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Earnings Hits Drive 30 Percent Differential in Insurer Price-to-Book Value: Aon Re Study
Study shows value of effective enterprise risk management
PRNewswire-FirstCall
CHICAGO
(NYSE:AOC)

CHICAGO, April 16 /PRNewswire-FirstCall/ -- Aon Re Global, a unit of Aon Corporation (NYSE: AOC), announced the release of its Price-to-Book study, which quantifies a more than 30 percent valuation differential that can exist for companies producing consistent quarterly earnings over those companies with more volatile earnings.

(Logo: http://www.newscom.com/cgi-bin/prnh/20041215/CGW049LOGO)

Insurance company stocks show a strong positive relationship between their prospective return on equity (ROE) and price-to-book multiple. Furthermore, the data shows this relationship is far steeper for a company that has produced a stable stream of earnings than for one which has had one or more earnings hits.

The study found the earnings-hit break-point to be a quarterly loss of 150 percent or more of average quarterly profit. For a company projecting a 15 percent ROE, the Aon Re Global analysis shows a price-to-book valuation differential of 30 percent between companies with no earnings hits since 1999 and those that have had one or more hits.

The study underscores the shareholder value that can be created through consistently and successfully managing to a prudent level of enterprise risk.

  Examples of earnings hits since 1999 include:
  --  Sept. 11, 2001 World Trade Center losses;
  --  reserve development from the 1998-2001 soft market period;
  --  reserve development from asbestos losses;
  --  2004 and 2005 hurricanes;
  --  investment losses from the bear market beginning in 2000 and the
      dot-com bust.

The Aon Re study found that companies with no earnings hits since 1999 saw their price-to-book ratio increase by 8.5 points for each 1 point increase in prospective return on equity, whereas companies with one or more earnings hits since 1999 saw their price-to-book ratio increase by 3.3. points for each 1 point increase in prospective return on equity.

For a company projecting a 15 percent return on equity, this translates into a price-to-book valuation differential of 1.3 with hits versus 1.7 without hits, a 30 percent difference.

"Insurance company stocks show a strong positive relationship between their prospective return on equity and price-to-book multiple," said Stephen Mildenhall, executive vice president and chief actuary at Aon Re Services. "This relationship is far steeper for a company that has produced a stable stream of earnings than for one which has had one or more earnings hits. Our study clearly shows the value in effective enterprise risk management and risk transfer programs."

Stock Price Reaction to Hurricanes Katrina, Rita & Wilma

Aon Re Global has also performed an analysis of the stock price reaction to reported losses from hurricanes Katrina, Rita and Wilma in 2005. The Katrina study found that post-event stock price declines were predicted best by Katrina-specific losses, rather than by losses from Katrina, Rita and Wilma combined, indicating a greater sensitivity to a single large loss than to an aggregation of smaller events. The threshold for primary companies with a loss of 10 percent or less of shareholder value was a net, after-tax event loss of 3-6 percent of equity or 21-34 percent of estimated current year earnings. For a typical company, a Katrina event loss in this range would not generate an earnings hit. The Price-to-Book regression study shows that investors are aware that insurance company results will be subject to some volatility, but that they are very averse to extreme, book-value destroying events.

For more information, visit: http://aon.mediaroom.com/index.php?s=53&item=199.

About Aon Corporation

Aon Re Global, the world's leading and most preferred reinsurance intermediary, provides clients with integrated capital solutions and services through a world-class network of experts in more than 35 countries. Clients are better able to differentiate and meet their business objectives with Aon Re Global's best-in-class treaty and facultative reinsurance placement services, capital markets expertise, and relevant analytics and technical expertise, including catastrophe management, actuarial, and rating agency counsel. Aon Re Global was named best reinsurance broker in 2007 and 2006 by readers of Business Insurance, in 2007 by readers of US Insurer and in 2006 by readers of Reinsurance.

Aon Corporation (NYSE: AOC) is the leading global provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting. Through its 36,000 colleagues worldwide, Aon readily delivers distinctive client value via innovative and effective risk management and workforce productivity solutions. Our industry-leading global resources, technical expertise and industry knowledge are delivered locally through more than 500 offices in more than 120 countries. Aon was named the world's "best broker" by Euromoney magazine's 2008 Insurance Survey. Aon also was ranked by A.M. Best as the number one global insurance brokerage in 2007 based on brokerage revenues, and voted best insurance intermediary, best reinsurance intermediary, and best employee benefits consulting firm in 2007 by the readers of Business Insurance. For more information on Aon, log onto http://www.aon.com/

   Media Contacts
   Rahsaan Johnson
   312.381.2684
   Rahsaan_Johnson@aon.com

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SOURCE: Aon Corporation

CONTACT: Rahsaan Johnson of Aon Corporation, +1-312-381-2684,
Rahsaan_Johnson@aon.com

Web site: http://www.aon.com/

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