UPDATE 2-Insurance broker Willis to buy rival for $1.7 bln

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By Lilla Zuill

NEW YORK, June 8 (Reuters) - Willis Group Holdings Ltd. (WSH.N), the world's third largest insurance brokerage, will buy smaller rival Hilb Rogal & Hobbs Co HRH.N for $1.7 billion, looking to boost business as insurance rates soften.

Willis will also take on $400 million of HRH debt in a cash-and stock deal valued at $46 a share, the two firms said in a statement on Sunday, a near-50 percent premium to HRH's closing price of $30.89 on Friday.

Willis' acquisition of HRH is the largest transaction for this industry since its biggest rival Marsh & McLennan's (MMC.N) 1998 acquisition of Sedgwick Group.

Domiciled in Bermuda and with headquarters in New York and London, Willis sees the acquisition adding to cash earnings per share from the time the purchase is closed, and annualized cost savings of about $140 million by 2012.

The industry helps commercial clients find insurance coverage for a wide range of risks, but a softening market for most insurance lines has eaten away at revenue, which is largely derived from commission and fees, leaving companies to pursue growth through deals such as this one.

Willis said the deal with HRH, a middle market insurance broker, will help it expand its footprint in North America, effectively doubling its revenue in the region. Post-merger the group will be known as Willis HRH in North America.

HRH's revenue in 2007 was $800 million, with all but $57 million of that derived from the North American market.

Together, Willis and HRH will have revenue of about $3.4 billion, based on 2007 figures, trailing Aon's $7.5 billion in 2007 revenue, and Marsh & McLennan's consolidated revenue from all units of $11.4 billion.

In the first quarter, Willis' net income slipped nearly 2 percent to $166 million, largely on severance costs and other one-time items. Its shares have fallen by a fifth in the past year.

Richmond, Virginia-based HRH is the 8th largest U.S. insurance brokerage according to information on its website, with more than 140 offices throughout the United States, and two in the United Kingdom.

Willis said, over time, it plans to repurchase a majority of the shares issued in connection with this deal under an already approved $1 share billion buyback plan. (Editing by Michael Urquhart)