Gregory C. Case - Aon Plc Christa Davies - Aon Plc.

Sarah E. DeWitt - JPMorgan Securities LLC David Styblo - Jefferies LLC Kai Pan - Morgan Stanley & Co. LLC Adam Klauber - William Blair & Co. LLC Elyse B. Greenspan - Wells Fargo Securities LLC Brian Meredith - UBS Securities LLC Jay A. Cohen - Bank of America Merrill Lynch.

Good morning and thank you for holding. Welcome to Aon Plc's Second Quarter 2017 Earnings Conference Call. At this time all parties will be in a listen-only mode until the question-and-answer portion of today's call. If anyone has an 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 second quarter 2017 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..

grow organically, expand margins, increase earnings per share and deliver free cash flow growth. In the second quarter, organic revenue growth was 3% overall, reflecting growth across every major revenue line, highlighted by strong growth in Reinsurance and Health Solutions.

Operating margin increased 110 basis points, primarily reflecting savings from investments in our Aon United operating model. EPS increased 13% to $1.45, reflecting both strong operating performance and effective capital management, including share repurchase of approximately $1 billion in the quarter.

Finally, free cash flow decreased $135 million, primarily reflecting investments in our operating model and transaction related cost, partially offset by operational improvement. Overall, we are fortunate to be operating from a position of strength.

Our first half results reflect 4% organic revenue growth, 160 basis points of margin improvement and 16% EPS growth. This momentum, amplified by new initiatives currently underway will substantially strengthen Aon for our clients and colleagues, creating we believe the next wave of shareholder value creation.

Turning to slide seven, on the second topic of organic growth and strategic investments. Organic revenue growth was 3% overall in the second quarter.

And as I mentioned earlier, on a year-to-date basis, organic revenue growth was 4%, an acceleration from 3% for the first half of 2016, reflecting growth across all five revenue lines with particular strength in Health Solutions and Reinsurance Solutions.

Reflecting on each of our core growth platforms, in Commercial Risk Solutions, organic revenue growth was 2%. On average globally, exposures were modestly positive and the impact from pricing was stable, resulting in a modestly favorable market impact overall.

Results reflect strong growth across the Pacific region in both Australia and New Zealand and solid growth in the U.S. and Canada. In U.S. Retail, new business increased over 20% in the quarter and strong management of the renewal book portfolio drove retention of 93% on average.

Results were partially offset by a modest decline in Latin America and Asia, as both these regions continue to face challenging macroeconomic conditions. In Reinsurance Solutions, organic revenue growth was 6%, an acceleration from flat in the prior-year quarter.

I would note that this is the highest level of organic revenue growth achieved in our Reinsurance business in nearly five years. Results primarily reflect strength in capital markets transaction and advisory for record cat bonds during the mid-year renewal season.

Continued growth in facultative placements and net new business generation in treaty also contributed to growth in the quarter. Results were partially offset by modest unfavorable market impact, primarily in the Americas. Our Reinsurance business continues to deliver improved growth.

And while the first half of the year is expected to be stronger than the second half, we would expect full year organic revenue growth to exceed the level achieved in 2016. Retirement Solutions, organic revenue growth was 1%.

We saw continued strong growth in investment consulting, specifically for delegated investment management services, reflecting an increase in client demand for Aon's tailored solutions and independent advice, as well as improved market performance.

Assets under management and delegated investment management reached $109 billion in the quarter, of which roughly half of the increase since last quarter was a result of new client wins. We also saw growth in our strategic advisory business, where our trusted advisors bring solutions to clients undergoing business change or transition.

Results were partially offset by a modest decline in our talent practice driven by unfavorable timing in the quarter and a decline in project related work. In Health Solutions, organic revenue growth was 5%. Results primarily reflect solid growth in health and benefits brokerage across the U.S. and EMEA, and double-digit growth across Asia.

New business in Asia increased over 30% in the quarter, a great reflection of the depth and breadth of our global capability. In Data & Analytics Services, organic revenue growth was 4%. Results primarily reflect strong growth in our Affinity business, with particular strength in the U.S. Growth in U.S.

Affinity was highlighted by exceptionally strong performance in pet, travel and financial solutions. Now turning to slide eight to discuss areas of strategic investment.

Clients are navigating an increasingly volatile world where economic, demographic and geopolitical shifts combined with the exponential pace of technology change are all converging to create a challenging new reality for businesses.

