怡安集團 (AON) 2016 Q1 法說會逐字稿

Welcome to Aon PLC first-quarter 2016 earnings conference call.

(Operator Instructions)

If anyone has any objections, you may disconnect your line at this time. I would also like to remind all parties that this call is being recorded.

And that it is important to note some of the comments in today's call may constitute certain statements that are forward-looking in nature, as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our first quarter 2016 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.

Good morning, everyone. Welcome to our first quarter 2016 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, and 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 first quarter, organic revenue growth was 3% with growth across every major business, highlighted by 4% growth in each of our retail brokerage businesses and positive organic growth in reinsurance. Operating margin increased 20 basis points, reflecting strong operating performance in Risk Solutions.

EPS decreased 1% to $1.35 including a $0.10 unfavorable impact from changes in foreign currency. Finally, free cash flow was $221 million, reflecting solid underlying performance in our seasonally weakest cash flow quarter. Overall, our first quarter results reflects the strength of our industry-leading franchise and a solid start to the year, with organic revenue growth across every major business, adjusted operating margin expansion, improved return on invested capital, and effective allocation of capital highlighted by the repurchase of $750 million of stock.

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 3%, similar to the prior-year quarter, driven by growth across all major businesses. As we've discussed previously, we're driving a set of initiatives and making strategic investments that are strengthening the 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, highlighted by record retention levels of nearly 94% in US retail and EMEA. New business generation of $225 million across retail brokerage, including record new business in US retail, 20 consecutive quarters of positive net new business in core treaty reinsurance. An increased operating leverage from our significant investments in innovative technology, and data and analytics including Aon InPoint, which captures over 3 million trades and $160 billion of bound premium.

ReView, our reinsure dashboard, combined with strategic consulting, to help reinsurers be effective in capital markets with ceding company clients and our Aon Broker Initiative to better match client need with insurer appetite for risk. A great example of our innovation into analytics was a launch of Aon Client Treaty the largest ever under written portfolio of risk in the history of Lloyd's.

Since launching on January 1, we remain very excited about the positive impact of the Client Treaty for our largest and most sophisticated clients. We've had terrific success and feedback from clients around the world and continue to attract new clients with the Client Treaty being a major differentiator. Finally, we're expanding our content and global footprint through tuck-in acquisitions that increase scale in emerging markets or expand capability.

Reflecting in the individual businesses within Risk Solutions, in the Americas, organic revenue growth was 4%, similar to the prior-year quarter. Exposures continue to be positive across the region, while the impact from pricing was negative, resulting in a relatively stable market impact overall, similar to the last six quarters.

We saw double-digit growth in Latin America, driven by management of the renewal book portfolio, with many regions delivering strong growth despite macroeconomic challenges facing the region. In US retail, growth was driven by solid retention rates and continued record new business generation, led by a diverse portfolio of products including health, P&C and surety. Affinity also recorded solid performance, highlighted by strong growth in the consumer solutions.

In international, organic revenue growth was 4% compared to 3% in the prior-year quarter. Similar to the last six quarters, exposures continued to be stable and the impact from pricing was modestly negative on average, driven by fragile market conditions in various countries across Europe and Asia, and continued pricing pressure in the Pacific region. Results reflect strong growth in Asia, including strength in health and benefits and strong management of the renewal book portfolio.

In Continental Europe, we saw solid growth, driven by both new business generation and management of the renewal book portfolio, reflecting strong leadership across the region but the macroeconomic environment continues to stabilize. And in the Pacific, we saw continued strength in New Zealand while Australia showed modest growth.

In reinsurance, organic revenue growth was 1% combined -- compared to negative 1% in the prior-year quarter, reflecting our previous guidance of an expected return to modest growth in 2016. Results in the quarter were primarily driven by growth in global facultative placements, cedent demand in Treaty, and from new business generation. Results were partially offset by unfavorable market impact.

As the rate of price decline continues to moderate, the capital is being deployed to new markets, including US mortgage credit risk, life and annuity risk, and other emerging risks such as cyber liability. And as highlighted in our prior discussions, new opportunities for growth, combined with industry-leading data and analytics has positioned our reinsurance business for a return to modest growth in 2016.

Turning to HR solutions, organic revenue growth was 2%, with growth across both businesses. We're seeing growth in high-demand areas where we have strategically invested in innovative solutions and client-serving capabilities. Reflecting Aon Hewitt's leadership and in-depth understanding 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, while strong growth area where assets under management have grown from $10 billion to roughly $85 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, including our suite of private health care exchanges.

We are also investing in Software-as-a-Service model in our HR BPO business, where growth in new clients and conversion of existing clients is driving strong demand as well as the expansion of our capabilities to include financial implementations. Finally, we're investing in our Talent Rewards business, as we're seeing strong demand for data and analytics to support increasing organizational change.

