Good morning, and thank you for holding. Welcome to Aon PLC's first quarter 2015 earnings conference call. At this time, all parties will be in a listen-only mode until the question and answer portion of today's call. If anyone has an objection, you may disconnect at this time. I would also like to remind all parties that this call is being recorded, that it is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature, as defined by the Private Securities 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 first quarter 2015 results, as well as having been posted on our website.
It is my pleasure to turn the call over to Greg Case, President and CEO of Aon PLC.
Thank you. Good morning, everyone. Welcome to our first quarter 2015 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 first quarter, organic revenue growth was 3% overall, with solid growth across both segments and highlighted by 4% growth in the Americas Retail Brokerage and HR Outsourcing businesses. Operating margin decreased 50 basis points as underlying operational improvement in both segments was more than offset by a significant unfavorable impact from foreign currency translation, primarily in Risk Solutions. EPS increased 7% to $1.37, including a $0.15 unfavorable impact from foreign currency translation, reflecting underlying operational improvement, other income gains, and effective capital management. Finally, free cash flow growth increased to $140 million, driven by a substantial increase in cash flow from operations. Overall, results reflect a solid start to the year, overcoming a significant challenge from foreign currency, driven by organic revenue growth across Risk Solutions and HR Solutions, underlying operational improvement, effective capital management, and substantial free cash flow generation.
We are well on track for continued improvement in 2015 and for further progress against our long-term goals. 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 solid growth across Retail Brokerage, partially offset by a modest decline 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 a renewal book through Aon Client Promise and retention rates of more than 90% on average across Retail Brokerage, highlighted by near record levels of retention of greater than 93% in U.S. Retail.
New business generation of more than $220 million across our retail business, highlighted by double-digit new business growth in many countries across Latin America, Asia, and emerging markets. In our core treaty reinsurance business, net new business trends reached record levels in Q1 and have been positive for 16 consecutive quarters, an outstanding performance in today's challenging marketplace that reflects Aon Benfield's long-term value proposition for clients and the application of excess capital in the industry to previously uninsured risk. 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 4%, similar to the prior year quarter. Exposures continued to be positive across the region, while the impact from pricing was flat, resulting in continued stable market impact.
We saw solid growth across all regions, U.S. Retail, Latin America, and Canada, and continued growth across all business lines, property casualty, health and benefits, and affinity. In U.S. Retail, as I mentioned earlier, we delivered retention rates near record levels greater than 93%, driven by strong management of the renewable book portfolio. Results in the quarter also reflect double-digit new business growth in Latin America and Canada. In international, organic revenue growth was 3%, similar to the prior year quarter. Exposures continued to be stable and the impact from pricing was modestly negative on average, driven by fragile market conditions in many countries across Europe and pressure in the Pacific region. We saw strong growth across Asia and emerging markets and solid growth in New Zealand, driven by new business generation and strong management of the renewable book portfolio.
Results in the quarter also reflect solid new business generation in continental Europe, an excellent result in the region as we're well-positioned to benefit from potential improvements in the macroeconomic environment across continental Europe. In reinsurance, organic revenue growth was -1% against a strong comparable of 3% in the prior year quarter. Excess capital in the space continues to pressure global treaty pricing, most notably in the Americas, driving a significant unfavorable market impact in the quarter. Results reflect near record levels of new business and treaty placements, as well as modest growth in facultative placements, partially offset by a modest decline in capital markets transactions. While the rate of price decline has decelerated compared to the previous year, a record amount of capital continues to place pressure on the market. As a result, clients are beginning to buy more coverage and record capital is being deployed to new markets.
New opportunities for growth, combined with industry-leading data and analytics, continues to position the business for long-term growth despite current industry conditions. Overall, across Total Risk Solutions, we delivered solid growth in the quarter and are well on track for low- to mid-single digit organic growth in 2015 as we continue to drive new business and take a unified approach to serving clients across the portfolio, despite continued pressure in reinsurance. Turning to HR Solutions. Organic revenue growth was 4%, with growth across most major businesses and in areas where we're making investments in the business, including healthcare exchange solutions, cloud-based outsourcing solutions, 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, such as healthcare reform, as healthcare costs and 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 the local level, managing and transferring risks against pension schemes that are increasingly frozen, largely underfunded and facing regulatory changes. Finally, software as a service models are quickly emerging as attractive platforms for companies as they provide the latest technology, access to upgrades, and a flexible pricing model with minimum investment in technology infrastructure. Turning to the individual businesses within HR Solutions. In consulting services, organic revenue growth was 2% 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. Results were partially offset by a modest decline in retirement solutions in Continental Europe. For the full year, we expect mid-single digit organic revenue growth across consulting services. In outsourcing, organic revenue growth was 4% compared to 1% in the prior year quarter. Organic revenue reflects growth in our healthcare exchange business from follow-on enrollments and additional off-cycle wins on the retiree exchange. The follow-on retiree enrollments that took place in the first quarter are expected to renew during the normal Q4 enrollment period in the upcoming years, returning to normal seasonality of the healthcare exchange revenues. Results also reflect new client wins in HR BPO as an increasing number of clients are adopting cloud-based outsourcing solutions.
