A Scandal Turns Into a Blessing

Aon, under the deft hand of new CEO Greg Case, has emerged as the nation's largest insurance broker

by Joseph Weber

Things looked bleak for Aon (AOC) three years ago, after regulators from New York, Connecticut, and Illinois teamed up to accuse it and other insurance brokers of cheating customers. Aon's stock plunged by more than a third, and its finances looked parlous. Even worse, with founding Chief Executive Patrick G. Ryan headed for semiretirement, the executive suite was in disarray.

But in a classic case of unintended consequences, the regulatory attack led by then-New York Attorney General Eliot Spitzer may have been the best thing to happen to Aon. It drove the outfit to recruit an untainted outsider—longtime McKinsey consultant Gregory C. Case—to take over as CEO. It also weakened Aon's biggest rival, Marsh & McLennan (MMC), whose clients and executives rushed for the exits, paving the way for Aon to poach business. And it compelled major brokers to tell clients exactly what they were paying for—giving Aon marketers a selling edge against rivals that don't break out revenue sources. "Spitzer was clearly a good thing for Aon," says UBS (UBS) analyst Brian R. Meredith.

Questionable Decision

That helps explain why Aon is hitting on all cylinders these days. Operating profit in 2007 is expected to come in at more than $945 million, up 26% from a year earlier, with revenue rising 10%, to $9.8 billion, says Citigroup (C) analyst Keith F. Walsh. The Chicago company also has surpassed Marsh to claim the title of world's biggest insurance broker. Aon is thriving as well in human-resource outsourcing, executive pay and merger advice, and global reinsurance operations. Happy investors have driven Aon's stock, now more than $46 a share, to all-time highs.

For Case, Aon's gains are sweet vindication. When he quit as head of McKinsey's financial-services practice to join the beleaguered company, friends thought he had gone off the deep end. "I'll put it nicely. They said I was making a bad decision," recalls the 45-year-old. But he saw opportunity if he could cut costs and restore Aon's standing with Wall Street. As Case told skeptical buddies at the time: "Clients globally have incredible needs, and Aon is in a great position to help them."

Case, a Harvard MBA who had spent his consulting career advising insurers and financial-services firms, wasn't blind to the problems. In March, 2005, a month before the Kansas City (Kan.) native came on board, regulators forced Aon to pay $190 million to settle allegations of fraud and anticompetitive practices. Like many other brokers, the company had been accepting so-called contingent commissions from insurers—payments that were routine in the industry but that Illinois Attorney General Lisa Madigan declared amounted to "secret payments from insurers for steering them business." Aon forswore such payments, which totaled about $200 million a year, and Ryan apologized.

Huge Cuts

Case came in with a big broom. He overhauled leadership ranks, reaching outside to such companies as McKinsey, Allstate (ALL), and Motorola (MOT) to fill seven of the company's top dozen posts, and to Microsoft (MSFT) to recruit Aon's incoming chief financial officer, Christa Davis. With a consultant's eye, Case also spotted areas rife with duplication. Since Aon was the product of more than 400 acquisitions, he found plenty of overlap in such areas as human resources, real estate, and information technology. He has cut some 3,000 jobs so far and plans over the next three years to trim another 2,700, paring Aon down to about 41,000 worldwide.