Turning to the individual businesses within HR Solutions. In Consulting Services, organic revenue growth was 3% compared to 2% in the prior-year quarter. Results in the quarter reflect continued growth in retirement consulting, primarily driven by demand for delegated investment consulting services.

We also saw growth in Core Pension solutions where we provide clients the best combination of expertise and execution and modest growth in communications consulting. In Outsourcing, organic revenue growth was 1% compared to 4% in the prior-year quarter.

The prior-year quarter included certain out-of-cycle follow-on enrollments on our retiree exchange related to a very large client implementation. Results, excluding the follow-on enrollments in the prior year, reflect strong growth in HR BPO driven by new client wins and cloud-based solutions.

In summary, we delivered solid organic growth across every major business 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 first quarter results reflect a solid start to the year. We delivered organic revenue growth across both segments and delivered strong operating margin improvement in Risk Solutions.

We improved return on invested capital through the disposition of certain businesses and effectively allocated capital, highlighted by the repurchase of $750 million of ordinary shares in quarter, more share repurchase than we've done in any quarter since 2008. Strong share repurchase, coupled with recent announcement of a 10% increase to the quarterly cash dividend, reflect our long-term belief in the strengthening free cash flow of the firm.

Now let me turn to the financial results for the quarter on Page 6 of the presentation. Our core EPS performance, excluding certain items, decreased 1% to $1.35 per share for the first quarter compared to $1.37 in the prior-year quarter. Certain items that were adjusted for in the core EPS performance and highlighted in the Schedules on Page 12 of the press release include non-cash intangible asset amortization.

As we noted at the beginning of the call, we evaluate performance over the course of the year, as macro factors or certain actions to strengthen underlying performance may distort results on a near-term basis.

To help put the first quarter underlying EPS in context, first, we incurred unfavorable foreign currency related impacts, totaling $0.10 per share, including $0.05 per share of translation for a stronger US dollar and $0.05 per share for remeasurement of monetary assets and liabilities in non-functional currencies, primarily resulting from significant devaluation of the exchange rate in Venezuela. Going forward, if currency were to remain stable at today's rates, we would expect an immaterial impact for the rest of the year.

Second, we took steps to further strengthen return on invested capital with the disposition of certain businesses. In HR Solutions, we incurred $0.06 per share of transaction and portfolio repositioning-related costs in connection with dispositions. These costs were more than offset by $0.10 per share of gains recorded in other income.

Lastly, the prior-year quarter benefited from $0.12 per share of other income gains. Now let me talk about each of the segments on the next slide. In our Risk Solutions segment, organic revenue growth was 3%. Operating margin increased 100 basis points to 24.2% and operating income increased 3% compared to the prior-year quarter. Operating income included a $13 million unfavorable impact from FX.

Excluding this impact, underlying operating income increased 6% versus the prior-year quarter. Operating income margin -- operating margin improvement of 100 basis points includes a 30 basis point favorable impact from FX. Excluding the impact from FX, underlying operating margin improved 70 basis points in the quarter.

Strong operating improvement in the first quarter reflects organic growth in each business, including reinsurance and improved return on their investments in data and analytics across the portfolio. We continue to face certain headwinds in the first quarter from an unfavorable market impact in reinsurance and weaker economic conditions in a number of geographies.

Despite these challenges, our performance in Risk Solutions reflects strong new business generation and increased operating leverage in the business. We expect continued growth and operational improvements throughout 2016 as we make progress towards our long-term operating margin target of 26%.

In addition, if short-term interest rates continue to rise, we believe we have significant leverage to an 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 2%. Operating margin decreased 140 basis points to 11.8% and operating income decreased 14% compared to the prior-year quarter. Results were exactly in line with our previously provided guidance. Operating income included a $3 million unfavorable impact from FX.

As mentioned previously, underlying results in the quarter included $20 million or minus 220 basis points of transaction and portfolio repositioning-related costs as we continue to drive improved return on capital for the firm. The gain relating to the sale of our recruitment process outsourcing business was recorded in other income.

Strong underlying operating performance was driven by organic revenue growth in high-demand areas where we've been investing as well as expense discipline and return on our investments.

Looking forward, we expect continued growth in revenue, operating income, and margin in 2016 towards our long-term target of 22% with quarterly patterning of operating income results in HR Solutions, similar to 2015. More specifically, operating income will be down in the first half and up in the second half of the year, most notably in Q4.

Now let me discuss a few of the line items outside of the operating segments on Slide 9. Unallocated expenses were $46 million compared to $47 million in the prior-year quarter. Interest income was $2 million compared to $3 million in the prior-year quarter. Interest expense increased $4 million to $69 million due to an increase in total debt outstanding.

Other income of $18 million primarily includes gains on the sale of certain businesses, partially offset by losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies. Going forward, we expect a run rate of approximately $45 million per quarter of unallocated expense and $3 million per quarter of interest income.

