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EDITED TRANSCRIPTAON - Q1 2014 Aon plc Earnings Conference Call

EVENT DATE/TIME: APRIL 25, 2014 / 12:30PM GMT

OVERVIEW:

AON reported 1Q14 core EPS, excluding non-cash intangible asset amortization,of $1.28.

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C O R P O R A T E P A R T I C I P A N T S

Greg Case Aon PLC - President & CEO

Christa Davies Aon PLC - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Brian Meredith UBS - Analyst

Adam Klauber William Blair & Company - Analyst

Dan Farrell Sterne, Agee & Leach, Inc. - Analyst

Paul Newsome Sandler O'Neill Asset Management - Analyst

Elyse Greenspan Wells Fargo Securities - Analyst

Michael Nannizzi Goldman Sachs - Analyst

Jay Cohen BofA Merrill Lynch - Analyst

Meyer Shields Keefe, Bruyette & Woods - Analyst

Kai Pan Morgan Stanley - Analyst

Charles Sebaski BMO Capital Markets - Analyst

P R E S E N T A T I O N

Operator

Welcome to Aon plc's first 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 mayconstitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subjectto certain risks and uncertainties that could cause actual results to differ materially from statements that are subject to certain risks and thoseanticipated. Information concerning the risk factors that could cause such differences are described in the press release covering our first quarterresults as well as having been posted on our website.

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

Greg Case - Aon PLC - President & CEO

Thanks very much. Good morning, everyone. Welcome to our first quarter 2014 conference call. Joining me here today is our CFO, Christa Davies.

Consistent with previous quarters, I'd like to cover three areas before turning the call over to Christa for further financial review. We note that thereare slides available on our website for you to follow along with our commentary today. First, is our performance against key metrics we communicateto shareholders. Second is overall organic growth performance. 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 four metrics we focus on achievingover the course of the year: grow organically; expand margins; increase earnings per share; and deliver free cash flow growth. Turning to Slide 3.In the first quarter, organic revenue growth was 2% overall, driven by solid growth across risk solutions.

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APRIL 25, 2014 / 12:30PM, AON - Q1 2014 Aon plc Earnings Conference Call



Operating margin increased 30 basis points, primarily reflecting strong margin improvement in our risk solutions segment. EPS increased 15% to$1.28, reflecting strong operating performance, a lower effective tax rate, and effective capital management. Last, free cash flow decreased $60million in our seasonally weakest quarter as solid underlying performance was more than offset by timing of certain payments in the quarter.

Overall, our results reflect a solid start to the year, driven by strong performance in risk solutions and double-digit earnings growth. As we investin innovative solutions and strengthen our industry-leading platform for long-term growth, strong free cash flow generation, and increased financialflexibility, we're returning a record amount of capital to shareholders highlighted by the repurchase of $600 million of ordinary shares in the quarterand the recently announced 43% increase in our quarterly cash dividend.

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 risksolutions, organic revenue growth was 3%, reflecting solid growth across all businesses. As we discussed previously, we're driving a set of initiativesthat are strengthening the underlying performance and positioning our risk solutions segment for long-term growth and improved operatingleverage, with management of our renewal book through client promise and retention rates of more than 90% on average, highlighting strongclient satisfaction in retail brokerage.

New business generation of more than $240 million across our retail business, with double-digit new business growth in many markets globallyacross Latin America, Asia, and the EMEA region. Investments in innovative technology and service capabilities, with the growth of GRIP and AonBroking deliver increased operating leverage. In our core treaty reinsurance business, net new business trends have now been positive for 12consecutive quarters or three full years, a truly outstanding performance reflecting Aon Benfield's long-term value proposition for clients.

Reflecting on the individual businesses within risk solutions. In the Americas, organic revenue growth was 4%, a solid performance despite a strongcomparable in the prior-year quarter. Exposures continue to be relatively stable across the region. The impacts from pricing was modestly positiveon average, reflecting the steady pace of market impact. We saw a growth across all regions -- US retail, Latin America, and Canada; includinggrowth across all businesses -- property-casualty, health and benefits, and affinity. In US retail, growth was driven by solid new business generation,while strong management of the renewal book portfolio drove growth in Latin America and Canada.

In international, organic revenue growth was 3%. Exposures continue to be stable. The impact from pricing was modestly negative on average,driven by continued softness in many regions across Europe. Results reflect strong growth across emerging markets in Asia, with solid growth ina number of other markets -- New Zealand, Germany, and France, to name a few. In Continental Europe, with leadership positions across this region,we continue to deliver solid growth against sustained economic and market headwinds, driven by strong management of our renewal bookportfolio and new business generation in a number of countries. While macro economic conditions still remain relatively fragile across many coremarkets, we're seeing signs of economic stabilization in this region.

In reinsurance, organic revenue growth was 3% compared to 1% in the prior-year quarter. Results were a bit stronger than anticipated, driven bysolid growth in facultative placements and capital markets transaction advisory services, which tend to be lumpy quarter to quarter. In treaty, asmentioned before, net new business won was positive for the 12th consecutive quarter, offset by an anticipated unfavorable market impact. Aswe have previously noted, record capacity continues to be available to meet demand and cedents are retaining more risks, driving expectednegative market impact, most notably in the US.

Absent an event in the industry, macro factors will continue to be a significant headwind for the balance of 2014. Against those headwinds, weexpect our results to reflect flat to modest growth for the full year, highlighted by continued positive net new business trends and growth in ourcapital markets and advisory transactions business. Overall, this level of performance and strength in new business generation reflects Aon Benfield'sunmatched level of investment and long-term value proposition for clients, while strengthening operational performance and reducing volatilitythrough unmatched data, analytics, and advisory capability.

