Hilb, Rogal & Hobbs Company reported net income dropped morethan $28 million in the third quarter–a result of soft prices,litigation costs and the elimination of volume-based contingentcommissions.

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The Richmond, Va.-based insurance broker reported a net incomeloss of more than $6.8 million for the quarter, or 19 cents ashare, compared to net income of more than $21.3 million, or 58cents a share, for the same period last year, for a 132 percentdrop in net income. Revenues increased 7 percent, or less than $11million, going from $153.7 million to less than $164.5.

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For the nine months, net income dropped 45 percent, or $29.4million, going from more than $66 million, or $1.81 a share in2004, to less than 37 million, or $1.01 a share. Revenues increased11 percent, or more than $50 million, from $460 million to $510million.

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HRH said it reached an agreement with Connecticut AttorneyGeneral Richard Blumenthal to set up a $30 million reimbursementfund for clients to settle allegations it steered insurancecontracts to insurers in exchange for lucrative volume-basedcontingent commissions. The arrangement is similar to agreementsfour other major brokers have reached with regulators.

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Volume-based contingent commissions have been the focus ofinvestigations by New York Attorney General Eliot Spitzer andothers. Investigators have charged that the commissions disguisedinsurers' kickbacks to brokers to steer business their way.

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The HRH agreement, reached in August, allows the broker to keepprofit-based contingent commissions, unlike the arrangements madeby brokers Marsh, Aon, Willis and Arthur J. Gallagher.

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HRH said the charges the company took for litigation costs alsoinclude legal and administrative costs of complying with thesettlement and estimates for additional settlements.

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Martin L. "Mell" Vaughan III, chairman and chief executiveofficer, said during an investor's analyst call today that thesettlement has been well received by clients, underwriters andinvestors, adding, "I think it sets a standard for disclosure."

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For the insurance market as a whole, he said, there is everyindication there will be increases. How much remains purespeculation, but brokers should have a good idea of the market'sdirection within the next 90 days.

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"Almost no one believes that rate increases will be only in theproperty market," he said, noting the effects of the recenthurricane catastrophes on Jan. 1 reinsurance renewals. Somespeculation has rates remaining flat to increasing as much as 15percent, he noted. Hardest hit will be coastal property exposures,he added.

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Mr. Vaughan said that 85 percent of the firm's revenues comefrom commissions, not fees. However, potential premium increasesfrom major clients would not help the firm because business is on afee basis, not commissions. Overall, the company should see somebenefit from the change in market conditions, he said.

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