Interest expense in the second quarter is expected to be approximately $72 million, or modestly higher than the first quarter due to the overlap of $750 million of notes placed in February and $500 million of notes due in May. We currently expect interest expense to decline to $70 million per quarter thereafter.

Turning to taxes. The effective tax rate on net income from continuing operations decreased to 18.4% compared to the prior-year quarter at 19.1% due to the geographic distribution of income and certain favorable discrete tax adjustments.

Lastly, average diluted shares outstanding decreased 5% to 273.7 million in the first quarter compared to 287.1 million in the prior-year quarter as we effectively allocate capital and manage dilution. The Company repurchased 7.7 million Class A ordinary shares for approximately $750 million in the first quarter. The Company has $3.3 billion of remaining authorization under its share repurchase program.

Actual shares outstanding on March 31, were 264.8 million and there are approximately 5 million additional dilutive equivalents. Estimated Q2 2016 beginning dilutive share count is approximately 270 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 March 31, 2016, cash and short-term investments were $1.1 billion. We expect the levels to return to our normal run rate between $600 million to $800 million in the second quarter.

Total debt outstanding was approximately $6.6 billion and total debt to EBITDA on a GAAP basis was 2.7 times. Cash flow from operations for the first three months decreased 8%, or $25 million to $273 million. This was primarily driven by unfavorable timing of certain tax-related items that we expect to normalize by Q2, partially offset by working capital improvements and a decline in cash paid for pensions and restructuring.

Free cash flow, as defined by cash flow from operations less CapEx, decreased 6%, or $15 million to $221 million, reflecting a decline in cash flow from operations, partially offset by a $10 million decrease in CapEx. Turning to the next slide to discuss our significant increases in free cash flow. 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 in 2017 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 near-term 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, CapEx and restructuring, which we expect to 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.

Turning to our pension plans. We've taken significant steps to reduce volatility and liability, as we've closed plans to new entrants, frozen plans from accruing additional benefits, and continue to derisk certain plan assets.

We currently expect contributions to decline by approximately $44 million in 2016 and expect non-cash pension income to be a modest benefit in 2016 versus 2015. Regarding our restructuring program, as all charges related to the restructuring program have been incurred, we 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, we delivered solid underlying results from the first quarter. Investments in our industry-leading platform of client serving capabilities across risk retirement and health continue to position the firm for long-term revenue growth, further margin expansion, and strong free cash flow generation towards our near-term goal of $2.4 billion for the full-year 2017.

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

(Operator Instructions)

Now our first question comes from the line of Sarah DeWitt of JPMorgan.

Hi, good morning. I was wondering if you could talk about what you're seeing in terms of the broader macro environment and your confidence and your ability to grow in both Risk Solutions and HR Solutions in the face of softening P&C market and somewhat choppy economy?

Well, let me just reflect -- take a step back a little bit, Sarah. We feel very, candidly, very good about continued progress. You saw it and you've seen this grow in each of the last number of years but if you think about our confidence, both in the current environment for the coming years, by the way, not just grow the business but also improve margins, tracking toward our 26% and 22% goals in Risk and HR Solutions.

And I would just say listen, just as an example, this often gets linked back into the pricing on the insurance side and we would encourage you to separate those and just consider -- and think about it from an analyst standpoint, three sources of growth and just take it on the Risk side for a moment. Our ability to grow in the traditional business, property, casualty, D&O, all those pieces reflects a multi-year investment in something we call Aon Client Promises.

It's really helping us bring more new clients into the fray and do more with the existing clients and as proof points for that set of -- that rollout, by the way, that's also across HR Solutions as well, look at new business in Q1. It was a record in US retail; It was a record worldwide. By the way, that's a record on top of a record. It was same in Q1 in 2015, with record levels of retention so this is just a 94% US retail for example, in EMEA, so these are just examples of what's happening in the core business and what we're about.

And we would say, by the way, as an aside, the market overall as we look at it is a bit, frankly, is a bit more stable when you think about pricing and insured values but that's just one aspect of Aon. Another aspect is our ability to grow outside the traditional core and think about, in this regard, just a couple of examples here, we've got two existing billion dollar revenue businesses we've invested in heavily, Affinity being $1 billion business growing exceptionally well.

Health and Benefits, $1 billion-plus business, also growing disproportionately well. So you've got the traditional; you've got these things outside the core I just described and then equally exciting for us is the ability to grow in new areas where we made substantial investment and just a few examples of those would be like Aon Client Treaty.

I highlighted the largest ever written portfolio of risk for Lloyd's, Aon InPoint, 40-plus carriers on that platform now; Aon Re/View and then finally, I would just highlight what we just did in US mortgage over the last couple of years has, frankly, brought insurance capital into the mortgage market and in 2015, alone, I think that's about $3.5 billion in net new premium, $5 billion since inception.

So the point being here, Sarah, this is such an important question. We believe we continue to prove the point that organic growth and margin improvement for us is not about insurance pricing or market impact. It's really about our ability to continue to invest and bring market -- bring it into the market capabilities and real products that help our clients succeed and frankly, that engine is under our control.

