forward, if currency were to remain stable at today's rates we would expect substantially less of a headwind, with a estimated unfavorable impact of roughly $0.10 for 2016 compared to $0.41 of impact for 2015. We would expect the majority of this impact to be weighted towards the first half of 2016, more so 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 5%, operating margin increased 100 basis points to 25.7%, and operating income increased 2% compared to the prior-year quarter. Operating income included a $27 million unfavorable impact from foreign currency translation. Excluding this impact, underlying operating income increased 7% versus the prior-year quarter.

Operating margin improvement of 100 basis points includes a 30 basis point favorable impact from foreign currency translation. Excluding the impact from foreign currency, underlying operating margin improved 70 basis points in the quarter. Our fourth-quarter performance reflects solid organic growth performance and improved returns on our investments in data and analytics across our portfolio.

For 2015, risk solutions operating income decreased 2%, which includes a $128 million unfavorable impact from foreign currency translation. Excluding this impact underlying operating income increased 5% versus the prior year.

Operating margin increased 70 basis points to 23.6%, including a 20 basis point favorable impact from foreign currency translation. Excluding the impact from foreign currency, underlying operating margin increased 50 basis points in the year.

We delivered strong operational improvement in 2015 with record operating margins despite significant headwinds from an unfavorable market impact in reinsurance and fragile macroeconomic conditions. This level of performance reflects strong EBITDA generation and increased operating leverage in the business, as well as expense discipline as we optimize our global cost structure.

We expect continued improvement in 2016 and are firmly on track with our long-term target of 26%. In addition, if short-term interest rates continue 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.

Turning to the HR Solutions segment, organic revenue growth was 4%, operating margin increased 270 basis points to 26.2%, and operating income increased 14% compared to the prior-year quarter. Operating income included a $6 million unfavorable impact from foreign currency translation. In addition, there are approximately $12 million or minus 90 basis points of transaction-related and portfolio-repositioning costs incurred in the quarter as we continue to drive improved return on capital.

The gain related to the sale of our absence management business was recorded in other income. Results were driven by organic growth, expense discipline and improved returns on investment including healthcare exchanges which delivered modest profitability in 2015.

For the full year, operating income increased 7% including a $20 million unfavorable impact from foreign currency translation. Excluding this impact underlying operating income increased 10% compared to the prior year, and operating margins increased 100 basis points to a record 18.1%. This level of performance demonstrates strong improvement over the prior year, reflecting solid financial results in our core business, as well as improved profitability in the areas we've been investing for long-term growth, including delegated-investment consulting, cloud-based solutions in HR BPO, and healthcare exchanges.

Looking forward, we expect continued operational improvement in 2016 towards our long-term target of 22%, with quarterly patterning of operating income results in HR Solutions similar to 2015. More specifically, down in the first half, more so in Q1, and up in the second half, most notably Q4.

Now let me discuss a few of the line items outside of the operating segments, on slide 9. Unallocated expenses increased $17 million to $61 million due to the timing of certain employee incentives and employee benefit-related expenses, as well as certain investments in shared services. Interest income was $4 million compared to $3 million in the prior-year quarter. Interest expense was $68 million, in line with quarterly guidance.

Other income of $49 million primarily includes a gain on the sale of our absence management business in outsourcing in HR Solutions. The sale continues to reflect our efforts to drive improved return on capital. Going forward we expect a run rate of approximately $45 million per quarter of unallocated expense, $3 million per quarter of interest income and $68 million of interest expense.

Turning to taxes, the adjusted effective tax rate on net income from continuing operations, excluding the applicable tax impact associated with expenses related to legacy litigation in Q2, decreased to 17.9% compared to the prior-year quarter at 19.6% due to the favorable impact of certain discrete tax adjustments. Our estimate of the underlying operating tax rate remains at 19%.

Lastly, average diluted shares outstanding decreased 5% to 279.3 million in the fourth quarter compared to 293.4 million in the prior-year quarter as we effectively allocate capital and manage dilution. The Company repurchased 4.3 million Class-A ordinary shares for approximately $400 million in the fourth quarter. The Company has $4.1 billion of remaining authorization under its share repurchase program.