Overall, for HR Solutions, we delivered improved organic revenue growth in the first quarter. Looking forward, we expect continued performance to be driven by growth in high demand areas where we made investments, as well as leadership across our core businesses and are on track for mid-single digit organic growth in 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. These investments have enabled and are expected to continue to enable Aon to drive sustainable long-term growth while building operating leverage into the business.
Aon's industry-leading platform continues to evolve to address clients' changing needs and strategic priorities with innovative, first-to-market solutions and unmatched advisory capability. A few examples include in Risk Solutions, we're investing in client leadership with a firm-wide rollout of Aon Client Promise, a unified approach to client service across Aon to drive greater productivity and efficiency. We're invested in innovative technology such as the Global Risk Insight Platform. GRIP is the world's largest leading global database of risk and insurance placement information, now capturing nearly 2.7 million trades and $119.5 billion of bound premium across 65 lines of business. We continue to have a growing list of carriers utilizing the platform, of which nearly half have signed multi-year contracts. An increasing number of clients are also adding strategic consulting services to their annual contract fee.
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 approach to help insurers be more effective as they approach markets for ceding and assuming company clients. We continue to align on 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 around the world. Finally, we're expanding our content and global footprint through tuck-in acquisitions that increase scale in emerging markets or expand capability to better serve clients.
HR Solutions, we're investing 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 three pillars of actuarial expertise, investment solutions, and pension administration. We're also providing the broadest set of health, retirement, and talent and advisory 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. Our third-year enrollment results on the active exchange have underscored the long-term sustainability of private exchanges.
Well-designed exchanges can be a better way to offer health benefits by delivering on their promise to engage consumers, offer broad choice, and control costs for employers. As noted last quarter, for clients going through their second-year renewal, 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 6%-8%. Equally important, client satisfaction for the enrollment period was outstanding for the second consecutive year, with 87% of employees having liked the ability to choose among multiple carriers. Carrier satisfaction was also strong, with 80% of employees giving their medical carriers a four or five-star rating.
Overall, our extensive portfolio of health solutions continues to drive strong client interest and demand with both exchange and bundle 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. In Q1, we completed the acquisition of the U.K.-based Kloud, the largest dedicated Workday consultancy firm outside the U.S. With this transaction, Aon Hewitt becomes the largest provider of Workday services in Europe and is fully resourced to deliver results for multinational clients as one of the world's largest Workday providers. Finally, we're expanding our international footprint to support a global workforce with key investments in talent capabilities across emerging markets. In summary, our first quarter reflects a solid start to the year, driven by underlying operational performance and investments in innovative client-serving capabilities.
Looking forward, we expect continued progress throughout the year as we position the firm for sustainable long-term growth, increased operating leverage, and significant free cash flow generation toward our goal of $2.3 billion or more for the full year 2017. With that said, I'm now pleased to turn the call over to Christa for further financial review. Christa?
Thank you so much, Greg. Good morning, everyone. As Greg noted, our first quarter results reflect a solid start to the year, overcoming a significant headwind from foreign currency translation. We delivered solid organic growth in Risk and HR Solutions, underlying operational improvement, monetized unproductive capital, and drove working capital improvements, resulting in strong earnings growth. We also delivered significant free cash flow growth, which enabled the repurchase of $250 million of ordinary shares in our seasonally weakest cash flow quarter, and the announcement of a 20% increase to the annual dividend subsequent to the close of the quarter. 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 7% to $1.37 per share for the first quarter, compared to $1.28 in the prior year quarter.
Included in the results was a $0.15 per share unfavorable impact related to foreign currency translation. Excluding the impact of foreign currency translation, earnings per share in the first quarter would have been $1.52, up 19% from the prior year quarter. These results reflect strong operational and financial performance, overcoming an anticipated unfavorable impact due to the U.S. dollar strengthening against most major currencies, most notably the EUR, which weakened 17% versus the prior year quarter. Impact from anticipated weakness in the EUR was compounded by the seasonal strength of our EMEA business and Retail Brokerage, as the majority of our corporate renewals take place in the first quarter.