It's working and it's continuing to build and a lot of the things we've invested in historically are just coming online and you saw it also in the momentum as we finished 2015. In 2015, we grew organically, had record margins in Risk, had record margins in HR Solutions, record free cash flow and record EPS. That momentum in 2015 carries us into 2016 and it really is that engine that's driving it so does that answer your question around growth?

Yes, that's great, very thorough. And then secondly, there were recent new inversion rules which proposed potentially limiting the amount of intercompany debt. Could you just talk about what the implications for this could be for Aon and as well as your tax rate?

Sure. So I think there were two primary sets of proposed Regulations published by the US Treasury. The first proposed regulation applies to inversion transactions and therefore does not apply to us. We completed our redomicile over four years ago; it was signed off by the IRS in September 2013, and following our redomicile, our capital structure looks like any other foreign based-company in a territorial tax system.

The second proposed regulation applies to intercompany debt placed after April 4, 2016. Our intercompany debt was placed prior to April 4, and would also not apply to Aon's current global capital structure. The majority of our existing intercompany debt would come due in 2023 and after. Overall, we feel really comfortable with our current effective tax rate for the foreseeable future.

Okay, and I know it's a ways away but what would happen in 2023?

I mean the way we think about this, Sarah, is we have an overall capital structure and we use intercompany debt as one part of that to help drive investments globally but there are many other factors that influence that. As a UK Company, we operate in territorial tax system which has different repatriation impacts than a worldwide tax system. We're growing in geographies with declining statutory tax rates, such as the UK, where we are domiciled where the tax rate is currently 20% and it's going to decline over the coming years to 17%.

And so statutory tax rates are really an important part of the business decision for where we invest and build new products and services. And we also leverage net operating losses where possible to decide where we invest and grow businesses so I guess what I would say is as we think about our business going forward, our overall global capital structure, we feel, is appropriate for our business and therefore, we feel really comfortable with our current effective tax rate for the foreseeable future.

Okay, great. Thank you.

Thank you very much. Our next question comes from the line of Dave Styblo of Jefferies.

Hi, good morning. Thanks for the questions. To follow-up on Sarah's -- I certainly appreciate the macro comments and the new areas of growth that's, I'm sure, attributing to the stronger growth in retail, I suspect, with a 4% up there but I'm also wondering more on the core side, we've seen a couple of your peers post slower growth than that and actually talk about sluggishness in the EU.

Of course, the pricing pressures and so forth and just overall tempering of growth, so I'm curious if you're just in areas or markets that are not seeing that or if you're perhaps gaining some share from peers, what's sort of your assessment more on the core part of the business?

Yes, we would step back, Dave, and just essentially say, look, and I'd describe three areas around the traditional areas outside the traditional and then areas related to the data and analytics, efforts we've made around investments and we're seeing growth in all three areas. Frankly, we saw growth -- and we're in all of the countries, so we're in 120 countries around the world; it's most comprehensive platform but we saw growth in EMEA, in Germany, in France, in Italy.

We note the retention rates I described before and the new business generation, so while there -- while the market conditions, we think, remain relatively stable and again, we would say on balance, when you think about pricing and insured values, put those two together and call those market impact, oftentimes you hear about pricing. You don't hear about market impact.

Market impact has as much impact as pricing. On balance, we actually think 2016 looks better than 2015 for our global footprint but you saw growth across EMEA in the countries I just highlighted. You're seeing new business generation; this is in the core business, net new business generation in the US and in EMEA that is literally record levels in Q1 and it was record on top of record.

So the comps are extremely, extremely high and record new retention rates that approaching 94%, 95% so for us, look, we're going to keep investing around how we -- new client leadership, how we actually bring new clients in and how we serve them and serve them more comprehensively and that's the engine we have control over and that's the engine that's working both in the traditional side, very much the traditional side as well as the areas like Affinity and health and benefits as well as net new areas we're investing in beyond that.

Okay, very good. If I can move over to the HR side, the Solutions side there and just dig into a little bit more of the outsourcing, that was a little bit more of a stand-up being particularly soft and that was sort of similar to a prior year but can you tell us more about the puts and takes there?

The retention and business activity and then as it relates to the margins in the segment and earnings, I know you said it was consistent with what you were looking for but a little bit steeper than I guess what we had expected, or I had at least expected from the outside. Is -- does any part of -- did you expect the repositioning costs and so forth to happen when you originally set guidance or is this something sort of new?

Well, I would start -- let me just start a little bit of top-line growth overall and then Christa give a little bit background on some of the details around the margin opportunities here. First, we would say our first quarter performance in outsourcing is exactly consistent with where we left the year with in 2015 and our expectations for 2016 are exactly in line with what we had expect them to be so there's really not been a change. There's a bit of noise in the quarter, which we can describe as exactly the same.

