Good morning, and thank you for holding. Welcome to Aon plc's fourth quarter and full year 2014 earnings conference call. At this time, all participants will be in a listen-only mode until the question and answer portion of today's call. If anyone has any objections, you may disconnect your line at this time. I would also like to remind all parties that this call is being recorded, and it is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature and defined by the Private Securities Litigation 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 and full year 2014 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. You may begin, sir.
Thank you, and good morning, everyone. Welcome to our fourth quarter and full year 2014 conference call. Joining me here today is our CFO, Christa Davies. I would note that there are slides available on our website for you to follow along with our commentary today. Consistent with previous quarters, I'd like to cover three areas before turning the call over to Christa for further financial review. First is our performance against key metrics we communicate to shareholders. Second is overall organic growth performance. Third, continued areas of strategic investment across Aon. On the first topic, our performance versus key metrics. Each quarter, we measure our performance against the key metrics we focus on achieving over the course of the year. Grow organically, expand margins, increase earnings per share, and deliver free cash flow growth. Turning to slide three.
In the fourth quarter, organic revenue growth was 6% overall, the strongest quarter of organic revenue growth in over a decade, highlighted by strong growth in our HR outsourcing and U.S. Retail brokerage businesses. Operating margin increased 180 basis points, reflecting strong operating margin improvement in both segments. EPS increased 23% to $1.89, reflecting strong operating margin improvement, a lower effective tax rate, and effective capital management. If we turn to the full year, organic revenue growth was 3% overall, reflecting solid growth in both segments, despite pricing pressure in our reinsurance business and overall economic uncertainty in Europe. Operating margin increased 50 basis points, reflecting margin improvement in both segments, inclusive of an unfavorable impact from foreign currency translation.
EPS increased 17% to $571. Finally, free cash flow was roughly flat at $1.4 billion as record cash flow from operations of $1.6 billion was offset by a $27 million increase in CapEx. Overall, our results reflect a strong finish to the year, despite industry and foreign currency headwinds. We delivered continued growth and operational improvement while making significant investments in client-serving capabilities across the firm and returning a record $2.5 billion of capital to shareholders in 2014. Turning to slide four, on the second topic of growth, I want to spend the next few minutes discussing the quarter for both of our segments. In Risk Solutions, organic revenue growth was 3% overall, reflecting strong growth in the Americas and improvement in reinsurance.
As we've discussed previously, we're driving a set of initiatives that are strengthening underlying performance and positioning our Risk Solutions segment for long-term growth and improved operating leverage, with management of our renewal book through Aon Client Promise and retention rates of more than 90% on average, highlighting strong client satisfaction in our retail business, new business generation of $360 million across our retail business, highlighted by another record quarter of new business in US Retail, as well as double-digit new business growth in many countries across APAC and emerging markets. In our core treaty reinsurance business, net new business trends have been positive for 15 consecutive quarters, an outstanding performance in today's changing marketplace that reflects Aon Benfield's long-term value proposition for clients and the application of excess capital in the industry to previously uninsured risks.
We have an increased operating leverage from our investments in innovative technology and data and analytics with the growth of GRIP, Review, and Aon Broking. Reflecting on the individual businesses within Risk Solutions. In the Americas, organic revenue growth was 7% compared to 4% in the prior year quarter. Exposures continued to be positive across the region, while the impact for pricing was flat, resulting in continued stable market impact. We saw solid growth across all regions, US Retail, Latin America, and Canada, and growth across all businesses, Property/Casualty, health and benefits, and affinity. In US Retail and Latin America, we delivered a record level of new business generation. Results in the quarter also include $8 million of anticipated favorable timing that unfavorably impacted the third quarter. Excluding this timing benefit, underlying organic revenue growth was 6%. In international, organic revenue growth was flat.
Similar to the previous quarter, exposures were stable and the impact from pricing was modestly negative on average, driven by fragile market conditions in many regions across Europe. We saw strong growth across Asia in both mature and emerging markets and solid growth across the Pacific region, specifically New Zealand, driven by new business generation. Results in the quarter were offset by a modest decline in Continental Europe. For the full year, Continental Europe delivered modest growth driven by new business in many countries and the management of our renewable portfolio across the region, an excellent outcome against the state market headwinds and economic uncertainty. In reinsurance, organic revenue growth was 3% compared to flat in the prior year quarter. Excess capital in the space continues to pressure global treaty pricing, driving a significant unfavorable market impact in the quarter.
Results reflect positive net new business in treaty placements, as well as growth in capital markets transaction and advisory business in facultative placements. While record capital is placing pressure on traditional treaty, clients are taking advantage by purchasing more coverage. In addition, we're putting capital to work in new areas such as the credit default market with Fannie and Freddie. Our industry market leading data and analytics are bringing new solutions to the annuity market for life insurers. Aon Benfield's unmatched level of investment and exhaustive portfolio of support and services is creating real value for clients and new products that are helping to offset near-term industry headwinds. Overall, across Risk Solutions, we delivered improved growth in the fourth quarter as anticipated, resulting in 2% organic growth for the full year.
As we continue to drive new business and to take a unified approach to serving clients across the portfolio, we expect low- to mid-single digit organic growth for total Risk Solutions in 2015. Turning to HR Solutions. Organic revenue growth was 10%, with growth across both major businesses and in areas where we're making investments in the business, including healthcare exchanges, pension risk, and delegated investment solutions. These investments reflect Aon Hewitt's client leadership, understanding and influence of market trends and solutions to sustainably address the long-term issues that face our clients. As healthcare reform, healthcare costs, the associated financial risks continue to rise at a time when overall health and wellness is not improving. Multinational clients are increasingly looking for global benefit solutions that support their global organizations delivered at a local level.
