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Executives

Martin Vaughan - Chairman and Chief Executive Officer

Carolyn Jones - Treasurer and Director of Investor Relations

Michael Dinkins - Executive Vice President and Chief Financial Officer

Michael Crowley - President

Analysts

Nik Fisken - Stephens

Keith Walsh - Citigroup

Mark Hughes – SunTrust

Dan Farrell – FPK

Chuck Hamilton - FTN Midwest

Doug Mewhirter – FBW

Eli Fleminger - Stifel Nicolaus

Amy Manilla - Margin Capital Management

Greg Laven - Decade

Hilb Rogal & Hobbs (HRH) Q4 2007 Earnings Call February 26, 2008 8:30 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Hilb Rogal & Hobbs conference call. (Operator Instructions) It is my pleasure to introduce Chairman and CEO of HRH, Mr. Martin Vaughan. Sir, you may begin.

Martin Vaughan

Good morning, everyone. Welcome to our fourth quarter 2007 investor call. We’re with you this morning from our headquarters in Richmond, Virginia. Here at the table with me are Mike Crowley, our President; Michael Dinkins, our Chief Financial Officer; Tim Korman, our Executive Vice President and Head of Mergers and Acquisitions; and Carolyn Jones, Treasurer and Director of Investor Relations for the company.

Today we’ll start by asking Carolyn Jones to present our forward-looking disclosure and risk statement. Then we’ll call on Michael Dinkins to give his financial report followed by my overview, and then Mike Crowley’s report on operations and immediately after that we will open up for Q&A.

Carolyn, over to you.

Carolyn Jones

Before we begin, please be aware that in the course of this call members of HRH management may make statements regarding the company’s future financial conditions, business plans, operations, opportunities and prospects, including any factors which may affect future earnings that are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The company cautions that such forward-looking statements are based upon management’s current knowledge and assumptions about future events that involve risks and uncertainties which may cause actual results to differ materially from those anticipated by the company at this time.

For additional information about the company and risks and uncertainties we face, we encourage you to consult our annual report on Form 10-K for the year ended December 31, 2006 and other reports from time to time filed with or furnished to the Securities and Exchange Commission.

The statements made on this call speak only as of today’s date and the company disclaims any duty to update the information provided.

Michael.

Michael Dinkins

HRH reported revenues for the fourth quarter of 2007 were $205.9 million, up $30.4 million or 17.3% over the prior year. Core commissions and fees rose $25.5 million including amounts from acquisitions net of divestiture of $25.6 million and supplemental commissions from two underwriters of $2.7 million. Contingent commission rose $1.5 million, including $0.8 million on a same-store basis. Investment income increased by $0.9 million, due to a higher invested asset related to acquired entities, along with improved cash management processes implemented during 2007.

The biggest factors influencing our revenues and earnings for the fourth quarter of 2007 was a continuation of the unprecedented soft market conditions which existed throughout 2007. As reported by the Council of Insurance Agents and Brokers during fourth quarter property and casualty premium rates declined on average 12%. Despite this incredible difficult market, we achieved organic growth of negative 0.1%, including a positive 1.5% in our domestic retail segment reflecting strong new business sales, supplemental commissions and retention rates which Mike Crowley will discuss later in this call.

There’s a table on the last page of our earnings release that summarizes organic growth rates by segment. The negative 21% organic growth in the other segment and the negative 11.8% in the ENS operations also reflect the impact of the current property and casualty market on our wholesale operations which are experiencing heavy rate declines compounded by the moving of business back to the standard market.

For the quarter, our reported operating earnings per share of $0.35 were down from $0.63 in the fourth quarter of 2007. In addition to the extremely soft property and casualty rates, the financial performance for the quarter was impacted by three major factors:

Glencairn, which was a January 1, 2007 acquisition, diluted our earnings by $0.11 per share. While we had expected this acquisition to have a strong second half of the year, when it became apparent this was not the case, late in 2007 we took decisive corrective action including the planned relocation of our UK operations under one roof with one strong leader.

In addition to $1.2 million of integration costs in the UK, which is excluded from our operating income, we incurred an additional $0.6 million of severance costs which was included in the fourth quarter operating earnings. We now believe that this segment is on track to produce improved and accretive future financial performance. Mel will speak more to the drivers of Glencairn’s 2007 performance.

In the fourth quarter of 2006, we recovered from insurance approximately $5 million or $0.08 per share of previously expensed legal costs negatively impacting the current year comparison. Our effective tax rate on operating earnings was 46.3%, up from 37.8% in the fourth quarter 2006 resulting in a $0.06 reduction on earnings. The fourth quarter reflects increased reserves for federal state tax compliance going back as far as 2002. We expect our operating tax rate to return to the historical 39% to 40% range.

Our operating profit margins for the quarter was 20.2% compared with 26.6% in the fourth quarter of 2006. Acquisitions in 2007, primarily Glencairn, reduced the fourth quarter 2007 margin by 2.0%. The aforementioned legal recovery increased the 2006 margins by 2.8%.

