怡安集團 (AON) 2016 Q4 法說會逐字稿

Good morning and thank you for holding. Welcome to Aon plc's fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

I would also like to remind all parties that this call is being recorded.

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 2016 results, as well as having been posted on our website.

Now, it's my pleasure to turn the call over to Greg Case, President and CEO of Aon plc. Sir, you may begin.

Thanks very much and good morning, everyone. Welcome to our fourth-quarter and full-year 2016 conference call. Joining me here today is our CFO, Christa Davies. I would note 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 overall organic growth performance, including continued areas of strategic investment, and this morning's important subsequent announcement of a definitive agreement to sell certain outsourcing assets.

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 3% overall with growth across both segments, highlighted by strong double-digit growth in our healthcare exchange business. Operating margin increased 210 basis points, reflecting significant operational improvement in both segments. EPS increased 13% to $2.56, primarily reflecting strong operating performance, effective capital management and a lower effective tax rate.

If we turn to the full year, organic revenue growth was 3% overall, including growth across every major business. Operating margin increased 80 basis points driven by strong operating performance and record margin results in Risk Solutions and HR Solutions. EPS increased 7% to $6.59. And, finally, free cash flow increased 22% to a record $2.1 billion.

Overall, we delivered positive performance across each of our key metrics for both the quarter and the full year. Substantial investments in high growth areas, improved operational performance and record free cash flow generation continued to position the firm for increased shareholder value creation over the long term.

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% overall driven by growth across all major businesses. As we've discussed previously, we're driving a set of initiatives to maximize return on invested capital and making strategic investments to strengthen underlying performance and position our Risk Solutions segment for long-term growth and improved operating leverage.

We continue to drive improvement in client leadership with management over our renewal book portfolio through a proactive client partnership we call Aon Client Promise, which is driving retention rates of more than 90%, on average, across retail brokerage, including record retention rates in the US and EMEA; new business generation of more than $360 million in the fourth quarter across retail brokerage, including double-digit growth in EMEA and the Pacific regions, as well as another consecutive quarter of record new business in US retail; and 23 consecutive quarters of positive net new business in core treaty reinsurance.

In addition, we're increasing operating leverage from our significant investments in innovative technology and data and analytics, including Aon InPoint, a growing business where we help carriers become more competitive and operationally efficient by integrating our market-leading data and analytics with strategic consulting and access to Aon's unmatched expertise. This includes the Risk Insight Platform which now captures 3.4 million trades and nearly $170 billion of bound premium, as well as our reinsurer dashboard, ReView.

Another example is our Aon broking initiative to better match client need with insurer risk appetite, including our ability to identify structured portfolio solutions. And, finally, we're investing significantly in high-growth businesses, including cyber, health and benefits and in Affinity.

Most recently in the fourth quarter we announced the acquisition of Admix, a leading health and benefits brokerage and solutions firm in Brazil, enabling Aon to expand its capabilities throughout Latin America. Additionally, we completed the acquisition of Stroz Friedberg, a global leader in cyber security, in cyber remediation, as well, earlier in the year. Finally, another important example is Univers, a leading elected benefits enrollment services firm in our health and benefits brokerage business.

Reflecting on our individual businesses within Risk Solutions, in the Americas, organic revenue growth was 3% against the strong comparable of 6% in the prior-year quarter. Exposures continue to be modestly positive across the region, while the impact from pricing was negative, resulting in a modestly negative market impact overall. We saw strong growth in Affinity, with continued strength in the consumer solutions group. Results also reflect strong growth in Latin America, driven by effective capital management of the renewal book portfolio, as well as continued record new business generation in US retail.

In international, organic revenue growth was 2% against the strong comparable of 6% in the prior year quarter. The impact from pricing remains modestly negative on average, driven by fragile market conditions in various countries across Asia and Europe, while exposures are modestly improving, resulting in a relatively flat market impact overall.

We saw growth across every major region including the Pacific, Asia and EMEA. Results were highlighted by double-digit growth in the health and benefits brokerage business across both Asia and EMEA regions. We also saw overall strength across the Pacific in both New Zealand and Australia, driven by strong new business generation.

In reinsurance, organic revenue growth was 2%, similar to the prior-year quarter. This marks the fifth consecutive quarter of positive growth in reinsurance. For the full year, the reinsurance business delivered organic revenue growth of 1%, reflecting a return to growth in 2016, as anticipated.

Results in the quarter were primarily driven by continued net new business generation in Treaty and growth in facultative placements, as well as growth in new products such as ReView. Results were partially offset by an unfavorable market impact globally and a modest decline in capital markets transactions. Overall, market conditions remain similar to prior discussions.

Price declines continue to moderate and seen demand continues to increase against record levels of capital. Against that back drop, Aon's leading data and analytics have been instrumental in driving innovative capital solutions across new markets, including US mortgage credit risk, life and annuity risk, and other emerging risks such as cyber liability. Overall, across Risk Solutions our strategic investments in high-growth areas and in data and analytics continue to drive new business generation, strong retention rates and increased returns across the portfolio, positioning the Risk Solutions segment for continued long-term growth.

Before turning to HR Solutions I'd like to wish my colleague and friend Steve McGill, our former Group President and Chairman of Risk Solutions, well in the next chapter of his career. Steve has spent nearly 40 years in the industry and has been a valued leader at Aon. Going forward our global Risk Solutions business will be led by two exceptional colleagues, Michael O'Connor as CEO of Aon Risk Solutions and Eric Andersen as the CEO of Aon Benfield.