Turning to HR solutions. Overall organic revenue growth was 1%, similar to the prior-year quarter with modest growth across both consulting andoutsourcing. Underlying performance in the first quarter reflects growth in areas where we're making investments in the business, including HRBPO, investment consulting, and delegated investment solutions. These investments reflect Aon Hewitt's client leadership, understanding and

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influence of market trends, and the long-term issues that face our clients, as healthcare reform, healthcare costs and the associated financial riskcontinue 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 a local level, managingand transferring risk against pension schemes that are increasingly frozen and largely underfunded.

Turning to the individual businesses within HR solutions and consulting services. Organic revenue growth was 1%, similar to the prior-year quarter.Underlying results reflect solid growth in compensation consulting and across our retirement business for investment consulting and delegatedpension management services. Despite continued economic weakness in Continental Europe, we're capitalizing on high-demand areas for ourclients around the globe, like the effect of regulatory changes in the retirement space and the increased IPO market activity in mergers andacquisitions.

Results in the quarter include an anticipated unfavorable timing of revenue in compensation consulting that will be recognized in the second halfof the year. For the full year, we continue to expect low to mid single-digit organic growth across consulting services. In outsourcing, organicrevenue growth was 1%, similar to the prior-year quarter.

We saw a modest growth in HR BPO, driven by new client wins. In benefits administration, we saw a modest growth driven by demand for discretionaryservices, partially offset by certain client losses that have become less of a headwind throughout 2014. For the full year, we would expect strongerorganic growth in outsourcing when taking into consideration the seasonality of revenue recognition in the health exchanges.

Slide 5 highlights the third topic, areas of investment. Aon has a unique and strong track record of developing innovative solutions to help solveproblems that bring differentiated value in response to specific client needs. Solid, long-term operating performance combined with expensediscipline 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 Promiseto drive greater productivity and efficiency. We're investing in innovative technology, such as the Global Risk Insight Platform. GRIP is the world'sleading global database of risk and insurance placement information, now capturing over two million trades and over $100 billion of boundpremium. We continue to have a growing 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 topackage similar risks and place substantial programs and facilities into the market on behalf of clients. Our sidecar facility with Berkshire Hathawaywas the first to market solution in this area. The ability to accurately match clients with the right sources of capacity is becoming increasinglyimportant with the growing contribution of third-party capital into the market.

We continue to align our global health and benefits platform to better capitalize on our global distribution channel and deep brokerage capability.We're investing in the further development of data and analytics capability at Aon Benfield to strengthen an already industry-leading valueproposition and client-serving capability. A great example of this is our impact forecasting center, the only catastrophe modeling center integratedfully into a global reinsurance broker, which enables us to provide real-time information on catastrophic events and analyze the financial implicationsfor our clients as incidents unfold.

Finally, we're expanding our footprint through tuck-in acquisitions that either increase scale in emerging markets or expand capability to betterserve clients. In HR solutions, we continue to invest in innovative solutions in high-growth areas. We're expanding solutions to de-risk pensionplans and are seeing tremendous growth in our delegated investment solutions, which will fill our clients' needs for faster execution of theirinvestment strategies.

These investment solutions are also helping us expand our services into other asset pools such as endowments, foundations, and insurancecompanies. We're also providing a broader set of advisory and advocacy solutions to our clients' employees to enable greater choice and improvedecision-making on their retirement options, especially important as regulatory changes around the world require more involvement fromindividuals.

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We continue to make significant investments to support future growth and strengthen our industry-leading position in health exchanges for activeemployees and retirees as part of our comprehensive portfolio of health solutions covering the full spectrum of benefit strategies.

Nearly one million employees, retirees, and their eligible dependents were served through Aon's suite of health exchanges for coverage in 2014.For clients on our active exchange, the average cost increase in fully insured premiums for 2014 was 5.1% including fees associated with theAffordable Care Act, which compares favorably to industry data reflected in the average healthcare costs increase for large US employers forcomparable plan designs which was approximately 6% to 8% -- an outstanding result, as we're not only benefiting and bending the cost curve forhealthcare for clients, but eliminating the volatility previously associated with our self-insured medical plans.

Equally important, client satisfaction through the enrollment period was outstanding, with 87% of employees having liked the ability to chooseamong multiple carriers with great transparency and comparable information. Overall, our pipeline of total lives we expect to enroll in 2014continues to grow. We look forward to updating you on our progress later this year when our primary sales cycle has ended.

We also continue to invest in our industry-leading benefits administration solutions and technology platforms, including extensive mobile solutionsand cloud -based outsourcing solutions. Finally, we're strengthening our international footprint to support our global workforce with investmentsin key talent and capabilities across emerging markets.

In summary, we delivered organic revenue growth across both segments, expanded margin while continuing to make strategic investments thatwill drive greater, long-term growth and operating leverage, and delivered double-digit earnings growth, as well as our returning record levels ofcapital to our shareholders. Moving forward, we are firmly on track for improved operational performance and significantly increased financialstrength in 2014.

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

Christa Davies - Aon PLC - CFO

Thanks so much, Greg. Good morning, everyone.

As Greg noted, our first quarter results reflect a solid start to the year, with strong operational performance and effective allocation of capital,highlighted by the repurchase of $600 million of ordinary shares in the quarter. I would note this is more share repurchase than we've done in anyquarter since 2008.

Now let me turn to the financial results for the quarter on page 6 of the presentation. Our core EPS performance, excluding non-cash intangibleasset amortization, increased 15% to $1.28 per share for the first quarter, compared to $1.11 in the prior-year quarter. Results from the quarterreflects strong operating performance in our risk solutions segment, a lower effective tax rate, and effective capital management. Lastly, foreigncurrency translation had no material impact on EPS in the quarter. If currency were to remain stable at today's rates, we would expect a modestunfavorable impact in each quarter for the rest of 2014.

