Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE SUMMARY OF 2016 FINANCIAL RESULTS

During 2016, we continued to face headwinds that adversely impacted our business. In our Risk Solutions segment, these headwinds included adverse changes in foreign currency exchange rates, economic weakness in certain regions around the globe and a negative market impact in our Reinsurance business. In our HR Solutions segment, these headwinds included price compression in our benefits administration business and economic weakness in certain regions around the globe.

The following is a summary of our 2016 financial results:

•

Revenue decreased $55 million to $11.6 billion in 2016 due primarily to a 2% unfavorable impact from changes in foreign currency exchange rates and a 2% decrease in commissions and fees related to acquisitions, net of divestitures, partially offset by organic revenue growth of 3% in the Risk Solutions segment and 3% in the HR Solutions segment. Organic revenue growth for the year was driven by strong new business generation and solid management of the renewal book portfolio across our Risk Solutions segment, as well as solid growth in both our Consulting and Outsourcing businesses within HR Solutions.

•

Operating expenses decreased $113 million, or 1%, to $9.7 billion in 2016 due primarily to a $248 million favorable impact from changes in foreign currency exchange rates, a $176 million decrease in expenses related to legacy litigation incurred in the prior year, a $144 million decrease in the core expense base resulting from acquisitions, net of divestitures, and a $37 million decrease in intangible asset amortization, partially offset by $220 million of non-cash expenses related to certain pension settlements, an increase in expense associated with 3% organic revenue growth, and $15 million of transaction costs incurred related to future portfolio repositioning activities.

•

Operating margin increased to 16.4% in 2016 from 15.8% in 2015. The increase in operating margin from the prior year is primarily driven by organic revenue growth of 3% and return on investments across the portfolio as well as a decrease in expense related to legacy litigation and the favorable impact from changes in foreign currency exchange rates, partially offset by non-cash expenses related to certain pension settlements. Risk Solutions operating margin increased to 21.2% in 2016 from 20.3% in 2015. HR Solutions operating margin increased to 13.3% in 2016 from 12.5% in 2015.

•	Net income attributable to Aon shareholders was $1.4 billion, an increase of $11 million, or 1%, from 2015. Diluted earnings per share increased 6% to $5.16 in 2016 from $4.88 in 2015.

•	Cash flow provided by operating activities was $2.3 billion in 2016, an increase of $317 million, or 16%, from $2.0 billion in 2015, due primarily to an increase in underlying net income after adjusting for certain non-cash pension expenses, lower cash pension contributions, and lower cash tax payments.

•

On February 9, 2017, we entered into an agreement to sell our Benefits Administration and Business Process Outsourcing (BPO) Portfolio (the “Business”) for cash consideration of $4.3 billion payable at closing plus additional cash consideration of up to $500 million based on future performance of the Business (the “Transaction”). The Business is within the HR Solutions segment described further below. The completion of the Transaction is subject to customary closing conditions, and the Transaction is expected to close by the end of the second quarter of 2017. In connection with the Transaction, we expect to implement a cost reduction program that will result in a future charge to the financial statements. We believe the cost reduction program will reduce stranded costs, create greater efficiency, and contribute towards the Company's objective of being accretive to analysts’ consensus earnings of $7.97 per share in 2018, as published by FactSet. Refer to Note 18 “Subsequent Event - Disposition of Benefits Administration and Business Process Outsourcing” of the Notes to Consolidated Financial Statements for additional details regarding the Transaction.

We focus on four key non-GAAP metrics that we communicate to shareholders: organic revenue growth, adjusted operating margins, adjusted diluted earnings per share, and free cash flow. The following is our measure of performance against these four metrics for 2016:

•

Organic revenue growth, a non-GAAP metric as defined under the caption “Review of Consolidated Results — Organic Revenue Growth,” was 3% in 2016. Organic revenue growth was driven by growth across every major business in both Risk Solutions and HR Solutions. In Risk Solutions, organic revenue growth was driven by strong growth in Retail brokerage across both the Americas and International businesses, as well as modest growth in Reinsurance. In HR Solutions, organic revenue growth was primarily driven by growth in health care exchanges and in HR BPO for cloud-based solutions as well as growth in investment and communications consulting.

•

Adjusted operating margin, a non-GAAP metric as defined under the caption “Review of Consolidated Results — Adjusted Operating Margin,” was 20.8% for Aon overall, 24.5% for the Risk Solutions segment, and 18.4% for the HR Solutions segment in 2016. In 2015, adjusted operating margin was 20.0% for Aon overall, 23.6% for the Risk Solutions segment, and 18.1% for the HR Solutions segment. The increase in adjusted operating margin for the Risk Solutions segment primarily reflects solid organic revenue growth and return on investments in data and analytics. The increase in adjusted operating margin for the HR Solutions segment primarily reflects solid organic revenue growth and expense discipline, partially offset by lost operating income and stranded costs related to previous dispositions, as well as unfavorable impact from changes in foreign currency exchange rates.

•

Adjusted diluted earnings per share from net income attributable to Aon’s shareholders, a non-GAAP metric as defined under the caption “Review of Consolidated Results — Adjusted Diluted Earnings per Share,” was $6.59 per share in 2016, an increase of $0.41 per share, or 7%, from $6.18 per share in 2015. The increase demonstrates solid operational performance and effective capital management, highlighted by $1.3 billion of share repurchase during 2016.

•	Free cash flow, a non-GAAP metric as defined under the caption “Review of Consolidated Results — Free Cash Flow,” was $2.1 billion in 2016, an increase of $385 million, or 22%, from $1.7 billion in 2015. The increase in free cash flow from the prior year was driven by record cash flow from operations of $2.3 billion and a 23%, or $68 million, decrease in capital expenditures.

REVIEW OF CONSOLIDATED RESULTS

As described in Note 1 “Basis of Presentation - Revision of Previously Issued Financial Statements” of the Notes to Consolidated Financial Statements, during the fourth quarter of 2016, we identified errors that impacted the years ended December 31, 2015 and 2014. The corrections for the errors, which we have concluded are immaterial, individually and in the aggregate, to all prior-period consolidated financial statements, are reflected herein.

Summary of Results

Our consolidated results of operations follow (in millions):

Years ended December 31	2016				2015				2014
Revenue:
Commissions, fees and other	$	11,605			$	11,661			$	12,019
Fiduciary investment income	22				21				26
Total revenue	11,627				11,682				12,045
Expenses:
Compensation and benefits	6,914				6,837				7,014
Other general expenses	2,807				2,997				3,065
Total operating expenses	9,721				9,834				10,079
Operating income	1,906				1,848				1,966
Interest income	9				14				10
Interest expense	(282		)		(273		)		(255		)
Other income	36				100				44
Income before income taxes	1,669				1,689				1,765
Income taxes	239				267				334
Net income	1,430				1,422				1,431
Less: Net income attributable to noncontrolling interests	34				37				34
Net income attributable to Aon shareholders	$	1,396			$	1,385			$	1,397

Consolidated Results for 2016 Compared to 2015

Revenue

Revenue decreased by $55 million, to $11.6 billion in 2016, compared to $11.7 billion in 2015. The decrease was driven by a 2% impact from unfavorable foreign exchange rates and a 2% decrease in commissions and fees related to acquisitions, net of

divestitures, partially offset by organic revenue growth of 3% in the Risk Solutions segment and 3% in the HR Solutions segment. Organic revenue growth in the Risk Solutions segment was driven by solid growth across both the Americas and International businesses. Record new business generation in US Retail, as well as strength in Affinity and growth across Latin America drove organic revenue growth in the Americas. International organic revenue growth was driven by growth across every major region; including Asia, EMEA, and the Pacific, despite economic weakness in certain countries. Reinsurance organic revenue growth was driven by net new business growth in treaty placements globally and modest growth in facultative placements, partially offset by an unfavorable market impact in treaty and a decline in capital markets transactions and advisory business. Organic revenue growth in the HR Solutions segment was driven by solid growth in both Consulting and Outsourcing. Consulting organic revenue growth was driven by retirement solutions, including investment consulting and delegated investment solutions, and communications consulting. Strong growth in health care exchanges and new client wins in HR BPO for cloud-based solutions drove organic revenue growth in Outsourcing.

