Aon plc
Q4 2014 Earnings Call Transcript

Published: 6 Feb 2015

[Operator:]

Good morning, and thank you for holding. Welcome to Aon plc's Fourth Quarter and Full Year 2014 Earnings Conference Call. [Operator Instructions] I would also like to remind all parties that this call is being recorded, and that it is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature and defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning any risk factors that could cause such differences are described in the press release covering our fourth quarter and full year 2014 results as well as have been posted to our Web site. Now, it is my pleasure to turn the call over to Greg Case, President and CEO of Aon plc. You may begin, sir. Greg Case Thank you, and good morning to everyone. Welcome to our fourth quarter and full year 2014 conference call. Joining me here today is our CFO, Christa Davies. I would note that there are slides available on our Web site for you to follow along with our commentary today. And consistent with previous quarters, I'd like to cover three areas before turning the call over to Christa for further financial review. First is our performance against key metrics we communicate to shareholders. Second is overall organic growth performance. Third, 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 fourth quarter, organic revenue growth was 6% overall; the strongest quarter of organic revenue growth in over a decade, highlighted by strong growth in our HR outsourcing and America's retail brokerage businesses. Operating margin increased to 180 basis points, reflecting strong operating margin improvement in both segments. EPS increased 23% to $1.89, reflecting strong operating margin improvement, a lower effective tax rate, and effective capital management. Now, if we turn to the full year; organic revenue growth was 3% overall, reflecting solid growth in both segments, despite pricing pressure on our reinsurance business and overall economic uncertainty in Europe. Operating margin increased 50 basis points, reflecting margin improvement in both segments, inclusive of an unfavorable impact from foreign currency translation. EPS increased 17% to 5.71. And finally free cash flow was roughly flat at 1.4 billion, as record cash flow from operations of 1.6 billion was offset by a 27 million increase in CapEx. Overall, our results reflect a strong finish to the year, despite industry and foreign currency headwinds. We delivered continued growth in operational improvement. We are making significant investments in client serving capabilities across the firm, and returning a record 2.5 billion of capital to shareholders in 2014. Turning to Slide 4; on the second topic of growth, I want to spend the next few minutes discussing the quarter for both of our segments. In Risk Solutions, organic revenue growth was 3% overall, reflecting strong growth in the Americas and improvement in reinsurance. As we've discussed previously, we're driving a set of initiatives that are strengthening underlying performance and positioning our Risk Solution 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, highlighting strong client satisfaction in our retail business; new business generation of 36040 million across our retail business, highlighted by another record quarter of new business in U.S. retail, as well as double-digit new business growth in many countries across APAC and emerging markets. In our core treaty reinsurance business, net new business trends have been positive for 15 consecutive quarters, an outstanding performance in today's changing marketplace. That reflects Aon Benfield's long-term value proposition for clients and the application of excess capital in the industry to previously uninsured risks, and increased operating leverage from our investments in innovative technology, and data and analytics with the growth of GRIP, ReView and Aon Broking. Reflecting on the individual businesses within Risk Solutions; in the Americas, organic revenue growth was 7% compared to 4% in the prior year quarter. Exposures continue to be positive across the region, while the impact from pricing was flat resulting in continued stable market impact. We saw solid growth across all regions; U.S, retail, Latin America, and Canada, and growth across all businesses; property casualty, health and benefits, and affinity. In U.S. retail and Latin America, we delivered a record level of new business generation. Results in the quarter also include 8 million of anticipated favorable timing that unfavorably impacted the third quarter. Excluding this timing benefit, underlying organic revenue growth was 6%. In International, organic