By the way, if we just think about outsourcing growth overall and go back to 2013, 2014 and 2015; 2013, it's 1%; 2014, it's 1%; 2015, it's 4%, 2016, it's back to 1%. It's 4% in 2015 because we were very fortunate to support a very, very, very large client on a retiree exchange opportunity and that actually skewed 2015.

Absent that, the trajectory looks exactly the same and from a growth standpoint for the year, we feel very, very good about what we're able to do, in particular, some of the things we're doing with cloud-based applications, which has just been exceptionally strong underlying growth and a stronger pipeline so top-line growth, we feel very good about where we are, how we started the quarter and no change in expectations for 2016.

And then in terms of your question around, did we expect the charges and restructuring we took in this quarter? Absolutely. We've really been very focused on return on capital for a number of years now, as you know, and we gave guidance in Q4 that we would grow revenue operating income and margin for the full year 2016 in HR Solutions.

And we're absolutely going to do that and we also gave guidance at operating income would pattern similar to 2015, with operating income down in the first half, up in the second half and up particularly in Q4 and really what you observe in Q1 is us continuing to improve return on capital, as we manage our portfolio and we did exit the recruitment process outsourcing business.

And you can see the gain of $0.10 in the other income line and then transaction and deal-related costs in the HR operating income line of $0.06, or $20 million and that really had a minus 220 basis point impact on margin in the quarter, ex that, you can see that the HR Solutions margin in the quarter would have been 14% so you can see the underlying improvement in margin in our business as we continue to focus on return on capital and drive revenue, operating income and margin growth for the full year 2016.

That's great and then just one final one on the Treasury, to come back to the intercompany debt aspect in 2023. So it's my understanding that there's nothing wrong with having intercompany debt.

It's just the matter in which it's being used to support the business. Is that something you guys, one, agree with and number two, is there any way to quantify how much debt you have and to give us a sense of, is there any of that, that might be at risk that might not be categorized the way it is as debt right now?

We would say that we're going to continue to invest in the US and intercompany debt is the way in which it will be enabled so we will continue to use intercompany debt to help us invest and grow our US business over the coming years, so absolutely, we think it's a core part of the way we run our business and then we absolutely think about intercompany debt similar to third party debt.

We manage it in terms of coverage and leverage ratios, as you would expect, and we really have a global capital structure that looks like any other foreign-based company in a territorial tax system, so we think that our global capital structure is appropriate for our Company and we feel really comfortable with our current effective tax rate for the foreseeable future.

Thanks.

Thank you very much. Our next question comes from the line of Quentin McMillan of KBW.

Sorry about that. Thank you so much. Greg, you called out particular strength in the Health business in your prepared comments and I just wanted to drill into the Health and Benefits segment more specifically. I think you said it's a $1 billion business now. Can you give us a little bit more color in terms of, if that's growing at an organic clip above or in line with what the rest of your brokerage segment is? Maybe what the profitability is and sort of how you view it currently and going forward?

Literally, what I was trying to highlight a little bit was when you think about some of the investments we're making outside of the retail brokerage pieces, as Sarah was highlighting, that's one example. That just happens to be Health and Benefits. What we're very excited about is the overall health category and this is a category we've been investing in substantially for a number of years and you're seeing that literally on the Health and Benefit side which is $1 billion-plus business growing exceptionally well but you also see it on what we're doing on the exchange side, a whole range of Health Solutions. We administer benefits for 22 million-plus Americans, 10 million -- 11 million of which is really on the health side and for us, we see this category as one of the primary areas of investment for Aon over time and it's been exceptionally positive really across the board.

Great. Thank you so much. And then secondly, Christa, if I could just ask a question in terms of the share repurchase; obviously, you guys have been very clear that you believe share repurchase is the best and highest return use of capital. But is there a way for us to sort of get a better understanding in terms of how you look at the return metrics on share repo versus M&A versus investment in the business? Maybe just what's most important to you and if you can give us any kind of color or clarity in terms of what the level of return might be in one versus the other?

So we have been very clear that we manage this in terms of return on capital. The way we measure the return on capital is on a cash-on-cash metric and as we think about sort of share repurchase and the return that, that generates, we have a discounted cash flow view of Aon over time and it is a very conservative view of the Company because we've beaten our own cash flow forecast in each of the last five years.

The discounted cash flow really is the value highlighted by the $2.4 billion in free cash flow we'll generate in 2017, and then future growth in cash from there onwards, and we do absolutely trade off investment in share repurchase, M&A, organic investment, pension, et cetera. And so that's how we think about it and in terms of Q1, we did take advantage of a lower share price in the quarter to do the largest amount of share repurchase we've done, $750 million since 2008.

Great, and I just -- one of the parts that I wanted to sort of touch upon and I apologize for not asking it more clearly. It's just s the divestiture you had in the business as well, the overall return you have, that you mentioned improved the return on invested capital. Is there sort of other businesses that might be dragging that down and are you sort of looking to optimize the entire portfolio that way? Or are you -- do you feel good about where everything sits currently?