Actual shares outstanding on December 31 were 269.8 million, and there are approximately 6 million additional dilutive equivalents. Estimated Q1 2016 beginning dilutive share count is approximately 276 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 December 31, 2015 cash and short-term investments was $740 million. Total debt outstanding was approximately $5.7 billion and total debt to EBITDA on a GAAP basis was 2.3 times.

Cash flow from operations for the year increased 11% or $197 million to a record $2 billion, driven by a decline in pension contributions, restructuring-related payments, cash paid for taxes, and working capital improvements, partially offset by $137 million in cash paid to settle legacy litigation and strong organic growth performance in the fourth quarter. Free cash flow, as defined by cash flow from operations less CapEx, increased 10% or $163 million to a record $1.7 billion, reflecting strong growth in cash flow from operations, partially offset by a $34 million increase in CapEx. The increase in CapEx in 2015 was primarily related to completed investments in certain projects to optimize our global real estate portfolio.

As we noted in our press release and related presentation today, during the quarter, for the years ended December 31, 2015 and 2014, we reclassified certain cash flows related to shares withheld for taxes from cash flow from operations to cash flow from financing. Shares withheld for taxes reflects the choice of colleagues upon vesting to choose growth or net shares to satisfy their withholding requirements. As nearly all colleagues choose to receive net shares, the Company then withholds an applicable amount of shares to cover withholding amounts, in effect creating a share repurchase-like transaction.

We believe the reclassification of shares withheld for taxes, the cash from financing activities provides greater transparency to the cash flow production from operating results, and aligns more closely with the accounting treatment of comparable peers. While the reclassification has no actual cash impact on the cash-flow statement, as a result of a reclassification we are increasing our near-term free cash-flow goal from $2.3 billion to $2.4 billion for the full-year 2017.

Turning to the next slide to discuss our significantly increasing free cash-flow generation, we value the Firm based on free cash flow and allocate capital to maximize free cash-flow returns. Free cash flow of $2.4 billion is not our end goal, as further long-term sustainable free cash flow will be driven by continued operating-income growth and additional working capital initiatives beyond 2017. There are four primary areas that are expected to contribute to our goal of delivering $2.4 billion or more for the full-year 2017.

The first is continued operational performance driven by organic revenue growth and margin expansion. The second is working capital improvements, as we focus on closing the gap between receivables and payables. The third is declining uses of cash of pension contributions, CapEx, and restructuring, which will free up more than $90 million of annual free cash flow between the end of 2015 and 2017. And, fourth, lower cash-tax payments reflecting a lower effective tax rate. Lastly, I would note that during 2015, we paid $137 million of cash to settle legacy litigation which we would expect to provide a tailwind to free cash-flow growth in 2016.

Turning to our pension plans, we have taken significant steps to reduce volatility and liability as we've closed plans' new entrants, frozen plans from accruing additional benefits, and continued to derisk certain plan assets. Based on 12/31/2015 actuarial assumptions, reported liabilities on a GAAP basis decreased to $1.8 billion at year-end 2015, reflecting a 94% funded status, compared to $2.1 billion at year-end 2014, reflecting a 90% funded status.

Not reflected in those amounts, however, are $1 billion of overfunded pension plans that are included in non-current assets on the balance sheet. Considered together, our net unfunded obligations are approximately $800 million. Overall we expect contributions to decline by approximately $44 million in 2016 and would expect non-cash pension income to be a modest benefit in 2016 versus 2015.

Regarding our restructuring program, cash payments declined by $54 million to $28 million in 2015. As all charges related to restructuring program have been incurred, we would expect cash payments to decline by $9 million to approximately $19 million in 2016, and continue to decline thereafter to an immaterial amount.

In summary, our results for both the quarter and the full year reflect solid organic growth, record operating margin performance across both Risk and HR Solutions, strong EPS growth, record free cash flow of $1.7 billion, and the return of roughly $1.9 billion in capital to shareholders. Despite challenging macroeconomic and industry-specific headwinds, our industry-leading franchise is strongly positioned to help clients manage through increasing complexity, magnitude and volatility across the areas of risk, retirement and health.

