S&P Drops Ratings on Marsh & McLennan Cos., Aon

Standard & Poor’s Rating Services has lowered its counterparty credit rating on Marsh & McLennan Cos. (MMC) to ‘BBB+/A-2’ from ‘A+/A-1’. The rating remains on CreditWatch with negative implications, where it was placed on Oct. 15, after the New York State Attorney General filed a civil complaint against MMC and its brokerage and consulting subsidiary, Marsh Inc. (Marsh; not rated).

The rating action reflects Standard & Poor’s revised expectations for Marsh’s earnings and cash flow given Marsh’s recent announcement that market service agreements (MSAs) are suspended. MSAs are agreements under which contingent commissions are received from insurers. The reduced earnings will diminish MMC’s ability to rapidly retire the short-term debt that was assumed in conjunction with the $1.9 billion acquisition of Kroll Inc. this past summer. The expectation of a fast reduction of this debt was embedded in Standard & Poor’s previous rating conclusion.

This rating action also reflects Standard & Poor’s belief that the Marsh franchise has – at least to some extent – been damaged by the allegations of bid-rigging by the State of New York.

The ratings remain on CreditWatch negative to reflect the ongoing uncertainties of the situation, including the potential for further negative developments with respect to the bid-rigging allegations and the possible adverse effects such developments might have on Marsh’s competitive position, earnings, or cash flow.

However, short of criminal charges being filed against the company by a legal authority, Standard & Poor’s believes that the diversified operational profile of MMC, with several well-positioned subsidiaries, will enable it to remain a viable and profitable entity into the future.

Standard & Poor’s also lowered its counterparty credit rating on Aon Corp. to ‘BBB+/A-2’ from ‘A-/A-2’. At the same time, Standard & Poor’s lowered its preferred stock rating on Aon to ‘BBB-‘ from ‘BBB’. In addition, Standard & Poor’s placed all these ratings on CreditWatch with negative implications.

Standard & Poor’s lowered the rating to reflect its revised expectations for Aon’s earnings and cash flow given the recent announcement by various industry players that they are suspending market service agreements (MSAs). MSAs are the agreements under which contingent commissions are received from insurers. Standard & Poor’s believes that the disruption to earnings resulting from the prospective suspension of MSAs materially reduces Aon’s ability to improve its operating and financial profiles. This improvement had been factored into the previous ratings.

The ratings are on CreditWatch negative to reflect the ongoing uncertainties related to the continued New York State Attorney General Investigation, for which Aon is a subpoenaed party, as well as concerns about private litigation. If the New York State Attorney General or other legal entities file a legal charge, there will likely be a further rating action.

The ratings on Aon are supported by its very strong competitive position in the insurance brokerage industry and its strong competitive positions in its individual supplemental accident, health, and disability insurance and employee benefit consulting lines of business.