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Crump to combine with rival wholesaler

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NEW YORK—BISYS Group Inc.'s wholesale brokerage operations will be combined with Crump Insurance Services Inc. under a deal in which Crump's owner, private equity firm J.C. Flowers & Co. L.L.C., is to purchase those operations as well as BISYS' retirement services business for an estimated $650 million.

Under terms of the deal announced last week, New York-based Citigroup N.A. is to acquire and retain BISYS, which also provides outsourcing solutions for the financial services sector, in a transaction valued at about $1.45 billion.

Simultaneously, Citi is to sell BISYS' Retirement and Insurance Services division to New York-based Flowers, making the net cost of the transaction to Citi about $800 million.

Flowers plans to combine Crump's commercial insurance business with BISYS Commercial Insurance Services to create an operation with greater scale, Roseland, N.J.-based BISYS said in a statement.

The combination of the Crump and BISYS operations "will introduce an element of stability into the overall market" and is positive for both the market and the ultimate insurance buyer, said John L. Ward, chief executive officer of Cincinnati-based Cincinnatus Partners L.L.C., an insurance industry adviser.

In addition, Flowers' acquisition of BISYS' life insurance and retirement services business could create a leading integrated provider of wholesale insurance brokerage and retirement services, according to BISYS.

BISYS, which said the deal is subject to shareholder approval and regulatory approval in the United States, Ireland and Bermuda, said the deal is expected to close in the second half of this year.

In its annual report for the year ended June 30, 2006, BISYS' insurance services segment reported $246.8 million in revenues and $62 million in operating earnings. Its investment services unit segment reported $596.1 million in revenues and $71.6 million in operating earnings.

BISYS Commercial Insurance Services ranked No. 6 among U.S. wholesale insurance brokers, with $1.02 billion in 2005 wholesale premium volume, according to Business Insurance's 2006 ranking. It was just behind Crump, which had an estimated $1.25 billion in 2005 wholesale premium volume.

Among 401(k) administrators, BISYS ranked No. 3 as of June 30, 2006, with 1.7 million unbundled participants, according to another BI ranking.

Observers point out that BISYS said last August that it was exploring "strategic alternatives," and the deal announced last week took an unusually long time to complete.

This "tells me that there were relatively few buyers that came to the table and took a serious look at the operation," said Mr. Ward.

In recent years, BISYS has faced legal and regulatory issues.

The company reached a settlement with the Securities and Exchange Commission last year following an investigation of its marketing and distribution arrangements in its mutual funds services business, under which it agreed to pay $25.1 million in disgorgement and prejudgment interest, according to its annual report.

It also faced shareholder litigation concerning its 2004 restatement of several years' of earnings, which lead to a $66.5 million settlement last year, according to the annual report.

Mr. Ward said the structure of the deal, with the company's operations split up, is unusual. "It's not often that two different firms come together to buy different pieces of the same company, and that makes it somewhat of a unique transaction," he said. The insurance services segment "was just not a fit" with Citi's operation.

However, "the property/casualty commercial brokerage operation is an excellent fit with the Crump operation, and when you profile the two operations, they're comparable in terms of size, number of employees and operating profile," Mr. Ward said.

"There's been a cloud of uncertainty relating to BISYS for the last year or two with their problems," said Mr. Ward.

This deal "brings a conclusion to that in a logical way," he said.

John Wicher, principal of San Francisco-based John Wicher & Associates, said the deal is a good one for insurance buyers. Flowers is in financial services, owns existing excess and surplus operations, and as a private company is not subject to earnings volatility--all of which are "positive things for the ultimate insured," he said.

Timothy J. Cunningham, a principal with OPTIS Partners L.L.C. in Chicago, said the deal gives Crump "a little more clout, but I don't see it as a real major issue." The business continues to be based on the relationship between the broker and the wholesaler, he said.

However, Rob Lieblein, president and managing principal with WFG Capital Advisors L.P. in Harrisburg, Pa., said the deal is "going to make the market more competitive on the wholesale side as you have another private equity player acquiring a wholesale broker."

Private equity firms became a market factor following investigations of brokerage compensation practices by state officials in 2004 and 2005, which raised questions about whether retail brokerages' ownership of wholesale operations creates conflict of interest.

In 2005, New York-based Marsh & McLennan Cos. Inc. sold Dallas-based Crump to Flowers and Aon Corp. sold Atlanta-based Swett & Crawford Group to Dallas-based HM Capital Partners L.L.C., a private equity firm that then was known as Hicks, Muse, Tate & Furst Inc.

Willis Group Holdings Ltd. also sold its Stewart Smith Group to independent wholesaler American Wholesale Insurance Group Inc. in 2005. San Francisco-based private equity firm Parthenon Capital L.L.C. now owns a majority interest in the Charlotte, N.C.-based AmWINS.