Aug. 22 (Bloomberg) -- Aon Corp., the world's biggest insurance broker, agreed to buy London-based Benfield Group Ltd. for 844 million pounds ($1.6 billion) after the companies settled a legal dispute a year and a half ago.

Benfield surged 27 percent to 345.5 pence in London after Chicago-based Aon said it will pay 350 pence apiece for shares of the reinsurance broker plus a dividend of 4 pence next month. Both companies said their boards support the takeover and declined to discuss the possibility of a higher bid.

``The management have agreed to the deal so it doesn't make a lot of sense for anyone else to come in,'' said Charles Coyne, an analyst at KBC Peel Hunt Ltd. in London who has a ``hold'' rating on Benfield. ``It's a knockout offer so everyone is happy. The companies know each other very well.''

Chief Executive Officer Gregory Case expanded Aon's London- based reinsurance business in 2006, triggering legal action when he hired about 20 Benfield employees. Case said today that Benfield's management was a ``leading driver'' for the takeover. CEO Grahame Chilton, 49, has a 10 percent stake now worth 77 million pounds in Benfield and would be vice chairman of the combined company.

Aon's reinsurance division is ``highly complementary with Benfield,'' Case said in a conference call today, and added that the merger would help the company expand margins.

The acquisition will increase Aon's presence in the U.S. catastrophe reinsurance market, Asia and Latin America, it said. The combination will generate about 20 million pounds in cost savings by 2009 and increase profit margins, Aon said.

`Cultural Fit'

``The strong cultural fit between our firms will enable us to quickly realize the benefits of this transaction and the value added for our clients and shareholders,'' the statement said.

Benfield has been struggling with low reinsurance rates for almost two years. First-half net income fell 7 percent to 57.9 million pounds, the company reported this month. Before today's surge, Benfield shares were down 43 percent from the May 2006 high.

Benfield directors' 18 percent stake in the company is now valued at 134 million pounds. Chairman John Coldman's holding is worth 49 million pounds.

Aon's second-quarter net income rose to $1.13 billion from $240 million after the company booked a gain on the sale of Combined Insurance Co. of America to Ace Ltd. Aon has bought back stock with proceeds of the sale and said Aug. 1 it was considering acquisitions to boost its brokerage.

Americas

Risk and brokerage services revenue in the Americas, Aon's biggest market, fell 1 percent in the period as Aon's clients cut costs and made smaller deals.

Aon rose $1.12, or 2.4 percent, to $47.82 at 1:02 p.m. in New York Stock Exchange composite trading. The insurer is down less than 1 percent this year, valuing the company at about $13 billion. The company has outperformed the Bloomberg U.S. Insurance Index, down 26 percent.

Aon hired employees in October 2006 from a reinsurance unit at Benfield, which responded with a lawsuit claiming the hires reduced profit by 10 million pounds. Aon agreed to pay 9.5 million pounds in March 2007 to settle the claim.

Benfield's adviser was Merrill Lynch & Co. while Aon was advised by Credit Suisse Group AG, the statement said.

To contact the reporters on this story: Jon Menon in London at jmenon1@bloomberg.net; Poppy Trowbridge in London at ptrowbridge@bloomberg.net

Last Updated: August 22, 2008 13:21 EDT