Now turning to HR Solutions, organic revenue growth was 5% overall driven by solid growth across high-demand areas where we continue to invest in innovative solutions and client serving capabilities. These investments reflect Aon's leadership and in-depth understanding of market trends including solutions to help plan sponsors both manage pension risk and drive better retirement outcomes for their employees.

A double-digit area of growth has been delegated investment consulting, where assets under management have grown from $10 billion to $90 billion in five years. We expect continued global growth in this area as sponsors are faced with regulatory changes and increasingly complex global markets.

In addition, continued investments 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 healthcare exchanges, we saw strong double digit growth across our exchange solutions including increased enrollments across both our active and retiree platforms, and significantly improved profitability for the full year. And, finally, we're investing in data and analytics across our health and retirement investment practices to provide superior advice and drive better outcomes for our clients and our clients' employees.

Reflecting on the individual businesses within HR Solutions, in outsourcing, organic revenue growth was 8% compared to 4% in the prior-year quarter. Results reflect strong double-digit growth in our healthcare exchange business driven by an increase in enrollments across the platform as well as certain project-related work. We also saw continued growth in HR BPO, driven by new client wins and cloud-based solutions.

In consulting services, organic revenue growth was flat. We saw continued strong growth in global retirement consulting, specifically for delegated investments and consulting services, reflecting an increase in demand for Aon's tailored solutions and independent advice. We also saw growth in communications consulting from continued momentum of employers communicating to employees on financial and health wellness. Results in the quarter were offset by a decline in project-related work from prior-year quarter, as well as a modest decline in our talent and compensation consulting business.

In summary of our performance, we end 2016 in a position of strength. We delivered growth across both segments, invested heavily in high-growth areas like cyber risk, advisory, and health and benefits, achieved record operating margins across the firm, and generated a record $2.1 billion of free cash flow for the year.

Now I'd like to turn to slide 6 of the presentation to discuss another exciting step in our journey. This morning, we announced a definitive agreement to sell our benefits administration and HR business process outsourcing assets. We believe this transaction reflects a continuation of our proven strategy and creates a catalyst for the next step of significant shareholder value creation.

For over a decade, we've been on a mission to strengthen our firm, a mission of increased focus on providing advice and solutions, a mission enabled by proprietary data and analytics, a mission to be the preeminent professional services firm in the world focused on risk, retirement and health. We've taken strategic actions from virtually every angle to achieve this mission, beginning with the dispositions of lower-margin capital-intensive insurance underwriting businesses and risk, reallocating capital from balance sheets to high-value solutions, strengthening our capabilities to serve global clients locally, and investing to build a set of unmatched data and analytics including $85 billion of annual risk premium supported by our InPoint and ReView technology, $30 billion of annual premium in health with a full set of health solutions, $4 trillion of pension assets under independent advisory, with $90 billion under delegation.

We believe in our mission and the progress has been positive with 6% annual revenue growth and 16% annual growth in total shareholder returns over the last 10 years. But we are not standing still. The decision to sell these outsourcing assets is another exciting step against our mission, creating a win-win situation for our clients and for Aon -- for our outsourcing clients, a partner in Blackstone, who will set the global standard for operations excellence and technology innovation in this area; and, for Aon, another step to sharpen our focus on advice and solutions. We're reallocating resources from capital-intensive outsourcing assets to accelerating investment in high-growth, high-margin areas across retirement and health, including such areas as delegating investment consulting, health and benefits brokerage, and private healthcare exchanges.

Overall, we're excited about this step and what it means for Aon, for our clients, and for our shareholders as the next step of significant shareholder value creation. I'm now pleased to turn the call over to Christa for further financial review. Christa?

Thank you, Greg, and good morning, everyone. As Greg noted, this transaction further strengthens the Firm's advisory capability and accelerates innovation through effective allocation of capital to maximize client and shareholder value. The pending sale of the benefits administration and HR BPO assets is expected to generate gross cash proceeds up to $4.8 billion, including $4.3 billion of cash consideration at closing and an additional consideration up to $500 million based on performance. Total after-tax cash proceeds are expected to be $3 billion. This reflects a multiple of approximately 12.1 times 2016 EBITDA of $396 million, which includes inter-Company corporate allocations and other expense adjustments.

We believe this transaction reflects a continuation of a proven strategy and is further evidence of our disciplined capital management approach to drive improved return on capital, which has increased each year since 2010, up 540 basis points to 17.1% in 2016. Driven by effective capital deployment of free cash flow and transaction proceeds, savings from operating model integration, and a lower effective tax rate, we expect the transaction to be accretive to 2018 FactSet consensus analyst estimates of $7.97 per share.

Further, we also announced that part of the proceeds from this transaction will be allocated to an increase in our previously authorized share repurchase program. The repurchase program will increase by $5 billion, bringing the total amount currently authorized for repurchase to approximately $7.7 billion as of February 10, 2017.

Lastly, we expect the transaction to close by the end of the second quarter 2017 with results of the assets being placed into discontinued operations for the first quarter of 2017. For modeling the impact of divested operating income and stranded costs going forward, we would eliminate $323 million of adjusted operating income, while adding $91 million of corporate allocations and other expense adjustments. These two adjustments we estimate would reduce future expectations by $414 million on an annual basis before any other adjustments for timing of close and potential actions we may take to improve operational performance.

