S&P Revises Outlook on HRH to Negative; Cites Contingent Commission Investigations

December 6, 2004

Standard & Poor’s Ratings Services announced that it has revised its outlook on its ‘BB’ counterparty credit rating on Hilb, Rogal and Hobbs (HRH) to negative from stable.

“The outlook revision reflects Standard & Poor’s belief that HRH’s earnings will be pressured as the industry reacts to the ongoing investigation by the office of the New York State Attorney General (NY AG) into the payment of contingent commissions, which has led various insurance companies and insurance brokers to end certain compensation agreements,” the bulletin said. “The complaint alleges that this practice motivates an insurance broker to place its clients’ business with the insurer that pays the highest contingent commissions rather than with the insurer that offers the best coverage for the price, allegedly violating the brokers’ fiduciary responsibility to its clients.”

S&P noted that HRH has neither been subpoenaed nor charged in Spitzer’s investigation, but the broker has indicated “that it has received subpoenas from Attorney Generals of other states, is the target of private litigation, and has received various requests for information from certain state insurance departments.”

According to S&P’s report, “HRH estimates full-year 2004 contingent and override commissions of $42 million, of which, $39.4 million has already been recognized as of Sept. 30, 2004.” From its analysis of HRH’s cash flows, however, the rating agency said it “believes that even after any adverse effects on earnings and cash flow due to the potential loss of contingent commission income, the company will still remain in compliance with its restrictive debt covenants.”

S&P noted: “As of Sept. 30, 2004, debt-to-total capital and GAAP interest coverage measured 33 percent and 16x respectively. Historically, the company has operated well within existing restrictive bank covenants, and Standard & Poor’s expects the company to continue to maintain prudent capitalization levels and operating margins in the near term, as demonstrated by a debt-to-total capital of less than 40 percent and GAAP interest coverage of 10x or more.”

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