| Hilb,
Rogal & Hobbs builds its brand in an industry that’s
under fire
Related
stories:
- Virginia joins probe of insurance
practices
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Publisher's Roundup
by
Garry Kranz
Virginia Business
December
2004
The
sunlight streams through the glass-enclosed conference
room in the Glen Allen headquarters of Hilb Rogal &
Hobbs Co. Assembled around a large conference table
on this October day, executives of the nation’s
seventh-largest insurance broker sound remarkably upbeat,
given the news that shook Wall Street just hours before
the meeting. “One of our competitors got sued
and took the whole sector [of insurance stocks] down,”
Bob Lockhart, the company’s president and chief
operating officer, tells the group. Spreading
his arms palms-up in a gesture of resignation, he adds,
“Our stock goes down, and we didn’t do anything
wrong.”
The
allusion is to Marsh & McClennan Cos., whose insurance
brokerage division, with revenue of $5.3 billion, is
the largest in the world. New York Attorney General
Eliot Spitzer is suing Marsh, accusing it of rigging
insurance bids so that it could collect large fees for
steering business to certain insurers.
Far
from sounding worried about a widening insurance probe,
the executives in the conference room talk brightly
about how their company is different in size, approach
and culture from larger competitors.
Hilb, Rogal & Hobbs, known as HRH, immediately distanced
itself from the controversy prompted by the Oct. 14
lawsuit. The company issued a statement saying that
it does not “engage in any of the practices alleged
in the suit against Marsh.”
Nonetheless, HRH revealed in a conference call in late
October that it was among about 43 companies that had
received subpoenas from Connecticut Attorney General
Richard Blumenthal in a separate investigation. The
subpoenas seek information concerning sales, pricing
and compensation practices. HRH said that the company
would comply with the subpoena and fully cooperate with
the investigation.
Stock analysts who follow HRH shrugged off the news.
“I don’t view it as a significant event,”
says Dave West, an analyst with Davenport & Co.
in Richmond. “Everyone in the industry is getting
these subpoenas” as more states start insurance
investigations. He notes that the bid-rigging allegations
appear to be “centered on handful of companies.”
John Keefe, an analyst with Ferris Baker Watts in Richmond,
points out that, after taking a hit in October, insurance
stocks have not reacted to the announcement of state
investigations.
The recent industry turmoil adds a burden to HRH executives
already facing a tough set of self-imposed expectations.
The company needs rapid sales growth to meet a goal
of doubling revenue every three to five years. Corporate
property-and-casualty lines and employee-benefits packages
now account for the lion’s share of revenue, 60
percent and 19 percent of sales, respectively.
At the heart of HRH’s strategy is a plan to develop
brand recognition as the broker of choice to “underserved”
small and midsized corporations. As Lockhart puts it:
“There is no model for us to emulate. What we
want to become exists only in our minds.”
Several milestones mark the company’s progression.
Insurance executives Robert Hilb, Alvin Rogal and David
Hamilton bought the insurance brokerage of Continental
Can Corp., a huge holding company, for $17 million in
1981. Six years later the stock of Hilb, Rogal &
Hamilton Co. appeared on Nasdaq and then moved to the
New York Stock Exchange in 1992.
All the while the company has practiced an aggressive
acquisition strategy. Voraciously gobbling up hundreds
of small insurance agencies — more than 220 since
its inception — the brokerage fattened profits
and diversified product lines. Asset growth is a double-edged
sword, though. Swallowing other companies to build critical
mass is one thing. Fusing them into an efficient enterprise
is another challenge.
That is why many consider the 2002 acquisition of Atlanta-based
Hobbs Group, one of the largest risk-management practices
in the nation, to be the most meaningful milestone to
date. Obtaining Hobbs gave the company $86 million in
new revenue. Hobbs also brings a history of strong growth
to a company eager to bolster earnings and improve operating
margins. The deal also symbolizes HRH’s move toward
integrating the disparate assets it has acquired. To
underscore the deal’s significance, HRH took the
extraordinary step of changing its corporate identity
to include the Hobbs name.
Most important, the transaction positions the company
to grab more lucrative business by selling risk management,
employee benefits and other high-end services to corporate
customers. Large corporations often employ full-time
risk managers to handle insurance issues. Most companies,
however, usually don’t have risk managers on staff.
Nor do they typically have expertise in designing employee
benefits or complicated pay packages for top executives.
The Hobbs deal equips HRH to serve new customers and
cross-sell these services to existing customers. “They
bought expertise that they didn’t have,”
Keefe says.
