(front cover)
HILB, ROGAL AND HAMILTON COMPANY
(Photograph of magnifying glass with the caption: "A New Focus")
1996
Annual Report
Contents
1 Financial Highlights
2 Letter to Shareholders
5 A New Focus
13 Financial Section
27 Directors and Officers
28 Agency Locations
29 General Information
(Map of the United States and Canada showing HRH agency and
branch locations)
Financial Highlights
HILB, ROGAL AND HAMILTON COMPANY & SUBSIDIARIES
(in millions of dollars, except per share amounts)
(Bar graphs reflecting the following financial information below)
1996 1995 1994 1993 1992
Total Revenues $ 158 $ 148 $ 141 $ 142 $ 140
Net Income 11.4 11.8 11.4 8.3 8.6
Net Income Per
Common Share .85 .82 .77 .57 .65
Dividends Per
Common Share .605 .57 .50 .45 .41
Our Business
Hilb, Rogal and Hamilton Company serves as an intermediary
between our clients-who are traditionally the mid-size, Main
Street businesses of the nation-and insurance companies that
underwrite clients' risks. With
69 agencies located in 16 states and five Canadian
provinces, Hilb, Rogal and Hamilton Company is able to
assist clients in transferring their risks in areas such as
property and casualty, employee benefits and other areas of
specialized risk exposure. Revenues are derived primarily
from commissions received from insurance companies with whom
client risk is placed. Support services related to risk
transfer transactions are an additional revenue source. As
an industry leader, the Company expands its business by
developing new clients, providing additional services to
current clients and maintaining a focused merger and
acquisition strategy.
(This section includes a photograph of Robert H. Hilb, Chairman and
Chief Executive Officer)
To Our Shareholders
A year ago, I had the pleasure of reporting to you that our
Company experienced improved performance, even in the midst
of very difficult market conditions. At that time, I also
told you that the Company was positioned for steady growth
and was an excellent choice for long-term investment.
Some things never change.
Though 1996 brought little relief from the soft market
conditions that have dominated our industry for more than a
decade, Hilb, Rogal and Hamilton Company achieved
satisfactory financial performance again in 1996. Revenues
were $158.2 million-a solid 6.8% increase over 1995.
Although our earnings decreased 3.6% to $11.4 million, the
Company's earnings per share increased from $.82 per share
in 1995 to $.85 in 1996. We believe these results are a
testament to the continued success of our Company's well-
established financial and operational strategies.
Yet even while many things remained constant for our
Company in 1996, others began changing in significant ways.
As part of our ongoing commitment to enhance shareholder
value, we began leveraging the Company more aggressively
last year. Partly due to this strategy, we were able to
continue the execution of our stock buyback program, with
total purchases in excess of 800,000 shares. We reduced our
number of shares outstanding from 13.7 million at December
31, 1995 to 13.3 million in 1996. This is quite an
accomplishment. During the fourth quarter of 1996, our
annual dividend rate was increased from $.60 per share to
$.62. Our Company continues to provide the highest return in
the industry. And as long as we believe our stock is
undervalued, we will continue this aggressive reinvestment
policy.
Several acquisitions were made during 1996. A total of
15 agencies were purchased during the year, with significant
acquisitions made in the United States (Moline, New Haven,
Birmingham and Ontario) and in Canada (Manitoba). These
acquisitions will fit well within our Company's new regional
infrastructure, which is now beginning to improve the way we
deliver services and products to our base of current and
prospective clients. A divestiture was made in 1996 as well,
when we completed the sale of our New Jersey office. This
action is consistent with our strong desire to constantly
review our operations in order to maximize our return on
assets and our value to shareholders. I invite you to read
more about the progress of our Company's new operational
focus in the following pages of this report.
1996 also brought one major management change to our
Company. In late November, I announced my plans for
retirement. Though I will continue as Chairman of the Board,
Andy Rogal, our current President and Chief Operating
Officer, will assume the position of Chief Executive Officer
at our annual directors' meeting in May of this year. Andy
clearly has the ability, enthusiasm and experience needed to take the
Company into the future. I have every confidence that this
orderly transition of leadership will ensure Hilb, Rogal and
Hamilton Company's continued success.
Since the Company's inception in 1982, we have
accomplished many great things. What started as a $15
million revenue system has grown to more than ten times that
size. In just fifteen years, we have acquired or merged with
over 160 agencies, making us the 9th largest agency network in the United
States and the 16th largest in our business worldwide.
Taking the Company public in 1987 was a major step towards
financial success and our move to the New York Stock Exchange in 1992
signaled that we had finally become one of the nation's top
insurance brokerages. Since that time, we have repaid the
original loan required to launch our business, have taken
the Company outside of the United States into the provinces
of Canada and have created an operating structure that will
provide greater value for our shareholders and our clients.
Of course, we could have never achieved these things
without the support of our Company's talented management and
employees. The people of Hilb, Rogal and Hamilton Company
have made our business what it is today. Their winning
attitudes and commitment to excellence have enabled us to
build a viable organization that is capable of creating
value on all levels. That is something of which everyone
in our Company can be proud.
Change is good-for our industry, for our business and
for our people. We have built a strong business based on
sound, conservative principles. Now it is time to take the
Company to the next level.
By providing better service, diversifying our products
and acquiring only agencies that fit within our Company's
financial and operational strategies, we will be able to
enhance the level of value for our shareholders, our clients
and our employees. And with the continued support of
investors like you, Hilb, Rogal and Hamilton Company will
meet the challenges of the future with the same level of
success with which we've met the challenges of the past.
Sincerely,
Robert H. Hilb
Chairman and Chief Executive Officer
(This section includes a photograph of Andrew L. Rogal, President
and Chief Operating Officer.)
This is an exciting time for Hilb, Rogal and Hamilton
Company. In an industry besieged by adverse market
conditions and fierce competitive pressures, we
have experienced remarkable success. Thanks to the exemplary
leadership of Bob Hilb, we have become one of the largest
insurance intermediaries in the nation. His vision and
dedication have been the driving forces behind our growth
and financial success. Under Bob's guidance, the transition
to new management has taken an orderly course.
In the latter part of 1995, we began consolidating the
majority of our offices into larger, regional business units
to position the Company to compete successfully in our industry
environment. We have completed the first stage of our
operational plan and have a strong platform on which to
build greater value for our shareholders, our clients and
our employees. It is now time to move to the next level of
our plan by integrating and rationalizing these larger
operating units. The re-creation of
our operating structure has generated much momentum and
excitement within our Company-creating an incredible
opportunity for HRH.
1997 will bring an intensified focus on our Company's
operations. Our decision making will be value-driven and
more strategically focused within this new operating
structure. We will be guided by a real commitment to excellence and to
the development of professional, highly-trained employees
who can contribute to our growth and to our ability to
reduce redundancies and increase efficiencies throughout the
organization. By providing better and more valuable services
to our clients, we will generate higher revenues and profits
for all of our HRH constituencies.
Our goal is to become the premier mid-market insurance
and risk management intermediary in North America. I believe
this is well within our reach. There is a new spirit of
enthusiasm within our Company. We look forward to focusing
this energy in new and profitable ways.
Sincerely,
Andrew L. Rogal
President and Chief Operating Officer
(Photogragh of a magnifying glass with the following enclosed caption:
Expanded Service Capabilities, Regionalization, Commitment to Sales,
Consolidating Efficiencies, Mergers & Acquisitions, Shared Resources.)
(Photogragh of Bradley P. Druehl, Regional Coordinator, California Region
and following captions.)
California Region
Offices: 11
Employees: 223
1996 Revenue Generated: $23.2 Million
"Regionalization was completely new for this Company, but
it made excellent business sense. We're now able to build
a regional structure that can better respond to the
diverse needs of our clients."
- Bradley P. Druehl
Regional Coordinator
California Region
In the past, Hilb, Rogal and Hamilton Company acted as a
true agency system comprised of dozens of independent
agencies. Though they functioned under the Company's name,
these agencies operated in a decentralized and relatively
isolated manner, which curtailed the sharing of resources
needed to provide the increasingly sophisticated services
and products required by the Company's base of upper mid-
market clients and prospective clients.
Because these individual operating units also lacked
the resources and revenue base required to be
institutionally meaningful to insurance companies and other
trading partners, they had no advantage over competing
businesses. Essentially, these small agency operations-as
high quality as they were-were subject to the same
relentless pressures on business and
bottom line that have caused the continuing tide of
consolidation in our industry.
