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Company Perspectives
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Hilb, Rogal & Hobbs Company (HRH) is the nation's eighth largest insurance brokerage firm. Much of its growth has come through the acquisition of small insurance agencies. Commissions from insurance companies comprise the majority of the brokerage's revenues and middle market businesses make up its primary market area.
Executive Business: 1982-89
The Rogal Family had begun selling insurance in Pittsburgh early in the 1920s. In 1972, a financial services company purchased Rogal Co., headed by Alvin Rogal, and eight other agencies, mainly based in the southeastern part of the country. The purchaser, Richmond Corp., formed Insurance Management Corp. (IMC). In 1977, Continental Group acquired Richmond and Robert H. Hilb was hired to run IMC. However, when a new CEO came on the scene at Continental, the conglomerate changed focus and moved to divest itself of the Richmond-based insurance operation.
Hilb, Rogal and Hamilton Co. was established in 1982, by three IMC executives, including Hilb, Rogal, and David W. Hamilton, head of the Birmingham office. The trio borrowed $17 million to buy out the 19-office company. Rogal was the largest agency of the group, producing 25 percent of combined revenue of $16.9 million. During their first eight months in business the new owners lost $1.9 million on $9.8 million in revenue.
By 1985, HRH revenues, primarily from commissions, had reached $25.4 million. Net income was $1.5 million. The company had fueled its growth by adding agencies to the fold. Small enterprises were lured aboard with promises of economies of scale, reduced administrative time, and an expanded range of services. The majority of purchases were funded by transactions consisting of 80 percent cash and 20 percent stock.
The Tax Reform Act of 1986, which resulted in double taxation on cash purchases of agencies prompted HRH to rethink its combination cash and stock acquisition transactions. All stock purchases, called pooling of interests, would move the acquired company's balance sheet to its own without the extra tax burden. An initial public offering in 1987 built up HRH's capital and created the vehicle for the pooling of interest purchases.
From January through October 1988, HRH acquired 14 U.S. insurance agencies: nine in Texas, two in Virginia, and one each in Florida, Georgia, and Maryland. Agencies in Arizona and Colorado were in its sights.
Based on its 1987 revenues of $36.1 million, the company held the number 12 spot among the nation's largest insurance agencies. The original founders continued to guide the company, with Hilb as president and Rogal as executive vice-president and director. Hamilton, who retired as executive vice-president in December 1987, remained on the board.
Profits rose from 1985 to 1987, despite a slump in the property-casualty insurance industry. Climbing from $1.5 million to $3.4 million over the period. But stock traded over the counter below that of comparable companies.
Not Just an Agency Anymore: 1990-99
By 1990, HRH ranked by Business Insurance as the tenth largest U.S. insurance agency system and the 20th worldwide. Revenue in 1989 topped $74 million. The largest insurer, New York broker Marsh & McLennan Cos. Inc., recorded gross revenues of $2.45 billion during 1989 but from 1988 to 1989 HRH's gross revenue had outpaced the giants of the industry, climbing 12.9 percent versus an average of 4.8 percent.
HRH continued to grow despite challenges facing insurers. Elevated competition and depressed pricing had continued in 1989. Moreover, Hurricane Hugo and the World Series quake brought multibillion-dollar losses. The combination resulted in the "industry's worst year ever," according to the Richmond Times-Dispatch. HRH, an insurance agency though not an underwriter, did not pay claims on clients' property and casualty losses, but competition put pressure on pricing and profits.
By October 1990, the company operated 40 offices in 15 states and the District of Columbia. Employees, as of mid-September that year, numbered 1,250 with another 150 expected to join the roll by year-end, reported the Richmond Times-Dispatch.
About 60,000 independent insurance agencies operated in the United States, leaving more room for consolidation. HRH planned to continue concentrating its efforts in the growing Sunbelt. The Southwest with a struggling economy was of particular interest. Development of new lines of business gained through previous acquisitions was also on the docket.
HRH offered agencies an appealing level of independence in addition to the benefits of merging with a national entity. The company's torrid growth was expected to slow as the climate of the industry improved, driving up the cost of buying agencies. But HRH would see a corresponding upswing in premium prices.
HRH set the stage for development outside the United States in October 1990 with the creation of Hilb, Rogal and Hamilton International Inc. Andrew L. Rogal, president of Hilb, Rogal and Hamilton Co. of Pittsburgh and son of Alvin Rogal, was tapped to take charge of the foreign market development beginning in Britain.
HRH's shift to acquisitions by way of pooling of interests had helped build the company but left some investors scratching their heads about its finances: "The drawback of these transactions is that they force Hilb, Rogal to restate its earnings as if the newly acquired agency had been part of the company all year. While this makes the Internal Revenue Service happy, it can be confusing for potential investors as it tends to lower earnings in the previous year, making the current year's earnings look better in comparison than if the earnings in the previous year had been left alone," W. Dolson Smith, vice-president and analyst with New Jersey-based Firemark Research Inc. told the Richmond Times-Dispatch.
Believing its stock was undervalued, HRH began a stock repurchasing plan in 1990.
The company's growth, not only in size but range of activities, had moved it from the ranks of insurance agencies to that of insurance intermediaries, doing broker-like activities, according to the National Underwriter Property & Casualty--Risk & Benefits Management.
In early 1993 HRH was planning a secondary offering to fuel the flow of more independent agencies into its fold. On its way to its place among the largest U.S. agencies, the company completed 114 mergers and studied a total of 500, according to the Richmond Times-Dispatch.
