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Aon (NYSE:AON)

Q4 2013 Earnings Call

January 31, 2014 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

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

Brian Meredith - UBS Investment Bank, Research Division

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Gregory Locraft - Morgan Stanley, Research Division

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Elyse Greenspan - Wells Fargo Securities, LLC, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., 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 have been posted to our website.

Now it is my pleasure to turn the call over to Greg Case, President and CEO of Aon plc.

Gregory C. Case

Thanks very much and good morning, everyone. Welcome to our fourth quarter and full year 2013 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. I would 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 4 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 4% overall, highlighted by strong growth in our HR Outsourcing and Americas Retail Brokerage businesses. Operating margin increased 160 basis points, primarily reflecting significant margin improvement in our HR Solutions segment. EPS increased 21% to $1.54, reflecting strong operating performance, a lower effective tax rate and effective capital management. And finally, free cash flow increased 23%, driven by strong working capital performance and a decline in CapEx spend. If we turn to the full year, organic revenue growth was 3% overall, reflecting solid growth across both segments despite pricing pressure on our reinsurance business and overall economic uncertainty in Europe.

Operating margin increased 40 basis points, reflecting strong margin improvement in Risk. EPS increased 16% to $4.89. And finally, free cash flow increased 22% to $1.4 billion, driven by a record $1.6 billion cash flow from operations, a truly incredible effort from the team, as we're well on track to double annual free cash flow in the next 3 to 5 years.

Overall, our results reflect a strong finish to a solid year, with improvement across each key metric for both the fourth quarter and full year. Having made significant investments across the firm in both risk analytics and the most robust set of solutions for health care exchanges, we continue to strengthen our platform for long-term growth, strong free cash flow generation and significantly increase financial strength 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%. 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 more than 90% on average, highlighting strong client satisfaction in Retail Brokerage; double-digit growth in new business generation, reflecting more than $335 million across our Retail business; with strong growth across the Americas, EMEA and Asia Pacific regions; investments in new products and service capabilities with the growth of GRIP and Aon Broking, delivering increased operating leverage; and in our core treaty reinsurance business, net new business trends have now been positive for 11 consecutive quarters.

Reflecting on the individual businesses within Risk Solutions, in the Americas, organic revenue growth was 4%, exposures are relatively stable and the impact from pricing was modestly positive on average, reflecting the steady pace of market impact. We saw strong growth in Latin America and solid growth in U.S. Retail, including growth across all businesses: property/casualty, Health and Benefits and Affinity.

In U.S. Retail, we delivered a record level of new business, with solid management of the renewal book portfolio, including record levels of retention.

In International, organic revenue growth was 2%. Exposures continued to be stable, and the impact from pricing was flat on average. We saw a growth in multiple markets: New Zealand, Italy, Spain and Portugal, to name a few, with double-digit growth across Asia. In the U.K. and Continental Europe, macroeconomic conditions still remain relatively fragile across many core markets. However, with leadership positions across this region, we continue to deliver modest growth against the same economic and market headwinds.

In Reinsurance, as we noted previously, our third quarter was favorably impacted by the timing of revenue pulled forward from the current quarter and we expected a modest decline in organic revenue. Overall, organic revenue growth was flat for the quarter. Results reflect growth in our capital market transactions and advisory business, as well as net new business growth in treaty placements, offset by the anticipated unfavorable impact of timing in the quarter.

As we've noted over the past year, record capacity continues to be available to meet demand and cedents are retaining more risk, driving expected negative market impact, most notably in the U.S. Absent an event in the industry, macro factors will continue to be a headwind in 2014.

Against those headwinds, we expect results to continue to reflect flat to modest growth, highlighted by net new business won, which was positive for the 11th consecutive quarter, growth from investments internationally and capital markets and advisory transactions business. Overall, this level of performance and strength in new business generation reflects Aon Benfield's unmatched level of investment and long-term value proposition for clients, while strengthening operational performance and reducing volatility through unmatched data, analytics and advisory capability.

Turning to HR Solutions. Overall, organic revenue growth was 8%, with growth across both major businesses and in areas where we're making significant investments in the business, including health care exchanges, investment consulting and delegated investment solutions. These investments reflect Aon Hewitt's client leadership, understanding an influence of market trends and the long-term issues that face our clients as health care reform, health care costs and the associated financial risks 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 across and 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 and engagement to prepare themselves for renewed long-term growth.

Turning to the individual businesses within HR Solutions. In Consulting Services, organic revenue growth was 1% compared to 8% in the prior year quarter, which benefited from certain non-recurring pension de-risking activities. Results in the quarter reflect solid growth across our compensation consulting business and in our retirement business for investment consulting and delegated pension management services, partially offset by a modest decline in demand through actuarial services and retirement consulting.