revenue growth was flat. Similar to the previous quarter, exposures were stable, but the impact from pricing was modestly negative on average, driven by fragile market conditions in many regions across Europe. We saw strong growth across Asia in both mature and emerging markets, and solid growth across the Pacific region, specifically New Zealand, driven by new business generation. Results in the quarter were offset by a modest decline in Continental Europe. For the full year, Continental Europe delivered modest growth driven by new business in many countries and the management of renewal book portfolio across the region; an excellent outcome against sustained market headwinds and economic uncertainty. In reinsurance, organic revenue growth was 3%, compared to flat in the prior year quarter. Excess capital in this space continues to pressure global treaty pricing, driving a significant unfavorable market impact to the quarter. Results reflect positive net new business in treaty placements, as well as growth in capital market transaction and advisory business and facultative placements. While record capital was placing pressure on traditional treaty, clients were taking advantage by purchasing more coverage. In addition, we're putting capital to work in new areas, such as the credit default market with Fannie and Freddie. And our industry market-leading data and analytics are bringing new solutions to the annuity market for life insurers. Aon Benfield's unmatched level of investment and exhaustive portfolio of support and services is creating real value for clients and new products that are helping to offset near-term industry headwinds. Overall, across Risk Solutions; we delivered improved growth in the fourth quarter as anticipated, resulting in 2% organic growth for the full year. As we continue to drive new business and to take a unified approach to serving clients across the portfolio, we expect lower to mid single-digit organic growth for total Risk Solutions in 2015. Turning to HR Solutions; organic revenue growth was 10% with growth across both major businesses, and in areas where we're making the investments in the business including healthcare exchanges, pension risks and delegated investment solutions. These investments reflect Aon Hewitt's client leadership, understanding, and influence of market trends, and solutions that sustainably address the long-term issues that face our clients as healthcare reform, healthcare costs, and associated financial risks continue to rise at a time when overall health and wellness is not improving. Multinational clients are increasingly looking for global benefit solutions to support our global organizations delivered at a local level, managing and transferring risk against pension schemes that are increasingly frozen, largely underfunded and facing regulatory changes. Turning to the individual businesses within HR solutions; in consulting services, organic revenue growth was 4%, compared to 1% in the prior year quarter. We saw continued strong growth in U.S. retirement, primarily from demand for pension de-risking and lump-sum winter activity along with continued growth in delegated investment consulting and growth across businesses in Asia. Results were partially offset by a mass decline in Continental Europe as macro conditions placed pressure on discretionary spend. For the full year, we delivered 5% organic growth across consulting services, in line with our outlook for 2014, and we expect mid single-digit organic revenue growth to continue in 2015. In outsourcing, organic revenue growth was 15% compared to 11% in the prior year quarter. Organic revenue reflects substantial growth in our healthcare exchange business as we recognize revenue related to the majority of enrollments that take place during the fourth quarter in our actives and retiree exchanges. Results also reflect new client wins in HR BPO as an increasing number of clients are adopting cloud based outsourcing solutions. Overall, for total HR solutions we delivered improved organic revenue growth for both the fourth quarter and full year as anticipated in our outlook for the segment and would expect this level of performance to continue into 2015. Slide 5 highlights the third topic; areas of investment. Aon has a unique and strong track record of developing innovative solutions to help solve problems and create differentiated value in response to specific client needs. Solid long-term operating performance, combined with expense discipline and strong free cash flow generation, continues to enable substantial investment in colleagues and capabilities around the globe. A few examples include