Aon has a strong track record of developing innovative, first-to-market solutions to help solve problems and create differentiated value in response to specific client needs.

We're investing organically and through M&A across our portfolio in areas such as Data & Analytics, in our Inpoint and Re/View businesses; cyber risk advisory through our recent acquisition of Stroz Friedberg; Affinity, in multiple areas; health and elective benefits brokerage through the acquisition of Admix in Latin America and Univers; health exchanges, where we offer the broadest set of solutions in health; and finally, in delegated investment management solutions, where we continue to grow substantially.

Overall, our strategic investments in high growth areas and in Data & Analytics are improving the firm's growth profile driven by new business generation, strong retention rates, and increased operating leverage across the portfolio, and we believe positioning the firm for continued long-term growth.

In summary, we took significant steps to strengthen our industry-leading, global professional services platform and delivered strong operational performance for both the second quarter and the first half of 2017. I'm now pleased to turn the call over to Christa for further financial review.

Christa?.

Thanks very much, Greg, and good morning, everyone. The actions we currently have underway place us in a position of strength to unlock the next wave of shareholder value creation.

In the second quarter, our colleagues around the world jointly accomplished a significant step of our journey with the completion of the sale of our outsourcing business, a tremendous amount of work and dedication from the global team.

Against that backdrop, in Q2, we delivered organic revenue growth across every major revenue line, strong operational improvement and double-digit earnings growth, highlighted by the repurchase of $1 billion of shares in the quarter. Turning to slide 10 of the presentation.

Our core EPS from continuing operations excluding certain items increased 13% to $1.45 per share for the second quarter compared to $1.28 in the prior-year quarter.

Certain items that were adjusted for the core EPS performance and highlighted in the schedules on page 11 and 12 of the press release include non-cash intangible asset amortization, which includes an impairment charge on intangible assets related to the sale of our outsourcing business, restructuring charges, charges related to certain regulatory and compliance matters and non-cash expenses related to pension (10:56) settlements in the prior-year quarter.

Included in the results was a $0.02 per share favorable impact related to foreign currency translation due primarily to a stronger U.S. dollar versus the pound and a modestly weaker U.S. dollar overall.

Additionally, we incurred $0.02 per share unfavorable impact recognized through other expense from losses on the re-measurement of assets and liabilities in non-functional currencies. If currency to remain stable at today's rates, we would expect no material impact in the second half of the year.

Lastly, EPS from discontinued operations excluding the gain on sale was $0.08 of total earnings per share attributable to Aon's shareholders compared to $0.22 in the prior year quarter. Results in the second quarter reflect one month of results compared to three months in the prior year as our transaction closed on May 1.

Turning to the next slide to discuss our strong operational performance. Operating income increased 9% and operating margin improved 110 basis points to 22.4%, compared to the prior year. Operating margin improvement primarily reflects $44 million or 190 basis points of savings and underlying operational improvements before reinvestments.

Initial savings have been driven primarily by workforce reduction, IT rationalization, vendor consolidation and travel optimization globally. Results in the quarter were partially offset by a minus 40 basis point headwind in errors and omissions expense and a minus 20 basis point headwind resulting from lower non-cash pension income.

For the first half of 2017, operating income increased 12% and operating margin improved 160 basis points from the first half of 2016, primarily driven by organic revenue growth, $54 million of savings from restructuring and other operational improvement initiatives before reinvestment; a strong first half of the year operationally as we kick off our multiyear investment in the firm.

Turning to page 12. I'd like to spend a few moments discussing the investments we're making to create the next generation global business services model that allows for better scalability, flexibility and enhanced colleague and client experience. These investments are intended to create one operating model with increased operating leverage.

Our primary investment areas are across IT, real estate and people. In IT, we expect to create greater insight from data center optimization, application management and strategic vendor consolidation. In real estate, we expected to drive greater collaboration and engagement through real estate portfolio optimization.

And in people, we expect to create efficient scalability of operations and activity including the use of centers of excellence and third-party providers. As part of these operating model investments, we plan to invest an estimated $900 million of total cash out of the $3 billion total outsourcing divestiture proceeds.

These investments include an estimated $700 million of cash charges expected to be incurred; $350 million in 2017, $250 million in 2018, and $100 million in 2019. And an estimated $200 million of incremental CapEx, expected to be incurred $30 million in 2017, $100 million in 2018, and $70 million in 2019.

