Aon Sells Insurance Cos. To ACE & Munich Re

Aon insurance brokerage is selling its two insurance companies for close to $3 billion to ACE Limited and Munich Re Group in an all cash deal.

Analysts and rating firms saw the deals as a positive for all the parties involved.

Chicago-based Aon said it will sell Combined Insurance Company of America, based in Glenview, Ill., for $2.4 billion in cash to Bermuda-based ACE. Combined Insurance is an underwriter and distributor of specialty individual accident and supplemental health insurance.

Munich Re will purchase Sterling Life Insurance Company for $352 million. The Bellingham, Wash.-based Sterling provides health care benefits to Americans over the age of 50. The company also has a strong presence in the Medicare program.

The deal should come as little surprise since Aon announced in August of last year that it was selling off its underwriting interests.

"Through these divestitures, we have further simplified our global organization and successfully executed our strategy to exit the lower margin and more capital intensive insurance underwriting business," said Greg Case, president and chief executive officer of Aon in a statement.

Aon said it plans to extract a one-time cash dividend of $325 million from Combined Insurance prior to the close of the deal. Total after-tax cash proceeds and dividends are expected to be approximately $2.6 billion.

The proceeds of the transactions will go to an increase in Aon's stock repurchase program. The program will be increased to $2.6 billion, bringing the total amount currently available for repurchase to approximately $2.78 billion, the firm said.

Evan G. Greenberg, chairman and CEO of ACE, said, "The acquisition of Combined is a significant milestone for ACE and represents both an opportunity for considerable growth and expense-related efficiencies."

He added, "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."

ACE said it expects the deal to be completed by the end of the second quarter of 2008 subject to regulatory approvals. The deal will be financed with cash and a modest amount of debt, the company said.

During a conference call today, ACE revealed that it plans to finance the deal with $1.65 billion in case on hand and $750 million in notes.

Mr. Greenberg said the deal would see internal cost savings in a very short period of time through efficiency of service that ACE can provide and elimination of redundancy.

"From a financial concern perspective, the growth potential is basically gravy," said Mr. Greenberg.

At Munich Re, Peter Choueiri, a member of the firm's International Health Board, said, "Sterling gives us an important platform with an excellent reputation to gain access to the fast-growing senior markets in the U.S. and to leverage our existing business."

The transaction, said Germany-based Munich Re, is to be paid out of its own funds and is expected to close during the first quarter of next year.

Moody's Investor Service reacted to the deal by affirming ACE's property-casualty companies' financial strength ratings, saying the ratings have a stable outlook.

Bear Stearns analyst David Small called the deal "a clear positive" for Aon in his note, saying the sale price is higher than expected, frees up capital for share repurchase and will allow Aon to focus on its brokerage business.

He added that the deal is a good strategic fit for ACE, doubling its accident and health business. Mr. Small went on to say that while some may be surprised by the deal, it gives ACE an opportunity to grow the accident and health business globally.

A.M. Best Co. said it has revised the under review status to positive from negative for both Combined Insurance and Sterling Life.

Best gives Combined Insurance a financial strength rating of "A (Excellent)" and Sterling Life a rating of "A-minus (Excellent)."

A.M. Best affirmed ACE's ratings saying that it was unchanged by the transaction.

Late today, Standard & Poor's said there would be no rating action taken on Aon on the news of the sale. It is rated "triple-B-plus/stable/A-2." In a separate report S&P affirmed ACE's "A-plus" financial strength rating.

Moody's Rating Service placed the long-term financial strength rating of Combined Insurance of "A3" and short term rating of "Prime-2" on review for possible upgrade. The rating of Aon senior unsecured debt of "Baa2" was unchanged with a positive rating outlook.

(This story was updated at 5:13 p.m.)