Therefore, in late 1995, HRH made a decision to
consolidate the majority of these agencies into five well-
defined U. S. regions: the Mid-Atlantic (which stretches
from Pennsylvania to Virginia), Alabama/ Georgia, Florida,
Texas and California. Each of these regions was assigned a
coordinator who has been empowered to develop individual
strategies that meet the regions' unique needs.
The creation of this regional system marked a
significant departure from HRH's previous operating
structure. Soon after, each region began developing its own
strategic plan, suited to the local environment and
marketplace, and designed to coordinate and focus all sales
and service activities. Because of the high level of
flexibility afforded to the regions, they may almost be
viewed as five smaller "companies" working within HRH's
national structure.
By developing these regional operating units, HRH has
created more effective profit centers that can respond
better to the needs of clients and deal better with trading
partners than the individual agencies could. "For the first
time, we're able to distribute special programs and develop
new niche markets on a regional basis," said Brad Druehl, regional coordinator
for California. "Finally, businesses and insurance carriers
are seeing us for the large, national company that we've
always been."
(Photograph of Richard E. Simmons, III, Regional Coordinator,
Alabama/Georgia Region, and following captions.)
Alabama/Georgia
Offices: 7
Employees: 256
1996 Revenue Generated: $21.7 Million
"In the regional structure, we have been able
to leverage our relationships with our insur-
ance carriers. By giving a smaller number of companies a
greater portion of our business, we receive significantly
enhanced contracts."
- Richard E. Simmons, III
Regional Coordinator
Alabama/Georgia Region
After just a short period of operation, our regions are now
beginning to reap the benefits of acting as cohesive,
coordinated operating units. Perhaps the most significant
advantage created by the regionalization of our offices is
the increasing number of strategic relationships made
possible by the consolidation of revenue.
In the past, individual agencies did not have the
buying power to attract enhanced contracts with insurance
carriers. Yet when negotiated on a regional basis, insurance
carriers are more likely to provide our Company superior
contracts that often include override commissions. In this
way, our Company's regions are leveraging their
relationships with their insurance carriers.
The Alabama/Georgia region is just one of many that is
experiencing the success of regionalization on contract
negotiations. "Insurance companies are looking for growth,"
said regional coordinator Richard Simmons. "They want
brokers who can deliver larger volumes. Our region has
nearly $200 million of consolidated premiums and that gets
people's attention. We have found that when we approach the
insurance carriers collectively, we have much more clout
than we did when we were operating as individual agencies."
Indeed, all of HRH's regions have begun to
consolidate contracts with carriers and most have
experienced a high degree of success.
Yet consolidating efficiencies go much further than
just contract negotiations with insurance carriers. By
consolidating other services on a regional basis, many
regions are making significant reductions in expenses. Some
regions have gone so far as to contract with one vendor to
provide office supplies and other regions are consolidating
trade association memberships.
"We've also reduced the level of redundancy
in our region by sharing expertise and services throughout
the area," said Simmons. "For instance, instead of having
three offices develop their own directors and officers
liability expertise, we are able to export one specialist
throughout the region. That helps us to increase revenue
with very minimal expense. It also saves a lot of time and
energy for our producers-time they can spend servicing our clients with
new products."
(Photogragh of Jay C. Adams, Jr., Regional Coordinator, Florida
Region and the following captions.)
Florida Region
Offices: 6
Employees: 176
1996 Revenue Generated: $16.6 Million
"What we've done is to concentrate on
providing more services such as loss control and
workers' compensation claims manage-
ment. Our clients have been very receptive to these
value-added services."
- Jay C. Adams, Jr.
Regional Coordinator
Florida Region
It's no secret that the "good old days"-when insurance deals
were made over dinner or during a round of golf-are over.
Today's mid-market, Main Street businesses require much more
than simple
policies and an occasional outing with the insurance agent.
These clients need professional risk management and other
important loss control services.
Throughout each of HRH's regions, an effort is being
made to increase the number of services available to
clients. Though our Company has traditionally been a
provider of property and casualty insurance, the number of
expanded services offered through our agency offices has
grown rapidly. Claims management, loss control, employee
benefits and other fee-for-
service product lines have been developed for use
in HRH's many offices.
The regionalization of HRH's agency system has made it
much easier for our producers to provide these value-added
services. For the first time, the Company is able to deploy
across a large regional
revenue stream coordinated services and an expanded product
mix that small, independent agencies cannot offer. Exporting
talents and specialty programs throughout regions enables
our producers to bring
in ready-made services that they may not have been able to
provide by themselves. Through regional meetings, internal
communications and the distribution of resource lists,
producers are given the opportunity to share ideas and
concepts that will help them serve our clients better.
Many regions have even hired specialists who
can provide much needed support to local producers.
"We added a regional claims administrator to our staff,"
said Jay Adams, who coordinates the Florida region. "This
person has become an important advocate for our clients by
helping them to better manage their workers' compensation
claims costs. He is also able to review older claims for
clients and prospects in order to reduce their outstanding
reserves and bring these claims to closure."
By deploying these additional services in the
context of the regional infrastructure, HRH is able to offer
its clients all the benefits of a large, national broker,
while maintaining the level of personal
service traditionally provided by the smaller, independent
firms. "We've really just gotten started,"
said Adams. "We plan to provide more and better
services in the near future."
(Photograph of Jack P. McGrath, Regional Coordinator, Mid-Atlantic
Region and following captions.)
Mid-Atlantic Region
Offices: 8
Employees: 335
1996 Revenue Generated: $33.9 Million
"Through regional sales meetings, pooled resources and a
greater focus on sales training and education, we've given
our producers many more tools for success. Now they have
better capabilities to increase revenue."
- Jack P. McGrath
Regional Coordinator
Mid-Atlantic Region
Along with our Company's dedication to a regional operating
system comes a renewed commitment to creating a stronger,
more profitable sales organization. Since market conditions
have shown no signs of improvement over the last decade, HRH
is beginning to focus on selling more products and services
to a wide range of clients.
This commitment to sales is manifesting itself in
a variety of ways. Many regions have contracted with outside
consultants to provide sales education and training to all
producers within the region. Most of these seminars have
been focused on transforming producers from commodity
sellers to consultative salespeople. Through a consultative
sales approach, producers can offer much more than low price
commodities. Thanks to the variety of services that are now
available through the regional organization, producers can
more easily position themselves as
full-service consultants to mid-market businesses.
Because the majority of mid-market businesses do not
employ full-time risk managers or insurance buyers, they can
greatly benefit from a professional who is able to advise
them on a wide variety of
matters-from property and casualty insurance to loss control
and employee benefits. "In the past, stand-alone profit
centers had individual salespeople who had no other services
available to them outside of their own expertise," said Mid-
Atlantic regional coordinator Jack McGrath. "Now we've
raised their sights, because we've given them many more
services to sell."
While sales training and education are helping
producers throughout the nation to be much more successful,
account retention programs are helping them maintain the
business once it is obtained. "We want to ensure that once
we win a client, we will be able to provide their business
with all the services they need," said McGrath. "Retaining
their business
is our number one priority."
Incentive programs on all levels of the regional
structure are also helping the Company to encourage
increased sales productivity. And as the level of regional
cooperation continues to increase, the Company expects to
see continued increases in
sales to current and prospective clients.
to current and prospective clients.
(Photograph of S. Loyd Neal, Jr., Regional Coordinator, Texas
Region and the following captions.)
Texas Region
Offices: 10
Employees: 269
1996 Revenue Generated: $23.4 Million
"In Texas, we continue to need a well-defined
merger and acquisition strategy in order to
be a better player in the state. But it's
important that we only acquire businesses
that fit within our strategy."
- S. Loyd Neal, Jr.
Regional Coordinator
Texas Region
Hilb, Rogal and Hamilton Company was built through an
aggressive merger and acquisition strategy. Since 1982, more
than 160 independent agencies have been acquired.
In the past, these transactions
were an excellent way for the Company to build its revenue
base in anticipation of a change in the insurance pricing
cycle. Unfortunately, that change has yet to occur, and many
believe that any future change will not be as significant as
in the past.
