Aon Announces Derivative Deal to Cut Investment Losses

January 21, 2002

Chicago-based Aon Corporation warned earlier this week that quarterly earnings would be trimmed by losses from its limited partnership investments, but said it had sold off that portfolio in a complex deal to halt future losses and stabilize earnings.

According to Reuters, Aon noted its corporate unit would report approximately $70 million of losses in the fourth quarter, due to declining values of its limited partnership investments.

The losses round off a terrible year for Aon’s corporate unit, as the value of its limited partnership investments have tumbled. For the first nine months of 2001, the unit lost $96 million, compared with a profit of $77 million in the year-ago period.

In order to trim further losses, and reduce volatility in its results, Aon reported on Wednesday that it had securitized the $450 million portfolio of limited partnership investments.

Aon reported it had sold 53 limited partnership interests, nearly all of the portfolio, to a special vehicle which will repackage them into derivative securities.

In return, Aon said it had obtained approximately $180 million, or 40 percent, of $450 million net asset value of the portfolio in cash. The remainder will be paid in securities issued by the special vehicle. Aon stands to gain if the value of the underlying investments increase, but it could also cash in on the securities.

The deal is the first securitization of a current portfolio of limited partnership interests that received stand-alone credit ratings from Standard & Poor’s, Aon reported. Its subsidiary, Aon Capital Partners, Inc., served as financial advisor on the deal, which closed on Dec. 31.

The limited partnership investments were previously held by Aon’s insurance underwriting units, Combined Insurance Co. of America and Virginia Surety Company Inc., which the parent company plans to spin off under the name Combined Specialty Corp. in the spring.

It stated the securitization deal would be desirable for investors, rating agencies, and regulators.

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