Despite weak demand for discretionary services and overall economic weakness in Continental Europe, for the full year, we delivered low- to mid-single-digit organic growth across the Consulting Services business and would anticipate similar levels of growth in 2014. In Outsourcing, organic revenue increased 11%. Organic revenue reflects substantial growth in our health care exchange business as we recognize revenue related to the majority of enrollments that take place during the fourth quarter in our active and retiree exchanges. Results also reflect modest growth in our HR BPO and in benefits administration for discretionary services, partially offset by unfavorable net client activity that we saw in early 2013 but became less of a headwind starting in Q4.

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 generation continues to enable substantial investment in colleagues and capabilities around the globe. A few examples include: in Risk Solutions, we're investing in client leadership with the international rollout of the Revenue Engine and Client Promise through our greater productivity and efficiency. We're investing in innovative technology, such as the Global Risk Insight Platform. GRIP is the world's leading global database of risk and insurance placement information, capturing roughly 1.9 million trades and $100 billion of bound premium. We continue to have a growing client list of insurance carriers utilizing the platform for its analytics and services capabilities. In addition, we're driving 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. We continue to align our global Health and Benefits platform to better capitalize on our global distribution channel and deep brokerage capabilities. And we're investing in the further development of data and analytics capability of Aon Benfield to strengthen our already industry-leading, client-serving assets.

Finally, we're expanding our footprint through tuck-in acquisitions that either increase scale in emerging markets or expand capability to better serve clients.

In HR Solutions, we're making significant investments to strengthen our industry-leading position and comprehensive portfolio of health solutions, including health care exchanges.

Health care exchanges, as Aon Hewitt's unique business model reflects, enable clients to begin transitioning their participants to a sustainable, full-service solution based on expanded choice and a competitive marketplace. Clients continue to reinforce the value of Aon's industry-leading vision for private health exchanges, as we're seeing increased interest from a broadening spectrum of industries and geographies. In Q4, we were very pleased with our enrollment results and the excellent service experience we delivered for our clients and their employees and retirees.

In the Aon active health exchange, employer participation was 6x higher, and employee covered lives tripled. We delivered on our Q4 anticipated enrollment numbers of more than 600,000 lives, including eligible dependents.

On the Aon Retiree Health Exchange, we serve more than 300,000 of our clients' retirees to evaluate the best Medicare options for their needs. Overall, we're excited about our robust pipeline of clients for the 2014 enrollment, continue to see increased interest from a broadening spectrum of industries and look forward to updating you on our progress later this year, when our primary sales cycle has ended.

Separately, across our HR Solutions portfolio, we're expanding in high-growth areas with innovative solutions to derisk pension plans. And our delegated investment solutions are opening relationships in new markets. We're also providing a broader set of advisory and advocacy solutions to our clients' employees to enable greater choice and improve decision making on their retirement and health care options. We continue to expand our industry-leading benefits administration solutions and technology platforms. And finally, we're strengthening our International footprint to support a global workforce with investments in key talent and capabilities across emerging markets.

In summary, for both the fourth quarter and full year, we delivered positive performance across each of our key financial metrics. In addition, we strengthened our industry-leading platform with strategic investments across data, analytics and solutions that we expect will drive long-term growth and greater operating leverage in 2014.

With that said, I am now pleased to turn the call over to Christa for further financial review. Christa?

Christa Davies

Thank you very much, Greg, and good morning, everyone. As Greg noted, we delivered positive performance against all 4 key metrics, while continuing to position Aon's industry-leading platform for long-term growth, strong free cash flow generation and significantly increased financial strength in 2014 and beyond.

Now let me turn to the financial results for the quarter on Page 6 of the presentation. Our core EPS performance, excluding certain items, increased 21% to $1.54 per share for the fourth quarter compared to $1.27 per share in the prior year quarter. Results of the quarter reflect strong operating performance in our HR and Risk Solutions segments, a lower effective tax rate as we deliver long-term benefits related to the company's redomicile and effective capital management reflecting the company's share repurchase program. Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on Page 13 of the press release include noncash intangible asset amortization and restructuring charges related to the Aon Hewitt reconstructing program. All charges for the formal restructuring program have now been completed.

Lastly, foreign currency translation had a $0.03 unfavorable impact on EPS in the quarter due primarily to a stronger dollar, U.S. dollar, versus the Australian dollar, Canadian dollar and Brazilian real. If currency were to remain stable at today's rates, we would expect no material impact in the first quarter.

Now let me talk about each of the segments on the next slide. In our Risk Solutions segment, organic revenue growth was 3%, operating margin increased 40 basis points to 23.6%, and operating income increased 2% versus the prior year quarter. Organic growth, driven by investments in GRIP and analytics, as well as $9 million of restructuring savings, were partially offset by a $16 million or 40 basis points unfavorable impact from foreign currency translation.