Now let me turn to the financial results for the quarter and year on page 8 of the presentation. Our results in the quarter reflect growth, operational improvement in both segments, strong double-digit free cash flow growth to a record $2.1 billion for the year, and effective capital management. Further, we deployed roughly $2.5 billion of capital in 2016 through share repurchase, attractive acquisitions in high-growth businesses, and dividends.

Our core EPS performance, excluding certain items, increased 13% to $2.56 per share for the fourth quarter compared to $2.27 in the prior year quarter. Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on page 13 in the press release include non-cash intangible asset amortization and non-cash expenses related to certain pension settlements, as well as transaction costs related to the sale of the outsourcing assets.

Also included in the results was a $0.03 per share favorable impact related to foreign currency translation due primarily to US dollar strength against the pound. For the full year, foreign currency translation had a $0.01 unfavorable impact on EPS. If currency remains stable at today's rates we would expect foreign currency translation to have a modest unfavorable impact in the first quarter of 2017.

Now let me talk about each of the segments, on the next slide. In our Risk Solutions segment, organic revenue growth was 3%, operating income increased 9%, and operating margin increased 190 basis points to 27.6% compared to the prior-year quarter. Operating margin improvement of 190 basis points reflects solid organic revenue growth across every major business and 100 basis points favorable impact from foreign currency translation, partially offset by $6 million or minus 30 basis points of transaction-related costs for acquisitions previously mentioned. For the full year, operating income increased 5% and operating margin improved 90 basis points to a record 24.5%, driven by return on our investments across the portfolio and a 60 basis point favorable impact from foreign currency translation.

Turning to the HR Solutions segment, organic revenue growth was 5%, operating income increased 7%, and operating margin increased 210 basis points to 28.3% compared to the prior-year quarter. Operating performance in the fourth quarter primarily reflects strong growth in our high-demand investment areas and expense discipline as we take steps to reduce certain costs related to previous dispositions. Results were modestly offset by an $8 million or minus 10 basis point unfavorable impact from foreign currency translation.

For the full year, operating income on a reported basis decreased 1% and operating margin increased 30 basis points to a record 18.4%. Driven by specific decisions to dispose of certain businesses at the beginning of 2016, we believe it's helpful to look at the underlying operational improvement of the platform. Adjusting for the impact of approximately $29 million of lost operating income and stranded costs related to previous dispositions, and $20 million of unfavorable foreign currency translation, underlying operating income would have increased 5%, with operating margins increasing 120 basis points to 19.6% for the full year.

Now let me discuss a few of the line items outside of the operating segments, on slide 9. Unallocated expenses decreased $4 million to $57 million. Interest income was $3 million compared to $4 million in the prior-year quarter. Interest expense increased $2 million to $70 million due to an increase in total debt outstanding. Other income of $9 million primarily includes gains due to the favorable impact of exchange rates on the remeasurements of assets and liabilities in non-functional currencies.

The prior-year quarter primarily included a gain on the sale of our absence management business in outsourcing in HR Solutions. Going forward, we expect a run rate of approximately $45 million per quarter of unallocated expense, $3 million per quarter of interest income, and $70 million per quarter of interest expense.

Turning to taxes, the adjusted effective tax rate on net income from continuing operations, excluding the applicable tax impact associated with non cash pension settlements, decreased to 14.9% compared to 17.9% in the prior-year quarter. Changes in the geographic distribution of income and certain favorable discrete tax adjustments impacted the adjusted effective tax rate in the current quarter and for the full year against our underlying operating tax rate of approximately 19%.

The prior year quarter adjusted effective tax rate excluded the applicable tax impact associated with expenses related to legacy litigation. As discussed on prior calls, discrete tax adjustments can be favorable or unfavorable in any given period.

Lastly, average diluted shares outstanding decreased 4% to 268.3 million in the fourth quarter compared to 279.3 million in the prior quarter as we effectively allocate capital. The Company repurchased 1.8 million Class A ordinary shares for approximately $200 million in the fourth quarter. Actual shares outstanding on December 31 were 262 million, and there are approximately 5 million additional dilutive equivalents. Estimated Q1 2017 beginning dilutive share count is approximately 267 million subject to share price movement, share issuance and share repurchase.

As mentioned previously, the Company announced an increase in its previously authorized share repurchase program this morning. The repurchase program will increase by $5 billion, bringing the total amount currently authorized to repurchase to approximately $7.7 billion as of February 10, 2017.

Now let me turn to the next slide to highlight our solid balance sheet and strong cash flow growth. At December 31, 2016, cash and short-term investments decreased to $721 million. Total debt outstanding was approximately $6.2 billion. Total debt to EBITDA on a GAAP basis was 2.5 times. While debt to EBITDA will be initially elevated as a result of this transaction, we expect to return back to the 2.5 area in 2018.

Cash flow from operations for the full year increased 16% or $317 million to a record $2.3 billion, primarily driven by an increase in underlying net income after adjusting for certain non-cash pension expenses, lower cash pension contributions and lower cash taxes. We also saw underlying working capital improvement reflected by a two-day decrease in day sales outstanding over the trailing 12-month period. Free cash flow, as defined by cash flow from operations less CapEx, increased 22% or $385 million to a record $2.1 billion, driven by strong growth in cash flow from operations and a $68 million decrease in CapEx. In 2016, we delivered strong double-digit free cash flow growth, reflecting momentum as we focus on converting each dollar of revenue into the highest free cash flow yield.