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

(Operator Instructions)

(technical difficulty)

Sorry, apparently we are having some difficulty on the queue, on the questions. We have a number in queue. I can assure you will take all the time we need today to answer any and all the questions we have. Be comfortable with that and we will work out this logistical glitch a bit. They are coming up in a bit, so a little patience and we will get this moving as soon as we can. So, apologies for that.

Redial back in and we'll get to the front of the queue. (technical difficulty)

Our first question is from the line of Ryan Tunis from Credit Suisse.

Ryan, are you with us?

Hi, Greg?

Yes, please.

Sorry about that. My first question is for Christa, and it's just I think she said that non-cash pension income will be a benefit this year versus 2015. Just wondering if you could quantify that, what the benefit is.

Yes, it's small, Ryan, but it is going to be up slightly year over year.

Okay, and then just on the reclassification, just trying to understand what's going on here. I think last year you guys still had something like $300 million-plus of share-based compensation that was helping free cash flow, but now it sounds like you're moving something to financing activities. I'm just trying to understand why it sounds like there might be some share-based compensation that's still helping free cash flow and some that might have been moved to financing activities.

I think the first thing to say, Ryan, is this reclassification has no cash impact on total cash generated or cash paid in previous or future periods. I think the issue you're referring to is actually quite a different issue. The reason we did this was really, it's a preferable classification and it's consistent with peers, and we feel like it's a much cleaner way to explain our overall cash flow and cash flow growth. The stock compensation expense is stable and has not changed.

Okay. And then just one last one, I know the guide for the tax rate has been about 19% but over the past couple years it's come in a little bit below that. I just wanted to make sure that the $2.4 billion 2017 free cash flow target, that we can assume that that's assuming a 19% tax rate.

Ryan, we expect 19% to be our underlying operational rate going forward. I think what shows up in any one year is impacted by discrete tax adjustments. They can be positive or negative and we actually can't forecast them. And the reason our full-year tax rate for 2015 on an adjusted basis was 17.9% was because we had positive discrete tax adjustments. So, what we would say is the right underlying rate to model for the Company and we use ourselves is 19%, but then discrete tax adjustments can come in positive or negative.

Okay. So, the $2.4 billion, though, is absent the discrete tax adjustments, which over the past couple years, I think, have been positive, correct?

Yes, it is impossible by nature of those adjustments to predict them because they happen at the time.

Okay, I'll stop there. Thanks so much, guys.

Your next question comes from Dan Farrell of Piper Jaffray.

(technical difficulty) your cash flow growth targets. Even if we take into account the pension decreases and some of the change, there's some healthy growth there. I'm wondering if you could comment on your view on the underlying macro trends that you think you might need for that. If we look at the last couple years, we probably had more headwinds than we would have thought we were going to have. Do you think you need any of that to reverse, or with the current headwinds that we're seeing do you think that cash flow growth is still achievable? Thank you.

I think it's a great question, Dan, because we have had some significant headwinds in the last couple years, most notably FX which had a $140 million impact on operating income in calendar year 2015. We would say that we do not need changes in the macro environment to achieve our $2.4 billion in free cash flow in 2017.

If you think about the $1.7 billion of free cash flow we delivered in 2015, you can add back the $137 million of cash we spent on litigation in 2015, and then you can add about $100 million of improvement in free cash flow from decreased uses of cash between now and 2017. So, you're already up to $2 billion of free cash flow. And then you really need an incremental $400 million from revenue growth and margin expansion and improved working capital. So, we really believe that we have exceptionally strong free cash flow over the coming years, and exceptionally strong free cash flow per share as we expect declining share count between now and 2017, too.

Okay, thank you very much.

Thank you. The next question is from Sarah DeWitt of JPMC.

Hi, good morning and congrats on a good quarter. First on the brokerage organic growth, the 5%, that's the best result you've had in years. Could you just talk about what's changed versus the third quarter?

