9. Hilb Rogal & Hobbs Co.

Hilb Rogal & Hobbs Co. is back on track in terms of growth on the acquisition front.

The Glen Allen, Va.-based brokerage, which is known for growth through acquisitions, completed acquisitions worth more than $35 million in annual revenues in 2006, noted Chairman and Chief Executive Officer Martin L. Vaughan III. The pace thus far in 2007 has been even swifter, with acquisitions worth about $75 million in annual revenue coming into the HRH fold, he said.

"The past 16 to 18 months have been excellent for us," Mr. Vaughan said.

"We're clearly looking for firms that are willing to share our strategies and values--that's paramount for us," he said. "Equal to that is our ability to add to our talent pool. We have to be sure that the companies that join us match our financial goals."

Last year's notable acquisitions included Chicago-based insurance agency and brokerage Thilman & Filippini L.L.C., which generated annual revenues of about $27.2 million; and Zutz Associates Inc., which was the largest independently owned insurance agency in Delaware, with annual revenues of about $9 million.

Perhaps the most notable acquisition thus far this year has been London-based Glencairn Group Ltd., which strengthened HRH's international capabilities in areas such as Australia, Russia and South Africa. "We hope that Glencairn acquisition will become a springboard for additional opportunities in the U.K. and other parts of Europe and Asia," Mr. Vaughan said.

"At the moment, there are plenty of opportunities," he said. "We're closing a lot of deals. We have a full pipeline, probably a more robust pipeline than we've had in a long time. As we go along and refine our operations and become better in all the things we need to do to keep our clients happy, we obviously become more selective about who can join us."

An analyst who tracks HRH agrees.

"Over the course of 2006, where they've been strong is on the acquisition front," said Mark Dwelle, an equity analyst with Ferris, Baker Watts Inc. in Richmond, Va. "They've done a very good job of identifying and completing attractive acquisitions. Where they've been challenged in some places is in integrating deals, more a function of getting expense structures and staffing rationalized to the right place."

"So far this year, they've been doing a very strong job of identifying targets--it's too soon to tell how the integration will go in most cases," said Mr. Dwelle. "As a result, their top-line growth that's aided by acquisitions has been good. Their organic growth--or non-acquisition growth--has been soft, as consistent with the overall market."

Premium volume increased to about $7.5 billion in 2006, a rise of about 5.6%. Brokerage revenues, which account for most of HRH's total gross revenues, rose about 5.8% to slightly more than $696 million.

That put HRH in ninth place in the Business Insurance 2007 ranking, up one spot from the 2006 list of the world's largest brokerages.

HRH's profits rose nearly 55% to $87 million in 2006 from $56.2 million in 2005. The previous year's profits, however, were depressed by sparse acquisition activity and the company's creation of a $30 million national fund to settle accusations by Connecticut Attorney General Richard Blumenthal that HRH steered clients to insurers paying the highest contingent commissions.

"We're pretty pleased with '06 and our performance" compared with the challenges of the two previous years, said Mr. Vaughan. "We wrote record new business and gained a lot of clients and increased our market share. If there was one down spot, it simply would have been that the premiums continue to be soft."

By the end of last year, HRH had "completed our last five-year plan and the results were excellent," said Mr. Vaughan. "We doubled the size of the company, we doubled the cash earnings of the company and we did that even though some of the external factors" were challenging, such as rate declines and "considerable turmoil in the industry," he said. "We are awfully proud that we were able to stay with our plan" by expanding HRH's employee benefits business, managing general agency business, reinsurance business, and excess and surplus lines business, he said.

"Those businesses continue to grow and be an important part of our company," he said, noting that HRH has also "continued to support and expand our national practice groups," such as its new power and utility practice.

"We've continued to try to grow particularly our employee benefits business," said Mr. Vaughan, noting that HRH has added retirement consulting to its offerings.

"We're awfully proud that we service a broad range of clients," he said. "We don't think about our clients in strict terms of large accounts or middle-market accounts. We have the ability to serve all clients and move up and down the ladder and have a broad market presence in that regard."

One of HRH's advantages for middle-market clients is "the ability to bring sophisticated risk management abilities to the middle market because of the investments we've made in very high-end talent. We also have an advantage with the larger risk management clients because we have the nimbleness of middle-market brokers--you kind of get the best of both worlds with us."

Turning to the question of compensation and disclosure, Mr. Vaughan said, "We feel like we have the fairest and most workable solution to the compensation issue--and we also feel like it's simple to understand.

"We simply define our customers as either broker clients--those are clients that are paying us a fee--and agency clients--those are clients where we are paid by the underwriter," he said. "We make disclosure to all clients. We disclose all forms of compensation proactively to the broker clients and the agency clients. We also have an agency customer bill of rights that outlines how we get paid and invites the client to ask anything they would like to know about our compensation."

"We do not accept contingents on broker business; we do accept contingents on agency business where we are being paid by the underwriter.

"That system is working very well for us, the clients understand it and there's full disclosure on how we get paid and we think it's a great model," Mr. Vaughan said.

HRH's net income for the first quarter of this year decreased 2.7% to $25.2 million from the $25.9 million posted in the same period of 2006. Although total revenues for the first quarter grew 7.8% to $198.2 million from the $183.8 million of the first quarter of 2006, the growth "primarily reflected the effects of acquisitions and new business, partially offset by accelerated declines in property and casualty rates, the effect of divested businesses and reduced contingent commissions," HRH said in a statement announcing the results.

On July 6, HRH's stock closed at $43.47 a share, with a 52-week high of $50.84 and a 52-week low of $36.06.