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Aon underwriting unit set for spinoff or sale

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CHICAGO—Aon Corp. is renewing efforts to divest itself from the underwriting business.

The Chicago-based brokerage announced last week that it is exploring strategic alternatives for Combined Insurance Co. of America, its remaining accident/health and life insurance underwriting unit, which generated around $2.0 billion in 2006 revenues.

This is Aon's third public effort to sell its underwriting units since 2001 and follows last November's completion of sales of Aon Warranty Group, including Virginia Surety Co., to an affiliate of Toronto-based investment firm Onex Corp. and Construction Program Group to Old Republic Insurance Co.

The brokerage placed all of its remaining property/casualty underwriting business into runoff in the fourth quarter of last year.

"Combined is a great company with a longstanding record of success, and I'm confident that it will continue to succeed in the future," Aon President and Chief Executive Officer Greg Case said in a statement. "We are making preparations for a spinoff of the company to our shareholders, but we anticipate receiving inquiries from potential buyers and are prepared to respond accordingly."

Aon has engaged Credit Suisse Securities (USA) L.L.C., Merrill Lynch & Co. and Aon Capital Markets as advisers on any potential transaction, Aon said.

Analysts say CICA could fetch from $2 billion to $2.5 billion in a sale and Aon most likely would use the proceeds to buy back company stock, although acquisitions are not out of the question, analysts noted.

"We believe this sale creates the potential for Aon to do a large share repurchase," said David Small, an analyst with Bear, Stearns & Co. Inc. in New York.

Aon's capital management strategy so far has been to buy company stock "very aggressively," although "we continue to believe that they could improve the collection of their consulting assets, (so) an acquisition there could make a lot of sense," said Mark Lane, a principal with William Blair & Co. in Chicago.

Aon first tried to exit the underwriting business in 2001 when it attempted to spin off Combined Specialty, the umbrella company under which it organized its underwriting operations, including CICA, Aon Warranty, Virginia Surety and London General. Aon, citing difficult market conditions, eventually scrapped the plans and opted instead to sell all or part of the umbrella operations.

With the exception of Sheffield Insurance Corp., a small excess and surplus lines insurer that Aon sold to AXIS Specialty Ltd. in November 2002, the underwriting operations remained part of Aon.

In November 2005, Aon said it was exploring strategic alternatives for its warranty, credit insurance and property/casualty underwriting businesses. CICA was excluded from consideration at that time (BI, Nov. 21, 2005).

In a conference call with analysts last week, Mr. Case said Aon's decision now to spin off or sell CICA and its subsidiaries, including Sterling Life Insurance Co., is a continuation of Aon's efforts beginning about 18 months ago to exit the underwriting business and focus on its core brokerage business.

Gretchen Roetzer, a credit analyst with Fitch Ratings in Chicago, said Aon could use the money from a sale of CICA for purposes that could range from repurchasing stock to making acquisitions to funding its pension plan.

"We've always thought (CICA) was strategic and not a core business and when the time was right it may be something (Aon) would look to try to do something with again," Ms. Roetzer said. "It's definitely not a fire sale. I think they waited for the right time, the right market and the right management."