Turning to the next slide to discuss our free cash flow growth over the long term, we value the Firm based on free cash flow and allocate capital to maximize free cash flow returns. We've made substantial progress since introducing free cash flow as a key financial metric in 2012, and continue to take significant steps to position the Firm for double-digit free cash flow growth over the long term.

There are three primary areas we expect to contribute to incremental free cash flow growth going forward. 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. We've made substantial progress in this area over the last five years, and working capital provided a positive inflow as part of our record free cash flow generation in 2016. We expect working capital to contribute to free cash flow by over $500 million over the long term. And third, is lower cash tax payments, reflecting a lower effective tax rate over time.

In summary, we delivered positive performance across each of our four key metrics for the quarter and full year. We're heading into 2017 in a position of strength, driven by substantial investments in high-growth areas, our record free cash flow generation, and continued discipline around capital deployment opportunities. We've increased return on invested capital from 11.7% in 2010 to over 17% in 2016. The transaction announced this morning will create, will further enable the Firm to improve return on invested capital, accelerate free cash flow growth and create the next wave of shareholder value creation.

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

(Operator Instructions)

The first question is coming from the line of Dave Styblo from Jefferies.

Thanks for the questions. I think I'll start with a qualitative question just about the transaction here and understanding maybe the history of when you put these assets together. And I think the rationale back then was cost synergies and diversification and so forth. And then over time, as we fast forwarded, can you just explain a little bit more about the rationale now as you're divesting these assets? Is it more so because it's maybe one of your lower-margin business lines and you see better opportunities for the ROIC as you look to deploy some of that cash organically or inorganically internally to some of the other areas that you mentioned? Maybe you could flush out some of those opportunities that you're looking at. And then I've got a second question on just the accretion that I'll hold for you in a second.

Sure, and it's a great place to start. Dave, for us, we see this as very much a natural progression. And, really, you go back more than a decade as you think about what we tried to do. Same strategy, same approach focused on preeminent firm in the world, focused on risk retirement, health, all the things around that -- talent, capital, things that come with that really risk retirement and health.

You've seen us make substantial investments all along the way, particularly focused around expertise and excellence in advice and solutions. And where we can underpin it by data and analytics, we've doubled down and invested more and more against that. That has served us exceptionally well. We love that strategy. We continue to double down and invest in that strategy.

The addition of Hewitt to the Aon family in 2010 was a great catalyst for us that reinforced our efforts around retirement and health, among other areas. And we've really incorporated those capabilities and continue to strengthen to build Aon.

And all you're seeing today is yet another opportunity to step back and say -- where is the best place for us to put capital, how can we do it most effectively, to reinforce the same strategy -- pre-eminent firm in the world focused on risk retirement and health, particularly around advice, solutions, underpinned by data and analytics. And that's what we are able to do today as we announce this divestiture.

What's great about this is we're taking our outsourcing assets, partnering with Blackstone. Our clients are going to be exceptionally well-served with Blackstone and the innovation they can bring to the table. And we are going to, then, now be able to innovate, more focused on our core strategy around risk retirement and health on the topics of advice, solutions and data. So, for us, this is just a great outcome and represents a continuation of a strategy we've been on for a long time that served us quite well.

And, Dave, the other thing I'd add, just to your question on return on capital, is it's absolutely driven by our return on capital strategy. This is a lower revenue growth, lower-margin business for us. You can see that in the schedule attached to the transaction release. And it will improve the overall return on capital of Aon. We believe Aon post this transaction will be higher revenue growth, higher margin, and higher return on capital with, higher free cash flow growth.

And as far as the areas -- I know you mentioned a couple of the exchanges and then reallocating assets to retirement and so forth -- can you talk a little bit more about those areas that you're most interested in, whether it's organically or inorganically?

We're going to continue, again, to make investments all along the topics of retirement, health, risk et cetera. If you think about maybe just the last year, the investments we have made in Admix, Universe, Cammack, Mayfair, all these are areas that really are health-related acquisitions that brought great capability, the investments we've made in delegated. We love this space. It's gone from $10 billion, as I said before, to $90 billion, and delegated. So, love the space around retirement.

You see us investing a lot in data and analytics as it relates to risk, retirement and health. So, for us, Dave, this is, again, a continuation of a strategy we've been on for a long time. And this gives us the opportunity to allocate even more capital into these areas and really double down on risk, retirement and health.

This is quite consistent. If you go back in time and think about what we did when we divested our insurance underwriting assets and invested it back into the business, now we've got yet another opportunity, Christa described and I described, a real catalyst for us to increase shareholder return as a result of this.

Okay, that's help. And then just on the numbers, maybe you can give us a little bit more of a quantitative bridge for the operating income loss -- I think it's 15%-plus of the total -- and how you replace that, whether it's -- I think buybacks can only do so much. Maybe you could give us a better idea. Are you thinking about using maybe half of the $3 billion for buybacks or some range there? And then what else is helping to bridge that? I know you talked about operating expense savings. Is that more so because you're just integrating the businesses a little bit more? And then on the tax savings, is there actual real tax savings or does the tax rate go lower just because the business mix changes?

Thanks, Dave. I think in terms of how you think about modeling this, if you took the 2016 operating income number on a GAAP basis, you'd eliminate $323 million of adjusted operating income. And then you'd add back $91 million of corporate allocations and other expenses. So, therefore, you'd adjust your 2016 numbers by $414 million on an annual basis, and that's really the basis from which you'd then start to model going forward. So I think that's what you're taking out.

