S&P Revises Aon Outlook to Negative

August 14, 2003

Standard & Poor’s Ratings Services has revised its outlook on Aon Corp. to negative from stable because of concerns about the disparity in pre-tax margins between what Aon is earning on its risk and insurance brokerage segment and what Aon’s peers are earning.

In the second quarter of 2003, Aon’s risk and insurance brokerage segment reported a pretax margin of 12.3 percent, and its pretax margin for the first six months of 2003 was 14.5 percent. At these levels, Aon’s performance is lower than S&P originally expected and lower than that of its relevant peer group.

In part, the underperformance of the risk and insurance brokerage segment in the second quarter reflects the weak operating performance of the claims business and the seasonal renewal of the business. However, it could also reflect an issue with pricing or expenses.

Notwithstanding this concern, S&P believes Aon one of three organizations in the insurance brokerage industry with the resources and geographic reach to meet the most sophisticated customer risk management and insurance needs. In addition to being the second-largest insurance broker in the U.S. and the world (offices in more than 120 countries), the company has incredible scale and expertise in the areas of retail, reinsurance, and wholesale brokerage; captive management; affinity; and managing underwriting, which provides it a very diversified set of services. Aon also benefits from diversified earnings from its consulting business and insurance underwriting that showed much improved results in the first half of 2003. This business has historically had steady earnings and strong cash flows.

Another benefit of having such a leading market position is the company’s ability to attract new capital. Last year, Aon—in spite of its decision not to spin off or sell its underwriting operations and the negative effects of the business-transformation plan—was successful in raising more than $1 billion of new capital, which it used primarily to reduce leverage and strengthen the balance sheet.

Although management has improved the quality of the balance sheet, debt levels appear high relative to free cash flow. Similarly, fixed-charge coverage, though improving, could be too low for the current rating.

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