Gregory C. Case - President and Chief Executive Officer Christa Davies - Chief Financial Officer & Executive Vice President.

Sarah E. DeWitt - JPMorgan Securities LLC David Anthony Styblo - Jefferies LLC Quentin McMillan - Keefe, Bruyette & Woods, Inc. Kai Pan - Morgan Stanley & Co. LLC Vinay Misquith - Sterne Agee CRT Brian Robert Meredith - UBS Securities LLC Charles Joseph Sebaski - BMO Capital Markets (United States) Josh D. Shanker - Deutsche Bank Securities, Inc..

Good morning and thank you for holding. Welcome to Aon Plc's First Quarter 2016 Earnings Conference Call. At this time all participants will be in listen-only mode until the question-and-answer portion of today's call. If anyone has any objection, 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 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 risk 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, and welcome to our first quarter of 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. And finally, free cash flow was $221 million, reflecting solid underlying performance in our seasonally weakest cash flow quarter. Overall, our first quarter results reflect 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 U.S. Retail and EMEA. New business generation of $225 million across retail brokerage, including record new business in U.S. Retail.

Twenty 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 reinsurer dashboard combined with strategic consulting to help reinsurers to be more effective capital markets for seeing company clients. And our Aon Broking initiative to better match client need with insurer appetite for risk.

A great example of our innovation in data and analytics was the launch of Aon Client Treaty, the largest ever underwritten 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 in feedback from clients around the world. And continue to attract new clients with the Client Treaty being a major differentiator. And finally, we're expanding our content and global footprint through tuck-in acquisitions that increase scale in emerging markets or expand capability.

Reflecting on the individual businesses within Risk Solutions. In the Americas, organic revenue growth was 4%, similar to the prior year quarter. Exposures continue to be positive across the region, while the impact on pricing was negative, resulted 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 renewable book portfolio with many regions delivering strong growth, despite macroeconomic challenges facing the region. In U.S.

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 continue 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, as 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%, 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, capital is being deployed to new markets, including U.S. 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 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 clients 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 de-risk pensions plans; and support for delegated investment solutions, a strong growth area, where assets under management have grown from $10 billion to roughly $85 billion in 5 years.

Continued investment to strengthen our industry leading portfolio of health solutions, covering a full range of benefit strategies, client size, and funding choices, including our suite of private health care exchanges.

We're also investing in Software-as-a-Service models 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.

And finally, we're investing in our Talent and 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 in 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 the quarter, more share repurchase than we've done in any quarter since 2008.

Strong share repurchase, coupled with the recent announcement of a 10% increase to the quarterly cash dividend, reflects 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 U.S.

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 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 our investments in data and analytics across the portfolio.

We continued 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 improvement 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 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 3 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 for pension, CapEx, and restructuring, which we expect to free up more than $90 million of annual free cash flow between the end of the 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 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 in 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..

Thank you. We will now begin the question-and-answer session. And now our first question comes from the line of Sarah DeWitt of JPMorgan. You may now ask your question..

Hi. Good morning..

Hi, Sarah..

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

Let me just reflect and take a step back a little bit, Sarah. We feel very – candidly, very good about continued progress. You saw it. And you've seen us 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 in 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 – think about from Aon's standpoint, three sources of growth. And just thinking on the Risk side for a moment. Our ability to grow in the traditional business, property/casualty, D&O, all those pieces reflects a multiyear investment in something we called Aon Client Promise.

This is 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 roll out – by that way, that's also across HR Solutions as well. Look at new business in Q1. It was a record in U.S. Retail. It was a record worldwide. By the way, that's a record on top of a record.

It was the same in Q1 in 2015 with record levels of retention. So this is just 94% in U.S. Retail, for example, and EMEA. So these are just examples of sort 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 more – 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 got two existing $1 billion revenue businesses we've invested in heavily. Affinity being one, $1 billion business growing exceptionally well. Health and Benefits, $1 billion business plus, also growing just proportionately 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've made substantial investment. And just a few examples of those would be like Aon Client Treaty, I highlighted the largest ever underwritten portfolio of risk for Lloyd's. Aon InPoint, 40 plus carriers on that platform now. And ReView.