Revenues for the year were $799.7 million an increase of $88.8 million, 12.5% over 2006. Core commissions and fees increased $79.7 million, acquisitions net of divestitures contributed $81.7 million and supplemental commissions totaled$ 8.8 million. Organic growth was a negative 0.3%. Contingent commissions rose $4.2 million, including $2.3 million on the same-store basis. Investment income increased by $3.7 million for the same reason mentioned for the quarter.

For the year, our operating earnings per share was $2.03 compared to $2.38 in 2006. Margins decreased from 25.5% to 22.8%. Included in the third quarter 2007 results was a charge of approximately $6.4 million related to an error and omissions for an act that occurred in 2001, which reduced our operating earnings by $0.10 per share and full year margins by 0.8%.

For the year, acquisitions -- primarily Glencairn -- were dilutive to earnings by approximately $0.15 per share and reduced margins by 1.0%. Our debt balances increased by $101 million since the end of the third quarter, including $100 million in borrowings from our revolving credit facility to help fund the November 1 acquisition of Bank of America Corporation Insurance Agency. As of December 31, we had approximately $53 million of non-preferred cash and $254 million available under our credit facilities subject to limitations under our debt covenant.

In addition, during the quarter we repurchased 357,800 shares of stock for an aggregate purchase price of $15.2 million. Our share repurchase authorization remains at $50 million per calendar year. As we look into 2008, please keep in mind that certain contingent commissions traditionally received in the first quarter have been replaced by supplemental commissions which are recognized over the course of the year.

In addition, while premium cycles are unpredictable, prudence suggests that we plan for continued soft property and causality rates in 2008. We have identified and implemented in late 2007 approximately $16 million in cost savings that we expect to realize in 2008, including those previously referred to in the discussion on the international segment. These savings, in combination with our demonstrated ability to write and retain business will allow us to create value despite the difficult industry setting.

At this time I will turn the call back over to Mel for further review of our operating results and outlook.

Martin Vaughan

Thanks, Michael. As Mr. Dinkins has described, the highlight for the quarter was our ability to hold organic growth flat despite persistent and extreme soft P&C pricing conditions. Our retail U.S. business produced organic growth of 1.5% for the quarter and stayed flat for the year, due in part to a record number of new clients and continued high client retention rates. This record is particularly noteworthy given our 85% leverage against commissions and fees and compares very well with our peers, particularly those that receive their pay in the form of commission as we do.

This morning I want to discuss in some detail the market setting, commercial property/ casualty market setting. I want to discuss our Glencairn operation in London. Those are the two subjects that affected our fourth quarter and full-year financial performance the most. After that I want to touch on our wholesale businesses, which also felt the heightened effect from the property and casualty rate cycle and talk some about our cost savings and process improvement initiatives which Michael said we expect to generate identified savings in 2008.

Before turning the floor over to Mike Crowley, who will discuss our operations for the fourth quarter and the year, I’ll take just a moment to comment on our record 2007 acquisition year and the acquisition outlook for 2008.

So starting with the P&C rates, everyone knows that commercial property casualty rates continued their unprecedented double-digit decline in the fourth quarter of 2007. It marked the fifth consecutive quarter of 10% or greater declines. While we’re working very hard to capture the best deals for our clients and taking care of those clients remarkably, the decline in rates obviously has a dramatic effect on our top line.

Michael Dinkins mentioned that the CIAB survey found an average decline of 12% for the fourth quarter and in fact if you take the CIAB quoted measurements and put those against the HRH mix of business by size, it would generate more like a 13.5% decline for the HRH commercial property casualty book. Keep in mind these are averages and there are differences within regions and lines of business.

Our outlook for rates is continued softness throughout 2008. I think everybody believes that. We do expect the rate decline to moderate somewhat as the year progresses and as underwriters begin to feel the effects of the price cutting on their top lines as they’re doing now and also on their combined ratios. They’ll also see effects of the higher loss costs and reduced investment income. So we’ll be happy to expand on the marketplace if you have questions. But I don’t want to over do that.

As far as Glencairn and our London operations are concerned, I want to be clear on where we stand and give you some details. Since we acquired Glencairn in January of last year, you know that Glencairn is primarily a wholesaler of insurance. We’ve spoken highly of its strategic fit. We’ve spoken highly of the leadership and the production teams there and the growth prospects. I want to make it clear that despite its underperformance during the first year with HRH, we have not at all changed our view that Glencairn ultimately will be seen as one of our most successful acquisitions. Glencairn is truly full of terrific talent. I go there all the time and I can tell you that.

We now have a substantial presence in London. That presence is critical for accessing the London insurance market as well as accessing underwriting capacity in Europe and Bermuda. It represents strategic assets that clearly broaden and deepen our ability to serve and grow our client base.

I’d like to give you some details regarding Glencairn’s underperformance and add a little color to what’s happened there. While historic seasonality accounted for some of the soft results in the first half of the year, as Michael Dinkins said, as the year progressed we discovered more influential issues were also at work.