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Adam Klauber of William Blair. Q - Adam Klauber Good morning, everyone. Couple of different questions; one, how should we think about the margin on the health exchange as we go into 2015? As you mentioned, I think you have 1.2 million people on the exchange today. I would assume for that 1.2 million people you have already done, implementation costs and the service costs are much higher first year, so do those -- from margin perspective, do those 1.2 million people become more margin accretive in '15 versus '14?

[Christa Davies:]

So, Adam, I would say healthcare exchanges, we made a modest loss in 2014 as you know. We'll continue to make progress in 2015, and I would describe it as an immaterial impact. We're really focused on our HR Solutions business and growing overall revenue growth as Greg described as mid single-digit revenue growth and continuing to grow operating income, and that's really the overall focus. And you should see the margin expansion towards 22% [ph] over time. Q - Adam Klauber Okay. And then, can you talk about -- I noticed you did a -- I think not a big deal, but another workday integrator in Europe, I think you bought the largest in the U.S. last year, that workday business, that's growing very rapidly. Is that part of your success in the -- growing your BPO outsource business? Could you discuss that a bit?

[Christa Davies:]

Absolutely, Adam. So we have invested significantly in workday capability in our BPO business and it is driving substantial growth as you described. We brought the largest implementation firm in the U.S., in 2012, OmniPoint. And we just closed the acquisition Cloud, which is the largest implementation firm across Europe. And we're very excited about the growth prospects of that business and how it enables us to deliver that capability plans. Q - Adam Klauber Sorry, could you just go on to a bit of detail on that, I don't think everyone is familiar what workday does and why is that driving growth, just more specifically?

[Christa Davies:]

Yes. I think the way we will describe the capability for larger than more sophisticated clients is it's a Software as a Service application as opposed to an on-premises application, and really the Software as a Service application enables clients to have much greater functionality. It's much lower cost. It's much easier to scale globally. And so, clients wanted to be more efficient and provide much greater analytics around the HR function. Q - Adam Klauber Okay. And then finally, how is the pipeline for the pension transfer business?

[Greg Case:]

Adam, it's actually been quite strong. If you think about what our clients are going through right now with the regulatory changes and challenges and general state of pensions on the world today, you can imagine it's a very substantial area of concern and interest for clients. And so as such we've been fortunate we've led a number of the situations that have actually been completely in the last 18 months, and we are continuing to do that. And really this is one of the contributor that drives overall consulting business that has actually progressed very, very well as you've seen in the results. Q - Adam Klauber Okay, great. Thank you very much.

[Operator:]

Thank you. Next question is Sarah DeWitt of JPMorgan.

[Sarah DeWitt:]

Low to mid single-digit organic growth in 2015, but P&C prices fall and we don't get much of a pick up in the global economy, to what extend do you think you can still achieve that and grow margin?

[Greg Case:]

So Sarah, you were cut off at the beginning, but I think you're asking the question, just correct me, we grew top line and we grew margin in '14, there is lot of pricing pressure, can we still do it in '15? Am I paraphrasing where you were?

[Sarah DeWitt:]

Right, and what to extend is your low -- can you still achieve your low to mid single-digit organic growth target in '15?

[Greg Case:]

Right. So top line, we're very comfortable and confident we're going to continue the low to mid single-digit growth in 2015. If you step back and think about it, with the insight platform, the global risk insight platform, we capture exactly what happens across our book. And what you've actually seen is a reduction in price as you described, offset by a modest improvement or increase in exposure, that's roughly flat overall. That's what we've seen. We think it will trend toward that. And with more pressure on the reinsurance side, that's offset quite substantially by efforts we've undertaken in the business to grow the business, both fundamentally with Aon Client Promise, but also with the investments we're making in data and analytics. And you are actually seeing that show through in almost every situation. Our new business is literally a record level of new business in the U.S. Never been achieved before and actually it patterns us very well for 2015, and really is a reflection of the underlying investments that the team has made over the last number of years in the business. So we're very, very comfortable. If you think about sort of progress over the last number of years, there's always been some version of a headwind out there and there will be in 2015, but we're quite confident we can move through that and grow the business and improve margin.

[Sarah DeWitt:]

Okay, thanks. And then on the pension, I heard your comments, but I still don't understand why are the future pension cash contributions decreasing when the liability on the balance sheet increased?

[Christa Davies:]

Yes, really because of a lot of moves we've made, Sarah, over the last five to seven years; we have frozen the plans, we've closed them, we decreased the benefits, and we continue to de-risk certain plan assets. And so that means that the cash contributions are really much more stable and on a path of decline, then they would otherwise be if we hadn't taken those steps. The other thing I would say, which I mentioned earlier is there is an overfunded asset in other assets of approximately 900 million, and if you add that to the minus 2.1 unfunded liability, you get a net of 1.2 billion, which is fairly sort of similar to last year of about 1.05 billion.

[Sarah DeWitt:]

Okay, thanks.

[Operator:]

Thank you. Next question is Dave Styblo of Jefferies.

[Dave Styblo:]

Sure. Good morning. Thanks for taking the questions; I just want to start out a little bit more on the FX headwinds and how you guys think about that for '15? I guess my understanding is that the stronger dollar against your British pound or Rupee are actually positive, and how much does that help mitigate currency pressure against the other currencies out there? And I guess the short one I'm trying to get to sense of how much of an EPS headwind are you expecting in '15 from the net…

[Christa Davies:]

Yes. Dave, your question is absolutely right. We have a positive impact from the Rupee and Pounds and then a negative impact really from most other currencies. And really what I said earlier is the total impact of 2014 was $39 million negative or about a $0.11 unfavorable impact on EPS for the full year 2014. We would expect a very similar total impact for 2015 entirely in Q1, and the Q2 to Q4 impact is essentially zero. And that's really where that positive impact from the Rupee and Pound offsets negative impact from other currencies. Does that make sense?