Managing and transferring risk against pension schemes that are increasingly frozen, largely underfunded, and facing regulatory changes. Turning to the individual businesses within HR Solutions. In consulting services, organic revenue growth was 4% compared to 1% in the prior year quarter. We saw continued strong growth in U.S. retirement, primarily from demand for pension de-risking and lump sum window activity, along with continued growth in delegated investment consulting and growth across businesses in Asia. Results were partially offset by a modest decline in continental Europe as macro conditions placed pressure on discretionary spend. For the full year, we delivered 5% organic growth across consulting services, in line with our outlook for 2014, and we expect mid-single digit organic revenue growth to continue in 2015. In outsourcing, organic revenue growth was 15% compared to 11% in the prior year quarter.
Organic revenue reflects substantial growth in our healthcare exchange business as we recognize revenue related to the majority of enrollments that take place during the fourth quarter in our active and retiree exchanges. Results also reflect new client wins in HR BPO as an increasing number of clients are adopting cloud-based outsourcing solutions. Overall, for total HR Solutions, we delivered improved organic revenue growth for both the fourth quarter and full year, as anticipated in our outlook for the segment, and would expect this level of performance to continue into 2015. Slide five highlights the third topic, areas of investment. Aon has a unique and strong track record of developing innovative solutions to help solve problems and create differentiated value in response to specific client needs.
Solid long-term operating performance, combined with expense discipline and strong free cash flow generation, continues to enable substantial investment in colleagues and capabilities around the globe. A few examples include in Risk Solutions, we're investing in client leadership with the firm-wide rollout of Aon Client Promise, a unified approach to client service across Aon to drive greater productivity and efficiency. We're investing in innovative technology such as the Global Risk Insight Platform, GRIP is world's leading global database of risk and insurance placement information, now capturing nearly 2.4 million trades and $119 billion of bound premium. We continue to have a growing client list of more than 35 insurance carriers utilizing the platform, of which more than half have signed multi-year contracts. Existing client renewals have been very strong, an increasing number of clients are also adding strategic consulting services.
We're driving our Aon Broking initiative to better match client needs with insurer appetite for risk and to identify structured portfolio solutions. We're investing in the continued development of data and analytics capability at Aon Benfield to strengthen an already industry leading value proposition and client serving capability. A great example of this is Aon Benfield Review, a reinsurer dashboard and strategic consulting service to help reinsurers be more effective markets for succeeding company clients. We continue to align our global health and benefits platform to capitalize on our global distribution channel and deep brokerage capabilities in an area that is high growth in nearly every region of the world. Finally, we're expanding our footprint through tuck-in acquisitions that increase scale in emerging markets or expand capability to better serve clients.
We completed 14 opportunistic acquisitions in 2014 for roughly $500 million, spanning multiple practice areas and geographies. In HR Solutions, we're investing in innovation to address high growth areas. We're expanding solutions to de-risk pension plans and support increasing needs for delegated investment solutions, which fulfill our clients' needs for faster execution of their investment strategies. Aon Hewitt is able to offer a differentiated strategy based on our strong three pillars of actuarial expertise, investment solutions and pension administration. We're also providing the broadest set of health, retirement, and talent advisory and advocacy solutions to our clients' employees and retirees to enable greater choice and improved decision making. As part of our comprehensive portfolio of health solutions covering the full spectrum of benefit strategies and funding choices, we continue to make investments to support future growth and strengthen our industry-leading position in health exchanges for active employees and retirees.
During the quarter, we delivered strong enrollment execution and excellent service experience for roughly 1.2 million employees and retirees, up 60% over the prior year, including the two largest employer transitions to the private exchange market in the industry. Our active exchange model is bending the cost of healthcare for clients, having placed over $4 billion in health insurance premium across a growing list of more than 30 national and regional carriers. For clients returning to our active exchange, the average cost increase was 2.6%, including administration fees and costs associated with the Affordable Care Act, which compares favorably to industry data reflecting the average healthcare cost increase for self-insured large U.S. employers was approximately 5%-8%.
Overall, our industry-leading portfolio of health solutions continues to drive strong client interest and demand with both exchange and bundled solutions that cover all client segments and needs in an evolving healthcare landscape. We also continue to invest in our industry-leading benefits administration solutions and consumer technology platforms, including extensive mobile solutions and cloud-based outsourcing solutions for clients. Finally, we're expanding our international footprint to support a global workforce with investments in key talent and capabilities across emerging markets. In summary, we delivered 23% earnings growth in the fourth quarter, highlighted by significant operational improvement in both segments and effective capital management for a strong finish to 2014. Looking forward, we expect continued improvement as we have positioned the firm for sustainable long-term growth, increased operating leverage, and significant free cash flow generation in 2015.
With that said, I'm now pleased to turn the call over to Krista for further financial review. Krista?