And then finally I would just highlight what we just did in U.S. 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 – bringing 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, 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 propose essentially limiting the amount of inter-company 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 regulation published by the U.S. Treasury. The first proposed regulation applies to inversion transactions, and therefore does not apply to us. We completed our redomicile over 4 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 inter-company debt placed after April 4, 2016. Our inter-company debt was placed prior to April 4 and would also not apply to Aon's current global capital structure.

The majority of our existing inter-company debt will come due on 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 inter-company debt as one part of that to help drive investments globally. But there are many other factors that influence that. As a U.K. 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 U.K., where we're 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 a really 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. You may now ask your question..

Hi. Good morning. Thanks for the questions. The 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 the 4% up there. But I'm also wondering, more on the core side, and we've seen of couple of your peers post slower growth than that.

And actually talk about some 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?.

We can step back, David, and essentially say, look – and I described three areas around – the traditional, sort of areas outside the traditional, and then areas related to some of 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 the countries.

So we're in 120 countries around the world. It's the most comprehensive platform out there. And 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 they're – 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. Often times 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 than better than 2015 for our global footprint. But you saw growth across EMEA and the countries I just highlighted. You're seeing new business generation. This is in the core business, net new business generation in the U.S. 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 – in 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 a traditional side, very much the traditional side, as well as the areas like Affinity and Health and Benefits, as well as the 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 standout being particularly soft and it was sort of similar to a prior year.

But can you tell us more about the puts and takes there, the retention, the business activity? And then as it relates to sort of 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.

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 can give a little background on some of the – on details around the margin opportunities here. First, we would say our first quarter performance in Outsourcing is exactly consistent with what we left the year with in 2015.

And our expectations for 2016 are exactly in line with what we had expected them to be. So there has really not been a change. There's a bit of noise in the quarter, which we could describe, but it's exactly the same. By the way, if we just think about Outsourcing growth overall and go back to 2013, 2014, and 2015.

2013 is 1%; 2014 is 1%; 2015 is 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 in reconstructing 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 that 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 inter-company debt aspect in 2023. So it's my understanding that there's nothing wrong with having inter-company 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 U.S. And inter-company debt is the way in which it will be enabled. And so we will continue to use inter-company debt to help us invest and grow our U.S. 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 inter-company 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. You may now ask your question..

Quentin, you may be on mute..

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 sort of drill into the Health and Benefit segment a little bit more specifically. I think you said it's sort of a $1 billion business now.

Can you give us a little bit more color on in terms of if that's growing at an organic clip sort of above or in line with what the rest of your brokerage segment is? Maybe what the profitability is? And sort of how you guys view it currently and going forward?.

Yeah. I would just literally – what I just was trying to highlight a little bit was just when you think about some of the investments we're making outside of some 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, Quentin, 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 Benefits side, which is a $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, 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 5 years. So this kind of 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 in that – and I apologize for not asking it more clearly – is just the divestiture you had in the business as well. Sort of 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 – 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 on 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 the 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. You may now ask your question..

Good morning. Thank you so much. It's just a follow-up of Quentin's question, buybacks. So it looks like $750 million, a very strong number especially for seasonally weak in the first quarter.

I just wonder, does it alter the pace of your buybacks throughout the year? And also could – if could you talk a little bit more about the source of funding for buybacks? Because – in related to last 2 year, pretty strong, like $2.3 billion in 2014 and $1.6 billion in 2015..

Yeah. So, Kai, if 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 an opportunity for us to add additional leverage.

And so there 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 the investment of that cash based on return on capital..

Then just follow up at the leverage.

If the 2.7 [times] level is the optimum level you want to maintain? Or there you want to work it down? Or you can even lever up from the current levels?.

Yeah. 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 really 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 in an optimal basis..

