Hilb, Rogal & Hobbs Company reported second-quarter incomedropped 23 percent due to higher legal and claims expenses, loss ofcontingent commissions, lowered retention rates and investment innew employees.

Second-quarter results for the Richmond, Va.-based insurancebroker showed net income decreased $4.7 million, from $20.5million, or 56 cents a share, in 2004, to $15.8 million, or 44cents a share. Revenues increase $14.3 million, going from lessthan $148 million to $162 million.

For the six months ending June 30, net income was down 3percent, or $1.2 million, going from $44.7 million, or $1.23 ashare, to $43.5 million, or $1.20 a share. Revenues were up 13percent, or more than $39 million, going from less than $306million to $345 million.

Martin L. "Mell" Vaughan III, chairman and chief executiveofficer, during an analyst's conference call today said the companyis dealing with the soft-market declining rate cycle by writing newbusiness and bringing in new talent.

He said business is generally seeing premium rate decreases of10-to-12 percent, which is significant for one acquired portion oftheir operation, Hobbs. Mr. Vaughan explained that the unit has alarge amount of property accounts. Property, he noted, continues tosee significant rate decreases.

The firm's performance has been hurt by lower retention rates,he continued, due to the "culling" of sales people who have takenaccounts with them. This has lead to legal actions against theformer employees for violation of contract.

The firm also is the target of a number of investigationsrelated to the industrywide probe of brokers' hidden feearrangements with insurers to fix prices and steer business tocertain carriers in exchange for lucrative contingent commissionsbased on business volume.

Subpoenas seeking fee arrangement information from the brokeragehave arrived from the attorney general in Connecticut and the U.S.Attorney for the District of Connecticut.

The firm said it also has received subpoenas from the attorneysgeneral in Florida, Massachusetts and North Carolina, and requestsfor information from 12 state insurance departments. It is engagedin at least five class action suits related to the activity that isunder investigation.

Legal and claim expenses for the brokerage increased $3.4million in the second quarter over last year and rose $8.3 millionfor the first six months of 2005 compared to 2004, the companysaid.

Mr. Vaughan said as of Jan. 1 the firm gave up contingentcommissions based on volume commitments, which amounted to about 5percent of revenue.

He said HRH is keeping traditional contingent commissions thatare based on the profitability of the book of business on itsagency business and some brokerage business. He said clients havebeen advised of the commissions.

The contingent commissions HRH gave up will result in the lossof $2 million in revenue in each quarter for the rest of the year,he said.