Hub reports quarterly dividend and Q2 growth

Hub International Limited (TSX:HBG) recently reported its 2Q and first-half revenue rose sharply, reflecting both the benefits of acquisitions and strong organic growth. Revenue for the quarter ended June 30, 2005 increased 37% to US$112.7 million from US$82.2 million a year earlier. Net earnings declined, as expected, due to the impact of a non-cash stock based compensation charge resulting from the 2004 acquisition of Talbot. Second quarter net earnings decreased 63% to US$4.3 million (US$0.12 per diluted share) from US$11.6 million (US$0.35 per diluted share) a year earlier. Excluding the Talbot charge and foreign currency effects, net earnings increased 11% to US$12.6 million ($0.36 per diluted share). Despite a declining rate environment, Hub continued to build revenue organically, posting an organic growth rate of 7% or 4% when foreign exchange benefits are excluded. Organic growth, which includes net revenue increases for businesses owned at least 12 months, was 3% in the United States and 13% in Canada. Excluding the impact of foreign exchange gains, contingent commissions and other income, Hub’s core commissions continued a sequential improvement in organic growth rates, rising to 3% in the second quarter of 2005 from 1% in the first quarter and negative 2% in the fourth quarter of 2004. Martin P. Hughes, chairman and chief executive officer, anticipates increased rate stability as 2006 unfolds based on a belief that insurers will exhibit more pricing and underwriting discipline during this cycle than they have in previous cycles. Underwriting discipline is being driven by more conservative management and accounting in a post-Sarbanes-Oxley environment, limited investment returns available for premium dollars and the relatively higher likelihood of a large loss of business for insurers that are downgraded by rating agencies.U.S. revenue rose 55% to US$78.6 million in the second quarter from US$50.7 million in the prior year, reflecting both acquisitions and organic growth. Organic growth of 3% included a 2% growth rate in core commission income. Canadian revenue increased 8% to $34.1 million from $31.5 million, including the impact of acquisitions, divestitures and foreign exchange. Organic growth of 13% in both revenue and core commission income included a benefit of nine percentage points from a stronger Canadian dollar. Cash compensation expense increased 46% to US$61.4 million from US$42.1 million a year earlier and rose to 55% of revenue from 51% in the second quarter of 2004. The increase in compensation relative to revenue reflected higher compensation expense ratios at Talbot, acquired July 1, 2004. However, the company also experienced excessive compensation ratios in hubs that have failed to meet their budget projections and operating ratios. Hughes said the company has been reducing costs in recent months and has instructed several hubs to accelerate the pace of reductions in the third quarter. Severance costs related to these reductions, to be implemented by Aug. 31, will limit their impact in the third quarter, with savings more evident in the fourth quarter and beyond. Non-cash stock based compensation rose to US$10.7 million from US$1.7 million in the second quarter of 2004, largely due to the Talbot charge of US$8.7 million or US$0.25 per diluted share. The Talbot charge up to US$52-$55 million from $45-$50 million will begin to decline in the fourth quarter of 2005 in accordance with the non-cash stock based compensation amortization schedule.Selling, occupancy and administration expense rose 29% to US$20.7 million in the second quarter of 2005 from US$16.1 million a year earlier, but declined to 18% of revenue from 20%. Pre-tax earnings declined 29% to US$13.2 million from US$18.6 million a year earlier. The non-taxable nature of the Talbot charge contributed to a sharp increase in the effective tax rate to 67.8% from 37.6%. Net earnings decreased 63% to US$4.3 million (US$0.12 per diluted share) in the second quarter from US$11.6 million (US$0.35 per diluted share) in the same period of 2004.Growth in the second quarter expanded on gains made in first quarter performance at Hub. For the first six months of 2005, revenue increased 45% to US$234.4 million from US$161.6 million. Organic growth was 8% for total revenue and 5% for core commissions. Foreign exchange effects added three percentage points to revenue growth rates in the first half. U.S. revenue rose 66% to US$165.7 million from US$99.5 million, reflecting both acquisitions and organic growth. Organic growth of 4% included a 1% growth rate in core commission income. Canadian revenue increased 11% to US$68.7 million from US$62.1 million, including the impact of acquisitions, divestitures and foreign exchange. Organic growth of 15% overall and 12% for core commissions included a benefit of nine percentage points from a stronger Canadian dollar. Cash compensation expense increased 51% to US$125.3 million in the first half of 2005 from US$82.8 million a year earlier, rising to 54% of revenue from 51% in 2004. Higher relative cash compensation ratios at Talbot and in some other hubs were partially offset by the benefit of higher contingent income, which has little compensation expense associated with it. Non-cash stock-based compensation rose to US$19.7 million from US$3.3 million, including US$15.9 million (US$0.43 per diluted share) for the Talbot charge. Absent the Talbot charge, non-cash stock based compensation increased 13%. Selling, occupancy and administration expense rose 29% to US$40.7 million in the first half of 2005 from US$31.6 million a year earlier, but declined to 17% of revenue from 20%. Pre-tax earnings increased 27% to US$42.6 million from US$33.5 million in the first half of 2004. The non-taxable nature of the Talbot charge contributed to a sharp increase in the effective tax rate to 51.3% from 36.6%. Net earnings decreased 2% to US$20.7 million ($0.59 per diluted share) from US$21.2 million ($0.64 per diluted share) a year earlier. The decrease in net earnings resulted from the Talbot charge, offset by higher contingent income, forgiveness of debt on a loan from an insurer and gains on disposal of assets. In addition, Hub recently reported a quarterly dividend of US$0.06 per share on the outstanding common shares of the company, payable on Sept. 30, 2005 to shareholders of record as at Sept. 15, 2005.