Now let me talk about each of the segments on the next slide. In our risk solutions segment, organic revenue growth was 3%. Operating marginincreased 110 basis points to 23.6%. Operating income increased 6% versus the prior-year quarter. Margin expansion in the quarter was driven byorganic growth across all major businesses, $11 million of restructuring savings, and underlying expense discipline.

Let me spend a moment on the formal restructuring programs, key initiatives that have enabled in concurrent funding of investments and long-termstructural margin expansion. Under the Aon Hewitt program, approximately $99 million of estimated savings will be achieved in risk solutions.Approximately $80 million of the cumulative savings have been achieved under the program to date, with the remaining $19 million to be achievedby the end of 2014. We have incurred 100% of the charges necessary to deliver the remaining savings.

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In Q1, we delivered strong underlying operating performance in risk solutions despite continued economic uncertainty in a number of regionsaround the globe and an unfavorable market impact in reinsurance, placing us firmly on track for margin expansion for the full year, and continuedprogress towards our long-term target of 26%.

Turning to the HR solutions segment. Organic revenue growth was 1%. Operating margin decreased 100 basis points to 13.3%. Operating incomedecreased 6% versus the prior-year quarter. Modest organic revenue growth and restructuring savings in the quarter were more than offset by anincrease in expense to support our future growth in our healthcare exchange business. And, as Greg previously described, an anticipated unfavorableimpact from timing of certain revenue in our consulting business.

Our first quarter results were exactly in line with expectations and Management's guidance previously provided for the HR solutions business. Withrespect to the Aon Hewitt restructuring program, approximately $280 million of the $303 million in total cumulative savings has been achievedunder the program, with the remaining $23 million to be achieved by the end of 2014.

As discussed in the previous quarter, we provided commentary regarding the outlook for HR solutions segments in 2014. That outlook is unchanged.For HR solutions in 2014, we expect to: number one, deliver organic growth; number two, generate greater scale and improved return frominvestments; number three, deliver remaining savings related to the restructuring program; and number four, deliver greater than mid single-digitoperating income growth and further margin expansion towards our long-term target of 22%. With the patterning unchanged, down in the firsthalf, both Q1 and Q2; and up in the second half, 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 $2 million to $43 million,reflecting an increase in long-term employee incentive compensation programs. Interest income increased $1 million to $2 million. Interest expenseincreased $6 million due to an increase in total bid outstanding and costs associated with certain derivative hedging programs. Other income of$1 million primarily includes gains on certain long-term investments. Going forward, we expect a run rate of approximately $1 million per quarterof 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 18.9%, compared to 26.1% in the prior-year quarter. Theeffective tax rate in the first quarter of 2014 was favorably impacted by changes in the geographic distribution of income. It's in line with ourprevious expectation of more than a 500 basis point reduction over the long-term. However, potential unfavorable discrete tax adjustments infuture quarters of 2014 could cause the effective tax rate for the full year 2014 to be higher than the effective tax rate reported in Q1 2014 of 18.9%.

Lastly, average diluted shares outstanding decreased to 307.3 million in the first quarter compared to 320 million in the prior-year quarter. TheCompany repurchased 7.2 million Class A ordinary shares for approximately $600 million in the first quarter. The Company has $2.3 billion ofremaining authorization under its share repurchase program. Actual shares outstanding on March 31, were 296.5 million. There are approximately9 million additional dilutive equivalents. Estimated Q2 2014 beginning dilutive share count is approximately 305 million, subject to share pricemovement, share issuance and share repurchase.

Now let me turn to the next slide to highlight our strong balance sheet and cash flow on page 10. At March 31, 2014, cash and short-term investmentswas $678 million. Total debt outstanding was approximately $4.7 billion. Overall debt to capital increased to 37.4% at March 31, compared to 35%at December 31, primarily driven by an increase in total debt outstanding.

In Q1, cash flow from operations decreased by $65 million to a use of $11 million. The first quarter is historically our seasonally weakest quarterfrom a cash flow perspective, due primarily to annual incentive compensation payouts. Organic growth and $64 million of unfavorable timingmore than offset solid underlying working capital performance and a decrease in both pension contributions and cash taxes in the quarter. Wewould expect the impact from unfavorable timing to reverse itself in the second quarter.

Free cash flow, as defined by cash flow from operations less CapEx, decreased by $60 million to a use of $66 million in the first quarter, driven bya decrease in cash flow from operations partially offset by a $5 million decrease in CapEx.

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Turning to the next slide to discuss our significant financial flexibility. We value the Firm based on free cash flow and allocate capital to maximizefree cash flow returns. There are three primary areas that will contribute to our goal of doubling free cash flow to more than $2.3 billion annuallywithin the next three to five years.

From the chart on the presentation, based on current assumptions, we expect annual free cash flow to increase by over $600 million over the nextfive years based only on a reduction in cash used for pensions and restructuring. Combined with growth in the core business, further marginexpansion, and a reduction in overall effective tax rate, we are well on track to achieve our expectations for substantial cash flow generation.

Regarding our underfunded pension plans. We have taken significant steps to reduce volatility and liability as we've closed plans to new entrants,frozen plans from incurring additional benefits, and continued to de-risk certain plan assets. We currently expect contributions to decline by roughly$138 million to $385 million in 2014 and continue to decline thereafter.

Regarding our restructuring plans. Cash payments were $152 million in 2013. As all charges related to restructuring programs have now beenincurred, we would expect cash payments to decline by $54 million to approximately $98 million in 2014 and decline significantly each yearthereafter.

In summary, our first quarter results reflect a solid start to the year, with strong operating performance and effective capital management placingus firmly on track to generate more than $2.3 billion of annual free cash flow over the next three to five years. Combined with a strong balancesheet and significant financial flexibility, we have positioned the Firm for significant shareholder value creation in 2014 and beyond.