Yes, Sarah, first, step back, when you think about brokerage overall, it's consistent with what we're trying to achieve over the course of the year, being able to grow in virtually every environment, and we've been able to do that. And in the fourth quarter what you've seen is just a continuation. So, for us it's really nothing new but a continuation of the yield on a lot of the investments we're making in the business and the progress we're making across the business overall.

And, listen, we saw the new business characteristics in US retail, for example. These are records -- record on record, in fact, in terms of what's happened over the course of the last year. So, for us, this is just a continuation in terms of where we are.

Across the business we really like our position now, the way we finished in 2015 and our position in 2016 and the trajectory going into 2016 overall. For us, what you'd read into this is this is just another quarter and a proof point of our underlying capability, and expect continued growth at the same levels going forward, and the ability, frankly, to deal with any headwinds that are out there, as we've been able to do, and move the business forward.

Okay, great. And then on consulting, the organic growth is usually seasonally highest in the fourth quarter because of private health exchanges. Why wasn't that the case this year? And could you just give us your latest thoughts on what you view as the opportunity for private health exchanges, especially since there's been some press that large employers are a bit slower to adopt and the Cadillac tax might be pushed out?

First, take a step back at overall HR Solutions. Again, we love where we finished on the risk side. We really like where we finished on HR Solutions. And this is a business over the course of the year that produced 10% operating income growth, grew at 4%. We made substantial -- by the way, also achieved record margins -- we made substantial investments in areas like retirement and delegating across the board and in our health solutions.

Again, we look at health solutions across the board, really every category in terms of the ability to help clients with this very important challenge they've got around the health side. And we think we've got one of the strongest capabilities here, whether it's H&B, whether it's global benefits across the board, and on the exchanges -- retiree, active, fully self, all across the board.

And what we would say, if you think about quarter over quarter, first, we would agree the adoption on the health active side across the board, especially at the larger end, hasn't been as fast as expected -- by the way, especially given some of the results we've seen with existing clients because they've been exceptional -- reduced volatility for them, price reductions year-over-year. 25%, in fact, had price reductions over the last year. So, so we're very positive in terms of the overall impact.

The pipeline looks very strong. And, again, even in the exchange business as it exists, we had double-digit growth and it's profitable. So, for us we love this solution on behalf of clients, but it's part of our broader health solution.

I would reflect, by the way, in the fourth quarter last year we had the single largest implementation on the retiree side in the history of the world, and maybe will forever be, in the history of the world. And that actually influenced the results a bit, too. But we really like the business overall tremendously and we really feel good about our position in HR Solutions.

Okay, great. Thank you.

The next question that we do have comes from the line of Quentin McMillan from KBW.

Hi, thanks very much. Can I ask a question on seasonality, a two-part question? One on just the reinsurance brokerage organic bounce back this quarter after a couple of quarters of negative growth. It was nice to see some positive trend there. But the last time that you showed a positive number was in Q4 2014. It may just be coincidence that that happened year over year but can you talk about how you account for revenue recognition in the reinsurance brokerage, and if there's anything to read into that? And then possibly what that could mean for next year or for Q4 2016?

And then on the HR Solutions side, your profitability in the fourth quarter basically doubles from the rest of the quarter. So, can you just help us to also understand why there's so much more profitability in Q4 other than just the healthcare exchanges, and if there's anything else that we can look at that? Thanks so much.

Let me do just technically how we account for reinsurance, because I think that was one of your questions. We account for revenue and reinsurance over the course of a 12-month period of time. So, therefore, what you're seeing in Q4 is revenue that was placed over the last 12 months. And that's really for our treaty business, I'm talking about, which is about 80% to 85% of our total revenue. So, 12 months revenue recognition.

What you're seeing in our Q4 results is the last four quarters of revenue. It's a lagging indicator because you're getting price over that last 12 months showing up in our current year's results. [The cycle of payment] in capital markets, they are recognized in the quarter. So, that's 15% to 20% of our revenue.

If you step back on the reinsurance side, basically, in terms of where we finished and thinking about going into 2016, again, this is consistent with the theme across the Company. We feel very good about how we finished the year and what it sets the stage for in 2016.