There is an additional estimated $50 million of non-cash charges included as part of asset impairments and lease consolidations. Overall, we expect these investments and other expense discipline initiatives to deliver $400 million of estimated annual savings in 2019, before any potential reinvestments.

Following this $900 million investment in our operating model, we have approximately $2.1 billion of incremental capital left from the outsourcing divestiture proceeds to invest in high growth, high margin areas across our portfolio and to return to shareholders. Turning to the next page.

In the second quarter, we incurred $155 million of restructuring related charges, primarily related to workforce reduction. Year-to-date, we've incurred $299 million of restructuring related charges representing 40% of the total program estimate. The cash impact year-to-date is an outflow of $94 million.

We recognized $44 million of savings in the second quarter, and $54 million of savings year-to-date, representing 36% of the savings for the year and 14% of the expected total savings estimate. Now let me discuss a few of the line items outside of operations on slide 14.

Interest income increased $5 million to $8 million for Q2, reflecting additional income earned on proceeds from the sale of the outsourcing business. Interest expense decreased $2 million to $71 million for Q2, due to a modest decrease in total debt outstanding.

Other expense of $5 million, or minus $0.02 per share, primarily includes losses due to the unfavorable impact of exchange rates on the re-measurement of assets and liabilities and non-functional currencies. Turning to taxes.

The adjusted effective tax rate on net income from continuing operations, excluding the applicable tax impact associated with certain non-GAAP adjustments, increased to 15.6% compared to 14.9% in the prior year quarter. The adjusted effective tax rate reflects a net favorable impact from certain discrete items in both periods.

Similar to Q1, excluding the impact of discrete items, the underlying non-GAAP rate would have been approximately 17.5%. Lastly, weighted average diluted shares outstanding decreased 3% to $262.4 million in the second quarter compared to $269.8 million in the prior-year quarter as we effectively allocate capital.

The company repurchased $8 million Class A ordinary shares for approximately $1 billion in second quarter. The company has $6.7 billion of remaining authorization under its share repurchase program. Actual shares outstanding on June 30, with 255.7 million and are approximately 4 million additional dilutive equivalents.

Estimated Q3 2017 beginning dilutive share count is approximately 260 million, subject to share price movement, share issuance and share repurchase. Now let me turn to the next slide to discuss our solid balance sheet and financial flexibility.

At June 30, 2017, cash and short-term investments increased to $3.4 billion, primarily reflecting the collection of proceeds from the sale of the outsourcing business. Total debt outstanding decreased modestly to $5.9 billion and total debt to EBITDA on a GAAP basis for continuing operations decreased to 3.2 times.

As discussed previously, while debt to EBITDA will be initially elevated as a result of the sale of the outsourcing business, we expect to return back to the 2 times to 2.5 times range by the end of 2018, driven by operational improvement.

Cash flow from operations for the first six months decreased $121 million to $436 million, primarily driven by $94 million of cash restructuring charges and $44 million of transaction related costs, partially offset by operational improvement.

Free cash flow, as defined by cash flow from operations less CapEx, decreased $135 million to $354 million, driven by a decline in cash flow from operations and a $14 million increase in CapEx, including investments to deliver our Aon United operating model. 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 return. We've made substantial progress since introducing free cash flow as a key financial metric in 2012, reaching record free cash flow of $2.1 billion in 2016.

Our disciplined capital management approach is focused on maximizing return on invested capital, which we've consistently improved each year since 2010, increasing 540 basis points to 17.1% in 2016. The recent sale of our outsourcing businesses and investments in our Aon United operating model are expected to improve this even further.

We have also taken significant steps to maximize the translation of each dollar of revenue into the highest amount of free cash flow, including working capital initiatives and actions to manage our cash pension contributions. Since 2010, we've increased our free cash flow margin by nearly 1,000 basis points to 18.1% in 2016.

Looking forward, there are three primary areas that we expect to continue to contribute to incremental free cash flow generation. The first is continued operational improvement, driven by accelerated organic revenue growth and margin expansion. The second is working capital improvements, as we focus on closing the gap between receivables and payables.

We expect working capital to contribute to free cash flow by over $500 million over the long-term. And third is expected lower cash tax payments, reflecting a lower effective tax rate over time. In summary, second quarter results reflect a strong performance, when considering the substantial amount of activity and steps we took to strengthen the firm.

Through the first half, we've accelerated organic revenue growth, driven by our investments in high growth areas, and improved operational leverage through investments in our Aon United operating model.

