HRH Scraps Volume-Based Contingents

Mr. Vaughan said HRH had volume placement agreements with three separate insurers. The agreements were changed to standard industry contingent agreements, which pay contingent commissions based on the profitability of a book of business instead of the volume of business placed with a carrier.

Volume-based contingent commissions have been at the center of a probe begun by New York's Attorney General Eliot Spitzer that has broadened nationally. The commissions ensnared Marsh & McLennan Companies in a civil suit by the prosecutor that accused the company's insurance brokerage firm, Marsh, of bid-rigging and other abuses in return for the profitable fees from carriers. MMC has since settled with Mr. Spitzer for $850 million to be paid to customer's who may have been affected.

MMC, Aon Corp., and Willis Group Holdings, regarded as the world's major brokers have said they would no longer accept contingent commissions after the suit was filed last October.

HRH, like many other brokers, is continuing to accept contingent commissions, which accounted for more than $42 million, or 7 percent, of the firm's $610 million in commissions and fees for all of 2004.

Mr. Vaughn noted that only $8 million of the $42 million accounted for the volume placement agreements. The company is also breaking out the contingent commission payments it receives in its financial reports.

"We are watching very closely as state regulators, attorney generals are still gathering information," he said. "Some buyers of insurance, particularly the larger accounts [have asked for information on commissions], and we are responding to them. We are being as transparent as we can possibly be. As things move along, and we see where the industry is heading, we will adjust our methods of doing business."

The new agreements apply to business written on or after Jan. 1. The payments will be paid and recorded beginning early 2006.

For the fourth quarter of 2004, HRH reported net income dropped 21 percent, or more than $4 million, going to $15 million, or 42 cents per share, from $19 million, or 53 cents per share in 2003. Revenues increased 12 percent, or $17.2 million, to $160 million.

For the year, net income rose 9 percent, or $6.5 million, to $81 million, or $2.23 per share, from $75 million, or $2.06 per share. Revenues rose 10 percent, or $56 million, to $620 million from $564 million.

HRH blamed much of the loss in income on legal expense involving the contingent fee investigation, regulatory compliance, enforcement of non-compete agreements and "an unusual claim situation" involving an account that did not have reinsurance for the risk.

The Richmond, Va.-based broker has declared a quarterly dividend of 10.5 cents per share payable on March 31 to shareholders of record as March 15.