With revenue of nearly $564 million in 2003, HRH is
the seventh-largest insurance broker in the U.S. and
eighth largest in the world, according to Business Insurance
magazine. Fortune magazine has named HRH one of the
100 fastest-growing U.S. companies for the past two
years. In November, the company also was named to Forbes
magazine’s list of 200 Best Small Companies in
the U.S. for the second time since 2000.
While growth strategies vary, HRH sticks with a technique
that has worked well for it. “When we have a client,
we essentially become part of that [company’s]
management team,” says Lockhart.
Often this approach includes giving advice about potential
areas of exposure and ways to minimize risks —
a pivotal factor when shopping for lower rates. For
instance, HRH may advise a company to install a new
sprinkler system or repair faulty equipment. Once a
policy is placed with an insurance carrier, HRH takes
a share of the total premiums as commission.
HRH represents most major insurance carriers, enabling
corporations to spread risks across several policies.
Rather than requiring contractors to secure their own
insurance, for example, real estate developers could
hire HRH to arrange a program of coverage that encompasses
workers’ compensation, liability, equipment and
other types of exposure. The program normally involves
many carriers, with each insuring a specific risk. HRH
writes similar programs for companies in mining, long-haul
trucking and other industries. Consolidating risk in
this way enables companies to gain leverage and control
how much they pay in premiums. U.S. competitors for
that business include Brown & Brown Inc. of Florida,
A.J. Gallagher & Co. in Itasca, Ill., and BB&T
Insurance Services Inc., a subsidiary of Winston-Salem,
N.C.-based Branch Banking and Trust Co.
Frustrating experiences with other brokers drove Richmond-based
Apex Systems Inc. to hire HRH to arrange property-and-casualty
coverage and structure employee benefits. “They’ve
done a really good job of identifying problems we didn’t
even know existed. That’s what sets them apart
from other players,” says Ted Hanson, CFO of the
information-technology staffing company.
Transactions thus far in 2004 have added more than $60
million in acquired revenue, with more deals in the
pipeline. Recent acquisitions include: Insurance Services
Inc. in Appleton, Wis., a $6.8-million brokerage specializing
in risk management and employee benefits; Milwaukee-based
Frank F. Haack & Associates Inc., an employee-benefits
consultant with $22 million in revenue; and Texas-based
Surplus Ltd., a managing general agency and excess and
surplus lines insurance broker with revenue of $3 million.
Even so, HRH remains selective. “There were some
deals we walked away from because the [asking] prices
exceeded our fiscal discipline and didn’t drive
shareholder value,” says CFO Carolyn Jones.
Until recently, the company’s individual agencies
remained largely autonomous, free to pursue their own
sales techniques and develop markets at their own pace.
While padding revenue, some acquisitions did little
to enhance shareholder value or boost internal growth,
according to West, the Davenport & Co. analyst.
“This company was adrift for awhile. The value
of some of its deals was questionable,” he says.
Building a corporate identity took on heightened importance
as insurance premiums leveled off around 1997. Former
Chairman and CEO Andrew Rogal, since retired, began
pushing to segment lines of business and build national
practices around specialty areas. Regional platforms
were established to serve markets where HRH lacked a
presence, particularly the Midwest. Also, the law of
diminishing returns kicked in, prompting a more strategic
approach to transactions. “Andy brought a new
mindset,” says West. “He de-emphasized acquisitions
and said, ‘Let’s get the platform right
so acquisitions make sense again.’”
The next phase is daunting: knitting the properties
into a cohesive brand. Even as it gets bigger, the company
wants to avoid becoming bureaucratic. Somehow management
must strike a delicate balance between giving local
brokers some autonomy but not too much. Heavy-handed
micromanagers could chase valuable employees away. Yet
there is danger in failing to standardize operations,
especially with 3,500 employees scattered across roughly
125 U.S. offices.
The company is in the midst of a five-year plan that
places greater emphasis on sales teams, restructures
incentives to reward productivity and motivates salespeople
to aggressively tackle new business. Those who don’t
measure up are held accountable. “We want ‘A’
players, people who bring real passion to the job,”
says Lockhart. “There have been a certain amount
of ‘C’ players we needed to cull from the
team.”
Digesting Hobbs triggered some hiccups. Hobbs’
boss Tom Golub, who joined HRH as an executive as part
of the merger in 2002, resigned just a year later. HRH
also agreed to pay earnouts to Hobbs executives during
the first year after the acquisition rather than spreading
the payments out over several years. That move contributed
to a decline in its stock price, analysts say. Earnouts
are performance-based components in the final price
of an acquisition. They often are used when the expected
profitability of an acquired company is difficult to
determine at closing.
Acquisitions will continue, albeit at a more measured
pace. Assimilating the vast holdings into an efficient
network of products and services holds the real key
to future earnings. Having begun that journey, HRH is
striding confidently toward that next milestone.
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