Compensation and Benefits

Compensation and benefits increased $77 million, or 1%, compared to 2015. The increase was primarily driven by a $220 million increase in non-cash expense related to certain pension settlements and an increase in expense associated with 3% organic revenue growth, partially offset by a $169 million favorable impact from changes in foreign currency exchange rates and a $97 million decrease in the core expense base resulting from acquisitions, net of divestitures.

Other General Expenses

Other general expenses decreased $190 million, or 6%, compared to 2015 due primarily to a $176 million decrease in expense related to legacy litigation incurred in the prior year, a $79 million favorable impact from changes in foreign currency exchange rates, a $47 million decrease in the core expense base resulting from acquisitions, net of divestitures, and a $37 million decrease in intangible amortization, partially offset by an increase in expense to support 3% organic revenue growth and $15 million of transaction costs incurred related to portfolio repositioning activities including the Transaction.

Interest Income

Interest income represents income earned on Cash and cash equivalents and Short-term investments. It does not include interest earned on funds held on behalf of clients. Interest income decreased $5 million, or 36%, from 2015, due to marginally lower average interest rates globally.

Interest Expense

Interest expense, which represents the cost of our worldwide debt obligations, increased $9 million, or 3%, from 2015. The increase in interest expense primarily reflects an increase in total debt outstanding.

Other Income

Other income decreased $64 million from $100 million in 2015 to $36 million in 2016. Other income in 2016 includes, among other things, $39 million in net gains on disposition of businesses and $13 million of equity earnings, partially offset by foreign exchange losses of $2 million and a $14 million net loss on certain financial instruments. Other income in 2015 includes $82 million in net gains on disposition of businesses, foreign exchange gains of $30 million, equity earnings of $13 million, partially offset by a $5 million net loss on certain long term investments and a $19 million loss from derivatives.

Income before Income Taxes

Income before income taxes was $1.7 billion in 2016, a decrease of $20 million, or 1%, from $1.7 billion in 2015 due to drivers identified above.

Income Taxes

The effective tax rate on net income was 14.3% in 2016 and 15.8% in 2015. The 2016 and 2015 rates reflect changes in the geographical distribution of income, the impact from certain pension settlements in the second and fourth quarters of 2016, a reduction in U.S. income resulting from the settlement of legacy litigation in the second quarter of 2015, and the impact of certain discrete items.

Net Income Attributable to Aon Shareholders

Net income increased to $1.40 billion ($5.16 diluted net income per share) in 2016, compared to $1.39 billion ($4.88 diluted net income per share) in 2015.

Consolidated Results for 2015 Compared to 2014

Revenue

Revenue decreased by $363 million, or 3%, to $11.7 billion in 2015, compared to $12.0 billion in 2014. The decrease was driven by a 6% impact from unfavorable foreign exchange rates, partially offset by organic revenue growth of 3% in the Risk Solutions segment and 4% in the HR Solutions segment. Organic revenue growth in the Risk Solutions segment was driven by solid growth across both the Americas and International businesses. Growth across all regions and product lines, including strong new business generation in US Retail, drove organic revenue growth in the Americas. International organic revenue growth in 2015 was driven by solid growth across Asia, the Pacific, and emerging markets, and strong management of the renewal book portfolio in continental Europe despite economic weakness. Reinsurance was down modestly due to an unfavorable market impact in treaty and a decline in capital markets transactions and advisory business, which more than offset the new business growth in treaty placements globally and modest growth in facultative placements. Organic revenue growth in the HR Solutions segment was driven by solid growth in both Consulting and Outsourcing. Consulting organic revenue growth was driven by retirement solutions, including investment consulting and delegated investment solutions, and compensation consulting. Strong growth in health care exchanges, new client wins in HR BPO for cloud-based solutions, and project-related revenue in benefits administration drove organic revenue growth in Outsourcing.

Compensation and Benefits

Compensation and benefits decreased $177 million in 2015, or 3%, compared to 2014. The decrease was driven by a $432 million favorable impact from changes in foreign currency exchange rates, partially offset by $14 million increase in expenses resulting from acquisitions, net of divestitures and an increase in expense associated with 3% organic revenue growth.

Other General Expenses

Other general expenses decreased $68 million in 2015, or 2%, compared to 2014 due largely to a $166 million favorable impact from changes in foreign currency exchange rates and a $38 million decrease in intangible amortization, partially offset by a $102 million increase in expense related to legacy litigation, and an increase in expense to support 3% organic revenue growth.

Interest Income

Interest income represents income earned on Cash and cash equivalents and Short-term investments. It does not include interest earned on funds held on behalf of clients. Interest income increased $4 million in 2015, or 40%, from 2014, due to marginally higher average interest rates globally.

Interest Expense

Interest expense, which represents the cost of our worldwide debt obligations, increased $18 million in 2015, or 7%, from 2014. The increase in interest expense primarily reflects an increase in total debt outstanding.

Other Income

Other income increased $56 million from $44 million in 2014 to $100 million in 2015. Other income in 2015 includes, among other things, $82 million in net gains on disposition of businesses, foreign exchange gains of $30 million, and equity earnings of $13 million, partially offset by a $5 million net loss on certain financial instruments and a $19 million loss from derivatives. Other income in 2014 includes $24 million in gains on disposition of businesses, foreign exchange gains of $18 million, equity earnings of $12 million, and $4 million in gains on investments, partially offset by a $19 million loss from derivatives.

Income before Income Taxes

Income before income taxes was $1.7 billion in 2015, a decrease of $76 million, or 4%, from $1.8 billion in 2014 due to drivers identified above.

Income Taxes

The effective tax rate on net income was 15.8% in 2015 and 18.9% in 2014. The 2015 and 2014 tax rates reflect changes in the geographical distribution of income, a reduction in U.S. income resulting from the settlement of a legacy litigation matter in the second quarter of 2015, and the impact of certain discrete items.

Net Income Attributable to Aon Shareholders

Net income decreased to $1.39 billion ($4.88 diluted net income per share) in 2015, compared to $1.4 billion ($4.66 diluted net income per share) in 2014.

Non-GAAP Metrics

In our discussion of operating results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.

Organic Revenue Growth

We use supplemental information related to organic revenue growth to help us and our investors evaluate business growth from existing operations. Organic revenue growth is a non-GAAP measure that includes the impact of intersegment and intrasegment activity and excludes the impact of foreign exchange rate changes, acquisitions, divestitures, transfers between business units, fiduciary investment income, reimbursable expenses, and certain unusual items. Supplemental information related to organic revenue growth represents a measure not in accordance with U.S. GAAP, and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. Reconciliations of this non-GAAP measure, organic revenue growth percentages, to the reported Commissions, fees and other revenue growth percentages, have been provided under the “Review by Segment” caption below.

Adjusted Operating Margin

We use adjusted operating margin as a non-GAAP measure of core operating performance of our Risk Solutions and HR Solutions segments. Adjusted operating margin excludes the impact of certain items, including intangible asset amortization and certain pension settlements, transaction costs, and litigation settlements, because we do not believe these expenses reflect our core operating performance. This supplemental information related to adjusted operating margin represents a measure not in accordance with U.S. GAAP, and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.

A reconciliation of this non-GAAP measure to reported operating margins is as follows (in millions, except percentage data):

Year Ended December 31, 2016	Total Aon (1)				Risk Solutions				HR Solutions
Revenue — U.S. GAAP	$	11,627			$	7,485			$	4,183
Operating income — U.S. GAAP	$	1,906			$	1,587			$	557
Intangible asset amortization	277				105				172
Pension settlements	220				144				26
Transaction costs	$	15			$	—			$	15
Operating income — as adjusted	$	2,418			$	1,836			$	770
Operating margins — U.S. GAAP	16.4		%		21.2		%		13.3		%
Operating margins — as adjusted	20.8		%		24.5		%		18.4		%

Year Ended December 31, 2015	Total Aon (1)				Risk Solutions				HR Solutions
Revenue — U.S. GAAP	$	11,682			$	7,426			$	4,303
Operating income — U.S. GAAP	$	1,848			$	1,506			$	536
Intangible asset amortization	314				109				205
Legacy litigation	176				137				39
Operating income — as adjusted	$	2,338			$	1,752			$	780
Operating margins — U.S. GAAP	15.8		%		20.3		%		12.5		%
Operating margins — as adjusted	20.0		%		23.6		%		18.1		%

Year Ended December 31, 2014	Total Aon (1)				Risk Solutions				HR Solutions
Revenue — U.S. GAAP	$	12,045			$	7,834			$	4,264
Operating income — U.S. GAAP	$	1,966			$	1,648			$	485
Intangible asset amortization	352				109				243
Legacy litigation	35				35				—
Operating income — as adjusted	$	2,353			$	1,792			$	728
Operating margins — U.S. GAAP	16.3		%		21.0		%		11.4		%
Operating margins — as adjusted	19.5		%		22.9		%		17.1		%

(1)Includes unallocated expenses and the elimination of intersegment revenue.

