S&P Raises HRH Ratings to ‘BB’

Standard & Poor’s Ratings Services has raised its counterparty credit rating on Virginia-based broker Hilb, Rogal & Hobbs to “BB” from “BB-” with a stable outlook.

S&P said the recent announcement of HRH’s acquisition of insurance broker Frank F. Haack & Associates Inc. (See related article in Midwest) and the previously announced T.J. Adams acquisition are within its expectations.

“The rating is based on HRH’s strong operating results, the company’s limited but improving financial flexibility, and the successful integration to date of multiple acquisitions, particularly Hobbs in July 2002,” said the bulletin.

“Offsetting these strengths are the company’s marginal though improved competitive position, which Standard & Poor’s believes contains above-average risk because of its reliance on an aggressive acquisition pace to achieve strategic and financial goals,” it continued.

S&P indicated that it “believes HRH’s operating performance could be more susceptible to a prospective soft market environment given the company’s acquisition-based business model.” However it said that it expects “the company to maintain an ROR of more than 22 percent through 2006 so that debt-to-total-EBITDA remains less than 2.0x.”

A summary of the Major Rating Factors is as follows:
— HRH’s operating margins to be strong and consistently above that of Standard & Poor’s interactively rated peer group average for insurance brokers.
— HRH’s financial profile–as measured by the balance among operational risk, financial leverage, and operating performance–is considered appropriate for the rating level.
– HRH has a ‘marginal though improved competitive position.” It’s the seventh-largest domestic insurance broker, has completed more than 200 independent agency acquisitions since it was founded in 1982, the most significant of which was the July 2002 acquisition of Hobbs. At the time, the acquisition led to an increase in annual revenues of about 30 percent. Standard & Poor’s believes that the company’s business model, which is to double revenues and earnings every three to five years, is an aggressive strategy that contains above-average risk because of its reliance on acquisitions.
– The company’s financial flexibility is seen as ‘limited but improving.’ S&P also observed that the company ‘has operated well within existing restrictive bank covenants,’ and said it ‘expects the company to continue to maintain prudent capitalization levels and operating margins, as demonstrated by a total-debt-to-EBITDA ratio of 2x or less.'”