Insurance Broker Willis to Acquire HRH


No. 3 global brokerage Willis Group agrees to buy Hilb Rogal & Hobbs in a $2.1 billion deal that could point to a fresh wave of consolidation

In what is believed to be the insurance brokerage industry's biggest deal in a decade, Willis Group Holdings (WSH) has agreed to buy Richmond (Va.)-based Hilb Rogal & Hobbs (HRH) in a deal valued at $2.1 billion. The deal will cement $2.6-billion-a-year Willis' standing as No. 3 in the industry globally, by adding HRH's $800 million a year in revenues.

The deal, to be detailed by executives from both companies on June 9, could signal a new wave of consolidation in the insurance brokerage field. Industry leaders Aon Corp. (AOC) and Marsh & McLennan (MMC), along with Willis, have been limited in their abilities to buy smaller players by agreements they made with state attorneys general to shun certain revenues, called "contingent commissions," that many potential target companies continue to collect. The brokers last week reached an agreement with the New York Attorney General that will permit them to acquire such target companies and then phase out such commissions over three years.

HRH collects some $40 million a year in such commissions—an amount that Willis executives expect to replace with other revenue over time. Willis Chief Executive Joseph Plumeri has long been a critic of such commissions, which insurers pay to the brokerage firms as rewards for placing business with them. The attorneys general, particularly former New York A.G. Eliot Spitzer, derided the payments as secret kickbacks that taint a broker's objectivity in finding the best insurance coverage for clients. Spitzer forced a settlement on the big brokers that deprived them of hundreds of millions of dollars annually in such commissions.

Standout Insurance CEO

Plumeri, in an interview, said the deal for HRH will dramatically boost London-based Willis' profile in North America. It will double the outfit's revenues in the market to about $1.5 billion annually. It will also sharply increase Willis' business in finding employee-benefits providers for corporate clients, a fast-growing area for the outfit. "When we looked at the initiatives that would shape our future and looked at our goals in the North American footprint, things like employee benefits and personal lines, Hilb appeared to be the best possible place to go," Plumeri said June 8.

The Willis CEO had been in discussions with Hilb when the new deal with New York Attorney General Andrew Cuomo's office cleared the way for the acquisition. Plumeri said he had been seeking just such a change from the Attorney General's office for a couple of years.

Plumeri has stood out from the pack in the brokerage world ever since he got into it in 2000. Leveraged-buyout giant Kohlberg Kravis Roberts, which had bought then-troubled Willis for about $3 a share in 1998 and took it private, brought him in to turn the company around. As chief executive of Citibank's North American operations and head of Travelers Group's Primerica financial-services division, he knew little about the insurance industry but could shake up a sales organization and boost its numbers. He took Willis public for $13.50 a share in mid-2001 and it now trades at about $36 a share, after climbing above $46 last year. It boasts the industry's heftiest profit margins.

"I know about people making clients feel good, about the service they get, and about motivating people to do more business," he said, adding that one of the main things he brought to Willis was a sense of direction and enthusiasm. "There's a real sales culture in the company and a sense of accountability for people to go out and do what the company does best, which is to sell insurance. Everybody understands what their job is; everybody sells at this company. I sell. If I'm not the biggest producer of new business in a year, I'm not doing my job."

Acquisition Wave Expected

The deal for HRH comes at a time when stock prices in the industry have been depressed amid aggressive brokerage competition and the general financial-services downturn. HRH's stock topped $50 a share in the spring of 2007 and slipped below $29 in April, its lowest level since December, 2003. It closed at 30.89 on June 6. Willis' shares, above $46 in the spring of 2007, slipped below $33 in March and closed at 35.88 on June 6. Willis is paying $46 a share in cash and stock for HRH, which amounts to about $1.7 billion, plus assuming $400 million in debt to take the deal's value up to $2.1 billion.

Industry observers said the deal with the New York Attorney General will help Aon, Marsh, and Willis, strengthening their hands to buy up smaller rivals. That puts such rivals, like HRH, at a disadvantage with the capital-rich big players. "The key takeaway is this opens up the domestic M&A [mergers-and-acquisitions] game for the global brokers as they can now compete effectively vs. smaller brokers on deals," Citigroup (C) analyst Keith Walsh wrote in a June 5 report on the Attorney General agreement.

Walsh said the pact would have the most negative impact on HRH because it has been a big buyer, and thus would face more competition for its acquisitions. The outfit last year acquired Banc of America Corporate Insurance Agency, an acquisition that added some $66 million to its sales. Walsh suggested that Willis would be in the best position to gain from the settlement: "Joe Plumeri clearly has a preference to do deals and a strong track record to match."

Joseph Weber is BusinessWeek's chief of correspondents, based in Chicago.

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