Thank you so much, Greg, and good morning, everyone. As Greg noted, our fourth quarter results reflect a strong finish to the year with double-digit earnings growth highlighted by the strongest quarter of organic revenue growth in over a decade. We had strong operating margin expansion in both segments and the repurchase of $500 million of ordinary shares. Balance sheet flexibility, combined with significant free cash flow generation, has enabled the deployment of roughly $3 billion of capital in 2014. With a record $2.5 billion returned to shareholders through share repurchase and dividends, and roughly $500 million in acquisitions that are expected to drive future growth. Now let me turn to the financial results for the quarter on page six of the presentation. Our core EPS performance, excluding certain items, increased 23% to $1.89 per share for the fourth quarter, compared to $1.54 in the prior year quarter.
Results from the quarter reflect strong operational improvement, a lower effective tax rate, effective capital management. Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on page 13 of the press release include non-cash intangible asset amortization and certain expenses related to legacy litigation assumed by us prior to 2005. In addition, changes in foreign currency rates had a $0.06 unfavorable impact on EPS in the quarter, due primarily to a stronger dollar versus most currencies, particularly the euro. For 2014, a stronger dollar drove an estimated $39 million or $0.11 unfavorable impact on EPS. If currency were to remain stable at today's rates, we would expect a similar impact in full year 2015 as we saw in 2014, with the first quarter incurring the majority of the impact in retail brokerage due to a weaker euro.
While Q2 to Q4 should see no material impact year-over-year. We expect to drive further operational improvement and effectively allocate capital, resulting in continued strong EPS growth in 2015. 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 110 basis points to 24.7%, and operating income increased 5% versus the prior year quarter. Results from the quarter reflect solid organic revenue growth and return on our investments in data and analytics such as GRIP and Aon Broking. Let me spend a moment on the Aon Hewitt restructuring plan. Savings in the fourth quarter are estimated at $25 million, compared to $21 million in the prior year quarter. The Aon Hewitt program is now complete.
The program delivered total cumulative expense savings of $402 million, of which $99 million were in Risk Solutions. In Q4, we delivered strong operating performance in Risk Solutions, despite a significant unfavorable market impact in reinsurance and continued economic uncertainty in Europe. For 2014, Risk Solutions operating income grew 2%, operating margin increased 40 basis points to 22.9%, including a -30 basis point unfavorable impact from foreign currency translation. Excluding the impact from foreign currency, underlying operating margin increased 70 basis points. We are firmly on track for improved operating income performance in 2015 and further margin expansion towards our long-term target of 26%. This is driven by the return on investments we have made, giving us greater operating leverage in the business and expense discipline as we optimize our global cost structure in areas such as IT, real estate, global procurement, and utilization of offshore capacity.
Turning to the HR Solutions Segment, organic revenue growth was 10%, operating margin increased 210 basis points to 23.5%, and operating income increased 19% versus the prior year quarter. Strong organic revenue growth in the quarter was partially offset by a $9 million anticipated unfavorable impact from certain expenses that were pushed from the prior quarter. With respect to the Aon Hewitt restructuring plan, savings in the fourth quarter are estimated at $76 million compared to $73 million in the prior year quarter. Approximately $304 million of the total cumulative savings were achieved in HR Solutions. As discussed previously, we provided guidance for Q4 to be up substantially in our seasonally strongest quarter, driven by organic revenue growth in healthcare exchanges. We delivered a strong finish to the year as anticipated. For the full year, operating income increased 7% and operating margin increased 40 basis points.
This level of performance is exactly in line with our full-year outlook for HR Solutions Segment of greater than mid-single-digit operating income growth and margin expansion. As Greg noted, we made excellent progress in 2014, delivering on our financial goals that were laid out at the beginning of the year. Looking forward, we expect continued operational improvement in 2015, with quarterly patterning of results similar to 2014, down in Q1, flat to modestly up in Q2 and Q3, and up substantially in Q4 in our seasonally strongest quarter. Overall, we are firmly on track for improved performance towards our long-term target of 22% as we generate greater scale and improve return from investments. Let me discuss a few of the line items outside of the operating segments on slide nine.
Unallocated expenses decreased $10 million to $44 million, driven by expense discipline in the current quarter and higher than normal expenses in the prior year quarter. Interest income was similar at $3 million. Interest expense increased $10 million due to an increase in total debt outstanding. Other income of $10 million included a $7 million gain due to the favorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and gains on certain long-term investments. Going forward, we expect a run rate of approximately $2 million per quarter of interest income, $45 million of unallocated expense, and $68 million of interest expense per quarter. Turning to taxes, the effective tax rate on net income from continuing operations was 19.6% compared to 24.2% in the prior year quarter.
The effective tax rate in the fourth quarter of 2014 was favorably impacted by changes in geographic distribution of income. The global effective tax rate for the full year was 18.9%. Lastly, average diluted shares outstanding decreased to 293.4 million in the fourth quarter, compared to 311.4 million in the prior year quarter. The company repurchased 5.4 million Class A ordinary shares for approximately $500 million in the fourth quarter. Actual shares outstanding on December 31st were 280 million, and there are approximately nine million additional dilutive equivalents. Estimated Q1 2015 beginning dilutive share count is approximately 289 million, subject to share price movement, share issuance, and share repurchase. In the fourth quarter, Aon plc's board of directors authorized a new $5 billion share repurchase program in addition to the existing share repurchase program previously authorized in April of 2012.