Obviously, again, look at it in terms of the overall year. We're not happy with the level of growth in reinsurance at negative 1% for the year, but we've said already we expect reinsurance to return to positive organic growth in 2016. And for us, especially for our reinsurance business maybe more than any other, it's a great example of a business right now, its business results don't really reflect the underlying capability and opportunity we see, which is exceptional.

Think about it -- we're the largest advisory in the world in this area and, really, number one in treaty, number one in fact, number one on the alternative capital side and capital markets. 20% of the global book is linked to US property cat, and that is fully commission based. Those rates have come down 15% to 25% over the last 24 months. That's been reflected. While those are starting to flatten out a bit, the decrease is not as great.

But against that has really been the team's ability to continue to win 19 consecutive quarters of wins on treaty reinsurance, which has been exceptional, and really the ability to create net new demand. And this is in areas like mortgage overall and what we've done in ReView. They've been able to offset these headwinds, which are diminishing, those businesses that they've offset with are going to continue to grow. On the opportunity going into 2016 we feel very good.

And I would say, by the way, just technically the 2% in this quarter is on top of a 5% in the Q4 2014, so it was on top of a very strong comparable. So, we feel good about the position. We love this business, we're very excited about it. So, maybe we can go back to Christa on the HR Solutions side on the seasonality overall.

Sure. What I would describe, Quentin, is we have an HR business which is very seasonally oriented towards the second half of the year, and in particular towards Q4. And as we think about the patterning for HR Solutions in 2016 it will look very similar to 2015 where, from an operating income point of view, we are down in the first half, particularly in Q1, we're up in the second half, particularly in Q4.

As you think about the overall HR Solutions business, we really have a very significant bias towards Q4, with annual enrollment in our benefits administration business primarily occurring in Q4, and healthcare exchanges primarily occurring in Q4, where you have expenses showing up in Q1, Q2, Q3 and Q4 and revenue really coming through in Q4. So, that's why we're primarily a Q4-oriented business in terms of revenue and, therefore, operating income.

That's perfect. Thanks so much, guys. And if I could sneak one more in, just in terms of the leverage you guys have -- the debt to EBITDA came down from 2.6 to 2.3 in the quarter. And I think you'd previously indicated that you were comfortable with that 2.6 level and willingness and an indication that if you wanted to you could debt in the future to repurchase shares. Does that still line up to what you think for 2016 and going forward? And what level do you feel comfortable at?

Yes, it's a great question, Quentin. What we would say is, strong free cash flow generation and therefore EBITDA growth allows us to continue to increase leverage in line with the 2 to 2.5 times leverage ratio. So, we do see the opportunity for incremental leverage given the strong free cash flow and EBITDA growth of the Company.

Great. Thanks very much, guys.

Thank you. The next question that we do have comes from the line of Adam Klauber of William Blair.

Thanks, good morning, everyone. The sale of the absence management company, just a couple points around that. Was that business higher or lower margin than your overall? In other words, will that help the margin going forward?

As we think about the absence management business, it's a terrific business, helping businesses really manage their workforce overall. One of the things we would say about that business is, given the high demand from corporations to manage their workforce, and obviously the absence of their employees over time, it has significant very high capital requirements to invest in this business over the coming years. As we look at our strategy, it's not as core to our strategy as some other areas in which we've been investing.

So, as we think about the need to invest capital in this business over the coming years, we do believe that Guardian has a much higher priority in this area and they are going to substantially invest. So, we feel really good about partnering with them to continue to serve our clients in this area. We did not disclose the financials in this business but you should think about this business as overall in line with our focus on improving return on capital.

Okay. And then just detailing that, I think you mentioned maybe $12 million of transaction costs. Was that in the operating line or was that adjusted out?

It is included in our HR Solutions operating income, so it is in the operating line. As we think about this business, there's obviously a gain that shows up in other income, which is quite significant. And then there are transaction costs and severance related to this showing up in the operating income of HR Solutions.

Okay. And was the revenue for the absence management pulled out for the fourth quarter or was that in the fourth quarter?

It was in the fourth quarter.