As part of our new focus on creating shareholder value
through operations, HRH will pursue a less aggressive merger
and acquisition strategy in the future. Though acquisitions
will clearly continue, they will be less frequent and more
selective than in the past. This redefinition of strategy
will enable the Company to focus more completely on building
a stronger, more operationally sound organization.
When acquisitions do occur, they will do so in the
context of the Company's regional strategies. The regions
themselves will be given more control over merger and
acquisition activity. If they feel that an acquisition is
necessary to fulfill needs within the region, the Company
will take action to secure the agency in question. Likewise,
if an agency being considered for acquisition does not fit the operating
strategies for the region, no transaction will occur.
"In order to reach our goals for profitability and
value-added enhancement in our region, we will need to bring
certain new locations into the HRH family," said Loyd Neal,
regional coordinator for Texas. "But there are other regions
in the Company that really don't need acquisitions. So this
strategy seems very appropriate for the Texas region."
Divestiture of non-performing assets is another
important component of the Company's operational plans for
the future. If an agency is not profitable,
or is not contributing sufficiently to enhance shareholder
value, the Company will consider divesting
the agency in order to invest that capital back into
its operations. Through a commitment to carefully controlled
acquisitions and ongoing divestiture, Hilb, Rogal and
Hamilton Company will ensure improved operational value and
profitability.
(Photograph of Robert J. Hilb, President, Resource Group with the
following captions.)
Resource Group
Location: Glen Allen, VA
Employees: 12
"As we continue to export specialist knowl-
edge, we'll see additional growth. Mutual
cooperation on all levels will clearly
help us achieve our operational goals."
- Robert J. Hilb
President
Resource Group
Much of the success of Hilb, Rogal and Hamilton Company's
new focus on operations will be dependent upon the continued
sharing of ideas and resources throughout the entire organization.
One way to provide all HRH offices with the tools they need
to create better value is to offer a centralized support
team.
To that end, HRH's Resource Group is dedicated to
developing vital products and support services for use
throughout the regions and in all offices. In 1996, the
Resource Group's commitment to providing value resulted in a
new focus on the creation of insurance products for
associations, affinity groups and homogenous industries. In
many ways, the development of such products is a reactive
process-driven by requests from the field. "We consider our
offices to be our initial clients," said Robert J. Hilb,
President of the Resource Group. "Since we do not operate as
a profit center, we've removed one of the barriers to
success. We're here to listen to what's needed and then to
provide the products necessary to gain the client's
commitment."
The Resource Group has developed a wide variety of
products and services for HRH. Among them are a national
flood program, a product for installers of security systems
and an executive liability facility. "With the addition of
Lars Lindeqvist, our program director, we are better
equipped to help identify products within the system that
might be exportable and may eventually assist other HRH
offices," said Hilb. "The scope of our involvement ranges
from assisting in putting the product together and then
getting out of the way, to actually performing the
underwriting function at the Resource Group."
Important market information is also gathered
by the Resource Group and distributed to everyone within the
Company. In this way, the Resource Group is able to ensure
that any potentially useful information makes its way into
the hands of the Company's sales force. "We're building a
firm that's comprised
of people who share the desire to grow-and we're acting
cohesively to create opportunities for our Company," said
Hilb. "The potential is tremendous."
"Within the Company, there is an enormous amount
of enthusiasm about our new focus on operations.
Our people are anxious to begin providing better
value through the operating system we have created."
- Andrew L. Rogal
President and Chief Operating Officer
Hilb, Rogal and Hamilton Company is functioning in a very
difficult operating environment. All commission-based
intermediaries struggle with the tremendous pressures that
have been created by a highly competitive pricing
environment and the vast capacity in the insurance company
marketplace. The challenge, then, is for our Company to find new ways to
expand our profit margins by developing an organization that
can identify and capitalize on new opportunities in an ever
changing industry.
We believe that our Company's new focus on operations
will give us this capability. Our new focus is designed to
accomplish HRH's central goal of
creating better value for shareholders, clients and
employees, while also strengthening our position in the
marketplace.
Clearly, our regionalization strategy is the best way
to develop the thriving entrepreneurial spirit needed to
create this higher level of success throughout the Company.
By acting together in well-coordinated operating units, our
regions will be able to function more effectively and more
efficiently. Through
consolidating efficiencies, value-added services and
a renewed commitment to creating a stronger sales
organization, HRH will begin to realize increased
revenues and greater bottom line profits-which are good for
our Company, and therefore, good for our shareholders.
It is important to note that this new focus does not
mean that HRH will abandon the conservative strategies that
made the Company such a stable financial investment.
Instead, these strategies will simply be modified to fit the
Company's operational focus. Mergers and acquisitions will
continue, but will now be shaped and directed by the
regionalization strategies. Divestitures will be pursued if
they can enhance the margins and operating efficiency of our
franchise. Our Company will also continue to repurchase its
stock in order to generate returns that enhance shareholder
value.
The resources at our disposal are impressive.
By tapping into the immense field of talent that exists
within our Company, we will make Hilb, Rogal and Hamilton's
name synonymous with value. We know that the people within
our organization have the |
abilities needed to create an even greater level of success
for HRH. Empowered by our operational strategy, they-and
your Company-will continue
to perform.
Selected Financial Data
Year Ended December 31 1996 1995 1994 1993 1992
(in thousands, except per share amounts)
Statement of Consolidated Income Data: 1
Commissions and fees $ 153,968 $ 141,555 $ 132,914 $ 137,662 $ 137,296
Investment and other income2 4,275 6,592 7,895 3,994 3,165
-----------------------------------------------------------------------
Total revenues 158,243 148,147 140,809 141,656 140,461
Compensation and employee benefits 88,406 82,761 78,311 82,470 81,940
Other operating expenses 41,951 38,264 35,976 37,774 36,209
Amortization of intangibles 7,596 6,966 6,436 6,581 6,558
Interest expense 1,245 559 812 1,270 1,821
Pooling-of-interests expense 488 503 533
-----------------------------------------------------------------------
Total expenses 139,198 128,550 122,023 128,598 127,061
-----------------------------------------------------------------------
Income before income taxes 19,045 19,597 18,786 13,058 13,400
Income taxes 7,639 7,768 7,394 4,765 4,809
-----------------------------------------------------------------------
Net income $ 11,406 $ 11,829 $ 11,392 $ 8,293 $ 8,591
=======================================================================
Net income per Common Share $ 0.85 $ 0.82 $ 0.77 $ 0.57 $ 0.65
=======================================================================
Weighted average number of shares outstanding 13,493 14,470 14,778 14,456 13,241
Dividends paid per Common Share $ 0.605 $ 0.57 $ 0.50 $ 0.45 $ 0.41
Consolidated Balance Sheet Data:
Intangible assets, net $ 80,006 $ 60,854 $ 48,729 $ 49,454 $ 47,682
Total assets 181,475 163,249 158,895 160,922 151,992
Long-term debt, less current portion 27,196 11,750 3,173 7,249 15,110
Other long-term liabilities 9,870 7,514 2,144 2,889 3,120
Total shareholders' equity 55,298 56,646 66,430 64,157 38,152
1. See Note J of Notes to Consolidated Financial
Statements for information regarding business purchase
transactions which impact the comparability of this
information. In addition, during the years ended December
31, 1993 and 1992, the Company consummated 6 and 9 purchase
acquisitions, respectively.
2. During 1996, 1995, 1994, 1993 and 1992, the Company
sold certain insurance accounts and other assets resulting
in gains of approximately $1,856,000, $3,337,000,
$5,044,000, $1,735,000 and $1,138,000, respectively.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The income of an insurance agency business such as the
Company is principally derived from commissions earned,
which are generally percentages of premiums placed with insurance
underwriters. Premium pricing within the insurance
underwriting industry has been cyclical and has displayed a
high degree of volatility based on prevailing economic and
competitive conditions. Decreases in premium rates result
directly in revenue decreases to the Company. Since 1987,
the property and casualty insurance industry has been in a
"soft market," during which the underwriting capacity of
insurance companies expanded, stimulating an increase in
competition and a decrease in premium rates and related
commissions and fees. The effect of the softness in rates on
the Company's revenues has been somewhat offset
by the Company's acquisitions and new business programs.
Management cannot predict the timing or extent of premium
pricing changes due to market conditions or their effects on
the Company's operations in the future, but believes that
the "soft market" conditions will continue into 1997.
