HRH Evaluating Contingency Fees; Defends Use

Martin L. "Mell" Vaughan III, HRH's chairman and chief executive officer, said that in light of the questions being raised by Mr. Spitzer's probe of the insurance industry, the firm is reviewing and reevaluating contingency fee practice, but did not indicate it was ready to abandon them, as four major brokers have done already.

The others include Arthur J. Gallagher, which today announced it is ceasing contingency fees, following Marsh, Aon and Willis brokerages, which have said they are doing the same.

Mr. Vaughan emphasized that the firm has received no subpoena from Mr. Spitzer and underscored the fact that its business model, dealing with middle-market accounts through decentralized field offices, does not allow it to perform the same type of leveraging of accounts other global brokers do, or influence the placement of business in the way Marsh is accused of doing.

At HRH, 90 percent of its business is performed as licensed agents for carriers, and on its few large accounts, the firm does act as a broker placing business on a fee basis, he said, adding it is committed to transparency and full disclosure to those clients.

"We believe there are differences between the way a few global brokers do business and the way most of the industry does business," said Mr. Vaughn. "I think those distinctions are being erased [in the mind of the public]."

"In our view, these types of loss sensitive commissions really benefit everybody," he continued. "They are not only not bad, but as you might expect, in a long-lived practice and a highly regulated and highly competitive industry, they are a positive force and serve the interest of everybody in the transaction."

Contingency fees amounted to $39.4 million for the first nine months of 2004, HRH said, about 7 percent of its revenue. Of that, 85 percent is standard contingency arrangements, loss sensitive profit sharing commission, and the remaining 15 percent is volume-based national agreements.

For the three months ending Sept. 30, revenues were up 10 percent, or $14.3 million, at $153.7 million, compared to $139.4 million for the same period last year. Net income rose 16 percent, or slightly less than $3 million, in the quarter, from $18.4 million, or 50 cents a share, to $21.4 million, or 58 cents a share.

For the first nine months, revenues increased nine percent, or $38.8 million, going from $421 million to $460 million. Net income was up 19 percent, or $10.5 million, going from $55.6 million, or $1.53 a share, to $66.1 million, or $1.81 a share.

Mr. Vaughn said the softening market and its own evolving sales culture affected earnings in the quarter and it would not see the benefit of changes it is making until later this year.

The company, he said, is seeking to reduce cost in a down market.

Robert B. Lockhart, HRH president and chief operating officer, said new business is up 15 percent, but should be higher.

He said the firm released more than 94 producers and account executives from the firm who did not meet the firm's expectations for growth, but brought in 43 new producers as it is making a reinvestment in a number of lines. Organic growth stood at 1.2 percent in the third quarter and 2.1 percent for the nine months, Mr. Lockhart reported.