As a wholesaler, the effect of rate declines are compounded. Lower rates cause you to cause your renewals and your new business revenues to be lower. But also you have a divergent of business from the traditional wholesale markets including Lloyd’s to standard U.S. and European underwriting markets. At Glencairn, reinsurance rates were also negatively impacted and new reinsurance business failed to materialize. Although it’s only about 13% of Glencairn’s revenue, the reinsurance is an important part of our operation. In addition, there was a shortfall of expected new business as the momentum that Glencairn had enjoyed from ‘05 to ‘06 dried up in ’07 again, due to marking.

In spite of these factors, Glencairn did grow their revenues modestly from ‘06 to ‘07 and had a small operating profit in ‘07. The dilution of earnings came from the amortization and the interest expense charges to our P&L.

So the steps that we’ve taken when the issues at Glencairn emerged in the second half, we took action, as Michael Dinkins says. We completed the planned combination of all three of our UK operations under one roof with one strong leader. We have reduced our average headcount by 14% in London, including the retirement of several senior positions and the elimination of redundant back office and administrative staff.

The severance payment for these staff reductions were expensed in 2007. Most importantly I want to note that we have retained all of our senior production talent in London. In addition, the other thing we did in London is we closed one of the offices that we refer to as a contact office which was a small office in South Africa.

Our outlook for Glencairn now as a result of these actions and even assuming continued soft market conditions, we clearly expect Glencairn itself and our other international operations now combined with Glencairn in the aggregate to be accretive in 2008 and we’ll be happy to answer additional questions.

While we’re talking about wholesale businesses we should also touch on the domestic wholesale businesses, just as in London our domestic ENS and program underwriting businesses are affected by lower rates on renewals and new business. And again, as well as diversion of business from what’s typically the E NS underwriting markets into what we refer to as the standard underwriting markets. Our ENS and program businesses account for about $55 million in revenue. They have historically enjoyed very high margins.

Our current strategy here is to aggressively compete for new business and renewals, carefully control our costs and position these operations for higher profitability as the P&C cycle advances. Of course, these businesses will receive the greatest immediate benefit when the market begins to harden.

On the cost saving and process improvement side, I’d like to add a little bit to what Michael Dinkins commented on the cost savings estimated to be $16 million that we expect to realize in 2008. We gave you some detail about these initiatives during our last call so I won’t go into all that detail again. But I want to emphasize today that these cost savings have already been implemented through staff reductions and through operating cost reductions and they clearly should help us to grow profit margins in 2008.

In addition to the identified cost savings, process improvements for the most part are also part of our long-term plans for applying newer technologies over our increased scale of operations. We’ve accelerated a number of these plans in an attempt to realize additional expense savings in 2008 and beyond.

The cost savings and process improvements we’ve put in place are not only designed to improve financial performance but they’re also designed to enhance client satisfaction and raise our competitiveness in the marketplace.

To ensure these changes meet our objectives, we’ve created the position of regional operating manager. Mike Crowley is going to tell you more about that in just a minute.

2007 was the biggest acquisition year in the history of HRH. We added over $150 million in annual revenue, boosting our base revenues by more than 20% and continuing to stay true to our financial discipline in acquisitions. In a minute we’ll ask Mike Crowley to update us on the largest of these, the former Bank of America Corporation Insurance Agency, a real employee benefits powerhouse.

I want to take just a second this morning and recognize our acquisition team led by Tim Korman and Brent King. Congratulations to them on a super year and congratulations to our regional and local deal champions for an outstanding year. Thanks to the folks who have joined us for helping us integrate these companies successfully.

In 2008 we expect more of a normal flow of deals. We can’t predict with certainty what that will be. The competition for deals remains intense as it was last year. Our pipeline now stands at more historic levels with several quality prospects in the pipeline. We’ll ask Tim Korman if he’ll take questions in just a moment.

Finally before I turn things over to Mike Crowley, I want to pay tribute to Al Rogal, one of our named founders and a long-time member of our board of directors. Al passed away during the fourth quarter. He was a lifelong resident of Pittsburgh and was known for his business acumen, his social responsibility and his philanthropy. He was loved by many people. We wish all of his survivors comfort, health, strength; particularly Al’s son, Andy Rogal, who was my predecessor and worked here at the firm.

So with that I will now ask Mike Crowley to give you his report. Mike.

Michael Crowley

Thanks, Mel. As both Mel and Michael mentioned, the property casualty market remained incredibly soft with rates declining double-digits in the fourth quarter. While 2007 was disappointing in some respects, we are still confident that our model designed to bring greater value to our clients is working. As mentioned earlier, new business sales in 2007 were excellent, resulting in another record year in dollars year over year and in unit sales year over year. This record new business coupled with the steady retention rates produced organic growth of a positive 1.5% in the fourth quarter in the U.S. retail operation.

In addition, because of the new business and the excellent job done by our associates in serving our clients allowing us to retain them, we have only a minimal decrease in margins in the U.S. retail operation when compared to 2006. In our strategic plan, enhancing our customer’s experience is one of three main pillars. We have discussed on several occasions during this call the tremendous talent available to serve our clients.

