Canadian Underwriter

Talbot acquisition lowers Hub earnings for 2004

February 23, 2005   by Canadian Underwriter

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Charges related to the acquisition of Talbot Financial Corp. in July caused earnings for broker network Hub International Ltd. (TSX, NYSE: HBG) to drop 28% in 2004.
The company posted earnings last year of $26.24 million, or $0.80 per share, for 2004, down from $36.5 million, or $1.14 per share in 2003. In the fourth quarter of 2004, earnings declined 64% to $3.9 million, or $0.13 per share, compared to $10.7 million, or $0.33 per share, in the fourth quarter of 2003. This includes a $7.50 million charge in the fourth quarter for non-cash, stock-based compensation to Talbot managers, which was higher than anticipated.
Revenue for the full-year 2004 was up 26% to $360.9 million from $286.4 million the year prior. This includes acquisitions plus a 5% organic growth rate on operations owned at least 12 months. Core commissions were up 27% year-over-year, while contingent commissions and volumne overrides rose 17%.
In Canada, revenue was up 12% on the year, as premium declines took hold later in the year than in the U.S., Hub reports. Canadian revenue totaled $121.8 million in 2004, up from $109.1 million in 2003, and Canadian operations posted organic growth of 13%, although 8 points of this came from the stronger Canadian dollar.
For the fourth-quarter 2004, revenue was up 33% to $104.4 million from $78.7 million in fourth-quarter 2003. While organic growth was just 1%, core commissions were up 34%, while contingent commissions and overrides grew 28%. For the fourth quarter of 2004, U.S. revenue was up 48% on acquisitions, while Canadian revenue was up 7% as a result of organic growth and the impact of a stronger Canadian dollar.
Expenses were also up for 2004, to $314.6 million from $231.0 million in 2003. And for the fourth quarter of 2004, expenses hit $95.6 million from $63.2 million in fourth-quarter 2003.
Total shareholders’ equity at the end of 2004 was up to $381.8 million from $342.8 million at the end of 2003.
Hub chair Martin P. Hughes says expense reduction will be a key focus in 2005. “Looking into 2005, we are focusing heavily on building organic growth levels while keeping pressure on expenses. We believe we can increase our margins as we achieve both organic growth and expense control.” He adds that expenses related to Sarbanes-Oxley compliance should drop this year, however these could be supplanted by costs due to the current investigations into broker compensation.
Hughes stresses that internal reviews have revealed no “inappropriate activity” at Hub. We will continue to emphasize the importance of ethical behavior and strong customer service in all our dealings with business partners, as that is the key to long-term account retention and value creation for shareholders.”

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