In terms of guidance going forward, what we have said is we expect to be accretive to 2018 FactSet analyst estimates of $7.97. And the way in which we would get there is continued operating income growth in the business, continued savings as we bring together the operational model of Aon under Aon United, areas like IT and real estate. As you think about, Aon is much more focused on advice and solutions. Its outsourcing business being much more capital intensive, it allows us to actually generate savings on the operating model side.

We will have a lower effective tax rate, really as a result of the things we continue to say -- lowest statutory rate reductions in different countries around the world and overall geographic distribution of income. And in terms of use of proceeds, as we think about the business going forward, we really think about continuing to deploy proceeds on a return on capital basis in terms of cash on cash returns. As you look, and we would expect that we would deploy the proceeds and our free cash flow growth in a mix of M&A and share repurchase. If you look at 2016, we did about $1 billion of M&A. As we think about the pipeline of M&A we have, with fantastic return on capital opportunities there, we would expect that trend to continue.

And we also, as you saw, authorized an increase in our share repurchase program of $5 billion, and we now have $7.7 billion of share repurchase authorization remaining. And share repurchase remains our highest return on capital opportunity across Aon. So, we do see terrific opportunities through improved operating income growth, M&A, share repurchase, reduced operating model savings and a lower effective tax rate to get back to accretive in 2018.

Thanks. I'll step back for others.

Thank you. Our next question comes from the line of Adam Klauber from William Blair.

Good morning. Thanks. Also on the transaction, you're selling the benefit administration platform of HR BPO, but it sounds like you're still going to be in the benefit brokerage business and the exchange business. Can you tell us how that's going to work?

Adam, it's very much going to work like it works today. Think about it, if you take the exchanges, for an example, just as it is today, we're going to be involved in architecture and design, all the carrier relationships, the plan details that come together, the actuarial work which underpins that, the risk management which is so important and critical for the back end risk adjustment of that. And our new partner at Blackstone is going to be helping and supporting around administration and call centers and enrollment flow and all of the things that are important to that.

At the front end, this is a place where, as we think about innovation, we're going to continue to invest in data and analytics to really innovate on the front end, as we think about the architecture and design. So, for us, this is a very natural progression. And what we're excited about is we're now going to actually be bringing to a client innovation on both the front end more intensively through us and on the operation side through Blackstone. So, we think this is, again, as I described a real win-win. It lets us really focus on the areas that we have highest interest in, highest return on invested capital, high margin, high growth, and it gives our clients the opportunity to actually benefit from more innovation across the supply chain.

So, it sounds like you're still going to sell and distribute the product but Blackstone will really run the technology and call center. Is that how the arrangement works?

Yes, it really is. It's a great way to describe it. And, again, I'd think about it, for those who are more focused and familiar with on the risk side of the business, it's not dissimilar to structuring an incredibly complex transaction for our client on the risk side, and then we partner with insurers who obviously do the underwriting and some of the claims processing and pieces around that. So, we think this is a very natural progression and we're very excited about it.

Okay, thanks. And then as far as the Workday and some of the other ERP implementation service business, is that a similar arrangement? Are you keeping the distribution or is that business mainly going to Blackstone?

No, this all goes to Blackstone. And, again, we wanted to make sure that platform was a very standalone clear platform that served clients effectively. We believe we've got that accomplished. And we're going to focus on the advice solutions part of the overall supply chain for our clients.

So, will you still be selling that Workday implementation but then Blackstone will be doing the work? Is that, again, how it works?

No, it's not. Again, Blackstone owns all the pieces around the outsourcing parts of this and the execution parts of this. We'll be relating to clients on the front end on the overall program and how it would work for them.

Okay. And then on the free cash flow, obviously you've done a great job. You previously talked about a target. Does the target reset lower because you're taking a lot of free cash out of the business? How should we think about that going forward?

Obviously we're very pleased with the $2.1 billion in free cash flow for 2016. It was really driven by operating income growth, improvements in working capital, lower pension cash and lower cash taxes. So, we're very pleased with that outcome, and you can see.

We expect free cash flow to continue to grow double digits going forward. So, that will be the expectation, as I said, because Aon exiting this business, Aon post this transaction is really a higher revenue growth, higher margin, higher return on capital business with higher free cash flow growth.

Right, but does the base start from a lower basis?

Yes, that's right.

Okay, that makes sense. And then as far as the cost saving element of this, will there be a charge related to it? And will most of those cost savings be attained in 2018 or is this going to be a several year program?

Like we've always done, Adam, for us this is about building long-term value. So, you'll see us invest back into the business in all the ways Christa described, but also around creating efficiencies. So, in the coming months and quarters you're going to see us take up efforts and initiative to do that. Again, we have an opportunity now to really streamline the business in ways we haven't done before, very much focused on the areas around advice solutions and data and analytics.

Okay, thank you very much.

Thank you. The next question comes from the line of Quentin McMillan from KBW.

Hi, thanks very much, guys. I just wanted to touch on the tax rate. You obviously said that you're going to be able to achieve a lower tax rate by divesting this business. And I'm assuming that's in relation to the current tax environment that we have today. But could you talk about any thoughts that you might have if the US corporate tax rate was to decline? Would that thought basically still hold true? And then just on the bigger picture questions that are out there, do you have any current thoughts about interest deductible going away or anything else that may come to pass?

Quentin, as we think about the legislative environment we're in, obviously there's a lot of uncertainty right now. We're certainly monitoring it very closely. At this stage it's too early to tell as there's little guidance and no draft legislation written on how this would impact financial services, insurance or insurance brokerage. So, we'll let you know as we learn more.