Adjusted Diluted Earnings per Share

We also use adjusted diluted earnings per share as a non-GAAP measure of our core operating performance. Adjusted diluted earnings per share excludes the impact of intangible asset amortization and certain pension settlements, transaction costs, and litigation settlements, along with related income taxes because we do not believe these expenses are representative of our core earnings. This supplemental information related to adjusted diluted earnings per share represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.

The effective tax rates used in the U.S. GAAP financial statements were 14.3% and 15.8% for the twelve months ended December 31, 2016 and 2015, respectively. Excluded items are generally taxed at the effective tax rate. However, after adjusting the underlying annual tax rate to exclude the impact associated with certain non-cash pension settlements in the second and fourth quarters of 2016 and expenses for legacy litigation in the second quarter of 2015, the adjusted effective tax rates for the full years 2016 and 2015 were 16.8% and 17.9%, respectively.

Reconciliations of this non-GAAP measure to the reported diluted earnings per share are as follows (in millions, except per share data):

Year Ended December 31, 2016	U.S. GAAP				Adjustments				As Adjusted
Operating income	$	1,906			$	512			$	2,418
Interest income	9				—				9
Interest expense	(282		)		—				(282		)
Other income	36				—				36
Income before income taxes	1,669				512				2,181
Income taxes	239				128				367
Net income	1,430				384				1,814
Less: Net income attributable to noncontrolling interests	34				—				34
Net income attributable to Aon shareholders	$	1,396			$	384			$	1,780
Diluted earnings per share	$	5.16			$	1.43			$	6.59
Weighted average ordinary shares outstanding — diluted	270.3								270.3

Year Ended December 31, 2015	U.S. GAAP				Adjustments				As Adjusted
Operating income	$	1,848			$	490			$	2,338
Interest income	14				—				14
Interest expense	(273		)		—				(273		)
Other income	100				—				100
Income before income taxes	1,689				490				2,179
Income taxes	267				122				389
Net income	1,422				368				1,790
Less: Net income attributable to noncontrolling interests	37				—				37
Net income attributable to Aon shareholders	$	1,385			$	368			$	1,753
Diluted earnings per share	$	4.88			$	1.30			$	6.18
Weighted average ordinary shares outstanding — diluted	283.8								283.8

Year Ended December 31, 2014	U.S. GAAP				Adjustments				As Adjusted
Operating income	$	1,966			$	387			$	2,353
Interest income	10				—				10
Interest expense	(255		)		—				(255		)
Other income	44				—				44
Income before income taxes	1,765				387				2,152
Income taxes	334				73				407
Net income	1,431				314				1,745
Less: Net income attributable to noncontrolling interests	34				—				34
Net income attributable to Aon shareholders	$	1,397			$	314			$	1,711
Diluted earnings per share	$	4.66			$	1.05			$	5.71
Weighted average ordinary shares outstanding — diluted	299.6								299.6

Free Cash Flow

We use free cash flow, defined as cash flow provided by operations minus capital expenditures, as a non-GAAP measure of our core operating performance. This supplemental information related to free cash flow represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto. The use of this non-GAAP measure does not imply or represent the residual cash flow for discretionary expenditures.

A reconciliation of this non-GAAP measure to cash flow provided by operations is as follows (in millions):

Years Ended December 31	2016				2015				2014
Cash flow provided by operating activities - U.S. GAAP	$	2,326			$	2,009			$	1,812
Less: Capital expenditures	(222		)		(290		)		(256		)
Free cash flow	$	2,104			$	1,719			$	1,556

Impact of Foreign Currency Exchange Rate Fluctuations

We conduct business in more than 120 countries, and, because of this, foreign currency exchange rate fluctuations have a significant impact on our business. Foreign currency exchange rate movements may be significant and may distort true period-to-period comparisons of changes in revenue or pretax income. Therefore, to give financial statement users meaningful information about our operations, we have provided an illustration of the impact of foreign currency exchange rate fluctuations on our financial results. The methodology used to calculate this impact isolates the impact of the change in currencies between periods by translating the last year’s revenue, expenses, and net income using the current year’s foreign currency exchange rates.

Translating prior year results at current year foreign currency exchange rates, currency fluctuations had a favorable impact of $0.01 on diluted earnings per share during the year ended December 31, 2016; currency fluctuations had unfavorable impacts of $0.38 and $0.11 on diluted earnings per share in the years ended 2015 and 2014, respectively, when prior year results were translated at rates prevalent in those years. Currency fluctuations had unfavorable impacts of $0.01, $0.41, and $0.11 on diluted earnings per share in the years ended December 31, 2016, 2015, and 2014, respectively, when prior year results were translated at rates prevalent in those years. These translations are performed for comparative purposes only and do not impact the accounting policies or practices for amounts included in the Consolidated Financial Statements and Notes thereto.

LIQUIDITY AND FINANCIAL CONDITION

Liquidity

Executive Summary

We believe that our balance sheet and strong cash flow provide us with adequate liquidity. Our primary sources of liquidity are cash flow from operations, available cash reserves, committed credit facilities, and debt capacity available through public debt markets, both short and long-term. Our primary uses of liquidity are operating expenses, capital expenditures, acquisitions, share repurchases, pension contributions, and shareholder dividends. We believe that cash flows from operations and available debt financing will be sufficient to meet our liquidity needs, including principal and interest payments on debt obligations, capital expenditures, pension contributions, and anticipated working capital requirements, for the foreseeable future.

Cash on our balance sheet includes funds available for general corporate purposes, as well as amounts restricted as to their use. Funds held on behalf of clients in a fiduciary capacity are segregated and shown together with uncollected insurance premiums in Fiduciary assets in the Consolidated Statement of Financial Position, with a corresponding amount in Fiduciary liabilities. Fiduciary funds generally cannot be used for general corporate purposes and are not a source of liquidity.

Cash and cash equivalents and Short-term investments decreased $19 million to $721 million in 2016 as compared to 2015. During 2016, cash flow from operating activities increased $317 million to $2.3 billion. Additional sources of funds in 2016 included proceeds from the sale of businesses of $107 million and issuances of debt, net of repayments of $522 million. The primary uses of funds in 2016 included share repurchases of $1.3 billion, acquisitions of businesses of $879 million, dividends to shareholders of $345 million, and capital expenditures of $222 million.

To manage unforeseen situations, we have committed credit lines of approximately $1.3 billion and we endeavor to manage our obligations to ensure we maintain our current investment grade ratings. At December 31, 2016, we had no borrowings on these credit lines.

Operating Activities

Net cash provided by operating activities during 2016 increased $317 million in 2015, or 16%, to $2.3 billion. This amount represents net income reported by the Company, as adjusted for gains or losses on sales of businesses, financial instruments and foreign exchange, and our non-cash expenses, which include share-based compensation, depreciation, and amortization, as well as changes in working capital that relate primarily to the timing of payments of accounts payable and accrued liabilities and collection of receivables. The increase from the prior year was primarily driven by net income, as adjusted for non-cash charges, and reductions in pension contributions.

Pension contributions were $123 million during 2016 compared to $194 million during 2015. In 2017, we expect to contribute approximately $185 million to our pension plans, with the majority attributable to non-U.S. pension plans, which are subject to changes in foreign exchange rates.