Operational performance combined with significant financial flexibility from transaction proceeds and underlying free cash flow generation positions the firm to deliver on our near-term goal of exceeding $7.97 adjusted EPS in 2018.

More importantly, this reinforces our ability to deliver double-digit annual cash flow growth over the long-term, reflecting what we believe is the next significant value creation opportunity for shareholders. 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. The first question comes from the line of Sarah DeWitt from JPMorgan Chase. Your line is now open..

Hi. Good morning..

Hi Sarah..

First on the organic growth, given all the investments you're making and that you discussed, how should we think about how much incremental organic growth those investments could drive over the longer-term?.

Sure. From our standpoint, first, if you step back and think about progress, you're already starting to see in our view some leverage coming from the investments we're making, we've made historically in areas like the Exchanges, in areas like cyber, in areas like data and analytics and the work on the Risk Insight Platform.

And if you think about it, Christa and I both highlighted this, in the first six months, reflecting back in 2017, 4% growth versus the first six months in 2016, which was 3% versus the first six months in 2015 which was 2%.

So, in essence you're starting to see, as Christa highlighted, a portfolio which has got greater and better growth characteristics than we've had before. So, you're going to continue to see that progression.

Obviously we're not going to give guidance on this other than to say we expect to see greater growth potential in Aon going forward from the investments we're making, but also from the portfolio changes we've made with the divestiture of our outsourcing business..

Okay. Great. Thank you. And then just on the margin, you had strong year-over-year expansion this quarter. However, if you take out the expense savings and the pension and the E&O impact, it implies that the margins slightly contracted year-over-year.

Is that just because of seasonality, where I think in the first three quarters of the year you don't have much margin expansion and then most of the underlying expansion comes in the fourth quarter or is there something else going on?.

So Sarah, what I would say is, as you look at the first half of 2017, operating income is up $117 million, of which $54 million of that is coming from savings from the restructuring program. So, if you think about it, operating income is up 12% for the first half of the year year-over-year and then excluding savings it's up 6%.

So we do see strong growth in operational performance on an underlying basis. So we feel really good with the first half performance on an underlying basis..

Okay.

Is there any seasonality we should be thinking about in terms of the quarterly growth?.

Not really. I mean, as you said, Q1 and Q4 are seasonally stronger quarters for us and that continues to be true..

Okay, great. Thank you..

Thank you. Your next question comes from the line of Dave Styblo from Jefferies. Your line is now open..

Hey, good morning. Thanks for the questions. I just want to talk about visibility for the rest of the year.

Do you guys have stats or keep stats on how much of your expected revenue you've got locked in on this point, and maybe an update along with retention that would go towards that? And specifically, I want to ask a little bit more about the Reinsurance business. Obviously you've had some good results on the organic side.

And just in canvassing the news, I'm picking up that you guys have won several accounts, especially down in Florida with People's Trust, Capitol and Argo Group outside there.

Is there something – maybe those are isolated wins and it's just part of the portfolio that moves it up and down, but is there any sort of shift that you guys are seeing in terms of new wins or progress either in Florida or more broadly across that book?.

Well, I'd say first of all, David, your first question around visibility into the rest of the year on revenue and organic growth, look, we continue to make investments to strengthen the firm as Sarah highlighted on the last question. Remember, this business, I highlighted in our Commercial Risk business a 93% plus retention business.

So from that standpoint, a pretty sticky business. That gives us a lot of visibility into what happens in the second half and what happens throughout the year for that matter. Still, doesn't mean we don't invest heavily to try to drive that up, but we've got a lot of visibility in what that baseline looks like.

So happy to come back to that, but a lot of visibility there. On the Reinsurance side, listen, to us this is just a continuation of what our team has done. We've got an exceptionally strong team on the Reinsurance side. We continue to add talent, but we start from a unique position.

We're the number one player in treaty, number one player in fac, number one player in ILS. And we've encountered a number of headwinds over the years as it relates to the pricing, particularly in the U.S., particularly in U.S. property, particularly in U.S.

property cat where we're number one in all those and yet our team, against that headwind over the last number of years has done nothing short of just keep investing in innovation.

And you've seen us do things in mortgage; you've seen us do things in other areas that no one else has done to actually create new markets and new capacity, new opportunities, and you're seeing us be able to react to client needs around reducing volatility, improve returns and help them grow. That really is just unmatched from that standpoint.