Okay. Okay. That's great. And then for Greg is, could you comment broadly about the recent market dislocation as well? Your commentary about the rising tension between brokers as well as the carriers..

Yeah. 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, because they're 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 sort of come up with new and innovative solutions. And it's really been great.

I mean 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 that 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 $0..

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

Sure..

Thank you very much. Our next question comes from the line of Vinay Misquith of Sterne Agee CRT. You may now ask your question..

Hi. Good morning. So, the first question is on the Consulting segment. Christa, you mentioned that the margins were 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, when organic growth 22%.

So can you 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. That 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. And 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..

One of the – look, of I'd add today as well. As you think about these investments drive top line, as Christa has 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 sort of making a difference across Aon..

That's very helpful. And the sale of the 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 part 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 that 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 it's 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 a 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 described before. And this will strengthen our ability. We believe this will strengthen our ability to grow organically. And you will 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 that is that just the 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 already? And also the debt increase, my estimate is that you're going to be up by 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 a 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. You may now ask your question..

Yes. Thank you. Just a quick one.

Greg, can you talk about potential implications of Brexit for you guys?.

Operator, you just broke – oh. Yeah. 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 U.K., more frequently than that. As we think about – and we really think about this, Brian, first and foremost for our clients.

And we see there's lots of ways it could – that if it ends up happening that it could impact them and their operations of their businesses over time. And that's really what we're most vigilant on. For Aon we actually feel very comfortable. We'll help them manage through it 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 that there is a set of opportunities here that come out of disruption, 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 really – that's how we'd shape it out..

Great..

And, 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 U.K. from Continental Europe, or pension plans, which 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 U.K., where we have the U.S. 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 a look at what's the pipeline look right now for the Corporate Exchange 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 know it takes time for these things to evolve. And you're seeing that play out on the Health Exchange side.

But it really is 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. You may now ask your question..

Good morning. Thank you..

Hey, 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 – expect to give 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 that math change? The margins on 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 I at some level think that the total line of that business would be even more than that and maybe should be over the next few years..

Listen, we agree in terms of sort of overall opportunity. If you 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 a credit to my Aon colleagues around the world, 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 risk spacing, traditional and non-traditional.

Think about global warming, pandemic, cyber, terrorism, all the different pieces. The challenges on Health, which are unprecedented literally in the U.S. 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, needs for clients.

And our platforms are actually very, very well positioned against these mega, really global needs from a client standpoint. And as I said at the beginning to Sarah's question, the ways we're helping clients are traditional brokerage, all the different pieces around that. There are areas that are outside that, as we continue to evolve and develop.

By the way, that's in HR Solutions and in Risk Solutions. And then in areas like data and analytics, which frankly are opening up an entire new vista for us that we've invested in. This is not flavor of the month for us.

This has been a 7-year set of investments in which we're investing $300 million, $400 million, $500 million over time around on data and analytics and insight. So for us we see this as a 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, strengthening 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 in 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..

Yeah. 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 tradeoffs.

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 – we're excited about where we are on 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. And our last question comes from the line of Josh Shanker of Deutsche Bank. You may now ask your question..

Yeah. Thank you for taking my question. Obviously Sarah had some interesting questions regarding the inter-company 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 facility seems to be in current liabilities and half of it seems to be in long term liabilities.

How does that work? And 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?.

Yeah. But, 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 U.S. via inter-company debt, because inter-company debt is permissible under the new proposed regulations..

Well, and will that – I guess that $9 billion of current liability debt inter-company be able to be rolled over for another year?.

Ryan (sic) [Josh], there's a bunch of normal – it's not inter-company debt. That is normal trade receivables and payables..

Okay. Inter-company – I guess – so when I look at it, it's hard to say. I actually see the – those $19 billion, I guess it looks like debt.

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 inter-company debt..

I think the punch line, by the way, if you step back and think about sort of 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 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 that's happened the last 6 months or the last 6 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 the turn call back over to Greg Case for closing remarks..

I just wanted to say thanks, everybody, for joining today. We really appreciate it. And I 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..