York Risk Services provides property, casualty and workers' compensation insurance to more than 6,300 clients in the United States.
The company, with headquarters in Parsippany, N.J., has handled claims for all of the major hurricanes over the past 40 years, as well as claims from the World Trade Center attacks on Sept. 11, 2001. It employs about 3,800 workers based in 75 offices.
"We are excited... to continue York's impressive track record of growth both organically and through strategic acquisitions," Robert Le Blanc, a senior managing director with Onex, said in a statement accompanying the announcement.
The deal is expected to close in the third quarter.
Canaccord Genuity analyst Scott Chan said Onex's purchase of York makes sense because it allows the company to use some of its large cash balance.
Prior to the deal, Onex (TSX:OCX) had about US$2.6 billion in cash, which made up about 40 per cent of the company's net asset value, he said, adding that this acquisition will help support future growth.
Chan said that it's been difficult for private equity firms to find worthwhile investments for their cash.
"It's been hard for Onex because the market has been so strong and valuations have increased so much," he said. "It's been a seller's market and not a buyer's market."
Chan rated Onex's stock as buy with a C$73 target. On the Toronto Stock Exchange, Onex shares closed 19 cents lower at C$63.66.
Onex did not disclose financials or evaluations for York, but said it will make an equity investment of about $560 million through its Onex Partners III investment fund, with other partners as co-investors, including management from both companies.
This isn't the first time Onex has invested in the insurance business.
In 2012, it purchased USI Insurance Services for approximately US$2.3 billion.
Private equity firms like Onex have been attracted to the insurance sector because of its positive performance during financial downturns and free cash flow.
Chan said he expects Onex will use York to acquire other small insurance providers.
"For these large-cap funds that Onex invests in, they do like to buy leaders in the space and then increase that leadership by buying out lower-tier firms within that same segment," he said.
"They tend to like to buy market leaders already and in this case, then consolidate within York Risk Services."
Onex manages approximately US$19 billion in private equity assets, credit securities and real estate.
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