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Aon (NYSE:AON)

Q4 2012 Earnings Call

February 01, 2013 8:30 am ET

Executives

Gregory C. Case - Chief Executive Officer, President, Executive Director and Member of Executive Committee

Christa Davies - Chief Financial Officer and Executive Vice President

Analysts

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Adam Klauber - William Blair & Company L.L.C., Research Division

Brian Meredith - UBS Investment Bank, Research Division

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Jay Gelb - Barclays Capital, Research Division

Michael Zaremski - Crédit Suisse AG, Research Division

Operator

Good morning, and thank you for holding. Welcome to Aon plc's Fourth Quarter 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 as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our fourth quarter 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. You may begin.

Gregory C. Case

Thank you, Jeff, and good morning, everyone. Welcome to our fourth quarter and full year 2012 conference call. Joining me here today is our CFO, Christa Davies.

Consistent with previous quarters, I'd like to cover 3 areas before turning the call over to Christa for further financial review. And we note that there are slides available on our website for you to follow, along with our commentary today. First is our performance against key metrics we communicate to shareholders. Second is overall organic growth performance. And third is continued areas of strategic investment across Aon.

On the first topic, our performance versus key metrics. Each quarter, we measure our performance against the 3 metrics we focus on achieving over the course of the year: grow organically, expand margins and increase earnings per share.

Additionally, beginning this quarter and going forward, we'll add free cash flow to our key metrics, given its fundamental importance to the value of the firm and how we think about value creation for shareholders.

Turning to Slide 3. In the fourth quarter, organic revenue growth was 4% overall, driven by solid growth across all businesses in both Risk Solutions and HR Solutions. Operating margin was flat overall. An increase in HR Solutions margin was offset by certain nonrecurring items of both risk and the unallocated section. EPS increased 9% to $1.27, reflecting both solid operating performance and effective capital management. And finally, free cash flow increased 243% to $484 million, driven by strong working capital performance.

If we turn to the full year, organic revenue growth was 4% overall, a continued rate of improved organic revenue growth from 2% in 2011, flat in 2010 and minus 1% in 2009. Operating margin declined 40 basis points, driven predominantly by an increased level of investment spend in the first half of 2012. EPS increased 4% to $4.21. And finally, free cash flow increased 48% to $1.2 billion, driven by a record $1.4 billion cash flow from operations, a truly incredible effort from the team.

Overall, both a solid finish to a challenging year and a year of substantial progress to strengthen our industry-leading platform for long-term growth, strong free cash flow generation and increased financial flexibility.

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, overall organic revenue growth was 3% compared to 2% in the prior-year quarter, with growth across every major business. As we've discussed previously, we're driving a set of initiatives that are strengthening underlying performance and positioning our Risk Solutions segment for long-term growth and improved operating leverage, with management of our renewal book through Client Promise and retention rates of 90% or better on average, highlighting strong client satisfaction. New business generation of more than $300 million across our Retail business, with record new business in U.S. Retail and double-digit new business growth in many markets globally across the Asia and Pacific regions. Investments in new products and service capabilities with the rollout of GRIP and Aon Broking globally. And in our core treaty reinsurance business, net new business trends have now been positive for 7 consecutive quarters.

Reflecting on the individual businesses within Risk Solutions. In the Americas, organic revenue growth increased 4% compared to 3% in the prior-year quarter. Exposures are relatively stable, and the impact from pricing was modestly positive on average, reflecting the steady pace of change over the last 12 months.

We saw solid growth across all regions, including Latin America, U.S. Retail and Canada. In U.S. Retail, we delivered solid growth, driven by a record level of new business, including growth in property/casualty, Health and Benefits, construction and M&A. A really tremendous effort across the team given significant disruptions from Superstorm Sandy in Q4, supporting clients and dealing with personal tragedy all at the same time.

In International, organic revenue growth increased 2% compared to 1% in the prior-year quarter. Exposures are relatively stable, and the impact from pricing was flat on average, with firmer pricing in cat-exposed regions and softer pricing in regions across Europe.

We saw strong growth in emerging markets, in New Zealand and in many regions across Asia, including double-digit growth in areas such as India, China and Taiwan. In the U.K. and Continental Europe, macroeconomic conditions remained fragile across many core markets. However, with leadership positions across this region, we saw strong retention rates and management of our renewal book portfolio delivered modest growth. Overall, a solid performance against economic and market headwinds.

In Reinsurance, organic revenue growth was 2% compared to 4% in the prior-year quarter. The results reflect strong growth in our treaty business globally, overcoming an anticipated decline given the challenging prior-year comparable quarter in the capital markets transactions and advisory business.

In treaty, as mentioned before, net new business won was positive for the seventh consecutive quarter, and results benefited from favorable market pricing impact in the near term, primarily due to losses incurred in the prior year from property cat-exposed regions.

Overall, this level of performance and strength in new business generation reflects Aon Benfield's value proposition for clients of strengthening operational performance and reducing volatility through unmatched data, analytics and advisory capability.

As we noted last quarter, record capacity continues to be available to meet demand and cedents are retaining more risk. Absent any events in the industry, macro factors may return as a headwind, as we will have to overcome in 2013.

Turning to HR Solutions. Overall organic revenue growth improved to 6% compared to 4% in the prior-year quarter. We saw the rate of organic growth improve across both Consulting and Outsourcing despite weak discretionary spend globally and continued economic pressure in Continental Europe. Performance also reflects growth in areas where we're making significant investments in the business, in areas such as health care exchanges, investment consulting, pension risk management consulting and HR BPO.

These investments reflect Aon Hewitt's client leadership, understanding of market trends and the long-term issues that face our clients, as health care reform, health care costs and associated financial risk continue to rise unchecked at a time when overall health and wellness is not improving.