Staying with Solutions, on the HR cloud business, is that business growing materially faster than your overall business? And how is the pipeline of large clients looking for 2016?

This business has done exceptionally well. We love the position overall and it's growing well above double digits. The fundamental capability we've got and the need clients have around HR transformation and improvement is just exceptional. And the capability we've got on the Workday front, in particular, is really carving out a lot of space there for us. And we're seeing the growth not only in the HR side but we're also seeing it as clients think beyond HR transformation how it relates to finance transformation. And this combination has just been incredibly positive.

By the way, Aon itself has gone through the same thing. We adopted Workday on the HR side, we've now adopted Workday and we're implementing it on the finance side. We see the potential and our clients see it, as well. So, for us this has been a very strong growth business. We really like the capabilities here and the prospects on behalf of our clients.

Thanks. And just one more, in the risk business, how much are exposures helping more now than a couple quarters ago?

Exposures continue to be helpful. And, by the way, it is the right question because, in the end, a lot is discussed on price. It really is an issue of exposure as much as price. Again we can clinically look at this with the risk insight platform across our entire book at a very micro level.

When you add all that together, price and exposures, their net-net is stable, so the market roughly is stable. So, a little up, a little down, but roughly it's been stable. I'm literally looking at the chart right now across multiple quarters and it's, give or take, stable. Prices have come down a little bit, exposures have come up. That's just how the market overall has performed.

From our standpoint, that's why we don't really look at market conditions as an excuse not to grow or reinforcement to grow. We're going to grow either way, and have proven we can do that. 2015 is another example of that and we see it in 2016. We've more than offset price changes and exposure changes with net new business and net new capabilities we brought to the marketplace, as well as our ability to retain our existing book of business and actually add services on to that. So, for us overall it's been market stable and our ability to deal with it has been quite positive.

Okay, thanks a lot.

Thank you. The next question comes from the line of Kai Pan of Morgan Stanley.

Thank you so much. Good morning. First question is on the HR Solutions. In the past you had been guiding year-over-year improvements in terms of underlying margin as well as operating income growth of mid to high single digits. I just wonder is that still valid going forward?

Kai, we fully expect to grow revenue organically, to continue to expand margins and to grow operating income in HR Solutions, as we have in 2015.

Okay, that's great. And then just a number question on the free cash flow target of $2.4 billion. It looks like 2015 the reclassification actually benefits about, more than $100 million to $200 million so the raise of your guidance $100 million. I just wonder what is the calculation behind it?

I think one of the things that -- shares withheld for taxes is really driven -- the amount is the result of employee choice and the market value of the stock, two variables over which we have no control. So, as we think about it, we think that we have very strong free cash flow growth over the next coming years and that, therefore, $2.4 billion is the right number. And this particular element we took out really has no impact on cash. We think that, therefore, $2.4 billion is the right goal going forward.

So, there's no change in underlying forecast for your free cash flow target.

No.

Okay, that's great. And, lastly, Greg, if you could talk about on the acquisition front, because the buyback had been very meaningful return to shareholders. I just wonder, in this marketplace, where do you see the platform capability you could help Aon grow in the future? And how do you balance between acquisitions versus share buybacks?

We actually look at those. And if you look at our history over the last 10 years, we've actually been a little more leaning toward acquisitions, when you look at the amount of overall investments versus what the buyback has been over time. And underlying that, if you look back over the last 10 years, our operating income growth year over year has been roughly 11%. So, it's something we've really invested in, and invested heavily in organic improvement, as well, as I described before.

The level of capabilities that we're investing in for existing clients, new clients and on the data and analytics side is, we believe, candidly, quite unprecedented. If you think about data analytics going from risk inside platform to ReView to the Aon client treaty now, to Inpoint, all the work we've done in delegated exchanges, you get the picture.

We're very much focused on investment back into the business and M&A plays a big role in that and will continue to play a big role in that. We probably -- I'm looking at Christa -- looked at more deals this year, situations this year, then maybe any time in our history, and measured in the billions. Done fewer of them because we're always going to be disciplined around return on invested capital.