I mean, you should think over the coming years that we're going to continue to manage our business with a return on capital basis. We'll continue to invest in the highest return on capital areas. We'll continue to divest or invest less in the lowest return areas so we're going to continue to manage this portfolio over time and I wouldn't note that it -- I'd note that it's happening across the firm.

We had a small divestiture in our retail brokerage business in the first quarter too, and so you should just think about us continuing to manage the portfolio and to continue to drive return on invested capital across the entire business.

Perfect. Thanks so much for the time.

Thank you very much. Our next question comes from the line of Kai Pan of Morgan Stanley.

Good morning. Thank you so much. Just to follow-up on Quentin's question on buybacks so it looks like $750 million, a very strong number especially for a seasonally weak in the first quarter. I just wonder, does it alter the pace of your buybacks throughout the year? And also could you talk a little bit more about the source of funding for buybacks because in related to the last two years pretty strongly, $2.3 billion in 2014 and $1.6 billion in 2015.

Yes, so Kai, as we think about buyback, we've absolutely described it as the highest return on capital use of cash we have today and therefore, as you think about the sources of cash that can contribute to buyback, it's really about the strong free cash flow growth we're generating from the business each year. And then as we think about leverage, we really think about our current investment grade rating as incredibly important to us and staying within our existing debt to EBITDA ratio.

But as EBITDA and free cash flow grows, it really creates the opportunity for us to add additional leverage and so those are the two sources, free cash flow from operations plus additional leverage as our cash flow and EBITDA grows over time. And as we think about the balance of the year, we're not really giving specific guidance, Kai, but really, what I would say is as you think about the cash we generate over any year, we're going to manage that -- the investment of that cash based on return on capital.

And just to follow-up at the leverage, is the 2.7 level is optimum level you want to maintain or there -- you want to walk it down or you can even level up from the current levels?

Yes, so as we think about our current investment grade rating, Kai, what we would say is it's really 3 times to 3.5 times on a Moody's basis, which is how we manage it internally and if you translate that to a GAAP debt to EBITDA basis, it's 2 times to 2.5 times so it's slightly above the range that we would like to be on an optimal basis.

Okay, okay, that's great. And then for Greg, is it -- could you comment just broadly about the recent market dislocation as well, your commentary about the rising tension between brokers as well as the carriers?

From our standpoint, as we think about where we are in the market, we're not seeing anything unusual about what's gone on over time, frankly. We've got a set of market partners who we -- who are incredibly important to us and because they are important to our clients. And our focus every day is really maniacally around how we bring solutions to clients to help drive their business and candidly, the market partners are central to that, absolutely critical. So we find ourselves actually working more and more with market partners in ways to come up with new and innovative solutions.

And it's really been great. One of the things we just spent time talking about, something we call Carrier Link which is actually enabling us to bring our global capability or global demand to carriers around the world. Carrier Link, for example, for Lloyd's, but for other carriers as well, to actually make it more electronic, to actually make it more efficient, so for us, we see our market partners as extremely central and just want to continue to reinforce and foster those relationships on behalf of our clients.

That's great. If I may, last one. Is there any better way for us to model the other income line?

I mean, I would say it is inherently, on an underlying basis, flat. I think it has been very lumpy based on sort of the return on capital moves we've been making around some portfolio repositioning but we, ourselves, when we budget internally, budget it at zero.

Great. Thank you so much for all of the answers.

Sure.

Thank you very much. Our next question comes from the line of Vinay Visquith of Sterne Agee CRT.

Hi, good morning. So the first question is on the consulting segment. Christa, you mentioned that the margins are 14% so just wanted to reconfirm that, that's the right base for the future. Is the 14% margin the right base and also surprised that margins increased about 80 basis points with organic growth grew 22% so if you could help me on that, please?

Sure. So if you exclude the one-time charges of $20 million in Q1, then 14% Q1 HR Solutions margin is the right underlying margin for the business set is absolutely right and then what I would say is, we've been investing a lot in that business. We've been investing in our Delegated Investments business, which is growing fantastically.

We've now got $85 billion in assets under management; we've been investing a lot in our BPO SaaS business, which is growing fantastically. We're winning substantial deals on the pipeline there is fantastic and we're investing a lot in our Talent business. We just bought a business called Modern Survey during the first quarter and it's fantastic. So we're feeling really good about the investments we've made in this business and really what you're observing is the return on those investments.

The other piece I'd add, Vinay, as well, is if you think about these investments drive top line, as Christa just described but they also, in many respects, not all, but in many respects, inject a level of operating leverage into the business that's actually quite powerful. So we're growing top line but we're also able to improve margin at lesser levels of growth, if you see where I'm coming from.