Multinational clients are increasingly looking for global benefit solutions that support their global organizations delivered at the local level, managing and transferring risk against pension schemes that are increasingly frozen and largely underfunded. And finally, after continuing to work through the worst economic recession in the last 70 years, clients are just beginning to renew their focus on talent, retention, development, engagement to prepare themselves for renewed long-term growth.

Turning to the individual businesses within HR Solutions. In Consulting Services, organic growth was 8% compared to 3% in the prior-year quarter. Results reflect strong demand across our Retirement business for investment consulting and pension administration services, including growth from certain nonrecurring product-related work, primarily to help clients to think about derisking defined benefit plans.

We also saw strong growth in talent rewards, primarily for compensation benchmarking. In Outsourcing, organic revenue growth improved to 6% compared to 4% in the prior-year quarter. We saw strong growth in health care exchanges and in HR BPO from new client wins, partially offset by a decline in benefits administration. Growth in health care exchanges was driven by renewals in our retiree exchange and the official launch of our corporate health care exchange, in which the majority of the revenue related to the active participants is recognized in the fourth quarter from a normal enrollment cycle.

If you think about the corporate exchange, the progress of the team has been a truly outstanding accomplishment. From concept in 2011 to launch in Q4 of the industry's only active corporate exchange, enrollment of roughly 100,000 employees, plus eligible dependents. All participating clients are referenceable, with representation from both existing and new clients on the exchange for Aon.

It's really great progress on the team in the health care exchange area, reflecting the strength of our industry-leading platform across employee benefits design, brokerage and administration.

Slide 5 highlights the third topic, areas of investment. We believe Aon is in a unique position. Solid long-term operating performance, combined with expense discipline and strong free cash flow, continues to enable substantial investment in colleagues and capabilities around the globe. A few examples include: In HR Solutions, as mentioned before, we're making significant investments to strengthen our industry-leading position in health care exchanges, both in the retiree and active markets. Health care exchanges enable clients to begin the shift of their participants to a market-based, defined contribution model for health care, while addressing unsustainable health care cost increases and decreasing population health.

While already a leader in the retiree market, we launched the industry's first and only fully insured multi-carrier corporate exchange in Q4. And we'll be focused on driving greater scale in 2013 and improve returns in 2014.

We're expanding our Outsourcing offerings in high-growth areas, such as financial advisory services for retirement plan participants. We continue to expand our industry-leading benefits administration solutions and technology platform. And we're developing new delegated solutions in investment consulting and pension risk management that leverage our total capabilities across advisory and delivery services.

A great example in this area was our recent advisory work for a large client around pension settlement and derisking activities, which led to one of the largest insured annuity settlement transactions in U.S. history.

Finally, we're strengthening our international footprint to support a global workforce with investments in key talent capabilities across Asia and the emerging markets. In Risk Solutions, we're investing in client leadership to drive greater productivity and efficiency with the rollout of the Revenue Engine internationally, as well as the rollout of Client Promise, which is driving greater retention and rollover rates.

We continue to invest in innovative technology such as the Global Risk Insight Platform. GRIP is the world's leading global database of risk and insurance placement information. We now have roughly 1.5 million trades and more than $80 billion of bound premium and a growing list of insurance carriers utilizing the platform for its analytics and service capabilities.

In addition, we're driving and delivering our Aon Broking initiative to better match client needs with insurer appetite for risk, as highlighted by our ability to package similar risks and place substantial programs and facilities into the market on behalf of clients.

In 2012, we aligned our global Health and Benefits platform to better capitalize on our global distribution channel and deep brokerage capabilities.

And finally, we're expanding our footprint through tuck-in acquisitions that either increase scale in emerging markets or expand capability to better serve clients, as well as adding key talent across Asia in specialty sectors and in our GRIP services business.

Overall, we proved the concept through these major investments in 2012, and as we move across 2013, we're on plan to deliver greater scale and increased operating leverage.

In summary, we delivered an improved rate of organic revenue growth across both Risk and HR Solutions, made substantial and significant strategic investments that will drive greater long-term growth, delivered record cash flow and took important steps to strengthen our global firm, highlighted by the re-domicile from Chicago to the U.K. completed earlier this year. With key members of the management team now fully relocated to London and as a U.K. headquarter multinational group, we're seeing increased interaction with international and emerging market clients, reinforcing our relationships with London markets, increasing our international brand awareness, driving the financial benefits related to the transaction and appreciating the opportunities to strengthen our relationship with the U.K. government.

And with that said, I'm now pleased to turn the call over to Christa for further financial review. Christa?

Christa Davies

Thanks so much, Greg, and good morning, everyone. As Greg noted, our performance reflects solid organic revenue growth, significant investments to strengthen our platform, strong free cash flow and effective allocation of capital, as highlighted by the repurchase of $500 million of ordinary shares in the quarter.

I would note, this is more share repurchase than we've done in any quarter since 2008 and is both the reflection of our belief in the underlying value of the firm and the record cash flow from operations we delivered in 2012.

Now let me turn to the financial results for the quarter as highlighted on Page 6 of the presentation. Our core EPS performance, excluding certain items, increased 9% to $1.27 per share for the fourth quarter compared to $1.16 in the prior-year quarter. Results reflect improved organic growth across both segments, a lower effective tax rate and effective capital management in the quarter.

Certain items that were adjusted for in the core EPS performance and highlighted in schedules on Page 13 of the press release include noncash intangible asset amortization, restructuring charges and re-domicile costs, primarily for legal and advisory fees.

Foreign currency exchange rates have no material impact on earnings per share in the quarter from a translation standpoint. If currency would have remained stable at today's rates, we would expect no material translation impact to EPS in the first quarter of 2013.