However, we’ve also reached the point at which our scale and available technologies properly combined will enable us to deliver even more value to clients and allow those clients better access to the knowledge that we have assembled. These process enhancements will improve our client’s experience and at the same time reduce our operating costs.

Michael Dinkins had already pointed out the cost savings of $16 million that we implemented at the end of 2007 that we expect to realize in 2008. To facilitate these cost savings and improve efficiency, we have selected seven of our senior insurance specialists to fill the position of regional operations manager in the seven U.S. regions. These individuals, along with our new operations manager, are leading our process improvement efforts across the U.S. retail division. These positions are outlined in our strategic plan and are critical to our future success.

I’m very pleased to announce that Kris [Burvais] will be joining HRH on March 3rd as Operations Manager and will report directly to me. Kris has over 20 years of experience in the insurance industry. She is skilled at developing teams and strategies to streamline operations and improve client service for the alignment of technology business and process design. Kris’ background includes serving for a number of years as Chief Information Officer for [inaudible] and most recently as Managing Director of Operations for Wachovia Insurance Services. She’ll be relocating to Richmond shortly.

In addition to Kris joining us, I am also pleased to announce that Peter [Gruinberg] has been promoted to the National Director for Employee Benefits for HRH. Peter came to us through the Bank of America acquisition where he held a similar position. Peter is a member of HRH’s national employee benefits executive committee; he also serves on the National Broker Advisory Council for three of the largest national health insurance companies and is a member of the employee benefits board of the Council of Insurance Agents and Brokers. Peter will report directly to me in his new role managing this very important segment of our business.

I’d like to make one comment about the recent Bank of America acquisition. Simply put, we are extremely pleased with the talent that has joined HRH and with the integration of this talent into our company. The team is off to an excellent start and is right on target with our expectations. We expect them to be great boost to us in 2008 and as we said earlier, two-thirds of their employee benefits revenues and we’re delighted with that addition to this growing segment of our business.

Finally, while we appreciate the difficulties ahead, we are nevertheless optimistic despite industry conditions with respect to those things that we can substantially control: new business development and retention and continuous improvement of our sales operating and service models and prudent management of cost and quality. I’d like to take this opportunity to thank all of our associates for their efforts in 2007 and for their commitment to our 2008 plan.

Mel.

Martin Vaughan

Thank you, Mike. That concludes our report. Jan, would you please open for questions?

Question-and-Answer Session

Operator

Our first question comes from Nik Fisken - Stephens.

Nik Fisken - Stephens

Remind me of the expected impact of BoA on EPS and margin?

Michael Dinkins

We haven’t disclosed the expected impact. We do expect it to be accretive. It will be hard to measure from the perspective of when fully integrating Bank of America into HRH some of their producers will be joining some of our existing profit centers and vice versa, some of their producers are joining ours. So going forward it will be hard to track it. But as Mike indicated, the early first two months, because we just have November and December, were in line with our expectations and we see absolutely no issues at all with the acquisition.

Michael Crowley

Keep in mind as we said earlier Bank of America was not a fixer-upper for us. It was a good operation with a lot of good production talent which we’ve retained and the integration is going very well and we are very pleased with their start.

Nik Fisken - Stephens

Is it safe to say that their EBITDA margins are below what HRH has typically been at?

Martin Vaughan

Nick, this is Mel. As we’ve said before, in almost every case where we make an acquisition, the EBITDA margins are slightly below HRH’s historical margins. I think that would also hold true in this case. Although I’ll tell you the margins prior to us acquiring the company and the margins in the business plan are above 20%.

Nik Fisken - Stephens

So if I look at ‘08, you guys get $16 million of cost saves which gives you a couple hundred basis points of margin improvement and if I look at the deteriorating pricing, I think I heard Mel say there was expectation that margins will go up in ’08?

Martin Vaughan

Yes. What I said, Nick, is that the $16 million will help the margins, which obviously it will since the actions have already been taken. We’re confident of our new business, we’re confident of our retention. The wild card in the mix is what happens to rates. If rates continue to decline double-digit plus, then obviously it’s going to be a little tougher than it will be if decreases moderate a little bit later in the year. So all things being equal, we would expect margins to improve. But that’s up against the market.

Nik Fisken - Stephens

Then Michael, what was the total supplemental commission number for ‘07?

Michael Dinkins

$8.8 million.

Nik Fisken - Stephens

Last thing I’ve got, so if I look at the other operating expenses of $41 million and I back out a couple of one-timers that gets me to about $38 million. Is that obviously we have to increase that a little bit for BoA. But I’m trying to get my arms around that specific number, because it’s actually gone up to about 19%, I believe it was, of revenue. Could you give us a little outlook on that one?

Michael Dinkins

It’s hard to speak to the $38 million that you’re referring to but let me just talk about other expenses in general. Once again, there’s items in there that are not truly run rate expenses and we didn’t mention it in this call, there was no big unusual legal or E&O or any type of those types of things. But obviously those are there in other expenses.

