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2016 brokerage revenue: $1.03 billion
Percentage increase (decrease): 0.2%
USI Insurance Services L.L.C. is set to be transformed after two blockbuster deals in 2017.
In a $4.3 billion transaction announced in March, Kohlberg Kravis Roberts & Co. L.P. partnered with Montreal-based pension fund Caisse de dépôt et placement du Québec to buy USI, with KKR using money directly from its balance sheet rather than an investment fund.
Then, three months later, USI announced that it would acquire most of the brokerage operations of Wells Fargo & Co., which had been rumored to be for sale for several months. Terms of that transaction, which roughly doubles USI’s revenue to about $2 billion annually, were not disclosed. The deal is expected to close in fourth quarter, therefore, it is not reflected in Business Insurance’s 2017 rankings.
The KKR purchase was novel in that it was from the private equity firm’s own balance sheet. It could also give USI added long-term stability.
“It’s not a typical KKR investment because it’s direct from the balance sheet. There is no fund with a time horizon and no investors who want their money back. So it’s not your typical private equity structure,” said Julie Herman, a director for S&P Global Ratings in New York.
“I think the structure is very much set up to be a longer-term investment than a traditional private equity investor or the traditional ownership structure of USI past,” Ms. Herman said. “Having the potential longer-term investors gives USI more flexibility.”
Mike Sicard, chairman and CEO of USI, said the deal was designed to “keep USI private for the long-term future. That creates for USI a long-term view to invest and innovate.”
“I have a favorable view of USI and Mike Sicard … They have made a lot of strides from where they were several years ago,” Ms. Herman said, noting that the brokerage has improved its organic growth rate.
USI reported brokerage revenue of $1.03 billion in 2016, up slightly from 2015. The brokerage moved into 10th place in Business Insurance’s ranking of the world’s largest brokers for 2017, ahead of its acquisition target Wells Fargo Insurance Services USA Inc., whose revenues slipped.
USI bought about 40 of Wells Fargo Insurance’s offices in 2014, paving the way for the acquisition of the whole business.
The previous transaction “gave USI a familiarity with how the integration process would work and therefore probably gave them more confidence competing for this acquisition,” said John Wepler, chairman and CEO of Marsh, Berry & Co. in Woodmere, Ohio.
“USI seems a logical buyer given its purchase of some 40 insurance brokerage offices from Wells Fargo in 2014,” said Bruce Ballentine, vice president and senior credit officer at Moody’s Investors Service Inc. in New York. “The proposed acquisition of Wells Fargo Insurance Services USA would give USI a big jump in market presence, but also a major integration challenge.”
USI has a good reputation and a good process in place for integration, according to Timothy J. Cunningham, managing director of Optis Partners L.L.C. in Chicago. “It’s going to take a lot of work and they are probably the best ones to make it happen,” he said.
Others agreed that integration is a USI strength.
“Some by design make acquisitions and leave the acquired entities very much alone. USI, on the other hand, brings acquired entities into the USI system. We think that paves the way for good organic growth over time,” said Mr. Ballentine.
“They have a much more integrated operating model relative to a lot of their peers, especially since Sicard took over,” Ms. Herman said.
Mr. Sicard said that he viewed the acquisition of Wells Fargo’s insurance business as a merger and that he developed a substantial respect for the business and management working on the 2014 transaction. Wells Fargo insurance head Tim Prichard will remain with the business and some 3,000 Wells employees will be offered employment, Mr. Sicard said.
“I think the Wells Fargo business looks very much like the USI business,” with its strong middle-market presence, said Mr. Cunningham of Optis.
“I believe this is a uniquely good fit,” said Mr. Wepler of Marsh Berry. “USI has the vast majority of its business in the middle market, and for Wells Fargo the acquisition that gave them much of their present scale was that of Acordia, a middle-market broker. The segments of the business align very well.
Commercial insurance brokers continue to face strong headwinds in 2017 as they strive to grow in the soft market and a still-sluggish economy.