Aon Posts Double-digit 2Q Profits, Contemplates Health Unit Spin-off

Aon Corp, the world's second-largest insurance broker, announced second-quarter profits increased by 24 percent to $240 million or 75 cents a share, up from $193 million or 57 cents a share, its highest rate of internal growth since 2003. Revenue climbed 13 percent to $2.49 billion, beating the $2.38 billion estimate of Charles Gates, an analyst at Credit Suisse Group in New York. A spokesperson for the brokerage went on to say it was considering spinning off or selling a 6,800-employee accident, health, and life insurer.  
  
Aon said it was planning a spinoff of its Combined Insurance Company of America unit, and is anticipating receiving queries from potential buyers as well; Credit Suisse and Merrill Lynch and Aon’s own investment bank will act as advisors on any transaction. Combined Insurance, an underwriter of supplemental life and health coverage and the last vestige of Aon’s roots as an insurer, has been a part of Aon since 1982, and posted $1.2 billion of revenue in the first half of 2007.  
  
As recently as February, Aon CEO Gregory Case defended holding on to Combined, even after he sold off or shut down other underwriting units. Last year, Aon sold its extended-warranty business to Onex Corp., a Toronto-based buyout firm, for about C$800 million ($701.5 million) and sold its construction liability insurer to Old Republic International Corp. for $85 million. Still, company executives have indicated that Combined Insurance does not fit with Aon’s long-term objectives.  
  
Dropping Combined ``makes sense, as they focus and sharpen their business operations in insurance broking and consulting,'' according to Charles Hamilton, a Nashville, Tennessee-based analyst with FTN Midwest Securities Corp. who rates the shares ``buy.'' ``Perhaps they can double down in the parts of the business that actually make better return.''   
  
Combined competitors such as Aflac Inc., Conseco Inc. and Unum Group might be potential buyers, Hamilton said. Combined sells supplemental accident and health insurance, largely to ``blue collar'' customers in the rural U.S., Hamilton said, as well as Medicare supplement insurance. It contributed $2 billion, or 22 percent, of Aon's 2006 revenue and employed 6,800 people at yearend, according to a regulatory filing.   
  
Combined's predecessor company bought Ryan Insurance in 1982, forming the company that would be renamed Aon -- the Gaelic word for unity -- five years later. In 2002, Aon dropped plans to split its brokerage and underwriting business into two separate companies, citing market conditions. Only New York-based Marsh & McLennan had more 2006 revenue from insurance brokerage and consulting than Aon, according to a ranking by Business Insurance magazine. London-based Willis ranked third.   
  
Second-quarter revenue in the brokerage business climbed 9 percent, fueled by new clients in North and South America. It would have grown 6 percent excluding the impact of foreign exchange, acquisitions, and payments from insurers, Aon said. This performance beat a 5 percent increase at Arthur J. Gallagher, the No. 4 broker, and a 1 percent decline at Brown & Brown Inc., the seventh-largest. Marsh & McLennan Cos., the largest in the world, reports results Aug. 7.