Hilb, Rogal & Hobbs Company reported net income dropped more than $28 million in the third quarter–a result of soft prices, litigation costs and the elimination of volume-based contingent commissions.
The Richmond, Va.-based insurance broker reported a net income loss of more than $6.8 million for the quarter, or 19 cents a share, compared to net income of more than $21.3 million, or 58 cents a share, for the same period last year, for a 132 percent drop in net income. Revenues increased 7 percent, or less than $11 million, going from $153.7 million to less than $164.5.
For the nine months, net income dropped 45 percent, or $29.4 million, going from more than $66 million, or $1.81 a share in 2004, to less than 37 million, or $1.01 a share. Revenues increased 11 percent, or more than $50 million, from $460 million to $510 million.
HRH said it reached an agreement with Connecticut Attorney General Richard Blumenthal to set up a $30 million reimbursement fund for clients to settle allegations it steered insurance contracts to insurers in exchange for lucrative volume-based contingent commissions. The arrangement is similar to agreements four other major brokers have reached with regulators.
Volume-based contingent commissions have been the focus of investigations by New York Attorney General Eliot Spitzer and others. Investigators have charged that the commissions disguised insurers' kickbacks to brokers to steer business their way.
The HRH agreement, reached in August, allows the broker to keep profit-based contingent commissions, unlike the arrangements made by brokers Marsh, Aon, Willis and Arthur J. Gallagher.
HRH said the charges the company took for litigation costs also include legal and administrative costs of complying with the settlement and estimates for additional settlements.
Martin L. "Mell" Vaughan III, chairman and chief executive officer, said during an investor's analyst call today that the settlement has been well received by clients, underwriters and investors, adding, "I think it sets a standard for disclosure."
For the insurance market as a whole, he said, there is every indication there will be increases. How much remains pure speculation, but brokers should have a good idea of the market's direction within the next 90 days.
"Almost no one believes that rate increases will be only in the property market," he said, noting the effects of the recent hurricane catastrophes on Jan. 1 reinsurance renewals. Some speculation has rates remaining flat to increasing as much as 15 percent, he noted. Hardest hit will be coastal property exposures, he added.
Mr. Vaughan said that 85 percent of the firm's revenues come from commissions, not fees. However, potential premium increases from major clients would not help the firm because business is on a fee basis, not commissions. Overall, the company should see some benefit from the change in market conditions, he said.
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