Going forward, if currency were to remain stable at today's rates, the impact will be substantially less than the headwind in the first quarter, as we now expect a modest unfavorable impact in each quarter, principally in Q2 and Q3, as rates have continued to weaken against the US dollar since our previous guidance. Let me talk about each of the segments on the next slide. In our Risk Solutions segment, organic revenue growth was 3%. Operating margin decreased 40 basis points to 23.2%, and operating income decreased 6% versus the prior year quarter. Included in the quarter was a significant unfavorable impact from foreign currency translation of $50 million or minus 60 basis points. Excluding the impact from foreign currency, operating margin increased 20 basis points to 23.8%, and operating income increased 4% versus the prior year quarter.
Underlying results reflect solid organic revenue growth and a return on our investments in data and analytics such as GRIP and Aon Broking. Overall, in Q1, we delivered solid underlying operating performance in Risk Solutions, despite continued headwinds from a significant unfavorable market impact in reinsurance. We are firmly on track for improved operating income performance and further margin expansion in 2015 towards our long-term target of 26%, driven primarily by the return on investments and expense discipline as we optimize our global cost structure in areas such as IT, real estate, and global procurement. Turning to the HR Solutions segment. Organic revenue growth was 4%. Operating margin decreased 10 basis points to 13.2%, and operating income was flat to the prior year quarter.
Solid organic revenue growth in the quarter was more than offset by a $6 million or minus 20 basis points unfavorable impact from foreign currency translation and investments to support future growth. Excluding the impact from foreign currency, operating margin increased 10 basis points to 13.4%, and operating income increased 5% versus the prior year quarter. Our first quarter results were exactly in line with expectations and management's guidance previously provided for the HR Solutions business, of down in the first half and up in the second half of the year, resulting in improved operating income performance for the full year and further margin expansion toward our long-term target of 22%. Let me discuss a few of the line items outside of the operating segments on slide nine. Unallocated expenses increased $4 million to $47 million. Interest income increased $1 million to $3 million.
Interest expense increased $7 million due to an increase in total debt outstanding. Other income of $42 million primarily includes $23 million of gains due to the favorable impact of exchange rates on the remeasurements of assets and liabilities in non-functional currencies, and certain transactional FX hedging activity to help mitigate an anticipated unfavorable translation impact. It also includes $19 million of net gain on the sale of certain businesses. The gains resulting from the sale of certain businesses reflect our intent to continue to optimize the portfolio around the highest return on capital, as well as monetization of unproductive capital. Going forward, we expect a run rate of $45 million per quarter of unallocated expense, $2 million per quarter of interest income, and $68 million per quarter of interest expense.
Turning to taxes, the effective tax rate on net income from continuing operations was 19.1%, similar to the prior year quarter at 18.9%. Lastly, diluted shares outstanding decreased to 287.1 million in the first quarter compared to 307.2 million in the prior year quarter. The company repurchased 2.5 million Class A ordinary shares for approximately $250 million in the first quarter. The company has $5.4 billion of remaining authorization under its share repurchase program. Actual shares outstanding on March 31st were 281.7 million, and there are approximately seven million additional dilutive equivalents. Estimated Q2 2015 beginning dilutive share count is approximately 288.5 million, subject to share price movement, share issuance, and share repurchase. Let me turn to the next slide to highlight our solid balance sheet and strong cash flow growth on slide 10. At March 31st, 2015, cash and short-term investments were $721 million.
Total debt outstanding was approximately $5.7 billion, and total debt to EBITDA on a GAAP basis was 2.1 times, similar to December 31st, 2014. Cash flow from operations increased $147 million to $136 million in our seasonally weakest cash flow quarter, driven by a decline in pension contributions, working capital improvements, and a decline in cash paid for taxes and restructuring. Free cash flow, as defined by cash flow from operations less CapEx, increased $140 million to $74 million, reflecting significantly higher cash flow from operations, partially offset by a $7 million increase in CapEx. As discussed previously, we expect significant free cash flow growth to continue 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 and the opportunity to further increase cash flow generation. We value the firm based on free cash flow and allocate capital to maximize free cash flow returns. There are four primary areas that are expected to contribute to our goal of doubling free cash flow from 2012 to more than $2.3 billion annually for the full year 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 pension restructuring and CapEx. Combined with operational improvement in the business, lower cash taxes, and working capital improvements, we are well on track to achieve our expectations for substantial cash flow generation.
