Aon completes its exit of the underwriting market

Aon’s strategy to cease underwriting activities has reached
finality with the signing of agreements to sell two wholly owned
units – speciality individual accident and supplemental health
insurer Combined Insurance Company of America (Combined) and
healthcare insurer Sterling Life Insurance – for a total cash
consideration of $2.73 billion. Aon, the world’s second-biggest
insurance broker, announced its intention to exit the underwriting
market in 2006, a decision that was followed by a series of sales
of speciality underwriting units.

The largest of the units sold in the latest deals is Combined,
which is to be acquired by Bermuda-based composite insurer and
reinsurer Ace for $2.4 billion in cash. Established in 1919,
US-based Combined targets middle-income consumers in the US,
Canada, Europe and Asia-Pacific. It has more than 4 million
policyholders worldwide.

Sterling, the smaller of the two units, is to be acquired for $352
million by German composite insurer and reinsurer Munich Re’s US
subsidiary, Munich-American Holding. Sterling, which focuses on the
50 years and older age group segment of the US healthcare insurance
market, has 155,00 members and is anticipated to have generated
total revenue of $805 million in 2007.

“Through these divestitures, we have further simplified our global
organisation and successfully executed our strategy to exit the
lower margin and more capital intensive insurance underwriting
business,” said Aon’s CEO, Greg Case. “Our core assets will now be
more strategically aligned as we expand our capabilities to better
serve our risk brokerage and consulting clients.

One-time cash dividend

Aon expects the Sterling transaction to be completed by the end of
the first quarter of 2008 and the Combined transaction by the end
of the second quarter of 2008. In addition to the proceeds of the
sales, Aon anticipates extracting a one-time cash dividend of $325
million from Combined prior to the close of the transaction. Total
after-tax cash proceeds and dividends are expected to be about $2.6
billion, subject to final transaction costs.

Cash generated from the sales is to be used by Aon to increase an
existing share repurchase programme by $2.6 billion. As at 17
December 2007, Aon had applied $1.82 billion to the $2 billion
repurchase programme that began in November 2005.

From Ace’s perspective, the acquisition of Combined is “a
significant milestone and represents both an opportunity for
considerable growth and expense-related efficiencies”, said Ace’s
chairman and CEO, Evan G Greenberg. “The acquisition essentially
doubles our already significant personal accident and supplemental
health insurance franchise, which has been and remains an area of
focus for our company.”

Greenberg continued that Combined’s salesforce of nearly 7,000
agents would also diversify Ace’s personal accident and
supplemental health insurance distribution capabilities. At
present, Ace relies predominantly on direct response and brokerage
distribution while Combined is “a leader” in captive agency
distribution, he explained.

“The addition of Combined to the Ace group of companies is
financially attractive to our shareholders and will produce results
that are accretive to our earnings, return on equity and book value
per share,” said Greenberg.

Ace also intends building on Combined’s capabilities. “We will
export Combined’s franchise to the developing markets of Latin
America, Asia-Pacific and other promising regions of the world
where we already have an established presence and where a growing
middle class presents favourable conditions,” said Greenberg.

A significant acquisition

Though Munich Re’s purchase of Sterling is a far smaller one than
that of Ace’s, it is also regarded as significant. “Sterling is a
target we have chosen carefully, and it perfectly contributes to
the strategy we implemented in early 2006,” said Wolfgang Strassl,
member of the board of Munich Re for life and healthcare. “It also
further strengthens our capabilities as a global provider of
integrated healthcare management.”

One of Sterling’s key attractions is its strong position in the
healthcare segment serving older customers. “Sterling gives us an
important platform with an excellent reputation to gain access to
the fast-growing senior markets in the US,” said Peter Choueiri,
member of Munich Re’s international health board. “Sterling fits
perfectly and is another step in the disciplined execution of our
US strategy.”