Let me spend a moment on the formal restructuring program, key initiatives that have enabled concurrent funding of investments and long-term structural margin expansion. Under the Aon Hewitt program, approximately $99 million of estimated savings will be achieved in Risk Solutions. Approximately $69 million of the cumulative savings has been achieved under the program, with the remaining $30 million to be achieved by the end of 2014. 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. We would note that 100% of the charges have been incurred and the Aon Hewitt restructuring program is closed.

In Q4, we delivered solid underlying operating performance in Risk Solutions, despite an unfavorable impact from foreign currency, continued economic uncertainty in Europe and unfavorable market impact in Reinsurance.

For 2013, Risk Solutions operating income grew roughly 6% and operating margin increased 80 basis points to 22.5%, placing us firmly on track for improved operating income performance in 2014, and further margin expansion toward our long-term target of 26%.

Turning to the HR Solutions segment. Organic revenue growth was 8%, operating margin increased 440 basis points to 21.4%, and operating income increased 36% versus the prior year quarter, in line with management's guidance. Significant growth in our health care exchange business and $18 million of incremental restructuring savings were the primary drivers of our anticipated strong fourth quarter performance.

With respect to the Aon Hewitt restructuring program, approximately $260 million of the $303 million in total cumulative savings has been achieved under the program, with the remaining $43 million to be achieved by the end of 2014.

As Greg noted, we made tremendous progress in 2013, delivering on both our operational and financial goals that were laid out at the beginning of the year. This performance is exactly in line with our long-term outlook for the HR segment and places us firmly on track for improved performance in 2014.

For HR in 2014, we expect to number one, deliver organic growth; number two, generate greater scale and improve return from investments; number three, deliver remaining savings related to the restructuring program; number four, deliver, in 2014, greater than mid single-digit operating income growth and further margin expansion toward our long-term target of 22%. The patterning will be similar to 2013. Down in the first half, both Q1 and Q2; up in the second half of the year; flat in Q3; and up substantially in Q4.

Now let me discuss a few of the line items outside of the operating segments on Slide 9. Unallocated expenses increased $6 million to $54 million, reflecting an increase in long-term employee incentive compensation programs. Interest income decreased $1 million to $3 million. Interest expense increased $2 million due to costs associated with certain derivative hedging program. Other income of $14 million primarily includes gains on sales of businesses and certain long-term investments as we monetize our long-term investments and put the capital to better use for shareholders. Going forward, we expect a run rate of approximately $1 million per quarter of interest income, $45 million of unallocated expense and $60 million of interest expense per quarter.

Turning to taxes. The effective tax rate on net income from continuing operations was 24.2% compared to 25.2% in the prior year quarter. The effective tax rate in the fourth quarter of 2013 was favorably impacted by changes in the geographic distribution of income and certain discrete tax adjustments.

Lastly, average diluted shares outstanding decreased to 311.4 million in the fourth quarter compared to 327.5 million in the prior year quarter. The company repurchased approximately 1 million Class A ordinary shares for approximately $77 million in the fourth quarter. The company has $2.9 billion of remaining authorization under its share repurchase program. Actual shares outstanding on December 31 were 300.7 million and there are approximately 9 million additional dilutive equivalents. Estimated Q1 2014 beginning dilutive share count is approximately 310 million, subject to share price movements, share issuance and share repurchase.

Now let me turn to the next slide to highlight our significant financial flexibility and strong free cash flow on Page 10. At December 31, 2013, cash and short-term investments were $1 billion and total debt outstanding was $4.4 billion. Overall debt-to-capital decreased to 35% at December 31 compared to 37.7% at September 30. Cash flow from operations increased 18% to $649 million in the fourth quarter, due primarily to growth in net income and a decrease in pension contribution. Free cash flow, as defined by cash flow from operations less CapEx, increased 23% or $110 million, to $594 million in the fourth quarter, driven by strong cash flow from operations and a $13 million decrease in CapEx. For the full year, cash flow from operations was a record $1.6 billion, up 15% due primarily to growth in net income, strong working capital performance and a decrease in pension contribution. Free cash flow increased 22% or $254 million, to $1.4 billion, driven by a record cash flow from operations and a $40 million decrease in CapEx, a truly outstanding performance.

Turning to the next slide to discuss our significant financial flexibility. We value the firm based on free cash flow and allocate capital to maximize free cash flow returns. As you can see from this chart, based on current assumptions, we would expect free cash flow to increase by over $600 million annually over the next 5 years based only on a reduction in cash used for pension and restructuring. Continued growth in the core business, further margin expansion and a reduction in the overall effective tax rate would generate additional free cash flow growth that puts us well on track with our goal of doubling free cash flow to more than $2.3 billion annually within the next 3 to 5 years. Regarding our underfunded pension plans, we've taken significant steps to reduce volatility and liability as we've closed plans to new entrants, frozen plans from accruing additional benefits and continued to derisk certain plan assets. Our overall unfunded status improved to $1.6 billion and 91% at year end 2013 compared to $2.3 billion and 82% at year end 2012.

