Hilb, Rogal & Hobbs Company reported second-quarter income dropped 23 percent due to higher legal and claims expenses, loss of contingent commissions, lowered retention rates and investment in new employees.
Second-quarter results for the Richmond, Va.-based insurance broker showed net income decreased $4.7 million, from $20.5 million, or 56 cents a share, in 2004, to $15.8 million, or 44 cents a share. Revenues increase $14.3 million, going from less than $148 million to $162 million.
For the six months ending June 30, net income was down 3 percent, or $1.2 million, going from $44.7 million, or $1.23 a share, to $43.5 million, or $1.20 a share. Revenues were up 13 percent, or more than $39 million, going from less than $306 million to $345 million.
Martin L. "Mell" Vaughan III, chairman and chief executive officer, during an analyst's conference call today said the company is dealing with the soft-market declining rate cycle by writing new business and bringing in new talent.
He said business is generally seeing premium rate decreases of 10-to-12 percent, which is significant for one acquired portion of their operation, Hobbs. Mr. Vaughan explained that the unit has a large amount of property accounts. Property, he noted, continues to see significant rate decreases.
The firm's performance has been hurt by lower retention rates, he continued, due to the "culling" of sales people who have taken accounts with them. This has lead to legal actions against the former employees for violation of contract.
The firm also is the target of a number of investigations related to the industrywide probe of brokers' hidden fee arrangements with insurers to fix prices and steer business to certain carriers in exchange for lucrative contingent commissions based on business volume.
Subpoenas seeking fee arrangement information from the brokerage have arrived from the attorney general in Connecticut and the U.S. Attorney for the District of Connecticut.
The firm said it also has received subpoenas from the attorneys general in Florida, Massachusetts and North Carolina, and requests for information from 12 state insurance departments. It is engaged in at least five class action suits related to the activity that is under investigation.
Legal and claim expenses for the brokerage increased $3.4 million in the second quarter over last year and rose $8.3 million for the first six months of 2005 compared to 2004, the company said.
Mr. Vaughan said as of Jan. 1 the firm gave up contingent commissions based on volume commitments, which amounted to about 5 percent of revenue.
He said HRH is keeping traditional contingent commissions that are based on the profitability of the book of business on its agency business and some brokerage business. He said clients have been advised of the commissions.
The contingent commissions HRH gave up will result in the loss of $2 million in revenue in each quarter for the rest of the year, he said.
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