Soft market challenges, the underperformance of an acquisition and a higher than anticipated tax rate were responsible for the 48 percent drop in net income Hilb Rogal & Hobbs Company reported in its fourth-quarter results for 2007.
The Richmond, Va.-based insurance brokerage firm reported net income declined by more than $10 million to $11 million in the fourth quarter. That translated into a 29 cent drop in earnings per share to 30 cents a share. Revenues increased 17 percent, or $30 million, to $206 million primarily on the strength of acquisitions.
For the year, HRH reported net income was down 10 percent, or $9 million, to $78 million, for a 28 cent drop in earnings per share to $2.11. Revenues increased 12 percent, or $89 million, to $800 million compared to 2006.
During an investor's conference call, Michael Dinkins, HRH's executive vice president and chief financial officer, said the underperforming acquisition concerned Glencarin Group Limited, a London-headquartered independent Lloyd's insurance and reinsurance broker that HRH acquired in January of 2007.
The underperformance diluted earnings by 11 cents a share, he said, which was a totally unexpected development.
To combat this loss in earnings, HRH moved ahead with the consolidation of three offices in London into one location with one leader.
"We expected this acquisition to have a strong second half of the year," said Mr. Dinkins. "When it became apparent that this was not the case, we took decisive corrective action."
Martin L. "Mell" Vaughan said the highlight of the firm's accomplishment in 2007 was to hold organic growth flat "despite persistent and extreme property-casualty pricing conditions." He called the double-digit declines in premium pricing unprecedented.
Organic growth in retail brokerage commissions and fees rose 1.5 percent in the quarter and stood at zero for the year. However, other lines lost ground, notably excess and surplus lines business with a loss of 12 percent in the quarter and 5 percent for the year. The loss was due to business moving out of the excess and surplus market into retail, said Mr. Vaughan.
Prices should begin to moderate in the second half of this year, Mr. Vaughan forecasted, as insurers begin to feel the effects of loss costs mount on insufficiently priced business and investment income drops.
In an analyst's note David Small with Bear Stearns said HRH's earnings per share were 20 cents below estimates. He said the firm has shown over the years "significant earnings inconsistency" and much of this volatility is related acquisitions, as was the case in this quarter.
He further questioned whether management has "the bandwidth to manage further acquisitions and integrations at this point."
On acquisitions, Mr. Vaughan said the firm has plenty of opportunities in its pipeline and competition is intensifying over agency purchases.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.