And so for us, that need from a client standpoint is very high. We keep investing to do that and you saw us in the quarter deliver what has been 6%, probably close to the highest we've been in a long, long time. But really, again, consistent with our conversation, we wouldn't look at the quarter.

We'd say in the first half, we've delivered 4% in the first half and we look for continued progress on the reinsurance side. It candidly draws from the strength of the team and what we can do on behalf of clients..

Okay. Great. Thanks. And then on capital deployment, you guys obviously stepped up the buybacks in the second quarter there.

Is that maybe about as high as you'd like to go in a given quarter for the pace of buybacks and maybe it steps out a little bit in the back half of the year, or what's dictating that versus potential M&A opportunities in the pipeline that you look at? I know you guys have characterized M&A pipeline as something that you'll probably do similar deals to what you've done in the past and be selective with those.

But curious how the M&A opportunities might balance what you're doing in terms of share buybacks given all the cash on the books right now..

Well Dave, as you know, we do think about allocating cash on a return on capital basis. That is the way we allocate cash between share repurchase, M&A, organic investment or any other use of cash.

And as we think about that the highest return on capital across the firm remains share repurchase which is why you've seen us do $1 billion of share repurchase in Q2. As we think about use of cash for the balance of the year, you can see we've got $3.4 billion of cash and short-term investments on the balance sheet.

We are generating substantial free cash flow in the second half of the year. It's our seasonally strongest half of the year, and so we have tremendous capital flexibility. And we do see us continuing our share repurchase given the exceptional return on capital that generates. We also have a very attractive pipeline in M&A.

It's probably the most significant it's ever been historically and so we expect to continue M&A, and so I think you'll see a mix of uses across the portfolio..

Great. Thanks..

Thank you. The next question comes from the line of Kai Pan from Morgan Stanley. Your line is now open..

Thank you, and good morning. My first question is on the restructuring program. You spent almost like 40% of total program cost in the quarter.

Can you talk a bit more in detail about the action that have been taken? I'm also wondering has this restructuring has any temporary impact in term of disruption of your business like organic growth?.

Yeah. So Kai, what we would say is the overall purpose of the program is to create the next generation operating model for AON, bringing together everything into one operating model for AON. We call it AON United.

And we're bringing together one operating model across the firm to drive greater operating leverage and to deliver additional insight, connectivity and efficiency, primarily in IT, in real estate and in people.

If you think about the 40% of the restructuring charge we've used year-to-date, it's primarily been in workforce reduction and we do think about that as setting up the future operating model of Aon. Longer term, because it takes longer to come through, you'll see more IT and you'll see more real estate.

We don't believe this is having a disruption to the firm. If you look at the first half revenue growth as Greg highlighted, we've accelerated revenue growth 2% in the first half of 2015, 3% in the first half of 2016, and 4% in the first half of 2017.

And so we do believe actually bringing together Aon under Aon United will help generate benefits for clients, because we're bringing together a common approach for clients which we think is going to be exceptional..

That's great. My second question is on the regulatory front. Do you have any updates on FCA investigation, the PRA like look into the market in the London market? As well there is a recent report from FCA on investment consultant. I just appreciate your updated view on this..

Yeah, happy to talk about both of those, Kai. On the first piece, first overall, you know how seriously we take compliance and regulatory matters, and will continue to do so. Certainly focused on the FCA and what they're looking at.

We took a $34 million charge in the second quarter for regulatory matters that are part of this, subject to this investigation. We obviously can't comment much further on that, but we're going to continue to work that arena very, very strongly and again, take it very, very seriously.

On the asset management side on the FCA from that standpoint, this is an area they're looking at overall, and really they're evaluating fiduciary standards which we do today.

What we would say and this is listen, this is any place we can create more client transparency, opportunity for more client value, we're very much in favor of and you will see us supporting in every way we possibly can..

That's great. Thank you so much..

Thank you. The next question comes from the line of Adam Klauber from William Blair. Your line is now open..

Good morning. Hi everyone. Two questions.

How is the Cyber with Stroz, how is that business doing? Is it growing? And then also how's Inpoint doing?.

I'm sorry.

The second question, Adam was?.

Inpoint..

Oh, sure..

Inpoint. Excellent. Thank you. Got it. So, on Cyber overall and Stroz, again remember you have to take a step back.

We had a very strong position in Cyber, exceptionally strong, disproportionate share of the overall placement in the market, and our colleagues said listen, although we've got this position and it's growing nicely, when you think about overall client need, it really is outstripping where the insurance industry is, and by the way, the industry, that's really all of us.