We currently expect contributions to decrease by roughly $138 million to $385 million in 2014 and continue to decline thereafter. Additionally, noncash pension expense was roughly $21 million in 2013, and we would expect noncash pension expense is 0 in 2014.

Regarding our restructuring plans, cash payments were $152 million in 2013. As all charges related to the restructuring programs have now been incurred, we would expect cash payments to decline by $60 million to approximately $90 million in 2014, and decline further each year thereafter.

In summary, we finished the fourth quarter and full year 2013 with solid performance across all 4 key financial metrics. We continued to make substantial investments for clients and drive future long-term growth in both Risk and HR Solutions. We delivered 22% free cash flow growth and have focused on 3 primary areas that will each contribute substantially to a doubling of annual free cash flow, more than $2.3 billion annually over the next 3 to 5 years. Combined with a strong balance sheet and significant financial flexibility, we've positioned the firm for improved financial performance and significant shareholder value creation in 2014 and beyond.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Adam Klauber of William Blair.

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

A couple of questions on exchanges. Number one, has the sales cycle for benefit admin exchanges started earlier than normal and is it active? And then the second question, you've obviously put on a big jump in new clients this year on both the active and retiree. Do you have more capacity as you go into next year to onboard even more clients than you did this year? So 2 different questions.

Gregory C. Case

First, Adam, on your question on the sales cycle. I would say, this is part of an ongoing conversation with our clients around literally how they serve their employees and support them in a more effective way. So as we completed the cycle last year, it's really been a continuous set of conversations with clients. We're obviously in the middle of a sales cycle now, but it's been a really continuous set of conversations that, I must say, had been building in momentum. More clients are interested, cutting across a broad set of geographies and industries in all sizes and shapes. So sort of very, very active set of conversations. And then as we've said before, for us, we have plenty of capacity. This has been about building in a very thoughtful, methodical way on the active side, initially, with 3 companies this cycle, with 18 companies. The pipeline is exceptionally strong and we have capacity and fully anticipate adding some of the next set of clients. And most important is serving them in an impeccable way, which we were very pleased to do this last cycle. And the same is holding on the retiree side, too. So very, very, very positive set of developments and it's within the context of what we do in ben admin anyway. We serve 9 million employees in ben admin across the board now on the active and the retiree side. So it's part of a natural progression and it's proceeded very, very well.

Operator

Next question is Brian Meredith of UBS.

Brian Meredith - UBS Investment Bank, Research Division

Yes, a couple of questions. First, Greg, I'm curious, could you give us some insight into what you see happening in the emerging markets right now? And could that have any impact on your business here in 2014, with the economic slowdown there?

Gregory C. Case

Well, actually, Brian, for us -- first of all, from an overall context, about 50% of our global business overall, and we've seen continued strong growth on the emerging markets side. I was just actually back -- I was in Beijing and Shanghai and Suzhou, and it was -- just tremendous opportunity everywhere. When you think about, it's obviously tied to GDP, that might be a bit of a headwind, but when you think about the level of incidence of insurance that have a coverage across per dollar of GDP, the growth opportunity in the emerging markets is just for us, from a risk standpoint, is substantial. And so we're seeing very strong growth across Asia, across Latin America, with particularly very high growth and well into the double digits in a number of countries. So from our standpoint, we -- this is a very positive industry, a very positive area of investment and development for us and we don't see that changing. And if it's great and it's a little less great, it's still in the great category.

Brian Meredith - UBS Investment Bank, Research Division

Great. And then, Christa, I'm wondering if I can just clarify your comments with respect to margin guidance in the HR Solutions business. Did you say that you expect margins to actually be down again in the first half of the year in '14, and then flat third quarter, and then up in the fourth quarter? And if so, why?

Christa Davies

Yes. So I was actually providing operating income guidance as opposed to margin guidance. And operating income, overall, we think will be greater than mid-single-digit growth in 2014. And then some of the patterning, it will be similar to 2013. Down in the first half, both Q1 and Q2; flat in Q3; and up substantially in Q4. And it's really reflecting the continued investment we make to support our clients in health care exchanges in 2014. And as you know, we incur expenses in all 4 quarters of the year in our health care exchange business and recognize the revenue in Q4. As we continue to scale more clients, really, because of the success we've had in the 2013 cycle, we are continuing to invest throughout the calendar year in 2014. That's why that patterning is continuing to occur.

Brian Meredith - UBS Investment Bank, Research Division

Is that because there's expense in onboard-ing the clients in the first half of the year, is that what's happening?

Christa Davies

Yes, that's exactly right.