I hate to go on a run rate basis, but absent something new and different coming up, we don’t expect that to change materially from our run rate where we’re at now.

Nik Fisken - Stephens

What would you say the operating run rate is? $41 million minus what?

Michael Dinkins

I’m not going to. I’m not going to give forward projections.

Nik Fisken - Stephens

In the quarter, what would the $41 million look like on an operating basis?

Michael Dinkins

I’d have to get back to you on that because what I need to do is take [the base] and put it in for four quarters because it was only in for two months. Let us give you a call back, we can dig into that and try and help you understand what the run rate is. I can’t give you that off the top of my head, because both [the base] and other operations were not in there for the full quarter.

Operator

Your next question comes from Keith Walsh - Citigroup.

Keith Walsh - Citigroup

Good morning gentlemen. Two quick questions. Mel, your comments about why you believe rates will firm this year when I’m looking at P&C underwriters still printing combined ratios in the low ‘90s I want to get a little more color why you have confidence rates are going to firm any time soon.

Michael, if you could talk a little bit about your fixed versus your variable employee costs and how you manage that in a soft market. Thanks.

Martin Vaughan

Keith, I think what I said was that as the year progresses we expect the declines to moderate and to me, I don’t want to get into semantics, but we do not expect -- a firm market to me means that in my definition would mean that rates are increasing. We don’t believe for a moment that rates are going to increase. At best what we think we’ll see is later in the year the declines moderating to something that’s a little less drastic than the 12% to 14% we’re seeing now on middle market and large accounts. Does that make sense?

Keith Walsh - Citigroup

Yes it does. Thank you for clarifying that.

Martin Vaughan

You’re welcome.

Michael Dinkins

Your question on relative to the fixed versus variable, the variable portion of our concentration is obviously our producer pay plan in which on a lag basis it’s directly variable with our revenue so that piece does vary.

The other piece, and as you say all costs are variable in the long run, but that is where a good portion of the process and cost improvement and changes have already taken place will be impacting that number also. Such things as just, again, process improvements, such things as taking operations and combining four or five process centers into one process center and having less administrative costs to support; one process center versus three small ones. There’s a lot of activity going on throughout 2008 that is buried into that $16 million that gets us at that.

In addition to that, we’ve done a lot of things on the IT side. This is why it’s hard to give a direct number that it’s taken our IT costs from a fixed cost to a variable cost. As an example, we entered into arrangements so that relative to our copiers and printers we take them to a managed service system environment where we don’t own the copiers anymore. We don’t own the printers anymore and we only pay for every sheet of paper that we actually print. So that as our volume goes up and down, rather than have a piece of equipment we have to amortize and eat no matter what our revenue levels are, we now have taken that and turned it into a variable cost.

There are some other things that we’re doing on the IT side also that will take us from managed services types of environments, take us from fixed cost to variable. So those are part of the process improvement changes that will make us more of a variable. But lower overall costs in general can take a higher percent of the variable.

Operator

Your next question comes from Mark Hughes – SunTrust.

Mark Hughes – SunTrust

Thank you very much. What is the magnitude of the 1Q shift from contingent to supplemental? Any numbers you can give us there?

Michael Dinkins

Those, from year to year, the amount of contingents vary. Just like we indicated this year on the same-store basis we had an increase of our contingent. So if you use a historical number, you have to take into consideration that they do change from year to year. It would be in the $5 million to $6 million range, just a swing from one quarter to the next. Again, that could vary because contingents do vary from year to year but the $5 million to $6 million range.

Mark Hughes – SunTrust

Is that to say because the payments will be spread out through the year $5 million to $6 million less in Q1?

Michael Dinkins

That is correct. We will have some things that mitigate that. Last year, in the first quarter, we could not recognize income, approximately $2.4 million of contingents that we got from Loan Protector. This year we’ll be able to recognize whatever we receive from Loan Protector in the P&L. That’s not to guarantee that we’ll get $2.4 million again but it is to say that that $5 million to $6 million is mitigated by the fact that, one, we will be able to recognize whatever we get from Loan Protector and we have some acquisitions that we picked up that will be able to recognize as contingents in the first quarter also. But, just stand-alone supplemental commission it does create a hole for us in the first quarter.

Mark Hughes – SunTrust

You’ve been holding the line very well on revenue, positive net to retail. Is that costing you in terms of earnings now in the near term and you’ll make it up later on renewals since you’ve got the market share, or is that at this point still neutral or accretive to earnings to be capturing share like you are?

Michael Crowley

As I said earlier, Mark, we did a good job of maintaining margins in a very tough market in the U.S. retail segment in 2007, and we also did a very good job, I think our people did a terrific job of controlling operating costs in the U.S. retail segment in 2007. So we would expect that the new business would continue to be very profitable for us going forward.