For the full year, the company repurchased 25.8 million Class A ordinary shares for a record total of $2.25 billion. The company has approximately $5.6 billion of remaining share repurchase authorization. Let me turn to the next slide to highlight our solid balance sheet and cash flow on page 10. At December 31st, 2014, cash and short-term investments were $768 million. Total debt outstanding was approximately $5.6 billion, and total debt to EBITDA on a GAAP basis was 2.1 times, compared to 2.3 times at September 30th, 2014. Cash flow from operations increased 1% to a record $1.6 billion, driven primarily by growth in net income and a decline in pension contributions, offset by an unfavorable impact from timing of significant receivable collections in the prior year period.
Free cash flow, as defined by cash flow from operations less CapEx, was roughly flat at $1.4 billion, reflecting higher cash flow from operations offset by a $27 million increase in CapEx. Looking forward, we expect significant free cash flow growth in 2015, driven by operational and working capital improvements, uses of cash for pension and restructuring continuing to wind down, and lower cash tax payments. 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. There are three primary areas that will contribute to our goal of doubling free cash flow to more than $2.3 billion annually by the end of 2017.
From the graph in the presentation, based on current assumptions, we expect annual free cash flow to increase by over $650 million based only on a reduction in cash used for pensions, restructuring, and CapEx. Combined with growth in our core business, further margin expansion, and a reduction in the overall effective tax rate, we are well on track to achieve our expectation for substantial cash flow generation. Regarding our pension plans, reported liabilities on a GAAP basis increased to $2.1 billion at year-end 2014, reflecting a 90% funded status, compared to $1.6 billion at year-end 2013, reflecting a 91% funded status, driven primarily by a decline in discount rates. Not reflected in those amounts, however, are $933 million of overfunded pension plans that are included in non-current assets on the balance sheet. Considered together, our net unfunded obligations are approximately $1.2 billion.
Despite significant pressure from historically low interest rates, because 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 de-risk certain plan assets, we currently expect contributions to decline by roughly $96 million-$220 million in 2015 and continue to decline thereafter. Additionally, non-cash pension expense was a modest benefit in 2014, and we expect pension expense to be a modest benefit in 2015. Regarding our restructuring program, cash payments were $82 million in 2014. All charges related to the restructuring program have now been incurred, we would expect cash payments to decline by $51 million to approximately $31 million in 2015 and continue to decline significantly each year thereafter. In summary, for both the fourth quarter and full year, we drove operational improvement across both segments and delivered double-digit earnings growth.
In addition, we returned a record $2.5 billion of capital to shareholders in 2014 through $2.5 billion of share repurchase and dividends, as well as the deployment of roughly $500 million of capital towards acquisitions that are expected to drive future growth. We expect strong earnings growth and significant free cash flow generation in 2015 as we progress towards our goal of generating more than $2.3 billion of free cash flow by the end of 2017. With a strong balance sheet and significant financial flexibility, we have positioned the firm for significant shareholder value creation in 2015 and beyond. With that, I would like to turn the call back over to the operator for questions.
Thank you. At this time for questions, press star one. Please record your name to be introduced. Again, star one, please. Our first question comes from Adam Klauber of William Blair.
Good morning, everyone. Couple different questions. One, how should we think about the margin on the health exchange as we go into 2015? As you mentioned, I think you have 1.2 million people on the exchange today. I would assume for that 1.2 million people, you've already done implementation costs, and the service costs are much higher first year. From a margin perspective, do those 1.2 million people become more margin accretive in 2015 versus 2014?
Adam, I would say for healthcare exchanges, we made a modest loss in 2014, as you know. We'll continue to make progress in 2015, and I would describe it as an immaterial impact. We're really focused on our HR Solutions business and growing overall revenue growth, as Greg described, as mid-single digit revenue growth and continuing to grow operating income. That's really the overall focus, and you should see the margin expansion towards 22% over time.
Okay. Then can you talk about, I noticed you did, I think not a big deal, but another Workday integrator in Europe. I think you bought the largest in the U.S. last year. That Workday business, that's growing very rapidly. Is that part of your success in growing your BPO outsource business? Could you discuss that a bit?
Absolutely, Adam. We have invested significantly in Workday capability in our BPO business, and it is driving substantial growth, as you described. We bought the largest implementation firm in the U.S. in 2012, Omnipoint, and we just closed the acquisition Kloud, which is the largest implementation firm across Europe. We're very excited about the growth prospects of that business and how it enables us to deliver that capability to clients.
Sorry, could you just go in a bit of detail on that? I don't think everyone's familiar with what Workday does. Why is that driving growth more specifically?
Yeah. I think the way we would describe the capability for our larger and more sophisticated clients is it's a software as a service application as opposed to an on-premises application. Really, the software as a service application enables clients to have much greater functionality. It's much lower cost. It's much easier to scale globally. Clients find it to be more efficient and provide much greater analytics around their HR functions.
Okay. Finally, how's the pipeline for the pension transfer business?
Adam, it's actually been quite strong. If you think about what our clients are going through right now with the regulatory changes and challenges and sort of general state of pensions in the world today, you can imagine it's a very substantial area of concern and interest for our clients. As such, we've been fortunate. We've led a number of the situations that have been actually completed in the last 18 months, and we're continuing to do that. Really, this is one of the contributors to driving our overall consulting business that has actually progressed very well, as you've seen in the results.
Okay, great. Thank you very much.
Thank you. Next question is Sarah DeWitt of JPMorgan.
Go to mid-single digit organic growth in 2015. If P&C prices fall and we don't get much of a pickup in the global economy, to what extent do you think you can still achieve that and grow margins?