Gregory C. Case

Brian, if you think about it, we've invested substantially -- said we would achieve mid-single-digit operating income in '13, which we did. Christa guided sort of where we're going to be in '14, which we will. Within that, we will have invested substantially sort of in the exchange side. But if you think about the categories of that, '13 was about really a lot of the infrastructure and things to get it up and running and really sort of build all the components of it, what you're seeing in the discussion in '14 is our anticipation of where the pipeline is and indications we're getting now of how that's going to evolve. And that really is going to be about specific client investment in addition to continued investment around the client experience.

Operator

Next question is Jay Cohen of Bank of America Merrill Lynch.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Yes, a couple of questions. First, I may have missed this on the call, but can you give us a sense of what the tax rate will look like in 2014?

Christa Davies

Yes, Jay, as we think about the tax rate, we've given long-term guidance on the tax rate of, sort of, more than 500 basis points. As we think about the tax rate for 2014, we're not giving guidance going forward. We have given long-term guidance and we'll report updates on progress as we report our results.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Okay. Second question, on the reinsurance broking side, I guess, I was interested in your comment suggesting that you may be able to eke out flat or even up organic revenue growth in 2014 despite what appears to be some pretty stiff headwinds, and I'm wondering why that is. And part of the question is, when you think about your compensation on the Reinsurance side, how much is fees versus commissions?

Gregory C. Case

So Jay, if we step back and think about sort of what we've done historically, first of all, irrespective of kind of what's happening on the pricing side, the exposure side, we've said we're going to grow the Risk Solutions business. That includes the Reinsurance business, and that's exactly what our goal is for 2014. And we believe we're going to be on track to do that. You're absolutely right, there is some substantial headwinds when you think about some of the capital. There's a record level of capital in the industry now, well above $500 billion. We've had a relatively light cat year and then that's fully compounded by the continued influx of capital from nontraditional sources, which is kind of at the $45 billion, $50 billion level now. We expect it to grow over time. Having said that, from our standpoint, our view is that when you think about what we do on behalf of clients, we're really helping them understand how to create value with their balance sheet, reduce volatility, improve operating performance, that's right exactly in the wheelhouse of what we do at Aon Benfield. We've invested in data and analytics in ways no one else has really been able to -- has ever done. And we believe that's going to help us serve clients effectively and that's why we believe we can continue to grow that business over time and fully anticipate being able to do that.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

And the fees versus the commissions, is the decent part of this fee, does that help protect the revenue to some extent?

Gregory C. Case

Yes, no, it's a mix on both sides, so fee and commission. We're about 70% commission and about 30% fee, overall. But we're doing a number of things on behalf of clients in addition to treaty placements. Some of it -- it's really just sort of adding advice and some of the things that come with data and analytics to help them think about their business overall, that's an increasing component. I would also say, for us, when you think about our leadership position, kind of, in the alternative capital area in cat bonds as an example, I mean, just -- there's clearly an acceleration on that front. If you think about since 2010, give or take, probably been about 90, 93, 94 deals done over that period of time. We've been involved in over half of them. Now there's been an acceleration of the 93. 31 were done last year. Again, we're involved in over half of them. So from our standpoint, there's lots of aspects in how we help insurers improve their performance across Aon Benfield. And that is reflected in our historical performance. I would also just say, reflect on sort of Aon over the last 5, 6, 7 years, in virtually any economic environment, we've been able to grow the business overall. And in fact, we've grown it every year except one, in which we were just down slightly. So our view is we've seen the movie before and fully anticipate being able to grow and help our clients succeed.

Operator

Next question is Gregory Locraft of Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

Again on reinsurance brokerage, it looks like organic growth dropped in '04, '05 to mid-single digits. And pricing in that environment was actually pretty bad. So can you compare the business for reinsurance today versus the '04, '05 when the pricing declines were similar? Why is it different, why won't we be seeing negative organics in the future periods in this division?

Gregory C. Case

A lot of those, I just described to Jay. I can't really speak for the overall industry, where we'll all [ph] be. I would just reflect on what Aon's been able to achieve in that exact environment. In that environment, we've been able to actually grow our position and fundamentally, this is about obviously, exceptional treaty placement as we described. But it really is more broadly about what we do on behalf of clients, insurers, to help them succeed. And in our case, the investment around data and analytics is just quite substantial. We invest well over $120 million a year, real money, cash in data -- in developing content and capability to help our clients make better decisions that, again, will improve operating performance, strengthen their balance sheet, reduce volatility. In that context, treaty placement is one aspect, it's very important, one aspect, but you're adding to that now all the capital markets choices they have, as well as just very clear views around how analytics, data, insight can actually help them make better decisions. And that's really the broad-based value proposition, what is just unique about Aon Benfield. It really has been what they've been able to do, my colleagues have been able to do over many, many years. And if you look at kind of new business generation, again, it's been net positive for 11 consecutive quarters through multiple types of environments. And we fully expect it will continue to do that as we help insurers succeed at Aon Benfield.

Gregory Locraft - Morgan Stanley, Research Division

Okay. And so basically, you have a more robust product offering today than you did in the mid-2000s, is that fair?