Our focus is going to be on continuing to upgrade and add top sales talent. We’ve got our platform built out in terms of our resources. So we feel good about the existing expense there. We think that the retention and the new business success over the last three years, all of which have been record years year over year, we expect that momentum to continue helping us significantly in the U.S.

Mark Hughes – SunTrust

Final question -- how much of the volatility at Glencairn is related to market conditions versus internal operational issues?

Martin Vaughan

Mark, this is Mel. It is market condition-driven. Glencairn had built a fine business and an infrastructure and a business plan that expected significant growth from ‘06 to ‘07. And as I said, part of the logic for that was that there had been tremendous growth from ‘05 to ‘06, and then the market worked very heavily against us at Glencairn in ‘07. Although we did eek out a modest increase in revenues, revenues did not go back. They went forward. We weren’t able to land a lot of the new business that we anticipated, particularly in the reinsurance area. Consequently, once we were geared up to handle that business and saw it wasn’t going to materialize because of the market conditions, then in the second half of the year we had to worry about reducing costs so that we could earn a substantial profit in ‘08.

We have a business plan for ‘08 that will get us back to where we expected to be in ‘07. Although we’re getting there through cost reductions and not through top line growth, but we’ll still produce our expected bottom line. We’ve done it in a way that I don’t think has cut the muscle out of the operation and still leaves the strength that we really bargained for when we bought the company.

Operator

Your next question comes from Dan Farrell - FPK.

Dan Farrell - FPK

Just first on the amortization of intangibles, the sequential increase, obviously some of that is driven by the deals you have been doing. But were there any changes made to your calculation of amortization for past deals given how they’ve been trending?

Michael Dinkins

There was a slight change. When we do an acquisition, we start the year by making an estimate of what the intangibles and goodwill to be. Then in the October/November timeframe we complete our large transactions and get our third-party valuations in, understand and agree upon the intent, et cetera. So in the fourth quarter there was some catch-up, roughly about a $0.5 million of amortization variance between what we had in booking during the first three quarters and what we needed to book in the fourth quarter to true up from what we had been estimating to what the valuations turned out to be.

Dan Farrell - FPK

And then just a little more detail on Glencairn. You talked about the annual numbers that they had. They had positive earnings for the year. What were the quarter results in the fourth quarter? Can you talk about income there? And then maybe just compare it to how far off it is from what they were doing a year ago.

Martin Vaughan

Dan, this is Mel. I don’t remember the exact word I used, but I think it was either slight or modest operating profit. So without interest and amortization, Glencairn did show a positive, a modest positive top line growth and a modest bottom line operating profit. Of course that profit was positive even though there was the $600,000 in severance costs that Michael Dinkins outlined.

I don’t have the numbers in front of me. The answer to your question, though, the other part of your question, the answer is that there was not an operating profit in the fourth quarter. The fourth quarter new business didn’t come through anywhere near what we thought and there was actually a loss on an operating basis where there had been a profit through the first nine months. There was a loss in the fourth quarter that ate up most of that profit.

Dan Farrell - FPK

Can you also refresh us on the duration of the earn-out for Glencairn, how many years it was? Have there been any departures from Glencairn? Is everyone basically intact since you acquired it?

Martin Vaughan

The earn-out, I believe one of my partners here will correct me, but I think it was a two-year earn-out, and ‘07 was the first year and ‘08 is the final year. However, we have now integrated the full company. We had three operations in London and we’ve now integrated those three. We have a very impressive trading floor in London and a lot of energy. And I’m the one that goes over there and Steve Hern reports to me. It’s really alive and impressive.

Dan Farrell - FPK

Just in terms of the people that are there, is that still intact since you acquired it?

Martin Vaughan

Other than the positions where there’s been redundancies or positions that we’ve determined we didn’t need any longer, I just talked about this a week ago with Steve Hern. He told me that there are 35 what would be called producers, brokers/producers and since the time we bought the firm, we’ve had three of those 35 people have turned over and none of the three brokers or what we would call brokers or producers were what I would refer to as senior level.

Dan Farrell - FPK

That’s very helpful. Just one additional question. On the $16 million of expense saves for ‘08, how much do you think will fall to the bottom line, sort of ex what happens in the market conditions? Because presumably you are still reinvesting in the business somewhat as well.

Michael Dinkins

Well, the $16 million represents the cost savings that we’ve identified and with any cost savings, there’s some execution risk. But we don’t see much in the actions that we’ve already planned, put in place and are currently monitoring toward execution. So that $16 million does fall to the bottom line. But as you indicate, we have a growing business and there’s other investments that we have to make and other things that we’ll do to meet clients’ demands. But that cost savings piece is identified costs that will fall to the bottom line.

Michael Crowley

In the U.S., most of our people expense additional in 2008 will be sales-related.

Operator

Your next question comes from Chuck Hamilton - FTN Midwest.

Chuck Hamilton - FTN Midwest

In terms of Glencairn, in your financial information you’ve indicated that there are $54 million of international revenues or core commissions and fees for the 2007 year. What fraction of that came from Glencairn this year?

