Chicago-based Hub International Limited reported strong growth in the second quarter and first half of 2003, leading the company to update its earnings guidance for the full year. All financials are reported in U.S. dollars.
“The underlying performance of our brokerages was strong in the second quarter and the first half,” Martin Hughes, chairman and CEO, commented. “We attained respectable levels of organic growth and maintained our focus on expense management. As a result, we are updating our earnings guidance to a range of $1.13-$1.18 per diluted share from our previous guidance of $1.08-$1.17 per diluted share.”
Revenue increased 29 percent to $74.1 million in the second quarter ended June 30, 2003, due to acquisitions and an organic growth rate of 13 percent. Net earnings declined to $10.1 million from $10.7 million, while diluted earnings per share declined to $0.31 from $0.41. Notwithstanding the impact of a 22 percent increase in the weighted average number of diluted shares for the quarter and adjusting for the following items, net earnings before tax increased 78 percent, net earnings increased 73 percent and diluted earnings per share increased 29 percent, as compared to 2002:
1. The second quarter of 2002 included the sale of two insurance
subsidiaries, which created a one-time non-taxable gain of $2.6
2. Revenue timing shifts led to $2.1 million of contingent
commissions being received by Hub in the second quarter of 2002,
while similar payments were received in the first quarter of
3. $1.3 million of non-cash stock based compensation was recognized
in the second quarter of 2003, versus no expense recognition in
the same period of 2002.
Second quarter revenue growth resulted from both market penetration and the strengthening of the Canadian dollar.
Excluding the impact of acquisitions, organic growth – the equivalent of same-store sales – was a solid 13 percent. The increased strength of the Canadian dollar accounted for approximately $3.0 million, or five percentage points, of Hub’s 29 percent revenue increase and $2.9 million, or five percentage points, of Hub’s 13 percent organic growth rate for the period. Absent that currency effect, Hub would have reportedly posted 24 percent revenue growth and an 8 percent organic growth rate for the second quarter.
Core commission income grew 33 percent in the second quarter of 2003 to $69.4 million from $52.1 million, reflecting an organic growth rate of 16 percent, or 11 percent excluding currency effects. Contingent commissions and volume overrides, which are additional payments made by insurers on the basis of business volume and profitability, declined by 12 percent for the second quarter of 2003, due to the previously described shift in revenue timing, but increased 62 percent for the first half of 2003.
U.S. revenue increased 33 percent to $44.7 million from $33.6 million, including organic growth of 6 percent. Organic growth included both a 9 percent rise in core commission income and a 12 percent decline in contingent commissions and volume overrides. The decline in contingent commissions and volume overrides resulted from the previously discussed shift in revenue timing.
Canadian revenue grew 24 percent to $29.5 million from $23.7 million, including organic growth of 23 percent. A stronger Canadian dollar was responsible for 12 percentage points of both total revenue growth and organic growth of Canadian operations. Canadian organic growth included 25 percent core commission growth and a 26 percent decline in contingent commissions and volume overrides. As was the case in the United States, the decline in contingent commissions and volume overrides reflected the shift in revenue timing described earlier.
Compensation increased as a percentage of revenue from 52 percent to 54 percent. The increase resulted from the shift in revenue timing and normal quarterly variations in revenue mix. For the first half, the percentage of compensation to total revenue of 54 percent was unchanged from a year earlier. At the same time, selling, occupancy and administration costs declined to 19 percent of revenue from 20 percent, largely as a result of cost control in a rising revenue environment.
Hub’s net earnings before tax grew 6 percent to $15.6 million from $14.8 million, as pre-tax margin (net earnings before tax divided by revenue) narrowed to 21 percent from an unusually strong 26 percent in 2002. The decline in pre-tax margin resulted from the expensing of non-cash stock based compensation in 2003 and the impact of the gain on the sale of the two insurance subsidiaries in 2002. The company’s tax rate increased to 35 percent from an unusually low 28 percent, as a result of the $2.6 million non-taxable gain on the sale of the two insurance subsidiaries in 2002.
As a result, net earnings decreased $0.6 million to $10.1 million from $10.7 million, yielding a net margin of 14 percent, down from 19% a year earlier. Diluted earnings per share fell 24 percent to $0.31 from $0.41. The weighted average number of diluted shares increased 22 percent to 33.9 million from 27.9 million, reflecting the impact of Hub’s June 2002 initial public offering in the United States, use of stock in acquisitions and issuance of shares for non-cash stock based compensation.
First Half Results Offer More Normalized Perspective
For the six months ended June 30, 2003, Hub reported revenue of $143.0 million, up 34 percent from $106.8 million a year earlier. The growth included the impact of acquisitions and organic growth, bolstered by the strength of the Canadian dollar.
Of the 34 percent revenue increase, approximately four percentage points resulted from a stronger Canadian dollar. The same currency translation contributed approximately four percentage points to Hub’s 14 percent organic growth rate for the first half which reflected both the 13 percent growth of core commission income and a 32 percent increase in contingent commissions and volume overrides.
“Growth of contingent commissions and volume overrides during the first half is a reflection of our ability to deliver an increasingly large and profitable book of business to high-quality insurers,” Hughes said. “In turn, we increase our importance to these insurers and expand our access to coverage on behalf of clients. In a hard insurance market, access is a critical competitive advantage, one that we emphasize continually in our strategies.”
In the United States, revenue increased 41 percent to $90.0 million from $63.7 million a year earlier, reflecting acquisitions and an organic growth rate of 9 percent. U.S. revenue increased to 63 percent of Hub’s total revenue from 60 percent a year earlier reflecting the more rapid pace of acquisitions in the United States. Organic growth included both a 7 percent rise in core commission income and a 40 percent increase in contingent commissions and volume overrides.
In Canada, revenue increased 23 percent to $53.1 million from $43.1 million, including an organic growth rate of 22 percent. A stronger Canadian dollar added 10 percentage points to overall revenue growth and organic growth of Canadian operations. Canadian organic growth included 22 percent core commission growth and an 18 percent increase in contingent commissions and volume overrides.
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