Soft Market Brings Cost Cuts At HRH

By Mark E. Ruquet

NU Online News Service, July 22, 4:24 p.m. EDT?The soft-market turn caught Hilb, Rogal & Hobbs by surprise, the chief executive said, and will force the insurance broker to look at cost-cutting measures to keep growing at a pace of 10-to-15 percent for the year.[@@]

Martin L. "Mell" Vaughan III, HRH chairman and chief executive officer, made his comments as the company reported second-quarter net income growth of 7.5 percent, or slightly less than $1.44 million, going from $19.1 million, or 52 cents a share, to $20.5 million, or 56 cents a share. Revenues in the quarter rose 6 percent, or slightly more than $8.2 million, going from $139.5 million to $148 million.

Mr. Vaughan said the Richmond, Va.-based broker is going to perform a midyear review of its expenses to make sure it is operating at its optimum level.

"Because of this change in the marketplace, we have entered into a cost reduction plan that has commenced now in order to protect our margins and do the things we need to do in light of changing market conditions," said Mr. Vaughan. "Clearly, the marketplace is changing."

"We did not expect to be in a declining market now," he said of the cost cutting review. "We hope at some point there will be some rational behavior [in rates]. We have to now run the business as if we are in a soft market."

Casualty renewal premiums, which were up 5 percent, are now flat, he continued. Property rates continue to decline at 10 percent or more, he added, and complex property accounts are declining at an even higher rate.

For example, he noted one client, a sugar processor, saw its property premium insurance rate decline by 23 percent on renewal.

"In a down-cycle market you have the opportunity to sell more business, but at the same time you can become more vulnerable on your renewals," noted Mr. Vaughan. "Competition can come from unexpected places."

Clients are still in a cost-cutting mode despite the improvements to the economy, he observed. They are not purchasing lower retention or higher limits, yet, "but we can expect to see some of that if the market continues to soften."

The turn in the market caused HRH to revise its net income per share guidance from 15-to-20 percent to 10-to-15 percent growth. This was done to make everyone more comfortable with the firm's future performance, said Mr. Vaughan. The broker does expect to reaffirm its 15-to-20 percent growth for 2005, however.

For the six-month period the company said net income increased 20 percent, or less than $7.6 million, going from $37.2 million, or $1.03 a share, to $44.7 million, or $1.23 a share. Revenues rose 9 percent, or less than $24.5 million, going from $281.5 million to $306 million.

The cost cutting the firm is taking involves the re-evaluation of some of its business plans and personnel.

"We have a very profitable business," he explained. "It's growing. It draws an awful lot of cash. We have tremendous momentum in a lot of ways, but the one thing we do not want to do is cut any bone."

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Soft Market Brings Cost Cuts At HRH

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