Regarding our pension plans, we've taken significant steps to reduce volatility and liability as we've closed our plans to new entrants and frozen plans from accruing additional benefits and continue to de-risk certain plan assets. We currently expect contributions to decline by roughly $96 million to $220 million in 2015 and continue to decline thereafter. Regarding our restructuring program, cash payments were $82 million in 2014. As all charges related to the restructuring program have now been incurred, we expect cash payments to decline by $51 million to approximately $31 million in 2015 and continue to decline significantly each year thereafter. In summary, we delivered a solid start to the year, overcoming a significant headwind from foreign exchange translation.
Results reflect strong earnings growth and substantial free cash flow generation, driven by continued organic growth in both segments, underlying operational improvement, and working capital improvements, placing us firmly on track towards our goal of generating more than $2.3 billion of free cash flow for the full year 2017. With a strong balance sheet and significant financial flexibility, we've positioned the firm for significant shareholder value creation in 2015 and beyond. With that, I'd like to turn the call back over to the operator for questions.
Thank you, ma'am. We will now begin the question and answer session. If you would like to ask a question, press star and then one. Please record your name slowly and clearly when prompted. Your name is required to introduce the question. To withdraw your request, press star and then two. One moment please for the first question. Our first question is for Mr. Adam Klauber. Sir, your line is open.
Good morning, everyone.
Hey, Adam.
My first question is about the HR cloud business. We understand you've had some good-sized wins in that business. One, is that true without mentioning the names? Two, how does the pipeline look currently for more good-sized clients?
Adam, it actually looks exceptionally positive. We are very pleased with the investment in Europe, as I described. That really is continuing to complement an already strong foundation we have in capability and Workday implementation. It's gone exceptionally well. When you describe the opportunities here for clients, it's greater flexibility, great platform, modifications over time, evolution, innovation, brings a lot of things to the table on behalf of clients that are quite beneficial, and we're very excited about it. Very positive trajectory.
I think you mentioned that that did help organic this quarter. Is the nature of that business lumpier once you win these clients? Should it be more of a continual ramp-up?
It really is a more continual ramp-up as you bring them online and service them over time. It had an impact on the quarter, and will have on the year as we continue to succeed in the business.
Okay, thanks. In the retiree exchange business, I understand there is more activity in the public or municipal side of the market. One, is that true? Is that more off-season than the traditional exchange business?
Well, the public side has evolved as you watch in the press over time. As we've focused on the private side of the business, it's gone exceptionally well. It really does complement a broad-based set of health solutions that we have. We've continued to have significant wins both on the active and the retiree side. We saw a little bit of off-cycle in the Q1, this report, but that's, as I said, going to even out and really show up in the fourth quarter over time, and really normalize at that point.
Okay. Thanks a lot.
Sure.
Thank you, sir. Our next question comes from Mr. Dave Styblo of Jefferies. Sir, your line is open.
Good morning. Thanks for taking the questions. Just want to follow up on that when you had just mentioned the significant wins. I want to be clear. Is that something that you're talking about are rolling onto the 2015 plan year, or you're in active negotiations and finalizing those deals such that it would impact 2016? Just broader, could you talk to how 2016 is shaping up? Are you at this point starting to see an inflection or tick up in actual enrollments?
Just to parse the questions. The first question was around literally the Workday implementation in Kloud and the implications and how it's going to evolve over time as that was coming online, which will show up in the year. The second was what we showed up in the first quarter, which was on the retiree exchange, some really follow-on applications that happened in the first quarter from our fourth quarter work last year. That's going to continue to ramp up over time. What you've seen on the exchange business for us is as part of our overall Health Solutions capability, that's just continued to build and will continue to do so. It still will continue to be fourth quarter dominated as it comes online. We'll just continue to see very good progress in that.
Okay. As far as an inflection for 2016, is that something you're starting to see at this point? How, obviously, conversations continue to be active and robust, and that tone seems to be similar, but just curious of the enrollment outlook for 2016.
The pipeline continues to be very strong. A lot of great conversations across the board on both the active exchange and the retiree exchange. As I described in my comments, the impact here has been substantial. In particular, the impact on, for us, the employee satisfaction levels have been exceptionally high. The opportunity to actually bend the cost curve, very positive from that standpoint. We just have been very fortunate in terms of our client wins and how that's evolved over time. We'll report out in the third quarter as we complete the season, but we continue to make progress.