So, we're not pointing fingers. We're really looking at Aon and saying how can we actually change that? And again, if you look at the reported loss in cyber or cyber-related items, it's $450 billion plus in the U.S., and by the way, the European theater is now just opening up as the regulation begins to change.

So you're about to see a number which is going to get close to $1 trillion plus in cyber reported loss and yet the insurance world is about $2.5 billion to $3 billion in premium overall.

And so when we looked at that we said, look, why is that? And what we saw was it was difficult and hard for balance sheets or insurance partners to actually apply capital against cyber without a better understanding of the root cause and the drivers of it.

And so we went about bringing in capability and talent really to address that on top of what we have today before. And so from our standpoint, it is really a real opportunity for us to serve clients in a very, very effective way.

And we're really doing a set of things in cyber that help redefine the marketplace to create opportunities to bring more capital in. So it's been exceptionally strong and we're looking forward to next steps, really in terms of what we can do on behalf of clients. So Cyber is very, very positive with lots of opportunity and a lot to do.

On the second piece on Inpoint, what I'd really like to talk about is the category, which is really Data & Analytics. What we've got from that standpoint is a broad set of relationships we developed over time, many of them underpinned by true content, true insight on Data & Analytics.

And what we see, and Inpoint's part of this, but really the whole category in Data & Analytic Services is really an opportunity for us to actually bring Data & Analytics to the table in a way in which you help clients understand risk differently, mitigate risk differently, understand opportunities, reduce volatility in a unique way and that's why we are so excited about the whole category of Data & Analytic Services, of which Inpoint is part of..

Great.

Just one follow-up, is it possible to see deals in one of those two categories, given such a bright future?.

Yeah. Listen, you're going to see us invest, as Christa said before, in areas where we think we can apply capital to improve return on invested capital and serve clients.

So you'll see us think about areas where we can bring in content and capability irrespective of – the revenue lines we've broken out, we're very excited about each and every one of them, all of them going through transitions and change as we invest in and around it.

And you're going to see that in Data & Analytic Services, you're going to see that in Health, you're seeing that in Retirement, seeing that in Reinsurance and you're certainly going to see it on the Commercial Risk side..

All right. Great. Great. Thanks a lot..

Thank you. The next question comes from the line of Elyse Greenspan from Wells Fargo. Your line is now open..

Hi. Good morning. I first had a question, a follow-up on the margin improvement you guys saw in the quarter. You guys saw underlying revenue growth of 3%. I calculate your underlying adjusted expenses grew about 2% in the quarter.

I think what's hard for us to see is how much of the margin improvement is being driven by your revenue growth exceeding your expense growth versus just the savings program falling to the bottom line.

Because I know you call out the $44 million of savings in the quarter, but how much of that hit your margins versus how much margin improvement are you seeing from your core business? And I would think, given the pickup in Reinsurance growth in the quarter, that would have been beneficial to your margin, since it's a pretty high margin business.

Just a little bit of more color there?.

So, what I would say, Elyse, is as we think about the quarter, there are lots of things that happen that are lumpy in a quarter, and I would go back to the first half of the year, because it's a much clear trend, and frankly it's much more indicative for full year 2017.

And so as you look at the first half of the year, you do see operating income up $117 million, which included $54 million of savings. And so as you think about operating income growth year-over-year, 12%, excluding savings 6%, so that's giving you your underlying operating income growth.

And we are getting underlying margin expansion as well, and so we do feel very good about the operational improvement in the first half of the year, which is on track for full year performance..

Okay. And then is there any way – I mean, we have $100 million of expense saves coming in the second half of the year.

If you could help us think through, I mean, what percent fell through, fell to the bottom line in the second quarter and how you're thinking about more saves potentially falling in the back half of the year that could lead to stronger margin improvement?.

Yeah. So, what we have said, Elyse, is that the $44 million of savings we had in Q2 was before reinvestment.

We are absolutely going to invest in high growth areas that drive expansion of margin and growth in free cash flow, and you can see those investments that we're making over the last couple of years have contributed to our accelerated organic revenue growth. And so we aren't going to give guidance in the second half of the year.

We have said for full year 2017 that our savings for 2017 will be $150 million, but we haven't given guidance on what percentage we will reinvest..

Okay.

Can you let us know, how much shares have you guys bought back quarter to-date?.