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 was flat at 23.2%, and operating income increased 2% versus the prior-year quarter. Included in operating income was an unfavorable impact from nonrecurring items and a $7 million or a 30 basis point decline in investment income from lower short-term interest rates, globally. Organic revenue growth and a modest benefit from restructuring savings in the quarter were primarily offset by these 2 items.

Let me spend a moment on formal restructuring programs, key initiatives that have enabled concurrent funding investments and long-term structural margin expansion.

The Aon Benfield's restructuring program is now complete. Savings in the fourth quarter are estimated at $36 million compared to $33 million in the prior-year quarter. The Aon Benfield program delivered cumulative expense savings of $146 million in 2012 compared to $122 million in 2011. Associated with the transfer of the Health and Benefits business at January 1, 2012, an estimated $52 million of restructuring savings under the Aon Hewitt program will be achieved in Risk Solutions. Approximately $40 million of the $52 million in cumulative savings have been achieved under the program, including an estimated $7 million of incremental savings in the fourth quarter. A breakout of restructuring charges incurred in Risk Solutions associated with the Aon Hewitt program is detailed in the schedules on Page 14 of the press release.

In 2012, we strengthened the Risk Solutions platform with significant investments in GRIP and key talents, managed through continued economic uncertainty in Europe and absorbed an unfavorable impact from both investment income and foreign currency translation.

Against these challenges, Risk Solutions margin increased 10 basis points to 21.7%, and operating income increased 2%, placing us on track for a stronger performance in 2013.

Turning to the HR Solutions segment. Organic revenue growth was 6%. Operating margin increased 50 basis points to 17%, and operating income increased 11% compared to the prior-year quarter. Strong organic revenue and $17 million of incremental restructuring savings more than offset our significant investments in long-term growth initiatives and an unfavorable revenue mix shift.

With respect to the Aon Hewitt restructuring program, we incurred $41 million of charges in the quarter. Cumulative savings related to the formal restructuring program in the fourth quarter are estimated at $67 million compared to $43 million in the prior-year quarter, of which, approximately $7 million of the incremental savings were achieved in the Risk segment.

While we are always cautious not to overplay the results of 1 quarter, our results reflect a solid performance. For the full year, we are primarily on track with the plans that we laid out at the beginning of 2012, which included: number one, improved organic growth in both businesses; number two, investments in new growth opportunities; number three, savings delivered related to the restructuring program; and number four, performance that would improve in the second half of the year.

As we think about full year 2013, we expect to: number one, deliver continued organic growth; number two, drive greater scale from the investments we made in 2012; number three, deliver additional savings related to the restructuring program; number four, deliver performance modestly down in the first half and up in the second half of the year, resulting in mid-single-digit operating income growth and margin expansion for the year.

Our guidance is a reflection of the seasonality of our business being weighted more towards the second half, similar to 2012. This is due to revenue recognition from health care exchanges in Q4, the timing of cost savings initiatives plus investments in the business. This is not a change in our long-term outlook and continues to reflect the path we laid out at the beginning of 2012 for improved operational performance in 2013.

Turning to the next slide, on our long-term operating margin targets. We continue to drive a set of initiatives to improve operating performance on an annual basis. While we've improved operating margins 510 basis points over the last 7 years, our long-term operating margin target of 26% for Risk Solutions reflects significant opportunity for further margin expansion in the following 5 ways: number one, deliver $16 million of remaining restructuring savings and other operational improvements; number two, continued rollout of Revenue Engine internationally; number three, Aon Broking and GRIP-related initiatives. These 3 are fully within our control. In addition, there are 2 additional macro drivers that provide significant operating leverage based on improvements in the external markets: number four, increases in short-term interest rates; number five, industry improvements, driving higher insured values or insurance pricing.

Similarly, for HR Solutions, while we've improved operating margins over 1,000 basis points over the last 7 years, our long-term operating margin target of 22% reflects significant opportunity for further margin improvement in the following 3 ways: number one, deliver $32 million of remaining restructuring savings after the transfer of savings for Health and Benefits; number two, growth in the core business and return on incremental investments, including health care exchanges; number three, improvements in HR BPO.

Now let me discuss a few of the line items outside of the operating segments on the next slide. Unallocated expenses were $48 million, including $3 million of nonrecurring costs related to the debt exchange offer completed in December and certain expenses related to the re-domicile. Interest income was flat at $4 million. Interest expense decreased $4 million to $55 million due to a decline in the average rate and the total debt -- amount of debt outstanding in the quarter.

Other income had no impact in the quarter. Going forward, we expect a run rate of approximately $1 million per quarter of interest income, $40 million of unallocated expense and $57 million of interest expense per quarter.

Turning to taxes. The effective tax rate on net income from continuing operations decreased to 25.2% in the fourth quarter compared to 27% in the prior-year quarter. The effective tax rate in the fourth quarter of 2012 was favorably impacted by certain discrete tax adjustments. We currently anticipate an effective tax rate of approximately 26% in 2013.

Minority interest was $2 million, roughly similar to $3 million in the prior-year quarter. With consolidation of one of our major joint ventures in Asia into consolidated results, we would now expect minority interest to be approximately $7 million per quarter going forward.

Lastly, average diluted shares outstanding decreased 327.5 million in the fourth quarter compared to 337.9 million in the prior-year quarter, due primarily to our share repurchase program. The company repurchased 8.9 million Class A ordinary shares for approximately $500 million in the fourth quarter and has approximately $4 billion of remaining authorization. Actual shares outstanding on December 31 were 310.9 million, and there are approximately 11.5 million of additional dilutive equivalents. Estimated Q1 2013 beginning dilutive share count is approximately 322.4 million.

Now let me turn to the next slide to highlight our strong balance sheet and cash flow.