We expect cash generated by operations for 2016 to be sufficient to service our debt and contractual obligations, finance capital expenditures, purchases shares under our share repurchase program, and pay dividends to our shareholders. Although cash from operations is expected to be sufficient to service these activities, we have the ability to access the commercial paper markets or borrow under our credit facilities to accommodate any timing differences in cash flows. We have committed credit facilities of approximately $1.3 billion, all of which was available at December 31, 2016, and can access these facilities on a same day or next day basis. Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed.

Investing Activities

Cash used for investing activities in 2016 was $954 million. The primary drivers of the cash used for investing activities were $879 million for acquisitions of businesses, net of cash acquired, $222 million for capital expenditures, and $21 million of net purchases of long-term investments, partially offset by $107 million of sale of businesses and $61 million of net sales of short-term investments.

Cash used for investing activities in 2015 was $138 million. The primary drivers of the cash flow used for investing activities were $290 million for capital expenditures, $46 million of net purchases of long-term investments, and $16 million for acquisitions of businesses, net of cash acquired, partially offset by sales of businesses of $205 million and net sales of short-term investments of $9 million.

Cash used for investing activities in 2014 was $545 million. The primary drivers of the cash used for investing activities were $479 million for acquisitions of businesses, net of cash acquired, and $256 million for capital expenditures, partially offset by net sales of long-term investments, sale of businesses of $48 million, and net sales of short-term investments of $32 million.

Financing Activities

Cash used for financing activities during 2016 was $1.3 billion. The primary drivers of the cash used for financing activities were share repurchases of $1.3 billion, dividends paid to shareholders of $345 million, and net cash payments of $129 million related to issuance of shares, partially offset by issuances of debt, net of repayments, of $522 million.

Cash used for financing activities during 2015 was $1.7 billion. The primary drivers of the cash flow used for financing activities were share repurchases of $1.6 billion, dividends paid to shareholders of $323 million, and net cash payments of $30 million related to issuance of shares, partially offset by issuances of debt, net of repayments, of $253 million.

Cash used for financing activities during 2014 was $1.3 billion. The primary drivers of the cash flow used for financing activities were share repurchases of $2.3 billion, dividends paid to shareholders of $273 million, and issuance of shares for employee benefit plans of $105 million, partially offset by issuances of debt, net of repayments, of $1.3 billion.

Cash and Short-Term Investments

At December 31, 2016, our Cash and cash equivalents and Short-term investments were $721 million, a decrease of $19 million from December 31, 2015, primarily related to share repurchases of $1.3 billion, payments for the acquisition of businesses of $879 million, cash dividends of $345 million, capital expenditures of $222 million, and cash contributions to our major defined benefit plans of $123 million, partially offset by $2.3 billion in Cash flow from operating activities, the net issuances of debt of $522 million, and proceeds for the sale of businesses of $107 million. Of the total balance as of December 31, 2016, $82 million was restricted as to its use, which was comprised of $53 million of operating funds in the U.K., as required by the FCA, and $29 million held as collateral for various business purposes. At December 31, 2016, $1.9 billion of cash and cash equivalents and short-term investments were held in the U.S. and overdrawn cash and cash equivalents and short-term investments of $1.2 billion were held in other countries. Due to differences in tax rates, the repatriation of funds from certain countries into the U.S. could have an unfavorable tax impact. We maintain multi-currency cash pools with third-party banks in which various Aon entities participate. Individual Aon entities are permitted to overdraw on their individual accounts provided the overall balance does not fall below zero. At December 31, 2016 and 2015, non-U.S. cash balances of one or more entities were negative; however, the overall balance was positive.

At December 31, 2015, our Cash and cash equivalents and Short-term investments were $740 million, a decrease of $28 million from December 31, 2014, primarily related to share repurchases of $1.6 billion and dividends to shareholders of $323 million, partially offset by $2.0 billion in Cash flow from operating activities and the net issuances of debt of $253 million. Of the total balance as of December 31, 2015, $105 million was restricted as to its use, which was comprised of $65 million of operating funds in the U.K., as required by the FCA, and $40 million held as collateral for various business purposes. At

December 31, 2015, $2.6 billion of Cash and cash equivalents and Short-term investments were held in the U.S. and overdrawn Cash and cash equivalents and Short-term investments of $1.9 billion were held in other countries. Due to differences in tax rates, the repatriation of funds from certain countries into the U.S. could have an unfavorable tax impact.

In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance underwriter. We also collect claims or refunds from underwriters on behalf of insureds, which are then returned to the insureds. Unremitted insurance premiums and claims are held by us in a fiduciary capacity. In addition, some of our outsourcing agreements require us to hold funds on behalf of clients to pay obligations on their behalf. The levels of fiduciary assets and liabilities can fluctuate significantly depending on when we collect the premiums, claims and refunds, make payments to underwriters and insureds, collect funds from clients and make payments on their behalf, and from the impact of foreign currency movements. Fiduciary assets, because of their nature, are generally invested in very liquid securities with highly-rated, credit-worthy financial institutions. In our Consolidated Statements of Financial Position, the amount we report for Fiduciary assets and Fiduciary liabilities are equal. Our Fiduciary assets included cash and short-term investments of $3.8 billion and $3.4 billion at December 31, 2016 and December 31, 2015, respectively, and fiduciary receivables of $5.7 billion and $6.5 billion at December 31, 2016 and 2015, respectively. While we earn investment income on the fiduciary assets held in cash and investments, the cash and investments cannot be used for general corporate purposes.

As disclosed in Note 13 “Fair Value Measurements and Financial Instruments” of the Notes to Consolidated Financial Statements, the majority of our investments carried at fair value are money market funds. These money market funds are held throughout the world with various financial institutions. We are not aware of any market liquidity issues that would materially impact the fair value of these investments.

As of December 31, 2016, our investments in money market funds had a fair value of $1.4 billion and are reported as Short-term investments or Fiduciary assets in the Consolidated Statements of Financial Position depending on their nature and initial maturity.

The following table summarizes our Fiduciary assets and non-fiduciary Cash and cash equivalents and Short-term investments as of December 31, 2016 (in millions):

	Statement of Financial Position Classification
Asset Type	Cash and Cash Equivalents				Short-term Investments				Fiduciary Assets				Total
Certificates of deposit, bank deposits or time deposits	$	431			$	—			$	2,735			$	3,166
Money market funds	—				290				1,081				1,371
Other investments due within one year	—				—				—				—
Cash and investments	431				290				3,816				4,537
Fiduciary receivables	—				—				5,669				5,669
Total	$	431			$	290			$	9,485			$	10,206

Share Repurchase Program

In April 2012, our Board of Directors authorized a share repurchase program (the “2012 Share Repurchase Program”) under which up to $5.0 billion of Class A Ordinary Shares may be repurchased. In November 2014, our Board of Directors authorized a share repurchase program (“the 2014 Share Repurchase Program” and together with the 2012 Share Repurchase Program, the “Share Repurchase Programs”) pursuant to which an additional $5.0 billion may be repurchased, in addition to the $5.0 billion of Class A Ordinary Shares authorized under the 2012 Share Repurchase Program. In February 2017, the Board of Directors authorized a $5.0 billion increase to the then existing remaining authorization under its share repurchase program. Under each Share Repurchase Program, shares may be repurchased through the open market or in privately negotiated transactions, based on prevailing market conditions, funded from available capital.

During 2016, the Company repurchased 12.2 million shares at an average price per share of $102.66, for a total cost of $1.3 billion. The Company recorded an additional $6 million of costs associated with the repurchase to retained earnings during 2016. During 2015, the Company repurchased 16.0 million shares at an average price per share of $97.04 for a total cost of $1.6 billion. In August 2015, the $5.0 billion of Class A Ordinary Shares authorized under the 2012 Share Repurchase Program was exhausted.

At December 31, 2016, and without giving effect to the increase in February 2017, the remaining authorized amount for share repurchase under the 2014 Share Repurchase Program was $2.8 billion. Under the Repurchase Programs, the Company has repurchased a total of 90.2 million shares for an aggregate cost of $7.2 billion through December 31, 2016.

For information regarding share repurchases made during the fourth quarter of 2016, see Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” as previously described.