Gregory C. Case

No, I would say, it's continued to evolve. We have a quite more substantial product offering. Again, if you're investing $120 million-plus a year on content and capability, it's broader, it's deeper, it's more connected globally. And equally important, we believe it's highly differentiated. There aren't many players in the industry, doing what we do, could invest in content and capability the way we do on behalf of clients and haven't had any the impact that it's had on behalf of clients. Because in the end, that's what really is what generates client leadership, you're helping clients succeed. And we've been able to do that and we believe that capability has strengthened substantially, really, every year for the period of time you described. And that's why we're in a, we believe, in a very advantaged position as we look forward.

Gregory Locraft - Morgan Stanley, Research Division

Okay. And then again, on reinsurance brokerage, the reported revenues flow kind of linearly through the year, while as the renewal cycle for the industry, is Jan 1, June 1. So can you kind of tie the 2, in other words -- and the reason I'm asking is, is do you kind of have great visibility on your revenues for the reinsurance division already based on what was bound on January 1?

Gregory C. Case

Of course, just as you said, I would say there's a substantial number of renewals that happen on -- a percentage which happen on 1/1 and then in April and then June. So we have a good visibility on the treaty front and see how that evolves, although we would recognize revenue over the course of the year. That's why you see that flatten out. But as I said before, there's a lot of activity we do on behalf of clients, in addition to the treaty portion of the equation. And all those are now part of the discussion and are active and ongoing. But you're absolutely right, in terms of how the treaty evolves, and we certainly have a -- we have a visibility on how the 1/1s played out for sure.

Gregory Locraft - Morgan Stanley, Research Division

Perfect. And last is just on Reinsurance again. Can you just talk about your ability to flex the margin? Let's just say you get kind of 6 months out and the world breaks to the negative a bit versus planned or perhaps, it breaks to the positive a bit versus planned. How do you flex the margin in this, what's your ability to toggle the P&L?

Gregory C. Case

Yes, we think about it. And it's less about the market and it's really about the value that we provide to clients. And fundamentally, this is the absolute focus of Aon Benfield and my colleagues sort of in this arena. And when you think about as we add value to clients -- and it turns out, by the way, oftentimes, the greatest value you add for them, particularly when you're adding advice, data and analytics on top of what you do in treaty and other arenas, in times of stress, it's actually the biggest opportunity to help clients succeed. So our ability to actually provide value, have clients recognize the value and then get paid for value, we believe, continues to increase. And that gives us the ability to actually think through sort of the ability to get a return out of the business, which we've been able to do.

Christa Davies

And just one sort of set of facts, to reinforce what Greg just said, if you look at the Reinsurance revenue growth in 2012 of 5%, in 2013, it was 2%. And despite a decline in Reinsurance growth year-over-year, risk margins are up 80 basis points. So we feel very good about our ability to grow Risk Solutions margin despite the macroeconomic headwinds we're facing.

Operator

Next question is Meyer Shields of KBW.

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

I think I have -- maybe more directed towards Christa. If we look at the uses of cash on Slide 11, it looks the pension contribution and CapEx forecast came down pretty significantly from the last update that we had. I was hoping you could explain what's going on there?

Christa Davies

Yes, so that's absolutely right, Meyer. So I think pension contributions came down commensurate with our unfunded pension liability, which declined from year end 2012 of $2.3 billion to $1.6 billion. So a $700 million decline in unfunded pension liability, which is decreasing our cash contributions. And you could see the pension contributions will continue to come down over the following years, and that's really in terms of -- driven by improved long-term rates. And then CapEx, you can see, we finished 2013 at a lower level than we expected. And we expect CapEx to grow in line with revenue going forward, albeit from a lower base.

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Switching gears a little bit, the share repurchases slowed in the quarter compared to what we saw in the third quarter. Is that -- is there anything underlying that or is that just the way things shake out?

Christa Davies

No, as we think about share repurchase, we think about return on capital and cash-on-cash returns. And share repurchase remains our highest return investment, hence, the fact that we repurchased $1.1 billion of shares during the course of 2013, despite providing guidance sort of around the $800 million level. And if you think about it, we provided original -- we did $1.1 billion in 2012 as well, but of that, $300 million came off the balance sheet. So as we think about share repurchase, we expect share repurchase in 2014 to be similar to 2013. And then obviously, excess cash we'll deploy on a cash-on-cash return using return on capital as the metric we use to allocate all excess uses of cash.

Operator

Next question is Elyse Greenspan of Wells Fargo.

Elyse Greenspan - Wells Fargo Securities, LLC, Research Division

I was hoping we could spend some time highlighting more of what you're seeing going on within the U.S. economy. I know you pointed to stable exposure in your prepared remarks and kind of how you see the economic conditions in the U.S. impacting what you expect to see with your organic revenue in 2014.

