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SAN FRANCISCO-The plans for a consortium of insurers and one major bank to buy a majority stake in broker USI Holdings Inc. exemplify a metamorphosis occurring in the insurance industry, observers say.

USI last week announced that CNA Financial Corp., the Equitable Cos., Orion Capital Corp., Provident Cos. Inc., Travelers Insurance Cos., Zurich Centre Investments Inc. and Chase Manhattan Corp. made private equity investments totaling more than 50% in the San Francisco-based insurance brokerage.

Terms of the transaction were not disclosed, but USI will use the capital to redeem shares of outstanding common and preferred stock, and retain some of the proceeds for general corporate purposes, a company statement said.

"This is the first time in the history of our industry that the major financial services companies have all joined hands as equity investors in a distribution system," boasted Bernard H. Mizel, chairman and chief executive officer of San Francisco-based USI.

But risk managers aren't convinced that such consolidation is a blessing.

And one day after the USI announcement, Willis Corroon Group P.L.C. announced that a consortium of investors, including five insurance companies, had made a $1.56 billion offer to acquire a majority stake in the broker (see related story).

"Insurers are devising all kinds of methods to have some influence over the distribution system," observed Russell Miller, president of San Francisco-based investment banker Russell Miller Inc.

With the consolidation of the brokerage industry in recent years, "insurance companies want to prevent a small handful of players from being the dominant force in any segment of the business," Mr. Miller explained.

As more and more brokers merged, "insurers got concerned that the balance of power would shift from the risk bearer to the distributor," he said.

"We're seeing consolidation throughout the industry. We're seeing changes in the way the industry is structured, and this is wholly in line with that," said an insurer source who asked not to be identified.

The investment also will enable USI to compete more effectively in a market increasingly dominated by megabrokers, such as Aon Corp. and J&H Marsh & McLennan Inc., other observers pointed out.

"The supply of capital for this company is very important given its growth strategy," said Jay Cohen, vp of Merrill Lynch & Co. in New York. "The company is very focused; it knows what it wants to achieve."

Forming relationships with these insurers and Chase Manhattan will give Mr. Mizel's USI more ideas and products to distribute, he said.

"It should be a healthy relationship-more than just a passive investment-so they will add value as owners of this company given his strategy of distributing different types of products," Mr. Cohen said.

USI, which was formed in 1994 with funding from private venture capital sources, has grown into the 11th largest insurance broker in the world, and seventh largest U.S. broker, with 1997 brokerage revenues of $236.2 million (BI, July 20).

While most of USI's growth can be attributed to acquisitions-it completed 72 transactions in four years-it also is generating new business through the cross-selling opportunities the acquisitions are providing, according to Mr. Mizel.

"USI is the only fully integrated financial services company in the United States," he said. "It is a company that offers a multiplicity of financial services-both insurance and other financial services-to middle-market customers."

USI's producers are "trained to think that if they do not offer a wide menu of products and services to their clients, that they not only are leaving all the profit on the table, but basically they're not serving the needs of their clients efficiently and effectively," Mr. Mizel said.

Besides general and specialty property/casualty insurance, USI also offers insurance-related financial services such as employee benefits, third-party administration, life insurance and related consulting and insurance wholesale operations.

While the new group of investors will hold a majority interest in the brokerage, USI's management will maintain control of operations.

In addition, USI's management-which also includes John Addeo, president and chief operating officer, and David L. Eslick, executive vp-will continue to own approximately 19% of the company, Mr. Mizel said.

Some of USI's initial backers also will retain part of their investment in USI, though he declined to specify how much.

"Nobody has a controlling vote in this company. The management of USI is overseeing the company," Mr. Mizel insisted.

The investment by these leaders in the insurance and financial services industries will enable USI to meet its objective of offering a diverse assortment of financial products and services-in addition to traditional insurance-to its clients, Mr. Mizel explained.

The investment will enable "the perpetuation of this company and its ability to penetrate the middle market in a way that is not being accomplished by anybody in the United States," Mr. Mizel said.

USI targets mainly middle-market insurance buyers, defined as those with between 100 and 2,000 employees.

Mr. Mizel actually began recruiting the investors last year, with Zurich Centre Investments and Chase Manhattan coming aboard initially.

He explained that Switzerland-based Zurich Centre shared USI's vision of being a one-stop financial services market because that strategy already was being employed by banks throughout Europe.

Furthermore, Zurich Centre's recent acquisition of the Scudder Group will provide some additional cross-selling opportunities for USI, which next plans to expand into individual asset management and securities distribution, he added.

Last October, New York-based Chase Manhattan announced it was entering into a strategic alliance with USI to sell commercial property and casualty insurance products and employee benefit services to Chase's middle-market customers (BI, Oct. 13, 1997).

CNA President Dennis Chook-aszian decided to invest because he shares USI's vision of the future, according to Mr. Mizel.

"Dennis is a great visionary in our industry. He is a man who sees things much more clearly than other people in our industry, clearly understands what is happening in terms of the transformation of the distribution of financial services, and it's indicated by the kind of diversity he has in CNA," Mr. Mizel said.

"We have had multiple discussions regarding what was necessary to get even further penetration of CNA products through our company," he continued.

CNA is currently USI's largest insurance market, according to Mr. Mizel.

After CNA joined the syndicate of investors, Mr. Mizel approached Equitable, a subsidiary of AXA Group that is a leading direct writer of life insurance products with 7,500 career agents.

"Equitable was looking at alternative distribution systems," he explained, In addition, the access to Equitable's financial products will enable USI to pursue its objective of becoming individual asset managers, Mr. Mizel explained.

"This absolutely ties in," he said.

At the same time, USI will offer Equitable agents access to products and services that they currently cannot provide to their clients, such as employee benefits and property/casualty insurance, he added.

"Basically our objective is to double the size of our sales team within the next two years with life agents," Mr. Mizel said.

USI currently has 325 producers with operations in 21 states.

"We share a common philosophy with USI to find innovative ways of responding to the evolving financial and insurance needs of middle-market business customers," said Michael Hegarty, vice chairman and chief operating officer of The Equitable Cos. and former vice chairman of Chase Manhattan.

Provident Group, which is partially owned by Zurich and has ties to Equitable and CNA through its EquiSource brokerage unit, will give USI access to disability income products.

"They also fit into our banking agenda because disability income is a very important type of sale to bank customers plus they are very interested in worksite marketing," Mr. Mizel explained.

Orion Group, a specialty underwriter, gives USI access to specialty commercial lines, and Travelers was included because its management had faith in USI's model, according to Mr. Mizel.

"We looked at it as a good investment in an industry that we feel we know very well," said a Travelers spokesman.

"For Orion it was a very simplistic decision. USI was a good existing business partner and they presented us with an excellent economic investment opportunity," said W. Marston Becker, chairman and CEO of Orion in Farmington, Conn.

Risk managers appear unconvinced that USI's move will provide more balance. "This is an example of the continuing erosion of competition in the brokerage industry," observed Steve Grebenstein, risk manager for the San Diego Transit Corp. "That's the concern of all the risk managers I know."

The other investors involved either declined to comment or did not return phone calls.