At December 31, cash and short-term investments were $637 million and total debt outstanding was $4.2 billion. Cash and short-term investments declined due to the use of excess capital held internationally on the balance sheet. Overall debt-to-capital was 34.9% at December 31 compared to 34.6% at September 30. As Greg mentioned, we've added free cash flow as our fourth key metric to measure performance each year, given its fundamental importance to both the value of the firm and how we think about value creation for shareholders.

Cash flow from operations increased 139% to $552 million in the fourth quarter compared to $231 million in the prior-year quarter.

Cash flow from operations for 2012 increased 39% to a record $1.4 billion compared to 1.1 -- sorry, $1 billion in 2011.

Improved working capital performance more than offset cash contributions to the major pension plans that increased $106 million in the fourth quarter and increased $186 million for the year. Free cash flow, as defined by cash flow from operations less CapEx, increased 243% to $484 million in the fourth quarter compared to $141 million in the prior-year quarter, reflecting a significant increase in cash flow from operations and a $22 million decrease in CapEx.

Free cash flow for 2012 was $1.2 billion, up 48% from $777 million in 2011. Strong free cash flow generation enabled the return of more than $1.3 billion of capital to shareholders in 2012 through share repurchase and dividends.

Turning to the next slide to discuss our long-term financial flexibility. As you can see from the chart, we've now laid out the major uses of cash, including pension contributions and restructuring cash. Based on the current assumptions, we expect these 2 uses of cash to substantially decline over the next 5 years, resulting in a greater financial flexibility and significantly increased free cash flow.

Regarding our underfunded pension plans, we've taken significant steps to reduce volatility and liability as we've closed plans' new entrants, frozen plans from accruing additional benefits and continue to de-risk certain plan assets.

In 2012, we contributed approximately $638 million to our plans. Combined with these steps we've undertaken over the last several years, our overall funding status improved to 82% from 78%, despite an increase in the overall liability from lower discount rate assumptions.

We currently expect contributions to decline $90 million to $548 million in 2013 and continue the decline thereafter, resulting in fully funded qualified plans on a GAAP basis by the end of 2016.

Additionally, noncash pension expense was roughly $53 million in 2012, and we expect a modest decline in 2013.

Regarding our restructuring plans, cash payments were $143 million in 2012. As our restructuring plans continue to wind down, we would expect cash payments to decline $49 million to approximately $94 million in 2013, before declining further each year thereafter.

As we continue to grow, improve operating performance and our required uses of cash decline, we expect our strong free cash flow to continue to be a significant source of value creation for shareholders. In 2012, we took significant steps to unlock that value for shareholders by increasing our strategic position and financial flexibility with the re-domicile to the U.K.

The company completed its change in jurisdiction of incorporation on April 2, 2012. And we believe the transaction will help drive shareholder value through: number one, greater global access to expected increases in future free cash flow; number two, an increase in future cash flows through a significant reduction in our global tax rate over the long term, more than what we've done over the last 5 years, which is approximately 500 basis points; number three, enabled us to access $300 million of excess cash held internationally on our balance sheet during 2012.

In summary, we delivered improved growth in 2012, and we have significant leverage to an improving global economy.

While we're investing to further strengthen our industry-leading portfolio, we are focused on 3 primary areas that will each contribute to substantially stronger free cash flow over the next several years: first, continued growth and operating margin improvement towards our long-term targets; second, declining uses of cash for pension and restructuring; third, greater capital flexibility and increased cash flow from a lower effective tax rate resulting from our re-domicile to the U.K. Combined with a stronger balance sheet and greater financial flexibility, we've positioned the firm to significant shareholder value creation.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Michael Nannizzi.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Christa, so did you say -- you said mid-single digits improvement in Consulting earnings, is that correct?

Christa Davies

Yes, so HR Solutions operating income will grow mid-single digits in 2013. And we also said that we would expect margin expansion in 2013.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay. So, I mean, in order to have double-digit earnings per share growth in the company, what do you need from brokerage or deployment to get there?

Christa Davies

Michael, we're not giving that level of guidance. Really, we've invested significantly in 2012, and we expect that free cash flow growth is really going to be driven by improved growth and operating margin expansion, decreased uses of cash and significant improvements in cash flow from our reduced tax rate. As we think about EPS growth, it's really improvement in operating margin in both Risk and HR, it's effective deployment of capital, as you've seen during 2012 with share buyback, and continued improvements in effective tax rate.

Gregory C. Case

And I'll just add, Michael, as you think about our portfolios come together, the Risk Solutions part of the business ARS first, Aon Benfield, are kind -- a little ahead of where Aon Hewitt is and HR Solutions is, which has sort of come together in terms of overall growth and development of the business, and that's what you're seeing develop here.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay. And then I guess, if I remember right, in the second quarter, I thought, Christa, maybe you had said that the expectations were for margin improvement on a year-over-year basis in Risk in the fourth quarter. Is that right or did I not have my notes right?

Christa Davies

We did originally anticipate that, and what we would say now is there were 2 specific items in the fourth quarter 2012 in Risk Solutions. One was a $7 million impact related to investment income, so a 30-basis-point decline related to that. We did have interest rates decline even further in Australia and Europe, which is hard to believe but true. And then we had a onetime item related to Denmark of $7 million or a 30-basis-point impact. So 60 basis points between those 2 items.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

I see. Okay. And then lastly just on the deployment. I mean, do you feel like you're going to be providing free cash flow, I guess from now it sounds like on a quarterly basis? How should we think about the fourth quarter in context? Is that -- are we assuming that, that was facilitated by some of the capital that was freed up during the repatriation? Or is there kind of an increased factor as far as the ability to deploy capital based on what you had given us in the past for expectations in 2012?