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

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions)

Brian Meredith, UBS.

Brian Meredith - UBS - Analyst

Christa, I guess a couple questions for you here. The first one, I was hoping you could elaborate a little bit on your comments with respect to thetax rate and some of the discrete tax adjustments we'll see here going forward? Perhaps you could give us some thoughts on kind of where thetax rate could potentially end up for the year?


Yes. Thanks, Brian. I think the comments I made in my prepared remarks were essentially that the rate we saw in Q1 2014, we may expect thefull-year rate for 2014 to be higher than that Q1 2014 rate of 18.9%. Brian, we're not giving specific guidance for 2014. But what I can say is that thefull-year tax rate could be higher because of unfavorable discrete tax adjustments in future quarters. If we looked at 2013, we did have 200 to 300basis points of unfavorable impact from discrete tax items.


Okay, that's helpful. So when you're saying higher, you're saying higher than 18.9% not necessarily higher than last year?

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Correct, that's right.


Got you. Good, just to clarify that. Then the second question, Christa, I was wondering if you could talk a little bit about share buyback in the quarter?I'm a little surprised at how high it was, particularly given this is your weakest cash flow quarter. Is this something that we could expect here goingforward that despite the weak cash flows you generally have in the first quarter, you can have significant share buyback?


Yes. Brian, we would actually say that if you looked at the share repurchase in the quarter, it was higher than we expected. It's higher than we wouldnormally do in Q1 given it is our seasonally weakest quarter. We did take a significant amount of cash off the balance sheet. So that was a bigportion of what you saw contributing to that share repurchase in the quarter. As we think about the rest of the year, we would not changeexpectations for share repurchase. We would really say, as we think about overall cash flow allocation, return on capital is the way in which weallocate free cash flow, as you know. Share repurchase remains our highest return on capital use of cash.


Does the fact that you bought back so much stock -- maybe this is for Greg also, reflect your investment spend if you anticipate for the year as wellas maybe what your thoughts are on the M&A environment here?


Yes. I guess what I would say, Brian, is we definitely have a discounted cash flow view of the Firm. We repurchase stock based on that discountedcash flow view of the Firm. So what you're seeing in Q1 is definitely a reflection of the value we see of Aon and how much we think it's going togrow over time.


Got you.


I'd add to that, Brian. It does not change in any way, shape or form our outlook and perspective. We will continue to make acquisitions as we havebeen doing, $200 million to $400 million range and keep doing that. We're going to continue to invest very heavily in our organic growth -- organicinvestments which have been very substantial when you think about the investments in GRIP, the investment in consulting side, the healthexchanges, Aon Benfield analytics, et cetera. We're going to continue to do that. So nothing's changed there. It really is this overlying ultimatelyagainst everything around return on invested capital and the fact that we have access to more cash just as Christa really led with which was we'regoing to continue to increase free cash flow in the Firm a double that over the next three to five years.


Great. Thanks for the answers.

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Operator

Adam Klauber, William Blair.

Adam Klauber - William Blair & Company - Analyst

On the health exchanges benefit administration segment, from what we understand this selling season actually kicked off pretty early. It actuallykicked off really more year-end I guess. One, is that so? Along with that, I guess, what's clients' comfort level looking at new benefit platformscompared to a year ago?


I would say, Adam, this is really a conversation we have with clients all the time. There really isn't a defined selling season, per se. There's a decisionpoint where clients have to get comfortable if they're going to make different changes that really are comfortable to explain and make sure theiremployees know exactly what they're doing to really reinforce the benefits they're providing.

So that's really the continued. I would say the activity, if you want to think about that, continues to be very, very strong. Our clients are excitedabout the opportunities to support their employees more effectively and take some steps to think about their overall cost curve. How they canshape that in the context of really serving their employees better.


Okay. Just one follow-up. It seems like this business is relatively seasonal. That you have obviously a lot of enrollment, enrollment season comesyear-end and implementation of new systems comes a couple months before that. How are you trying to smooth out some of that infrastructure,some of that seasonal infrastructure?


I would say a couple of things, first of all, remember this is an investment we're making in the Business that's growing well. There are a set ofcharacteristics that the revenue is captured more in the fourth quarter and a lot of investments are in the first, second and third quarter as youramp up. Part of the reflection now you see is our success and actually bringing clients on board. We're making investments to do that. So we'requite comfortable with this. We have a high degree of particularly in terms of what's going to happen, which is why we're comfortable saying we'regoing to grow operating income mid to greater single-digits for the year which is what we're thinking about overall.


Yes. Absolutely, greater than mid single-digit operating income growth for the year. As we think about this, Adam, we really think about it on thefull-year basis. We continue to make progress on health exchanges each year that goes on. Both on a return on the original investments we made.As Greg described in terms of client and pipeline and experience that our clients had in 2013 which was very impressive. Greg referred to in hisoriginal comments of having cost growth of only 5.1% compared to an industry average of 6% to 8%. So a significant benefit the clients are achievingis part of being part of the exchange.

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All it really does is reflect -- again, against this annual view on the financials, how do we strengthen our business to serve clients more effectively?This happens to represent one really important step in that direction. We'll continue to do that to support our clients and ultimately really drivethe financial performance that comes with that.


I'm sorry. One just quick final. Am I right in thinking that as the book of exchange client seasons -- in other words, as clients are on the exchangeone, two years does the margin go up on the season book of business compared to the new business?


There's obviously clearly a set of ramp-up costs that comes with bringing new clients on board, ramping them onto this. So yes, over time, you canexpect to sort of see that trend in the underlying business which we fully expect. But I would emphasize, we're very comfortable with the upfrontinvestment required to do that for two reasons: one is absolute fundamental benefit that we're bringing to our clients and our employees; andalso obviously the resulting financial results that comes with that, when you're supporting clients.