And by the way, you see that in Risk Solutions and you see that in HR Solutions, both, so these investments we've been making over time that are beginning to -- you're beginning to see show up, have both pieces in the context of that, so it really is an investment at scale, if you will, in terms of making a difference across Aon.

Sure. That's helpful. And the sale of that piece of the business in that segment had a 7%, I guess, negative impact on the top line this quarter. Should we expect a similar level for the next few quarters and both of the guidance, I believe, was that you would grow your total revenue so is it the growth even after the sale of the segment?

We will continue to grow even after the sale of the segment, yes, and one of the things I would observe that you saw in Q1 2016, as Greg described, is we had an unusually strong comparable in Q1 2015 with the enrollments and the retiree exchange of one of our largest clients, but I think what you're seeing in the column I guess, Page 11 of the earnings release, that minus 7% is really two things going on. It's the exit of the business in Q1 2015 where we exited the business in our Payroll segment and then the business that we also exited in Q4 2015, so there's a number of different components going into this so it isn't one business.

But you will see us, over time, Vinay, grow this business organically as we've described before and this will strengthen our ability. This will strengthen our ability to grow organically and you'll see that play out over the coming quarters.

Sure, fair enough and just one follow-up on the capital management. Sorry to beat this to death but the way that I understand it is that so it's a free cash flow minus the amount you spend on dividends and M&A. So what number are you looking at in terms of M&A for this year and also the debt increase, my estimate is that you're going to be up around $250 million net debt this year. Just wondering if that number makes sense.

So we're not going to give specific guidance around M&A in any particular year because the way we run the process is really around managing return on capital every week and every month to optimize our investments organically, investments in M&A, investments in share repurchase, et cetera. And so we actually, while we intend to spend certain amounts on M&A in the year, it's going to end up being a different number than depending on what the actual opportunities and the returns on those opportunities are. And then in terms of your debt question, it's really around, as you think about that ratio, 2 times to 2.5 times debt to EBITDA on a GAAP basis, that's really how we think about managing the Company and so that's the right leverage level for us going forward.

Okay, thank you.

Thank you very much. Our next question comes from the line of Brian Meredith of UBS.

Yes, thank you. Just a quick one. Greg, can you talk about potential implications of Brexit for you guys?

Yes, sorry about that. Got it. Brexit. Listen, step back overall, it's obviously a topic of conversation now daily with clients around the world, obviously, as you get into Europe and the UK, more frequently than that. As we think about -- if we really think about this, Brian, first and foremost for our clients and we see there's lots of ways that could -- that it, if it ends up happening, it could impact them and their operations and their businesses over time and naturally, what we are most vigilant on.

For Aon, we actually feel very comfortable. We'll help them manage through it and if they have to endure that and if not, we feel comfortable with that as well. So there's not as much impact on Aon overall but from our standpoint, feel like that there is a set of opportunities here that come out of disruption and if that's the case and there's a set of items we're going to help our clients to address it but for us, it's rarely ever. That's how we'd shape it up.

Brian, the other thing we'd say is any time there's a regulatory change, it means you've got to help clients through that and so helping clients navigate business interruption insurance when you've got to separate out the UK from Continental Europe or pension plans which are across EMEA and you've got to separate them out, there's a lot of activity that would be generated for us.

And the other thing I would say is, we have substantial business in the UK where we have US dollar revenue and a Pound expense base and so to the extent that the Pound becomes weaker because of this, it actually benefits us.

Thanks. That's helpful and then last question, I wonder if you could give us a little bit of look at what's the pipeline look like right now for the corporate expense business?

We actually feel really good about the continuation of this, Brian, as I said before. First of all, for us, first and foremost, it's really the health category absolutely. Really like the position we're in and how that's continuing to grow and on the exchange side, our clients continue to experience very, very good results. A large percentage of our clients actually had rate decreases in the last cycle overall.

Satisfaction continues to be very high and the pipeline is very, very strong. We'd note it takes time for these things to evolve and you're seeing that play out on the health exchange side but really, it's part of an overall health solution which is actually quite, quite strong.

Great. Thanks for the answers.

Thank you very much. Our next question comes from the line of Charles Sebaski of BMO Capital markets.

Good morning. Thank you.

Hi, Charles.

Just curious, Greg, about growth in the Risk business and not for this quarter per se, but I guess over the next couple of years, obviously, you guys don't give expected guidance on M&A and you haven't done much in this space over the last few years, as you had really strong cash flow growth but if looking forward over the next couple of years, does the -- does that math change?

The margins in that business have increased incredibly well, a lot of the restructuring and whatnot has been taken out and you guys have one of the best toolboxes in the industry. Wondering, I guess I just sort of think that the growth in that business should even be better, while 4% organic is really good in this market. I guess, at some level, think the total line of that business would be even more than that and maybe should be over the next few years.

Well, listen, we agree in terms of overall opportunity. To step back and think about the journey that Aon has been on, as we've shaped and built our firm, we would say this is an unfinished business for us.