Christa has in place a very structured way to think about how we can very meticulously invest our capital to get the highest return on capital, generate free cash flow and build wealth for our shareholders, and, in the context of that, serve clients in a very effective way. That's really the machine we set up, that's how the engine runs, and that's what we have done.

So we're going to continue to look at what the best place is to place our capital. And we'll be open to acquisitions, as we are, organic investment, buyback, and all of the above. That's really how we're looking at it.

Okay. Specifically, if you can follow up, there's price discussion about wholesale platform. I'm wondering is that something would be of your interest?

We're not going to comment on specific situations or categories. But you can imagine we are going to do what we need to do to actually support our clients and deliver distinctive value to our clients, and do it in a way, again, that returns benefits to our shareholders. So, we're going to look at capabilities across the board. We've partnered with great capability on the wholesale side, and we're going continue to do that and always look at options.

That's great. Thank you so much. And good luck.

Thank you. The next question that we do have comes from the line of Vinay Misquith of Sterne Agee CRT.

Hi, good morning. The first question is on the HR Solutions. Margins grew by 100 basis points this year while organic revenue growth was actually lower this year -- that's 2015 versus 2014. Just curious how you've managed to expand margins even though the organic revenues were lower this year versus last year.

It's a great question and I think it's really about the investments we've made, Vinay, in the areas of growth that we've outlined -- delegated investment management, HR BPO and our cloud solutions, and healthcare exchanges. They are generating great returns on investments, which is how we're able to continue to expand margins and grow operating income at lower levels of organic growth. We will continue to manage the portfolio on a return on capital basis and generating improved cash flow from the investments we made organically and inorganically in our business.

Vinay, really what's being highlighted here is the idea of operational leverage. A lot of the core organic investments we make in the areas Christa described -- the same is true, by the way, on the risk solutions side -- is the reason, again back to we're very confident and comfortable talking about margin expansion in lower growth environments.

By the way, don't take away from that that we're not interested in growing organically. We're absolutely focused on that, and that's a high priority and we'll continue to do that. But our ability to actually produce results in a variety of environments is really a function of our ability to invest heavily back into the business from an organic standpoint.

Sure, that's helpful. And within the segment, I believe there were $12 million of costs. Should we add back those $12 million to say that that's the normalized operating income for this segment for this year?

Yes, I think that's probably right.

Okay, great. And then one last question, just on the free cash flows -- and maybe my math is not that great but my understanding is that the reclassification helped the free cash flows by about $200 million, and the future guidance for free cash flow has increased only by $100 million. So, have the underlying cash flows for the future come down by $100 million?

No, they have not. One of the things that I tried and obviously failed to communicate earlier was this number varies substantially by year. The amount is the result of employees' choice -- gross or net shares -- and the market value of our stock. Therefore, we have no control over the number.

As we think about our free cash flow going forward, there is no change to our view on the underlying free cash flow growth of the Firm. We do believe that this amount going forward is somewhere between zero and 100, therefore, we've increased our target by $100 million to $2.4 billion.

One of the other things I would make clear is that the $2.4 billion in free cash flow in 2017 is fully deployable cash, because if you look at the $1.7 billion we generated in 2015, we actually returned $1.9 billion of cash to shareholders in 2015. So, we are generating a huge amount of cash which we can fully deploy on either return to shareholders or, as Greg said, investing back into our business, either organically or inorganically in the form of M&A. So, we're very excited about the future growth potential of the Firm given the huge cash flow generation we're going to produce.

Okay, thank you.

Thank you. The next question comes from the line of Charles Sebaski of BMO Capital Markets.

Good morning, thank you. The first question, Christa, a follow-up to the free cash flow question going forward, and that's in regard to the working capital improvement. I was hoping you could just help me understand a little bit how that is truly incremental as opposed to timing. If I think you pull in your accounts receivable and push out payables, it's a timing issue. But is there something else in that that's truly incremental to free cash flow?

Yes. One of the things I would say is that we are on a march, Charles, to really improve our flow through of $1 of revenue through to $1 of free cash flow. And I would say we're on a 10-year journey to get there. I think the overall industry in which we operate has not been particularly focused on free cash flow. And I think it has been a journey for us which we've been on, really, for the last almost five years.

