Bermuda's largest re/insurance company ACE has expanded its business empire with the acquisition of Aon Corporation's Combined Insurance Company of America (CICA) and some of its subsidiaries for a total of $2.4 billion in cash yesterday.

CICA is headquartered in Illinois and is a leading underwriter and distributor of specialty individual accident and supplemental health insurance products targeted at middle income consumers in the US, Europe, Canada and the Asia Pacific region and serves more than four million policyholders worldwide.

ACE expects the definitive agreement deal will be financed by a combination of $1.65 billion in cash and by raising $750 million of new debt, with CICA's current management expected to remain in place.

Post closing, all of the acquired subsidiaries will be restructured as sister companies and direct subsidiaries of ACE INA Holdings.

The transaction, which is subject to regulatory approvals and customary closing conditions, and is expected to be completed by the end of the second quarter of 2008, includes a $325 million cash dividend payment to Aon and a restructuring of the investment portfolio to meet ACE's asset quality requirements.

Aon has also signed a separate definitive agreement to sell Sterling Life Insurance Company to Munich Re Group for $352 million, which is expected to be completed by the end of next year's first quarter, with Aon pumping the proceeds of both sales into its previously authorised share repurchase programme, taking the total figure up to about $2.78 billion.

Evan Greenberg, chairman and CEO of ACE declared himself pleased with the acquisition, which he reckons will play a big part in the development of the re/insurance giant.

"The acquisition of Combined is a significant milestone for ACE and represents both an opportunity for considerable growth and expense-related efficiencies," he said.

"The acquisition essentially doubles our already significant personal accident and supplemental health insurance franchise, which has been and remains an area of focus for our company."

Furthermore, Mr. Greenberg believes the purchase of CICA will enable ACE to diversify its portfolio.

"Combined's sales force of nearly 7,000 agents will diversify our distribution for this class of business," he said.

"ACE has relied predominantly on direct response and brokerage, while Combined is a leader in captive agency distribution.

"We will export Combined's franchise to the developing markets of Latin America, Asia Pacific and other promising regions of the world where we already have an established presence and where a growing middle class presents favourable conditions.

"The addition of Combined to the ACE Group of Companies is financially attractive to our shareholders and will produce results that are accretive to our earnings, return on equity and book value per share.

"Moreover, we project a very attractive return on equity deployed."

Greg Case, president and CEO of Aon, said: "Through these divestitures, we have further simplified our global organisation and successfully executed our strategy to exit the lower margin and more capital intensive insurance underwriting business.

"Our core assets will now be more strategically aligned as we expand our capabilities to better serve our risk brokerage and consulting clients.

"At the same time, the increased share repurchase programme reflects our ongoing belief in the underlying positive momentum of the business and is an effective use of capital to maximise long-term shareholder value."

The purchase price is subject to adjustment to reflect certain changes to CICA's net worth through the closing of the transaction.

CICA has diversified premium of approximately 66 percent domestic and 33 percent international and will provide diversification to ACE's premium base in a business where expertise already exists.

Meanwhile AM Best believes that ACE management's challenges will be less of business integration than the long term execution issues associated with maintaining an expensive captive distribution force, sensitive lapse rates and regulatory scrutiny.

The ratings agency believes that ACE maintains sufficient capital to fund the acquisition and, further, that reinvestment in profitable, cash producing and complementary businesses is more beneficial on a long-term basis than alternate capital management possibilities.

AM Best has also revised the under review status to positive implications from negative for the financial strength rating of A (excellent) and issuer credit ratings of "a" of CICA and Combined Life Insurance Company of New York.