Dividends

During 2016, 2015, and 2014, we paid dividends on our Class A Ordinary Shares of $345 million, $323 million, and $273 million, respectively. Dividends paid per Class A Ordinary Share were $1.29, $1.15, and $0.92 for the years ended December 31, 2016, 2015, and 2014, respectively.

Distributable Reserves

As a U.K. incorporated company, we are required under U.K. law to have available “distributable reserves” to make share repurchases or pay dividends to shareholders. Distributable reserves may be created through the earnings of the U.K. parent company. Distributable reserves are not linked to a U.S. GAAP reported amount (e.g., retained earnings). As of December 31, 2016 and 2015, we had distributable reserves in excess of $1.6 billion and $2.1 billion, respectively. We believe that we will have sufficient distributable reserves to fund share repurchases and shareholder dividends for the foreseeable future.

Borrowings

Total debt at December 31, 2016 was $6.2 billion, which represents an increase of $505 million compared to December 31, 2015. This increase is primarily due to issuances of debt, net of repayments, of $522 million, including a net increase in commercial paper outstanding of $279 million compared to December 31, 2015.

On May 27, 2016, $500 million of 3.125% Senior Notes due May 2016 issued by Aon Corporation matured and were repaid in full.

On March 1, 2016, Aon plc issued $750 million of 3.875% Senior Notes due December 2025. The Company used the proceeds of the issuance for general corporate purposes.

Credit Facilities

As of December 31, 2016, we had two committed credit facilities outstanding: our $400 million U.S. credit facility expiring in March 2017 (the “2017 Facility”) and our $900 million multi-currency U.S. credit facility originally expiring in February 2020. Effective February 2, 2016, the $900 million multi-currency U.S. credit facility terms were extended for one year and will now expire on February 2, 2021 (the “2021 Facility”). Each of these facilities is intended to support our commercial paper obligations and our general working capital needs. In addition, each of these facilities includes customary representations, warranties, and covenants, including financial covenants that require us to maintain specified ratios of adjusted consolidated EBITDA to consolidated interest expense and consolidated debt to adjusted consolidated EBITDA, tested quarterly. We intend to let the 2017 facility expire, but may obtain additional committed credit facilities in the future. At December 31, 2016, we did not have borrowings under either the 2017 Facility or the 2021 Facility, and we were in compliance with the financial covenants and all other covenants contained therein during the twelve months ended December 31, 2016.

Our total debt-to-EBITDA ratio at December 31, 2016 and 2015, is calculated as follows (in millions, except ratio):

Years Ended December 31	2016				2015
Net income	$	1,430			$	1,422
Interest expense	282				273
Income taxes	239				267
Depreciation of fixed assets	232				229
Amortization of intangible assets	277				314
Total EBITDA	$	2,460			$	2,505
Total Debt	$	6,205			$	5,700
Total debt-to-EBITDA ratio	2.5				2.3

We use EBITDA, as defined by our financial covenants, as a non-GAAP measure. This supplemental information related to EBITDA represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.

Shelf Registration Statement

On September 3, 2015, we filed a shelf registration statement with the SEC, registering the offer and sale from time to time of an indeterminate amount of debt securities, preference shares, Class A Ordinary Shares, and convertible securities, among other securities. Our ability to access the market as a source of liquidity is dependent on investor demand, market conditions and other factors.

Rating Agency Ratings

The major rating agencies’ ratings of our debt at February 23, 2017 appear in the table below.

	Ratings
	Senior Long-term Debt		Commercial Paper		Outlook
Standard & Poor’s	A-		A-2		Stable
Moody’s Investor Services	Baa2		P-2		Stable
Fitch, Inc.	BBB+		F-2		Stable

A downgrade in the credit ratings of our senior debt and commercial paper could increase our borrowing costs, reduce or eliminate our access to debt capital, reduce our financial flexibility, increase our commercial paper interest rates, or restrict our access to the commercial paper market altogether, and/or impact future pension contribution requirements.

Letters of Credit and Other Guarantees

We have entered into a number of arrangements whereby our performance on certain obligations is guaranteed by a third party through the issuance of a letter of credit (“LOCs”). We had total LOCs outstanding of approximately $90 million at December 31, 2016, compared to $58 million at December 31, 2015. These LOCs cover the beneficiaries related to certain of our U.S. and Canadian non-qualified pension plan schemes and secure deductible retentions for our own workers compensation program. We also have obtained LOCs to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at our international subsidiaries.

We have certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. The maximum exposure with respect to such contractual contingent guarantees was approximately $95 million at December 31, 2016, compared to $104 million at December 31, 2015.

Other Liquidity Matters

We do not have exposure related to off balance sheet arrangements. Our cash flows from operations, borrowing availability, and overall liquidity are subject to risks and uncertainties. See Item 1, “Information Concerning Forward-Looking Statements,” and Item 1A, “Risk Factors.”

Contractual Obligations

Summarized in the table below are our contractual obligations and commitments as of December 31, 2016 (in millions):

	Payments due in
	2017				2018 – 2019				2020 – 2021				2022 and beyond				Total
Principal payments on debt	$	336			$	278			$	1,000			$	4,700			$	6,314
Interest payments on debt	271				522				479				2,570				3,842
Operating leases	355				600				451				696				2,102
Pension and other postretirement benefit plans	189				485				396				1,023				2,093
Purchase obligations	410				405				133				12				960
Total	$	1,561			$	2,290			$	2,459			$	9,001			$	15,311

Pension and other postretirement benefit plan obligations include estimates of our minimum funding requirements pursuant to ERISA and other regulations and minimum funding requirements agreed with the trustees of our U.K. pension plans. Additional amounts may be agreed to with, or required by, the U.K. pension plan trustees. Nonqualified pension and other postretirement benefit obligations are based on estimated future benefit payments. We may make additional discretionary contributions.

In 2013, our principal U.K subsidiary agreed with the trustees of one of the U.K. plans to contribute an average of $11 million per year to that pension plan for the next three years. We are currently negotiating the 2016 valuation, which will determine the required cash contributions for the next three years. The trustees of the plan have certain rights to request that our U.K. subsidiary advance an amount equal to an actuarially determined winding-up deficit. As of December 31, 2016, the estimated winding-up deficit was £175 million ($215 million at December 31, 2016 exchange rates). The trustees of the plan have accepted in practice the agreed-upon schedule of contributions detailed above and have not requested the winding-up deficit be paid.

Purchase obligations are defined as agreements to purchase goods and services that are enforceable and legally binding on us, and that specifies all significant terms, including the goods to be purchased or services to be rendered, the price at which the goods or services are to be rendered, and the timing of the transactions. Most of our purchase obligations are related to purchases of information technology services or other service contracts. Purchase obligations exclude $278 million of liabilities for uncertain tax positions due to our inability to reasonably estimate the period(s) when potential cash settlements will be made.

Financial Condition

At December 31, 2016, our net assets were $5.5 billion, representing total assets minus total liabilities, a decrease from $6.1 billion as revised for December 31, 2015 (see Note 1 “Basis of Presentation - Revision of Previously Issued Financial Statements” of the Notes to Consolidated Financial Statements for details on the revision of previously issued financial statements). The decrease was due primarily to share repurchases of $1.3 billion, dividends to shareholders of $345 million, and an increase in Accumulated other comprehensive loss of $489 million related primarily to foreign currency translation, partially offset by Net income of $1.4 billion for the year ended December 31, 2016. Working capital increased by $171 million from $480 million at December 31, 2015 to $651 million at December 31, 2016.

Accumulated other comprehensive loss increased $489 million at December 31, 2016 as compared to December 31, 2015, which was primarily driven by negative net foreign currency translation adjustments of $493 million, which are attributable to the strengthening of the U.S. dollar against certain foreign currencies, a decrease of $16 million in net post-retirement benefit obligations, and net financial instrument losses of $12 million.

REVIEW BY SEGMENT

Overview

We serve clients through the following segments:

•	Risk Solutions acts as an advisor and insurance and reinsurance broker, helping clients manage their risks, via consultation, as well as negotiation and placement of insurance risk with insurance carriers through our global distribution network.

•	HR Solutions partners with organizations to solve their most complex benefits, talent and related financial challenges, and improve business performance by designing, implementing, communicating and administering a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies.