Sarah, you were cut off at the beginning, but I think you were asking the question, just correct me. We grew top line and we grew margin in 2014. There's a lot of pricing pressure. Can we still do it in 2015? Am I paraphrasing where you were?
Right. To what extent can you still achieve your low to mid-single digit organic growth target in 2015?
Right. Top line, we're very comfortable and confident we're going to continue the low modest single digit growth in 2015. If you step back and think about it with the insight platform, the Global Risk Insight Platform, we capture exactly what happens across our book. What you've actually seen is a reduction in price, as you've described, offset by a modest improvement or increase in exposures. That's sort of roughly flat overall. That's what we've seen. I think it'll trend toward that. With more pressure on the reinsurance side. That's offset quite substantially by efforts we've undertaken in the business to grow the business, both fundamentally with Aon Client Promise, but also with the investments we're making in data and analytics. You're actually seeing that show through in almost every situation.
Our new business is literally a record level of new business in the U.S., never been achieved before, and it actually patterns us very well for 2015. It really is a reflection of the underlying investments that the team has made over the last number of years in the business. We're very, very comfortable. If you think about sort of the progress over the last number of years, there's always been some version of a headwind out there. There will be in 2015, but we're quite confident we can move through that and grow the business and improve margin.
Okay, thanks. Then on the pension, I heard your comments, but I still don't understand why are the future pension cash contributions decreasing when the liability on the balance sheet increased?
Yeah. Really because of a lot of moves we've made, Sarah, over the last five to seven years. We have frozen the plans, we've closed them, we've decreased the benefits, and we've continued to de-risk certain plan assets. That means that the cash contributions are really much more stable and on a path of decline than they would otherwise be if we hadn't taken those steps. The other thing I would say, which I mentioned earlier, is there is an overfunded asset in other assets of approximately $900 million. If you add that to the minus $2.1 billion unfunded liability, you get a net of $1.2 billion, which is fairly sort of similar to last year of about $1.05 billion.
Okay, thanks.
Thank you. Next question is Dave Styblo of Jefferies.
Sure. Good morning. Thanks for taking the questions. Just want to start out a little bit more on the FX headwinds and how you guys think about that for 2015. I guess my understanding is that the stronger dollar against your GBP and INR are actually positives. How much does that help mitigate currency pressure against the other currencies out there? I guess in short, what I'm trying to get a sense of how much of an EPS headwind are you expecting in 2015 from the net of all this?
Yeah. Dave, your question is absolutely right. We have a positive impact from the INR and GBP, then a negative impact really from most other currencies. Really what I said earlier is the total impact for 2014 was $39 million negative or about $0.11 unfavorable impact on EPS for the full year 2014. We would expect a very similar total impact for 2015 entirely in Q1, the Q2 to Q4 impact is essentially zero. That's really where that positive impact from the INR and GBP offsets negative impacts from other currencies, if that makes sense.
Sure, that does. Thanks. Sorry I missed that earlier. I was hopping across. Shifting gears over the reinsurance side here. I won't name names, but one of your competitors who also happened to report today also had strong organic growth of 3%-4% in both retail and reinsurance brokerage businesses. I'm just wondering, what are we to take from that? Are you guys seeing something in the market broadly that's making it easier to sell into the market, or some of the pressures are abating? What are you broadly seeing, and are we just in a sweet spot at this point?
Well, Dave, step back and think about first, fundamentally, there continues to be exceptional demand out there to improve fundamental insurers' performance. That's what the reinsurance world is all about. There happens to be a tremendous amount of capital chasing that's what's been discussed and talked about. With more capital, $575 billion underpinning the industry right now. That's the greatest level that it has ever been with more sort of on the horizon. Having said that, when you think about the product it's become less expensive. We're seeing actually insurers find different ways to buy increasing amounts. That's one piece. The second piece is, if you think about Aon Benfield's level of investment content capability over the last number of years, it's been extensive. With that, we are actually bringing capital to different solutions. What we did in the mortgage industry is a area of growth.
What we've done sort of in the life world is another area of growth. Essentially, if you think about Aon Benfield we believe it's the best in the world at matching capital with fundamental demand around risk in different categories around the world. What you're seeing is a bit of a reflection of that. I would say, again, back on the new business front it's one of the strongest quarters and years we've had in a long, long time on new business generation. We're just doing more with the existing clients we have as well. From our standpoint our capability and financial strength to invest behind this business in data and analytics, fundamentally, we believe will frankly separate us from what others can do in the space. We think clients value that and are going to utilize it for their benefit and pay for it.
Lastly, if I could sneak one in on the exchanges. You guys had mentioned your 2.6% increase for clients returning. Another competitor is pretty low in that range.
These are impressive results, I'm just wondering how much is this resonating with the potential clients that you're talking to? Are you starting to see any sort of inflection point as we're going forward and selling for the 2016 sales cycle? What are the conversations looking like at this point?
Dave, as we reflect overall, first of all, the team just did a phenomenal job in 2014. Again, we've got 1.2 million enrolled. I want to emphasize enrolled lives on our exchanges versus eligible, as you think about it. When you consider it's really, for us, as we've seen from a cost standpoint, a 200 to 500 basis point change, against a comparable plan design. That's our 2.6% versus the industry's 5.8%. By the way, that's against a fully insured answer. That means volatility is next to zero versus a much more expensive and much more volatile answer. You can imagine, that's one of the reasons.
