Aon s Case Seeks Takeovers as Insurance Rates Drop

Aon Corp., the world's second-biggest insurance broker, will find ``attractive'' takeover opportunities and has the resources to buy competitors as insurance rates drop, Chief Executive Officer Gregory Case said.

``Aon is in a very privileged position right now,'' Case, 45, said yesterday in an interview in Chicago. ``We're going to continue to make acquisitions.''

The biggest insurance brokers are buying companies as commercial-insurance prices fall and stock declines persuade smaller rivals to sell. Willis Group Holdings Ltd., the No. 3 broker, agreed on June 8 to purchase Hilb Rogal & Hobbs Co. for $1.7 billion after reporting three straight profit declines.

``The industry is likely to consolidate, certainly over a cycle that gets more difficult,'' said Eric McKissack, who oversees a mid-cap stock fund for $16 billion money manager Calvert Asset Management Co. and owns Aon shares. ``I'm sure the remaining companies are in their scope.''

Aon, based in Chicago, spent about $250 million on 21 purchases last year. Chief Administrative Officer Gregory Besio said it may spend more this year. Following Willis's takeover of Hilb Rogal, Besio said he started a review of possible targets.

``It is likely you'll see an acceleration of our M&A activity,'' Besio, head of Aon's corporate strategy, said in a separate interview yesterday. ``At least once a quarter we look at everybody and say, what would we do and why? `Do the numbers make sense?'''

Track Record

Aon fell $1.31, or 2.8 percent, to $45.95 in 4:03 p.m. New York Stock Exchange composite trading. The stock gained 10 percent in the past year, while Willis tumbled 24 percent and No. 1 Marsh & McLennan Cos. slid 19 percent.

Aon's share price more than doubled since Case was named CEO in 2005. He has cut at least 3,200 jobs and sold an underwriting unit to focus on the business of helping corporate clients shop for insurance coverage.

One of Aon's main responsibilities is placing coverage with insurers whose balance sheets will ``hold up against the test of time,'' Case said. That need has been made more urgent by multibillion dollar disasters including Hurricane Katrina in 2005, according to Case.

Insurers, which invest premiums before paying out claims, have weathered the collapse of the subprime mortgage market better than banks, Case said. American International Group Inc., the world's biggest insurer by assets, is ``one notable exception,'' according to Case. New York-based AIG has posted two record quarterly losses on writedowns tied to subprime loans.

Confidence in AIG

``At the core client level, we have not really perceived'' an erosion of confidence in AIG's ability to pay claims, Case said. ``AIG remains one of the strongest markets in the world.''

Aon's brokerage division had a 17.1 percent profit margin last year, beating the 9.1 percent performance at Marsh & McLennan. Aon has ``a significant amount of liquidity'' and ``significant debt capacity,'' Case said. The company is in the best financial shape for acquisitions in a decade, according to Besio.

``There's not a target out there that we couldn't afford to buy,'' Besio said.

Aon had $452 million in cash and $84 million in short-term debt at the end of March, according to the company's first- quarter filing.

Prices Decline

Prices for business coverage in the U.S. fell 14 percent in the first quarter from a year earlier. Insurers are competing for revenue after two consecutive years of lower-than-average hurricane losses, according to a survey by the Council of Insurance Agents & Brokers in Washington.

Revenue declines at smaller brokers can be deeper than at their bigger rivals because they rely more heavily on commissions, which are calculated as a portion of prices, according to Besio. Larger firms tend to make more money on fixed-rate fees, he said.

``Any smaller or mid-market company is going to have more pressure on it,'' said John Nigh, a managing principal with consulting firm Towers Perrin in New York. ``They're much more vulnerable to pressure to do something when rates are being squeezed.''

Aon's potential for expansion got a boost this month when regulators agreed to relax bans on certain types of commissions in the event of a combination between two brokers. The accord eases some restrictions on collecting payments from insurers. The top three brokers submitted to the change after a 2004 investigation by Eliot Spitzer, then attorney general of New York.

``It makes acquisitions in the U.S. relatively more attractive,'' Case said. ``We're very, very bullish on the U.S.''

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Aon s Case Seeks Takeovers as Insurance Rates Drop