[Dave Styblo:]

Sure, that does. Thanks. Sorry, I missed that earlier; I was hoping across. Shifting gears over the reinsurance side here; I won't name names, but one of your competitors who are also having to report today also have strong organic growth of 3% to 4% in both retail and reinsurance brokerage businesses; I mean just wondering what do we need to take from that? Are you guys seeing something in a market broadly that's making it easier to sell into the market or some of the pressures abating, what are you broadly seeing, and are we just in a sweet spot at this point?

[Greg Case:]

Well, David, if you step back and think about, first, fundamentally there continues to be exceptional demand out there to improve fundamental insurers' performance. That's what the reinsurance world is all about, perhaps to be a tremendous amount of capital chasing that. And that's what's been discussed and talked about with more capital of 575 billion underpinning the industry right now. That's the greatest level that it's ever been with more set up on the horizon. Having said that, when you think about the product; it's become less expensive, we are seeing actually insurers point different ways to buy increasing amounts; that's one piece. The second piece is if you think about Aon Benfield's level of investment and content capability over the last number of years, it's been expensive. And with that, we are actually bringing capital to different solutions. So what we did in the mortgage industry is an area of growth. What we've done in the life world is another area of growth, and essentially if you think about Aon Benfield, we believe it's the best in the world with matching capital with fundamental demand around risk in different categories around the world. And what you're seeing is a bit of reflection of that. I would say, again, back on the new business front, it's one of the strongest quarters in years we've had. It's been a long, long time, our new business generation. And we're just doing more to the existing clients we have as well. So from our standpoint, our capability and financial strength to invest behind this business and data and analytics fundamentally we believe will frankly separate us from what others can do in the space, and we think clients value that and are going to utilize and put their benefit and pay for.

[Dave Styblo:]

Okay. And then last if I can sneak one in on the exchanges; you guys did mentioned your 2.6% increase for clients returning and other competitor is pretty low in that range, and these the impressive results and I'm just wondering how much of this is resonating with potential clients that you are talking to? Are you starting to see any sort of inflection point as we're going forward and selling for the 2016 sales cycle? What are the conversations looking like at this point?

[Greg Case:]

Dave, it really reflects overall -- first of all, the team just did a phenomenal job in 2014. Again, we got 1.2 million enrolled. I want to emphasize enrolled lives on our exchanges versus eligible, as you think about it. When you consider, it's really -- for us as we've seen from a cost standpoint at 200 to 500 basis point change against a comparable plan design; that's our 2.6 versus the industry's 5.8. By the way, that's against a fully insured answer. That means volatility is next to zero versus a much more expensive and much more volatile answer. So you can imagine that's one of the reasons, that plus by the way, 87% individual employee satisfaction is one of the reasons why we've had a 100% retention on the exchange, and why as other companies look at it, they're seeing a highly viable option for them. So we've had very robust and active set of conversations with the pipeline. We're excited about the continued progress of this aspect of what we do in health, we do a lot of other things too with this aspect; and we are looking forward to 2015 and 2016 as we continue to expand exchanges.

[Dave Styblo:]

Okay, thanks for the questions.

[Operator:]

Thank you. Next question is Brian Meredith of UBS.

[Brian Meredith:]

Yes. Good morning, everybody, a couple of questions here; first, Christa, I'm wondering if you could break out for us a little bit the growth that you saw in the outsourcing, I know part was BPO, part, obviously healthcare exchanges, anyway can you give us a sense of how much of that was related to the BPO, and is that BPO revenue kind of continuing? My thoughts are those are for the longer term contracts, right?

