Aon chief sees high demand for risk management advice.


Gregory Case, the consultant-turned-corporate-chieftain heading Aon Corp., is far too politic to suggest that the woes besetting so many financial behemoths may be a boon for Aon. But there’s a good chance that they will be.

Aon, after all, is no longer the loose conglomeration of insurance representatives that it was in April 2005, when Case left McKinsey & Co. to become chief executive of the Chicago-based company. He describes Aon as a tightly knit group of “colleagues” and “leaders” (he thinks words like “boss” and “employee” are needlessly divisive) who offer “risk management advice” (not “consulting,” the former consultant insists) to clients across the globe. And these days, companies certainly need to manage risk. “We’re not a balance-sheet company or an underwriting company anymore,” Case says. “We’re a professional services firm.”

That would not have been true of the company that Case inherited from Patrick Ryan, who founded Aon in 1964 and ran it until the board tapped Case. It had just paid a $190 million fine as the culmination of a financial scandal that had swept its entire industry relating to so-called contingent commissions — essentially kickbacks to brokers for pushing specific policies. Aon’s stock, like that of its rivals, had declined.

The stock soon recovered, but Aon’s structural problems were not as easy to fix. The company was a hodgepodge of 425 acquired insurance companies, whose incentive systems did not encourage representatives to introduce clients to an affiliate’s services.

They do now.

Case also has used bolt-on acquisitions to shore up Aon’s business in “human capital advice”—from employee benefits policies to personnel recruitment — as well as risk management. In April, Combined Life was sold to Ace for $2.4 billion and the Sterling Life segment was sold to Munich Re for $352 million. Four months later Case bought Benfield Group, a U.K. reinsurance broker that fits more neatly with his view of Aon’s future, for $1.75 billion. The portfolio rejiggering continues. In October, Aon sold AIS Management Group, its California automobile insurance unit, to Mercury Insurance Group for $120 million plus incentive payments of up to $34.7 million, payable over two years.

Last year Aon derived $6.1 billion from risk insurance brokerage and approximately $1.4 billion from providing advice. Under Case the company’s share price has moved from the $20 level to the $40s, and it has not fallen precipitously even in the current tumultuous market. It closed at $37.96 on October 20. “We are not diminished when environments are in turmoil,” Case says. “Clients always want advice about dealing with identity theft, with global warming, with pandemics. And now the financial meltdown has amplified those needs and reinforced our strategy.”

In a conversation with Institutional Investor Contributing Writer Claudia Deutsch, Case talks about the insurance landscape of today and the role he sees Aon playing in the landscape of the future.

Institutional Investor: The travails of American International Group give many people the impression that the insurance industry is in trouble. But AIG was brought down by its investment arm, not its insurance business. So since Aon has pretty much stuck to its insurance knitting, are you able to watch the panic from the sidelines?

Case: You’re right in that, unlike the banking industry, the global insurance sector is overcapitalized. There is almost $1 trillion worth of capital backing up the insurance business today, so the industry is fine. And yes, so are we.

But we do a significant amount of business with AIG, so we’ve had to make sure our clients understand all of their options. We set up four centers, in different time zones, to field calls from clients. We put a “situation room” on our Web site that keeps them current on the AIG situation. We’ve held several conference calls. And Aon people, including me, have been talking to clients on a daily basis.

Have you been encouraging those with AIG policies to move their business elsewhere?

We make it clear that AIG is still an approved option, as far as we’re concerned. But we certainly do offer clients other options if they want them. And we’ve been highlighting new products of our own. We’re now selling a product that sits on top of your directors’ and officers’ policy and kicks in if your primary underwriter encounters difficulties. Five underwriters are participating in that one. We’ve got another product, which we’re doing with Berkshire Hathaway, that involves real estate and one that deals with managing crises related to such pandemic situations as global warming.

These sound like the kind of nitty-gritty insurance products that industry veterans would create. Yet you’re from the consulting world, and you peppered Aon’s executive suite with outsiders. Why isn’t Aon’s board promoting insurance experts from within?

It’s not like Aon and insurance were alien to me. I spent 17 years in McKinsey’s financial services practice; Aon was a McKinsey client. And I lived in Chicago, where Aon was based. And yes, there are many tremendous entrepreneurs at the 400-plus companies that make up Aon, and they’ve built a huge network of clients. But Aon, like McKinsey, really is a professional services firm. The board wanted someone with a professional services profile.

I’ve promoted many people from within. The heads of our Asia operations, our man in the U.K. — all are from inside. But I went to McKinsey for a head of reinsurance. And I brought Christa Davies in from Microsoft Corp. as my finance officer. She’s an Australian, she’s operated in numerous cultures, and she understands services. I put people in positions where I think they can be successful.

She has often said that Aon would use most of the money from selling underwriting to buy back stock. But you usually talk about growing the company. Which is it?

We analyzed what drives our share price, and it’s not margins, it’s not revenue growth — it’s return on invested capital. So share buyback is the primary metric against which we measure acquisitions. We’ve purchased in excess of $3 billion in shares in the past two years, and made only $200 million to $300 million in acquisitions. We did the big merger with Benfield only after we determined that it offered a higher ROIC than buybacks.

In Gaelic, “aon” means oneness. But until now Aon has been a multiplicity of entrepreneurs doing their own thing. Can you ever make it live up to its name?

It’s been hard. Aon, remember, was built on acquisitions. It has operations in 120 countries, and it was using upwards of 30 different sales reporting systems. It was impossible for the management team, let alone other Aon reps, to coordinate client contacts, to know who was calling on whom.

We talked to Aon clients and to Aon colleagues, and all of them agreed this had to change. So we bought software from that provides a blanket sales reporting system and lets us keep track of client relationships. Every one of our colleagues now knows that Aon is a place where no one gets to say, “I own my own clients and do my own thing.”

Aren’t you afraid that all this standardization and coordination will stifle innovation?

Quite the contrary. If anything, we’ve instilled an ethic of innovation at Aon. Last year we put $50 million into an internal venture capital fund and asked colleagues to submit ideas for using it. We got more than 300 ideas, and we’re already funding 20 of them.

Are all of your new products an outgrowth of the economic tailspin?

Not at all. Lots of them happened after we finally coordinated our network of global offices. For example, we now have Risk Console, a product that lets multinational companies keep track of the thousands of local insurance policies they’ve taken out. It’s based on software that AIG bought from Microsoft. We bought it from AIG and turbocharged it.

Any thoughts about what is needed to fix the financial system — that is, to prevent another credit crisis like the one we’ve been living through?

I’m not a sage, but I will say this: I truly believe that the fundamentals of the free market system are sound. What’s fallen down is the ability to execute at the micro level. Take securitization, for one. The concept is sound, and if there had been a much more disciplined approach to creating the underlying pool of loans or securities, it would have worked. We need more disciplined execution, and we need oversight. The credit markets have to be based on healthy financial services companies, and we need to ensure that through oversight. My personal preference is that the free market and the firms provide the oversight themselves. But if it requires a central regulatory body, then so be it.