Aon sells units for $2.7 billion
Insurance brokerage Aon Corp. is selling two underwriting units for $2.75 billion in separate cash deals to focus on more profitable lines of business in the face of falling insurance rates.
Aon said in the sale announcement Monday that it will use the sale proceeds to ramp up its share buyback program.
The company said it is selling its Combined Insurance Company of America to Ace Ltd. for $2.4 billion and its much smaller Sterling Life Insurance Co. to Munich Re AG for $352 million.
Proceeds from the sales will increase Aon's share buyback power to $2.78 billion, the company said.
Chief Executive Greg Case said the divestitures are part of its strategy to exit the lower-margin and more capital-intensive insurance underwriting business. The moves shift emphasis to its other two businesses: brokerage services and consulting.
"Our core assets will now be more strategically aligned as we expand our capabilities to better serve our risk brokerage and consulting clients," Case said. "At the same time, the increased share repurchase program reflects our ongoing belief in the underlying positive momentum of the business."
The announcement comes seven weeks after Aon kicked off its second restructuring in less than three years by cutting 2,700 jobs, or 6 percent of its work force, as part of a plan expected to save it $240 million a year by 2010. Its largest competitor, Marsh & McLennan, also is restructuring and laying off employees.
Analysts and investors appeared to endorse the move. Aon shares rose 46 cents to close at $49.40 Monday. The stock is up more than 40 percent in 2007.
Keith Walsh of Citigroup said Aon got a higher price for its Combined Insurance unit than he expected.
Lehman Brothers analyst Jay Gelb said the company has impressive momentum but may not be able to sustain it in a difficult environment.
"Aon's expense-saving initiatives could continue to drive margin improvement, but organic growth will likely slow," he wrote in a note to investors.
Evan Greenberg, chairman and chief executive of Glenview-based Ace Ltd., called the acquisition a "milestone" and an opportunity for considerable growth.
Celent analyst Donald Light said Ace may be trying to hedge its bets on the softening property-casualty business, its primary business focus, by strengthening its presence in the personal accident and supplemental health business with the Combined acquisition.
"This could be a win for both Aon and ACE," he said in an e-mail.
The deal is expected to close in the second quarter of 2008.
Aon expects to extract a one-time cash dividend from Combined Insurance of $325 million before the closing.
Both Aon units will be placed into discontinued operations in the fourth quarter of 2007, the company said.