Gregory C. Case

Yes, as we've said -- a couple of things, as you think about overall. First of all, just the broad-based macro trends right now, we described was kind of pricing environment, which has really been stable, around kind of flat overall, with an exposure change which has been modestly positive. So for us, from a U.S. standpoint, you can start to see aspects of the U.S. economy strengthening, not strong but strengthening overall. And so that's sort of the macro view of where we are. But I would say, though, in that context, back to our ability to make investments in the business and improve margin, we continue to make investments in the business and that really has helped us from the standpoint of just -- from -- and this is really around Client Promise and what we do on Revenue Engine, and all the different pieces of it, really helps us generate level of new business, $336 million across our Retail business, really driven across the U.S. as well, that is a record level for us. So we feel very good about sort of what we have in place, the investments we've made and the impact we're going to have over time as we grow the business organically, really, irrespective of sort of what happens on U.S. GDP. And in the end, if you look at the components, we've got a big construction book and that's obviously trending a little more positive, entries [ph] is a little more positive, tracks [ph] a little more positive from that standpoint. And then that puts -- and the exposures overall against those pieces are up a bit, as I've said before. And that really is sort of how we see the U.S. playing out, with some positive overall macro implications and -- amplified by what we do from an investment standpoint.

Elyse Greenspan - Wells Fargo Securities, LLC, Research Division

Okay. And then one other question, on the reinsurance broking business, you pointed to your presence within the alternative capacity market. How big is that as compared to your overall book?

Gregory C. Case

It's very small overall. As we said before, a large piece obviously, of our treaty book. But this is a smaller percentage overall, 5% to 10%, let's say, but growing. And I'll -- what I wanted to highlight is, if you think about alternative capital, this we believe is a reality, it's an option for clients, it's highly viable. About $45 billion or so in the context of, call it, a $550 billion capital base for the insurance world. We are primary in it, but overall, it turns out to be 5% to 10% of our overall book.

Operator

Next question, Michael Nannizzi of Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Christa, maybe following up on Meyer's question on the kind of sources -- or the uses of cash, Slide 11. So it looks like -- so pension contributions went down on forward -- or are going to decline. CapEx, looks like it's going to decline and -- but the cumulative increase to free cash flow doesn't seem to be increasing by as much as those 2 things are declining. Is there -- if we had sources of cash, what would that look like, I guess?

Christa Davies

Yes. So look, maybe the best way to start that question is, Michael, is to sort of start with free cash flow in 2012, which was $1.15 billion. The free cash flow number in 2012 is the number we're anchoring from to double, to get to $2.3 billion over the next 3 to 5 years. And included in that free cash flow, our free cash flow definition is cash from operations, straight from the cash flow statement, less CapEx. Included in cash from operations is pension contribution and restructuring. And then, obviously, the less CapEx means this CapEx number is also included in the free cash flow number. So if you think about it and your starting point obviously for free cash flow now is $1.4 billion, because it's what we produced in 2013. And so if you look at this cumulative increase, you can basically take the $1.15 billion, add $600 million, so you get to $1.75 billion, which is just from these 3 line items by themselves, that includes no improvement in operations of our business, all our revenue growth and continued margin expansion or a decline in tax rate. And so you can see that we are making good progress towards doubling free cash flow over the next 3 to 5 years.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay. I guess, I mean, and I'll take it offline, I guess. But just if I look at -- just from '14 on, because '13 is behind us. If I look at '14 on and I compare it to -- it looks like you're a couple of hundred million dollars better on pension, maybe a little bit more. Couple of hundred million dollars better on CapEx, but the cumulative free cash flow is up by about $20 million over that period.

Christa Davies

So the way to think about it is, if you look at the 2014 number and, say, it's $333 million as the cumulative increase, and then you look at the $602 million, then, from $214 million to $218 million, you've got a $300 million increase in free cash flow just from the line items above. And you add that to $1.4 billion, which equals $1.7 billion.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Got you. Okay. I'll take it offline. I guess -- Greg, I guess, or maybe Christa as well, on the Risk segment, so you had -- margins were up about [indiscernible] on 3 points of organic. Where do you need organic to be overall, I mean, is that -- do you think about it that way in order to continue to expand margins? Or because of GRIP and Broking, do you feel like you have levers to continue to expand margins even if organic falls below that level.

Gregory C. Case

Yes, I would just start at the top line. Our view is we are going to continue to expand the risk margin overall. And if you look across time, I've made investments, have been able to do that and at largely multiple types of organic growth environments. And that's, in fact, exactly what we intend to be able to do. A lot of the investments around GRIP, what we've done, and analytics, have really helped create leverage, operating leverage in the business, which is more substantial. So our ability to improve margin on lower growth rates is real. And you're starting to see that actually play out in the improvement this year. You'll see that play out over time. If we happen to get continued big pickup in the global economy or we happen to get rate improvement, et cetera, not something our management team has actually ever experienced, we'd love that. That would be great. But that's not what we require in order to actually improve the margin of the business. And that's really been part of the strategy over a multi-year period to invest in the business so that we could, in fact, improve margins, irrespective of the overall rate or exposure environment.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Great. And then last one, just on the exchanges. How much capacity do you have on the exchange right now, I mean, without investing more in terms of number of covered lives that you could put on the exchange? And where do you expect to be at the end of next year, just given whatever investments you plan to make during the year?