So, we don't give guidance on shares. What we can say is we bought $1 billion of shares in Q2. And as I mentioned on a previous question, as we think about the balance of the year, we've got $3.4 billion of cash and short-term investments sitting on the balance sheet. We're generating substantial free cash flow in the second half of the year.

The second half of the year is our strongest free cash flow half. And as we invest that cash, our highest return on capital opportunity remains share repurchase. And so we expect to continue to repurchase stock in the second half of the year..

Okay. Thank you very much..

Thank you. Next question comes from the line of Brian Meredith from UBS. Your line is now open..

Hi. Yeah. Just a couple quick numbers questions here for you. On the Reinsurance business, the capital market stuff can be really, really lumpy.

Is it possible to get what the benefit to organic revenue growth was in the quarter from the cat bond and capital markets?.

Brian, we really, as I said before, really don't look at it that way. And again, we're essentially helping clients to improve return on their own capital, whether it's from cat bonds or treaty or fac and all the different pieces around that.

So we really look at them together and it was certainly a strong part of the quarter for us, as I highlighted, given the position we've got. We've got a very strong position in this category. But we've got strong positions in the other categories as well..

Okay. And then, a second question.

Christa, I'm just curious, the pension headwind that you had in the quarter, is that going to persist here for the rest of the year?.

Yes..

Great. Thank you..

Thank you. Last question comes from the line of Jay Cohen from Bank of America. Your line is now open..

Yes, thank you. Just a question. On page 12 of the slide deck, you talk about the $900 million of investments you plan on making, but then you also talk about reinvesting potentially some of the savings.

What's the difference between the initial investment, $900 million, and then any potential reinvestment?.

Well, so Jay the $900 million is really a restructuring charge. It's a one-time charge to generate the savings. So if you think about the return on capital, that you're investing $900 million in cash and you're generating $400 million of savings. So that's the way we think about the return on invested capital of that particular exercise.

And there's a separate exercise which is, as we come across terrific growth opportunities, and Greg talked about several of them, whether it's data analytics, whether it's health and elective benefits, whether it's delegated investment management, then we will look at those as separate exercises and we will invest organically to get a return in those businesses.

And you've seen them generate an acceleration in our organic revenue growth, they contribute to margin expansion and they particularly contribute to our double-digit free cash flow growth that we expect to do annually going forward.

And so, what I would say is, we don't expect all of the $400 million of savings to fall to the bottom line, but we certainly expect the reinvestment in savings to generate accelerated revenue growth, margin expansion and free cash flow growth going forward..

One of the things, Jay, as you look at what we have done, put them in the second quarter, it really, for us, is just an example of our reinforcement of the overall game plan and that's reflected in the first half performance.

If you think about the Aon of 2016 versus the Aon of the future, we believe as you look at that picture, that from two, it's a pretty compelling picture.

The Aon of 2016 delivered 16% TSR for a decade, which is fine, but we expect the Aon of the future, as we go through the restructuring, as we invest, continue to invest in organic opportunities, is going to deliver the near-term EPS expectations you all have, but we're going to end up with a platform that's higher growth, higher margin, higher ROIC, higher free cash flow growth and higher operating leverage that's going to support future improvement and it's going to put us, as Christa described, fully on track to deliver double-digit free cash flow growth over the long-term.

So, that's the program we've undertaken. That's what we're very excited about and we see the first half of the year fully reflecting that progress..

Got it. That's helpful. Last question. You talk about going forward, one source of additional cash flow is a lower tax rate over time. Your tax rate is so much lower than any competitor.

Clearly your structure's a bit different too, but how much lower can the tax rate go from here?.

Well Jay, what I would point out though is what you saw with our non-GAAP tax rate in Q2 of 15.6% was that was impacted favorably by positive discretes.

And so, excluding those positive discretes, the underlying non-GAAP rate would have been approximately 17.5% for Q2 and that is exactly the same as what we said, the underlying rate, underlying non-GAAP rate would have been approximately 17.5% for Q1 this year too.

And so, what we do think is there is opportunity over the long-term to reduce that rate, but in addition to that, there's the timing of the cash rate and the effective tax rate over time and the cash rate is slightly above the effective tax rate today and it will come down to equally effective tax rate over time and accelerate free cash flow growth doing that..

That's good clarification. Thank you..

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

Ashley, thanks very much. Just want to say to everyone thanks very much for joining the call and we look forward to our discussion next quarter. Have a great day..

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