Okay, great. Then just in terms of the health and benefits business as it relates to the healthcare exchange, are you going to be folding the healthcare exchange in there as a tool that will be sold in conjunction with that? And then, also, obviously putting up double-digit growth in health and benefits in Asia and EMEA was very strong in the quarter. But in the Americas, some other peers of yours had talked about a little bit longer decision-making process from some of their clients related to the ACA and other healthcare decisions that could be changing. Did you see any weakness in the Americas that could show up in the back half of this year or might have changed the selling cycle there at all?

We really didn't on that point, Quentin. When we would step back and say -- listen, for us, it isn't about one specific area, so it's not about an exchange or health and benefits piece, it's about health. As we've said before, we love the category. We've got a business that's a $1.5 billion business that has grown double digits over the last three years, with a very attractive margin. And we're doubling down and investing in that, whether it's on the exchange, in H& P, elective. We love the space and we're going to continue to double down and invest in it and we see a lot of momentum there.

Okay, great. And just one quick one, in terms of the share repurchases, it was just a little bit below what I would have expected in the fourth quarter. Can you just comment, was your share repurchase in the fourth quarter impacted by the fact that you had material non-public information from this deal?

Yes, it was.

Okay, thank you.

Thank you. Our next question comes from the line of Sarah DeWitt from JPMorgan.

Hi, good morning. Looking at the Risk Solutions organic growth in the quarter, I thought there was going to be some revenue that was shifting from the third quarter to the fourth quarter. So, I thought you would have seen a sequential pick up in organic versus Q3. Could you just talk about what was going on there?

Yes, really, for us, we actually feel good about where we finished in the year overall, Sarah. Obviously the 6% comp in the prior-year quarter created a little headwind. We don't ever like to use that as an excuse but the math is the math. But we really feel good about how we finished the quarter and the year.

If you look at net new business growth, it's, again, another record across the Firm with real momentum, particularly around what we've done on Aon Client Promise and how that's affected retention rates. So, we feel good about it. We would reflect -- again, we always want to drive for more growth and we're working on doing that, but we finished the year at 3% overall and record margin. So, for us, pretty good progress.

Okay, great. Thanks. And then just a couple numbers questions on the deal today. How much of the proceeds will you be using for share buybacks? And how much do you expect your overall tax rate to fall and how much could be he return on invested capital improve?

Sarah, as we think about the starting point, we do believe that the after-tax cash proceeds are expected to be about $3 billion. And as we think about those cash proceeds plus our free cash flow, we have substantial amounts of cash to invest. And we really believe we're going to invest in a mix of M&A and share repurchase. And we're going to allocate that based on return on capital and cash on cash returns.

You can see the chart in the release in terms of return on capital, how much we've grown, over 540 basis points over the last five years. We are divesting a lower revenue growth, lower-margin business and therefore you can expect return on capital to continue to increase. And we haven't given specific guidance around overall mix of allocating the cash because we continue to optimize it on a return on capital basis.

Okay, thanks. And then just the tax rate?

As we think about the tax rate going forward, we are not giving future guidance. As we said, we're monitoring the legislative environment very closely and will continue to update you as we learn more.

I just present with the deal, could you even just tell us what the tax rate was on the business sold?

It's certainly a higher tax business because it's mostly a US-based business. As you look at the growth proceeds, you can see the tax rate applicable is very high because it's mostly a US-based business.

Okay, thank you very much.

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

Thank you and good morning. With the divestiture, in the past you talk about HR Solution operating margin target of 22% over the long run. Could this change that target as well as the trajectory towards there?

Kai, for us, again, we feel very good about where we are and the momentum we have around risk retirement and health. And this will continue to reinforce progress there. So, you will see momentum and push against that. Again, we had a record margin as you reflect on the year. So, we finished the year at 18.4%, which was, again, the highest it's ever been, and you're going to see continued progress against that.

As Christa described, we literally just divested of the business. It was lower growth, lower margin and lower return on invested capital. So, by definition, we're going to get some momentum against that. But that's not as important for us as what we're going to be able to invest now back into the business in the ways Christa described, both in M&A as well as in what we're doing in areas like delegated, like the exchanges, like data and analytics organically, which underpin that. So, for us, we believe this is a catalyst for performance, which is what Christa highlighted in her discussion.

Great. And then you talk now more about potential acquisition opportunities. I just wonder, in the past you've been, recent years, more focused on buybacks and now acquisition coverage. I just wonder, is buyback still best return, from your perspective, or will we see more active interim acquisitions?

Kai, buyback, as I said earlier, is still the highest return on capital opportunity across the Company, and that's why you saw the increased $5 billion authorization of buyback this morning. We have $7.7 billion of buyback authorization remaining. And what we see in the M&A pipeline is some terrific high return on capital opportunities. And we will be generating tremendous free cash flow growth over the coming years, and we've got proceeds from the transaction, so we expect to be investing in both.

If you look back over time, just building on what Christa just described, over the last 10 years we've really deployed $18 billion-plus around decisions, which were obviously in dividends but also the part left over was roughly half in buyback and roughly half in M&A. So, for us, it really has been an investment opportunity over time.

We have been very, as Christa described, disciplined about how we've done that. I think -- Christa -- last year we had zero in M&A in 2015 and this year we've got $1 billion in 2016. So, if you think about -- and now we're going into 2017, so for us this is not about any criteria. This is about straight up return on invested capital and making sure we're delivering on behalf of our clients in that regard, but also shareholders. And that's how you'll see us deploy capital going forward, just as we've done in the past.

