Leading ratings agency Standard & Poor's says it is likely to follow any legal actions against broking firms Willis and Aon with a downgrade to credit ratings.

The warning from S&P comes after rival Marsh & McLennan earlier this month settled a civil suit brought against it by New York Attorney General Eliot Spitzer for the steep price of $850 million.

The lawsuit levelled fraud and anti-trust violations against Marsh with allegations that it had steered clients to insurers that paid it the highest commissions as well as rigging bids to create the sham appearance of competition.

S&P said this week that it was keeping the ratings where they were for Willis and Aon, but if either came under legal fire a downgrade could follow.

The announcements followed each broker delivering fourth quarter and year-end earnings reports.

In the case of Willis, S&P said it was keeping its 'BBB-' counterparty credit rating on CreditWatch with negative implications, indicating the rating could see a downgrade.

"The ratings are remaining on CreditWatch because of the ongoing uncertainties related to continued regulatory investigations, including the ongoing New York State Attorney General investigation, for which Willis is a subpoenaed party," said credit analyst Donovan Fraser.

The ratings body said it was also concerned about private litigation involving Willis.

"If the New York State Attorney General or another legal entity files a legal charge against Willis, Standard & Poor's will consider lowering the rating," Mr. Fraser said, adding that any rating action would be based on S&P's "view of the immediate financial impact in terms of settlement and fines and the adverse effects such charges would have on Willis's competitive position".

Willis reported fourth-quarter 2004 before-tax earnings of $163 million, a decrease of eight percent over $179 million for the same period in 2003.

The company also reported a hit on its contingent commission income which fell to $25 million, down from $39 million in the fourth quarter of 2003, as a result of the company's decision to no longer accept the compensation agreements.

Willis, Marsh and Aon have all said they will no longer accept the controversial incentive payments from insurers.

S&P said the decline in fourth-quarter 2004 operating results was consistent with expectations that Willis's earnings would be adversely affected by the termination of contingent commission contracts.

Concerns were said to be offset by Willis' three percent organic growth in the fourth quarter, during a period of declining premium rates.

The ratings on Willis are supported by its good competitive position as the third-largest global insurance broker, strong operating results, and low leverage relative to its industry peers, S&P said.

For Aon, S&P said its counterparty credit and senior debt ratings were also to remain on CreditWatch negative, indicating a possible downgrade if conditions change.

In addition to concerns on potential legal actions against Aon, S&P said it was also watching the company after it made a regulatory filing announcing the renewal of its three-year US commercial paper back-up facility totalling $600 million and the renewal of the Euro facility of 650 million.

"The ongoing CreditWatch reflects the ongoing uncertainties related to the continued regulatory investigations, including the ongoing New York State Attorney General investigation for which Aon is a subpoenaed party, as well as concerns about private litigation," said credit analyst Steven Ader.

S&P said it would "actively weigh a negative rating action" if Mr. Spitzer or other legal entities file charges against Aon.

As with Willis, S&P said it expected Aon's earnings to decline because of the loss of contingent commission revenue.

The company's fourth-quarter and year-end earnings before tax declined by 22 percent and seven percent respectively.

"Fourth-quarter organic growth (excluding the discontinuance of contingent commissions) of two percent in the Risk and Insurance Brokerage Services and flat expenses (after foreign exchange adjustments) are positive developments, though consistent with our expectation that Aon will improve its top line performance relative to its competitors, while continuing to realise the benefits of its expense control initiatives," S&P said.

S&P said it expected that Aon had the financial flexibility to manage any potential settlements that might be reached in connection with outstanding legal and regulatory investigations.

The ratings on Aon were said to be 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.