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NEWPORT BEACH, Calif.--The recent boom in private equity investments in the insurance brokerage business took another twist last week when the Blackstone Group bought out another private equity firm's interest in Alliant Insurance Services Inc. for a reported $1.1 billion.
The deal will bring New York-based Blackstone a brokerage with a firm hold in several specialty areas. Alliant is ranked the 13th largest broker in the United States, according to the 2006 Business Insurance broker rankings.
The purchase of Newport Beach, Calif.-based Alliant, which is expected to close by the end of August, comes on the heels of private equity buyouts of rival retail brokers USI Holdings Corp. of Briarcliff Manor, N.Y. and Hub International Ltd. of Chicago. Though in those cases, the brokerages were public traded firms that were taken private through the deals.
Private equity interest in the retail brokerage sector has been accompanied by several private deals in the wholesale brokerage sector.
And investors' interest in the brokerage industry is not expected to let up anytime soon, observers say.
The only surprising thing about the Alliant deal is that private equity firm Lindsay Goldberg & Bessemer of New York is selling its stake in the brokerage after acquiring it only about 18 months ago, said John L. Ward, chief executive officer of Cincinnati-based Cincinnatus Partners L.L.C., an advisory firm specializing in insurance.
Regardless of which private firm is behind Alliant the deal is not expected to affect the broker's clients in the same way that a buyout by a rival brokerage might, observers say.
"From a customer standpoint I don't see any change," said Tom Vance, risk manager for Anaheim, Calif., which uses Alliant to place it property coverage and for administration of an excess liability pool.
Alliant has a large book of public entity business as well as specialty practice groups for energy, health care, Indian nations, construction and several other industries. It also provides employee benefits broking and consulting services and has about 20,000 commercial clients.
"I don't think it's going to impact us one way or the other," said Tom Phillips, risk manager for Santa Monica, Calif., which also uses Alliant for some of its property/casualty risks.
Alliant said Blackstone's resources will help it remain independent and provide a larger platform from which to grow through acquisitions and expanding its risk management offerings for large accounts.
Blackstone says it manages about $88 billion in assets, whereas Lindsay Goldberg says it has more than $5 billion in equity capital.
"We have had very, very direct discussions with Blackstone about our business plan," said Tom Corbett, Alliant's chairman and chief executive officer.
"We would not let them get involved and they would not get involved if there was an expectation that there would be some sort of change to undermine the success that we have had historically," he said.
Alliant also will benefit from providing risk services for roughly 100 companies owned by Blackstone, Mr. Corbett said. Blackstone will own a majority stake in Alliant "but whether that is 51% or 60% or 65% will be determined over the next 60 days," he said.
The precise share controlled by Blackstone will depend on the shares sold by Alliant employees and managers. The employees' and managers' stake, however, is expected to remain substantial in the deal, which is expected to close within 75 days of its announcement.
Although the deal marks Blackstone's entry into the insurance brokerage business, it is not its first commercial insurance industry involvement. Blackstone is a shareholder in Bermuda-based Aspen Holdings Ltd. and Ariel Reinsurance Ltd.
Blackstone's participation in the brokerage sector adds another significant investor to the mix of those interested in insurance broking, Mr. Ward said.
"It's another new and significant player coming into this market, so it adds to the dynamics and the interest in watching how this is going to play out and what the impact is going to be," Mr. Ward said.
Alliant itself previously has been part of the mergers and acquisition trend. Lindsey Goldberg and Alliant's management bought the brokerage in 2005 and last fall Alliant purchased the U.S. property/ casualty and employee benefits retail brokerage business of U.K. broker Jardine Lloyd Thompson Group P.L.C. for $100 million.
That purchase likely gave Alliant enough scale to attract Blackstone's interest in paying a hefty enough price to entice Lindsay Goldberg to flip the broker so soon after purchasing it, observers said.
Lindsay Goldberg did not return calls seeking comment, and the parties involved in the sale of Alliant to Blackstone declined to discuss terms of the deal. But reports say Blackstone is paying $1.1 billion for the brokerage.
Interest in distribution
Insurance brokers are attractive to private equity firms because they produce stable returns with little risk, said Timothy J. Cunningham, a principal with OPTIS Partners L.L.C. in Chicago.
"Insurance distribution is a fairly simple business," he said. "So consequently, it's a fairly simple business for purchasers like these private equity firms to get into."
Heightened private equity firm interest in brokers is expected to continue despite some challenges to revenue production, such as a soft commercial insurance pricing and the contingent commissions issue, Mr. Ward said.
Alliant's Mr. Corbett agrees that private equity money will continue seeking to invest in brokers. Brokerages require little capital investment and the industry's fragmented nature provides opportunity for Alliant with Blackstone as a parent to make acquisitions, he said.
"We believe that there is a need for consolidation, and we think it will step up quite a bit over the next three to five years," Mr. Corbett said.