Insurance brokerage giant Willis Group will buy Hilb Rogal & Hobbs (HRH), the United States' eighth-largest broker, for $2.1 billion, representatives of the brokerages announced Sunday.
The merger came on the heels of last week's amendment to the 2005 ban prohibiting the largest brokerages from collecting contingency commissions from insurers. If a large brokerage buys a commission-collecting smaller brokerage, the amendment now allows the large brokerage to collect commissions on existing business for the next three years, according to a Times Online report.
Although the move will likely allow the newly-formed company, called "Willis HRH" in North America, to more than double its revenues while receiving an additional $40 million to $50 million in contingency commissions for the next three years, it could also present opportunities for the market's smaller firms.
"… The tendency anytime you have a merger of brokerage firms is to move upstream -- everybody seems to target the big fish, or even the whale. Sometimes [the large brokerages] forget the small medium-sized clients," Jere Cowden, president of Pittsburgh-based Cowden Associates, says. (Listen to the rest of Cowden's remarks.)
Mergers such as Willis HRH can also force the company to shed employees. These castoffs could bring technical talent to smaller firms or start their own firms, Cowden said.
Across the newswires:
"Combining these complementary businesses will substantially improve Willis's position in important areas in North America including California, Florida, Texas, Illinois, New York, Boston, New Jersey and Philadelphia, and in key business lines. In particular, it will more than double Willis's North America revenues in Employee Benefits, an already strong area of expertise that Willis has targeted for further growth." Willis Press Release
"The transaction -- in which Willis will pay $1.7 billion for HRH's equity and assume $400 million of its debt -- come as brokers seek to mitigate the effects of falling rates for personal and casualty insurance. It is also seen as a possible harbinger of further consolidation following last week's amendment on US rules governing contingent commissions, or bonuses paid by insurers to brokers." Times Online
"The transaction will create a more 'robust and diversified global company with tremendous added strength in key markets and business lines,' [Willis chairman and CEO Joe Plumeri] added." National Underwriter
"Willis' purchase of the world's ninth-largest brokerage, according to Business Insurance's 2007 rankings, will significantly expand its presence in North America and in the middle market, Mr. Plumeri said. Willis will remain the third-largest brokerage on completion of the deal." Financial Week