Results of Operations
Total revenues for 1996 were $158.2 million, an
increase of $10.1 million or 6.8% over 1995. For 1995, total revenues
were $148.1 million, an increase of $7.3 million or 5.2%
from 1994.
Commissions and fees for 1996 were $154.0 million, or
8.8% higher than 1995. Approximately $14.7 million of
commissions and fees were derived from purchase acquisitions
of new insurance agencies. These increases were offset by
decreases of $2.2 million from the sale of certain offices
and accounts in 1996 and 1995.
Commissions and fees for 1995 were $141.6 million, or
6.5% higher than 1994. Approximately $14.9 million of
commissions and fees were derived from purchase acquisitions
of new insurance agencies. These increases were offset by
decreases of $6.4 million from the sale of certain offices
and accounts in 1995 and 1994 and reductions in override
commissions of $1.2 million.
Investment and other income decreased by $2.3 million
in 1996 and $1.3 million in 1995. These amounts include
gains of $1.9 million, $3.3 million and $5.0 million in
1996, 1995 and 1994, respectively, from the sale of certain
offices, insurance accounts and other assets.
Total operating expenses for 1996 were $139.2 million,
an increase of $10.6 million or 8.3% from 1995. For 1995,
total operating expenses were $128.6 million, an increase of
$6.5 million or 5.3% from 1994.
Compensation and employee benefits costs for 1996 were
$88.4 million, an increase of $5.6 million or 6.8% from
1995. Increases included approximately $7.1 million related
to purchase acquisitions offset by decreases of $1.1 million
related to offices sold in 1996 and 1995. Compensation and
employee benefit costs for 1995 were $82.8 million, an
increase of $4.4 million or 5.7% from 1994. Increases
include approximately $8.4 million related to purchase
acquisitions offset by decreases of $3.9 million related to
offices sold in 1995 and 1994.
Other operating expenses for 1996 were $42.0 million,
or 9.6% higher than 1995. Increases relate primarily to
purchase acquisitions. Other operating expenses for 1995
were $38.3 million, or 6.4% more than 1994. Increases relate primarily
to purchase acquisitions offset in part by the sales of certain
offices in 1995 and 1994.
Amortization expense primarily reflects the
amortization of expiration rights, an intangible asset
acquired in the purchase of insurance agencies. Amortization
expense increased by $630,000 or by 9.0% in 1996 and by
$530,000 or 8.2% in 1995 which is attributable to purchase
acquisitions consummated during 1996, 1995 and 1994 offset
by decreases from amounts which became fully amortized or
were sold in those years.
The effective tax rates for the Company were 40.1% in
1996, 39.6% in 1995 and 39.4% in 1994. An analysis of the
effective income tax rates is presented in "Note G-Income
Taxes" of Notes to Consolidated Financial Statements.
Over the last three years, inflationary pressure has
been relatively modest and did not have a significant effect on
the Company's operations.
Liquidity and Capital Resources
Net cash provided by operations totaled $16.6 million,
$16.2 million and $19.7 million for the years ended December 31,
1996, 1995 and 1994, respectively, and is primarily
dependent upon the timing of the collection of insurance
premiums from clients and payment of those premiums to the
appropriate insurance underwriters.
The Company has historically generated sufficient funds
internally to finance capital expenditures for personal
property and equipment. Cash expenditures for the
acquisition of property and equipment were $5.1 million,
$4.0 million and $2.2 million
in the years ended December 31, 1996, 1995 and 1994,
respectively. The timing and extent of the purchase of
investments is dependent upon cash needs and yields on
alternate investments and cash equivalents.
In addition, during 1996 and 1995,
total investments decreased by $4.2 million and $17.1
million, respectively, as the Company utilized these funds
for the repurchase of Common Stock of the Company.
Cash expenditures for the purchase of insurance agencies
accounted for under the purchase method of accounting amounted
to $9.7 million, $6.5 million and $9.7 million in the years
ended December 31, 1996, 1995 and 1994, respectively. Cash expenditures for
such insurance agency acquisitions have been funded
primarily through operations, from the proceeds of the sale
of Common Stock in 1993 and from long-term borrowings. In
addition, a portion of the purchase price in such
acquisitions may be paid through Common Stock and deferred
cash payments. Cash proceeds from the sale of certain
offices, insurance accounts and other assets totaled $2.5
million, $3.5 million and $7.9 million in the years ended December 31,
1996, 1995 and 1994, respectively. The Company did not have
any material capital expenditure commitments as of December
31, 1996.
Financing activities utilized cash of $6.0 million,
$22.1 million and $13.3 million for the years ended December
31, 1996, 1995 and 1994, respectively, as the Company made
scheduled debt payments and annually increased its dividend rate. In
addition, during 1996, 1995 and 1994, the Company
repurchased 801,700, 1,336,820 and 172,360, respectively,
shares of its Common Stock under a stock repurchase program.
The Company is currently authorized to purchase an
additional 423,000 shares and
anticipates that it will continue to repurchase shares in
1997. The Company anticipates the continuance of its
dividend policy. The Company has a bank credit agreement for
borrowings of up to $30.0 million under loans due in 2002.
At December 31, 1996, there were loans of $23.0 million
outstanding under the agreement.
The Company had a current ratio (current assets to
current liabilities) of 0.86 to 1.00 as of December 31,
1996. Shareholders' equity of $55.3 million at December 31,
1996 is decreased from $56.6 million at December 31, 1995
and the debt to equity ratio of 0.49 to 1.00 at December 31,
1996, is increased from the last year-end ratio of 0.21 to
1.00 due to the aforementioned purchase of Common Stock of
the Company and an increase in borrowings to $23 million
under the bank agreement used for insurance agency
acquisitions and the repurchase of Common Stock.
The Company believes that cash generated from
operations, together with the proceeds from borrowings, will
provide sufficient funds to meet the Company's short and
long-term funding needs.
Consolidated Balance Sheet
December 31 1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including $11,260,000 and
$10,104,000, respectively,of restricted funds $ 19,774,374 $ 17,020,706
Investments 5,088,020 11,154,673
Receivables:
Premiums, less allowance for doubtful accounts of
$2,445,000 and $1,772,000,respectively 41,453,677 41,707,706
Other 6,122,612 4,794,396
------------------------------
47,576,289 46,502,102
Prepaid expenses and other current assets 3,816,819 3,937,964
------------------------------
TOTAL CURRENT ASSETS 76,255,502 78,615,445
INVESTMENTS 6,185,686 4,300,000
PROPERTY AND EQUIPMENT, NET 16,092,075 13,700,260
INTANGIBLE ASSETS
Expiration rights 76,402,292 68,345,441
Goodwill 32,718,982 24,432,875
Noncompetition agreements 11,421,278 9,888,798
------------------------------
120,542,552 102,667,114
Less accumulated amortization 40,536,482 41,812,787
------------------------------
80,006,070 60,854,327
OTHER ASSETS 2,936,014 5,778,932
------------------------------
$ 181,475,347 $ 163,248,964
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $ 66,527,381 $ 69,481,803
Accounts payable and accrued expenses 11,401,805 8,040,022
Premium deposits and credits due customers 8,837,483 8,062,626
Current portion of long-term debt 2,345,059 1,755,238
------------------------------
TOTAL CURRENT LIABILITIES 89,111,728 87,339,689
LONG-TERM DEBT 27,195,571 11,749,848
OTHER LONG-TERM LIABILITIES 9,869,777 7,513,537
SHAREHOLDERS' EQUITY
Common Stock, no par value; authorized 50,000,000 shares;
outstanding 13,320,577 and 13,706,764
shares,respectively 25,266,279 29,903,900
Retained earnings 30,031,992 26,741,990
------------------------------
55,298,271 56,645,890
------------------------------
$ 181,475,347 $ 163,248,964
==============================
See notes to consolidated financial statements.
Statement of Consolidated Income
Year Ended December 31 1996 1995 1994
Revenues
Commissions and fees $ 153,967,914 $ 141,555,188 $ 132,914,113
Investment and other income 4,275,186 6,591,850 7,895,501
-------------------------------------------------------
158,243,100 148,147,038 140,809,614
Operating expenses
Compensation and employee benefits 88,406,342 82,760,664 78,310,999
Other operating expenses 41,950,933 38,264,085 35,975,715
Amortization of intangibles 7,596,274 6,965,947 6,436,119
Interest expense 1,244,729 559,654 812,216
Pooling-of-interests expense - - 487,986
-------------------------------------------------------
139,198,278 128,550,350 122,023,035
-------------------------------------------------------
INCOME BEFORE INCOME TAXES 19,044,822 19,596,688 18,786,579
Income Taxes 7,638,431 7,767,778 7,394,296
-------------------------------------------------------
NET INCOME $ 11,406,391 $ 11,828,910 $ 11,392,283
=======================================================
NET INCOME PER COMMON SHARE $ 0.85 $ 0.82 $ 0.77
=======================================================
Weighted Average Number of Shares of Common Stock 13,493,255 14,470,407 14,778,304
Outstanding =======================================================
See notes to consolidated financial statements.
