Hilb Rogal & Hobbs Hit By Legal Expenses in 2nd Quarter

July 28, 2005

Hilb Rogal & Hobbs Company, based in Richmond, Va., reported that for the second quarter, total revenues were $162.0 million, compared with $147.8 million a year ago, an increase of 9.7 percent.

Commissions and fees rose 8.8 percent to $158.4 million, during the quarter, compared with $145.7 million last year, primarily reflecting acquisitions, offset by a continued decline in premium rates, reduced contingent and override commissions, and lower than normal retention rates primarily related to recent producer culling.

Net income for the quarter was $15.8 million, or $0.44 per share, compared with $20.5 million, or $0.56 per share a year ago, a decrease of 22.9%. Operating net income was $16.5 million, or $0.46 per share, compared with $20.8 million, or $0.57 per share, a year ago, a decrease of 20.6%. Operating net income benefited from higher revenues but was reduced by higher legal and claims expenses, a decline in same-store contingent and override commissions, and investment in sales and service talent. Legal and claims expenses in the second quarter were $3.4 million higher than the same period of 2004. The increase primarily related to various regulatory inquiries and the protection of restrictive covenants in employment contracts, net of insurance recoveries on contested claims.

For the first six months, total revenues rose 12.9% to $345.4 million from $306.0 million a year ago. Commissions and fees increased 12.1% to $338.7 million from $302.1 million last year, due to the revenue factors above. Net income for the six months was $43.5 million, or $1.20 per share, compared with $44.7 million, or $1.23 per share, in 2004, a decrease of 2.7%. Operating net income was $43.6 million, or $1.20 per share, compared with $45.4 million, or $1.25 per share, a year ago, a decrease of 4.0%. Similar to the quarter, the company said that operating net income was positively impacted by higher revenues but lowered by higher legal, compliance and claims expenses. Legal, compliance and claims expenses for the six months increased $8.3 million compared with the prior year period. These expenditures primarily related to the factors noted above for the quarter as well as compliance with Section 404 of the Sarbanes-Oxley Act.

Organic growth, defined as the change in commissions and fees before the effect of acquisitions and divestitures, was (2.7)% for the second quarter and (1.2)% for the six months. Higher new business production was offset by declining premium rates, the elimination of override commissions, producer culling, timing, and quarter-specific items. Excluding contingent and override commissions, organic growth was (1.1)% for the second quarter and (1.9)% for the six months.

The operating margin for the second quarter was 22.5% compared with 27.1% for the prior year quarter. For the six months, the operating margin decreased to 26.1% in 2005 from 28.3% in 2004. The margin decline in both periods was primarily attributable to legal and regulatory expenses incurred in response to investigations of industry practices, the elimination of override commissions, quarter-specific commission adjustments, and continued net investment in sales and service talent.
The pace of acquisitions slowed during the first half, as it did last year in the second quarter, but HRH continues to expect acquired annualized revenues for this year to be between $30 million and $60 million.

Martin L. (Mell) Vaughan, III, chairman and chief executive officer, said, “Industry developments influenced our financial results this quarter and for the first half of 2005. On the revenue side, premium rates generally continued to decline at a pace that accelerated in the second quarter. If there is a silver lining to declining rates, it is the opportunity to show clients how effectively we can market their risks to insurance carriers. On the expense side, we incurred legal costs related to government investigations, inquiries into industry practices, and an internal review of HRH’s business practices along with costs for the addition of experienced professionals who became available as industry events unfolded after October 2004. We view the quality and quantity of the industry talent that we attract as a validation of our strategy and confirmation of our long-term outlook.”

Vaughan emphasized the company’s ability over the last nine months to attract good talent, which he said is necessary for it to implement its long-term strategic plan of expanding in the major account territory while continuing to grow its middle-market presence.

“Our current leadership team is as deep and experienced as any in the business, he said.

He also said that the regulatory scrutiny facing his own company and the industry could turn out to be a benefit. “Finally, although we cannot predict the course of regulatory developments, we are hopeful that when the regulatory activity begins to recede, the industry and insureds will be strengthened by the experience,” he commenetd.

Hilb Rogal & Hobbs Company is the eighth largest insurance and risk management intermediary in the U.S. and tenth largest in the world. It has offices throughout the U.S. and in London. The company is traded on the New York Stock Exchange, symbol HRH. Additional information about HRH may be found at www.hrh.com.

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