Risk Solutions

Years ended December 31 (millions, except percentage data)	2016		2015		2014
Revenue	$7,485		$7,426		$7,834
Operating income	$1,587		$1,506		$1,648
Operating margin	21.2%		20.3%		21.0%

The demand for property and casualty insurance generally rises as the overall level of economic activity increases and generally falls as such activity decreases, affecting both the commissions and fees generated by our brokerage business. The economic activity that impacts property and casualty insurance is described as exposure units, and is most closely correlated with employment levels, corporate revenue, and asset values. During 2016, pricing was modestly negative on average globally, and we still consider this a “soft market.” In a soft market, premium rates flatten or decrease, along with commission revenues, due to increased competition for market share among insurance carriers or increased underwriting capacity. Changes in premiums have a direct and potentially material impact on the insurance brokerage industry, as commission revenues are generally based on a percentage of the premiums paid by insureds.

Continuing through 2016, we faced difficult conditions as a result of continued weakness in the global economy, and the repricing of credit risk. Weak economic conditions in many markets around the globe have reduced our customers’ demand for our retail brokerage and reinsurance brokerage products, which have had a negative impact on our operational results.

Risk Solutions generated approximately 64% of our consolidated total revenues in 2016. Revenues are generated primarily through fees paid by clients, commissions and fees paid by insurance and reinsurance companies, and investment income on funds held on behalf of clients. Our revenues vary from quarter to quarter throughout the year as a result of the timing of our clients’ policy renewals, the net effect of new and lost business, the timing of services provided to our clients, and the income we earn on investments, which is heavily influenced by short-term interest rates.

We operate in a highly competitive industry and compete with many retail insurance brokerage and agency firms, as well as with individual brokers, agents, and direct writers of insurance coverage. Specifically, we address the highly specialized product development and risk management needs of commercial enterprises, professional groups, insurance companies, governments, health care providers, and non-profit groups, among others; provide affinity products for professional liability, life, disability income, and personal lines for individuals, associations, and businesses; provide reinsurance services to insurance and reinsurance companies and other risk assumption entities by acting as brokers or intermediaries on all classes of reinsurance; provide capital management transaction and advisory products and services, including mergers and acquisitions and other financial advisory services, capital raising, contingent capital financing, insurance-linked securitizations and derivative applications; provide managing underwriting to independent agents and brokers as well as corporate clients; provide risk consulting, actuarial, loss prevention, and administrative services to businesses and consumers; and manage captive insurance companies.

Revenue

Commissions, fees and other revenue for Risk Solutions were as follows (in millions):

Years ended December 31	2016				2015				2014
Retail brokerage:
Americas	$	3,357			$	3,294			$	3,288
International (1)	2,739				2,750				3,046
Total retail brokerage	6,096				6,044				6,334
Reinsurance brokerage	1,367				1,361				1,474
Total	$	7,463			$	7,405			$	7,808

(1)	Includes the U.K., Europe, Middle East, Africa and Asia Pacific.

In 2016, Commissions, fees and other revenue increased $58 million, or 1%, compared to 2015 due to 3% organic revenue growth, partially offset by a 2% unfavorable impact from foreign currency exchange rates.

Reconciliation of organic revenue growth to reported Commissions, fees and other revenue growth for 2016 versus 2015 is as follows:

	Percent Change		Less: Currency Impact		Less: Acquisitions, Divestitures & Other		Organic Revenue Growth
Retail brokerage:
Americas	2%		(2)%		—%		4%
International (1)	—		(3)		—		3
Total retail brokerage	1		(3)		—		4
Reinsurance brokerage	—		(1)		—		1
Total	1%		(2)%		—%		3%

(1)	Includes the U.K., Europe, Middle East, Africa and Asia Pacific.

Retail brokerage Commissions, fees and other revenue increased 1% in 2016 as compared to 2015, driven by 4% organic revenue growth, reflecting revenue growth in both the Americas and International businesses, partially offset by a 3% unfavorable impact from foreign currency exchange rates.

Americas Commissions, fees and other revenue increased 2% in 2016 as compared to 2015, reflecting 4% organic revenue growth driven by record new business generation in U.S. Retail and strength in Affinity and Latin America, offset by a 2% impact from unfavorable foreign currency exchange rates.

International Commissions, fees and other revenue was flat in 2016, as 3% organic revenue growth, driven by solid growth across every major region; including Asia, EMEA, and the Pacific, despite economic weakness in certain countries, was offset by a 3% impact from unfavorable foreign currency exchange rates.

Reinsurance Commissions, fees and other revenue was flat in 2016 as compared to 2015, as 1% organic revenue growth was offset by a 1% impact from unfavorable foreign currency exchange rates. Organic revenue growth for 2016 was driven by net new business growth in treaty placements globally and modest growth in facultative placements, partially offset by an unfavorable market impact in treaty and a decline in capital markets transactions and advisory business.

Operating Income

Operating income increased $81 million, or 5%, from 2015 to $1.6 billion in 2016. In 2016, operating income margins in this segment were 21.2%, an increase of 90 basis points from 20.3% in 2015. The increase in operating margin was driven by solid organic revenue growth and returns on investments in data and analytics across the portfolio, as well as a decrease in expense related to certain legacy litigation in the prior year.

HR Solutions

Years ended December 31 (millions, except percentage data)	2016		2015		2014
Revenue	$4,183		$4,303		$4,264
Operating income	$557		$536		$485
Operating margin	13.3%		12.5%		11.4%

Our HR Solutions segment generated approximately 36% of our consolidated total revenues in 2016 and provides a broad range of human capital services, as follows:

•	Retirement specializes in global actuarial services, defined contribution consulting, tax and ERISA consulting, and pension administration.

•	Compensation focuses on compensatory advisory/counsel including: compensation planning design, executive reward strategies, salary survey and benchmarking, market share studies, and sales force effectiveness, with special expertise in the financial services and technology industries.

•	Strategic Human Capital delivers advice to complex global organizations on talent, change, and organizational effectiveness issues, including talent strategy and acquisition, executive on-boarding, performance management, leadership assessment and development, communication strategy, workforce training, and change management.

•	Investment consulting advises public and private companies, other institutions, and trustees on developing and maintaining investment programs across a broad range of plan types, including defined benefit plans, defined contribution plans, endowments, and foundations.

•	Benefits Administration applies our human resource expertise primarily through defined benefit (pension), defined contribution (401(k)), and health and welfare administrative services. Our model replaces the resource-intensive processes once required to administer benefit plans with more efficient, effective, and less costly solutions.

•	Exchanges builds and operates healthcare exchanges to provide employers with a cost effective alternative to traditional employee and retiree healthcare, while helping individuals select the insurance that best meets their needs.

•	Human Resource Business Processing Outsourcing provides market-leading solutions to manage employee data; administers benefits, payroll and other human resources processes; and records and manages talent, workforce and other core human resource process transactions as well as other complementary services such as flexible spending, dependent audit, and participant advocacy.

Revenue

Commissions, fees and other revenue were as follows (in millions):

Years ended December 31	2016				2015				2014
Consulting services	$	1,662			$	1,686			$	1,700
Outsourcing	2,557				2,658				2,607
Intersegment	(36		)		(41		)		(43		)
Total	$	4,183			$	4,303			$	4,264

Commissions, fees and other revenue for HR Solutions decreased $120 million, or 3%, in 2016 compared to 2015 due to a 4% decrease in commissions and fees resulting from net divestitures and a 2% impact from unfavorable foreign currency exchange rates, partially offset by 3% organic revenue growth in commissions and fees.

Reconciliation of organic revenue growth to reported Commissions, fees and other revenue growth for 2016 versus 2015 is as follows:

	Percent Change		Less: Currency Impact		Less: Acquisitions, Divestitures & Other		Organic Revenue Growth
Consulting services	(1)%		(3)%		—%		2%
Outsourcing	(4)%		(1)%		(7)%		4%
Total	(3)%		(2)%		(4)%		3%

Consulting services revenue decreased $24 million, or 1% in 2016 as compared to 2015, due primarily to a 3% impact from unfavorable foreign currency exchange rates, partially offset by organic revenue growth of 2% driven by strong growth in retirement solutions, including investment consulting and delegated investment solutions, as well as communications consulting.

