Meyer Shields, an analyst with Baltimore-based Legg Mason, said the investors perception of the brokerage sector is becoming increasingly negative as the soft market affects earnings, and there appears to be growing temptation among carriers to increase competition and underprice their products.

Richmond, Va.-based HRH said it expects fourth-quarter net income between 45 cents and 48 cents per share, compared to 55 cents per share for the same period in 2003.

In a statement, Martin L. "Mell" Vaughan III, HRH chairman and chief executive officer, said the shortfall is due to continued investments in the firm's expansion into large accounts and legal, compliance and claims expenses.

The legal, compliance and claims expenses increased approximately $4 million from the same period last year. The expenses increased $6.5 million for the year compared to 2003.

The broker also experienced an approximate $2.4 million fourth-quarter decrease in override and contingent commissions. However, organic growth has increased 3 percent.

Revenues are expected to be up 10 percent for the year, fueled by acquisitions and new business.

"We believe that most of the fourth-quarter expenses ultimately will fortify our competitive strengths and enable us to take advantage of rapidly emerging long-term industry growth opportunities," said Mr. Vaughn.

In reaction, two investment firms, Sandler O'Neill & Partners, L.P. and Legg Mason Inc., downgraded HRH to sell.

Both have relationships with HRH and provide services to the firm.

Nick Pirsos, a managing director with New York-based Sandler O'Neill, said HRH has experienced a couple of missteps of late, "some of which are out of their control," such as the ongoing investigation into insurance contingency fees by state attorneys general and insurance regulators, and the soft market.

Mr. Pirsos said other problems exist, notably the integration of Hobbs into the HRH framework. The firm is also going through a transition from a middle-market broker to a mix of middle-market and large accounts.

"It is taking a toll on investors and the question is, when will it start performing again?" he said. "We still have not seen a model that will work."

Mr. Shields, the Legg Mason analyst, said the firm is "not optimistic" about the brokerage sector.

Adding to the negative perception of such stocks, he said, is the contingency fee abuse scandal. The feeling, said Mr. Shields, is that eventually these insurer incentive payments for business will be eliminated, reducing earnings more, and there appears to be nothing in place to replace the loss.

The bid-rigging activity that Marsh brokerage has been accused of "was so bad," said Mr. Shields, that it "has cast a pall over the industry."

He said HRH's activity to secure large accounts as some policyholders seek to move away from the big brokers, may be a good move long term, but in the short term it is proving expensive.

For the sector as a whole, Mr. Shields noted that Legg Mason has put sell ratings on Marsh and Aon, but a hold on Willis. He said Willis, while it too is susceptible to the problems other brokers are facing, may be in a good position to benefit from the "turmoil" at Marsh.

"This is not to say that these are bad companies," he pointed out, "but it is very difficult sector wide."