Martin Vaughan

The $54 million in total, I think probably $36 million. You can actually see it on the report. If you look at the international segment on the last page under adjustments that $36,774,000 is Glencairn.

Chuck Hamilton - FTN Midwest

Understanding you’ve had some cost saving initiatives that have been taking place and you indicated that they posted a slight operating profit for the full year 2007 expected to be accretive in 2008 what are your expectations for the long-term EBITDA margins that Glencairn can post?

Martin Vaughan

The short answer will be 25 plus.

Chuck Hamilton - FTN Midwest

Looking at the domestic ENS business, did you lose any significant programs this year as a result of market conditions, either rate or just loss to the standard markets?

Michael Crowley

Jeff, we have not. I was thinking for a second. We have not lost any significant programs. In fact, it’s in a soft market it’s a perfect time; the underwriters are really aggressively seeking programs and program business. So the effect on our program business, MGU business, ENS business that we’ve described just simply has to do with the double whammy that they are under in the sense that they face the same declining property casualty rates that the retail side of the business faces.

Plus they face the defection of clients from the traditional ENS and wholesale markets into what we call standard markets. An example would be a tough-to-insure risk that would historically go to the ENS market and because the traditional underwriters have broadened their appetite, all of a sudden the Hartford or the Travelers or the Chubb decide to write business that would normally be on the fringe of their appetite.

And so that business moves from ENS over to those companies. And then of course as I said in my report, when the market begins to turn and underwriters begin to tighten, that’s the first business that’s jettisoned back to the ENS markets and ENS markets get a significant spike up when that starts to occur.

Chuck Hamilton - FTN Midwest

That’s very helpful. Michael, a couple of questions for you on the numbers side. In terms of the amortization for the quarter, and obviously we saw a big tick on the sequential as well as a year over year basis, was there any significant write off of goodwill that was previously recorded on your acquisition activity?

Michael Dinkins

No, there was no write off of previously recorded goodwill.

Chuck Hamilton - FTN Midwest

On the tax accrual, I think you indicated that there was, what, a $0.06 impact in the quarter, about maybe $2.2 million. Could you give us a little more color in terms of what that reflects, what that’s for your higher tax accrual you said going back to 2002.

Michael Dinkins

What it reflects is the fact that we’ve done some studies in terms of our state tax compliance and we have found some things that we will be approaching the various states. We’ve set up a reserve reflecting the outcome that we expect from that. That’s the reason why we believe our rate will return back to historical levels after this quarter.

Chuck Hamilton - FTN Midwest

That reflects your action rather than maybe some of the states coming to you first and perhaps there might be penalties and interest on top of that going forward?

Michael Dinkins

In establishing our reserves, based upon guidance that we have and issues we try to take into consideration an appropriate amount of penalties and interest. We will be approaching the states and hoping that because we are approaching them and making the corrections that we can mitigate some of that. But we do have some of that included in our reserve.

Chuck Hamilton - FTN Midwest

Great, as a last question, Michael, I think one of the other callers had requested further detailed information on Bank of America’s insurance agency for revenues and expenses in the quarter to help us better understand the impact. That would be great if you could publish that for us.

Michael Dinkins

As a general rule, in terms of external publishing, we don’t go down below the segment level in terms of data that we provide. But we will try to meet your needs for information, try to give you some type of guidance. But we’re not going to be publishing anything externally.

Chuck Hamilton - FTN Midwest

You will not have a note in the K giving further color on that acquisition?

Michael Dinkins

Yes, we will have some further information in the K relative to that acquisition.

Chuck Hamilton - FTN Midwest

Thank you very much for your answers.

Operator

Your next question comes from Doug Mewhirter – FBW.

Doug Mewhirter – FBW

Did you have any net hires or fires in your U.S. producer force for the quarter? Also if you have that number for the year that would be helpful.

Michael Dinkins

I don’t have the number in front of me for the year. But there was nothing extraordinary in the quarter.

Doug Mewhirter – FBW

The other question I had was about your benefits business. I guess the benefits of the benefits business are it is maybe a little less volatile than property and casualty. Do you have any trade-offs for that less volatility? Is there generally lower margins in benefits brokerage than in property casualty?

Michael Dinkins

No, actually in some cases it may be higher. And there is less volatility in the rate environment with regards to the employee benefits business. It doesn’t reflect anything like the property casualty business does. That’s one of the reasons why we’ve been interested in growing that segment of business as a percentage of our revenues.

Operator

Your next question comes from Eli Fleminger - Stifel Nicolaus.

Eli Fleminger - Stifel Nicolaus

Can you quantify Glencairn’s impact and pre-tax margins in the quarter?

Michael Dinkins

Well, we’ve done it now on an EPS basis. I don’t have an exact number for the EBITDA for the quarter. We did give you the margin impact, the operating margin impact that it had for the quarter. I think just take that rate times the dollars and you’ll have an idea, an approximation of the impact.

Eli Fleminger - Stifel Nicolaus

You do give the impact on the margin? Where is that?