Gregory C. Case

We have substantial capacity. Again, our goal here is to serve clients in an effective way. First and foremost, making absolutely certain that the experience that our client has and their employees have is absolutely pristine. As we've said before, we've done that through the last few cycles, feel very good about that. And now is the opportunity to continue to react and to help our clients in a much broader, more robust pipeline. We have capacity to do that. And we'll update you when we get through the next sales cycle, maybe the second or third quarter. When we have that behind us, we'll take you through kind of what the overall picture looks like at that point in time and then move forward from there. But we've got a lot of capacity as we planned it out to help our clients succeed.

Operator

Our last question comes from Mike Zaremski of Credit Suisse.

Michael Zaremski - Crédit Suisse AG, Research Division

In terms of revenues in HR Solutions, Consulting Services slowed down, Outsourcing clearly picked up a lot. Should we be thinking about a shift in dynamic, which is due to health care exchanges or are they independent of each other?

Christa Davies

They're independent of each other. And as we look at our Consulting business, we'd say it grew 3% for calendar year 2013, and we'd expect something similar for 2014. And some of the Q4 number, we really have had a very strong comparable in Q4 2012, as Greg mentioned. And so that was really what's happening there.

Gregory C. Case

Yes, and I'd add one other piece. As you think about the overall business, as I said, we're very -- we feel very positive, very pleased with sort of how our efforts on the exchange front are evolving. But within the context of broad-based Aon Hewitt and all the things we're doing there, we've made some tremendous investments on the talent solutions side, in what we're doing to help clients think about really transitioning to the cloud-based approach on HR and, really, kind of the idea of Software-as-a-Service space for HR, tremendous investments. On the retirement solutions side, we've done a lot of work in the pension space, which is very interesting, very dynamic. A number of investments there, really thinking about our delegated pension management services and what we can do and accomplish to help clients really think about overall oversight, management of their pension plans. And certainly, on the defined pension -- or on defined contribution side, we've got a couple of efforts, something called DC Nexus and SimPlus Savings you're going to hear a lot about over time. So I want to emphasize the exchange story, we believe, is compelling, powerful and emerging. But it's really within the context -- it's a small part of Aon Hewitt overall. In fact, we continue the investment in the bottom line in '13. We hope it will be slightly positive in '14 from a bottom line standpoint. But there's a lot going on across Aon Hewitt that we're very, very excited about and a lot's going on inside the Consulting business, we're very, very excited about in terms of sort of the overall picture.

Michael Zaremski - Crédit Suisse AG, Research Division

Okay. That's helpful. So not to -- I realize it's a small piece of revenues, but operating income, clearly, was terrific in HR Solutions this quarter. Would you say a good portion of that was due to the health care exchange impact?

Gregory C. Case

No, as I've said before, if you think about -- what we said is we're going to be able to invest in the business and invest or -- and then actually improve operating income mid-single digits, which is exactly what we did. It was actually negative from the exchange side for '13, and we expect it will be slightly positive for '14. The real operating leverage that comes to the exchanges shows up in '15 to '16, and as we continue to evaluate the pipeline and think about the -- what really has been a tremendous set of conversations coming through there, our view is that we will be at a very good place from an operating leverage standpoint in '15 and '16 and just would say again, what Christa laid out for you is that we're going to have greater than mid-single digits operating improvement growth in '14.

Michael Zaremski - Crédit Suisse AG, Research Division

Okay, got it. And finally, for Christa, back to the tax rate, so is it long run, the tax rate falls below -- you said 5 points, is that below 24%, 23%, is that how we should be thinking long-term?

Christa Davies

No, no, no. I said when we started 2012, we had a tax rate of 29%. We then filed a statement which basically said that our tax rate would be more than 500 basis points, starting at 29%. And we expect that to happen over time.

Michael Zaremski - Crédit Suisse AG, Research Division

Got it. So you got to 24% this quarter, but we should be thinking to stay at this level will be -- down in the longer run.

Christa Davies

The thing I would say is quarterly tax rate numbers get impacted by certain things like discrete tax numbers. And the 25% for the full year is sort of the rate I would look at for the full year.

Operator

All right, thank you. I would now like to turn the call back over to Greg Case for closing remarks.

Gregory C. Case

That's it, everyone. Thanks very much for participating and I look forward to our discussion next quarter. Thanks very much.

Operator

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

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