Okay. Then just flipping gears over to the international side, organic growth of 3%. That seemed to hold up better than I thought it would in this environment. Just want to ensure that there isn't any unusual benefits in the quarter from timing. Assuming not, can you just drill into and provide a little bit more color about what you're seeing in the market, what you're doing to help maintain that decent organic growth that's going on right now?
What we really saw across the board, really, not just in Europe, but also across the Americas, if you think about as I described before, retention levels in U.S. Retail were exceptionally high, 93%, almost near record levels. In Europe also reflects very high retention levels. Then efforts we've done around Aon Client Promise, the implementation of how we actually support and serve clients, introduce new ideas to clients as their needs change over time. This has all been against a backdrop of a challenging pricing environment and an overall economic environment that's challenged. From our standpoint, we view the opportunities in Europe and in the Americas as quite strong, quite positive, and our capability to serve them as quite high. That's really what's driven new business growth, what's driven retention, and what's driven the results.
Our view is we're going to continue to grow and build the business that we have for the last decade every year, irrespective of the headwinds. That includes all the aforementioned, FX or interest rates or economic conditions or pricing.
Super. Thanks.
Thank you, sir. Our next question is coming from Mr. Brian Meredith of UBS. Sir, your line is open.
Yes, thanks. Good morning. Greg, I'm wondering if you could talk a little bit about or update us on progress on improving yield in the Risk Solutions business, monetizing that GRIP asset, that kind of stuff.
Brian, we would say we continue to make very good progress and reflected in the performance as we grow and improve margin over time. What we've done on the data and analytics efforts here, it really is helping our market partners understand and improve their return on invested capital. That's really fundamentally what GRIP is able to help us do. We've got 35-plus carriers who have actually signed on to this, and fundamentally it helps them succeed in the business. We're essentially helping them match their capital with our demand in a more efficient and effective way. That's what the data and analytics has helped us do. It's progress. We're strengthening the relationships as they evolve in that area. Watch and see, data and analytics will continue to be a stronger and stronger part of our value proposition.
It's complemented by the Singapore Innovation Center and the Dublin Innovation Center, which we brought online. You see it show up in the marketplace in areas like the Risk Insight Platform, like ReView, which we've done on the reinsurance side, very, very strong, very, very positive. This is an area of substantial investment for Aon. In many respects, we believe we've got an unprecedented level of data, but we need to translate that into true insight and action for our clients. If our clients can take that data and insight and improve operating performance, strengthen their balance sheet, or reduce their volatility, we've provided something to the market no one else can do. We believe that's distinctive, that is sustainable, and that's going to create value for them and for us.
On the yield, given that we're in a competitive and softening market, have you been able to boost commission rates or do other things to perhaps offset some of the price declines?
Yeah. We've done a number of different things to, again, come back to add value for clients and help them understand it and get paid for that and do the same on the market side. In the overall environment, this all translates and shows up in the Risk Solutions margin, which we would say we're going to continue to improve in 2015, just as we did in 2014 and 2013, as we march toward our 26%. You'll see us actually pulling a number of different levers to do that, this being one of them.
Got you. Just quickly on HR Solutions, Christa. The margin, ex FX actually improved on a year-over-year basis. I would have thought per your guidance, they would have actually declined. Was there something unusual that happened in the quarter?
Yeah. You're right. It did improve 10 basis points on an underlying basis. We did see some timing between Q1 and Q2, Brian, what we would say is that the first half is going to be down exactly in line with guidance and the second half up in operating income to grow overall operating income and margin for the full year.
Got you. A little bit tougher in the second quarter. Great.
That's right.
Thank you.
Thank you, sir. Our next question is coming from Mr. Dan Farrell of Piper Jaffray. Sir, your line is open.
Thanks, and good morning. Just back on the Risk Solutions margins, Greg, in your prepared comments, you talked about ongoing investments in that business to drive organic and then drive improved operating leverage. Do you think investments in that business right now are running higher than you ultimately think they will be? Is there anything else to be thinking about from a mix perspective in Risk Solutions that might be impacting margin, say, whether it be reinsurance, macro pressures there or something like that? Thank you.
Well, look back. We are going to continue to make investments to sort of build and strengthen the business. As we said before, we want to do this while at the same time making meaningful progress in improving risk brokerage margin, marching toward the 26%. We're just going to keep doing that. The investments have actually happened across the business. They've happened on the retail side of the business as we've invested in data and analytics, as I described before, the Singapore Innovation Center, our Dublin Innovation Center. These are very, very substantial investments for us, which drive the Risk Insight Platform on the retail side. We've invested in new product ideas and structured portfolio solutions, a whole series of things we've done fundamentally to strengthen the value proposition that we provide to clients.