Christa Davies

Yes, Michael, it is exactly cash freed up from repatriation. If you look at share repurchase during the course of 2012, we repurchased $1.1 billion. Included in that was $300 million freed up from international cash held on our balance sheet. So $800 million is the underlying amount of share repurchase. And if you think about share repurchases for 2013, we would say it will be similar to 2012. And similarly patterned, a la back-half weighted, given that's where our seasonality in our business and cash generation occurs.

Operator

The next question is from Dan Farrell from Sterne Agee.

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Just wanted to ask a follow-up on the Brokerage business. So I know you grew margins if you adjust Denmark. And then, even if you look at the change in the fiduciary income, I think you would've expected that it would be down versus the 14 a year ago. So there is improvement, but it still feels like it didn't come through as much as you might have thought it would. And I'm wondering if there's anything else from an expense or revenue issue that we should be thinking about as we think about earnings power for next year?

Gregory C. Case

Dan, we don't think there is. In fact, if you step back and think about how the margin evolved, Christa highlighted a few one-timers for Q4, which you're always going to have back and forth. As we think about margins for the year, we put it in context of we're up slightly. But what was more important for us from an operating margin leverage standpoint is the investments we were able to make in 2012 and how we were able to absorb them completely and still have positive margins for the year. When you think about our investment in GRIP, which we talked about in the first, second and third quarter, it was really at an unprecedented level as we've rolled that out, with investments in Aon Benfield analytics, Aon Broking, et cetera. So we were able to make a series of investments that we think are fundamentally strengthening the operating leverage of the company and still absorb all that in the year. So from our standpoint, as we reflect on '12, we feel very good about the prospects for '13 and '14 from a margin expansion standpoint. And in many respects, when we think about sort of how those investments have actually played out, and you couldn't have made them in a year and still recovered margin unless they were really starting to pay dividends, we feel actually quite good about progress toward the 26%, as Christa described. And then if you combine that with sort of the engine of the firm, around record or substantial growth, certainly greater than any time over the last number of years, the cash flow generation in that engine is now just kicking in, in the way Christa described, and then the re-domicile of the headquarters to the U.K, which is principally going to help the Risk Solutions business more than any other, we feel good about operating leverage through '13 and '14, in fact, probably stronger now than we did at the beginning of '12.

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Okay. And then one other question just on balance sheet cash. Of the $600 million roughly of unrestricted at the end of the quarter, how much of that do you feel is usable? And then also, there's the $350 million of higher invoicing that's dragging cash. If I recall at the beginning of the year, it was closer to $400 million, so you've had a little unwind. But I thought the beginning of the year felt like most of that would resolve through 2012. And it doesn't seem like that much has. So I'm just wondering on the timing of when the rest of that $350 million actually comes back into the balance sheet cash.

Christa Davies

Right. So we do -- we have made progress during this quarter, approximately $25 million. So at the end of Q3, it was $375 million, at the end of Q4, it was $350 million. We do expect the remaining $350 million to reverse itself during 2013, so that will be a sort of improvement in working capital during the course of 2013.

Operator

The next question is from Adam Klauber from William Blair.

Adam Klauber - William Blair & Company L.L.C., Research Division

How much did -- what was the investment level in health -- HR Solutions in 2012? And would you expect that investment level to be around the same in 2013, higher or lower?

Christa Davies

Yes. So we originally said, Adam, that would spend $35 million in 2011, an additional $40 million in '12 and that, that would decline in '13, with getting a return on that investment in sort of '14 onwards. We expect that still to be the case. We still will be in investment mode in '13, but we will absorb that investment to generate, as I said, mid-single digit operating income growth for the year. And the way that investment will pattern itself is it will be investing through the first 3 quarters of 2013 and revenue is recognized in Q4. And that's really why, as I described, operating income growth of mid-single digits for the year will be down modestly in the first half and up in the second half.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay, that's helpful. And then as far as the health care exchanges, how big is the retiree exchange, number one? And number two, maybe if you could give some color on the implementation of the active exchanges? From what I've heard, it was a little bumpy on the retiree side, originally. Could you contrast how the implementation has been on the active compared to the retiree, would be helpful?

Gregory C. Case

Well, start overall, I remember describing sort of the opportunities we see as substantial on both the retiree side and on the active side. We watched this market, the potential for this market evolve over the last few years, and we're probably as positive on it as we've ever been, with 48 million eligible retirees out there and 122 million active employees with employer-sponsored plans, there's just tremendous opportunity here. The retiree exchange Navigators, who has about 100,000 retirees on it, it's the leading platform in the industry, it's done very, very well. As we started up last year, we progressed through the normal set of beginnings that one would expect, but have really come through this cycle exceptionally well. Our team couldn't be more pleased with where we stand right now on that platform on our retiree side. And we're investing, as Christa described before, to even strengthen that platform. So we fully believe we've got an industry -- the industry-leading platform on the retiree side with Navigators and going exceptionally well with very, very high interest. And then we're also quite excited about the corporate exchange. There's been a lot of talk out there around exchanges. And we were the first to actually launch it, we made it real. And we brought 3 companies in. We now have over 100,000 enrolled employees, plus dependents. And it's just went exceptionally well, the employee response has been very good, the company response has been very good. And what we're most excited about is the pipeline for 2013. Because as companies have come online and actually seen the concept proven, they're quite excited about the potential to think through how they can both begin to get a bit of a handle on health care cost but do it in a way that really works for their employees, which is very, very important in the process. So we're positive about these investments, feel very, very good about it. The team has done a great job. I've put them in context, this is part of a $3.9 billion, $4 billion HR Solutions business with lots of other things going on, on the retiree side and elsewhere, just exceptional platforms there. But on this specific piece around health care exchanges, feel very good about both the retiree and the corporate exchanges.

Operator

The next question is from Brian Meredith from UBS.