Great, thank you very much.

Operator

Dan Farrell, Sterne Agee.

Dan Farrell - Sterne, Agee & Leach, Inc. - Analyst

Just a question reinsurance brokerage and the solid organic this quarter. You mentioned good new business wins. I'm wondering if you could talkabout, do you feel that's coming from share gains from peers? Share gains from the direct market? Or do think it's driven by an expansion of thepie that might be happening from alternative capital or geographic expansion or anything like that? Just a little more color around there?


Yes. I would say to you, step back, Dan. Our fundamental position that really resulted in the specifics are, when we look at our treaty business, wecaptured a very micro level sort of wins and losses. For 12 consecutive quarters now that has been very positive or have been positive for three fullyears. That is a function of about everything. The buy -- we look at in terms of, how we think about helping clients succeed? How do we help themimprove their return on vested capital? Reduce their volatility.

That comes from lots of different categories. Whether it's in the classic treaty business where we've got the number one platform or in facultative,also within one platform or in the whole world around capital markets and transaction advisory services were got the number one platform. Boththree capabilities, we bring to our clients on integrated basis. Our goal is not a product based goal. It is a client value-based goal. How do we helpthem improve performance? Decrease volatility. That's what's led to what we believe is a strong traction in the Business. We'll continue to be goingforward.

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Then just one follow-up, on the capital markets side can you talk a little more about trends there. Maybe talk about the impact that had on thequarter as well?


As we said before, if you think about sort of we thought we'd kind of be modestly positive for the year overall. We came in a little stronger in thequarter that was do to facultative and some of our transaction advisory business which tends to be lumpy. Was a little more in the first quarter, butwe don't change our view for the year. Kind of modestly positive for the year, overall When you think about the impact on capital markets andwithholding transaction advisory fees, we'll continue to be very important, particularly as alternative capital comes in the marketplace

If you think about it, we reported a level of capital of $540 billion and literally all-time high, up 7% from year-end 2012 and probably underlyingthat $540 billion was about $50 billion in alternative capital in the context of that. So just over 9%. We expect that to be $100 billion over the nextthree, four, five years. A lot of dynamics happening that our clients need to react to, which means we have to help them think about it and reactto that, which is one of the real strength of what we bring to the table and why we're excited about this platform and how we can help clientsgoing forward.


Thanks. Just one really quick item too. Just on the tax rate again in the discrete items that you talked about that could happen later this year. Arethose unusual items? Or do you think there are things I can recur again? I'm just trying to think about 2015 trend relative to 2014?


Yes. Discrete tax adjustments happen every year. As I mentioned, we had a 200 to 300 basis point unfavorable impact from discrete tax adjustmentsin 2013. There are things like prior period adjustments as we continue to close out audits and things like that around the globe. So I would expectthem to continue.


Okay, thank you very much.

Operator

Paul Newsome, Sandler O'Neill.

Paul Newsome - Sandler O'Neill Asset Management - Analyst

Is there a way to look at the organic growth in the HR solutions if we back out the impact of the timing issues as well as the exchanges?


Yes. If you back out the impact of the timing, it's approximately 4% underlying for the quarter. It's very similar sort of the low to mid single-digitgrowth that we would expect an HR consulting for the year and similarly for the overall HR segment for the full year.

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The quarter really reinforce our view for the year, just as Christa described.


Then I guess, a little bit more broad related question. You and Gallagher actually mentioned this in their earnings earlier, that organic growth foryour business seems to be increasingly back-ended loaded. Is that purely a function and your opinion of what's going on with exchanges? Or maybeyou could talk about mechanically, why that's happened. But also are there other factors that are affecting the organic growth for your businessthat means that you're just seeing more revenue shift basically towards the back half of the year?


Yes, Paul, there really is -- there really isn't that much of a structural shift going on here. It really is very straightforward. When you think about ourrisk business, nothing really has changed. We've always had a relatively -- fourth quarter weighted in the US for a renewal standpoint. By the way,the first quarter's heavily weighted for EMEA. So nothing's changed all on the risk side of the business which is a very, very large percentage of ouroverall business obviously.

In the HR solutions side, the new mini series is what we're doing on the exchange front which is an offering which happens to be more fourthquarter weighted which is because of the way the enrollment cycle works. So not a lot going on here, pretty straightforward you're starting to seethis move in HR solutions because of the work on the exchanges.


Thank you. That's great.

Operator

Elyse Greenspan, Wells Fargo.

Elyse Greenspan - Wells Fargo Securities - Analyst

I just had a couple of other questions on the HR solutions business as well. I know, I mean every quarter we kind of see except the fourth quarter,the margins offset to a degree by the investment you're making in the healthcare exchanges. Any way to a certain degree pinpoint the level ofmargin improvement we might be seen in the rest of your book, just outside of the private healthcare exchanges?


You come back to basically think about where we are. Really, as Christa described, this is really an outlook that should be viewed at over the courseof a year versus quarter-to-quarter. What you saw in margins in the first quarter and you're going to see in the second quarter too, really is theinvestment as we bring clients on the exchange front.

Nothing at all has changed in our view around operating income, which is mid single-digit and greater over the course of the year. That's reallywhat we said, Christa can comment on that. It really is that investment upfront that sort of puts us in a position where operating income is downfor the first couple of quarters, kind of flat for the third and up for the fourth. That picture hasn't changed at all. Christa?

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The other thing I would say Elyse is if you think about our healthcare exchange business, we will generate a modest profit in that business in 2014which means it's dilutive to our overall margins. Therefore, the margins in the rest of our business are growing substantially to generate greaterthan mid single-digit operating income growth as Greg said for the full year.


