Standard & Poor’s Rating Services announced that it has affirmed its ‘A-‘ counterparty credit rating on Aon Corp., but the outlook remains negative.
“The ratings on Aon are supported by its very strong competitive position in the insurance brokerage industry and its strong competitive positions in its individual supplemental accident, health, and disability insurance and employee benefit consulting lines of business,” said S&P. “These factors are offset by the company’s operating performance and financial profile, which, though improving, are below those of its peers and what is typically required for the rating category.”
S&P also indicated that it “expects that recently implemented management initiatives–in combination with Aon’s very strong competitive position–will drive improving operating performance and financial leverage through 2006. Aon continues to improve its balance between operating profits and financial leverage.”
It warned, however: “If Aon is not able to sustain the improvement in its operating and financial profiles, Standard & Poor’s will consider lowering the rating.”
The bulletin cited the following “Major Rating Factors:
— Standard & Poor’s considers Aon’s competitive position in the insurance broker segment as very strong. In addition to being the second-largest insurance broker in the U.S. and the world (offices in more than 120 countries), Aon has significant scale and expertise in the areas of retail, reinsurance, and wholesale brokerage; captive management; affinity; and managing underwriting, which collectively accounted for 58 percent of consolidated revenue in 2003.
— Aon enjoys strong competitive positions in the individual supplemental accident, health, and disability insurance market and employee benefit consulting lines of business. Aon’s profitable niche in the individual supplemental accident, health, and disability insurance markets generated $1.6 billion in revenue in 2003, which was 16% of consolidated revenue. Aon’s competitive position is also bolstered by its status as the third-largest employee benefit consulting company in the world, with $1.2 billion in revenue in 2003, which was 12 percent of consolidated revenue.
— Aon’s operating performance, though improved in 2004, is below that of its peer group and, given the current balance between earnings and financial leverage, below that of the rating category. In the core risk and insurance brokerage unit, which was responsible for $5.6 billion in revenue in 2003 (58 percent of consolidated revenue), the pretax ROR, as reported in the 2003 10k filings, was 12.9 percent in 2001, 15.9 percent in 2002, and 14.6 percent in 2003. This markedly trails major peers Marsh (22.1 percent, 25.2 percent, and 25.5 percent, respectively) and Willis (5.5 percent, 20.4 percent, and 27.3 percent, respectively). Although Aon has taken organizational and expense-control initiatives to improve results in the past few years, operating results have only recently begun to be positively affected.
— Aon’s financial balance among operational risk, financial leverage, and earnings performance remains below that of the rating category. Adjusted fixed-charge coverage (incorporating imputed interest on noncancelable operating leases) was 4.4x in 2003, and adjusted financial leverage (incorporating the imputed debt on noncancelable operating leases) was 45 percent. Although adjusted fixed-charge coverage has markedly improved from 3.7x in 2002 and 2.0x in 2001, it remains below that of the rating category. Aon’s adjusted financial leverage, bolstered by modest debt reduction and income retention, is similarly improved from 50 percent in 2002 and 53 percent in 2001.
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