Statement of Consolidated Shareholders' Equity
Common Stock Retained Earnings
Balance at January 1, 1994 $ 45,376,820 $ 18,780,173
Issuance of 15,450 shares of Common Stock 169,050
Purchase of 172,360 shares of Common Stock (2,076,406)
Payment of dividends ($.50 per share) (7,224,935)
Transactions related to pooled companies (43,169) 56,340
Net income 11,392,283
------------------------------------
Balance at December 31, 1994 43,426,295 23,003,861
Issuance of 318,326 shares of Common Stock 3,817,746
Purchase of 1,336,820 shares of Common Stock (17,389,044)
Payment of dividends ($.57 per share) (8,209,877)
Other 48,903 119,096
Net income 11,828,910
------------------------------------
Balance at December 31, 1995 29,903,900 26,741,990
Issuance of 462,170 shares of Common Stock 6,251,661
Purchase of 801,700 shares of Common Stock (10,845,095)
Payment of dividends ($.605 per share) (8,116,389)
Other (44,187)
Net income 11,406,391
------------------------------------
Balance at December 31, 1996 $ 25,266,279 $ 30,031,992
====================================
See notes to consolidated financial statements.
Statement of Consolidated Cash Flows
Year Ended December 31 1996 1995 1994
OPERATING ACTIVITIES $ 11,406,391 $ 11,828,910 $ 11,392,283
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets 7,596,274 6,965,947 6,436,119
Depreciation and amortization 3,259,452 2,790,772 2,849,831
-------------------------------------------------------
Net income plus amortization and depreciation 22,262,117 21,585,629 20,678,233
Provision for losses on receivables 1,276,258 1,500,231 1,238,500
Provision for deferred income taxes (816,246) 44,119 (148,756)
Gain on sale of assets (1,856,443) ( 3,337,219) (5,047,488)
Changes in operating assets and liabilities net of
effects from insurance agency acquisitions
and dispositions:
(Increase) decrease in accounts receivable (1,405,660) 513,907 976,828
(Increase) decrease in prepaid expenses (1,649,239) (768,431) 546,613
Decrease in premiums payable to
insurance companies (4,241,464) (1,156,960) (506,723)
Increase (decrease) in premium deposits
and credits due customers 774,857 (784,471) 743,579
Increase (decrease) in accounts payable
and accrued expenses 224,046 (1,639,586) 551,458
Other operating activities 2,077,498 230,569 624,242
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,645,724 16,187,788 19,656,486
INVESTING ACTIVITIES
Purchase of held-to-maturity investments (7,339,705) (7,399,402) (25,488,282)
Purchase of available-for-sale investments (260,000) - -
Proceeds from maturities of held-to-maturity 7,866,672 24,546,279 21,238,187
investments
Proceeds from sale of available-for-sale investments 3,914,000 - -
Purchase of property and equipment (5,051,253) (4,007,468) (2,179,808)
Purchase of insurance agencies, net of cash acquired (9,722,979) (6,540,948) (9,740,808)
Proceeds from sale of assets 2,461,177 3,515,102 7,943,937
Other investing activities 222,231 216,173 114,153
-------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,909,857) 10,329,736 (8,112,621)
FINANCING ACTIVITIES
Proceeds from long-term debt 30,861,966 32,522,950 16,000,000
Principal payments on long-term debt (18,024,341) (29,194,326) (20,205,709)
Repurchase of Common Stock (10,845,095) (17,389,044) (1,950,661)
Dividends (8,116,389) (8,209,877) (7,224,935)
Other financing activities 141,660 158,347 32,221
-------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (5,982,199) (22,111,950) (13,349,084)
-------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,753,668 4,405,574 (1,805,219)
Cash and cash equivalents at beginning of year 17,020,706 12,615,132 14,420,351
-------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 19,774,374 $ 17,020,706 $ 12,615,132
=======================================================
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
December 31, 1996
Hilb, Rogal and Hamilton Company (the Company), a
Virginia corporation, operates as a network of insurance
agencies with offices located in 16 states and five Canadian
provinces. Its principal activity is the performance of
retail insurance services which involves placing property
and casualty and life and health insurance with insurers on
behalf of commercial clients in a variety of industries and
individual clients.
Note A-Significant Accounting Policies
Principles of Consolidation: The accompanying
financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts and
transactions have been
eliminated in consolidation.
Use of Estimates: The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenues: Commission income as well as the related
premiums receivable from customers and premiums payable to
insurance companies are recorded as of the effective date of
insurance coverage or the billing date, whichever is later. Premium
adjustments, including policy cancellations, are recorded as
they occur. Contingent commissions and commissions on
premiums billed and collected directly by insurance
companies are recorded as revenue when received. Fees for
services rendered and override commissions
are recorded as earned. These policies are in accordance
with predominant industry practice.
Cash Equivalents: The Company considers all highly
liquid investments with a maturity of three months or less
at the date of acquisition to be cash equivalents.
Investments: Management determines the appropriate
classification of debt securities at the time of purchase
and reevaluates such designation at each balance sheet date.
Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are
stated at amortized cost, which is adjusted for
amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment
income. Interest and dividends are included in investment
income. Realized gains and losses, and declines in value
judged to be other than temporary are included in investment income.
Marketable debt securities not classified as held-to-
maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value. Amortized cost of debt securities
in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains and losses and
declines in value judged to be other than temporary on
available-for-sale securities are included
in investment income. The cost of securities sold is based
on the specific identification method. Interest and
dividends on securities classified as available-for-sale are
included in investment income.
Property and Equipment: Property and equipment are
stated on the basis of cost. Depreciation is computed by the
straight-line method over estimated useful lives (30 to 33
years for buildings, 3 to 7 years for equipment). Leasehold
improvements are generally amortized using a straight-line
method over the term of the related lease.
Intangible Assets: Intangible assets arising from
acquisitions accounted for as purchases principally
represent expiration rights, the excess of costs over the
fair value of net assets acquired and noncompetition agreements.
The cost of such assets is being amortized principally on a straight-line
basis over periods ranging up to 15 years for expiration rights,
15 to 40 years for the excess of cost over the fair value of net
assets acquired and three to 20 years for noncompetition agreements.
Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Adoption of this
statement did not have a material impact on the Company's
financial position or results of operations.
Accounting for Stock-Based Compensation: In October
1995, the Financial Accounting Standards Board (the FASB)
issued Statement No. 123, "Accounting for Stock-Based
Compensation" (Statement No. 123). The statement defines a
fair value based method of accounting for employee stock
options. Companies may, however, elect to adopt this new
accounting rule through a pro forma disclosure option, while
continuing to use the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No.
25).
The Company has elected to continue to follow APB No.
25 and related interpretations in accounting for its
employee stock options. In addition, the effect of applying
Statement No. 123's fair value method to the Company's
employee stock options does not result in net income and
earnings per share that are materially different from
amounts reported. Accordingly, the pro forma disclosures
required by Statement No. 123 have not been included in the
footnotes to the financial statements.
Fair Value of Financial Instruments: The carrying
amounts reported in the balance sheet for cash and cash equivalents,
receivables, premiums payable to insurance companies,
accounts payable and accrued expenses and long-term debt
approximate those assets and liabilities' fair values. Fair
values for investment securities are based on quoted market
prices and are disclosed in Note B.
Income Taxes: The Company (except for pooled entities
prior to acquisition and its Canadian subsidiary) files a
consolidated federal income tax return. Deferred taxes
result from temporary differences between the reporting for
income tax and financial statement purposes primarily
related to bad debt expense, depreciation expense, basis
differences in intangible assets, deferred compensation
arrangements and the recognition of net operating loss
carryforwards from pooled entities.
Net Income Per Common Share: Net income per Common
Share is based on the weighted average number of shares of
Common Stock outstanding during each year.