Brian Meredith - UBS Investment Bank, Research Division

A couple of questions here. First, Greg, I wonder if you could talk a little bit about Europe and what's going on in Europe with respect to your business kind of exposures, any headwinds that you foresee from economic activity?

Gregory C. Case

Yes, I would -- Brian, as you know, we've got very, very strong businesses across Europe and really exceptional platforms. And while it's been variable in different countries, Europe has long been, I think, a fiction of the U.S.'s imagination. This is a whole series of individual countries driving a set of agendas and focus. And we react locally to each one of those situations, and the team has done a very good job, which is why we've been able to grow in Europe in spite of the headwinds. But we're seeing, if you think about characterizing the world, probably a bit more instability and volatility in Europe than maybe anyplace in the world right now. I'd remind you by the way, this has been the -- this would have been the conversation we've been having about the U.S. a few years ago, and we managed through that. We'll do the same on the European front. Does that answer your question?

Brian Meredith - UBS Investment Bank, Research Division

Yes, that's terrific. And then I was wondering if you could talk a little more about GRIP here? Is there more investment plans here in 2013, or we're pretty much done with that? And should we start to see the benefits in '13?

Gregory C. Case

Yes, was what we said back to the margin question from before, we made substantial investments in GRIP as we really watched it evolve, and at the beginning of 2012, realized the potential. And really, we're able to absorb those in year, so not only do we make the investments, we're able to absorb and increase margin in year. We'll always continue to invest to build on it. We now are going to move to Health and Benefits in GRIP as well, so there's lots of different opportunities. But I would say the return profile moving into '13 and '14 is exactly what we hoped it would be. And the proof of concept there is we were able to achieve, as we said before, positive margin in '12 even though we made a significant investment. So just start to see that dynamic shift a bit in '13 and '14, we think that bodes very well.

Operator

The next question is from Meyer Shields from Stifel, Nicolaus.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Christa, I just want to clarify your comments. When you talked about the low -- I'm sorry, the mid-single digit growth, was that just in the HR Solutions business or is that for Aon as a whole?

Christa Davies

That was just the mid solutions -- that was just the HR Solutions business.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Okay, I wrote that down wrong. When we look at the planned use of cash, the cash expenditures anticipated for restructuring in 2013 went up, and I was wondering if you could talk about that?

Christa Davies

No, they went down. So if you look at the slide deck that we released, let me just get the page for you. It is -- Page 11 of the deck shows that restructuring cash in 2012 is $143 million and restructuring cash in 2013 is $94 million. Therefore, your question, CapEx?

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

No, the question was the $94 million. I think, in the third quarter, the slide showed $77 million for 2013.

Christa Davies

Yes, look the timing of these amounts will change slightly. So obviously, we're forecasting at any particular point in time. As we complete plans and implement them over time, the numbers will change slightly. But it is -- the long-term amount is declining as each year passes.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Is it reasonable to expect to continue -- I know you might be describing derisking of the defined benefit plans revenues as nonrecurring. Is that something that's nonrecurring for the long term? Or even in the short term, we don't expect a lot of similar revenue?

Gregory C. Case

All we're doing, Meyer, now is pointing out that we had a lot of activity in Q4. It was actually, for the team, it was extraordinary to see. We were in fact privileged to work on some of the most significant situations out there as companies with underfunded pensions are really taking steps and actions to deal with those. You can imagine in many respects, this is like our M&A advisory business or our cap on business that literally, it's going to be lumpy, it's going to be transaction-oriented. We said onetime, because you're going to do it and you're going to that advice with the company in one time, but you can imagine, there are going to be many, many companies over time actually wanting to think about doing this. So we see the potential as quite substantial, and all we were doing is just highlighting in Q4 that there was a lot of activity as really we begin the journey to really take action against this very, very important issue.

Operator

The next question is from Jay Cohen from Bank of America Merrill Lynch.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Just one, I guess, clarification. Greg, in your initial responses, you talked about still seeing some macro headwinds or the reemergence of macro headwinds in 2013. Was that a European comment or was there other things involved with that?

Gregory C. Case

Yes, what I was really referring to was on the Reinsurance side, just an observation. And if you think about where we are, sort of in the reinsurance world, the capacity really has emerged at an all-time high. So we're at give or take around $500 billion right now. And it references $455 billion in 2011, so there's a substantial increase, people with lots of different activity. There are new sources of capital that want to come in, so whether it's in pension funds or life insurers or high net worth individuals, and by the way, Aon Benfield is incredibly well positioned to help facilitate the entrance of that capital, and at the same time, cedents are increasing retentions. All I was just highlighting is when you think about the headwinds around market impact, you can imagine that could reemerge in '13 at some point, and it's just something we have to deal with, which we've done before.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Great. And one more quick question then. Some of the pension work has closed out things that you worked on. The margin associated with those types of projects tend to be higher or lower than your normal margin?

Christa Davies

I mean, we don't reveal specific margins in our pension business. What I would say is we have an industry-leading platform, and we are doing some of the world's most innovative work. And we're very proud of the work we've done during the course of 2012. And we believe more of that type of derisking and buyout-type activity will occur in 2013.

Gregory C. Case

Jay, this is fundamentally advice on some of the most important topics that affect our clients' balance sheets and operating statements and the work reflects that.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Got it. And if I could squeeze in one more question. Capital usage, clearly, you've signaled and you've shown that buybacks for you is the way you're using your excess capital. Why the strong desire to buy back stock versus dividends?

Christa Davies

Jay, we allocate capital, as we've described before, on a return on capital basis, cash on cash. And as we look at the discounted cash-flow view of our own business and valuation, we think we are substantially undervalued today. And on that basis, we think the return on capital share buyback is in excess of dividends. And so we're allocating capital that way. Having said that, we did increase the dividend in 2012. And over time, we'll continue to think about the dividend more.