Outsourcing revenue decreased $101 million, or 4% in 2016 as compared to 2015, due to a 7% decrease in commissions and fees resulting from net divestitures and a 1% impact from unfavorable foreign currency exchange rates, which more than offset 4% organic revenue growth driven by strong growth in health care exchanges and new client wins in HR BPO for cloud-based solutions, partially offset by a modest decline in benefits administration.

Operating Income

Operating income was $557 million in 2016, an increase of $21 million, or 4%, from 2015. Margins in this segment for 2016 were 13.3%, an increase of 80 basis points from 12.5% in 2015. Operating margin improvement was driven by solid organic revenue growth and expense discipline, partially offset by lost operating income and stranded costs related to previous dispositions, as well as unfavorable foreign currency translation.

Unallocated Income and Expense

A reconciliation of our operating income to income before income taxes is as follows (in millions):

Years ended December 31	2016				2015				2014
Operating income (loss):
Risk Solutions	$	1,587			$	1,506			$	1,648
HR Solutions	557				536				485
Unallocated expense	(238		)		(194		)		(167		)
Operating income	1,906				1,848				1,966
Interest income	9				14				10
Interest expense	(282		)		(273		)		(255		)
Other income	36				100				44
Income before income taxes	$	1,669			$	1,689			$	1,765

Unallocated operating expense includes corporate governance costs not allocated to the operating segments. Net unallocated expenses increased $44 million to $238 million in 2016 compared to $194 million in 2015 due primarily to $50 million of non-cash expenses related to certain pension settlements.

Interest income, Interest expense, and Other income and its components are discussed in Management’s Discussion of Financial Condition and Results of Operations - Review of Consolidated Results.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Consolidated Financial Statements and Notes thereto have been prepared in accordance with U.S. GAAP. To prepare these financial statements, we make estimates, assumptions, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented.

In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, pensions, goodwill and other intangible assets, contingencies, share-based payments, and income taxes, and base our estimates, assumptions, and judgments on our historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these Consolidated Financial Statements.

Revenue Recognition

Risk Solutions segment revenues primarily include insurance commissions and fees for services rendered and investment income on funds held on behalf of clients. Revenues are recognized when they are earned and realized or realizable. We consider revenues to be earned and realized or realizable when all of the following four conditions are met: (1) persuasive evidence of an arrangement exists, (2) the arrangement fee is fixed or determinable, (3) delivery or performance has occurred, and (4) collectability is reasonably assured. For brokerage commissions, revenue is typically recognized at the completion of the placement process, assuming all four criteria required to recognize revenue have been met. The placement process is typically considered complete on the effective date of the related policy. Commission revenues are recorded net of allowances for estimated policy cancellations, which are determined based on an evaluation of historical and current cancellation data.

HR Solutions segment revenues consist primarily of fees paid by clients for consulting advice and outsourcing contracts. Fees paid by clients for consulting services are typically charged on an hourly, project, or fixed-fee basis. Revenues from time-and-materials or cost-plus arrangements are recognized as services are performed, assuming all four criteria to recognize revenue have been met. Revenues from fixed-fee contracts are recognized as services are provided using a proportional-performance model or at the completion of a project based on facts and circumstances of the client arrangement. Revenues from healthcare exchange arrangements are typically recognized upon successful enrollment of participants, net of a reserve for estimated cancellations, assuming all four criteria to recognize revenue have been met. Reimbursements received for out-of-pocket expenses are recorded as a component of revenues. Our outsourcing contracts typically have three-to-five year terms for benefits services and five-to-ten year terms for human resources business process outsourcing (“HR BPO”) services. We recognize revenues as services are performed, assuming all four criteria to recognize revenue have been met. We may also receive implementation fees from clients either up-front or over the ongoing services period as a component of the fee per participant. Lump sum implementation fees received from a client are typically deferred and recognized ratably over the ongoing contract services period. If a client terminates an outsourcing services arrangement prior to the end of the contract, a loss on the contract may be recorded, if necessary, and any remaining deferred implementation revenues would typically be recognized over the remaining service period through the termination date.

In connection with our long-term outsourcing service agreements, highly customized implementation efforts are often necessary to set up clients and their human resource or benefit programs on our systems and operating processes. For outsourcing services sold separately or accounted for as a separate unit of accounting, specific, incremental, and direct costs of implementation incurred prior to the services commencing are generally deferred and amortized over the period that the related ongoing services revenue is recognized. Deferred costs are assessed for recoverability on a periodic basis to the extent the deferred cost exceeds related deferred revenue.

Pensions

We sponsor defined benefit pension plans throughout the world. Our most significant plans are located in the U.S., the U.K., the Netherlands and Canada and are closed to new entrants. We have ceased crediting future benefits relating to salary and service for our U.S., U.K., Netherlands and Canadian plans to the extent statutorily permitted.

Beginning for 2016 expense, we elected to utilize a full yield curve approach in the estimation of the service and interest cost components of net periodic pension and post-retirement benefit cost for our major pension and other post-retirement benefit plans by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. In 2015 and prior years, we estimated these components of net periodic pension and post-retirement benefit cost by

applying a single weighted-average discount rate, derived from the yield curve used to measure the benefit obligation at the beginning of the period.

Recognition of gains and losses and prior service

Certain changes in the value of the obligation and in the value of plan assets, which may occur due to various factors such as changes in the discount rate and actuarial assumptions, actual demographic experience, and/or plan asset performance are not immediately recognized in net income. Such changes are recognized in Other comprehensive income and are amortized into net income as part of the net periodic benefit cost.

Unrecognized gains and losses that have been deferred in Other comprehensive income, as previously described, are amortized into Compensation and benefits expense as a component of periodic pension expense based on the average life expectancy of the U.S., the Netherlands, Canada, and U.K. plan members. We amortize any prior service expense or credits that arise as a result of plan changes over a period consistent with the amortization of gains and losses.

As of December 31, 2016, our pension plans have deferred losses that have not yet been recognized through income in the Consolidated Financial Statements. We amortize unrecognized actuarial losses outside of a corridor, which is defined as 10% of the greater of market-related value of plan assets or projected benefit obligation. To the extent not offset by future gains, incremental amortization as calculated above will continue to affect future pension expense similarly until fully amortized.

The following table discloses our unrecognized actuarial gains and losses, the number of years over which we are amortizing the experience loss, and the estimated 2017 amortization of loss by country (millions, except amortization period):

	U.K.				U.S.				Other
Unrecognized actuarial gains and losses	$	1,256			$	1,618			$	394
Amortization period	9 - 31				7 - 26				14 - 40
Estimated 2017 amortization of loss	$	30			$	52			$	11

The unrecognized prior service cost (credit) at December 31, 2016 was $6 million, $19 million, and $(6) million in the U.S., U.K. and other plans, respectively.

For the U.S. pension plans we use a market-related valuation of assets approach to determine the expected return on assets, which is a component of net periodic benefit cost recognized in the Consolidated Statements of Income. This approach recognizes 20% of any gains or losses in the current year’s value of market-related assets, with the remaining 80% spread over the next four years. As this approach recognizes gains or losses over a five-year period, the future value of assets and therefore, our net periodic benefit cost will be impacted as previously deferred gains or losses are recorded. As of December 31, 2016, the market-related value of assets was $1.8 billion. We do not use the market-related valuation approach to determine the funded status of the U.S. plans recorded in the Consolidated Statements of Financial Position. Instead, we record and present the funded status in the Consolidated Statements of Financial Position based on the fair value of the plan assets. As of December 31, 2016, the fair value of plan assets was $1.7 billion.

Our non-U.S. plans use fair value to determine expected return on assets.

Rate of return on plan assets and asset allocation

The following table summarizes the expected long-term rate of return on plan assets for future pension expense and the related target asset mix as of December 31, 2016:

	U.K.		U.S.		Other
Expected return	3.36%		7.88%		2.68 - 5.15%

In determining the expected rate of return for the plan assets, we analyze investment community forecasts and current market conditions to develop expected returns for each of the asset classes used by the plans. In particular, we survey multiple third-party financial institutions and consultants to obtain long-term expected returns on each asset class, considered historical performance data by asset class over long periods, and weighted the expected returns for each asset class by target asset allocations of the plans.