Okay. Then just following up, you did put that modest positive earnings on kind of number out there last quarter? Did anything kind of happenedduring the enrollment season last year and looking forward that might cause you to be a little bit more positive or are you just kind of waiting forthe enrollment season to potentially update your view on that front?


Well, nothing's really changed since -- last year, we said we'd be mid single-digit that's exactly where we were. This year, we said we're going to bemid single-digits or greater, that's exactly what we are based on first quarter. As we said, things going exactly as planned. We're very excited aboutprogress. We're looking forward to updating you once we finish the enrollment cycle.


Okay, perfect. Then, just if we can spend a little time just discussing on the retail brokerage business? I know in your commentary, you did pointto stable exposures and some modest benefit from rate increases. I was just trying to get a little bit more of a view as we look forward for thebalance of 2014 kind of how you see trends standing out there? How maybe the level of organic growth you would expect to see from here?


Maybe I'll split that between sort of market view and just a thought on Aon. We track this with the Risk Insight Platform at a very granular level. Sowe track it across our regions and across the world for everything we place. We would -- if you think about, we're really talking about market impacthere, which is a function of both price and insured values. Until we can look at market impact overall, it's flat to slightly positive. It has been flat toslightly positive for number of quarters.

We expect that for the remainder of the year. So as we think about the overall market and the measurement called market impact flat to flatlypositive. As it relates to Aon, we intend to grow our business. If it gets to the environment, we're going to grow our business. We'd expect -- whatyou saw in this quarter it's going to be reflective of what you're going to see for the year, mid single-digit growth and against the boot, as we'reinvesting it to grow as I described before.


Okay, thank you very much.

Operator

Michael Nannizzi, Goldman Sachs.

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Michael Nannizzi - Goldman Sachs - Analyst

Thanks. Greg, maybe would it be -- it is possible maybe, Christa, to talk about and we haven't talked about GRIP for little while. I am just curious toknow, how much of an impact did GRIP have on margins and risk this quarter, and what has been the take up there? I don't know if you can giveus sort of notionally, or how much the fee stream there has increased over the last year? Thanks.


We are not going to break out GRIP, as we haven't before, in too much detail, other than to say, GRIP is really a function of all of the efforts in thedata analytics investments, around improving our Aon booking capability. And we have continued to get very strong uptake from our -- frominsurance carriers, and sort of their ability to use GRIP information to actually help them decide, where they are going to make investments, andto get a -- frankly do better at matching their capital with our client needs. That has worked exceptionally well, continues to do that. But GRIP isreally part of -- it's really part of the overall effort to drive towards 26%, and that has actually helped us do that. I would say we are up over 30 carriersnow, which is continued progress, which there are obviously a lot more out there. But sort of the 30, which we think is very, very progress, andGRIP continues to contribute to growth from a margin standpoint.


Do you think you could raise prices, or do you anticipate raising prices for GRIP for your -- for current or potentially new sign-ups?


This is not for us about raising price, in any way shape or form. This is about really trying to drive value on behalf of our clients, first and foremost.And when we drive value on behalf of clients, we are really helping markets get better aligned against client needs. I mean, one of the realbreakthroughs on GRIP -- let's just take the fact that we got the largest database in the world around placement information. But we have gotcolleagues who now work with that data, working with clients, our insured carriers, to help them think about how to shape their capital in a waythat is more value added to our clients. That is powerful. That is actually -- is what gives GRIP meaning to our insurance carriers, and real meaningultimately to our clients. And that's really how we think about it.


Great. And then in terms of the healthcare exchanges, can you -- is it possible to understand like the amount of investment you have made thisquarter versus last year? And when do you expect -- I mean, clearly, you are having a lot of success, and you are gaining a lot of traction. When doyou expect that sort of balancing between investing and revenue generation turn, so that the margins out of exchange are consistent with therest of your benefits business?


Yes. So what we would say is, if you look back over the last two years, we invested, and therefore made a loss in exchanges. In 2014, we said thatwe are going to be modestly positive, and every year after that, we are going to drive greater scale, and therefore greater return on those investments.And we are absorbing the investment in 2014, to drive greater than mid-single-digit operating income growth in HR Solutions. And so, each yearthat goes by, we will get greater return on that investment. And we think it is a very attractive business to be in, and therefore is worth the upfrontinvestment we are making.

As you know, we do allocate our capital, whether it's organic investments in healthcare exchanges, in GRIP and other things, or it's M&A, or it'sshare repurchases or it's dividends, on a free cash flow return on capital basis. And so, this is one of the most attractive segments across our entirebusiness.

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Right.


The -- it is interesting, when you think about it, the exchange investment is not different than investment we made in GRIP, the investments wemade in other areas on investment consulting side. What we have really focused on doing, is make substantial organic investments where webelieve they can strengthen our platform. And we said, we will fully absorb those investments, and still improve margins or improve operatingincome, as we are on HR solutions side, and margin on the risk side. We have to be able to absorb those and strengthen our platform. And for us,that has been one of the most gratifying things over the last few years, is to be able to make meaningful investments to build our business. But atthe same time, grow organically and improve margins. And that really is fundamental to what we think our thesis is for our investors.


And you think the 22% margin that you talk about on slide 8, is that -- what -- at-scale is that a reasonable goal or target for your exchange platform?


Yes, it is again the 22% of the 26% are not specific to individual areas.


Right.


Really, the 26% is the next step on risk solutions. The 22% is the next step on HR Solutions, and we feel like we are marching toward those, andwe'll continue to do that, when you reflect on it year-over-year.


Last quick one. Thank you for all the answers by the way. Reinsurance, how do you think about the weakness in heading into [6/1] renewals, andhow that could potentially impact you, before and then potentially -- include the before, and then potentially including the capital markets potentialactivity? And thanks, again, for all the answers. Sorry for so many questions.