[Christa Davies:]

Yes, I mean I would say we had growth across the outsourcing business brand. We had growth in BPO. We had growth in our traditional benefits administration business and we had growth in healthcare exchanges. And I don't want to over rotate on healthcare exchanges. I think while it's an incredible business for us and we're incredibly proud of the progress we made this year. We've also had great performance at our benefits administration and our BPO business. We don't actually break them out, Brian, but while the healthcare exchange growth year-over-year is also the highest it's the smallest of those three businesses too. So -- they're all growing to get to that total outsourcing growth number.

[Brian Meredith:]

So is it fair to say the contribution for the BPO kind of the year-over-year growth of 13% -- actually 15% organic that was a big part of this, just a pick up there?

[Christa Davies:]

I would actually say the BPO contribution to overall outsourcing growth for the year was modest. And I would say -- but it came from all over, Brian, it came from BPO, it came from Ben admin, and it came from healthcare centers.

[Brian Meredith:]

Great, great thanks. And then on healthcare exchanges as well, can you give us a sense of what the pipeline looks like right now for potential new signees coming into the fourth quarter of 2015? Are we seeing a pickup in interest levels this year?

[Greg Case:]

Brian, revenue -- I had said it in substantial number of conversations and dialogs, we feel very good about the pipeline and the progress we're making. As we've described, the outcome for the last few years where clients have been on -- it's just been exceptionally strong as I mentioned before to one of the other questions. Literally, we're seeing cost savings -- truly bending the curve the cost curve here. That's a level of 200 to 500 basis points which is exceptional and then when you combine that with the idea that this is not just reduction but it's also in price, but a reduction of volatility and so these are fully insured outcomes with clients set our individual employee sat at 87% plus that's been very, very strong. In assets we got three years with the data that we're looking to on behalf of clients and so you could imagine against that backdrop the interest is actually quite strong.

[Brian Meredith:]

Right and then just lastly, on the reach the insurance growth in the quarter -- how much was period now they can be kind of lumpy?

[Greg Case:]

You captured it very well. Obviously the capital markets transactions are achieved in both -- in capital markets also in fact another just had an exceptionally strong quarter that was a big piece of it. But I also want to emphasize the new business story here is exceptionally strong. It's one of the business strongest new business generation periods ramp until history of 5 consecutive quarters of new business generation. But we ended the year with a lot of momentum in that category. So it was really a combination but certainly reflects the lumpiness as you described on capital markets.

[Brian Meredith:]

So would you say most of that was that?

[Greg Case:]

No, I would say substantial now for Q4 result.

[Brian Meredith:]

Okay, thank you.

[Operator:]

Thank you. Next question is Ryan Burns with Janney Capital.

[Ryan Burns:]

Great. Good morning, everybody. I'm not sure I may have missed it earlier, but did you guys give any sort of guidance for adjusted income in the HR Solutions segment. I know you gave kind of margin in quarterly basis. But just want to see if you had any guidance for the operating -- sorry adjusted income?

[Christa Davies:]

What I did say Ryan was that we expect revenue growth of mid single-digits for the HR Solutions business in 2015. We expect operating income to continue to grow so we expect growth in operating income and growth in margins in 2015. And we expect to pattern very similar to 2014; with operating income down in Q1 flat to modestly up in Q2 and Q3 and substantially up in Q4 which is our seasonally strongest quarter.

[Greg Case:]

2014 was a level on year of progress we see 2015 exactly the same way.

[Ryan Burns:]

Great. Thanks for that color. And then just my last one is -- obviously the payout ratio this year if I do dividends plus buybacks, it get around 150% of operating earnings; and I realize there's roughly $300 million of excess cash heading into the quarter or into the year. Just want to think about or just get your ideas as to how we should about that going forward?

[Christa Davies:]

Yes, I mean the way we think about capital allocation Ryan is really around return on capital on a cash on cash basis. And we did deploy substantial amount $2.25 billion of into share repurchase because we believe was substantially undervalued today as we look at our own discounted cash flow view of the firm. And that's why are deploying much more capital on share purchase versus dividends. And so that's the way -- you should think about that forward. As we think at the total amount of capital we might -- deploy our return to shareholders in 2015 if we looked at the 2014 -- if you looked at free cash flow growth of -- 1.4 billion and in 2014 we'll continue to grow free cash flow in 2015. As free cash flow grows there is opportunity for incremental leverage. And maybe unproductive capital and then that results in the cash that we can return to shareholders and continue to look at that on a return on capital basis to the highest return n capital opportunities.