I think as we continue to improve the collection of cash from customers, and we continue to manage the payment of cash to suppliers, we believe that we have improvements in cash for at least the next five to eight years in terms of working capital. And it's structural improvements in the process around which we do this, in the way in which we manage this, in the overall portfolio of business we do.

So guess what I would say, as you think about Aon, we believe we should be working capital neutral overall, and we are far from that today. So, we believe the upside in terms of cash and working capital is substantial over the coming years.

And obviously you guys are a different business but in some other industries, if you pull in your receivables faster, an incremental improvement might be you have less charge-offs, right? You have less credit events, that there's something that truly is incrementally increasing as opposed to just the time value of money by getting that cash flow today versus 90 days from now. I'm wondering, is there structural elements in that improvement for you or is it timing related?

It's absolutely structural. If you think about it today, we are tying up a huge amount of cash, essentially, by not collecting the cash from customers early enough or by paying suppliers. So, as we think about return on capital of Aon, we are managing our overall portfolio to improve cash in this area. And we would say we are making structural process improvements and have for the last couple of years.

You can see it if you look at receivables divided by revenue, you can see day sales outstanding improve over time. And same on the supplier side. So, whether we're improving invoice velocity or eliminating prepaid expenses, there are a number of structural things we're doing to improve the flow through of $1 revenue to $1 of free cash flow.

Okay, I appreciate that. Finally, just on the risk business and the investments you guys have made in the debt and analytics, I think we more clearly see it on the reinsurance side or maybe on the GRIP program with the insurance carriers. But I was hoping you might be able to just expound a little bit on where maybe some of the data and analytic investments are helping you improve the retail. I don't know if you can either charge for it at the retail level or if it flows through in organic growth and that piece of it if you think of the multitude pieces in the risk business, the real core retail side and where the data and analytics is helping the business there.

The effort on data and analytics has really been multi-year and ongoing and, for us, we believe is going to be fundamental to what we need to try to get accomplished over time, Charles. And, really, it's going to be differentiated in terms of our capability versus the marketplace. And there are many examples. By the way, the risk insight platform efforts really are actually, the work is done directly with primary insurers serving clients. So, it actually touches very much the primary insurance marketplace.

But let me give you one example. I happened to be in London yesterday with Lloyd's and Lloyd's syndicates. We just launched something called Aon Client Treaty, which is basically built on a foundation around data and analytics. So, in essence, it will be, when done, the single big biggest underwriting transaction likely in the history of Lloyd's to date.

And it really takes our book that goes into the London market through our global broking center and we actually modeled that book in detail, really bottom up all different aspects of what was going on -- 64,000 policy transactions, 120 different classes of business, 157 countries. You get the idea. We built an incredible data room in which underwriters could come in and actually take a company level understanding at underwriting and then apply it at a portfolio level.

In essence what we're saying to a client -- by the way, on Monday I happened to be at our property symposium, I'm talking to clients at our property symposium and essentially saying -- if you're going to use London capacity you've eliminated your tail risk. So, when you actually think about the set of syndicates that are actually going to come to bear on behalf of you, the last three or four or five actually create risk. We've eliminated that. So, we've actually pre-confirmed 20% of that capacity that will follow the lead capacity going into London. That makes that capital we're bringing to bear much more competitive.

So, so there's an example of hard clear data and analytics that essentially we've analyzed our book. It happens to be in the London marketplace, but imagine we can look at this all over the world, in which we are actually providing distinctive value, unduplicated value, to clients using data and analytics.

That was a bit long-winded but I hope you get the idea that's a very powerful tool. By the way, in order to do that, you had to be able to analyze all 6,000 clients going into London in a way that, frankly, leverages off our Risk Insight Platform. Never been done before.

Thank you very much for the answers.

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

Excellent. Let me apologize again for the logistics during the Q&A. If anything comes up and you want to ask us, please feel free, we're available at any time. And just appreciate everybody being on the call today and look forward to catching up at the end of the first quarter. Thanks very much.

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