Note B-Investments
The following is a summary of held-to-maturity and
available- for-sale investments included in current and long-term
assets on the consolidated balance sheet:
Held-to-Maturity Investments
Gross Gross
December 31, 1996 Cost Unrealized Gains Unrealized Losses Fair Value
Obligations of U.S. government agencies $ 1,500,000 $ 3,000 $ 1,497,000
Obligations of states and political subdivisions 7,795,000 $ 75,000 1,000 7,869,000
Certificates of deposit and other 1,719,000 1,719,000
----------------------------------------------------------------
$ 11,014,000 $ 75,000 $ 4,000 $ 11,085,000
================================================================
Available-for-Sale Investments
Gross Gross
December 31, 1996 Cost Unrealized Gains Unrealized Losses Fair Value
Obligations of states and political subdivisions $ 260,000 $ - $ - $ 260,000
================================================================
Held-to-Maturity Investments
Gross Gross
December 31, 1995 Cost Unrealized Gains Unrealized Losses Fair Value
Obligations of U.S. government agencies $ 107,000 $ 1,000 $ 108,000
Obligations of states and political subdivisions 10,570,000 97,000 $ 2,000 10,665,000
Certificates of deposit 864,000 864,000
---------------------------------------------------------------
$ 11,541,000 $ 98,000 $ 2,000 $ 11,637,000
===============================================================
Available-for-Sale Investments
Gross Gross
December 31, 1995 Cost Unrealized Gains Unrealized Losses Fair Value
Obligations of states and political subdivisions $ 3,914,000 $ - $ - $ 3,914,000
===============================================================
During December 1995, the Company reclassified certain
investments aggregating $3,914,000 from held-to-maturity to
available-for-sale, pursuant to the FASB's one time
"holiday" allowing such reclassification without calling
into question the Company's intent
to hold other debt securities to maturity in the future.
The amortized cost and fair value of held-to-maturity
and available-for-sale investments at December 31, 1996, by
contractual maturity, are as follows. Actual maturities may
differ from contractual maturities because the issuers of
the securities may have the right to prepay obligations
without prepayment penalties.
Cost Fair Value
Held-to-Maturity Investments
Due in one year $ 4,828,000 $ 4,845,000
Due after one year through
five years 5,836,000 5,889,000
Due after five years through
ten years 350,000 351,000
----------------------------
$ 11,014,000 $ 11,085,000
=============================
Available-for-Sale Investments
Due in one year $ 260,000 $ 260,000
=============================
Note C-Property and Equipment
Property and equipment consists of the following:
1996 1995
-----------------------------------
Furniture and equipment $ 27,589,000 $ 24,454,000
Buildings and land 7,666,000 7,565,000
Leasehold improvements 1,986,000 1,641,000
-----------------------------------
37,241,000 33,660,000
Less accumulated depreciation
and amortization 21,149,000 19,960,000
-----------------------------------
$ 16,092,000 $ 13,700,000
===================================
Note D-Long-term Debt and Override Commission Agreements
1996 1995
-----------------------------------
Notes payable to banks, interest
currently at 6.11% $ 23,000,000 $ 8,500,000
Installment notes payable incurred
in acquisitions of insurance
agencies, 4.9% to 10%, due in
various installments, to 1999 3,846,000 2,637,000
Mortgage notes payable, currently
9.4%, due in installments, to 2000 2,156,000 2,180,000
Installment notes payable, 6%
to 8.5%, due in various
installments, to 2003 539,000 188,000
-----------------------------------
29,541,000 13,505,000
Less current portion 2,345,000 1,755,000
-----------------------------------
$ 27,196,000 $ 11,750,000
===================================
Maturities of long-term debt for the four years ending
after December 31, 1997 are $1,241,000 in 1998; $713,000 in
1999; $2,113,000 in 2000; and $48,000 in 2001.
Interest paid was $1,232,000, $733,000 and $1,014,000
in 1996, 1995 and 1994, respectively.
At December 31, 1996, land and buildings having a
depreciated cost of $2,374,000 were pledged as collateral
for the mortgage notes payable.
The Company entered into a credit agreement with two
banks that allows for borrowings of up to $30,000,000 under
loans due in 2002, which bear interest at variable rates. At
December 31, 1996, $23,000,000 was borrowed under this
agreement. This credit agreement contains, among other provisions,
requirements for maintaining a minimum level of shareholders' equity
($48,477,000 at December 31, 1996) and certain financial ratios.
The Company had override commission agreements with its
insurance company lenders which provided additional
commission income through 1994, up to a maximum of
$2,517,000 if specified levels of premiums were placed with the
respective lenders or their affiliated insurance companies. Additional
commission income earned under these agreements amounted to
$1,225,000 in 1994.
Note E-Retirement Plans
The Hilb, Rogal and Hamilton Company Profit Sharing
Savings Plan (the Profit Sharing Plan) covers substantially
all employees of the Company and its subsidiaries. The
Profit Sharing Plan, which may be amended or terminated by
the Company at any time,
provides that the Company shall contribute to a trust fund
such amounts as the Board of Directors shall determine
subject to certain earnings restrictions as defined in the
Profit Sharing Plan.
Prior to merger with the Company, certain of the merged
companies had a separate profit sharing, ESOP or benefit
plan. These plans were terminated or frozen at the time of
merger with the Company.
The total expense under these plans for 1996, 1995 and
1994 was approximately $2,680,000, $2,075,000 and
$2,812,000, respectively.
The Company has a Supplemental Executive Retirement
Plan (the SERP), which is a defined benefit plan under which
the Company will pay supplemental pension benefits to key
executives in addition to amounts received under the Profit
Sharing Plan. Such benefits will be paid from Company
assets.
The following table sets forth the SERP's funded status
and amounts recognized in the Company's consolidated balance
sheet:
1996 1995
------------------------------------
Actuarial present value of:
Vested benefits $ (1,923,000) $ (2,054,000)
Nonvested benefits (226,000) (210,000)
------------------------------------
Accumulated benefit obligation (2,149,000) (2,264,000)
Effect of anticipated future
compensation levels (827,000) (710,000)
------------------------------------
Projected benefit obligation (2,976,000) (2,974,000)
Plan assets at fair value - -
------------------------------------
Excess of projected benefit
obligation over assets (2,976,000) (2,974,000)
Unrecognized prior service costs 1,921,000 2,047,000
Unrecognized net loss 38,000 450,000
------------------------------------
Accrued SERP expense (1,017,000) (477,000)
Adjustment to recognize
minimum liability (1,132,000) (1,786,000)
Pension liability recognized in ------------------------------------
consolidated balance sheet $ (2,149,000) $ (2,263,000)
====================================
The expense for the SERP includes the following
components:
1996 1995 1994
-----------------------------------------------------
Service cost $ 182,000 $ 159,000 $ 6,000
Interest cost 223,000 175,000 7,000
Amortization of prior 135,000 126,000 4,000
service cost -----------------------------------------------------
$ 540,000 $ 460,000 $ 17,000
=====================================================
Significant assumptions used in determining obligations
and the related expense for the SERP include a weighted
average discount rate of 8.0% and 7.5% in 1996 and 1995,
respectively, and an assumed rate of increase in future
compensation of 4% in both years.
Note F-Other Postretirement Benefit Plans
The Company sponsors postretirement benefit plans that
provide medical and life insurance benefits to retirees.
Employees who retire after age 55 with 10 years of service
are eligible to participate. The plans are contributory for
substantially all participants, with retiree contributions
adjusted annually and the health care plan contains other
cost sharing features such as deductibles and coinsurance.
The accounting for the health care plan anticipates future
cost sharing changes to the written plan that are consistent
with the Company's expressed intent to increase retiree
contributions annually in accordance with increases in
health care costs. The Company's policy is to fund the cost
of these benefits when actual claims are incurred.