Again, if they understand it and it provides value in their business, it's going to help improve Aon's performance. We've made equal and substantial investments across the reinsurance side of the portfolio as well, and we continue to do that. While certainly well-publicized reinsurance is under some pressure given capital coming into the marketplace and pricing dynamics, particularly in the CAT business, we love the business. We love what we're doing on the reinsurance side. Our capability to help insurers improve their return on invested capital and their performance, we believe is high and even unprecedented from an Aon Benfield standpoint. We're number 1 in treaty, we're number 1 in facultative, we're number 1 in capital markets and the things we do with new capital coming in the industry. You're going to see us continue to invest. It's not a high or a low.
It's a steady set of investments we make over time that we believe will help us build the business. We're going to continue to do that while at the same time, we are very clear we need to overcome headwinds that are out there as we've done over time. This year, we're talking about FX. In previous years, it might have been interest rates or it might have been the economy or it might have been pricing. We're going to overcome those, grow margin, and invest in the business for the long term.
Thanks. That's very helpful. Just a follow-up. Some of your competitors have talked about needing to achieve a certain level of organic growth, say in the 2%-3% range before operating leverage can start to fully materialize. Is that something conceptually that you guys sort of agree with when you think about margin expansion?
I guess what we would say is because of the investments we've made in data analytics, as Greg Case described, there's less of an organic revenue growth number we need to expand margins. I would note that in calendar year 2009, in the depth of the economic recession, organic revenue growth for us was -1% and we expanded margins. Having said that, if you look at our expense base, the primary expense we have in the business is people. There is an inherent inflationary push, let's call it 2%, on that expense base. That is absolutely a challenge we acknowledge, but we also see that the return on the significant investments we've made in data and analytics allows us to expand margin in lower growth environments.
This fundamentally, Dan Farrell, comes back to Brian Meredith's question around margin and this idea of operational leverage. It's very important as you think about our performance versus the rest of the world right now. These investments we're making fundamentally give us the ability to both strengthen our franchise, which is really what we have to do, but also with the operating leverage accompanying the investments around data and analytics in particular, we can improve margin at lower levels of organic growth. By the way, it's not to mean we're focused on lower levels. We have high aspirations on growing the business, but the operational leverage in the business continues to grow.
Great. That's helpful. Thank you very much.
Thank you, sir. Our next question is coming from Miss Elyse Greenspan of Wells Fargo. Ma'am, your line is open.
Hi, good morning. Just a few questions. The first, in terms of foreign exchange, I know the hit was obviously a bit larger than expected in the first quarter, and you guys had previously guided to about $0.11 for the full year. What do you think the full-year level will come in at, given how you set expectations for the balance of the year?
Yeah. FX is coming in a little bit higher in terms of the impact than we'd previously guided, because since we guided last time, the Euro in particular has declined versus the U.S. dollar. What we did say, Elyse, is that we'll have a modest unfavorable impact in each quarter in the balance of the year, most significantly in Q2 and Q3.
Okay, in terms of your looking at the share repurchase, I know the Q1 is a high cash usage quarter. If we're thinking about the share repurchase level in the next few quarters, how do you think about in terms of a go-forward level on your capital management outlook for the year?
Yeah. We're not giving specific guidance, Elyse. What we would say is, as you think about our free cash flow growth, it's going to be substantial in the rest of the year, and obviously it's been significant in Q1 already. We expect to grow free cash flow for the year. As EBITDA continues to grow, we're very focused on our investment-grade rating, but we would continue to increase debt in line with EBITDA growth. As you think about the overall cash we then have to deploy, we use a return on capital basis to deploy across all forms of capital usage and share repurchase is definitely the highest return on capital we observe at this time. We'll continue to deploy capital based on that.
On the retiree exchange, the off-cycle enrollment, just so I understand correctly, was that included in the enrollment figures and in terms of the number of companies and the number of lives you guys had provided in September of last year for the 2015 year?
It was. In many respects, there's really no real new news here from the standpoint. This is just a current existing set of clients we brought online, and we just had a few of the enrollments move over into the first quarter. It's relatively small, and this will balance itself out by Q4 as we go forward. It really is a little bit of off-cycle with that as well.
Okay, one last question. You mentioned a decline in capital markets business within your reinsurance segment in the quarter. Just was the last Q1 a higher volume quarter, so it was a tough comp? I'm just kind of curious, especially we've heard a lot going on in the capital market space, why you might have seen a slowdown in the first quarter of this year. Any more information there would be helpful. Thank you.