That plus, by the way, 87% individual client sat, this is the individual employee satisfaction, is one of the reasons why we've had 100% retention on the exchange and why, as other companies look at it, they're seeing a highly viable option for them. We've had a very robust and active set of conversations with the pipeline. We're excited about the continued progress of this aspect of what we do in health. We do a lot of other things too, but this aspect. We're looking forward to 2015 and 2016 as we continue to expand the exchanges.
Okay. Thanks for the question.
Thank you. Next question is Brian Meredith, UBS.
Yeah. Good morning, everybody. A couple questions here. First, Christa, I'm wondering if you could break out for us a little bit the growth that you saw in the outsourcing. I know part was BPO, part obviously healthcare exchanges. Any way to give us a sense of how much of that was related to the BPO, and is that BPO revenue kind of continuing? My thoughts are those are kind of longer-term contracts, right?
Yeah. I would say we had growth across the outsourcing business, Brian. We had growth in BPO. We had both growth in our traditional benefits administration business, and we had growth in healthcare exchanges. I don't want to over-rotate on healthcare exchanges. I think while it's an incredible business for us and we're incredibly proud of the progress we made this year, we've also had great performance in our benefits administration and our BPO business. We don't actually break them out, Brian. While the healthcare exchange growth year-over-year is obviously the highest, it's the smallest of those three businesses too. They're all growing to get to that total outsourcing growth number.
Is it fair to say the contribution from the BPO, kind of the year-over-year growth of 13% or actually 15% organic, that was a big part of it, just the pickup there?
I would actually say the BPO contribution to overall outsourcing growth for the year was modest.
Okay.
It came from all areas, Brian. It came from BPO, it came from Ben Admin, and it came from healthcare exchanges.
Great. Thanks. On the healthcare exchanges as well, can you give us a sense of what the pipeline looks like right now for potential new signees coming into the fourth quarter of 2015? Are we seeing a pickup in interest levels this year?
Brian, we're having a substantial number of conversations and dialogues. We feel very good about the pipeline and the progress we're making. As we've described the outcome for the last few years for clients who've been on, it's just been exceptionally strong. As I mentioned before, to one of the other questions, literally, we're seeing cost savings, truly bending the curve, the cost curve here, at the level of 200 to 500 basis points, which is exceptional. When you combine that with the idea that this is not just a reduction in price, but a reduction in volatility, as these are fully insured outcomes. With client sat, our individual employee sat, that's 87%+. That's been very strong. In essence, we've got three years worth of data that we're looking to on behalf of clients.
You can imagine against that backdrop, the interest is actually quite strong.
Right. Just lastly, on the reinsurance growth in the quarter, how much of that was due to the capital markets transactions? Because I know they can be kind of lumpy.
Yeah, you captured it very well. Obviously, the capital markets transactions, our team in both capital markets, also in FAC. In other words, just had an exceptionally strong quarter. That was a big piece of it. I also want to emphasize the new business story here is exceptionally strong. It's one of the strongest new business generation periods through Aon Benfield's history. It's been 15 consecutive quarters of new business generation. We ended the year with a lot of momentum in that category. It was really a combination, certainly reflects the lumpiness as you described on capital markets and FAC.
Should we say most of it was that?
No, I'd say a substantial amount for Q4 was that.
Okay. Thank you.
Thank you. Next question is Ryan Burns with JD Capital.
Great. Good morning, everybody. I'm not sure, I may have missed it earlier, did you guys give any sort of guidance for adjusted income in the HR Solutions segment? I know you gave margins on a quarterly basis, just wanted to see if you had any guidance for the adjusted income.
What I did say, Ryan, was that we expect revenue growth of mid-single digits for the HR Solutions business in 2015. We expect operating income to continue to grow. We expect growth in operating income and growth in margins in 2015, and we expect it to pattern very similar to 2014, with operating income down in Q1, flat to modestly up in Q2 and Q3, and substantially up in Q4, which is our seasonally strongest quarter.
If 2014 was a level and year of progress, we see 2015 exactly the same way.
Great. Thanks for that color. Just my last one is, obviously the payout ratio this year, if I do dividends plus buybacks, I get to around 150% of operating earnings, and I realize there was roughly $300 million of excess cash heading into the year. We just wanted to get your idea as to how we should think about that going forward.
Yeah. The way we think about capital allocation, Ryan, is really around return on capital on a cash-on-cash basis. We did deploy a substantial amount, $2.25 billion into share repurchases because we believe we're substantially undervalued today as we look at our own discounted cash flow view of the firm. That's why we're deploying much more capital in share repurchases versus dividends. That's the way you should think about that going forward. As we think about the total amount of capital we might deploy our return to shareholders in 2015, if you looked at free cash flow growth of $1.4 billion in 2014, we'll continue to grow free cash flow in 2015. As free cash flow grows, there is opportunity for incremental leverage, and maybe unproductive capital.
That results in the cash that we can return to shareholders, we'll look at and continue to look at that on a return on capital basis to the highest return on capital opportunities.
Great. Thanks for the answers, guys.
Thank you. Next question is Jay Cohen, Bank of America, Merrill Lynch.
Yes, thank you. Looking forward, one of the sources of, I guess, additional cash that you cite is a lower tax rate. I don't know if you were talking about from 2012 forward or from today forward. Do you expect the tax rate to go down more from where it is now?