[Ryan Burns:]

Great, thanks for answers, guys.

[Operator:]

Thank you next question is Jay Cohen, Bank of America Merrill Lynch.

[Jay Cohen:]

Yes, thank you. Looking forward, one of the sources of I guess additional cash that you say is a lower tax rate and I don't know if you were talking about 2012 forward or from today forward? Do you expect the tax rate to go down more from where it is now?

[Christa Davies:]

Jay, we think the 18.9% tax rate for 2014 is the right operational rate going forward. What we would say is that as you think about the cash flow growth over time the cash tax is likely to be lower in 2015 because there are often timing differences between the effective tax rate saw in 2014 and cash taxes.

[Jay Cohen:]

Okay. I think you can't really quantify that?

[Christa Davies:]

No.

[Jay Cohen:]

Okay, but the tax rate on a reported basis should be similar or relatively equal?

[Christa Davies:]

Right. Yes.

[Greg Case:]

Eventually -- it evens out. There are just say timing in such transitions…

[Jay Cohen:]

Got it. Thank you. Operator Thank you. Next question is Mike Nannizzi of Goldman Sachs.

[Michael Nannizzi:]

Thank you, I guess one question that i had was on the pension expense and the impact of lower interest rate I saw in your presentation that you have the cash proceeds to pension declining, and so just trying to reconcile that I'm guessing there is some risking -- continuity risking activities that you undertook in the year to maybe offset some of the impacts of that but love to get more color. Thanks.

[Christa Davies:]

Yes, and Mike we did say on pension expense. Pension expense was a modest benefit in 2014 and we expect it to be a modest benefit in 2015 again. And absolutely right market is due to the fact that we've taken substantial actions over multiple years. We froze the plans, we close them, we've de-risked the certain plan assets over time as you described, and all those things have led to lower cash contributions and sustained and pension expense being a modest benefit again in '15.

[Michael Nannizzi:]

Got it. And then if I could just one on the exchanges is it possible now I mean we're couple of years in to the cycle and probably have better handle on -- the economics in the build out of the platform, is it possible to get an idea of how you think about the operating leverage that you get from 8customer being a traditional benefit customer versus on exchange -- how do you think about the return how do you think about the -- the drivers of whether its contribution margin or operating margin obviously there's a lot of expenses still so you've -- that net margin number probably still looks similar to the other business. But just trying to get an idea of underneath once you've factored out the platform investments how shall we think of how're they thinking about the one versus the other and the operating leverage of one versus the other? Thanks.

[Christa Davies:]

Yes, and so, Mike, the way we think about it is return on capital unsurprisingly, and really when we made the initial investment in exchanges both in active in retiree we thought about our return on capital basis cash-on-cash. And you're absolutely right process; the investments are substantial in both operating expense people as well as the technology platform. And we are still investing as you know because we made a lot of an exchange in 2014. And what I would say is we do expect the return on capital of our investment to be substantially superior to the rest of our business which is why we invested so much in that area. And so we do expect it to have higher than average returns because -- the fixed cost are largely fixed and as we continue to get scale we'll get disproportionate returns on those incremental lives and clients.

[Greg Case:]

Of course I do -- exactly the same way we looked at the other organic investment substantial across the firm, and what we've done in data and analytics across the insights platform is the exact same approach. Ultimately, we are making use of assets because they -- we believe we will serve clients fundamentally better. That absolutely has to be in place. And that certainly is in place for the exchanges but they also have to give us greater operating leverage. And so we're essentially investing cash flow back into the business to create greater operating leverage and that's in fact what the exchanges are doing -- that's what data analytics has done. That's the risk insight platform is doing. That's what U.S. is going to do, et cetera, et cetera. So that's the philosophy; everything you see us do sort of follows that same track.