Typically, the agencies in its network were solid operations that had been weighed down by pricing pressures. Many were stymied by difficulties related to leadership succession. Selling to HRH eased both dilemmas.
"The company's strategy is to build a significant market share in small to mid-sized metropolitan areas where it does business. Hilb, Rogal said that it expects its offices to be among the top two or three property and casualty agencies in each market," Mollie Gore wrote for the Richmond newspaper. Slightly more than three-quarters of its revenue was coming from commercial property and casualty account commissions.
HRH had purchased more than 140 agencies by late 1995. Robert H. Hilb, chairman and CEO, bought companies from people he liked and felt he could work with on a daily basis, explained David Ress in the Richmond Times-Dispatch. Hilb's business philosophy was straightforward. "The business is real simple. It's selling and it's service. There's no point in making it more complicated," Hilb said.
HRH entered the Canadian market in 1995, with the purchase of a small group of agencies. Also during the year Andrew L. Rogal, son of one of the other founders, was promoted to president and COO.
Looking toward the next century, HRH refocused its strategy. In 1996, the company announced plans to: create a regional framework, shifting away from its decentralized system; increase emphasis on internal growth through sales; and continue to acquire agencies in the United States and Canada. The company had slipped in Business Insurance rankings to 18th from 16th among the world's largest brokerages.
Despite the change, HRH maintained that it fared well against its competition, delivering a greater degree of service and expertise than independent agencies. Admittedly, the giants of the industry had the same advantage over HRH, drawing from a deeper well of resources. The regional office concept was introduced to improve service to clients and improve results for HRH. By mid-year 1996, five formal regions had been created in the United States. The Mid-Atlantic region consisted of offices in Maryland, New Jersey, Pennsylvania, and Virginia and was the largest in terms of revenue. The Southeast region encompassed the states of Alabama and Georgia. The California region also included the Nevada offices. Texas and Florida offices formed the remaining two U.S. regions. A separate Canadian region also was established.
HRH, which acted as an intermediary between midsize businesses and the insurance underwriters, experienced a spike in revenue and earnings and was rewarded with a corresponding rise in its price per share in 1997. Hilb retired as CEO during the year but continued as chairman of the board. Andrew Rogal stepped in as the new chief officer.
The waning years of the century were marked by a state of upheaval in the financial services industry, as new laws allowed banks, investment companies, and insurers to cross into each other's territory. As for HRH, it continued on its acquisitive path. But the new century would bring new challenges for the company.
Challenging Times: 2000-05
Andrew Rogal, chair and CEO of the parent company, had begun his tenure in Pittsburgh. Rogal, having earned degrees in journalism and law, took interest in the insurance business when HRH was established and began buying up small agencies. He joined the Pittsburgh operation, becoming president in 1987 and senior vice-president of the parent firm in 1990, CEO in 1996, and chair in 2000. The business he headed placed 80th on Forbes's list of the 200 Best Small Companies in America in 2000.
The top ten insurance broker recorded revenues of $262.1 million in 2000. HRH embarked on expansion in the Midwest in the summer of 2001. Prior to the purchase of Ohio's largest independent broker, the company held just five offices in the region. A purchase of significance in 2002 was the Hobbs Group L.L.C., based in Atlanta. The company specialized in property and casualty coverage, risk management, executive compensation, and employee benefits.
Andrew L. Rogal stepped down as chairman and CEO in May 2003 and was succeeded by Martin L. "Mell" Vaughan, company president and COO. Vaughan joined HRH in 1999, when the company he headed was acquired. Rogal led the company during its period of expansion. During Rogal's tenure stock price more than quadrupled, according to the Richmond Times-Dispatch.
Net income rose from $13 million in 1997 to $65 million in 2002.
In 2003, the company changed its name to Hilb, Rogal & Hobbs Company, dropping the Hamilton name; David W. Hamilton, one of the original founders, retired from the board in 1994. "Martin L. Vaughan, HRH's chairman and chief executive, said the retooled name recognizes 'the strategic contribution of Hobbs Group to HRH and the equity of its brand identity in the risk-management community,'" the Richmond Times-Dispatch reported.
The company continued growth in the Midwest during 2004, acquiring assets from firms in Illinois, Michigan, and Wisconsin. But troubles were on the horizon in 2005. The industry overall was being affected by the specter of investigations into insurance contingency fees by state attorneys general and insurance regulators and a soft pricing market, according to National Underwriter Property & Casualty--Risk & Benefits Management.
Specific to HRH were problems with integration of Hobbs and its transition from a middle market player to a mix of middle-market and large-market accounts.
Robert B. Lockhart, HRH president and COO and former head of the Hartford office and Northeast region, resigned in May 2005. Connecticut officials had charged the Hartford office with making improper contingency fee arrangements beginning in 1998. The office was accused of taking payments from insurers in exchange for sending clients their way. The fee was hidden in the premium paid by customers. HRH agreed to set up a $30 million restitution fund as part of the terms to end the action. "This settlement is the first involving insurance agents, the first really to involve product lines that go to 'Joe Main Street insurance consumer'--owners of automobiles, homes and small businesses who purchase insurance," Connecticut Attorney General Richard Blumenthal said in the Hartford Courant in September 2005. HRH would continue to collect commissions paid to them by insurance underwriters. The company also agreed to improve its disclosure practices.
Principal Competitors
Arthur Gallagher; Brown & Brown, Inc.; Marsh & McLennan Companies, Inc.
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