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Public or private, risk managers say broker service quality matters most

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Risk managers are not losing any sleep over the prospect of their publicly held insurance brokerages going private.

They say so long as their brokers continue to deliver quality service, it makes little if any difference to them as to whether the firms are owned by shareholders or private equity firms.

These risk managers--some of whose own companies also have gone private--point to Willis Group Holdings Ltd. as a reassuring example. They say there was no noticeable impact on the quality of Willis' operations between 1998, when Kohlberg Kravis Roberts & Co. took the brokerage private, and its 2001 initial public offering.

The one possible concern is that a privately held broker, which has fewer reporting requirements, may be less forthcoming in providing information about its operations, say some risk managers. The fact that privately held companies are not subject to the Sarbanes-Oxley Act's governance requirements may be an issue as well.

Private equity funds have been particularly active in the insurance brokerage business of late. Recent deals include the $1.4 billion buyout of Briarcliff, Manor, N.Y.-based USI Holdings Corp. and the $1.9 billion buyout of Chicago-based Hub International Ltd., both of which were publicly held, and the $1.1 billion buyout of Newport Beach, Calif.-based Alliant Insurance Services Inc. from another private equity fund.

Meanwhile, rumors continue to circulate of hedge funds' interest in other brokerages.

Nevertheless, most risk managers say they are not worried.

"I don't know that it makes any difference," said James D. Hinton, vp-risk and insurance at Nashville, Tenn.-based HCA Inc. "I mean, private equity's taken over lots of companies," including HCA, which went private in November 2006.

Thom Hansen, director of risk management at Little Rock, Ark.-based Alltel Corp. Inc., which also is being taken private, said he does not believe a brokerage's ownership affects the quality of service it provides its clients.

Some clients may be dropped because their inclusion does not create a good client mix, but "that's an everyday business decision that any company would make, not just a brokerage company," said Mr. Hansen.

"Clearly, there are a lot of financial controls and reporting controls for publicly held companies," said Carolyn Snow, director, insurance and risk management at Louisville, Ky.-based Humana Inc. "On the other hand, there are a lot of privately held, regional brokers that have excellent reputations for management and service."

"I believe the real issue for us, as risk managers, is...around quality of service, quality of the personnel, in particular the support staff, and transparency in all the transactions," she said. "Publicly held or privately held, to me, just doesn't have that great a significance."

"In the overall scheme of things, history has proven...that both private and publicly held companies can be very successful," said Lance Ewing, vp-risk management in Memphis, Tenn., for Harrah's Entertainment Inc.

"It all comes down to the individuals and the people that are being represented to the risk management professionals," said Mr. Ewing. "I'm more concerned about the quality of service we're receiving" and if the brokerage servicing the account has the necessary resources, knowledge base, chemistry and competency. "I'm not overly concerned about who owns them," he said.

Service quality and insurance market access are among the factors that Mark Carufel, risk manager for Sterling Heights, Mich., says he looks for in an insurance broker. "I don't know (that) it matters" who owns the brokerage as long as those qualities are met, said Mr. Carufel.

Some risk managers point to transparency, however, as a potential issue.

Gerald Blanchard, risk manager for the Lansing Board of Water & Light in Lansing, Mich., said, "As long as there's some transparency and disclosure of what they're doing on our account," he would have no concerns about brokerage ownership.

"I think you can do a perfectly good job either way," said Tom Vance, risk manager for the city of Anaheim, Calif. In fact, being a publicly held firm can be negative because of the focus on results in response to shareholder demands.

"My only concern is there is a good deal of transparency that comes along with being a publicly held company, including financial statements," he said. "I don't think private companies will have to provide as much information, even to their insurance regulatory authorities in the individual states."

Bill McMann, risk manager for Riverside, Calif.-based Fleetwood Enterprises Inc., pointed to the Sarbanes-Oxley Act. "I think it boils down to one primary issue for me, which is if the brokers go private, they're not going to be subject to (the Sarbanes-Oxley) requirements as a private entity the way they were as a public corporation," he said.

"As the risk manager of a public firm, we go through a lot of audit processes for outside auditors, and what that's done for me, personally, is given me not only a comfort factor of what goes on inside our company, but also it gives me a greater comfort factor for outside entities that I deal with," knowing they have to go through these processes as well, Mr. McMann said. As a result, "if the big names go private, there would have to be some kind of discussion about what kind of governance is in place."

"I would just have a little bit of concern simply because the private equity money can be good and it can be bad," said Judith S. Camp, director of insurance and risk management for Plano, Texas-based Triad Hospitals Inc. "I almost think it's just going to be a wait and see" situation.

Ms. Camp said her concern centers around the amount of influence the private equity money is "going to have on how the company conducts its business."

Some private equity funds will try not to "upset" matters if they see a great opportunity to make some money, "think the management team is great" and that it treats its clients well, said Ms. Camp.

But, "you just don't know whether that's going to be the case," Ms. Camp said.