Michael Dinkins

When we mentioned in the call that, let me go back. What’s the number again? We said acquisitions in 2007 which was primarily Glencairn reduced the fourth quarter 2007 margins by 2.0%.

Eli Fleminger - Stifel Nicolaus

I guess I missed that earlier. I’m sorry about that.

Michael Dinkins

That 2% can approximate your EBITDA impact.

Eli Fleminger - Stifel Nicolaus

One other question on amortization. If you take out the $500,000 true-ups during the quarter, does that give you a reasonable run rate going forward?

Michael Dinkins

We still would be missing one month of [base] to get to a run rate going forward.

Operator

Your next question comes from Amy Manilla - Margin Capital Management.

Amy Manilla - Margin Capital Management

I just had a few questions on some cash and non-cash items. First what was the stock-based comp for the quarter?

Michael Dinkins

Hold on a second while we look it up.

Amy Manilla - Margin Capital Management

And what was CapEx?

Michael Dinkins

We’re digging. Hold on. CapEx was $3.8 million.

Amy Manilla - Margin Capital Management

And stock-based comp?

Michael Dinkins

Year to date was $6.3 million.

Amy Manilla - Margin Capital Management

6.3 for the year?

Michael Dinkins

6.9 for the year.

Amy Manilla - Margin Capital Management

6.9 for the year. Back to amortization, I think the reason everyone is centering on this is a lot of the myth if you will was really a non-cash charge, and it would really help to understand this a bit more maybe if you could break out in that amortization of intangibles for the quarter what Glencairn was and what BoA was, I think that would be very helpful.

Michael Dinkins

Again, giving information below the segment level externally would be inconsistent with our reporting guidance that we want to give. What we can do is just give you some guidance overall on that amortization. As we said before, the quarter reflects pretty much the run rate, because that half a million catch up, when you add [base] for a full quarter, it’s probably not materially different what you’re going to see going forward.

What we can do is make sure we provide everyone on the call with a little more color on that. Plus when you get our 10-K, you’ll have further breakdowns of what’s in that amortization, how we calculate it.

Amy Manilla - Margin Capital Management

One last question. How many years does it take to amortize, let’s say, the Glencairn acquisition or a BoA acquisition?

Michael Dinkins

Well, there’s different lives on the various intangibles from relatively short, three years to some items go out as far as 10 years.

Amy Manilla - Margin Capital Management

Is the bulk of it in the first three years, though, would you say?

Michael Dinkins

No, I would not say the bulk of it is in the first three years. I’d say the bulk of it is in the 10 year life category as opposed to the short stuff.

Operator

Your next question comes from Greg Laven - Decade.

Greg Laven - Decade

On the operating margin expansion plan does that exclude the impact to the margins from acquisitions during 2007?

Michael Dinkins

No, it does not. It includes our base of business that we have now. If you take the base of business that we had at the end of the year, we expect to generate $16 million in cost improvement from our existing book of business.

Greg Laven - Decade

Expenses are not going to persist into the future the one-time, the tax rates improved and your operating environment calls for a continuation of this rate erosion, 12% to 14% with a little bit of moderation maybe towards the end of the year. That’s all predicated on guidance for expansion of margins on that base?

Michael Dinkins

Yes, we do anticipate that our tax rate will return to historical levels around 39% to 40% and it is our expectation based upon information that we get from third-party sources, CIAB et cetera that everyone is indicating that rates will still go down in the 2008. Therefore, management put together a business plan that was consistent with expecting rates to continue to go down. So knowing that our shareholders and our obligation is to get those margins back up to something acceptable, we are running the company to target to improve our margins in a continued soft rate environment.

Greg Laven - Decade

One last clarification. Of the three items that impacted the quarter, one was market conditions. It seemed like that was mostly felt in ENS and other and didn’t really impact the retail segment.

Michael Crowley

It absolutely did impact the retail segment. The property casualty business is heavily impacted by those rate declines. As Mel commented if you take our property casualty business in the U.S. retail we estimate the rates to us at over 13%.

Greg Laven - Decade

1.5% organic versus your budget it still impacted?

Martin Vaughan

It just simply means we’re selling tons of new business and gaining market share like we never have in the history of the company.

Greg Laven - Decade

Revenue dollars weren’t that bad and if it was impacting the other two. Any ratios you can share with us on the new business, the new loss business or anything else in retail how that might have changed this first quarter versus the last nine months?

Michael Crowley

Our retention rates held steady and our new business momentum was consistent with the rest of the year.

Michael Dinkins

When we say held steady we are measuring it in dollars. By holding it steady, the 12% to 13% decline in rates we really had a good performance.

Operator

At this time there are no further questions.

Martin Vaughan

Thank you, Jan. With no further questions we’ll close. Now we want to say thank you to our investors and the analysts that have participated in the call. We appreciate your interest in HRH and we want to take just a second to thank all of our HRH associates for your hard work and dedication to your clients during these tough market conditions. Good day.

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Source: Hilb Rogal & Hobbs Q4 2007 Earnings Call Transcript

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