[Michael Nannizzi:]

Got it. When we think about timing, if we were to quarantine the revenues and expansions from exchanges and put those aside, because you're basically flat, it sound like. Then the margins on the rest of the business are expanding more than the segment, margins would indicate. And then at some point that investment that you are making is going to result in margins as well. So just trying to think about, like, what's the timing of that, and when -- because once we switch flips I mean that we should start to see that in margins…

[Christa Davies:]

Yes, and Mike, you are absolutely right about that, because we also achieved margin expansion and operating income growth in '14, which we did in HR Solutions. We are continuing to invest and make lots in exchanges. Then you are absolutely right, the rest of the business is expanding margins and growing operating income growth substantially. So that is absolutely true. And then we would say as we look at exchanges, it is a long-term investment or a long-term return, and we would expect that to happen over a multi-year period of time.

[Greg Case:]

And again, if I could I would broaden this is as a broader firm; if you think back philosophically to the question earlier on the call, which is, "Can we grow in 2015 and gets more headwinds?" Answer is we've grown every year and increased profitability and increased margin, and invested heavily in the business. And part of the reason we're confident in our continued progress against whatever headwinds are out there are these specific types of investments, because as they come online and create operating leverage for us, that's really what's going to fuel bottom line. By the way if the headwinds went away, that would be magnified, but irrespective of the headwinds, these investments, in exchanges, in risk insight platform, in ReView, in additional data and analytics, in the Singapore Innovation Center, in the Irish Innovation Center; these types of things give us operating leverage we believe is unique to the industry.

[Michael Nannizzi:]

Okay, thank you.

[Operator:]

Thank you. Next question is Charles Sebaski, BMO Capital Markets.

[Charles Sebaski:]

Good morning. Thank you. I guess the first question I have, Greg, is on the healthcare exchange, and the cost save that you talked about -- the 2.6% rate increase. I guess, if I go back to a press release you guys put out in November talking about the healthcare exchanges and the increasing costs, that document said that the 18 returning customers to the healthcare exchange actually saw a 5.3% rate increase anticipated for 2015 versus the 2.6%. And I'm just wondering how you can help us rectify that?

[Greg Case:]

Great. So, literally as were talking about, we were talking about the total set of companies online and what we see coming in, and in two-year average for the company, so I think we're little bit apples and oranges. What I was trying to do is give you the latest and greatest hot off the presses, what exactly is going on in the market and what we are seeing. I guess the overall market trend and what we are seeing; and so that's the 200 to 500 basis points. You still come back and essentially say, you're getting fundamental cost save in a substantial way; again, 200, 300, 400, 500 basis points cost save and no volatility, because it's fully insured versus self-insured, plus the client sat that I described before, that could be employee sat. So from our standpoint we feel very, very good about and we are trying to give the latest and greatest sort of what's going on in the market.

[Charles Sebaski:]

All right. . Give a little update on M&A, both forward, but also what happened in 2014? You made $500 million of acquisitions in the year. But when I look at the revenue detail for the Company, it was kind of zero for the year on revenue impact. And so, I guess, in this $500 million you bought, what's the acquired revenue base? Where should we see that come up in dollars, or should it all be in 2015? And then, what's your expectation for the upcoming year?

[Christa Davies:]

Yes. So you are absolutely are, Charles, we spent about 500 million on acquisitions in 2014. We invested in a number of geographies, the U.S., the U.K., the Pacific region and a number of specific capability areas, National Flood Services and LARK [ph] employee benefits being two great ones. The majority of these acquisitions were in our Risk Solution business. The thing I would say is as you look at the mix on M&A, it's mix of acquisitions and divestitures, because there were some divestitures during the year too as we continue to optimize our portfolio around return on capital. And what I would say is these are terrific capabilities. They are unbelievable teams. They really place the teams in the capability sub front and they will generate great returns in the long-term.

[Charles Sebaski:]

Okay. But will they show up? Is it a capability that helps your current Business grow, as opposed to net new revenue where we would see in an acquisition line?

[Greg Case:]

A lot of these are tuck-in acquisitions that are impacting the overall business. You're going to start to see them in top line. You will also see them with existing business we've got, magnifying and expand that business. So it will be a combination of both. The investments of 500 million or so investments in '14, you're going to certainly see in '15. A lot of it depends on timing when they come in. You are going to see us still continuing to make in the order of 200, 300, $400 million of acquisitions per year, where we can build content capability, and we've been doing that quite well.