Top line, we had a strong comparable quarter. That's a little bit of what was going on from that standpoint. A little bit of timing. When you think about the capital coming in, we don't want to minimize that. There's still tremendous capital coming in. $60 billion-plus is sort of coming into the market right now. We anticipate more over time. We again, see lots of opportunity with that. I would just highlight in a little bit of the dynamic that as the treaty pricing comes down, it looks more attractive relative to capital markets. There's a little bit more of a balance than there was before. I wouldn't overplay it. We saw a little bit of that show up in the quarter.
Thank you very much.
Thank you, ma'am. Our next question is coming from Mr. Michael Nannizzi of Goldman Sachs. Sir, your line is open.
Thank you. Would it be possible to sort of quantify the aggregate FX impact for the rest of the year? We can have an idea of what that might look like. I mean, relative to the first quarter, if we're saying it was $50 million or whatever it was in the first quarter, how should we be thinking about that number, just a notional number for the rest of the year? Thanks.
Michael, what we can say is that the FX impact by quarter for the rest of the year will be substantially less than what we observed in Q1. It's going to be a modest unfavorable impact in Q2, three, and four, primarily in Q2 and Q3.
In the aggregate, just notionally, is it much smaller across the three quarters in the first quarter or?
Yes.
One question on the tax rate. Should we assume that the tax rate at the current level, is that something that you guys feel is sustainable longer term that we should assume that that is sort of the run rate? What are the factors that could impact that either reverting or going lower?
Michael, as we've said previously, 19% is the right operational rate for the company going forward. We do believe it's sustainable. That's the operational rate we're using for the company going forward. We would expect that to be the best guide for you to use. Things that could impact it going forward are discrete tax adjustments, and they could be positive or negative in any one quarter. We'd expect that 19% is the underlying operational rate for the company.
Got it. Great. Then I've asked the question before, but I wonder if it'd be possible, just thinking about the HR segment. Obviously, you're making a lot of investments, and you're making them with an eye on operating leverage in the future. Is there a way to think about the difference between, or can you give us some context on how we might be able to think about a contribution margin, if you will, relative to an operating margin in that segment and maybe with regard to the private exchange element in particular? Just as we think about that segment, is there a way to sort of peel those two out separately just to get an idea of what they look like?
Michael, I think what you're getting to is sort of the investments we're making around the healthcare exchange and how to think about the return on that versus everything else. Is that right?
Yeah, that's fair.
Yeah. Look, one way to think about it is if you've added up the numbers we've invested in healthcare exchanges, call it about $100 million. If you wanted to take that out of the current base, it'd improve operational margins by about 200 basis points. It's one way to think about it. Obviously, the return on that investment is going to be significant over time. We obviously mentioned that we made a loss from that business in 2014, and that we would continue to improve returns on it each year going forward.
If you think about the improvement in operating income we made in both calendar year 2013 and 2014 in the HR Solutions business, we're clearly overcoming a significant investment we're making in healthcare exchanges by the growth in our consulting business, which is exceptionally strong, particularly around, as Greg described, pension de-risking and investment consulting, as well as the improvement in the rest of our outsourcing business. Those two things are improving whilst we're continuing to make investments in exchanges.
Got it. This year, if we think about this year's investments, should we be thinking about that relative to that sort of $100 million? Or was that a bigger number and that number starting scaling down as you start to scale up on exchanges, for example?
Yeah. Here's what I would say, I did say this last quarter. As we think about the investment we've made in exchanges, it's really an operating expense. It's not a capital expense that's one time. It's really people and technology. You should think about that $100 million level as the right ongoing level going forward. Then it's really about incremental revenue to drive and improve return on that underlying operating expense. We would say that we've largely scaled the exchanges at the end of 2014. From here, we're now going to add incremental revenue and incremental costs as we bring new clients on, but not the sort of significant investments we've made historically.
Got it. Thank you.
Thank you, sir. Our next question is coming from Mr. Kai Pan with Morgan Stanley. Sir, your line is open.
Thank you. The first question is just could you give a little bit color on the other income line? Looks like pretty lumpy from quarter to quarter. How should we think about that going forward?
Yeah. What we would say is it is obviously very lumpy, and we, in our sort of budgeting process, model it at zero because where essentially it should be zero. Unless we monetize unproductive capital or sell a business which we deem is lower return or less of a strategic fit to Aon, which is what you saw in the quarter. I would say the $19 million of gains, I would say is lumpy and almost impossible to model, so we do model that internally at zero. The $23 million of FX impact on our assets and liabilities in foreign currency and the hedging gain, I would say I net that myself against the $53 million of FX impact on operating income we had to say we had a net impact of minus $30 million on our business in terms of operating income from FX.