Great. Last one on free cash flow per share, will that also be accretive in 2018, similar to the adjusted EPS?

We haven't given guidance on that. What we said about free cash flow is we expect free cash flow to grow double digits going forward.

Okay, great. Thank you so much.

Thank you. Next question comes from the line of Jay Cohen from Bank of America Merrill Lynch.

Thank you. Just to clarify one thing, I'm assuming that the added potential consideration of $500 million, that will not be included in earnings -- correct?

It's going to happen over time, Jay, so it would happen many years from now. We really think about that being based on performance. We would give you guidance over the coming years as the performance gets delivered.

But you will include it then in your adjusted earnings eventually?

It's cash. It wouldn't flow through earnings.

Right, okay, that's what I thought. Just double checking on that. And then given your goal of reducing the leverage, will you have to take some explicit deleveraging actions to deal with your debt at all?

We do not intend to do that. We do believe that the growth in operating income, the additional operating income that we will add from M&A, will be terrific. And, as I said, our debt to EBITDA on a GAAP basis were 2.5 times at year-end 2016. And while we will be slightly elevated post this transaction we expect to return to 2.5 levels in 2018.

That's really helpful. And I'm going to sneak one more quick one in. That is, when you talk about a lower tax rate helping the accretion by 2018, I'm assuming that's simply because you're getting rid of a business that has a higher tax rate. This sale should not impact your tax rate from your other businesses -- correct?

It shouldn't, no.

Good, thank you.

Thank you. The next question comes from the line of Paul Newsome from Sandler O'Neill.

Good morning. Maybe some clarifying questions. The $3 billion in cash, does that include the proceeds from the $500 million in the performance bonus related?

No, it does not.

So that's then theoretically a positive prospectively?

It would theoretically be incremental cash over time. And given its performance base, as I mentioned earlier, we would give you an update on the timing and amount of that based on performance in the coming years.

Was the outsourcing business that you're selling inherently a more volatile business from an earnings perspective than the rest of Aon or was it pretty similar?

It's fairly similar. The way I would describe it is it was a lower revenue growth, lower-margin, more capital-intensive business. But it was not more volatile.

And then -- this is a little bit of an aside -- the accounting change that you made related to the revenue rec in the risk business, am I to assume that that seasonality change will persist prospectively?

Absolutely right.

Okay, that's it for me. Thank you.

Thank you. The next question comes from the line of Josh Shanker from Deutsche Bank.

Yes, thank you very much for taking my questions. Two easy ones. The $3 billion you're citing, does that include or exclude the potential higher price if you meet certain performance objectives?

It does not include the $500 million earn out.

Excellent, great. And, two, following on Adam's question a little bit, anything about healthcare exchange, I think it's a technology, I think it's a distribution platform. Is Blackstone going to be operating the healthcare exchange and you're going to be doing the healthcare design? How is that relationship going to work on this very growthy business?

On the exchanges, again, as I described before, we're retaining the exchanges. We're going to work with Blackstone on the exchanges but we're retaining the exchanges. So, we're doing design, broking, actuarial, as those are put into place, and Blackstone will be doing administration delivery against that platform.

Again, we think this is going to be a very seamless connection. And the beauty of this is we're going to have more innovation on the topic of exchanges than ever before -- us, on the front end doing what I just described; Blackstone on the operating back end doing what they described. And it allows us to apply data and analytics more effectively to actually create that innovation. And you can expect Blackstone will do the same thing on technology innovation from an operation standpoint. And for us, the net is, as Christa described before, we're in a less capital-intensive situation in which we're able to focus on advice and solutions consistent with what our overall strategy is.

And if, let's say, hypothetically an employee accesses a portal and is the Company is giving $150, $200 to the exchange operator, is Aon getting those revenues or is blackstone getting those revenues?

These are split. Blackstone owns the processing pieces of this, as I described before, and we own the front end design, broking, actuarial pieces, as I described before.

So, you'll share portal fees?

We're going to get a commission from that standpoint, and then from the operating side Blackstone will get the operating revenues from that.

Okay, thank you very much.

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

Thank you. Good morning or afternoon. Greg, I was hoping you could just walk us through or at least help me understand relative to the original Hewitt acquisition in 2010. I know in your prepared comments or at the beginning you mentioned that this is a low-margin business and low growth, and compared it to the previous sale of underwriting, as I understand. But the underwriting business was a legacy business when you came onboard in the construct of Aon, as opposed to Hewitt which was a deal you guys did and the benefits in HR BPO being the lion's share of that business when it was transacted.

I'm just trying to understand what's transpired over the last six years that's given you a different view of that, because on a return on capital basis, of that $4.9 billion deal done in 2010, I'm not seeing the return on capital of that transaction then. Is the world different? Is it the pieces come together differently than expected, in hindsight. Just the thought process, I would appreciate.

Let me just step back, Charles, because I think you're making some assumptions which actually are not how we saw it at all. In fact, if we step back, we couldn't be actually more excited and pleased with the bringing Hewitt into the Aon family. This has always been about building content capability around the topics of risk, retirement and health. And Hewitt brought such tremendous capability for us on retirement and health.

We're sitting today in the strongest position we've ever been, in categories we absolutely love. We just delivered record margin against those categories. And now we're, in essence, in a position where we can continue to grow and reinvest in those areas. So, for us, Hewitt was just an incredibly positive catalyzing event for Aon that really reinforced and underpinned our strategy. So, we loved this.