Jay, we think that the 18.9% tax rate for 2014 is the right operational rate going forward. What we would say is that as you think about the cash flow growth over time, that cash tax is likely to be lower in 2015 because there are some timing differences between the effective tax rate you saw in 2014 and cash taxes.
Okay. Obviously, you can't really quantify that, huh?
No.
Okay, the tax rate on a reported basis should be similar, all else being equal.
Yes.
Eventually it evens out. There's just a timing as this transitions.
Got it. Thank you.
Thank you. Next question is Michael Nannizzi of Goldman Sachs.
Thank you. Yeah, I guess one question that I had was on the pension expense and the impact of lower interest rates. I saw in your presentation that you have the cash proceeds to pension declining. Just trying to reconcile that. I'm guessing there were some continued de-risking activities that you undertook in the year that maybe offset some of the impact of that, I'd love to get some more color. Thanks.
Yeah. Mike, we did say on pension expense, pension expense was a modest benefit in 2014, and we expect it to be a modest benefit in 2015 again. Absolutely right, Mike. It is due to the fact that we've taken substantial actions over multiple years. We froze the plans, we closed them, we've de-risked the certain plan assets over time, as you described, and all those things have led to lower cash contributions in 2015 and pension expense being a modest benefit again in 2015.
Got it. If I could just one on the exchanges. Is it possible now, we're a couple of years in to the cycle and you probably have a better handle on the economics and the build-out of the platform. Just probably get an idea of how you think about the operating leverage that you get from a customer being a traditional benefits customer versus on an exchange. How do you think about the return? How do you think about the drivers of whether it's contribution margin or operating margin versus obviously there's a lot of expenses still, so that net margin number probably still looks similar to your other business. Just trying to get an idea of underneath, once you factor out the platform investments, how are you thinking about the one versus the other and the operating leverage of one versus the other? Thanks.
Yeah. Mike, the way we think about it is return on capital, unsurprisingly. Really when we made the initial investment in exchanges, both in active and retiree, we thought about it on a return on capital basis, cash on cash. You're absolutely right. The investments are substantial in both operating expense people and process as well as the technology platform. We are still investing, as you know, because we made a loss in exchanges in 2014. What I would say is we do expect the return on capital of that investment to be substantially superior to the rest of our business, which is why we invested so much in that area.
We do expect it to have higher than average returns because the fixed costs are largely fixed, and as we continue to get scale, we'll get disproportionate returns on those incremental lives and clients.
If you look at this-
Yeah, go. Sorry, Greg.
Exactly the same way we looked at using with the other organic investments substantial across the firm, what we've done in data and analytics across the Insight Platform, exact same approach. Ultimately, we're making these investments because we believe we will serve clients fundamentally better, period. That absolutely has to be in place, and that certainly is in place for the exchanges. They also have to give us greater operating leverage. We're essentially investing cash flow back into the business to create greater operating leverage. That's in fact what the exchanges are doing. That's what data analytics has done. That's what Risk Insight Platform is doing. That's what Review is going to do, et cetera. That's the philosophy. Everything you see us do sort of follows that same track.
Got it. When we think about timing, because if we were to quarantine the revenues and expenses from exchanges and put those aside because you're basically flat, it sounds like, then the margins on the rest of the business are expanding more than the segment margins would indicate. At some point, that investment that you're making is going to result in margins as well. Just trying to think about what's the timing of that and when, because once the switch flips, we should start to see that in margins, I would think.
Yeah. Mike, you are absolutely right about that, because for us to achieve margin expansion and operating income growth in 2014, which we did in HR Solutions, when we're continuing to invest and make a loss in exchanges, you're absolutely right. The rest of the business is expanding margins and growing operating income growth substantially. That is absolutely true. We would say, as we look at exchanges, it is a long-term investment and a long-term return, and we would expect that to happen over a multi-year period of time.
Again, if I could, I would have brought this to the broader firm. If you think back philosophically to the question earlier on the call, which is, can we grow in 2015 against more headwinds? The answer is, we've grown every year and increased profitability and increased margin and invested heavily in the business. Part of the reason we're confident in our continued progress against whatever headwinds are out there are these specific types of investments. As they come online and create operating leverage for us, that's really what's going to fuel bottom line. By the way, if the headwinds went away, that would be magnified.
Irrespective of the headwinds, these investments in exchanges, in the Risk Insight Platform, in Review, in additional data and analytics, in the Singapore Innovation Center, in the Irish Innovation Center, these types of things give us operating leverage we believe is unique to the industry.
Okay. Thank you.
Thank you. Next question is Charles Sebaski, BMO Capital Markets.
Good morning. Thank you. I guess the first question I have, Greg, is on the health care exchange, and the cost save that you talked about, the 2.6% rate increase. I guess if I go back to a press release you guys put out in November, talking about the health care exchanges and the increase in cost, that document said that the 18 returning customers to the health care exchange actually saw a 5.3% rate increase anticipated for 2015 versus the 2.6%. Just wondering how you help us rectify that.
Right. Literally, as we were talking about, we're talking about the total set of companies online and what we see coming in, and the 2-year average for the company. I think we're a little bit apples and oranges. What I was trying to do is give you the latest and greatest, hot off the press, is what exactly is going on in the market and what we're seeing against an overall market trend and what we're seeing. That's the 2 to 500 basis points. You still come back and essentially say, you're getting fundamental cost save in a substantial way. Call it, again, 200, 300, 400, 500 basis point cost save and no volatility because it's fully insured versus self-insured. Plus the client sat that I described before, the employee sat. From our standpoint, we feel very good about it.