Operator

The next question is from Matthew Heimermann from JPMC.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

I need a little bit of help with Consulting side. And the reason is that, in 2012, in the first half, you characterized about $33 million of investments in health care exchanges as onetime. And if you simply just reverse those, you assume that doesn't recur in 2013, that would get you to the mid-single digit operating income growth, which would kind of imply that there's no growth coming from anywhere else. So I'm just -- that doesn't sound quite right to me. So I'm wondering what I'm missing in that thought process?

Christa Davies

Yes, let me help clarify for you, Matthew. The health care exchanges' investment is not a onetime investment, it's in people and IT, and I would say...

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

But Christa, in the first half, you specifically called out $33 million of investment, which you -- which were incremental to what the kind of ongoing expenses are. So I completely understand that those expenses run ahead of the revenue. But that's what I'm addressing.

Christa Davies

Yes, and what we said, Matthew, for the full year, was that we would invest about $35 million in 2011, an incremental $40 million in the course of 2012. And as I said in my comments, we're investing in 2013 as well, but we're absorbing that investment to deliver mid-single digit operating income growth. And the expense, the way the expense patterns during the course of the year, because revenue is recognized in that business only in Q4, is that you get expense Q1 through Q3, then you get revenue recognized in Q4, which therefore gets sort of improved returns. And that's why you see the patterning that we saw in the first half of '12 versus the second half of '12.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

I think the issue then is, and maybe it was just me but I don't think I'm alone in this, is that I think most people perceive those to be incremental to the run rate or perceive them to be characterized as such. So I think when people are kind of asking the question on mid-single digit, that's where the confusion is coming from. Because mid-single digit, like-for-like, doesn't seem unreasonable, but I think most people were thinking you would -- you had some one-offs that likely weren't going to recur. And that's kind of building on kind of how things have been characterized in 4Q. But anyways just...

Christa Davies

Matthew, we continue to say that we think we'll get a return on this health care exchange business in 2014 onwards. It is a long-term investment. It takes quite some time. We described the economics and why the economics take time to scale. We feel very good about the opportunity in the return, that's going to be substantially above our average margin in our HR Solutions business, and therefore help us materially contribute to hitting our 22% long-term target.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

I don't disagree with the outlook for exchanges, just noting that. The -- with respect to the growth in 4Q, I was wondering if you could help put that growth in annual -- kind of on an annualized context? Specifically, I mean, is that kind of -- I know disproportionally will be a 4Q revenue recognition, but if I look at kind of the delta relative to what I was looking for, it kind of implies about 100 basis-point kind of annualized benefit for this year. Is that in the ballpark of how you would characterize it?

Gregory C. Case

As we think about -- and you're talking about the HR Solutions business?

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Yes, just the health care exchange benefit to growth, yes.

Gregory C. Case

Yes, the health care, again, put in perspective overall, we're around $3.9 billion, $4 billion top-line business. Of which -- a portion of which, about 40% or so, is on sort of in the category around health. And in that context, we're talking about a much smaller investment in the health care exchanges. It will have an impact on top line, and -- but it's going to be marginal. The engine you're seeing here on the growth side is really driven around the Consulting business, the admin business and HR BPO and the fundamental, the core businesses we've got. Health care exchanges are, again, for us, a very exciting, significant opportunity. As Christa described, we took the position we needed to make significant investments to do that and pull it off, and we did. We're gratified as to where they've come out, both on the retiree side and on the corporate side. We think we're exceptionally well positioned, but we want to be really clear that the big impacts are going to be in '14 and beyond. And we'll see some in '13, in the fourth quarter, but really, the major impacts are going to come there, which are going to be very important to the business overall, but we want to put them in context. It's -- this is an area in the context of a much bigger business.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

What's -- given you called it out in the press release, I guess I'm surprised to hear you characterize that as marginal for 4Q.

Gregory C. Case

Well, what we wanted to highlight in the press release really more than anything else is we launched the first-ever corporate exchange. So it's never been done before. It's 100,000 lives, sort of enrollees on it, with their dependents. And literally, it's been something that's been talked about for quite some time by multiple competitors, and even by our government in the world of exchanges. And Aon Hewitt, our colleagues in Aon Hewitt, were literally, for the first time ever, were able to actually pull that off. So we actually aligned markets, which was a challenge to do. We aligned clients. We actually pulled together this exchange, multi-carrier exchange, and actually proved the concept to really the rest of corporate America that it could be done. As a result of that, by the way, you've seen many of our competitors, all jump on board, everybody talking about their own corporate exchange now, and we now have a pipeline of companies who are interested in the corporate exchange, which are very, very substantial. So that's why we called it out. We think, actually, it's a very -- it's a fundamental crossroad that we were able to get through in a various positive way, but we also don't want to overstep with the impact it's going to have in the near term. Long term, substantial. The near term, less so.

Operator

The next question is from Jay Gelb from Barclays.

Jay Gelb - Barclays Capital, Research Division

I was just looking to follow up on Risk Solutions. If -- I'm sort of backing into this, if HR Solutions earnings growth is going to be mid-single digits in 2013, it seems to -- that for Aon to kind of hit expectations, Risk Solutions earnings growth in 2013 will need to be probably 10% or maybe even a little higher. And I mean, I know you haven't really wanted to drill into that level of detail, but it would really be helpful for us in terms of understanding expectations for the rest of the year.

Christa Davies

Jay, we appreciate that it would be helpful for you. And obviously, it would be even more helpful if we gave guidance, but we really don't do that. And the reason we have given specific sort of information around HR Solutions is we have been in an investment year. We did have some unfavorable revenue mix shift during the course of '12, and therefore, we wanted to be specific both around the magnitude of that growth in '13 and the patterning of it. What I would say is if you think about 2013, we expect Risk Solutions operating margin expansion, we expect HR Solutions operating margin expansion, we expect share count to decline. And there are some other miscellaneous items, interest expense to be lower and minority interest to be lower as we've guided.