The U.S. pension plan asset allocation is based on approved allocations following adopted investment guidelines. The investment policy for U.K. and non-U.S. pension plans is generally determined by the plans’ trustees. Because there are several pension plans maintained in the U.K. and non-U.S. category, our target allocation presents a range of the target allocation of each plan. Further, target allocations are subject to change.

Impact of changing economic assumptions

Changes in the discount rate and expected return on assets can have a material impact on pension obligations and pension expense.

Holding all other assumptions constant, the following table reflects what a 25 basis point increase and decrease in our estimated discount rate would have on our projected benefit obligation at December 31, 2016 (in millions):

Estimated liability discount rate Increase (decrease) in projected benefit obligation of December 31, 2016 (1)	25 Basis Point Change in Discount Rate
Increase				Decrease
U.K. plans	$	(226	)		$	237
U.S. plans	(83		)		87
Other plans	(53		)		56

(1)	Increases to the projected benefit obligation reflect increases to our pension obligations, while decreases in the projected benefit obligation are recoveries toward fully funded status. A change in the discount rate has an inverse relationship to the projected benefit obligation.

Holding all other assumptions constant, the following table reflects what a 25 basis point increase and decrease in our estimated discount rate would have on our estimated 2017 pension expense (in millions):

	25 Basis Point Change in Discount Rate
Increase (decrease) in expense	Increase				Decrease
U.K. plans	$	(4	)		$	4
U.S. plans	1				(1		)
Other plans	—				—

Holding other assumptions constant, the following table reflects what a 25 basis point increase and decrease in our estimated long-term rate of return on plan assets would have on our estimated 2017 pension expense (in millions):

	25 Basis Point Change in Long-Term Rate of Return on Plan Assets
Increase (decrease) in expense	Increase				Decrease
U.K. plans	$	(14	)		$	14
U.S. plans	(4		)		4
Other plans	(3		)		3

Estimated future contributions

We estimate contributions of approximately $185 million to our pension plans in 2017 as compared with $123 million in 2016.

Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair market value of the net assets acquired. We classify our intangible assets acquired as either tradenames, customer related and contract based, or technology and other.

Goodwill is not amortized, but rather tested for impairment at least annually in the fourth quarter. In the fourth quarter, we also test the acquired tradenames (which also are not amortized) for impairment. We test more frequently if there are indicators of impairment or whenever business circumstances suggest that the carrying value of goodwill or trademarks may not be recoverable. These indicators may include a sustained significant decline in our share price and market capitalization, a decline in our expected future cash flows, or a significant adverse change in legal factors or in the business climate, among others. No events occurred during 2016 that indicate the existence of an impairment with respect to our reported goodwill or tradenames.

We perform impairment reviews at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component.

The goodwill impairment test is initially a qualitative analysis to determine if it is “more likely than not” that the fair value of each reporting unit exceeds the carrying value, including goodwill, of the corresponding reporting unit. If the “more likely than not” threshold is not met, then the goodwill impairment test becomes a two-step analysis. Step One requires the fair value of each reporting unit to be compared to its book value. Management must apply judgment in determining the estimated fair value of the reporting units. If the fair value of a reporting unit is determined to be greater than the carrying value of the reporting unit, goodwill and trademarks are deemed not to be impaired and no further testing is necessary. If the fair value of a reporting unit is less than the carrying value, we perform Step Two. Step Two uses the calculated fair value of the reporting unit to perform a hypothetical purchase price allocation to the fair value of the assets and liabilities of the reporting unit. The difference between the fair value of the reporting unit calculated in Step One and the fair value of the underlying assets and liabilities of the reporting unit is the implied fair value of the reporting unit’s goodwill. A charge is recorded in the financial statements if the carrying value of the reporting unit’s goodwill is greater than its implied fair value.

In determining the fair value of our reporting units, we use a discounted cash flow (“DCF”) model based on our most current forecasts. We discount the related cash flow forecasts using the weighted-average cost of capital method at the date of evaluation. Preparation of forecasts and selection of the discount rate for use in the DCF model involve significant judgments, and changes in these estimates could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We also use market multiples which are obtained from quoted prices of comparable companies to corroborate our DCF model results. The combined estimated fair value of our reporting units from our DCF model often results in a premium over our market capitalization, commonly referred to as a control premium. We believe the implied control premium determined by our impairment analysis is reasonable based upon historic data of premiums paid on actual transactions within our industry. Based on tests performed in both 2016 and 2015, there was no indication of goodwill impairment, and no further testing was required.

We review intangible assets that are being amortized for impairment whenever events or changes in circumstance indicate that their carrying amount may not be recoverable. There were no indications that the carrying values of amortizable intangible assets were impaired as of December 31, 2016. If we are required to record impairment charges in the future, they could materially impact our results of operations.

Contingencies

We define a contingency as an existing condition that involves a degree of uncertainty as to a possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur. Under U.S. GAAP, we are required to establish reserves for loss contingencies when the loss is probable and we can reasonably estimate its financial impact. We are required to assess the likelihood of material adverse judgments or outcomes, as well as potential ranges or probability of losses. We determine the amount of reserves required, if any, for contingencies after carefully analyzing each individual item. The required reserves may change due to new developments in each issue. We do not recognize gain contingencies until the contingency is resolved and amounts due are probable of collection.

Share-Based Payments

Share-based compensation expense is measured based on the estimated grant date fair value and recognized over the requisite service period for awards that we ultimately expect to vest. We estimate forfeitures at the time of grant based on our actual experience to date and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Restricted Share Units

Restricted share units (“RSUs”) are service-based awards for which we recognize the associated compensation cost on a straight-line basis over the requisite service period. We estimate the fair value of the awards based on the market price of the underlying share on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period where applicable.

Performance Share Awards

Performance share awards (“PSAs”) are performance-based awards for which vesting is dependent on the achievement of certain objectives. Such objectives may be made on a personal, group or company level. We estimate the fair value of the awards based on the market price of the underlying stock on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period.

Compensation cost is recognized over the performance period. The number of shares issued on the vesting date will vary depending on the actual performance objectives achieved. We make assessments of future performance using subjective estimates, such as long-term plans. As a result, changes in the underlying assumptions could have a material impact on the compensation expense recognized.

The largest performance-based share-based payment award plan is the Leadership Performance Plan (“LPP”), which has a three-year performance period. The 2014 to 2016 performance period ended on December 31, 2016, the 2013 to 2015 performance period ended on December 31, 2015 and the 2012 to 2014 performance period ended on December 31, 2014. The LPP currently has two open performance periods: 2015 to 2017 and 2016 to 2018. A 10% upward adjustment in our estimated performance achievement percentage for both open performance periods would have increased our 2016 expense by approximately $8.1 million, while a 10% downward adjustment would have decreased our expense by approximately $8.1 million. As the percent of expected performance increases or decreases, the potential change in expense can go from 0% to 200% of the targeted total expense.

Income Taxes

We earn income in numerous countries and this income is subject to the laws of taxing jurisdictions within those countries.

The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies, and are based on management’s assumptions and estimates about future operating results and levels of taxable income, and judgments regarding the interpretation of the provisions of current accounting principles.

Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In this assessment, significant weight is given to evidence that can be objectively verified.

We assess carryforwards and tax credits for realization as a reduction of future taxable income by using a “more likely than not” determination. We have not recognized a deferred tax liability for permanently reinvested earnings of certain subsidiaries. Additional income taxes could be recorded (or incurred) if we change our investment strategy relating to these subsidiaries, which could materially affect our future effective tax rate.

We base the carrying values of liabilities and assets for income taxes currently payable and receivable on management’s interpretation of applicable tax laws, and incorporate management’s assumptions and judgments about using tax planning strategies in various taxing jurisdictions. Using different estimates, assumptions and judgments in accounting for income taxes, especially those that deploy tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and changes in our results of operations.

NEW ACCOUNTING PRONOUNCEMENTS

Note 2 “Summary of Significant Accounting Principles and Practices” of the Notes to Consolidated Financial Statements contains a summary of our significant accounting policies, including a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable.