Richmond, Virginia-based insurance broker Hilb Rogal & Hobbs, which is in the process of being acquired by bigger insurance broker Willis, reported revenues were up 5.3 percent while net income plummeted for the second quarter.
Net income for the second quarter fell to $1.1 million from $22.2 million.
Acquisitions and new business helped offset continued price reductions in property and casualty insurance. Total revenues for the second quarter were $210.6 million, a 5.3 percent increase over than $200.1 million in the second quarter of last year.
Total operating expenses increased to $198.2 million from $162.8 million in the same quarter of last year.
Total revenues for the first six months were $417.5 million, higher than $398.3 million in the same period of 2007.
On June 8, 2008, HRH and Willis Group Holdings Limited announced they had reached an agreement for the merger of HRH and a wholly-owned subsidiary of Willis. The transaction, which is expected to close in the fourth quarter of 2008, is subject to customary closing conditions, including HRH shareholder approval.
HRH said that net income for the second quarter 2008 reflected a non-cash $18.4 million intangible asset impairment charge related to HRH Reinsurance Brokers Limited, a London-based reinsurance subsidiary, as a result of the departure of certain key producers prior to the HRH/Willis merger announcement who were responsible for a significant portion of the operation’s revenue.
Subsequent to the end of the second quarter, HRH entered into a revenue sharing agreement with Willis to retain the subsidiary’s clients. This operation, which was acquired in 2003 prior to the 2007 acquisition of Glencairn Group Limited, represents less than 0.8 percent of the company’s revenues and less than 1.4 percent of the company’s operating profit for the 12-month period ended June 30, 2008.
For the quarter, the continued sharp decline in property and casualty premium rates and the intangible asset impairment charge significantly influenced financial results. In addition, the operating earnings per share comparison for the quarter was affected by the dilutive impact from the acquisition of Banc of America Corporate Insurance Agency and increased professional and claims fees, the latter in part related to a legal matter for which the company received a settlement in July 2008 of $9.8 million. The timing related to the shift from contingent to supplemental commissions and increased costs related to the employee medical program also affected results.
Included in the total second quarter revenues of $210.6 million are core commissions and fees, which rose 4.4 percent to $195.6 million for the quarter, compared with $187.4 million for the same period in 2007. Contingent commissions increased $3.6 million to $12.0 million from the same period in 2007.
Organic growth on core commissions and fees — the before the effect of acquisitions and divestitures– was 5.0 percent for the 2008 second quarter.
Martin L. (Mell) Vaughan, III, chairman and chief executive officer, explained the impact of the acquisition and litigation expenses that affected results. “After the quarter, one major contributor to litigation expense was resolved decisively in our favor. The acquisition dilution issue will take longer to resolve than we initially thought, but its strategic fit and prospects remain attractive,” he said, “In the meantime, the challenging economy and volatile insurance markets create many opportunities to build existing client relationships through superior risk management support and service, and introduce new ideas to prospective clients.”
F. Michael Crowley, president and chief operating officer, said that all of the issues relating to the dilutive acquisition “have been or are currently being addressed.” He said the litigation expenses included a restrictive covenant matter relating to one office in a matter that was concluded in July with a $9.8 million payment to HRH. While the office remained profitable, the lost business and legal expenses affected results for the quarter.
Source: Hilb Rogal & Hobbs Co.