The following table sets forth the plans' combined
funded status reconciled with the amounts shown in the Company's
consolidated balance sheet:
1996 1995
-------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $ (1,050,000) $ (1,419,000)
Active plan participants - -
------------------------------------
Total (1,050,000) (1,419,000)
====================================
Plan assets at fair value - -
------------------------------------
Accumulated postretirement
benefit obligation in excess
of plan assets (1,050,000) (1,419,000)
Unrecognized net gain (909,000) (512,000)
Unrecognized transition benefit
cost 1,149,000 1,264,000
------------------------------------
Accrued postretirement
benefit liability $ (810,000) $ (667,000)
====================================
Net periodic postretirement benefit cost includes the
following components:
1996 1995 1994
--------------------------------------------------------
Interest cost $ 82,000 $ 104,000 $ 103,000
Amortization of transition
obligation over 14 years 115,000 115,000 115,000
Amortization of prior gains (67,000) (29,000) (6,000)
-------------------------------------------------------
Net periodic postretirement
benefit cost $ 130,000 $ 190,000 $ 212,000
========================================================
For measurement purposes, a 7.85% and a 9.10% annual
rate of increase in the per capita cost of covered health
care benefits was assumed for 1997 and 1996, respectively;
the rate was assumed to decrease gradually to 6.15% in 2021
and remain at that level thereafter. The health care cost
trend rate assumption has an effect on the amounts. For
example, increasing the assumed health care cost trend rates
by one percentage point in each year would increase the
accumulated postretirement benefit obligation for the
medical plan as of December 31, 1996 and 1995 by $97,000 and
$130,000, respectively, and the net periodic postretirement
benefit cost for 1996 by $8,000.
The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 8.0%
and 7.5% at December 31, 1996 and 1995, respectively.
Note G-Income Taxes
The components of income taxes shown in the statement
of consolidated income are as follows:
1996 1995 1994
-------------------------------------------------------
Current
Federal $ 6,481,000 $ 6,232,000 $ 6,176,000
State 1,305,000 1,268,000 1,367,000
Foreign 668,000 224,000 -
--------------------------------------------------------
8,454,000 7,724,000 7,543,000
--------------------------------------------------------
Deferred
Federal (639,000) 76,000 (125,000)
State (73,000) 14,000 (24,000)
Foreign (104,000) (46,000) -
--------------------------------------------------------
(816,000) 44,000 (149,000)
--------------------------------------------------------
$ 7,638,000 $ 7,768,000 $ 7,394,000
========================================================
The effective income tax rate varied from the statutory
federal income tax rate as follows:
1996 1995 1994
--------------------------------------------------------
Statutory federal
income tax rate 35.0% 35.0% 35.0%
Tax exempt investment income (1.4) (2.1) (2.4)
State income taxes, net
of federal tax benefit 4.5 4.2 4.8
Other 2.0 2.5 2.0
--------------------------------------------------------
Effective income tax rate 40.1% 39.6% 39.4%
========================================================
Income taxes paid were $10,128,000, $8,428,000 and
$7,074,000 in 1996, 1995 and 1994, respectively.
Income before income taxes from Canadian operations was
$1,168,000 and $317,000 in 1996 and 1995, respectively.
Deferred income taxes reflect the tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets on the
consolidated balance sheet are as follows:
1996 1995
---------------------------------
Deferred tax liabilities:
Intangible assets $ 6,483,000 $ 2,893,000
Other-net 661,000 1,600,000
----------------------------------
Total deferred tax liabilities 7,144,000 4,493,000
----------------------------------
Deferred tax assets:
Deferred compensation 844,000 693,000
Bad debts 925,000 670,000
Other 751,000 775,000
----------------------------------
Total deferred tax assets 2,520,000 2,138,000
----------------------------------
Net deferred tax liabilities $ 4,624,000 $ 2,355,000
===================================
In December 1996, the Company reached a tentative
agreement with the Internal Revenue Service (the IRS) to
resolve all issues arising from the IRS's recently completed audit of the
Company's income tax returns for the seven years ended
December 31, 1994. Since the agreement relates to deductions
claimed in connection with intangible assets acquired by the
Company, the additional tax that will ultimately result from
the agreement has been recorded as an increase to current
and deferred tax liabilities of $2,626,000 and $1,500,000,
respectively, and an increase in goodwill of $4,126,000 on
the December 31, 1996 balance sheet. The proposed settlement
will not have a significant impact on the Company's future
earnings.
Note H-Leases
The Company and its subsidiaries have noncancellable
lease contracts for office space, equipment and automobiles
which expire at various dates through the year 2006 and
generally include escalation clauses for increases in
lessors' operating expenses and increased real estate taxes.
Future minimum rental payments required under such
operating leases are summarized as follows:
1997 $ 6,595,000
1998 5,282,000
1999 4,248,000
2000 2,563,000
2001 1,269,000
Thereafter 917,000
--------------
$ 20,874,000
==============
Rental expense for all operating leases amounted to
$6,845,000 in 1996, $6,712,000 in 1995 and $6,549,000 in
1994. Included in rental expense for 1996, 1995 and 1994 is
approximately $313,000, $435,000 and $798,000, respectively,
which was paid to employees or related parties.
Note I-Shareholders' Equity
The Company has adopted and the shareholders have
approved the 1986 Incentive Stock Option Plan and the Hilb,
Rogal and Hamilton Company 1989 Stock Plan, which provide
for the granting of options to purchase up to an aggregate
of approximately 1,843,000 and 1,895,000 shares of Common
Stock as of December 31, 1996 and 1995, respectively. The
number of shares available for grant may increase or
decrease with the respective changes in the number of shares
of Common Stock outstanding. Stock options granted have ten
year terms and vest and become fully exercisable at various
periods up to five years. Stock option activity under the
plans was as follows:
Weighted Average
Shares Exercise Price
Outstanding at January 1, 1994 886,400 $13.44
Granted 38,000 12.00
Exercised 2,950 6.46
Expired 51,875 13.72
-------
Outstanding at December 31, 1994 869,575 13.39
Granted 25,000 12.17
Exercised 600 12.75
Expired 87,250 13.10
-------
Outstanding at December 31, 1995 806,725 13.38
Granted 72,900 13.00
Exercised 3,600 10.40
Expired 132,700 13.21
-------
Outstanding at December 31, 1996 743,325 13.39
=======
Exercisable at December 31, 1996 542,825 13.36
=======
The options outstanding at December 31, 1996 have
exercise prices that range from $6.00 to $18.20. The
weighted average
contractual life of these options is six years.
Note J-Acquisitions
During 1996, the Company acquired certain assets and
liabilities of 15 insurance agencies for $16,189,000
($7,343,000 in cash, $2,736,000 in guaranteed future
payments and 451,610 shares of Common Stock) in purchase
accounting transactions. Assets acquired include expiration
rights of $13,565,000, noncompetition agreements of
$2,820,000 and goodwill of $2,717,000. The combined purchase
price may be increased by approximately $4,678,000 in 1997,
$4,675,000 in 1998, $1,354,000 in 1999, $127,000 in 2000 and
$37,000 in 2001 based upon commissions or net profits
realized.
During 1995, the Company acquired certain assets and
liabilities of 14 insurance agencies for $13,097,000
($7,303,000 in cash, $1,974,000 in guaranteed future
payments and 317,726 shares of Common Stock) in purchase
accounting transactions. Assets acquired include expiration
rights of $9,616,000, noncompetition agreements of $385,000
and goodwill of $7,278,000. The combined purchase price was
increased by approximately $1,748,000 in 1996 and may be
increased by approximately $2,354,000 in 1997, $690,000 in
1998 and $358,000 in 1999 based upon commissions or net
profits realized.
During 1994, the Company acquired all of the
outstanding shares of three insurance agencies in exchange
for 543,930 shares of Common Stock of the Company. The
transactions were accounted for as pooling-of-interests
mergers.
During 1994, the Company acquired certain assets and
liabilities of four insurance agencies for $8,766,000
($8,340,000 in cash, $276,000 in guaranteed future payments
and 12,500 shares of Common Stock) in purchase accounting
transactions. Assets acquired include expiration rights of
$7,350,000 and noncompetition agreements of $966,000. The
combined purchase price was increased by approximately
$1,176,000 in 1996 and $1,203,000 in 1995 and may be
increased by approximately $75,000 in 1997 based upon
commissions or net profits realized.
The above purchase acquisitions have been included in
the Company's consolidated financial statements from their
respective acquisition dates.
The pro forma unaudited results of operations for the
years ended December 31, 1996 and 1995, assuming the above
1996 and 1995 purchase acquisitions had occurred as of
January 1, 1995, are as follows:
1996 1995
Revenues $166,919,000 $171,689,000
Net Income 11,499,000 11,579,000
Net Income Per Common Share 0.85 0.77
Note K-Sale of Assets
During 1996, 1995 and 1994, the Company sold certain
insurance accounts and other assets resulting in gains of
approximately $1,856,000, $3,337,000 and $5,044,000,
respectively. These amounts are included in investment and
other income in the statement of consolidated income.