[Charles Sebaski:]

And then finally, one of your initiatives that you mentioned is the global consulting initiative that you mentioned, Greg; and I believe this is more of a management consulting initiative for insurance companies?

[Greg Case:]

Yes, what I would, it wasn't really broad-based consulting. In essence, what the team is doing is really a step-forward is they brought very, very unique data and analytics capability to bear on behalf of our insurance clients, much likely we've done with insights platform. And they not only brought what's called ReView. They not only brought that to bear. They also offered around that some wide space services to actually not only help and provide new insights, because essentially we're matching capital with client need, and they are doing that for at the reinsurance level now. But in addition to this, the fundamental raw analytics, they're also bringing an element around advice. And a number of clients have really valued that. And so that's an added component. Our view is data is interesting; a lot of people have it, we happen to have a tremendous amount, but data is basically work loss and that's what actually changes client behavior. That client behavior has got to drive performance and things like operating performance, balance sheet strengthening and reduction of volatility, and the way to help clients do that is to add some components around advice to it. So that's really the nuance that we wanted to try to convey.

[Charles Sebaski:]

So, that won't be a stand-alone product within risk that might -- it's part of the overall value proposition, as opposed to a new stand-alone group within the risk organization?

[Greg Case:]

It is going to be -- its part of what we are doing in terms of something we bring to bear on behalf of our reinsurance clients. So in that regard, it is capability that we are continuing to develop. It's actually gone through a tremendous start with lots of interest in demand in the marketplace. And so you will see it's part of our overall Aon Benfield offering.

[Charles Sebaski:]

What's the size of that? How many people are dedicated things providing the service today?

[Greg Case:]

Well, we haven't disclosed that, but if you take a step back and think about the capability of Aon Benfield, we spent over a 100 million in year in content, data and analytics with literally -- it's better part of 400 to 500 colleagues involved and dedicated to that. Again, back to the idea of how we create operating leverage in the business. This is just one more important, albeit, one more important step as we continue to build up that capability.

[Charles Sebaski:]

Could you explain the legal settlement in risk for $35 million in the quarter?

[Christa Davies:]

So that what a legacy litigation of liability we incurred as part of 2005, and a decision was made in the court against the expense incurred.

[Charles Sebaski:]

Thank you very much for all the answers.

[Greg Case:]

Sure.

[Operator:]

Thank you. Our final question comes from Arash Soleimani of KBW.

[Arash Soleimani:]

Thanks. Good morning, I just have a couple of questions; I know you mentioned the impacts of organic growth -- reinsurance organic growth coming from capital market; is there anyway to quantify the margin impact in risk solutions from capital markets this quarter?

[Greg Case:]

We don't really break that out as we said before; it's a tremendously positive business for our clients and for us. We lead the market in it. It is something that we've built over the last number of years, it's exceptional strong and particularly lumpy, sort of up and down across the quarters and it was quite strong in the quarter.

[Arash Soleimani:]

And was any of the lumpiness attributable to just timing differences, working capital markets?

[Christa Davies:]

No.

[Arash Soleimani:]

Okay. And my other question was in terms of the FX impacts, I know you quantified it on the income statement in the press release; how does that flow-through on the cash flow statement?

[Christa Davies:]

I mean it's really flowing through net income, but it's hitting operating income, as I've described. It's basically $31 million lower in operating income and Risk Solutions is the way you should think about it. But I would say that if you listened to what we said, we said it's going to be the same FX impact overall in operating income and EPS impact in full year '15 as we saw in full year '14. And against that headwind in 2014, we grew EPS 17%. And so we feel really good about our ability to grow earnings substantially in '15 and grow cash flow substantially in '15, despite the headwinds.

[Greg Case:]

In many respects FX has come up quite naturally two times on the call, it is a headwind as Christa described we will work through it and have it very, very effectively just like pricing was the headwind just like in interest rates or headwind et cetera; all these things are out there. Our ability to grow top line and improve margin in the phase of that, we believe is pretty proven and with the organic investments we've made or increased operating leverage, we think bodes very well for 2015.

[Arash Soleimani:]

Okay, thank you for the answers.

[Operator:]

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

[Greg Case:]

I just want say thanks to everybody for joining the call, and look forward to our discussion next quarter. Thanks very much.

[Operator:]

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.