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Aon Mum As Pressure Mounts

Oct 21, 2004 | Aon Corp. is under more intense pressure to stop taking so-called contingent commissions from insurers after a rival announced Thursday it no longer would accept such payments.

London-based Willis Group Holdings Ltd., the third largest commercial insurance brokerage in the U.S. after No. 2 Aon and embattled industry leader Marsh & McLennan Cos., said it will no longer accept the back-end commissions insurers pay based on the volume and quality of business brokers place with the them.

“We want our clients to know that we have heard them loud and clear: they don’t like contingency agreements,” Willis CEO Joseph Plumeri said in the announcement.

Marsh last week announced it would suspend acceptance of the commissions following a lawsuit by New York Attorney General Eliot Spitzer. The insurance industry was thrown into turmoil last week when Mr. Spitzer alleged Marsh rigged insurer bids to steer clients’ business to companies that paid higher contingent commissions. Marsh has pledged cooperation with Mr. Spitzer.

Of the top three brokers, Chicago-based Aon remains the only one that hasn’t publicly stated its stance on the commissions, following Mr. Spitzer’s lawsuit against Marsh and his general criticism of the industry for its compensation arrangements. An Aon spokesman again declined to comment today.

The payments contributed $200 million, or 2%, of Aon’s revenues last year, but analysts say they accounted for as much as 20% of its earnings because there are so few costs associated with the payments.

Some analysts say Aon will follow the other brokers. “They have to do it,” says Mark Lane, an insurance industry analyst with William Blair & Co. LLC in Chicago. “They don’t have a choice.”

The market responded positively to the news that Willis would drop the payments. The company’s stock rose more than 8% in late trading. Aon’s stock was down nearly 2%.

Separately, Standard & Poor’s lowered its credit rating for Aon today to BBB+/A-2 from A-/A-2, saying “the disruption to earnings resulting from the prospective suspension of (contingent commissions) materially reduces Aon’s ability to improve its operating and financial profiles.”

S&P left Aon on a negative CreditWatch even after the downgrade.

Mr. Spitzer has subpoenaed Aon, and reportedly is scrutinizing whether Aon steered business to insurers that used Aon’s separate reinsurance-brokerage business to buy reinsurance. Aon hasn’t been implicated to date and has said it believes “to the best of our knowledge” that its employees didn’t rig bids or steer business to favored insurers.

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