We're trying to give the latest and greatest sort of on what's going on in the market.
All right. Can I get a little update on the M&A, both forward, but also what happened in 2014? You made $500 million of acquisitions in the year, but when I look at the revenue detail for the company, it was kind of 0 for the year on revenue impact. I guess in this $500 million you bought, what's the acquired revenue base? Where should we see that come up in dollars, or should it all be in 2015? What's your expectation for the upcoming year?
Yeah. You're absolutely right, Charles. We spent about $500 million on acquisitions in 2014. We invested in a number of geographies, the U.S., the U.K., the Pacific region, and a number of specific capability areas, National Flood Services and Lorica Employee Benefits being two great ones. The majority of these acquisitions were in our Risk Solutions business. The thing I would say is you look at the net on M&A, it's net of acquisitions and divestitures because there were some divestitures during the year, too, as we continue to optimize our portfolio around return on capital. What I would say is these are terrific capabilities. They're unbelievable teams. We're really pleased with the teams and the capabilities to serve clients, and they will generate great returns over the long term.
Okay. Will they show up? Is it a capability that helps your current business grow as opposed to net new revenue, where we would see in an acquisition line?
A lot of these are tuck-in acquisitions that impact the overall business. You'll see them in top line. You'll also see them with existing business we've got, magnify and expand that business. It'll be a combination of both. The $500 million or so investments in 2014 you're going to certainly see in 2015. A lot depends on timing when they come in. You're going to see us, though, continue to make on the order of $200, $300, $400 million of acquisitions per year, where we can build content and capability. We've been doing that, and it's served us quite well.
Finally, on one of your initiatives that you mentioned is the global consulting initiative that you mentioned, Greg. I believe this is more of a management consulting initiative for insurance companies.
What I was describing, it wasn't really broad-based consulting. In essence, what the team is doing really a step forward has brought very unique data and analytics capability to bear on behalf of our insurance clients, much like we've done with the Risk Insight Platform. It's called Review. They not only brought that to bear, they also offered around that some advice-based services to actually not only help and provide new insights, because essentially we're matching capital with client need, and they're doing that at the reinsurance level now. In addition to this, the fundamental raw analytics, they're also bringing an element around advice. A number of clients have really valued that. That's an added component. Our view is data is interesting. A lot of people have it.
We happen to have a tremendous amount, data is basically worthless unless it actually changes client behavior. That client behavior's got to drive performance and things like operating performance, balance sheet strengthening, and a reduction of volatility. The way to help clients do that is to add some components around advice to it. That's really the nuance that we wanted to try to convey.
That won't be a standalone product within Risk that it's sort of part of the overall value proposition as opposed to a new standalone group within the Risk organization?
No, literally, it's added as part of what we're doing in terms of sort of something we bring to bear on behalf of our reinsurance clients. In that regard, it is a capability that we are continuing to develop. It's actually got off to a tremendous start with lots of interest and demand in the marketplace. You'll see it as part of our overall Aon Benfield offering.
What's the size of that? How many people are dedicated to providing this service today?
We haven't disclosed that, but take a step back and think about the capability of Aon Benfield. We spend over $100 million a year in content data and analytics with literally the better part of four to 500 colleagues involved and dedicated to that. Again, back to the idea of how we create operating leverage in the business. This is just one more important, albeit, one more important step as we continue to build out that capability.
Could you explain the legal settlement in Risk, the $35 million in the quarter?
That was a legacy litigation of a liability we incurred prior to 2005. A decision was made in the quarter, hence the expense incurred.
Thank you very much for all the answers.
Sure.
Thank you. Our final question comes from Arash Soleimani of KBW.
Thanks. Good morning.
Morning.
I just had a couple questions. I know you mentioned the impact of reinsurance organic growth coming from capital markets. Is there any way to quantify the margin impact in Risk Solutions from capital markets this quarter?
We don't really break that out. As we said before, it's a tremendously positive business for our clients and for us. We lead the market in it. It is something that we've built over the last number of years exceptionally strong. It's particularly lumpy, sort of up and down across the quarters. It was quite strong in the quarter.
Was any of the lumpiness attributable to just timing differences within capital markets?
No.
No. Okay. My other question was, in terms of the FX impact, I know you quantified it on the income statement on the press release. How does that flow through on the cash flow statement?
It's really flowing through our net income because it's hitting operating income, as I described. It's basically $31 million lower in operating income and Risk Solutions is the way you should think about it. I would say that if you listen to what we said, we said it's going to be the same FX impact overall in operating income and EPS impact in full year 2015 as we saw in full year 2014. Against that headwind in 2014, we grew EPS 17%. We feel really good about our ability to grow earnings substantially in 2015 and grow cash flow substantially in 2015 despite that headwind.
In many respects, FX has come up quite naturally a few times on the call. It is a headwind, as Christa described. We will work through it and have it very effectively, just like pricing was a headwind or just like interest rates are a headwind, et cetera. All these things are out there. Our ability to grow top line and improve margin in the face of that we believe is pretty proven. With the organic investments we've made to increase operating leverage, we think bodes very well for 2015.
Thank you for the answers.
Thank you. I would like to turn the call back over to Greg Case for closing remarks.
Just want to say thanks to everybody for joining the call and look forward to our discussion next quarter. Thanks very much.
Thank you for your participation. That does conclude today's conference. You may disconnect at this time.