Gregory C. Case

And your point is correct, though, if you think about sort of, we alluded this before, where our businesses are as they evolve. And Risk Solutions, including ARS and Aon Benfield, are at a -- are literally a few more years along than we are on Aon Hewitt, so you can certainly expect from a growth standpoint as the investments kick in, in a way we believe, and we think in '12, we've proven they will, it gives us a substantial operating leverage in '13. And that's we think you're going to see on the Risk Solutions side. And if you can imagine this conversation, we'll have exactly the same one a year from now, 1.5 years, 2 years from now on the Aon Hewitt side. But right now, Risk Solutions is a little ahead from a growth standpoint, operating income growth standpoint, than Aon Hewitt. and that's -- you're exactly right in terms of sort of how the math is going to come together.

Jay Gelb - Barclays Capital, Research Division

Okay. And then just a real detail question for Christa. The share dilution, should we be using 11 million going forward? Or is that sensitive to other factors, besides the share price, obviously?

Christa Davies

So for Q4, obviously, we finished actual shares outstanding at 310.9 million or 11.5 million dilutive share equivalents. So that means you're dilutive share count start point for 1/1/2013 is 322.4 million. And as you think about sort of going forward 2013, we issue about 5 million to 6 million shares a year. And then obviously, you should think about what sort of share buyback you plug in, there's sort of the input variables.

Operator

The next question is from Mike Zaremski from Crédit Suisse.

Michael Zaremski - Crédit Suisse AG, Research Division

I'm hoping to revisit GRIP, because frankly I feel investors have been really unable to measure the impact the initiative is having. So I guess, investment in GRIP was cited as having a negative impact in Risk Solutions within the slide deck. If there's a way to quantify that, that would be helpful. And related, I know you've talked about GRIP increasing the yield per dollar of premium placed. So how could we translate that into how it's impacted the margin, how you expect that to trend going forward?

Gregory C. Case

So if you step back and think about what GRIP is about and what it enables us to do, so because we can -- we're able to now track the premium placement across our overall network with roughly $80 billion of ground [ph] premium we can look at, we're actually able to have conversations with insurance partners around how and where they want to apply capital, and in different places around our network and around the world. And that's actually quite advantageous for our clients, first and foremost, and most important, but also for the insurance carriers. And in that context, we have been literally able to offer opportunities, contracts to insurance carriers, and literally, they've come online and actually been able to improve their performance and strengthen what we actually give to clients. So fundamentally, that's one area that GRIP allows us to attack in a way that really we don't think very few, if anyone out there, can do. And in that context, that's literally what the investment in '12 was about. It was literally how we rolled that on, brought people on around that, completed the technology pieces around that, and really, really advanced and ramped up the expense. That's why it had a negative impact on margin. But if we invested all that in GRIP in '12, you have to imagine we've got some revenue, too, which is why we literally were able to invest a huge amount in '12 and keep margins flat/up a little bit for the year. So if you think about sort of how that's going to evolve in '13, that investment starts to ramp down a bit as we've got that in place, and the proven revenue against that, which we now have seen, actually comes to the fore. And that's why we believe there's real operating leverage we didn't have before in '13 and '14 that actually emerge out of these investments over the last couple of years.

Michael Zaremski - Crédit Suisse AG, Research Division

And so how can we size up the rev? Does it produce $20 million, $50 million, $80 million of revenue, like any numbers behind the initiative?

Gregory C. Case

So from our view, we think one of the advantages -- we know one of the advantages we have that's really unique is our ability to understand and apply data in a way that changes carrier performance and actions and benefits our clients. That is a fundamental, substantial competitive advantage. So we're not going to quantify the GRIP outcome. We're not going to quantify the investments. We think they'll both be substantial. The thing we'd ask you to look at and come back to is Brokerage margin. So flat out Risk Solutions, Brokerage margin really is the metric that we think at the end of the day is your '13 measure around, do we have the operating leverage. From our standpoint, this story around Aon has not changed over the last 5, 6 years. Exact same strategy, exact same progression. We drove a lot of coordination around expense and improved margin, as Christa described, 300, 400 basis points over the last few years, 500 basis points since '05. And by the way, we now shifted, and say, we've got to invest to literally build capability to take the next step. We've now done that over the last couple of years. We think we've proven that in '12 and for ourselves in terms of what the economic leverage is, and we think you'll see that going forward. But the play side I'd ask you to look as a proof point, the only proof point, is going to be Risk Brokerage margin, which we think is a very compelling one for you guys.

Michael Zaremski - Crédit Suisse AG, Research Division

Okay. And lastly, Christa, in regards to the tax rate guidance of 26% next -- this year, I think that's flat with 2012. So why shouldn't that rate go lower given the re-domicile benefits? And I believe, for example, the U.K. corporate tax rate will continue to fall in 2013, 2014?

Christa Davies

Yes. So it's not about the U.K., and what we would say is our estimate at this point in time is 26%. We have said that we would achieve benefits of approximately 500 -- or more than 500 basis points over the long term. And it's not going to be sort of neatly patterned. And as we make progress and complete activities, we will update you in future periods.

Michael Zaremski - Crédit Suisse AG, Research Division

But the U.K. matters, because you do generate 15% plus of your revenues in the U.K., right?

Christa Davies

It actually doesn't have an impact on our global effective tax rate.

Operator

I will now turn the call back over to Greg Case.

Gregory C. Case

Terrific. Just wanted to say to everybody, thank you very much for participating, we appreciate it, and look forward to the next call. Thanks very much.

Operator

This concludes today's conference call. You may now disconnect.

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