So it is quite all right. And you step back, we don't provide pricing guidance in the market on the reinsurance side. That is something that sort of-- we have got a tremendous amount of data and analytics behind it. We provide it directly into our clients. We think it is quite beneficial and quitehighly competitively positive for them. Having said that, when you think about the market overall, obviously a lot of pressure out there. The newcapital, I described before, a lot of pressure out there.

But fundamental, you step back and ask the question, do clients need help from the standpoint of improving operating performance and reducingvolatility? And the answer continues to be, yes, lots of different opportunities for them to do that. And that is where we come in, whether it's on

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treaty or facultative or capital markets and advisory business, that is what we do. And that is why I said, from our standpoint, we expect to be flatto modestly positive for the year on the reinsurance side top line, irrespective of what is happening in the overall market.


Thanks so much.

Operator

Jay Cohen, Bank of America.

Jay Cohen - BofA Merrill Lynch - Analyst

Yes. Just a follow-up on the reinsurance side. Obviously, these capital markets transactions are becoming more numerous, and you are playing avery important role there. When you assist one of your ceding Company clients in that form, versus buying traditional reinsurance, from yourstandpoint is that more profitable? In other words, if a Company instead of buying a particular layer through the traditional reinsurance marketwhere you place that, or you underwrite catastrophe bond as a specific example, same terms, which approach is more profitable for you?


So Jay, I would say, we don't really think about it on a product basis that way. There is kind of a clinical way you can sort of parse those up. Obviously,one is recurring, one is not. There is a whole series of things that go into that. We think of it very much around an overall client view. So what wedo to help that clients succeed? By the way, very measurable, operating performance, balance sheet strength, volatility as I said before, againstthat very specific set of metrics. What value are we bring into the table? And when we bring value to the table, we have been very fortunate, ourclients are very, very clear about wanting to pay us for value. But they hold a very high bar as they should, and we want them to do for everybody.

We all need to provide value. If we do, we are going to do fine economically. And if we don't, they will be all challenged economically. But that isexactly the bar you want, if you are providing value into the market, as we are. And we want more transparency around that, more clarity aroundthat, and we think that actually serves Aon Benfield very, very well, given our privileged positions in treaty, in fact, and in the capital market side.


Got it. Second question on the tax rate, you had talked about reducing the tax rate. I think it was 500 basis points, and you always said over time.It just feels like that happened a lot faster than one might have expected. I know the full-year tax rate may not be as low as what you saw in thefirst quarter, but still it was quite a bit lower than certainly we expected, and I think others. And so, did something change here, where you wereable to recognize that tax savings quicker than you might have originally expected?


Jay, I would really say that we have been on a path, as you know to reduce our tax rate by more than 500 basis points over the long-term. And therate in Q1 is very much in line with our sort of previous expectations. And I would reinforce the point you made, which is we do think that the fullyear rates 2014 could be higher, due to discrete tax adjustments. And so, whilst the Q1 rate is really a reflection of the geographic distribution ofour income, which does change from quarter to quarter, as the mix of our business shifts. And as you look at sort of the mix of our business, Jay,you can see things like emerging markets are growing disproportionately higher than developed markets. And then, the areas in which wedisproportionally invest, whether it is GRIP or healthcare exchanges or other areas, are growing much faster than our core business too. And so,we do expect the mix to change over time as well.

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So this tax rate didn't surprise you on the favorable side at all?


No. It is very much in line with our expectations of the more than 500 basis points over the long-term.


You keep saying, long-term, but it happened a lot quicker, I guess. Thanks, Christa, I appreciate it.

Operator

Meyer Shields, KBW.

Meyer Shields - Keefe, Bruyette & Woods - Analyst

Thanks, good morning. Two margin questions, if I can. One, I think Christa, you mentioned that there was some lumpiness in that revenues associatedwith capital market transactions, that helped reinsurance brokerage organic growth. Does that have any impact on margins? Is there sort ofoperating leverage embedded in that?


Not really. I mean we would say, as Greg said. Definitely capital markets transactions and facultative transactions are lumpy, and therefore as wethink about the reinsurance organic growth rate for the full year 2014, we would say it -- we would expect it to be flat to modestly positive. Butthese capital market transactions, and in fact, it is a much smaller part of our business, but 85% of our revenue reinsurance is treaty, and so that isthe majority of what you are seeing in the quarter.


And obviously, the margin numbers that we report are risk solutions margins overall, and our report margins on Aon Benfield. And as Christadescribed, we expect to make progress on margin in risk solutions in 2014, first quarter reflects progress.


No, that's clear. I just wanted to know if there is any nonrecurring or component to that. Second, I guess, going forward if you do see those discretetax adjustments driving the tax rate higher in future quarters in 2014, is that going to have any impact on compensation expenses, either in corporateor in the individual segments?


Look, as we think about the overall business, we think about the total Company results. And as we look at our compensation, we have actuallydone a lot of work on compensation to align with driving value for shareholders. Example, our annual bonuses are really based on growing profityear-over-year, and the stock for our senior-most executives across the Company is cumulative three-year EPS, as we report to shareholders.

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And so, nothing that sort of in the overall, sort of compensation structure or reward structure of our senior leadership team is time-based. Everythingis performance-based, a very, very large percentage of everything we do is performance-based. So anything that affects performance, is going toultimately affect compensation.


Okay. And last question if I can. Is there any read-through from the significant dividend increase, in terms of the relative attractiveness of sharerepurchases?


Obviously, you can see we did more share repurchase in Q1 2014, and we have since 2008. And as I said earlier, share repurchase remains thehighest return on capital we have, in terms of uses of cash. And, look, I would just say that the dividend increase is our third year of increase individends, and we are returning capital to shareholders, and we will continue to go down that path.