I guess I view it as two different ways, if that makes sense to you.
Okay. That's good. If we looking underlying, basically you're taking off $0.15 of foreign exchange impact and then probably the $0.12 gain on the other income line. You look at underlying probably around at $1.40 EPS. That compares $1.28 last year. Year-over-year growth is about 9%. It's kind of much lower than if you look back the historical last eight quarter average, about 16%. I just wonder, is there any sort of seasonality in the first quarter? You think we should still be able to sustain a double-digit EPS growth going forward?
Yeah. Look, I wouldn't over-rotate on one quarter. As you correctly observed, we had the most significant FX impact in Q1, and we're going to have a lot smaller FX impact through the balance of the year. I'd focus much more on the full year. We do expect significant EPS growth for the full year. As you've seen, we've done 16% EPS growth CAGR over the last 10 years. We feel really good about the earnings growth of calendar year 2015 and beyond. Obviously, and most importantly, about how that translates through to free cash flow. We're going to see substantial free cash flow growth in 2015 on track to our $2.3 billion in free cash flow for the full year 2017.
Okay. Well, lastly, just to follow on the buyback question. The first quarter seasonal week, but last year you did like $600 million as well. I just wonder, the pace of buyback would be sustainable at least at a level of last year, given that your free cash flow is growing and also you can also leverage a little bit more on the debt side.
Yeah. Again, I wouldn't sort of over project from one quarter. I would note that in Q1 2014, we did utilize cash on the balance sheet at year-end 2013, which was much higher than normal. We had about $3, almost $400 million of excess cash on the balance sheet at year-end 2013, which contributed to higher than normal share repurchases in Q1 2014.
Great. Thanks so much for all the answers. Thank you, sir. Our last question is coming from Mr. Joshua Shanker with Deutsche Bank. Sir, your line is open.
Thank you for getting me on the phone. I appreciate it. I know that you're interested in growing free cash flow in addition to operating cash flow by lowering your working capital. I was wondering if you could put some numbers around the scale of what you can do, and also last year, the spread between receivables and payables went unfavorable for you. I assume you were working on it. What are the pitfalls and obstacles to making that happen?
As we think about free cash flow growth for calendar year 2015, we think there are four major contributors to it. The first is improvement in operating income, and that's obviously driven by revenue growth and margin expansion. The second is decreased contributions to pension and restructuring. The third is improvements in working capital, and the fourth is declining taxes. As we think about those for the full year, Josh, we look then again to sort of the growth in free cash flow for the quarter of free cash flow grew $140 million, and the two biggest contributors to that free cash flow growth for the quarter were pension and restructuring contributions declining by $89 million, and working capital improvements of $63 million.
To answer your specific question about working capital in 2014, I would note that we had substantial improvement in working capital in 2013. That really created a headwind for 2014. As you said, it's a continued progress, and we expect to have substantial cash flow growth from all four metrics as we drive towards the $2.3 billion in free cash flow for 2017.
You really are highlighting an area that as you think about the new news over the last 12 to 18 months, it really is the projections and the perspectives around how we're going to be able to build free cash flow in addition to what we do from an operating standpoint. The move to $2.3 billion by 2017, as Christa highlights, is a substantial improvement, another doubling since 2012, which we believe really underscores the power of the franchise.
Certainly. Just to understand the $63 million of improvement, that's going to jump around quarter-to-quarter. It may be positive, it may be negative. Is the $63 million a really good quarter for improvement to think about, or is that what you think you can deliver for the foreseeable future all things being equal? How should we think about the scope?
Yeah. We obviously think it was a strong performance in terms of working capital. As we look at that $63 million, we're looking at three lines on the balance sheet or cash flow, receivables, payables, and other assets and liabilities. We really think about cash flow growth for the full year. We're looking at substantial free cash flow growth for the full year 2015.
Yeah. There's no guidance though around how we should think about just the payables, receivables part?
Look, we would continue to expect that we will improve cash flow from receivables and payables. We haven't given specific guidance.
Okay. Thank you very much. Good luck.
Thank you.
Thank you. I would now like to turn the call back over to Greg Case for closing remarks.
Thanks very much for joining us. We look forward to our next call. Thanks very much.
That concludes today's conference. Thank you for participating. You may now disconnect.