This is -- while we've made great progress and it's really credit to my Aon colleagues around the world and the progress they've made over the last number of years, the platform we have and given the current state of the -- state of where our clients are with unprecedented risks facing traditional and non-traditional, think about global warming pandemic, cyber terrorism, all of the different pieces, the challenges on health, which are unprecedented, literally in the US and around the world, the challenges on retirement.

These set of issues for us represent what, we believe, is an incredible set of demands for clients, and needs for clients and our platforms are actually very, very well positioned against these mega, really, global needs from a client's standpoint. And as I said at the beginning, to Sarah's question, the ways we're helping clients are traditional brokerage, all of the different pieces around that.

There are areas that are outside that, as we continue to evolve and develop. By the way, that's an HR Solutions and in Risk Solutions and in areas like data and analytics which, frankly, open up an entirely new Vista for us that we've invested in. This is not flavor of the month for us. This has been a seven-year set of investments, in which we invest $300 million, $400 million, $500 million over time around data and analytics and insight.

For us, we see this as tremendous opportunity and it's not just top line. It really is around operating performance improvement which is why, again, we look at 2016, 2017, 2018 as just a continuation. This is not new news, a continuation of building Aon's strength and Aon on behalf of clients and the record shows we're making progress against that with more opportunity to come.

I guess what I was trying to get to is even towards your goals, right, if you look at the long-term operating margin and risk, you're kind of already half the way there if I look back to when you laid out your cash flow doubling plan in 2012. And as you encroach on that, if I think of 2016 or 2017 cash flow doubling, I guess does the math conceptually change where M&A might become more attractive than share buyback because the rapidness of improvement of the core business has been -- so much has already been done.

Well, listen, again, remember back to what Christa described in terms of our overall framework. We have a pretty maniacal framework around return on invested capital and what I would highlight for you is while we've done a lot of buyback in the last 10 years, we've also done $7 billion, $8 billion worth of M&A so we've done a tremendous amount of M&A. We've done a tremendous amount of buyback and over a 10-year period, we've improved operating income 10% per year over that period of time and grown EPS about 16% per year over that period of time.

And so we're going to keep looking at these trade-offs and we-- as we make our cash flow goal in 2017 of $2.4 billion and continue to build on it, as Christa described, our capacity to invest back in the business organically, M&A, buyback, we have all these at our disposal as we build the firm. And that's why, candidly, we're very excited about where we are in the journey and what the possibilities are going forward and we see more possibilities going forward than we do historically in terms of what the opportunities are going to look like.

I appreciate the answers. Thank you very much.

Thank you very much. Our last question comes from the line of Josh Shankar of Deutsche Bank.

Yes, thank you for taking my question. You know, obviously, Sarah had some interesting questions regarding the intercompany debt and the 2023 date. When I look at your balance sheet by, I guess, Company segment, it seems to be that half the debt of the $19 billion slowly seems to be in current liabilities and half of it seems to be in long-term liabilities. How does that work and then in terms of what you're reading of the new proposals are, will those current liabilities be able to be rolled over for another year?

Yes, so Josh, as you look at our balance sheet, you can see that we have a normal intercompany trade receivables and payables, as all companies do who operate in more than one country and it's split into short-term and long term. And so that is a normal part of doing business and as we said earlier to this question, we feel really comfortable with our current effective tax rate for the foreseeable future because as we think about the new proposed regulations, we're going to continue to invest in the US via intercompany debt because intercompany debt is permissible under the new proposed regulations.

Well and will that, I guess, will that $9 billion of current liabilities debt intercompany vehicle to be rolled over for another year?

Right. There's a bunch of normal -- it's not intercompany debt. That is normal trade receivables and payables.

Okay, intercompany. I guess so when I look at it, it's hard to see; it's nice to hear that those $19 billion, I guess it looks like that. If it's not really debt, how does that work exactly?

So we have normal trade receivables and payables, as you would expect in any global company and so the majority of that is not intercompany debt.

I think the punch line, between, if you step back if you think about the trades because we've gotten a few questions here on the balance sheet with more interest than we've ever had before. If you step back and think about the tax rate, that I think you're getting back to and Christa's point that literally, we feel very comfortable with where it is.

By the way, we feel very comfortable with where it is and for the foreseeable future; that's past 2021, 2022, 2023, so past that time period so you take all of the debt pieces off the table completely and ask how comfortable are we with our current tax rate. We feel very comfortable with it. It will evolve over time back and forth but we feel very comfortable and nothing has happened in the last six months or the last six weeks has changed that point of view in the least bit so just, I think that's the governing thoughts and so you might want to take away from where we are.

Well, I think that's very reasonable. Thanks, Greg.

Sure.

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

I just want to say thanks everybody for joining today. We really appreciate it and appreciate your interest in Aon and look forward to the next call. Thanks very much.

And that concludes today's conference. Thank you all for participating. You may now disconnect.