Okay, great. Thank you.

Operator

Kai Pan, Morgan Stanley.

Kai Pan - Morgan Stanley - Analyst

Good morning, or I should say good afternoon to you. And I have two questions, one is just on the margin side. You have 3% organic growth in resolutions. You showed a 110 basis point margin improvement. I was just wondering, if we sustained this sort of low to mid-single-digit organicgrowth, will we be able to see the continued margin expansion in the re solutions?


Yes. We absolutely think that's the case. If you think about sort of we expect mid single-digit operating -- mid single-digit organic growth in risksolutions in calendar year 2014. If you look at our underlying expense base, it's mostly people. They are our largest expense. You would see a naturalsort of inflationary impact, of let's call it 2% growth in expenses. Therefore, even a 3% organic revenue growth level, we can absolutely drive marginexpansion. That is what you saw calendar year 2013, and that is what you have seen in Q1 2014.


Okay, great. And then on the margin on HR side. You had put out long-term target 22%, I guess, before the launch of the healthcare exchange. Ijust wonder, does the outlook for the private healthcare exchange and the margin of the business, will that be sort of like increasing, or sort of likebe above your long-term targets for the business, 22%?

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We absolutely believe that the returns on the healthcare exchange business will help us achieve our 22% margin target in HR Solutions. We haven'tgiven specific long-term margins for our healthcare exchange business, but we have said that is one of the best returns on capital opportunitiesacross the Firm. Obviously, the profile of this investment is, we are making significant investments on behalf of clients up front, and we expect toreturn that over time.


Great. And lastly on the buyback, the source of fund. So I just wonder could you remind us what -- like how much of your cash of $[338] millionwas sitting in the US, versus the international, and how do you fund the buyback? And is it through like increasing sort of like a debt, or fromoperating cash flow from the US operations?


Yes. So as we think about our cash flow, we really have a central sort of Treasury operation. It is a combined cash pool. That is a result of our movingto the UK in April, 2012. And so, we really think about it as a common cash pool. If you look at how much of the share repurchase was funded fromcash and short-term investments on the balance sheet, you saw at year-end 2013, cash and short-term investments were about $1 billion, and ithas come down to $678 million. So that gives you a sense that $322 million roughly came off the balance sheet. So that was a significant portionof the share repurchase contribution. I don't know if I answered every part of your question?


Yes. So but wonder if, vis-a-vis the share buyback has to use the cash available in the US, right?


Yes. We don't think about like that. We have a global cash pool.


Okay. All right. Thank you so much for the answers.

Operator

Charles Sebaski, BMO Capital Markets.

Charles Sebaski - BMO Capital Markets - Analyst

Good morning. Thanks for taking my call. I just wanted to get an idea of the investment profile that you ave been talking about in HR Solutions?And just sort of -- is that in people or is that technology or infrastructure? And sort of, how is the level of investment being made this year, comparedto 2012 or 2013, when we think about how that business and that investment is ramping up over time?

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Well, let's just start broad, and then maybe Christa can talk about the exchanges per se. But this was more than just exchanges. Our team in HRSolutions has really taken a broad-based view around very core topics, retirement, pensions, health, rewards, talent, et cetera, and made verysubstantial investments on the investment consulting side, and work we are doing there in pensions -- very, very substantial set of investments.In addition to investments that we talked about on this call around the health exchanges, and on the talent reward side. So it's really a broad-brushbase set of investments, with a specific set of -- I guess, a specific set of criteria, starting with how do we help clients succeed? And then, againstthe return on invested capital, cash on cash metric that Christa has talked about. So that's how we think about it overall.


I guess, my question is, when you say those investment -- I mean, are those people, are those teams being hired, or is that infrastructure andtechnology? Like I am just trying to understand when you say investment, are you referring to the people are putting in, such a people-heavybusiness? Or is this technology and infrastructure type investments?


It's mostly people. It is also technology and infrastructure. So if you think about the healthcare exchange business, it's people, it's process, and itis a significant amount of technology in the platform to run at scale. And so, but the majority of the investments is people, to service clients, andthat's exactly what we are doing. And so, as you think about the client growth each year, the underlying expense base is going to increase, becausewe are serving far more clients in calendar year 2014, than we did in 2013. But as we said, the profitability is improving each year, and the returnon capital is improving each year.


Okay. And then, just one other question on compensation overall. Normally first quarter seems to be a higher compensation quarter on a relativebasis, and the compensation growth seemed a bit lower this year. And I am just wondering, what if there is anything that has gone into that? Orany change on the compensation make-up corporate-wide?


Yes. So as we think about our compensation programs corporate-wide, we put in place a number of years ago as Greg described, aligning ourcompensation programs with performance as delivered to shareholders. Whether that is operating income growth year-over-year, or whether thatis cumulative EPS growth, or free cash flows growth. And they have not, these compensation programs have not changed over the last couple ofyears. We think they have aligned management incentives with shareholder returns, and therefore, we have kept them stable.


Was there any benefit to the level of compensation for the Company from the restructuring program? I mean, I guess, given the returns and thehurdles you guys have hit, I would have expected compensation growth to sort of stay more in line with last year, as opposed to the growthslowdown. That is all I am trying to understand?


Yes, I mean, obviously, as we invested in restructuring, we did get a return in terms of reduced compensation from those programs. But we arebalancing investments in restructuring, both investments in organic ideas for the business, with all of our other opportunities for investing acrossAon. And so, I wouldn't say that is particularly out of line with trends in previous years.

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Okay. Thank you very much.


Thank you.

Operator

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


I just want to say to everyone, thank you very much for participating with us today. We look forward to the call again next quarter. Thanks verymuch.

Operator

Thank you. Thank you all for attending today's conference. You may now disconnect.

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