Revenues, expenses and assets of these operations were not
material to the consolidated financial statements.
Note L-Commitments and Contingencies
Included in cash and cash equivalents and premium
deposits and credits due customers are approximately
$1,798,000 and $1,396,000 of funds held in escrow at
December 31, 1996 and 1995, respectively. In addition,
premiums collected from insureds but not yet remitted to
insurance carriers are restricted as to use by laws in
certain states in which the Company operates. The amount of
cash and cash equivalents so restricted was approximately
$9,462,000 and $8,708,000 at December 31, 1996 and 1995,
respectively.
There are in the normal course of business various
outstanding commitments and contingent liabilities.
Management does not
anticipate material losses as a result of such matters.
The Company is generally involved in routine insurance
policy related litigation. Several suits have been brought
against the Company involving settlement of various
insurance matters where customers are seeking both punitive
and compensatory damages. Management, upon the advice of
counsel, is of the opinion that such suits are substantially
without merit, that valid defenses exist and that such
litigation will not have a material effect on the
consolidated financial statements.
Note M-Subsequent Events
Subsequent to December 31, 1996, the Company acquired
certain assets and liabilities of three insurance agencies
in exchange for $5,920,000 ($3,814,000 in cash, $1,806,000
in guaranteed future payments and 22,305 shares of Common
Stock). The transactions, which are not material to the
consolidated financial statements,
will be accounted for as purchase transactions.
Note N- Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of
operations for the years ended December 31, 1996 and 1995:
Three Months Ended 1
March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------
(in thousands, except per share amounts)
1996
Total Revenues $43,076 $37,936 $38,315 $38,916
Net Income 5,162 2,674 2,241 1,329
Net Income Per
Common Share 0.38 0.20 0.17 0.10
Three Months Ended 1
March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------
(in thousands, except per share amounts)
1995
Total Revenues $39,455 $36,573 $36,395 $35,724
Net Income 4,928 3,3102 2,389 1,202
Net Income Per
Common Share 0.33 0.23 0.17 0.09
1 Quarterly financial information is affected by seasonal
variations. The timing of contingent commissions, policy
renewals and acquisitions may cause revenues, expenses and
net income to vary significantly from quarter to quarter.
2 Second quarter 1995 net income increased approximately
$1,477,000 from the sale of certain insurance accounts and
other assets.
Report of Ernst & Young LLP,Independent Auditors
Shareholders and Board of Directors
Hilb, Rogal and Hamilton Company
We have audited the accompanying consolidated balance
sheet of Hilb, Rogal and Hamilton Company and subsidiaries
as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
consolidated financial position of Hilb, Rogal and Hamilton
Company and subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted
accounting principles.
Richmond, Virginia
February 12, 1997
Board of Directors & Officers
Board of Directors
Robert H. Hilb (1) (4)
Chairman and Chief Executive Officer
Hilb, Rogal and Hamilton Company
Glen Allen, Virginia
Andrew L. Rogal (1)
President and Chief Operating Officer
Hilb, Rogal and Hamilton Company
Glen Allen, Virginia
Theodore L. Chandler, Jr. (1)(2)(3)
Attorney
Williams, Mullen, Christian & Dobbins
Richmond, Virginia
J.S.M. French (2)(3)(4)
President
Dunn Investment Company
Birmingham, Alabama
Thomas H. O'Brien (2)(3)(4)
Chairman and Chief Executive Officer
PNC Bank Corp.
Pittsburgh, Pennsylvania
Robert S. Ukrop (1)(4)
President and Chief Operating Officer
Ukrop's Super Markets, Inc.
Richmond, Virginia
Philip J. Faccenda (2)
Vice President and General Counsel, Emeritus
University of Notre Dame
Notre Dame, Indiana
Norwood H. Davis, Jr. (3)
Chairman of the Board and Chief Executive Officer
Trigon BlueCross BlueShield
Richmond, Virginia
(1) Executive Committee Member
(2) Compensation Committee Member
(3) Audit Committee Member
(4) Nominating Committee Member
Officers
Robert H. Hilb
Chairman and Chief Executive Officer
Andrew L. Rogal
President and Chief Operating Officer
Timothy J. Korman
Executive Vice President, Chief Financial Officer and
Treasurer
John C. Adams, Jr.
Executive Vice President
Dianne F. Fox
Senior Vice President - Administration and Secretary
Ronald J. Schexnaydre
Senior Vice President
Carolyn Jones
Vice President and Controller
Walter L. Smith
Vice President, General Counsel and Assistant Secretary
Vincent P. Howley
Vice President - Audit
Ann B. Davis
Vice President - Human Resources
Janice G. Pouzar
Assistant Vice President - Retirement Plans
Robert W. Blanton, Jr.
Assistant Vice President
Valerie C. Elwood
Assistant Vice President
Agency Locations
UNITED STATES
Alabama/Georgia Region
Atlanta
Birmingham
Fort Payne*
Mobile*
Gainesville
St. Simons Island
Savannah
Arizona
Phoenix
Flagstaff*
Mesa*
Tucson*
California Region
Fresno
Bakersfield*
Dinuba*
Ontario
Orange County
Palm Desert
San Rafael
Sacramento*
Santa Rosa*
Truckee*
Vallejo*
Colorado
Denver
Connecticut
New Haven (2 locations)
Clinton*
Derby*
Madison*
Middletown*
Old Saybrook*
Florida Region
Daytona Beach
Fort Lauderdale
Fort Myers
Gainesville
Orlando
Tampa
Illinois
Moline
Chicago*
Louisiana
New Orleans
Mid-Atlantic Region
Baltimore, Maryland
Pittsburgh, Pennsylvania
New York, New York*
Richmond, Virginia
Charlottesville*
Fredericksburg*
Virginia Beach*
Rockville, Maryland
Michigan
Grand Rapids
Port Huron
Richmond*
New York
Buffalo
Rochester*
Syracuse*
Oklahoma
Oklahoma City
Texas Region
Amarillo
Hereford*
Corpus Christi
Dallas
Abilene*
Houston
McAllen
Victoria
Cuero*
Edna*
*Denotes Branch Offices
CANADA
Winnipeg, Manitoba
Edmonton, Alberta*
Montreal, Quebec*
Toronto, Ontario*
Vancouver, British Columbia*
General Information
FORM 10-K
Any shareholder wishing to obtain a copy of the Company's
Form 10-K for the year ended December 31, 1996 as filed with
the Securities and Exchange Commission may do so without
charge by writing to Dianne F. Fox, Senior Vice President
and Secretary, at the corporate address.
Annual Meeting
The Company's Annual Meeting of Shareholders will
be held on May 6, 1997 at 10:00 A.M. at Crestar Bank,
919 East Main Street, Richmond, Virginia.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
(800) 756-3353
Shareholder Inquiries
Communications regarding dividends, lost stock certificates,
change of address, etc. should be directed to ChaseMellon
Shareholder Services. Other inquiries should be directed
to Dianne F. Fox, Senior Vice President and Secretary, at
the corporate address.
Outside Counsel
Williams, Mullen, Christian & Dobbins
Richmond, Virginia
Independent Auditors
Ernst & Young LLP
Richmond, Virginia
Corporate Headquarters
4235 Innslake Drive
P. O. Box 1220
Glen Allen, Virginia 23060-1220
Tel: (804) 747-6500
Fax: (804) 747-6046
Web Site: http://www.hrh.com
Shareholders
The Company's Common Stock has been publicly traded since
July 15, 1987. It is traded on the New York Stock Exchange
under the symbol "HRH." As of December 31,
1996, there were 711 holders of record of the Company's
Common Stock.
Market Price of Common Stock
High and low stock prices and dividends per share for the
indicated quarters were:
Cash
Sales Price Dividends
Quarter Ended High Low Declared
- ----------------------------------------------------------
1995
March 31 $ 12.13 $ 10.75 $ .14
June 30 13.13 10.50 .14
September 30 13.50 12.00 .14
December 31 14.38 13.25 .15
1996
March 31 14.00 12.63 .15
June 30 14.00 12.63 .15
September 30 13.75 11.38 .15
December 31 14.00 12.13 .155