And the outsourcing business, from that standpoint, was a business that was more capital intensive, was a business that was lower return on invested capital. But we continue to invest and build that, as well. And now we have an opportunity, as we announced today, to step back and say -- now that we've achieved that we can actually now divest that asset and now redeploy back into the areas that we have really been focused on all along. So, for us this is very much a continuation, very much a logical step and a strategy we've had for over a decade, and really reinforce.

And then, by the way, just as a reference, again, if one were doing the math you'd go back in 2010 and look at our return on invested capital, and since 2010 our return on invested capital has increased 540 basis points. We feel pretty good about that progress. We can always do better. Feel good about that progress. And it's a record now 17.1%.

The day before we announced Hewitt, I think we were trading at about $38, and last I looked we were slightly higher than that now. So, from a standpoint of how things worked, we feel great about that, not so much from a return standpoint -- which, by the way, the mechanics were exceptional, just exceptional -- but really from a strategic standpoint. Then I would urge you not to compare what the acquisition of Hewitt was versus what today is because we didn't keep Hewitt separate. Hewitt was about Aon, it was about strengthening Aon, and it actually accomplished all that, frankly, and exceeded our expectations.

Okay. I appreciate that. And a couple of numbers questions. For Christa, thinking of the free cash flow going forward, you guys have put in this presentation the annualized growth, which is very helpful. Is it reasonable since -- how you calculate the cash flow of operating cash flow less CapEx but we don't have a split out by business. Our starting point of the $2.1 billion for 2016 just being netted down by the adjusted EBITDA number that you provided for the sold business, is $1.6 billion the adjusted starting point for cash flow for 2016? Is that a reasonable way to think about your double-digit starting?

Yes, I think. That -- and then there was CapEx of about $80 million. So, as you think about that, you're starting with a slightly higher basis and then double-digit cash flow growth from there, I think is the right way to think about it.

Okay. And then, finally, on taxes, I know you aren't giving guidance, but the tax hit on the sale, about 30%, I think, on the $3 billion cash versus the $4.3 billion sale price, is that going to have a disproportionate effect in 2017 numbers relative to your tax rate going back? Is that going to flow through differently than the business would? I'm just trying to understand on how that's going to affect current year's overall organizational tax for the 2017 period.

I would separate out the transaction from the operating rate. And I did say again for 2016, the right underlying operating rate for Aon was about 19%. And it has remained that way for several years. That's been the operating rate for the last couple of years. The transaction is a one-time item and would not flow through the adjusted EPS and effective tax rate.

Thank you very much for the answers.

Thank you. Our last question comes from the line of Ryan Tunis from Credit Suisse.

Thanks. I just had a question on how we should think about the level of accretion possible here relative to the consensus $7.97, because thinking about the deployment of proceeds into all buyback or M&A and the lost operating income of $323 million doesn't seem to quite get me back to $7.97. And I hear you guys that you're not giving the guidance on the tax rate or specific cost saves, but I'm wondering, should we be thinking about this as significantly accretive to $7.97 to compensate you guys for the risk of having to do this? Or is $7.97 more the target now for 2018? Thanks.

Ryan, what we've said is we're going to be accretive to the FactSet $7.97. We haven't given more guidance than that. And what I would say is it is a combination of proceeds and return on those proceeds from the transaction, continued organic revenue growth and margin expansion in our businesses, savings as we bring together the operational model, particularly in IT and real estate, and a reduction in tax rate. So, they are the component pieces that get you that.

What I might add, Ryan, if I could, we didn't see this -- you mentioned risk, compensated for risk -- we don't see it that way. I just want to emphasize again, we really see this as an opportunity to take another step forward in a journey that we've been on for over a decade. This is exactly consistent with what we continue to do as we allocate capital, reallocate capital, think about our structure, think about performance improvement, all against a strategy around being the preeminent firm focused on risk, retirement and health in every single way, and using more and more data and analytics, content, insight as a way to drive that strategy. So, for us this was a natural progression.

In fact, the possibility to do it and serve clients well on the outsourcing side for us made it imperative. This is something we absolutely had to do because we're excited about what it means for Aon, we're excited about what it means for Blackstone, and we're excited about what it means for our clients. So, for us, this wasn't about risk. This was a real step forward that strengthens our Firm for the long term. And I'd just say, as we started this conversation, we see this as a real catalyst for shareholder value creation for Aon.

Okay, understood. Thank you. And then I think Christa just mentioned that what can continue to drive accretion here is margin expansion in the remaining businesses. Looking at organic growth this year just in the brokerage side, 3%. To have margins expand off of that, are you saying that you think that organic can accelerate off the 3% next year? Or do you think that 3% organic growth can still produce margin expansion in that business? Thanks.

Ryan, one of the things we're extremely proud of is in 2016 in our risk business we delivered 3% organic revenue growth overall and record margins of 24.5%. And one of the things that we have mentioned many times is, because of the investments we've made over the last several years in data analytics, we can drive margin expansion quite substantially at lower levels of growth. It's certainly not our aspiration. Our aspiration is to grow higher than we are today, but we are getting return on those investments in data analytics, and that is driving more than half of the margin expansion you've seen in each of the last three years. So, we're very confident about continued margin expansion in our risk business.

Thank you for the questions.

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

Thanks very much, everybody, for joining the call. And we look forward to our discussion next quarter.

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